<PAGE>
Rule 424(b)(5)
Registration No. 33-
Prospectus Supplement
(To Prospectus dated June 22, 1995)
RESIDENTIAL ASSET SECURITIES CORPORATION
COMPANY
RESIDENTIAL FUNDING CORPORATION
MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1995-KS1
$94,350,062 ADJUSTABLE RATE CLASS A CERTIFICATES
----------------
The Series 1995 KS1 Mortgage Pass-Through Certificates (the "Certificates")
will include one class of senior Certificates (the "Class A Certificates") and
one class of subordinate Certificates (the "Class R Certificates" or the
"Residual Certificates"). Only the Class A Certificates are offered hereby.
It is a condition of the issuance of the Class A Certificates that they be
rated "AAA" by Standard & Poor's Ratings Group ("Standard & Poor's") and "Aaa"
by Moody's Investors Service, Inc. ("Moody's").
The Certificates in the aggregate will evidence the entire beneficial
ownership interest in a trust fund (the "Trust Fund") consisting primarily of
a pool of conventional, adjustable-rate, one- to four-family first mortgage
loans with terms to maturity of not more than 30 years (the "Mortgage Loans")
to be deposited by Residential Asset Securities Corporation (the "Company")
into the Trust Fund for the benefit of the Certificateholders. The interest
rate (the "Mortgage Rate") on each Mortgage Loan will adjust semi-annually as
described herein, subject to the limitations described herein. Accordingly, a
significant increase in the Mortgage Rate and the amount of the scheduled
monthly payments due thereafter may result, which may increase the likelihood
of default on and prepayment of such Mortgage Loan. The Mortgage Loans have
been originated using underwriting standards that are less stringent than the
underwriting standards of Fannie Mae or Freddie Mac. See "Risk Factors--Risks
Associated with the Mortgage Loans" herein. The characteristics of the
Mortgage Loans are more fully described herein under "Description of the
Mortgage Pool."
The Company has caused Financial Security Assurance Inc. (the "Certificate
Insurer") to issue a certificate guaranty insurance policy (the "Certificate
Insurance Policy") for the benefit of the Class A Certificateholders pursuant
to which it will guarantee certain payments to the Class A Certificateholders
as described herein.
[LOGO]
(Continued on following page)
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PROCEEDS OF THE ASSETS IN THE TRUST FUND AND PROCEEDS FROM THE CERTIFICATE
INSURANCE POLICY (AS DESCRIBED HEREIN) ARE THE SOLE SOURCE OF PAYMENTS ON THE
CLASS A CERTIFICATES. THE CLASS A CERTIFICATES DO NOT REPRESENT AN INTEREST IN
OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER, GMAC MORTGAGE CORPORATION
OR ANY OF THEIR AFFILIATES. NEITHER THE CLASS A CERTIFICATES NOR THE MORTGAGE
LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY
OR BY THE COMPANY, THE MASTER SERVICER, GMAC MORTGAGE CORPORATION OR ANY OF
THEIR AFFILIATES.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
There is currently no secondary market for the Class A Certificates. Neither
the Company, Residential Funding Securities Corporation (the "Underwriter")
nor any other person or entity intends to create a secondary market in the
Class A Certificates. There can be no assurance that a secondary market for
the Class A Certificates will develop or, if it does develop, that it will
continue. The Class A Certificates will not be listed on any securities
exchange.
The Class A Certificates will be offered by the Underwriter, an affiliate of
the Company, on a best efforts basis, from time to time to the public,
directly or through dealers, in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. The termination date of
the offering is the earlier to occur of June 28, 1996 or the date on which all
of the Class A Certificates have been sold. Proceeds of the offering will not
be placed in any escrow, trust or similar arrangement. The proceeds to the
Company from any sale of the Class A Certificates will be equal to the
purchase price paid by the purchaser thereof, net of any expenses payable by
the Company and any compensation payable to the Underwriter and any dealer.
The Class A Certificates are offered subject to receipt and acceptance by the
Underwriter, to prior sale and to the Underwriter's right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Class A Certificates will be made
at the office of Residential Funding Securities Corporation, 8400 Normandale
Lake Boulevard, Suite 700, Minneapolis, Minnesota 55437 on or after June 28,
1995, against payment therefor in immediately available funds.
RESIDENTIAL FUNDING SECURITIES CORPORATION
The date of this Prospectus Supplement is June 22, 1995.
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(Continued from previous page)
As described herein, a "real estate mortgage investment conduit" ("REMIC")
election will be made in connection with the Trust Fund for federal income tax
purposes. The Class A Certificates will represent ownership of "regular
interests" in the REMIC and the Residual Certificates will constitute the sole
class of "residual interests" in the REMIC. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
Distributions on the Class A Certificates will be made on the 25th day of each
month or, if such day is not a business day, then on the next business day,
commencing on July 25, 1995 (each, a "Distribution Date"). As described
herein, interest payable with respect to each Distribution Date on the Class A
Certificates will accrue during the period commencing on the 25th day of the
month immediately preceding the month on which such Distribution Date occurs
and ending on the 24th day of the month in which such Distribution Date
occurs. Interest will be calculated on the basis of the actual number of days
during such period and on a 360-day year, and will be based on the Certificate
Principal Balance thereof and the then-applicable Pass-Through Rate, as
reduced by certain interest shortfalls. The Pass-Through Rate on the Class A
Certificates will be 6.7125% per annum on the first Distribution Date.
Distributions in respect of principal of the Class A Certificates will be made
as described herein under "Description of the Certificates--Principal
Distributions on the Class A Certificates." The rights of the holders of the
Class R Certificates to receive distributions with respect to the Mortgage
Loans will be subordinate to the rights of the holders of the Class A
Certificates to the extent described herein and in the Prospectus.
THE YIELD TO MATURITY ON THE CLASS A CERTIFICATES WILL DEPEND ON THE RATE AND
TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS AND
LIQUIDATIONS) ON THE MORTGAGE LOANS AND ON ADJUSTMENTS TO THE MORTGAGE RATES.
THE MORTGAGE LOANS GENERALLY MAY BE PREPAID IN FULL OR IN PART AT ANY TIME;
HOWEVER, PREPAYMENT MAY SUBJECT THE MORTGAGOR TO A PREPAYMENT CHARGE. THE
YIELD TO INVESTORS ON THE CLASS A CERTIFICATES MAY BE ADVERSELY AFFECTED BY
ANY SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE LOANS DUE TO PREPAYMENTS,
LIQUIDATIONS OR OTHERWISE. SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE
LOANS DUE TO PREPAYMENTS IN FULL WILL BE OFFSET BY THE MASTER SERVICER TO THE
EXTENT DESCRIBED HEREIN. SEE "SUMMARY--SPECIAL PREPAYMENT CONSIDERATIONS," "--
SPECIAL YIELD CONSIDERATIONS" AND "CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS" HEREIN AND "YIELD CONSIDERATIONS" IN THE PROSPECTUS.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S-13 BEFORE PURCHASING ANY OF THE CLASS A CERTIFICATES.
As provided herein under "The Certificate Insurer--Incorporation of Certain
Documents by Reference," the Company will provide without charge to any person
to whom this Prospectus Supplement is delivered, upon oral or written request
of such person, a copy of any or all financial statements incorporated herein
by reference. Requests for such copies should be directed as provided under
"The Certificate Insurer--Incorporation of Certain Documents by Reference"
herein.
----------------
THE CLASS A CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART
OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE COMPANY AND ARE BEING
OFFERED PURSUANT TO ITS PROSPECTUS DATED JUNE 22, 1995, OF WHICH THIS
PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS
SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS
OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO
READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE CLASS
A CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
----------------
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT
AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
S-2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the
meanings assigned in the Prospectus.
Title of Securities............. Mortgage Pass-Through Certificates, Series
1995-KS1.
Company......................... Residential Asset Securities Corporation (the
"Company"), an affiliate of Residential
Funding Corporation, and an indirect wholly-
owned subsidiary of GMAC Mortgage Corporation
("GMAC Mortgage"). See "The Company" in the
Prospectus.
Master Servicer................. Residential Funding Corporation (the "Master
Servicer" or "Residential Funding"), an
affiliate of the Company and an indirect
wholly-owned subsidiary of GMAC Mortgage. See
"Pooling and Servicing Agreement--The Master
Servicer" herein and "Residential Funding
Corporation" in the Prospectus.
Trustee......................... The First National Bank of Chicago, a
national banking association (the "Trustee").
Cut-off Date.................... June 1, 1995.
Delivery Date................... On or about June 28, 1995.
Denominations................... The Class A Certificates will be issued in
registered, certificated form in minimum
denominations of $25,000 and integral
multiples of $1 in excess thereof.
The Mortgage Pool............... The Mortgage Pool will consist of a pool of
conventional, adjustable-rate, fully-
amortizing and balloon payment mortgage loans
(the "Mortgage Loans"), with an aggregate
principal balance as of the Cut-off Date of
$94,350,062. The Mortgage Loans are secured
by first liens on fee simple or leasehold
interests in one- to four-family residential
real properties and, with respect to one
Mortgage Loan on interests in shares issued
by cooperative apartment corporations and the
related proprietary leases (each, a
"Mortgaged Property") having individual
principal balances at origination of at least
$20,000 but not more than $620,000 with an
average principal balance at origination of
approximately $108,146. The Mortgage Loans
have terms to maturity from the date of
origination or modification of not more than
30 years, and a weighted average remaining
term to stated maturity of approximately 354
months as of the Cut-off Date. Approximately
74.8% of the Mortgage Loans (by aggregate
principal balance as of the Cut-off Date)
will
S-3
<PAGE>
be refinance mortgage loans. Approximately
0.9% of the Mortgage Loans require monthly
payments of principal based on 30 year
amortization schedules and have scheduled
maturity dates of 15 years from the due date
of the first monthly payment (each such
Mortgage Loan, a "Balloon Mortgage Loan"), in
each case leaving a substantial portion of
the original principal amount due and payable
on the respective scheduled maturity date.
The Mortgage Rate on each Mortgage Loan will
adjust semi-annually on the date (the
"Adjustment Date") specified in the related
Mortgage Note to a rate equal to the sum
(rounded as described herein) of the Index
described below and the Note Margin set forth
in the related Mortgage Note, subject to the
limitations described herein. The amount of
the monthly payment on each Mortgage Loan
will be adjusted semi-annually on the first
day of the month following the month in which
the Adjustment Date occurs to the amount
necessary to pay interest at the then
applicable Mortgage Rate and, except with
respect to the Balloon Mortgage Loans, to
fully amortize the outstanding principal
balance of the Mortgage Loan over its
remaining term to stated maturity. The
Mortgage Loans will initially bear interest
at Mortgage Rates of at least 5.75% per annum
but no more than 17.30% per annum, with a
weighted average Mortgage Rate of
approximately 10.2837% per annum as of the
Cut-off Date. The Mortgage Loans will have
different Adjustment Dates, Note Margins and
limitations on the Mortgage Rate adjustments,
as described herein.
For a further description of the Mortgage
Loans, see "Description of the Mortgage Pool"
herein. The Mortgage Loans have been
originated using underwriting standards that
are less stringent than the underwriting
standards applied by other first mortgage
loan purchase programs such as those run by
Fannie Mae or by Freddie Mac. See "Risk
Factors--Risks Associated with the Mortgage
Loans" herein.
The Index Applicable to the
Mortgage Loans.................
The Index applicable with respect to
approximately 76.6% and 12.0% of the Mortgage
Loans (each, by aggregate principal balance
as of the Cut-off Date) will be a per annum
rate equal to the average of interbank
offered rates for six-month U.S. dollar-
denominated deposits in the London market
based on quotations of major banks ("Six-
Month LIBOR"), as published in The Wall
Street Journal and as most recently available
as of the first business day of the month
immediately preceding the month in which the
S-4
<PAGE>
Adjustment Date occurs, or as of the date
forty-five days prior to the Adjustment Date,
respectively. With respect to approximately
11.4% of the Mortgage Loans (by aggregate
principal balance as of the Cut-off Date) the
Index shall be Six-Month LIBOR, as published
by Fannie Mae and as most recently available
as of the date forty-five days prior to the
Adjustment Date. In the event that the Index
specified in a Mortgage Note is no longer
available, an index reasonably acceptable to
the Trustee that is based on comparable
information will be selected by the Master
Servicer. See "Description of the Mortgage
Pool" herein.
The Class A Certificates........ The Class A Certificates in the aggregate
evidence an initial interest of 100% in the
principal of a trust fund (the "Trust Fund")
consisting primarily of the Mortgage Pool.
The Class A Certificates will be issued
pursuant to a Pooling and Servicing
Agreement, to be dated as of the Cut-off
Date, among the Company, the Master Servicer
and the Trustee (the "Pooling and Servicing
Agreement"). The Class A Certificates will
have an initial principal balance of
$94,350,062.
The Class A Certificates are subject to
priorities for payment of interest and
principal as described herein. For a
description of the allocation of interest and
principal distributions to the Class A
Certificates see "Summary--Interest
Distributions," and "--Principal
Distributions," "Description of the
Certificates--Interest Distributions," and
"--Principal Distributions on the Class A
Certificates" herein.
Pass-Through Rate on the Class
A Certificates.................
The Pass-Through Rate on the Class A
Certificates on the first Distribution Date
will be 6.7125% per annum. On each
Distribution Date thereafter, the per annum
Pass-Through Rate applicable to the Class A
Certificates will be equal to the lesser of
(i) One-Month LIBOR (see "Description of the
Certificates--Calculation of One-Month LIBOR"
herein) plus 0.65%, and (ii) the Available
Funds Pass-Through Rate for such Distribution
Date.
The "Available Funds Pass-Through Rate," as
of any Distribution Date, is a per annum rate
equal to a fraction the numerator of which is
an amount equal to (a) the aggregate amount
of interest due on all of the Mortgage Loans
for the related Due Period plus (b) the
Subordination Reduction Amount (as defined
herein), if any for such Distribution Date
minus (c) the Servicing Fee and the Premium
Fee (as defined herein) for such Distribution
Date and the denominator of which is one-
twelfth of the Certificate Principal Balance
of the Class A Certificates
S-5
<PAGE>
immediately prior to such Distribution Date.
The Available Funds Pass-Through Rate may be
limited by the Maximum Mortgage Rates and
Periodic Rate Caps for the Mortgage Loans.
See "The Mortgage Pool" herein.
Interest Distributions.......... On each Distribution Date, holders of the
Class A Certificates will be entitled to
receive interest distributions (the "Interest
Distribution Amount") in an amount equal to
interest accrued during the related Accrual
Period (as defined herein) on the Certificate
Principal Balance thereof at the then-
applicable Pass-Through Rate, subject to
reduction only in the event of shortfalls
caused by the Relief Act and any Prepayment
Interest Shortfalls to the extent not covered
by the Master Servicer allocated as described
herein. Interest payable with respect to each
Distribution Date on the Class A Certificates
will accrue during the period commencing on
the 25th day of the month immediately
preceding the month in which such
Distribution Date occurs and ending on the
24th day of the month in which such
Distribution Date occurs (each such period,
an "Accrual Period"). Interest will be
calculated on the basis of the actual number
of days in the Accrual Period and on a 360-
day year. Notwithstanding the foregoing, if
payments were not made as required under the
Certificate Insurance Policy, interest
shortfalls may be allocated to the Class A
Certificates, as described herein. See
"Description of the Certificates--Interest
Distributions" herein.
Any Prepayment Interest Shortfalls resulting
from prepayments in full in any calendar
month will be offset by the Master Servicer
on the Distribution Date in the following
calendar month to the extent such Prepayment
Interest Shortfalls do not exceed the lesser
of (a) one-twelfth of 0.125% of the Stated
Principal Balance of the Mortgage Loans
immediately preceding such Distribution Date
and (b) the sum of the master servicing fee
payable to the Master Servicer in respect of
its master servicing activities and
reinvestment income received by the Master
Servicer on amounts payable with respect to
such Distribution Date. No assurance can be
given that the master servicing compensation
available to cover Prepayment Interest
Shortfalls will be sufficient therefor. See
"Pooling and Servicing Agreement--Servicing
and Other Compensation and Payment of
Expenses" and "Description of the
Certificates--Interest Distributions" herein.
Principal Distributions......... The "Class A Principal Distribution Amount"
for any Distribution Date will be the lesser
of:
(a) the excess of (i) the Available
Distribution Amount (as defined
herein) over (ii) the Interest
Distribution Amount; and
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(b) the sum of:
(i) the principal portion of scheduled
monthly payments received or
Advanced (as defined herein) on
the Mortgage Loans;
(ii) 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) during the preceding
calendar month;
(iii) the principal portion of all
other unscheduled collections
received during the preceding
calendar month (or deemed to be
received during the preceding
calendar month) (including,
without limitation, full and
partial Principal Prepayments
made by the respective
Mortgagors), to the extent not
distributed in the preceding
month; and
(iv) the amount of any Subordination
Increase Amount (as defined
herein) for such Distribution
Date;
minus
(v) the amount of any Subordination
Reduction Amount (as defined
herein) for such Distribution
Date.
In no event will the Class A Principal
Distribution Amount with respect to any
Distribution Date be (x) less than zero or
(y) greater than the then outstanding
Certificate Principal Balance of the Class A
Certificates. See "Description of the
Certificates--Principal Distributions on the
Class A Certificates" herein.
The Certificate Principal Balance of any
Class A Certificate as of any date of
determination is equal to the initial
Certificate Principal Balance thereof,
reduced by the aggregate of (a) all amounts
allocable to principal previously distributed
with respect to such Certificate and (b) any
reductions in the Certificate Principal
Balance thereof deemed to have occurred in
connection with allocations of Realized
Losses in the manner described herein. The
Certificate Principal Balance of the Class R
Certificates in the aggregate, as of any date
of determination is equal to the excess, if
any, of (a) the then aggregate Stated
Principal Balance of the Mortgage Loans over
(b) the then aggregate Certificate Principal
Balance of the Class A Certificates.
The subordination and cash flow provisions of
the Class R Certificates result in a limited
acceleration of the principal
S-7
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payments to the holders of the Class A
Certificates; such subordination provisions
are more fully described under "Description
of the Certificates--Overcollateralization
Provisions" herein. Such subordination
provisions have the effect of shortening the
weighted average life of the Class A
Certificates by increasing the rate at which
principal is distributed to the Class A
Certificateholders. See "Prepayment and Yield
Considerations" in the Prospectus.
Credit Enhancement.............. The Credit Enhancement provided for the
benefit of the Class A Certificateholders
consists of (a) the overcollateralization
described below and (b) the Certificate
Insurance Policy.
Overcollateralization: The subordination and
cash flow provisions of the Class R
Certificates result in a limited acceleration
of the Class A Certificates relative to the
amortization of the Mortgage Loans. This
acceleration feature creates
overcollateralization which results from the
excess of the aggregate principal balances of
the Mortgage Loans over the Class A
Certificate Principal Balance. Once the
required level of overcollateralization is
reached, and subject to the provisions
described in the next paragraph, the
acceleration feature will cease, unless
necessary to maintain the required level of
overcollateralization.
The Pooling and Servicing Agreement provides
that, subject to certain trigger tests, the
required level of overcollateralization may
increase or decrease over time. An increase
would result in a temporary period of
accelerated amortization of the Class A
Certificates to increase the actual level of
overcollateralization to its required level;
a decrease would result in a temporary period
of decelerated amortization to reduce the
actual level of overcollateralization to its
required level. See "Description of the
Certificates--Overcollateralization
Provisions" herein.
The Certificate Insurance Policy: The Class A
Certificateholders will have the benefit of
the Certificate Insurance Policy discussed
below. The Certificate Insurance Policy does
not insure shortfalls caused by the Relief
Act and any Prepayment Interest Shortfalls to
the extent not covered by the Master Servicer
allocated as described herein. See
"Description of the Certificates--The
Certificate Insurance Policy" and "The
Certificate Insurer" herein.
The Certificate Insurer......... Financial Security Assurance Inc. (the
"Certificate Insurer") is a New York monoline
insurance company engaged in the business of
writing financial guaranty insurance,
principally in respect of securities offered
in domestic and foreign
S-8
<PAGE>
markets. The Certificate Insurer's claims-
paying ability is rated "Aaa" by Moody's
Investors Service, Inc. ("Moody's") and "AAA"
by Standard and Poor's Ratings Group
("Standard & Poor's"), Nippon Investors
Service, Inc. and Standard & Poor's
(Australia) Pty. Ltd. See "Description of the
Certificates--The Certificate Insurance
Policy" and "The Certificate Insurer" herein.
Certificate Insurance Policy.... The Certificate Insurer will issue a
financial guaranty insurance policy (the
"Certificate Insurance Policy") with respect
to the Class A Certificates, pursuant to
which it will irrevocably and unconditionally
guaranty payment on each Distribution Date,
as further described herein, an amount that
will cover any interest shortfalls (except
for shortfalls in respect of the Relief Act
and any Prepayment Interest Shortfalls)
allocated to the Class A Certificates plus
the principal portion of any Realized Losses
allocated to the Class A Certificates. A
payment by the Insurer under the Certificate
Insurance Policy is referred to herein as an
"Insured Payment." See "Description of the
Certificates-- The Certificate Insurance
Policy" herein.
So long as there does not exist a failure by
the Certificate Insurer to make a required
payment under the Certificate Insurance
Policy (such event, a "Certificate Insurer
Default"), the Certificate Insurer shall have
the right to exercise all rights of the
holders of the Class A Certificates under the
Pooling and Servicing Agreement without any
consent of such holders, and such holders may
exercise such rights only with the prior
written consent of the Certificate Insurer
except as provided in the Pooling and
Servicing Agreement. In addition, the
Certificate Insurer will be entitled to
reimbursement for all Insured Payments,
except as otherwise described herein.
Advances........................ The Master Servicer is required to make
advances ("Advances") in respect of
delinquent payments of principal and interest
on the Mortgage Loans, subject to the
limitations described herein. See
"Description of the Certificates--Advances"
herein and in the Prospectus.
Allocation of Losses; Except as otherwise described herein,
Subordination.................. Realized Losses will be allocated first to
the Class R Certificates until the
Certificate Principal Balance thereof has
been reduced to zero; second to the Net
Monthly Excess Cash Flow (as defined herein);
and third to the Class A Certificates to the
extent described in "Description of the
Certificates--Allocation of Losses" herein.
All Realized Losses allocated to the Class A
Certificates will be covered by the
Certificate Insurance Policy.
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<PAGE>
Neither the Class A Certificates nor the
Mortgage Loans are insured or guaranteed by
any governmental agency or instrumentality or
by the Company, the Master Servicer, the
Trustee, GMAC Mortgage or any affiliate
thereof.
Class R Certificates............ As of the Cut-off Date, the Class R
Certificates have no initial Certificate
Principal Balance and no Pass-Through Rate.
The Class R Certificates are not being
offered hereby.
Optional Termination............ At its option, on any Distribution Date when
the aggregate Stated Principal Balance of the
Mortgage Loans is less than 10% of the
aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, the Master
Servicer or the Company may (i) purchase from
the Trust Fund all remaining Mortgage Loans
and other assets thereof, and thereby effect
early retirement of the Certificates or (ii)
purchase in whole, but not in part, the
Certificates. See "Pooling and Servicing
Agreement--Termination" herein and "The
Pooling and Servicing Agreement--Termination;
Retirement of Certificates" in the
Prospectus.
Special Prepayment The rate and timing of principal payments on
Considerations................. the Class A Certificates will depend, among
other things, on the rate and timing of
principal payments (including prepayments,
defaults, liquidations and purchases of
Mortgage Loans due to a breach of
representation and warranty) on the Mortgage
Loans. As is the case with mortgage-backed
securities generally, the Class A
Certificates are subject to substantial
inherent cash flow uncertainties because the
Mortgage Loans may be prepaid at any time.
Generally, when prevailing interest rates
increase, prepayment rates on mortgage loans
tend to decrease, resulting in a slower
return of principal to investors at a time
when reinvestment at such higher prevailing
rates would be desirable. Conversely, when
prevailing interest rates decline, prepayment
rates on mortgage loans tend to increase,
resulting in a faster return of principal to
investors at a time when reinvestment at
comparable yields may not be possible. In
addition, a majority of the Mortgage Loans
(by aggregate outstanding principal balance
as of the Cut-off Date) provide for a
prepayment charge. Typically, the Mortgage
Loans with a prepayment charge provision
provide for a prepayment charge for partial
prepayments and full prepayments made within
approximately five years of the origination
of such Mortgage Loan. Such prepayment
charges may reduce the rate of prepayment on
the Mortgage Loans.
See "Description of the Certificates--
Principal Distributions on the Class A
Certificates" and "Certain Yield and
Prepayment Considerations" herein and
"Maturity and
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<PAGE>
Prepayment Considerations" in the Prospectus.
For further information regarding the effect
of principal prepayments on the weighted
average life of the Class A Certificates, see
the table entitled "Percent of Initial
Certificate Principal Balance Outstanding at
the Following Percentages of CPR" herein.
Special Yield Considerations.... The yield to maturity on the Class A
Certificates will depend on, among other
things, the rate and timing of principal
payments (including prepayments, defaults,
liquidations and purchases of Mortgage Loans
due to a breach of representation and
warranty) on the Mortgage Loans and the
allocation thereof to reduce the Certificate
Principal Balance of such class. The yield to
maturity on the Class A Certificates will
also depend on changes in One-Month LIBOR and
the effect of the Maximum Mortgage Rate,
Minimum Mortgage Rate and Periodic Rate Cap
(each as defined herein) applicable to each
Mortgage Loan. The yield to investors on the
Class A Certificates will be adversely
affected by any allocation of Prepayment
Interest Shortfalls on the Mortgage Loans,
which are expected to result from the
distribution of interest only to the date of
prepayment (rather than a full month's
interest) in connection with prepayments in
full, and the lack of any distribution of
interest on the amount of any partial
prepayments. Prepayment Interest Shortfalls
resulting from principal prepayments in full
in any calendar month will not adversely
affect the yield to investors in the Class A
Certificates to the extent such Prepayment
Interest Shortfalls are covered by the Master
Servicer as discussed herein.
In general, if the Class A Certificates are
purchased at a premium and principal
distributions to such class occur at a rate
faster than anticipated at the time of
purchase, the investor's actual yield to
maturity will be lower than that assumed at
the time of purchase. Conversely, if the
Class A Certificates are purchased at a
discount and principal distributions to such
class occur at a rate slower than that
assumed at the time of purchase, the
investor's actual yield to maturity will be
lower than assumed at the time of purchase.
Certain Federal Income Tax An election will be made to treat the Trust
Consequences................... Fund as a real estate mortgage investment
conduit ("REMIC") for federal income tax
purposes. Upon the issuance of the Class A
Certificates, Thacher Proffitt & Wood,
counsel to the Company, will deliver its
opinion generally to the effect that,
assuming compliance with all provisions of
the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund
will qualify as a REMIC under Sections 860A
through 860G of the Internal Revenue Code of
1986 (the "Code").
S-11
<PAGE>
For federal income tax purposes, the Residual
Certificates will constitute the sole class
of "residual interests" in the REMIC and the
Class A Certificates will represent ownership
of "regular interests" in the REMIC and will
generally be treated as debt instruments of
the REMIC.
For further information regarding the federal
income tax consequences of investing in the
Class A Certificates, see "Certain Federal
Income Tax Consequences" herein and in the
Prospectus.
Legal Investment................ The Class A Certificates will constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") for so long as they are
rated in one of the two highest rating
categories by at least one of the Rating
Agencies. Institutions whose investment
activities are subject to legal investment
laws and regulations, regulatory capital
requirements or review by regulatory
authorities may be subject to restrictions on
investment in the Class A Certificates and
should consult with their legal advisors. See
"Legal Investment" herein and "Legal
Investment Matters" in the Prospectus.
Ratings......................... It is a condition to the issuance of the
Class A Certificates that they be rated "AAA"
by Standard & Poor's and "Aaa" by Moody's. A
security rating is not a recommendation to
buy, sell or hold securities and may be
subject to revision or withdrawal at any time
by the assigning rating organization. A
security rating does not address the
frequency of prepayments of Mortgage Loans,
or the corresponding effect on yield to
investors. See "Certain Yield and Prepayment
Considerations" and "Ratings" herein and
"Yield Considerations" in the Prospectus.
S-12
<PAGE>
RISK FACTORS
In addition to the matters described elsewhere in this Prospectus Supplement
and the Prospectus, prospective investors should carefully consider, among
other things, the following factors in connection with the purchase of the
Class A Certificates:
RISKS ASSOCIATED WITH THE MORTGAGE LOANS
The Mortgage Loans have been originated using underwriting standards that are
less stringent than the underwriting standards applied by other first mortgage
loan purchase programs such as those run by Fannie Mae or by Freddie Mac or by
the Company's affiliate, Residential Funding, for the purpose of
collateralizing securities issued by Residential Funding Mortgage Securities I,
Inc. For example, the Mortgage Loans may have been made to Mortgagors having
imperfect credit histories, ranging from minor delinquencies to bankruptcies,
or Mortgagors with higher ratios of monthly mortgage payments to income or
higher ratios of total monthly credit payments to income. As a result of the
underwriting standards, the Mortgage Loans are likely to experience rates of
delinquency, foreclosure and bankruptcy that are higher, and that may be
substantially higher, than those experienced by mortgage loans underwritten in
a more traditional manner. 2.0% of the Mortgage Loans are one month delinquent
in payment of principal or interest at the time of their deposit into a Trust
Fund. See "Description of the Mortgage Pool--Mortgage Pool Characteristics" and
"--Underwriting Standards" herein. The Mortgage Loans with higher loan-to-value
ratios (each, a "Loan-to-Value Ratio") may also present a greater risk of loss.
Approximately 10.5% of the Mortgage Loans, by aggregate principal balance as
of the Cut-off Date, have been originated approximately between one and two
years prior to the Closing Date. Such seasoned Mortgage Loans may have higher
current Loan-to-Value Ratios than at origination if the value of the related
Mortgaged Property has declined. No assurance can be given that values of the
Mortgaged Properties have remained or will remain at the levels existing on the
dates of origination of the related Mortgage Loans. If a residential real
estate market should experience an overall decline in property values, or if
the Mortgagors of such seasoned Mortgage Loans have lower incomes or poorer
credit histories than at the time of origination of the related Mortgage Loan,
the actual rates of delinquencies, foreclosures and losses could be higher than
the rates otherwise expected by an investor in the Class A Certificates.
Approximately 21.9% of the Mortgage Loans, by aggregate principal balance as of
the Cut-off Date, are secured by Mortgaged Properties located in the State of
California. If the California residential real estate market should experience
an overall decline in property values after the dates of origination of the
Mortgage Loans, the rates of delinquencies, foreclosures, bankruptcies and
losses on the Mortgage Loans may be expected to increase, and may increase
substantially.
LIMITED OBLIGATIONS
The Certificates will not represent an interest in or obligation of the
Company, the Master Servicer, the Mortgage Collateral Sellers (as defined
herein), GMAC Mortgage or any of their affiliates. The only obligations of the
foregoing entities with respect to the Certificates or any Mortgage Loan will
be the obligations (if any) of the Company, the Mortgage Collateral Sellers and
the Master Servicer pursuant to certain limited representations and warranties
made with respect to the Mortgage Loans and the Master Servicer's servicing
obligations under the Pooling and Servicing Agreement (including the Master
Servicer's limited obligation to make certain Advances). Neither the
Certificates nor the underlying Mortgage Loans will be guaranteed or insured by
any governmental agency or instrumentality, or by the Company, the Master
Servicer, the Mortgage Collateral Sellers, GMAC Mortgage or any of their
affiliates. The Class A Certificates are covered by the Certificate Insurance
Policy, as and to the extent described herein. Proceeds of the assets included
in the Trust Fund (including the Mortgage Loans and the Certificate Insurance
Policy) will be the sole source of payments on the Certificates, and there will
be no recourse to the Company, the Master Servicer, the Mortgage Collateral
Sellers, GMAC Mortgage or any other entity in the event that such proceeds are
insufficient or otherwise unavailable to make all payments provided for under
the Certificates.
S-13
<PAGE>
LIMITATIONS AND REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
Credit enhancement will be provided for the Class A Certificates in the form
of the overcollateralization provisions described herein and the Certificate
Insurance Policy. Such overcollateralization provides limited coverage as to
Special Hazard Losses, Fraud Losses and Bankruptcy Losses and provides no
coverage as to Extraordinary Losses. None of the Company, the Master Servicer,
the Mortgage Collateral Sellers, GMAC Mortgage nor any of their affiliates will
have any obligation to replace or supplement such credit enhancement, or to
take any other action to maintain any rating of the Class A Certificates.
PASS-THROUGH RATE RISK
The Pass-Through Rate is based upon the value of an index (One-Month LIBOR
(as defined herein)) which is different from the value of the indices
applicable to the Mortgage Loans, as described under "Description of the
Mortgage Pool" herein. Each Mortgage Loan adjusts semi-annually based upon Six-
Month LIBOR (as defined herein) whereas the Pass-Through Rate on the Class A
Certificates adjusts monthly based upon One-Month LIBOR (as defined herein),
limited by the Available Funds Pass-Through Rate (as defined herein). In
addition, One-Month LIBOR and the Index applicable to such Mortgage Loans may
respond differently to economic and market factors, and there is not
necessarily any correlation between them. In addition, the Mortgage Loans are
subject to Periodic Rate Caps, Maximum Mortgage Rates and Minimum Mortgage
Rates (each as defined herein). Thus, it is possible, for example, that One-
Month LIBOR may rise during periods in which the Mortgage Loan's Index is
stable or is falling or that, even if both One-Month LIBOR and such Index rise
during the same period, One-Month LIBOR may rise much more rapidly than such
Index.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate principal
balance outstanding as of the Cut-off Date, after deducting payments of
principal due on such date, of $94,350,062. The Mortgage Pool will consist of
conventional, adjustable rate, fully-amortizing and balloon payment, first
Mortgage Loans with terms to maturity of not more than 30 years from the date
of origination or modification. With respect to Mortgage Loans which have been
modified, references herein to the date of origination shall be deemed to be
the date of the most recent modification. All percentages of the Mortgage Loans
described herein are approximate percentages (except as otherwise indicated) by
aggregate principal balance as of the Cut-off Date.
The Mortgage Loans were purchased by the Company through its affiliate
Residential Funding from mortgage collateral sellers (each a "Mortgage
Collateral Seller") and assigned to the Company by Residential Funding. Such
purchases occurred by (i) direct purchases from Mortgage Collateral Sellers and
(ii) purchases through the AlterNet Mortgage Program. 33.8% of the Mortgage
Loans were purchased from (and will be subserviced by) National Mortgage
Corporation and the remaining Mortgage Loans were purchased through the
AlterNet Program, including 33.9% of the Mortgage Loans which were purchased
from (and will be subserviced by) Option One Mortgage Corporation. See "--The
Servicers" herein. Except as described above, no Mortgage Collateral Seller
sold more than 11.2% of the Mortgage Loans to Residential Funding. See "--The
AlterNet Program" below. For a description of the underwriting criteria
applicable to the Mortgage Loans, see "--Underwriting Standards" below.
The Company and Residential Funding will make certain limited representations
and warranties regarding the Mortgage Loans as of the date of issuance of the
Certificates. The Company and Residential Funding will be required to
repurchase or substitute for any Mortgage Loan as to which a breach of its
representations and warranties with respect to such Mortgage Loan occurs if
such breach materially and adversely affects the interests of the
Certificateholders in any such Mortgage Loan and the Mortgage Loan is not
otherwise repurchased by the related Mortgage Collateral Seller in accordance
with the terms of the
S-14
<PAGE>
Pooling and Servicing Agreement. The Company, as assignee of Residential
Funding, will also assign to the Trustee for the benefit of the
Certificateholders certain of its rights, title and interest in any agreement
relating to the transfer and assignment of the Mortgage Loans to the Company by
Residential Funding, including certain representations and warranties made by
the Mortgage Collateral Sellers. Insofar as any such agreement relates to the
representations and warranties made by the related Mortgage Collateral Seller
in respect of such Mortgage Loan and any remedies provided thereunder for any
breach of such representations and warranties, such right, title and interest
may be enforced by the Master Servicer on behalf of the Trustee and the
Certificateholders. However, neither the Company nor Residential Funding will
be required to repurchase or substitute for any Mortgage Loan in the event of a
breach of its representations and warranties with respect to such Mortgage Loan
if the substance of any such breach also constitutes fraud in the origination
of such affected Mortgage Loan. A limited amount of losses on Mortgage Loans as
to which there was fraud in the origination of such Mortgage Loans will be
covered by the Subordination (as defined herein) provided by the Class R
Certificates as described herein under "Description of the Certificates--
Allocation of Losses; Subordination." Additional fraud losses will be covered
by the Certificate Insurance Policy.
MORTGAGE RATE ADJUSTMENT
The Mortgage Rate on each Mortgage Loan will adjust semi-annually on the
Adjustment Date specified in the related Mortgage Note to a rate equal to the
sum rounded up to the nearest multiple of 0.125% (other than 22.6% of the
Mortgage Loans which round to the nearest multiple of 0.125% and 10.5% of the
Mortgage Loans which do not round) of the Index described below and a fixed
percentage set forth in the related Mortgage Note (the "Note Margin"), subject
to certain limitations described herein. The amount of the monthly payment on
each Mortgage Loan will be adjusted semi-annually on the first day of the month
following the month in which the Adjustment Date occurs to equal the amount
necessary to pay interest at the then-applicable Mortgage Rate and, except with
respect to the Balloon Mortgage Loans (as defined herein), to fully amortize
the outstanding principal balance of the Mortgage Loan over its remaining term
to stated maturity. As of the Cut-off Date, 15.4% of the Mortgage Loans will
have reached their first Adjustment Date. The Mortgage Loans will have
different Adjustment Dates, Note Margins and limitations on the Mortgage Rate
adjustments, as described below.
Each Mortgage Note contains an interest rate adjustment cap (the "Periodic
Rate Cap") which limits the adjustment of the Mortgage Rate to not more than
1.00% (or 1.50% with respect to 1.6% of the Mortgage Loans) above or below the
previous Mortgage Rate. The Mortgage Rate on a Mortgage Loan may not exceed the
maximum Mortgage Rate (the "Maximum Mortgage Rate") or be less than the minimum
Mortgage Rate (the "Minimum Mortgage Rate") specified for such Mortgage Loan in
the related Mortgage Note. For approximately 5.2% of the Mortgage Loans, the
Mortgage Rate as of the Cut-off Date was less than the Minimum Mortgage Rate
specified in the Mortgage Note. The Minimum Mortgage Rates will range from
2.625% to 17.300%, with a weighted average Minimum Mortgage Rate as of the Cut-
off Date of 9.7833%. The Maximum Mortgage Rates will range from 9.875% to
23.300%, with a weighted average Maximum Mortgage Rate as of the Cut-off Date
of 16.0709%. No Mortgage Loan provides for payment caps on any Adjustment Date
which would result in deferred interest or negative amortization.
The Index applicable with respect to approximately 76.6% and 12.0% of the
Mortgage Loans will be a per annum rate equal to the average of interbank
offered rates for six-month U.S. dollar-denominated deposits in the London
market based on quotations of major banks ("Six-Month LIBOR") as published in
The Wall Street Journal and as most recently available as of the first business
day of the month immediately preceding the month in which the Adjustment Date
(each such date as of which Six-Month LIBOR is determined, a "Reference Date")
occurs, or as of the date forty-five days prior to the Adjustment Date,
respectively. With respect to approximately 11.4% of the Mortgage Loans the
Index shall be Six-Month LIBOR, as published by Fannie Mae and as most recently
available as of the date forty-five days prior to the Adjustment Date. In the
event that the Index is no longer available, an index reasonably acceptable to
the Trustee that is based on comparable information will be selected by the
Master Servicer.
S-15
<PAGE>
Listed below are levels of Six-Month LIBOR as published by The Wall Street
Journal that are or would have been applicable to mortgage loans with a
Reference Date of the first business day of the preceding month, and having the
following adjustment dates for the indicated years. Such average yields may
fluctuate significantly from month to month as well as over longer periods and
may not increase or decrease in a constant pattern from period to period. There
can be no assurance that levels of Six-Month LIBOR published by Fannie Mae, or
published in The Wall Street Journal on a different Reference Date would have
been at the same levels as those set forth below. The following does not
purport to be representative of future levels of Six-Month LIBOR (as published
by Fannie Mae or The Wall Street Journal). No assurance can be given as to the
level of Six-Month LIBOR on any Adjustment Date or during the life of any
Mortgage Loan.
SIX-MONTH LIBOR
<TABLE>
<CAPTION>
ADJUSTMENT DATE 1992 1993 1994 1995
- --------------- ------ ----- ----- -----
<S> <C> <C> <C> <C>
January 1.......................................... 4.9375% 4.000% 3.500% 6.562%
February 1......................................... 4.1875 3.625 3.500 7.000
March 1............................................ 4.250 3.375 3.375 6.687
April 1............................................ 4.375 3.312 4.000 6.437
May 1.............................................. 4.500 3.375 4.250 6.500
June 1............................................. 4.250 3.312 4.688 6.375
July 1............................................. 4.1875 3.500 5.000 6.000
August 1........................................... 4.0625 3.500 5.250
September 1........................................ 3.625 3.500 5.313
October 1.......................................... 3.625 3.437 5.313
November 1......................................... 3.250 3.375 5.750
December 1......................................... 3.625 3.437 5.937
</TABLE>
The initial Mortgage Rate in effect on a Mortgage Loan generally will be
lower, and may be significantly lower, than the sum of the Index that would
have been applicable at origination and the Note Margin. Therefore, unless the
Index declines after origination of a Mortgage Loan, the related Mortgage Rate
will generally increase on the first Adjustment Date following origination of
such Mortgage Loan subject to the Periodic Rate Cap. The repayment of the
Mortgage Loans will be dependent on the ability of the Mortgagors to make
larger monthly payments following adjustments of the Mortgage Rate. Mortgage
Loans that have the same initial Mortgage Rate may not always bear interest at
the same Mortgage Rate because such Mortgage Loans may have different
Adjustment Dates (and the Mortgage Rates therefore may reflect different Index
values), Note Margins, Maximum Mortgage Rates and Minimum Mortgage Rates. The
Mortgage Rate on each Mortgage Loan will be adjusted on each Adjustment Date to
equal the sum (rounded as described herein) of the Index and Note Margin,
subject to the Maximum Mortgage Rate, Minimum Mortgage Rate and Periodic Rate
Cap for such Mortgage Loan.
BALLOON MORTGAGE LOANS
Approximately 0.9% of the Mortgage Loans require monthly payments of
principal based on 30 year amortization schedules and have scheduled maturity
dates of 15 years from the due date of the first monthly payment (each such
Mortgage Loan, a "Balloon Mortgage Loan"), in each case leaving a substantial
portion of the original principal amount due and payable on the respective
scheduled maturity date (a "Balloon Payment"). The existence of a Balloon
Payment generally will require the related mortgagor to refinance such Mortgage
Loan or to sell the Mortgaged Property on or prior to the scheduled maturity
date. The ability of a mortgagor to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage
rates at the time of sale or refinancing, the mortgagor's equity in the related
Mortgaged Property, the financial condition of the mortgagor, tax laws and
prevailing general economic conditions. None of the Company, the Master
Servicer or the Trustee is obligated to refinance any Balloon Mortgage Loan.
The Certificate Insurance Policy will provide coverage on any losses incurred
upon liquidation of a Balloon Mortgage Loan arising out of or in connection
with the failure of a mortgagor to make its Balloon Payment.
S-16
<PAGE>
MORTGAGE POOL CHARACTERISTICS
The Mortgage Pool will have the following characteristics as of the Cut-off
Date:
<TABLE>
<S> <C>
Number of Mortgage Loans........................................ 875
Range of Net Mortgage Rates (1)................................. 5.135%-16.560%
Mortgage Rates:
Weighted Average.............................................. 10.2837%
Range......................................................... 5.750%-17.300%
Note Margins:
Weighted Average.............................................. 5.4641%
Range......................................................... 2.625%-9.950%
Net Note Margins (2):
Weighted Average.............................................. 4.7429%
Range......................................................... 2.010%-9.210%
Minimum Mortgage Rates:
Weighted Average.............................................. 9.7833%
Range......................................................... 2.625%-17.300%
Minimum Net Mortgage Rates:
Weighted Average.............................................. 9.0621%
Range......................................................... 2.010%-16.560%
Maximum Mortgage Rates:
Weighted Average.............................................. 16.0709%
Range......................................................... 9.875%-23.300%
Maximum Net Mortgage Rates:
Weighted Average.............................................. 15.3497%
Range......................................................... 9.260%-22.560%
Weighted Average Months to next Adjustment Date after June 1,
1995 (3)....................................................... 4
</TABLE>
- --------
(1) The Net Mortgage Rate on each Mortgage Loan is equal to the Mortgage Rate
thereon minus the related Servicing Fee Rate (as defined herein) and the
per annum rate at which the Premium Fee (as defined herein) accrues. The
Net Mortgage Rate with respect to each Mortgage Loan as of the Cut-off Date
will be set forth in the Mortgage Loan Schedule attached to the Pooling and
Servicing Agreement. As of the Cut-off Date, the weighted average Net
Mortgage Rate will be 9.5625% per annum.
(2) The Net Note Margin is equal to the Note Margin minus the Servicing Fee
Rate and the per annum rate at which the Premium Fee accrues.
(3) The Weighted Average Months to next Adjustment Date will be equal to the
weighted average of the number of months until the Adjustment Date next
following June 1, 1995.
All percentages of the Mortgage Loans described herein are approximate
percentages (except as otherwise indicated) by aggregate principal balance as
of the Cut-off Date.
None of the Mortgage Loans will have been originated prior to June 4, 1993 or
will have a maturity date later than June 1, 2025. No Mortgage Loan will have a
remaining term to stated maturity as of the Cut-off Date of less than 175
months. The weighted average remaining term to stated maturity of the Mortgage
Loans as of the Cut-off Date will be 354 months. The weighted average original
term to maturity of the Mortgage Loans as of the Cut-off Date will be 357
months.
As of the Cut-off Date, 2.0% of the Mortgage Loans are one month delinquent
in payment of principal and interest. As of the Cut-off Date, no Mortgage Loan
is two months or more delinquent in payment of principal and interest.
The Mortgage Loans are generally assumable pursuant to the terms of the
related Mortgage Note. See "Maturity and Prepayment Considerations" in the
Prospectus.
S-17
<PAGE>
A majority of the Mortgage Loans (by aggregate outstanding principal balance
as of the Cut-off Date) provide for payment of a prepayment charge. As to each
such Mortgage Loan, the prepayment charge provisions typically provide for
payment of a prepayment charge for partial prepayments and full prepayments
made within approximately five years of the origination of such 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 the 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.
No Mortgage Loan provides for deferred interest or negative amortization.
None of the Mortgage Loans will be Buydown Mortgage Loans.
None of the Mortgage Loans provide for the conversion of the Mortgage Rate
from an adjustable rate to a fixed rate.
Set forth below is a description of certain additional characteristics of the
Mortgage Loans as of the Cut-off Date (except as otherwise indicated). All
percentages of the Mortgage Loans are approximate percentages by aggregate
principal balance as of the Cut-off Date (except as otherwise indicated).
Unless otherwise specified, all principal balances of the Mortgage Loans are as
of the Cut-off Date and are rounded to the nearest dollar.
MORTGAGE RATES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
MORTGAGE RATES (%) LOANS BALANCE MORTGAGE POOL
- ------------------ --------- ----------- -------------
<S> <C> <C> <C>
5.500- 5.999............................... 4 $ 894,895 0.95%
6.000- 6.499............................... 10 1,415,593 1.50
6.500- 6.999............................... 29 4,899,499 5.19
7.000- 7.499............................... 14 1,409,743 1.49
7.500- 7.999............................... 25 3,524,768 3.74
8.000- 8.499............................... 23 2,168,346 2.30
8.500- 8.999............................... 44 5,547,146 5.88
9.000- 9.499............................... 74 8,212,672 8.70
9.500- 9.999............................... 106 11,263,023 11.94
10.000-10.499............................... 92 10,834,252 11.48
10.500-10.999............................... 123 13,216,731 14.01
11.000-11.499............................... 77 7,043,019 7.46
11.500-11.999............................... 79 7,718,833 8.18
12.000-12.499............................... 50 4,770,425 5.06
12.500-12.999............................... 44 4,332,226 4.59
13.000-13.499............................... 20 2,018,327 2.14
13.500-13.999............................... 34 3,112,548 3.30
14.000-14.499............................... 8 590,241 0.63
14.500-14.999............................... 9 556,129 0.59
15.000-15.499............................... 3 250,253 0.27
15.500-15.999............................... 4 321,918 0.34
16.000-16.499............................... 2 163,104 0.17
17.000-17.499............................... 1 86,370 0.09
--- ----------- ------
Total..................................... 875 $94,350,062 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Rate of the Mortgage
Loans will be approximately 10.2837% per annum.
S-18
<PAGE>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
NUMBER OF
RIGINAL MORTGAGEO MORTGAGE PERCENT OF
LOAN BALANCE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- ----------------- --------- ----------------- -------------
<S> <C> <C> <C>
$ 0-100,000..................... 529 $34,321,771 36.38%
100,001-200,000..................... 250 33,675,526 35.69
200,001-300,000..................... 72 16,974,936 17.99
300,001-400,000..................... 17 5,867,720 6.22
400,001-500,000..................... 5 2,347,339 2.49
500,001-600,000..................... 1 543,307 0.58
600,001-700,000..................... 1 619,464 0.66
--- ----------- ------
Total.............................. 875 $94,350,062 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the Mortgage
Loans will be approximately $107,829.
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
NUMBER OF
ORIGINAL MORTGAGE PRINCIPAL PERCENT OF
LOA-TO-VALUE RATIO (%)N LOANS BALANCE MORTGAGE POOL
- ----------------------- --------- ----------- -------------
<S> <C> <C> <C>
0.01-50.00................................ 58 $ 4,396,743 4.66%
50.01-55.00................................ 27 2,536,073 2.69
55.01-60.00................................ 81 8,674,245 9.19
60.01-65.00................................ 155 15,201,663 16.11
65.01-70.00................................ 201 19,107,755 20.25
70.01-75.00................................ 163 19,182,305 20.33
75.01-80.00................................ 149 18,857,350 19.99
80.01-85.00................................ 20 2,965,130 3.14
85.01-90.00................................ 11 1,892,412 2.01
90.01-95.00................................ 10 1,536,388 1.63
--- ----------- ------
Total.................................... 875 $94,350,062 100.00%
=== =========== ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage Loans
will be approximately 70.33%.
S-19
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
STATE LOANS BALANCE MORTGAGE POOL
- ----- --------- ----------- -------------
<S> <C> <C> <C>
California.................................. 158 $20,629,962 21.87%
Colorado.................................... 95 10,229,427 10.84
Massachusetts............................... 93 9,491,666 10.06
Connecticut................................. 62 7,713,108 8.17
Illinois.................................... 74 7,102,162 7.53
Washington.................................. 52 5,969,448 6.33
Oregon...................................... 44 4,373,072 4.63
Georgia..................................... 55 4,229,673 4.48
Other (1)................................... 242 24,611,543 26.09
--- ----------- ------
Total..................................... 875 $94,350,062 100.00%
=== =========== ======
</TABLE>
- --------
(1) Other includes states and the District of Columbia with under 3%
concentrations individually.
No more than 0.6% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area in California and no more than 1.0%
of the Mortgage Loans will be secured by Mortgaged Properties located in any
one zip code area outside California.
SCHEDULED MORTGAGE TERM
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
SCHEDULED MORTGAGE TERM LOANS BALANCE MORTGAGE POOL
- ----------------------- --------- ----------- -------------
<S> <C> <C> <C>
175......................................... 1 $ 203,598 0.216%
176......................................... 3 623,429 0.661
177......................................... 4 279,908 0.297
178......................................... 3 245,605 0.260
337......................................... 1 72,196 0.077
340......................................... 1 231,597 0.245
342......................................... 1 138,821 0.147
343......................................... 1 58,871 0.062
344......................................... 1 233,287 0.247
346......................................... 15 2,506,462 2.657
347......................................... 8 1,249,196 1.324
348......................................... 24 3,890,879 4.124
349......................................... 12 1,583,054 1.678
350......................................... 4 667,894 0.708
351......................................... 3 490,128 0.519
352......................................... 1 88,589 0.094
353......................................... 16 2,174,431 2.305
354......................................... 9 1,177,700 1.248
355......................................... 17 2,578,914 2.733
356......................................... 47 5,925,833 6.281
357......................................... 225 21,278,445 22.553
358......................................... 313 32,082,947 34.004
359......................................... 109 11,082,199 11.746
360......................................... 56 5,486,078 5.815
--- ----------- -------
Total..................................... 875 $94,350,062 100.000%
=== =========== =======
</TABLE>
As of the Cut-Off Date, the weighted average Scheduled Term to Maturity will
be approximately 354 months.
S-20
<PAGE>
RISK GRADES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
RISK GRADE LOANS BALANCE MORTGAGE POOL
- ---------- --------- ----------- -------------
<S> <C> <C> <C>
CATEGORY 1A................................. 182 21,244,627 22.517
CATEGORY 1.................................. 283 30,712,950 32.552
CATEGORY 2.................................. 178 19,954,020 21.149
CATEGORY 3.................................. 129 12,919,745 13.693
CATEGORY 4.................................. 103 9,518,720 10.089
--- ----------- ------
Total..................................... 875 $94,350,062 100.00%
=== =========== ======
</TABLE>
MORTGAGE LOAN PURPOSE
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
LOAN PURPOSE LOANS BALANCE MORTGAGE POOL
- ------------ --------- ----------- -------------
<S> <C> <C> <C>
Purchase.................................... 212 $23,803,480 25.23%
Rate/Term Refinance......................... 119 14,595,827 15.47
Equity Refinance............................ 544 55,950,754 59.30
--- ----------- ------
Total..................................... 875 $94,350,062 100.00%
=== =========== ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of rate and term
refinance Mortgage Loans will be 71.00%. The weighted average Loan-to-Value
Ratio at origination of equity refinance Mortgage Loans will be 68.41%.
MORTGAGE LOAN DOCUMENTATION TYPES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
DOCUMENTATION TYPE LOANS BALANCE MORTGAGE POOL
- ------------------ --------- ----------- -------------
<S> <C> <C> <C>
Full Documentation.......................... 655 $70,750,884 74.99%
Reduced Documentation....................... 220 23,599,178 25.01
--- ----------- ------
Total..................................... 875 $94,350,062 100.00%
=== =========== ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage Loans
which were underwritten under a reduced loan documentation program will be
62.23%. No more than 15.7% of such reduced loan documentation Mortgage Loans
will be secured by Mortgaged Properties located in California.
OCCUPANCY TYPES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
OCCUPANCY LOANS BALANCE MORTGAGE POOL
- --------- --------- ------------ -------------
<S> <C> <C> <C>
Primary Residence.......................... 746 $ 83,987,614 89.02%
Second/Vacation............................ 14 1,839,265 1.95
Non Owner-occupied......................... 115 8,523,183 9.03
--- ------------ ------
Total.................................... 875 $ 94,350,062 100.00%
=== ============ ======
</TABLE>
S-21
<PAGE>
MORTGAGED PROPERTY TYPES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
PROPERTY TYPE LOANS BALANCE MORTGAGE POOL
- ------------- --------- ----------- -------------
<S> <C> <C> <C>
Single-family detached...................... 699 $77,772,106 82.43%
Planned Unit Developments (detached)........ 30 3,954,065 4.19
Two- to four-family units................... 90 7,318,081 7.76
Condo Low-Rise (less than 5 stories)........ 35 2,635,884 2.79
Condo Mid-Rise (5 to 8 stories)............. 4 599,795 0.64
Condo High-Rise (9 stories or more)......... 3 365,975 0.39
Townhouse................................... 4 334,464 0.35
Planned Unit Developments (attached)........ 8 848,437 0.90
Leasehold................................... 1 57,548 0.06
Cooperative Units........................... 1 463,707 0.49
--- ----------- ------
Total..................................... 875 $94,350,062 100.00%
=== =========== ======
</TABLE>
NOTE MARGINS
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
NOTE MARGINS (%) LOANS BALANCE MORTGAGE POOL
- ---------------- --------- ------------ -------------
<S> <C> <C> <C>
2.500-2.999................................ 44 $ 7,404,830 7.85%
3.000-3.499................................ 29 4,230,984 4.48
3.500-3.999................................ 34 4,375,350 4.64
4.000-4.499................................ 25 3,211,790 3.40
4.500-4.999................................ 73 9,035,628 9.58
5.000-5.499................................ 102 10,223,410 10.84
5.500-5.999................................ 210 22,100,452 23.42
6.000-6.499................................ 126 11,402,489 12.09
6.500-6.999................................ 105 10,623,059 11.26
7.000-7.499................................ 61 5,679,979 6.02
7.500-7.999................................ 36 3,082,606 3.27
8.000-8.499................................ 20 2,064,492 2.19
8.500-8.999................................ 9 826,621 0.88
9.500-9.999................................ 1 88,373 0.09
--- ------------ ------
Total.................................... 875 $ 94,350,062 100.00%
=== ============ ======
</TABLE>
As of the Cut-Off Date, the weighted average Note Margin of the Mortgage
Loans will be approximately 5.4641% per annum.
S-22
<PAGE>
MAXIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
MAXIMUM MORTGAGE RATES (%) LOANS BALANCE MORTGAGE POOL
- -------------------------- --------- ----------- -------------
<S> <C> <C> <C>
9.000- 9.999................................ 2 $ 526,731 0.56%
10.000-10.999................................ 31 5,426,408 5.75
11.000-11.999................................ 16 2,420,836 2.57
12.000-12.999................................ 14 1,644,116 1.74
13.000-13.999................................ 30 3,626,403 3.84
14.000-14.999................................ 63 7,110,488 7.54
15.000-15.999................................ 189 21,145,466 22.41
16.000-16.999................................ 199 21,420,938 22.70
17.000-17.999................................ 152 14,336,700 15.20
18.000-18.999................................ 95 8,907,746 9.44
19.000-19.999................................ 56 5,492,543 5.82
20.000-20.999................................ 17 1,146,370 1.22
21.000-21.999................................ 8 895,844 0.95
22.000-22.999................................ 2 163,104 0.17
23.000-23.999................................ 1 86,370 0.09
--- ----------- ------
Total...................................... 875 $94,350,062 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the weighted average Maximum Mortgage Rate of the
Mortgage Loans will be approximately 16.0709% per annum.
MINIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
MINIMUM MORTGAGE RATES (%) LOANS BALANCE MORTGAGE POOL
- -------------------------- --------- ----------- -------------
<S> <C> <C> <C>
2.000- 2.999................................ 43 $ 7,171,543 7.60%
3.000- 3.999................................ 18 2,970,206 3.15
4.000- 4.999................................ 3 588,681 0.62
5.000- 5.999................................ 3 189,656 0.20
6.000- 6.999................................ 9 1,113,843 1.18
7.000- 7.999................................ 33 3,957,083 4.19
8.000- 8.999................................ 65 7,426,259 7.87
9.000- 9.999................................ 167 17,734,797 18.80
10.000-10.999................................ 202 21,983,715 23.30
11.000-11.999................................ 152 14,434,008 15.30
12.000-12.999................................ 84 7,710,428 8.17
13.000-13.999................................ 51 4,941,160 5.24
14.000-14.999................................ 31 2,962,929 3.14
15.000-15.999................................ 11 916,281 0.97
16.000-16.999................................ 2 163,104 0.17
17.000-17.999................................ 1 86,370 0.09
--- ----------- ------
Total...................................... 875 $94,350,062 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the weighted average Minimum Mortgage Rate of the
Mortgage Loans will be approximately 9.7833% per annum.
S-23
<PAGE>
NEXT INTEREST RATE ADJUSTMENT DATES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
NEXT INTEREST CHANGE DATE LOANS BALANCE MORTGAGE POOL
- ------------------------- --------- ----------- -------------
<S> <C> <C> <C>
July 1995.................................... 32 $ 4,496,633 4.77%
August 1995.................................. 55 7,450,444 7.90
September 1995............................... 232 22,048,480 23.37
October 1995................................. 330 34,792,014 36.88
November 1995................................ 128 14,208,279 15.06
December 1995................................ 97 11,267,523 11.94
January 1996................................. 1 86,688 0.09
--- ----------- ------
Total...................................... 875 $94,350,062 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the weighted average Months to Next Interest Rate
Adjustment Date will be approximately 4.
In connection with Mortgage Loans that are secured by a leasehold interest,
the Seller shall have represented to the Company that, among other things: the
use of leasehold estates for residential properties is an accepted practice in
the area where the Mortgaged Property is located; residential property in such
area consisting of leasehold estate is readily marketable; the lease is
recorded and no party is in any way in breach of any provision of such lease;
the leasehold is in full force and effect and is not subject to any prior lien
or encumbrance by which the leasehold could be terminated or subject to any
charge or penalty; and the remaining term of the lease does not terminate less
than ten years after the maturity date of each such Mortgage Loan.
Certain aspects of the Cooperative Loan included in the Mortgage Pool differ
from those of other types of Mortgage Loans. See "Certain Legal Aspects of
Mortgage Loans and Related Matters--Cooperative Loans" in the Prospectus.
STANDARD HAZARD INSURANCE AND PRIMARY MORTGAGE INSURANCE
Each Mortgage Loan is required to be covered by a standard hazard insurance
policy. In addition, to the best of the Company's knowledge, except with
respect to 25 Mortgage Loans, representing approximately 3.9% of the Mortgage
Loans, each Mortgage Loan with a Loan-to-Value Ratio at origination in excess
of 80% will be insured by a primary mortgage insurance policy (a "Primary
Insurance Policy") covering the amount of such Mortgage Loan in excess of 75%
of the value of the related Mortgaged Property used in determining such Loan-
to-Value Ratio (the "Appraised Value"). Substantially all of such Primary
Insurance Policies were issued by General Electric Mortgage Insurance
Corporation, PMI Mortgage Insurance Company, Mortgage Guaranty Insurance
Corporation or United Guaranty Residential Insurance Company, (collectively,
the "Primary Insurers"). Each Primary Insurer has a claims paying ability
currently acceptable to the Rating Agencies that have been requested to rate
the Certificates; however, there is no assurance as to the actual ability of
any Primary Insurer to pay claims. See "Insurance Policies on Mortgage Loans or
Contracts Standard Hazard Insurance on Mortgaged Properties" and "--Primary
Mortgage Insurance Policies" in the Prospectus.
UNDERWRITING STANDARDS
Prior to assignment to the Company, Residential Funding reviewed the
underwriting for each Mortgage Loan and purchased the Mortgage Loans from
Mortgage Collateral Sellers who participated in or whose loans were in
substantial conformity with the standards set forth in Residential Funding's
AlterNet program, and from National Mortgage Corporation (see "--National
Mortgage Corporation" and "--The Servicers" below) which had developed its own
guidelines and network of sellers with respect to the Mortgage Loans it funded
and subsequently sold to Residential Funding.
S-24
<PAGE>
All of the Mortgage Loans including those acquired from National Mortgage
Corporation had features which generally distinguish such loans from the more
stringent underwriting requirements used as standards for Fannie Mae and
Freddie Mac, and moreover, from the more stringent underwriting standards set
forth in Residential Funding's Seller Guide for Mortgage Loan collateral that
does not present special risk features (which generally provides the basis for
underwriting Mortgage Loans that serve as the assets for securities issued by
Residential Funding's affiliate, Residential Funding Mortgage Securities I,
Inc.). Residential Funding established risk categories by which it could
aggregate acceptable loans into groupings considered to have progressively
greater risk characteristics. A more detailed description of those risk
categories is set forth below.
Residential Funding's underwriting of the Mortgage Loans generally consisted
of analyzing the creditworthiness of a mortgagor, the income sufficiency of a
mortgagor's projected family income relative to the mortgage payment and to
other fixed obligations (including in certain instances rental income from
investment property), and the adequacy of the mortgaged property (expressed in
terms of Loan-to-Value Ratio), to serve as the collateral for a mortgage loan.
Generally, each mortgagor would have been required to complete an application
designed to provide to the original lender pertinent credit information
concerning the mortgagor. As part of the description of the mortgagor's
financial condition, each mortgagor furnished information (which may have been
supplied solely in such application) with respect to its assets, liabilities,
income, credit history, employment history and personal information, and
furnished an authorization to apply for a credit report which summarized the
borrower's credit history with local merchants and lenders and any record of
bankruptcy. The mortgagor may also have been required to authorize
verifications of deposits at financial institutions where the mortgagor had
demand or savings accounts. In the case of investment properties, income
derived from the mortgaged property may have been considered for underwriting
purposes. With respect to mortgaged property consisting of vacation or second
homes, generally no income derived from the property was considered for
underwriting purposes.
Based on the data provided in the application, certain verifications (if
required by the originator of the mortgage loan) and the appraisal or other
valuation of the mortgaged property, a determination was made by the original
lender that the mortgagor's monthly income would be sufficient to enable the
mortgagor to meet its monthly obligations on the mortgage loan and other
expenses related to the property (such as property taxes, utility costs,
standard hazard insurance and other fixed obligations other than housing
expenses). The originator's guidelines for mortgage loans generally specify
that scheduled payments on a mortgage loan during the first year of its term
plus taxes and insurance and all scheduled payments on obligations that extend
beyond ten months (including those mentioned above and other fixed obligations)
equal no more than specified percentages of the prospective mortgagor's gross
income. The originator may also have considered the amount of liquid assets
available to the mortgagor after origination.
Certain of the Mortgage Loans have been originated under "limited
documentation" programs which require less documentation and verification than
do traditional "full documentation" programs. Generally, under such a program,
minimal investigation into a mortgagor's credit history and income profile
would have been undertaken by the originator and the underwriting for such
mortgage loans will place a greater emphasis on the value of the mortgaged
property. As used in this section, "Loan-to-Value Ratio" shall generally mean
that ratio, expressed as a percentage of (a) the principal amount of the
Mortgage Loan at origination, over (b) the lesser of the sales price or the
appraised value of the related Mortgaged Property at origination, or in the
case of a refinanced or modified Mortgage Loan, the lesser of the appraised
value determined at origination or at the time of the refinancing or
modification.
The adequacy of a mortgaged property as security for repayment of the related
mortgage loan generally has been determined by an appraisal in accordance with
pre-established appraisal procedure guidelines for appraisals established by or
acceptable to the originator. Appraisers were either staff appraisers employed
by the originator or independent appraisers selected in accordance with pre-
established guidelines established by the originator. The appraisal procedure
guidelines generally will have required the appraiser or an agent on
S-25
<PAGE>
its behalf to personally inspect the property and to verify whether the
property was in good condition and that construction, if new, had been
substantially completed. The appraisal would have considered a market data
analysis of recent sales of comparable properties and, when deemed applicable,
an analysis based on income generated from the property or replacement cost
analysis based on the current cost of constructing or purchasing a similar
property. In certain instances, the Loan-to-Value Ratio was based on the
appraised value as indicated on a review appraisal conducted by the Mortgage
Collateral Seller or originator.
Generally, the Mortgage Loans were either originated and underwritten in
accordance with Residential Funding's AlterNet Program, as discussed below, or
acquired from a Mortgage Collateral Seller and reviewed by Residential Funding
to determine acceptability and risk category classification. However, in the
case of National Mortgage Corporation, Residential Funding agreed to re-
underwrite the Mortgage Loans purchased from National Mortgage Corporation in
accordance with the stated underwriting standards of National Mortgage
Corporation, but made its own determination as to the risk category
classification assigned to each of such Mortgage Loans.
The risk categories established by Residential Funding and applicable to all
of the Mortgage Loans, including those acquired from National Mortgage
Corporation, are expressed herein as Risk Categories 1A, 1, 2, 3 and 4.
Risk Category 1A: Under Risk Category 1A, the prospective mortgagor must have
repaid installment or revolving debt according to its terms. A maximum of one
30-day late payment, and no 60-day or 90-day late payments, within the last 12
months is acceptable on an existing mortgage loan. Minor derogatory items are
allowed as to non-mortgage credit (provided, any open charge-offs in excess of
$200 must be paid down to zero at closing). As to each mortgagor in this Risk
Category, bankruptcies were discharged during the two-year period prior to the
date the mortgage loan was made and there was evidence that the mortgagor had
re-established its credit to an acceptable level. The mortgaged property must
be in average to good condition. A maximum Loan-to-Value Ratio of 95% is
permitted for a mortgage loan on a single family owner-occupied property (or
80% for a mortgage loan originated under a limited documentation program). A
maximum Loan-to-Value Ratio of 90% (or 65% for mortgage loans originated under
the limited documentation program) is permitted for a mortgage loan on a non-
owner occupied property. The mortgagor's debt service-to-income ratio generally
is 45% or less based on the initial rate on the mortgage loan plus 2% per
annum.
Risk Category 1: Under Risk Category 1, the prospective mortgagor is required
to have generally repaid all previous or existing installment or revolving debt
according to its terms. A maximum of two 30-day late payments, and no 60-day or
90-day late payments, within the last 12 months is acceptable on an existing
mortgage loan. As to non-mortgage credit, some prior defaults may have occurred
(provided, any open charge-offs in excess of $200 must be paid down to zero at
closing). No bankruptcies were discharged during the two-year period prior to
the date the mortgage loan was made and there was evidence that the Mortgagor
had re-established its credit to an acceptable level. The mortgaged property
must be in average to good condition. A maximum Loan-to-Value Ratio of 85% (or
75% for mortgage loans originated under a limited documentation program) is
permitted for a mortgage loan on an owner-occupied property. A maximum Loan-to-
Value Ratio of 75% (or 65% for mortgage loans originated under a limited
documentation program) is permitted for a mortgage loan on a non-owner occupied
property. The debt service-to-income ratio generally is 45% or less based on an
initial rate on the mortgage loan plus 2% per annum.
Risk Category 2: Under Risk Category 2, the prospective mortgagor may not
have paid all previous or existing installment or revolving debt according to
its terms, and may have some charge-offs. A maximum of four 30-day late
payments and one 60-day but no 90-day late payments, within the last 12 months
is acceptable on an existing mortgage loan. As to non-mortgage credit, some
prior defaults may have occurred (provided, any open charge-offs in excess of
$2500 must be paid down to zero at closing). No bankruptcies were discharged
during the eighteen-month period prior to the date the mortgage loan was made
and there was evidence that the Mortgagor had re-established its credit to an
acceptable level. The applicant must have also established some good credit
since any bankruptcy proceedings. The mortgaged property must be in
S-26
<PAGE>
average to good condition. A maximum Loan-to-Value Ratio of 80% (or 70% for
mortgage loans originated under a limited documentation program) is permitted
for a mortgage loan on an owner-occupied property. A maximum Loan-to-Value
Ratio of 70% (or 60% for mortgage loans originated under a limited
documentation program) is permitted for a mortgage loan on a non-owner-occupied
property. The debt service-to-income ratio generally is 50% or less based on
the initial rate on the mortgage loan plus 2% per annum.
Risk Category 3: Under Risk Category 3, the prospective mortgagor may have
experienced significant credit problems in the past. A maximum of six 30-day
late payments, two 60-day late payments and one 90-day late payment, within the
last 12 months is acceptable on an existing mortgage loan, provided that if
there are no 60-day or 90-days late payments, a mortgagor may be permitted to
have more than six 30-day late payments. As to non-mortgage credit, significant
prior defaults may have occurred (provided, any open charge-offs in excess of
$2500 or more must be paid down to zero at closing). No bankruptcies were
discharged during the 12-month period prior to the date the mortgage loan was
made. The mortgaged property must be in average to good condition. A maximum
Loan-to-Value of 70% (or 65% for mortgage loans originated under a limited
documentation program) is permitted for a mortgage loan on an owner-occupied
property. A maximum Loan-to-Value Ratio of 65% (or 60% for mortgage loans
originated under a limited documentation program) is permitted for a mortgage
loan on a non-owner occupied property. The debt service-to-income ratio
generally is 55% or less based on the initial rate on the mortgage loan plus 2%
per annum.
Risk Category 4: Under Risk Category 4, the prospective mortgagor may have
experienced substantial credit problems in the past. As to the mortgaged
credit, the mortgagor may have had a history of being generally 30 to 60 days
delinquent, and a maximum of two 90-day late payments within the last 12 months
is acceptable on an existing mortgage loan. The prospective mortgagor's credit
history is poor and a notice of default may have been filed. As to non-mortgage
credit, significant prior defaults may have occurred and any open charge-offs
may not have been paid off prior to closing. A bankruptcy filing by the
mortgagor is permitted if it is discharged at closing. The mortgaged property
must be in average to good condition. A maximum Loan-to-Value Ratio of 65% for
mortgage loans originated under a full or limited documentation program is
permitted for a mortgage loan on an owner-occupied property. A maximum Loan-to-
Value Ratio of 60% for mortgage loans originated under a full or limited
documentation program is permitted for a mortgage loan on a non-owner occupied
property. The debt service-to-income ratio generally is 60% or less based on
the initial rate on the mortgage loan plus 2% per annum.
As described above, the indicated underwriting standards applicable to the
Mortgage Loans include the foregoing categories and characteristics as
guidelines only. On a case-by-case basis, the underwriting process may
determine that the prospective mortgagor warrants a risk category upgrade based
on compensating factors. The underwriting standards applicable for Risk
Categories 1A, 1 and 2 may include debt service-to-income ratios up to 5%
higher for mortgage loans which have Loan-to-Value Ratios of 70% or less. An
additional 5% variance for mortgage loans which have Loan-to-Value Ratios less
than 65% may also have been permitted. Similar variance adjustments of up to 5%
may have been allowed for Risk Category 3 for mortgage loans which have Loan-
to-Value Ratios less than 65%.
Based on the indicated underwriting standards applicable for mortgage loans
with risk features originated thereunder, and in particular mortgage loans in
Risk Categories 3 and 4 as described herein, such mortgage loans are likely to
experience greater rates of delinquency, foreclosure and loss, and may
experience substantially greater rates of delinquency, foreclosure and loss
than mortgage loans underwritten under more stringent underwriting standards.
THE ALTERNET PROGRAM
Residential Funding has established a program (the "AlterNet Program")
primarily for the purchase of mortgage loans that are made to borrowers that
may have imperfect credit histories, higher debt to income
S-27
<PAGE>
ratios or mortgage loans that present certain other risks to investors. The
Mortgage Collateral Sellers that participate in the AlterNet Mortgage Program
(each, an "AlterNet Program Seller") have been selected by Residential Funding
on the basis of criteria set forth in Residential Funding's AlterNet Seller
Guide (the "AlterNet Seller Guide"). For those Mortgage Loans which Residential
Funding purchased from AlterNet Program Sellers, each Mortgage Loan determined
by Residential Funding to be acceptable for purchase would have been originated
in accordance with or would have been determined to be generally consistent
with the provisions of the AlterNet Seller Guide. Each AlterNet Program Seller
is a HUD-approved mortgagee or a financial institution supervised by a federal
or state authority and has had a minimum of two years' experience (which may be
through a predecessor entity) in originating mortgage loans. If an AlterNet
Program Seller becomes subject to the control of the Resolution Trust
Corporation or otherwise becomes the subject of a receivership, conservatorship
or other insolvency or bankruptcy proceeding or if an AlterNet Program Seller's
net worth, financial performance or delinquency and foreclosure rates are
adversely impacted, such institution may continue to be treated as an AlterNet
Program Seller.
NATIONAL MORTGAGE CORPORATION
Approximately 33.8% of the Mortgage Loans totaling approximately $31,874,027
were purchased from National Mortgage Corporation ("National Mortgage"). See
"--the Servicers" below for additional information regarding National Mortgage.
National Mortgage made representations and warranties with respect to the
Mortgage Loans it sold to Residential Funding and will serve as the primary
servicer for such loans. National Mortgage is a privately-held Colorado
corporation owned by two of the senior officers of the corporation. These
individuals also have ownership interests in other corporate entities engaged
in real estate finance and mortgage loan securitization.
National Mortgage is a mortgage banking organization which has been approved
by Ginnie Mae, Fannie Mae, Freddie Mac and HUD. Its principal business is the
acquisition of, and the resale or securitization of, residential mortgage loans
and, ongoing primary servicing for many of the mortgage loans it sells.
National Mortgage originates or purchases first mortgage non-conforming
mortgage loans on residential properties throughout the United States,
including residential mortgage loans with varying risk features such as the
Mortgage Loans that Residential Funding acquired from National Mortgage, and
which constitute a substantial percentage of the Mortgage Loans included in the
Mortgage Pool. National Mortgage has developed its HomeSource Program, which
generally serves as the basis for its acquisition of mortgage loans from
approved sellers. The principal offices of National Mortgage are located at
7600 E. Orchard Road, Suite 330-S, Englewood, Colorado 80111-4943.
OPTION ONE MORTGAGE CORPORATION
Approximately 33.9% of the Mortgage Loans totaling approximately $32,018,242
were purchased from Option One Mortgage Corporation ("Option One"). See "--The
Servicers" below for additional information regarding Option One. Option One
made representations and warranties with respect to the Mortgage Loans it sold
to Residential Funding and will serve as the primary servicer for such loans.
Option One was organized in October, 1992 as a wholly owned subsidiary of Plaza
Home Mortgage Corporation ("Plaza") and began operations in February, 1993.
Plaza was purchased by Fleet National Bank ("FNB") in March of 1995 and Option
One became a wholly owned subsidiary of FNB, a subsidiary of Fleet Financial
Group (NYSE: FLT) and an affiliate of Fleet Mortgage Group. Option One engages
in the origination, purchase, sale and servicing of one- to four-family
residential mortgage loans. Option One provides loans primarily to borrowers
that do not qualify for loans conforming to Fannie Mae or Freddie Mac
guidelines who also have the ability to make large down payments or who have
substantial equity in their property.
RESIDENTIAL FUNDING
Residential Funding will be responsible for master servicing the Mortgage
Loans. Such responsibilities will include the receipt of funds from
Subservicers, the reconciliation of servicing activity with respect to the
S-28
<PAGE>
Mortgage Loans, investor reporting, remittances to the Trustee to accommodate
distributions to Certificateholders, follow up with Subservicers with respect
to Mortgage Loans that are delinquent or for which servicing decisions may need
to be made, REO management and liquidation of REO Properties, notices and other
responsibilities as detailed in the Pooling and Servicing Agreement.
Residential Funding and its affiliates are active purchasers of non-
conforming mortgage loans and have sold a substantial amount of mortgage loans
that do not present certain of the special risk factors presented by the
Mortgage Loans as described herein, and serves as the master servicer for
transactions backed by most of such mortgage loans. As of March 31, 1995,
Residential Funding was master servicing 93,719 of such mortgage loans,
totalling approximately $23.8 billion. As a result of the underwriting
standards of the Mortgage Loans, however, the Mortgage Loans are likely to
experience rates of delinquency, foreclosure and loss that are higher, and that
may be substantially higher, than those experienced by other pools of mortgage
loans for which Residential Funding acts as master servicer. In addition,
Residential Funding has not had sufficient experience master servicing the
types of mortgage loans comprising the Mortgage Pool to provide meaningful
disclosure of its delinquency and loss experience with respect to such mortgage
loans.
THE SERVICERS
Primary servicing will be provided by National Mortgage for approximately
33.8% of the Mortgage Loans and by Option One for approximately 33.9% of the
Mortgage Loans. The remainder of the Mortgage Loans will be serviced by various
AlterNet Program Sellers or on a contract basis on behalf of Residential
Funding by non-Mortgage Collateral Sellers, including 15.9% of the Mortgage
Loans which will be subserviced by LSI Financial Group (which is not an
affiliate of the Company) and 6.7% of the Mortgage Loan which will be
subserviced by GMAC Corporation of Iowa (an affiliate of the Company), both of
which are subservicing on a contract basis. See "--The AlterNet Program" above.
National Mortgage has provided Residential Funding with the following
information regarding its organization and the servicing of mortgage loans
which it considers non-conforming credits and none of the Company, the Master
Servicer or the Underwriter make any representations or warranties as to the
accuracy or completeness of such information. The table below sets forth the
overall delinquency experience on residential one- to four-family mortgage
loans for non-conforming credits which are currently serviced by National
Mortgage and which are included as part of two pools of mortgage loans backing
the Fund America Investors Corporation II, Series 1993-H and Series 1994-A Pass
Through Certificates, and one pool of mortgages backing the Residential Asset
Securities Corporation Series 1995-K1, but does not include information
regarding the Mortgage Loans. No mortgage loan is considered delinquent for
purposes of the table until a payment is 30 days past due on a contractual
basis. It should be noted that National Mortgage commenced its servicing
activities for these types of non-conforming mortgage loans in 1993 and that
its portfolio consists of mortgage loans that were originated during the
periods from 1993 to 1995 in accordance with the underwriting standards it had
established or other underwriting guidelines that it determined were
substantially similar. The information in the table below is not intended to
indicate or predict the expected delinquency experience on past, current or
future pools of mortgage loans for which National Mortgage is the primary
servicer.
S-29
<PAGE>
NATIONAL MORTGAGE CORPORATION
SECURITIZED NON-CONFORMING MORTGAGE LOAN PORTFOLIO EXPERIENCE
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MAY 31, MAY 31,
1993 1994 1994 1995
------------ ------------ ------- --------
(DOLLAR AMOUNTS IN (DOLLAR AMOUNTS
THOUSANDS) IN THOUSANDS)
<S> <C> <C> <C> <C>
Total Number of Mortgage Loans...... 371 728 341 1,401
Total Dollar Amount of Mortgage
Loans.............................. $38,244 $68,909 $33,342 $130,545
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1994 MAY 31, 1994 MAY 31, 1995
----------------- ----------------- ----------------- -----------------
NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Period of Delinquency
30-59 days............. 18 4.85% 24 3.30% 13 3.82% 45 3.21%
60-89 days............. 4 1.08% 6 0.82% 5 1.47% 16 1.14%
90-120 days............ 0 0.00% 0 0.00% 1 0.29% 1 0.07%
120 days or more(1).... 0 0.00% 4 0.55% 1 0.29% 5 0.36%
---- ----- ---- ----- ---- ---- ---- ----
Total Delinquent
Mortgage Loans(1)...... 22 5.93% 34 4.67% 20 5.87% 67 4.78%
==== ===== ==== ===== ==== ==== ==== ====
Loans in Foreclosure.... 0 0.00% 13 1.79% 8 2.35% 36 2.57%
Net Loan Gains (Losses)
for the Period......... 0 $0.00 0 $0.00 0 $0 2 ($52)
Net Loan Gains (Losses)
as a Percent of
Outstanding Loans...... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.14% 0.04%
</TABLE>
- --------
(1) Does not include loans in foreclosure
OPTION ONE MORTGAGE CORPORATION
The information set forth below with respect to Option One has been provided
by Option One, and none of the Company, the Master Servicer or the Underwriter
make any representations or warranties as to the accuracy or completeness of
such information. Option One typically retains the servicing of the loans it
originates and is a Fannie Mae approved servicer. The following table sets
forth certain information relating to the delinquency experience of one- to
four-family residential mortgage loans serviced by Option One. The indicated
periods of delinquency are based on the number of days past due on a
contractual basis. No mortgage loan is considered delinquent for these purposes
until it is one month past due on a contractual basis.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MAY 31, 1994 1994 AT MAY 31, 1995
------------------- ------------------- -------------------
BY PERCENT BY BY PERCENT BY BY PERCENT BY
NO. OF NO. OF NO. OF NO. OF NO. OF NO. OF
LOANS LOANS LOANS LOANS LOANS LOANS
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio......... 2,688 6,115 8,872
Period of Delinquency
30-59 days............. 6 0.22% 32 0.52% 50 0.56%
60-89 days............. 1 0.04% 17 0.28% 41 0.46%
90 days or more........ 5 0.19% 28 0.46% 100 1.13%
-------- ---- -------- ---- -------- ----
Total Delinquent Loans.. 12 0.45% 77 1.26% 191 2.15%
======== ==== ======== ==== ======== ====
Memo item
Loans in Foreclosure*... 8 0.30% 50 0.82% 148 1.67%
Loans in Bankruptcy*.... 1 0.04% 7 0.11% 39 0.44%
</TABLE>
- --------
*Loans in Foreclosure and Loans in Bankruptcy are included in the delinquent
loans
S-30
<PAGE>
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the mortgage portfolios set forth in the foregoing tables. The statistics shown
above represent the delinquency experience for the indicated mortgage servicing
portfolios only for the periods presented, whereas the aggregate delinquency
experience on the Mortgage Loans comprising the Mortgage Pool will depend on
the results obtained over the life of the Mortgage Pool. The mortgage servicing
portfolios set forth above include mortgage loans that were originated using a
variety of different underwriting procedures and standards which may have been
more selective. They include mortgage loans with a variety of payment and other
characteristics (including geographic location) which are not necessarily
representative of the payment and other characteristics of the Mortgage Loans
comprising the Mortgage Pool. It should be noted that if the residential real
estate market should experience an overall decline in property values, the
actual rates of delinquencies and foreclosures could be higher than those
previously experienced by the Servicers. In addition, adverse economic
conditions may affect the timely payment by Mortgagors of scheduled payments of
principal and interest on the Mortgage Loans and, accordingly, the actual rates
of delinquencies and foreclosures with respect to the Mortgage Pool.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Class A
Certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise, if the Company deems such removal
necessary or appropriate. A limited number of other mortgage loans may be
included in the Mortgage Pool prior to the issuance of the Class A
Certificates. The Company believes that the information set forth herein will
be substantially representative of the characteristics of the Mortgage Pool as
it will be constituted at the time the Class A Certificates are issued although
the range of Mortgage Rates and maturities and certain other characteristics of
the Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the Class A
Certificates and, together with the Pooling and Servicing Agreement, will be
filed with the Securities and Exchange Commission within fifteen days after the
initial issuance of the Class A Certificates. In the event Mortgage Loans are
removed from or added to the Mortgage Pool as set forth in the preceding
paragraph, such removal or addition will be noted in the Current Report on Form
8-K.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1995-KS1 Mortgage Pass-Through Certificates (the "Certificates")
will include one class of senior Certificates (the "Class A Certificates") and
one class of subordinate Certificates (the "Class R Certificates" or the
"Residual Certificates"). Only the Class A Certificates are offered hereby.
The Certificates in the aggregate will evidence the entire beneficial
ownership interest in the Trust Fund. The Trust Fund will consist of: (i) the
Mortgage Loans; (ii) such assets as from time to time are identified as
deposited in respect of the Mortgage Loans in the Custodial Account and in the
Certificate Account and belonging to the Trust Fund; (iii) property acquired by
foreclosure of such Mortgage Loans or deed in lieu of foreclosure; and (iv) any
applicable Primary Insurance Policies and Primary Hazard Insurance Policies and
all proceeds thereof. The Class A Certificates will be entitled to the benefit
of a financial guaranty insurance policy (the "Certificate Insurance Policy")
to be issued by Financial Security Assurance Inc. (the "Certificate Insurer"),
which will protect the holders of the Class A Certificates against any interest
shortfalls (except as described herein) allocated to the Class A Certificates
and the principal portion of any Realized Losses allocated to the Class A
Certificates. The Certificate Insurance Policy is not part of the Trust Fund.
S-31
<PAGE>
The Class A Certificates will be issued in registered, certificated form in
minimum denominations of $25,000 and integral multiples of $1 in excess
thereof.
AVAILABLE DISTRIBUTION AMOUNT
The "Available Distribution Amount" for any Distribution Date is equal to the
sum of (i) the aggregate amount of scheduled payments on the Mortgage Loans due
on the related Due Date and received on or prior to the related Determination
Date, after deduction of the master servicing fee, the subservicing fees and
the premium payable with respect to the Certificate Insurance Policy, (ii)
certain unscheduled payments, including Mortgagor prepayments on the Mortgage
Loans, Insurance Proceeds, Liquidation Proceeds and proceeds from repurchases
of and substitutions for the Mortgage Loans occurring during the preceding
calendar month, and (iii) all Advances made for such Distribution Date, in each
case net of amounts reimbursable therefrom to the Master Servicer and any
Subservicer. In addition to the foregoing amounts, with respect to unscheduled
collections, not including Mortgagor prepayments, the Master Servicer may elect
to treat such amounts as included in the Available Distribution Amount for the
Distribution Date in the month of receipt, but is not obligated to do so. With
respect to any Distribution Date, (i) the Due Date is the first day of the
month in which such Distribution Date occurs, and (ii) the Determination Date
is the 20th day of the month in which such Distribution Date occurs or, if such
day is not a business day, the immediately succeeding business day.
The Master Servicer may elect to treat Insurance Proceeds, Liquidation
Proceeds and other unscheduled collections (not including prepayments by the
Mortgagors) received in any calendar month as included in the Available
Distribution Amount for the Distribution Date in the month of receipt, but is
not obligated to do so. If the Master Servicer so elects, such amounts will be
deemed to have been received (and any related Realized Loss shall be deemed to
have occurred) on the last day of the month prior to the receipt thereof.
INTEREST DISTRIBUTIONS
On each Distribution Date, holders of the Class A Certificates will be
entitled to receive interest distributions (the "Interest Distribution Amount")
in an amount equal to interest accrued during the related Accrual Period (as
defined herein) on the Certificate Principal Balance thereof at the then-
applicable Pass-Through Rate, subject to reduction only in the event of
shortfalls caused by the Relief Act (as defined in the Prospectus) and any
Prepayment Interest Shortfalls for such Distribution Date to the extent not
covered by the Master Servicer allocated in the manner described below. As
described below, Accrued Certificate Interest on the Class A Certificates is
subject to reduction in the event of certain interest shortfalls allocable
thereto. However, in the event that any such shortfall is allocated to the
Class A Certificates, the amount of such allocated shortfall will be drawn
under the Certificate Insurance Policy and distributed to the holders of the
Class A Certificates; provided that no such draw will be made in respect of any
such shortfall caused by the Relief Act and any Prepayment Interest Shortfalls.
Notwithstanding the foregoing, if payments are not made as required under the
Certificate Insurance Policy, any interest shortfalls may be allocated to the
Class A Certificates as described below.
With respect to any Distribution Date and the Class A Certificates, Accrued
Certificate Interest will be equal to interest accrued during the related
Accrual Period on the Certificate Principal Balance of the Class A Certificates
at the then applicable Pass-Through Rate (as defined below), in each case, less
interest shortfalls, if any, allocated to such class for such Distribution
Date, to the extent not covered with respect to the Class A Certificates by the
Subordination provided by the Class R Certificates, including in each case (i)
any Prepayment Interest Shortfall (as defined below) to the extent not covered
by the Master Servicer as described below, (ii) the interest portions of
Realized Losses (including Special Hazard Losses in excess of the Special
Hazard Amount ("Excess Special Hazard Losses"), Fraud Losses in excess of the
Fraud Loss Amount ("Excess Fraud Losses"), Bankruptcy Losses in excess of the
Bankruptcy Loss Amount ("Excess Bankruptcy Losses") and losses occasioned by
war, civil insurrection, certain governmental actions, nuclear reaction and
certain other risks ("Extraordinary Losses")) not allocated solely to the Class
R Certificates,
S-32
<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 (as defined in the Prospectus)
or similar legislation or regulations, all allocated as described below. With
respect to each Distribution Date, interest payable on the Class A Certificates
will accrue during the period commencing on the 25th day of the month
immediately preceding the month in which such Distribution Date occurs and
ending on the 24th day of the month in which such Distribution Date occurs
(each such period, an "Accrual Period"). Interest will be calculated on the
basis of the actual number of days in the Accrual Period and on a 360-day year.
The Prepayment Interest Shortfall for any Distribution Date is equal to the
aggregate shortfall, if any, in collections of interest (adjusted to the
related Net Mortgage Rates) resulting from Mortgagor prepayments on the
Mortgage Loans during the preceding calendar month. Such shortfalls will result
because interest on prepayments in full is distributed only to the date of
prepayment, and because no interest is distributed on prepayments in part, as
such prepayments in part are applied to reduce the outstanding principal
balance of the related Mortgage Loans as of the Due Date in the month of
prepayment. However, with respect to any Distribution Date, any Prepayment
Interest Shortfalls resulting from prepayments in full during the preceding
calendar month will be offset by the Master Servicer, but only to the extent
such Prepayment Interest Shortfalls do not exceed an amount equal to the lesser
of (a) one-twelfth of 0.125% of the Stated Principal Balance (as defined
herein) of the Mortgage Loans immediately preceding such Distribution Date and
(b) the sum of the master servicing fee payable to the Master Servicer in
respect of its master servicing activities and reinvestment income received by
the Master Servicer on amounts payable with respect to such Distribution Date.
Prepayment Interest Shortfalls resulting from partial prepayments will not be
offset by the Master Servicer from master servicing compensation or otherwise.
No assurance can be given that the master servicing compensation available to
cover Prepayment Interest Shortfalls will be sufficient therefor. See "Pooling
and Servicing Agreement--Servicing and Other Compensation and Payment of
Expenses" herein.
In addition, the amount of any interest shortfalls that are covered by
Subordination (specifically, interest shortfalls not described in clauses (i)
through (iv) in the second preceding paragraph) will constitute unpaid Accrued
Certificate Interest and will be distributable to the Class A
Certificateholders on subsequent Distribution Dates, to the extent of available
funds after interest distributions as required herein. Such shortfalls could
occur, for example, if delinquencies on the Mortgage Loans were exceptionally
high and were concentrated in a particular month and Advances by the Master
Servicer did not cover the shortfall. Any such amounts so carried forward will
not bear interest. Any interest shortfalls will not be offset by a reduction in
the servicing compensation of the Master Servicer or otherwise, except to the
limited extent described in the preceding paragraph with respect to Prepayment
Interest Shortfalls resulting from prepayments in full.
The Pass-Through Rate on the Class A Certificates on the first Distribution
Date will be 6.7125% per annum. On each Distribution Date thereafter, the per
annum Pass-Through Rate applicable to the Class A Certificates will be equal to
the lesser of (i) One-Month LIBOR plus 0.65%, and (ii) the Available Funds
Pass-Through Rate for such Distribution Date.
The "Available Funds Pass-Through Rate," as of any Distribution Date, is a
per annum rate equal to a fraction the numerator of which is an amount equal to
(a) the aggregate amount of interest due on all of the Mortgage Loans for the
related Due Period plus (b) the Subordination Reduction Amount (as defined
herein), if any for such Distribution Date minus (c) the Servicing Fee and the
Premium Fee for such Distribution Date and the denominator of which is one-
twelfth of the Certificate Principal Balance of the Class A Certificates
immediately prior to such Distribution Date. The Available Funds Pass-Through
Rate may be limited by the Maximum Mortgage Rates and Periodic Rate Caps for
the Mortgage Loans. See "The Mortgage Pool" herein.
On any Distribution Date, the amount of the premium (the "Premium Fee")
payable to the Certificate Insurer is equal to one-twelfth of the product of a
percentage specified in the Pooling and Servicing Agreement and the Certificate
Principal Balance of the Class A Certificates.
S-33
<PAGE>
As described herein, the Accrued Certificate Interest allocable to the Class
A Certificates is based on their Certificate Principal Balance. The Certificate
Principal Balance of any Class A Certificate as of any date of determination is
equal to the initial Certificate Principal Balance thereof, reduced by the
aggregate of (a) all amounts allocable to principal previously distributed with
respect to such Certificate and (b) any reductions in the Certificate Principal
Balance thereof deemed to have occurred in connection with allocations of
Realized Losses in the manner described herein. The Certificate Principal
Balance of the Class R Certificates in the aggregate, as of any date of
determination is equal to the excess, if any, of (a) the then aggregate Stated
Principal Balance (as defined herein) of the Mortgage Loans over (b) the then
aggregate Certificate Principal Balance of the Class A Certificates.
CALCULATION OF ONE-MONTH LIBOR
The Pass-Through Rate on the Class A Certificates on the first Distribution
Date will be 6.7125% per annum. Thereafter, on the second business day
preceding each Distribution Date (each such date, an "Interest Determination
Date"), the Trustee will determine the London interbank offered rate for one-
month U.S. dollar deposits ("One-Month LIBOR") for the next Accrual Period for
the Class A Certificates on the basis of the offered rates of the Reference
Banks for one-month U.S. dollar deposits, as such rates appear on the Reuter
Screen LIBO Page, as of 11:00 a.m. (London time) on such Interest Determination
Date. As used in this section, "business day" means a day on which banks are
open for dealing in foreign currency and exchange in London and New York City;
"Reuter Screen LIBO Page" means the display designated as page "LIBO" on the
Reuter Monitor Money Rates Service (or such other page as may replace the LIBO
page on that service for the purpose of displaying London interbank offered
rates of major banks); and "Reference Banks" means leading banks selected by
the Trustee and engaged in transactions in Eurodollar deposits in the
international Eurocurrency market (i) with an established place of business in
London, (ii) whose quotations appear on the Reuter Screen LIBO Page on the
Interest Determination Date in question, (iii) which have been designated as
such by the Trustee and (iv) not controlling, controlled by, or under common
control with, the Company or any Seller.
On each Interest Determination Date, One-Month LIBOR for the related Due
Period for the Class A Certificates will be established by the Trustee as
follows:
(a) If on such Interest Determination Date two or more Reference Banks
provide such offered quotations, One-Month LIBOR for the related Due Period
shall be the arithmetic mean of such offered quotations (rounded upwards if
necessary to the nearest whole multiple of 0.0625%).
(b) If on such Interest Determination Date fewer than two Reference Banks
provide such offered quotations, One-Month LIBOR for the related Due Period
shall be the higher of (x) One-Month LIBOR as determined on the previous
Interest Determination Date and (y) the Reserve Interest Rate. The "Reserve
Interest Rate" shall be the rate per annum that the Trustee determines to
be either (i) the arithmetic mean (rounded upwards if necessary to the
nearest whole multiple of 0.0625%) of the one-month U.S. dollar lending
rates which New York City banks selected by the Trustee are quoting on the
relevant Interest Determination Date to the principal London offices of
leading banks in the London interbank market or, in the event that the
Trustee can determine no such arithmetic mean, (ii) the lowest one-month
U.S. dollar lending rate which New York City banks selected by the Trustee
are quoting on such Interest Determination Date to leading European banks.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Trustee and the Trustee's calculation of the rate of interest applicable to
the Class A Certificates for the related Due Period shall (in the absence of
manifest error) be final and binding.
PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES
The "Class A Principal Distribution Amount" for any Distribution Date will be
the lesser of:
(a) the excess of (i) the Available Distribution Amount over (ii) the
Interest Distribution Amount; and
S-34
<PAGE>
(b) the sum of:
(i) the principal portion of all scheduled monthly payments on the
Mortgage Loans received or Advanced (as defined herein) on the Mortgage
Loans with respect to the related Due Date;
(ii) the principal portion of all proceeds of the repurchase of a
Mortgage Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) as required by the Pooling and
Servicing Agreement during the preceding calendar month;
(iii) the principal portion of all other unscheduled collections
received during the preceding calendar month (or deemed to be received
during the preceding calendar month) (including, without limitation,
full and partial Principal Prepayments made by the respective
Mortgagors), to the extent not distributed in the preceding month; and
(iv) the amount of any Subordination Increase Amount (as defined
herein) for such Distribution Date;
minus
(v) the amount of any Subordination Reduction Amount for such
Distribution Date.
In no event will the Class A Principal Distribution Amount with respect to
any Distribution Date be (x) less than zero or (y) greater than the then
outstanding Certificate Principal Balance of the Class A Certificates.
On each Distribution Date, the Certificate Insurer shall be subrogated to the
rights of the Class A Certificateholder to receive payments of the Interest
Distribution Amount and the Class A Principal Distribution Amount as
applicable, with respect to distributions on the Class A Certificates to the
extent of the aggregate of any payment ("Cumulative Insurance Payments") by the
Certificate Insurer under the Certificate Insurance Policy to the extent not
previously reimbursed. The Class R Certificates shall be entitled to the amount
remaining on such Distribution Date, if any, following the foregoing
distributions.
The Stated Principal Balance of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the Cut-
off Date, whether or not received, reduced by all other amounts allocable to
principal that have been distributed to Certificateholders with respect to such
Mortgage Loan on or before such date, and as further reduced to the extent that
any Realized Loss thereon has been allocated to one or more classes of
Certificates on or before the date of determination.
OVERCOLLATERALIZATION PROVISIONS
Overcollateralization Resulting from Cash Flow Structure. The Pooling and
Servicing Agreement requires that, on each Distribution Date, the "Net Monthly
Excess Cashflow," if any, be applied on such Distribution Date as an
accelerated payment of principal on the Class A Certificates, but only to the
limited extent hereafter described. The Net Monthly Excess Cashflow for a
Distribution Date is equal to the excess of (x) the Available Distribution
Amount for such Distribution Date over (y) the sum of (i) the Interest
Distribution Amount payable to the Class A Certificateholders on such
Distribution Date and the amount described in clause (b) of the definition of
"Class A Principal Distribution Amount" (calculated for this purpose without
regard to any Subordination Increase Amount or portion thereof included
therein) and (ii) Cumulative Insurance Payments, if any, for such Distribution
Date.
This application has the effect of accelerating the amortization of the Class
A Certificates relative to the amortization of the Mortgage Loans. To the
extent that any Net Monthly Excess Cashflow is not so used or used to make
certain payments to the Certificate Insurer as described herein, the Pooling
and Servicing Agreement provides that it will be paid to the holders of the
Class R Certificates.
With respect to any Distribution Date, the excess, if any, of (a) the
aggregate Stated Principal Balances of the Mortgage Loans immediately following
such Distribution Date over (b) the Certificate Principal
S-35
<PAGE>
Balance of the Class A Certificates as of such date (after taking into account
the payment of the amounts described in clauses (b) (i)-(iii) of the definition
of "--Class A Principal Distribution Amount") is the "Subordinated Amount" as
of such Distribution Date. The Pooling and Servicing Agreement requires that
the Net Monthly Excess Cashflow, as reduced by any allocation of Realized
Losses thereto and the payment of certain amounts to the Certificate Insurer,
as described herein, will be applied as an accelerated payment of principal on
the Class A Certificates until the Subordinated Amount has increased to the
level required by the Pooling and Servicing Agreement. Any amount of Net
Monthly Excess Cashflow actually applied as an accelerated payment of principal
is a "Subordination Increase Amount." The required level of the Subordinated
Amount with respect to a Distribution Date is the "Required Subordinated
Amount" with respect to such Distribution Date. The Required Subordinated
Amount will be set at an amount equal to approximately 2.0% of the initial
Certificate Principal Balance of the Class A Certificates as of the Cut-off
Date until the 37th month following the Cut-off Date and thereafter may be
reduced over time, subject to certain triggers, to an amount equal to the
lesser of such amount and approximately 4.0% of the then outstanding
Certificate Principal Balance of the Class A Certificates (but not less than
0.5% of the initial Certificate Principal Balance of the Class A Certificates
as of the Cut-off Date).
In the event that the Required Subordinated Amount is permitted to decrease
or "step down" on a Distribution Date in the future, the Pooling and Servicing
Agreement provides that a portion of the principal which would otherwise be
distributed to the holders of the Class A Certificates on such Distribution
Date shall be distributed to the holders of the Class R Certificates on such
Distribution Date. This has the effect of decelerating the amortization of the
Class A Certificates relative to the amortization of the Mortgage Loans, and of
reducing the Subordinated Amount. With respect to any Distribution Date, the
excess, if any, of (a) the Subordinated Amount that would apply on such
Distribution Date after taking into account all distributions to be made on
such Distribution Date (except for any distributions of related Subordination
Reduction Amounts as described in this sentence) over (b) the Required
Subordinated Amount is the "Excess Subordinated Amount" with respect to such
Distribution Date. If, on any Distribution Date, the Excess Subordinated Amount
is, or, after taking into account all other distributions to be made on such
Distribution Date would be, greater than zero (i.e., the Subordinated Amount is
or would be greater than the related Required Subordinated Amount), then any
amounts relating to principal which would otherwise be distributed to the
holders of the related Class A Certificates on such Distribution Date shall
instead be distributed to the holders of the Class R Certificates in an amount
equal to the lesser of (x) the Excess Subordinated Amount and (y) the amount
available for distribution specified in clauses (b)(i)-(iii) of the definition
of "Class A Principal Distribution Amount" on such Distribution Date; such
amount being the "Subordination Reduction Amount" for such Distribution Date.
CERTIFICATE INSURANCE POLICY
The following summary of the terms of the Certificate Insurance Policy does
not purport to be complete and is qualified in its entirety by reference to the
Certificate Insurance Policy. A form of the Certificate Insurance Policy is
included as an exhibit to the Pooling and Servicing Agreement.
Simultaneously with the issuance of the Class A Certificates, the Certificate
Insurer will deliver the Certificate Insurance Policy to the Trustee for the
benefit of the Class A Certificateholders. Under the Certificate Insurance
Policy, the Certificate Insurer will irrevocably and unconditionally guarantee
payment on each Distribution Date to the Trustee for the benefit of the holders
of the Class A Certificates the full and complete payment of Insured Payments
(as defined below) with respect to the Class A Certificates. "Insured Payments"
shall mean with respect to the Class A Certificates as of any Distribution Date
(i) any shortfall in amounts available in the Certificate Account to pay one
full month's interest on the Certificate Principal Balance of the Class A
Certificates at the then applicable Pass-Through Rate, net of any Prepayment
Interest Shortfalls and any interest shortfalls relating to the Relief Act
allocated to the Class A Certificates, and (ii) the principal portion of any
Realized Loss allocated to the Class A Certificates and (iii) following the
purchase of all assets of the Trust Fund pursuant to the termination section of
the Pooling and Servicing Agreement, any shortfall in the Available
Distribution Amount to pay amounts owed to the holders of the Class A
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Certificates pursuant to such section of the Agreement. In addition, with
respect to any Distribution Date occurring on a date on which a claim has been
previously made under the Certificate Insurance Policy which has not been
reimbursed for six months, the Certificate Insurer at the sole option of the
Certificate Insurer may pay any or all of the outstanding Certificate Principal
Balance of the Class A Certificates.
Payment of claims under the Certificate Insurance Policy will be made by the
Certificate Insurer following Receipt by the Certificate Insurer of the
appropriate notice for payment on the later to occur of (a) 12:00 noon, New
York City time, on the second Business Day following Receipt of such notice for
payment, and (b) 12:00 noon, New York City time, on the relevant Distribution
Date.
The terms "Receipt" and "Received," with respect to the Certificate Insurance
Policy, means actual delivery to the Certificate Insurer and to its fiscal
agent appointed by the Certificate Insurer at its option, if any, prior to
12:00 p.m., New York City time, on a Business Day; delivery either on a day
that is not a Business Day or after 12:00 p.m., New York City time, shall be
deemed to be Receipt on the next succeeding Business Day. If any notice or
certificate given under the Certificate Insurance Policy by the Trustee is not
in proper form or is not properly completed, executed or delivered, it shall be
deemed not to have been Received, and the Certificate Insurer or the fiscal
agent shall promptly so advise the Trustee and the Trustee may submit an
amended notice.
Under the Certificate Insurance Policy, "Business Day" means any day other
than (i) a Saturday or Sunday or (ii) a day on which banking institutions in
the City of New York, New York, the State of New York or in the city in which
the corporate trust office of the Trustee is located, are authorized or
obligated by law or executive order to be closed. The Certificate Insurer's
obligations under the Certificate Insurance Policy to make Insured Payments
shall be discharged to the extent funds are transferred to the Trustee as
provided in the Certificate Insurance Policy, whether or not such funds are
properly applied by the Trustee.
"Term of the Policy" means the period from and including the date of issuance
of the Certificate Insurance Policy to and including the date on which the
Certificate Principal Balance of the Class A Certificates is zero.
The Certificate Insurer shall be subrogated to the rights of the Class A
Certificateholder to receive payments of principal and interest, as applicable,
with respect to distributions on the Class A Certificates to the extent of any
payment by the Certificate Insurer under the Certificate Insurance Policy. To
the extent the Certificate Insurer makes Insured Payments, either directly or
indirectly (as by paying through the Trustee), to the Class A
Certificateholders, the Certificate Insurer will be subrogated to the rights of
the Class A Certificateholders, as applicable, with respect to such Insured
Payment and shall be deemed to the extent of the payments so made to be a
registered Class A Certificateholder for purposes of payment.
Claims under the Certificate Insurance Policy constitute direct unsecured and
unsubordinated obligations of the Certificate Insurer, and will rank equally
with any other unsecured and unsubordinated indebtedness of the Certificate
Insurer for borrowed money. Claims against the Certificate Insurer under the
Certificate Insurance Policy and claims against the Certificate Insurer under
each other financial guaranty insurance policy issued by it constitute equal
claims against the general assets of the Certificate Insurer. The terms of the
Certificate Insurance Policy cannot be modified, altered or affected by any
other agreement or instrument, or by the merger, consolidation or dissolution
of the Company. The Certificate Insurance Policy by its terms may not be
cancelled or revoked. The Certificate Insurance Policy is governed by the laws
of the State of New York. The Certificate Insurance Policy is not covered by
the Property/Casualty Insurance Security Fund specified in Article 76 of the
New York Insurance Law.
To the fullest extent permitted by applicable law, the Certificate Insurer
agrees under the Certificate Insurance Policy not to assert, and waives, for
the benefit of each Class A Certificateholder, all its rights (whether by
counterclaim, setoff or otherwise) and defense (including, without limitation,
the defense of
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fraud), whether acquired by subrogation, assignment or otherwise, to the extent
that such rights and defenses may be available to the Certificate Insurer to
avoid payment of its obligations under the Certificate Insurance Policy in
accordance with the express provisions of the Certificate Insurance Policy.
Pursuant to the terms of the Pooling and Servicing Agreement, unless the
Certificate Insurer fails to make a required payment under the Certificate
Insurance Policy or certain events of insolvency in respect of the Certificate
Insurer exist (either, a "Certificate Insurer Default"), the Certificate
Insurer will be entitled to exercise, among others, the following rights of the
Class A Certificateholders, without the consent of such Certificateholders, and
the Class A Certificateholders may exercise such rights only with the prior
written consent of the Certificate Insurer: (i) the right to direct the Trustee
to terminate the rights and obligations of the Master Servicer under the
Pooling and Servicing Agreement upon the occurrence of an Event of Default by
the Master Servicer and (ii) the right to consent to or direct any waiver of an
Event of Default by the Master Servicer. In addition, unless a Certificate
Insurer Default exists, the Certificate Insurer's consent will be required
prior to, among other things, (i) the removal of the Trustee, (ii) the
termination by the Trustee of the rights and obligations of the Master Servicer
under the Pooling and Servicing Agreement upon the occurrence of an Event of
Default by the Master Servicer, (iii) the appointment of any successor Trustee
or Master Servicer or (iv) any amendment to the Pooling and Servicing
Agreement.
The Company, Residential Funding and the Certificate Insurer will enter into
an Insurance and Indemnity Agreement (the "Insurance Agreement") pursuant to
which the Company will agree to reimburse, with interest, the Certificate
Insurer for amounts paid pursuant to claims under the Certificate Insurance
Policy. The Company will further agree to pay the Certificate Insurer all
reasonable charges and expenses which the Certificate Insurer may pay or incur
relative to any amounts paid under the Certificate Insurance Policy or
otherwise in connection with the transaction and to indemnify the Certificate
Insurer against certain liabilities. Except to the extent provided therein,
amounts owing under the Insurance Agreement will be payable solely from the
Trust Fund. Net Monthly Excess Cashflow will be used to make such payments
prior to use of such amounts to increase the Subordination or to make payments
on the Class R Certificates.
ALLOCATION OF LOSSES; SUBORDINATION
The Certificate Insurance Policy will cover all Realized Losses allocated to
the Class A Certificates. Notwithstanding the foregoing, if payments are not
made as required under the Certificate Insurance Policy, Realized Losses will
be allocable to the Class A Certificates based on the following priorities.
The Subordination provided to the Class A Certificates by the Class R
Certificates will cover Realized Losses on the Mortgage Loans that are
Defaulted Mortgage Losses, Fraud Losses, Bankruptcy Losses (each as defined in
the Prospectus) and Special Hazard Losses (as defined herein). Any Realized
Losses which are not Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary Losses will be allocated first, to the Class
R Certificates until the Certificate Principal Balance of the Class R
Certificates has been reduced to zero; second, to the Net Monthly Excess Cash
Flow for the related Distribution Date; and third, to the Class A Certificates.
Any allocation of a Realized Loss (other than a Debt Service Reduction) to a
Certificate will be made by reducing the Certificate Principal Balance thereof,
in the case of the principal portion of such Realized Loss, and the Accrued
Certificate Interest thereon, in the case of the interest portion of such
Realized Loss, by the amount so allocated as of the Distribution Date occurring
in the month following the calendar month in which such Realized Loss was
incurred. As used herein, "Debt Service Reduction" means a reduction in the
amount of the monthly payment due to certain bankruptcy proceedings, but does
not include any permanent forgiveness of principal. As used herein,
"Subordination" refers to the provisions discussed above for the sequential
allocation of Realized Losses among the various classes, as well as all
provisions effecting such allocations including the priorities for distribution
of cash flows in the amounts described herein.
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Any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses, Extraordinary Losses or other losses of a type not covered by
Subordination will be allocated on a pro rata basis among the Class A
Certificates and Class R Certificates. An allocation of a Realized Loss on a
"pro rata basis" among two or more classes of Certificates means an allocation
to each such class of Certificates on the basis of its then outstanding
Certificate Principal Balance prior to giving effect to distributions to be
made on such Distribution Date (in the case of an allocation of the principal
portion of a Realized Loss) or based on the Accrued Certificate Interest
thereon (in the case of an allocation of the interest portion of a Realized
Loss).
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer or the Subservicer for Advances and expenses, including attorneys'
fees) towards interest and principal owing on the Mortgage Loan. Such amount of
loss realized and any Special Hazard Losses, Fraud Losses and Bankruptcy Losses
are referred to herein as "Realized Losses."
In order to maximize the likelihood of distribution in full of amounts of
interest and principal to be distributed to holders of the Class A Certificates
on each Distribution Date, holders of Class A Certificates have a right to
distributions of the Available Distribution Amount that is prior to the rights
of the holders of the Class R Certificates. In addition, the
overcollaterization as described herein will also maximize the likelihood of
distribution of full amounts of interest and principal to the Class A
Certificates on each Distribution Date.
The aggregate amount of Realized Losses which may be allocated to the Class R
Certificates or covered by Net Monthly Excess Cash Flow otherwise distributable
to the Class R Certificateholders in connection with Special Hazard Losses (the
"Special Hazard Amount") through Subordination shall initially be equal to
$1,238,927. As of any date of determination following the Cut-off Date, the
Special Hazard Amount shall equal $1,238,927 less the sum of (A) any amounts
allocated solely to the Class R Certificates through Subordination in respect
of Special Hazard Losses and (B) the Adjustment Amount. The Adjustment Amount
will be equal to an amount calculated pursuant to the terms of the Pooling and
Servicing Agreement. As used in this Prospectus Supplement, "Special Hazard
Losses" has the same meaning set forth in the Prospectus, except that Special
Hazard Losses will not include and Subordination will not cover Extraordinary
Losses, and Special Hazard Losses will not exceed the lesser of the cost of
repair or replacement of the related Mortgaged Properties.
The aggregate amount of Realized Losses which may be allocated to the Class R
Certificates or covered by net Monthly Excess Cashflow otherwise distributable
to the Class R Certificateholders in connection with Fraud Losses (the "Fraud
Loss Amount") through Subordination shall initially be equal to $2,830,502. As
of any date of determination after the Cut-off Date, the Fraud Loss Amount
shall equal (X) prior to the first anniversary of the Cut-off Date an amount
equal to 3.00% of the aggregate principal balance of all of the Mortgage Loans
as of the Cut-off Date minus the aggregate amounts allocated through
Subordination with respect to Fraud Losses up to such date of determination;
(Y) from the first to the second anniversary of the Cut-off Date, an amount
equal to (1) the lesser of (a) the Fraud Loss Amount as of the most recent
anniversary of the Cut-off Date and (b) 2.00% of the aggregate principal
balance of all of the Mortgage Loans as of the most recent anniversary of the
Cut-off Date minus (2) the aggregate amount allocated through Subordination
with respect to Fraud Losses since the most recent anniversary of the Cut-off
Date up to such date of determination; and (Z) from the second to the fifth
anniversary of the Cut-off Date, an amount equal to (1) the lesser of (a) the
Fraud Loss Amount as of the most recent anniversary of the Cut-off Date and (b)
1.00% of the aggregate principal balance of all of the Mortgage Loans as of the
most recent anniversary of the Cut-off Date minus (2) the aggregate amount
allocated through Subordination with respect to Fraud Losses since the most
recent anniversary of the Cut-off Date up to such date of determination. 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.
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<PAGE>
The aggregate amount of Realized Losses which may be allocated to the Class R
Certificates or covered by net Monthly Excess Cashflow otherwise distributable
to the Class R Certificateholders in connection with Bankruptcy Losses (the
"Bankruptcy Amount") through Subordination will initially be equal to $100,000.
As of any date of determination, the Bankruptcy Amount shall equal $100,000
less the sum of any amounts allocated through Subordination for such losses up
to such date of determination.
Notwithstanding the foregoing, the provisions relating to Subordination will
not be applicable in connection with a Bankruptcy Loss so long as the Master
Servicer has notified the Trustee in writing that the Master Servicer is
diligently pursuing any remedies that may exist in connection with the
representations and warranties made regarding the related Mortgage Loan and
either (A) the related Mortgage Loan is not in default with regard to payments
due thereunder or (B) delinquent payments of principal and interest under the
related Mortgage Loan and any premiums on any applicable Primary Hazard
Insurance Policy and any related escrow payments in respect of such Mortgage
Loan are being advanced on a current basis by the Master Servicer or a
Subservicer.
The Special Hazard Amount, Fraud Amount and Bankruptcy Amount are subject to
further reduction as described in the Prospectus under "Subordination."
ADVANCES
Prior to each Distribution Date, the Master Servicer is required to make
Advances (out of its own funds, advances made by a Subservicer, or funds held
in the Custodial Account (as described in the Prospectus) for future
distribution or withdrawal) with respect to any payments of principal and
interest (net of the Servicing Fee Rate) which were due on the Mortgage Loans
on the immediately preceding Due Date and delinquent on the business day next
preceding the related Determination Date.
Such Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, Insurance
Proceeds, or Liquidation Proceeds. The purpose of making such Advances is to
maintain a regular cash flow to the Certificateholders, rather than to
guarantee or insure against losses. The Master Servicer will not be required to
make any Advances with respect to reductions in the amount of the monthly
payments on the Mortgage Loans due to Debt Service Reductions or the
application of the Relief Act or similar legislation or regulations. Any
failure by the Master Servicer to make an Advance as required under the Pooling
and Servicing Agreement will constitute an Event of Default thereunder, in
which case the Trustee, as successor Master Servicer, will be obligated to make
any such Advance, in accordance with the terms of the Pooling and Servicing
Agreement.
All Advances will be reimbursable to the Master Servicer on a first priority
basis from either late collections, Insurance Proceeds and Liquidation Proceeds
from the Mortgage Loan as to which such unreimbursed Advance was made. In
addition, any Advances previously made which are deemed by the Master Servicer
to be nonrecoverable from related late collections, Insurance Proceeds and
Liquidation Proceeds may be reimbursed to the Master Servicer out of any funds
in the Custodial Account prior to distributions on the Class A Certificates.
THE CERTIFICATE INSURER
The following information has been obtained from the Certificate Insurer and
has not been verified by the Company or the Underwriter. No representation is
made by the Company or the Underwriter as to the accuracy and completeness of
such information.
GENERAL
Financial Security Assurance Inc. (the "Certificate Insurer" or "Financial
Security") is a monoline insurance company incorporated on March 16, 1984 under
the laws of the State of New York. Financial
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<PAGE>
Security received its New York State insurance license and commenced operations
on September 23, 1985. Financial Security is licensed, directly or through its
subsidiaries, to engage in financial guaranty insurance business in all 50
states, the District of Columbia, Puerto Rico and the United Kingdom.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities--thereby enhancing the credit rating of those securities--
in consideration for the payment of a premium to the insurer. Financial
Security and its subsidiaries principally insure asset-backed, collateralized
and municipal securities. Asset-backed securities are generally supported by
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. Collateralized
securities include public utility first mortgage bonds and sale/leaseback
obligation bonds. Municipal securities consist largely of general obligation
bonds, special revenue bonds and other special obligations of state and local
governments. Financial Security insures both newly issued securities sold in
the primary market and outstanding securities sold in the secondary market that
satisfy Financial Security's underwriting criteria.
Financial Security is a wholly-owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange Listed company.
Holdings is owned approximately 61.3% by US WEST Capital Corporation ("US
WEST"); 9.5% by Fund American Enterprises Holdings, Inc. ("Fund American"); and
7.5% by The Tokio Marine and Fire Insurance Co., Ltd. ("Tokio Marine"). US WEST
is a subsidiary of US WEST, Inc., which operates businesses involved in
communications, data solutions, marketing services and capital assets,
including the provision of telephone services in 14 states in the western and
midwestern United States. Fund American is a financial services holding company
whose principal operating subsidiary is one of the nation's largest mortgage
servicers. Tokio Marine is a major Japanese property and casualty insurance
company. US WEST has announced its intention to dispose of its remaining
interest in Holdings as part of its strategic plan to withdraw from businesses
not directly involved in telecommunications. Fund American has certain rights
to acquire and vote additional shares of Holdings from US WEST and Holdings. No
shareholder of Holdings is obligated to pay any debt of Financial Security or
any claim under any insurance policy issued by Financial Security or to make
any additional contribution to the capital of Financial Security.
The principal executive offices of Financial Security are located at 350 Park
Avenue, New York, New York 10022, and its telephone number at that location is
(212) 826-0100. At March 31, 1995, Financial Security and its subsidiaries had
165 employees.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written by Financial Security or any of its subsidiaries are
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, Financial Security
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with other reinsurers under various quota share treaties and
on a transaction-by-transaction basis. Such reinsurance is utilized by
Financial Security as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit Financial
Security's obligations under any financial guaranty insurance policy.
RATINGS OF CLAIMS-PAYING ABILITY
Financial Security's claims-paying ability is rated "Aaa" by Moody's
Investors Service, Inc. ("Moody's") and "AAA" by each of Standard & Poor's
Ratings Group ("Standard & Poor's"), Nippon Investors Service, Inc. and
Standard & Poor's (Australia) Pty. Ltd. Such ratings reflect only the views of
the respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies. See "Ratings".
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CAPITALIZATION
The following table sets forth the capitalization of Financial Security and
its wholly-owned subsidiaries on the basis of generally accepted accounting
principles as of March 31, 1995 (in Thousands):
<TABLE>
<CAPTION>
MARCH 31, 1995
--------------
(UNAUDITED)
<S> <C>
Unearned premium reserve (net of prepaid reinsurance
premiums)................................................ $217,048
--------
Shareholder's equity:
Common stock............................................ 15,000
Additional paid-in capital.............................. 497,506
Unrealized gain on investments (net of deferred income
taxes)................................................. 406
Accumulated earnings.................................... 44,509
--------
Total shareholder's equity............................ 557,421
--------
Total unearned premium reserve and shareholder's equity... $774,469
========
</TABLE>
For further information concerning Financial Security, see the Consolidated
Financial Statement of Financial Security and its subsidiaries, and the notes
thereto, incorporated by reference herein. Copies of the statutory quarterly
and annual financial statements filed with the State of New York Insurance
Department by Financial Security are available upon request to the State of New
York Insurance Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described under "Incorporation of Certain
Information by Reference" in the Prospectus, the consolidated financial
statements of Financial Security included as an exhibit to, the following
documents, which have been filed with the Securities and Exchange Commission by
Holdings are hereby incorporated by reference in the Registration Statement to
which the Prospectus and this Prospectus Supplement form a part:
(a) Annual Report on Form 10-K for the period ended December 31, 1994;
and
(b) Quarterly Report on Form 10-Q for the period ended March 31, 1995.
All financial statements of Financial Security included in documents filed by
Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
The Company will provide without charge to any person to whom this Prospectus
Supplement is delivered, upon oral or written request of such person, a copy of
any or all of the foregoing financial statements incorporated by reference.
Requests for such copies should be directed to its principal executive office
at 8400 Normandale Lake Boulevard, Minneapolis, Minnesota 55437, or by
telephone at (612) 832-7000.
INSURANCE REGULATION
Financial Security is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of New York, its
state of domicile. In addition, Financial Security and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial
guaranty insurance corporation licensed to do business in the State of New
York, Financial Security is subject to Article 69 of the New York Insurance Law
which, among other things, limits the business of each such insurer to
financial guaranty insurance and related lines, requires that each such insurer
maintain a minimum surplus to policyholders, establishes contingency, loss and
unearned premium reserve requirements for each such insurer, and limits the
size of individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer.
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Other provisions of the New York Insurance Law, applicable to non-life
insurance companies such as Financial Security, regulate, among other things,
permitted investments, payment of dividends, transactions with affiliates,
mergers, consolidations, acquisitions or sales of assets and incurrence of
liability for borrowings.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yield to maturity and the aggregate amount of distributions on the Class
A Certificates will be affected by the rate and timing of principal payments on
the Mortgage Loans, the amount and timing of Mortgagor defaults resulting in
Realized Losses and by adjustments to the Mortgage Rates. Such yield may be
adversely affected by a higher or lower than anticipated rate of principal
payments on the Mortgage Loans in the Trust Fund. The rate of principal
payments on such Mortgage Loans will in turn be affected by the amortization
schedules of the Mortgage Loans (which will change as described in "Description
of the Mortgage Pool--Mortgage Rate Adjustment"), the rate and timing of
principal prepayments thereon by the Mortgagors, liquidations of defaulted
Mortgage Loans and purchases of Mortgage Loans due to certain breaches of
representations and warranties. The timing of changes in the rate of
prepayments, liquidations and repurchases of the Mortgage Loans may, and the
timing of Realized Losses will, significantly affect the yield to an investor,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation. Since the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described more fully herein and in the Prospectus under
"Yield Considerations" and "Maturity and Prepayment Considerations"), no
assurance can be given as to such rate or the timing of principal payments on
the Class A Certificates.
The Mortgage Loans generally may be prepaid by the Mortgagors at any time;
however, in certain circumstances, the Mortgage Loans will be subject to a
prepayment charge for prepayments. The Mortgage Loans generally are assumable
under certain circumstances if, in the sole judgment of the Master Servicer or
Subservicer, the prospective purchaser of a Mortgaged Property is creditworthy
and the security for such Mortgage Loan is not impaired by the assumption. In
the event the Master Servicer or Subservicer does not approve an assumption,
the related Mortgage Loan will be due-on-sale. The Master Servicer shall
enforce any due-on-sale clause contained in any Mortgage Note or Mortgage, to
the extent permitted under applicable law and governmental regulations;
provided, however, if the Master Servicer determines that it is reasonably
likely that any Mortgagor will bring, or if any Mortgagor does bring, legal
action to declare invalid or otherwise avoid enforcement of a due-on-sale
clause contained in any Mortgage Note or Mortgage, the Master Servicer shall
not be required to enforce the due-on-sale clause or to contest such action.
The extent to which the Mortgage Loans are assumed by purchasers of the
Mortgaged Properties rather than prepaid by the related Mortgagors in
connection with the sales of the Mortgaged Properties will affect the weighted
average life of the Certificates and may result in a prepayment experience on
the Mortgage Loans that differs from that on other conventional mortgage loans.
See "Maturity and Prepayment Considerations" in the Prospectus. Prepayments,
liquidations and purchases of the Mortgage Loans will result in distributions
to holders of the Class A Certificates of principal amounts which would
otherwise be distributed over the remaining terms of the Mortgage Loans.
Factors affecting prepayment (including defaults and liquidations) of mortgage
loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties, changes in
the value of the mortgaged properties, mortgage market interest rates and
servicing decisions.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. Increases in the monthly payments to an amount in excess of the monthly
payment required
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at the time of origination may result in a default rate higher than that on
level payment mortgage loans, particularly since the Mortgagor under each
Mortgage Loan was qualified on the basis of the Mortgage Rate in effect at
origination. The repayment of such Mortgage Loans will be dependent on the
ability of the Mortgagor to make larger monthly payments as the Mortgage Rate
increases. In addition, the rate of default on Mortgage Loans which are
refinance or limited documentation mortgage loans, and on Mortgage Loans with
high Loan-to-Value Ratios, may be higher than for other types of Mortgage
Loans. As a result of the underwriting standards applicable to the Mortgage
Loans, the Mortgage Loans are likely to experience rates of delinquency,
foreclosure, bankruptcy and loss that are higher, and that may be substantially
higher, than those experienced by mortgage loans underwritten in accordance
with the standards applied by Fannie Mae and Freddie Mac first mortgage loan
purchase programs, or by Residential Funding for the purpose of acquiring
mortgage loans to collateralize securities issued by Residential Funding
Mortgage Securities I, Inc. See "Description of the Mortgage Pool--Underwriting
Standards". In addition, because of such underwriting criteria and their likely
effect on the delinquency, foreclosure, bankruptcy and loss experience of the
Mortgage Loans, the Mortgage Loans will generally be serviced in a manner
intended to result in a faster exercise of remedies, which may include
foreclosure, in the event Mortgage Loan delinquencies and defaults occur, than
would be the case if the Mortgage Loans were serviced in accordance with such
other programs. 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.
The amount of interest otherwise payable to holders of the Class A
Certificates will be reduced by any interest shortfalls to the extent not
covered by the Certificate Insurance Policy or by the Master Servicer as
described herein. If payments were not made as required under the Certificate
Insurance Policy, interest shortfalls not allocable to the Class R Certificates
and not covered by the Master Servicer would be allocated to the Class A
Certificates as described herein. See "Yield Considerations" in the Prospectus
and "Description of the Certificates--Interest Distributions" herein for a
discussion of the effect of principal prepayments on the Mortgage Loans on the
yield to maturity of the Class A Certificates and certain possible shortfalls
in the collection of interest.
In addition, the yield to maturity of the Class A Certificates will depend
on, among other things, the price paid by the holders of the Class A
Certificates and the then applicable Pass-Through Rate. The extent to which the
yield to maturity of a Class A 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 A Certificate is purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a Class A Certificate is
purchased at a discount and principal distributions thereon occur at a rate
slower than that assumed at the time of purchase, the investor's actual yield
to maturity will be lower than that assumed at the time of purchase.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security to the date of distribution to the
investor of each dollar distributed in reduction of principal of such security
(assuming no losses). The weighted average life of the Class A Certificates
will be influenced by, among other things, the rate at which principal of the
Mortgage Loans is paid, which may be in the form of scheduled amortization,
prepayments or liquidations. Because the amortization schedule of each Mortgage
Loan will be recalculated semi-annually after the initial Adjustment Date for
such Mortgage Loan, any partial prepayments thereof will not reduce the term to
maturity of such Mortgage Loan. In addition, an increase in the Mortgage Rate
on a Mortgage Loan will result in a larger monthly payment and in a larger
percentage of such monthly payment being allocated to interest and a smaller
percentage being allocated to principal, and conversely, a decrease in the
Mortgage Rate on the Mortgage Loan will result in a lower monthly payment and
in a larger percentage of each monthly payment being allocated to principal and
a smaller percentage being allocated to interest.
S-44
<PAGE>
The assumed final Distribution Date with respect to the Class A Certificates
is June 25, 2025, which is the Distribution Date immediately following the
latest scheduled maturity date of any Mortgage Loan. No event of default,
change in the priorities for distribution among the classes or other provision
under the Pooling and Servicing Agreement will arise or become applicable
solely by reason of the failure to retire the entire Certificate Principal
Balance of any class of Certificates on or before its assumed final
Distribution Date.
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement, the Constant
Prepayment Rate model ("CPR"), assumes that the outstanding principal balance
of a pool of mortgage loans prepays at a specified constant annual rate or CPR.
In generating monthly cash flows, this rate is converted to an equivalent
constant monthly rate. To assume an 18% CPR or any other CPR percentage is to
assume that the stated percentage of the outstanding principal balance of the
pool is prepaid over the course of a year. No representation is made that the
Mortgage Loans will prepay at that or any other rate.
The table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics
of the Mortgage Loans that are expected to be included in the Trust Fund as
described under "Description of the Mortgage Pool" herein and the performance
thereof. The table assumes, among other things, that: (i) as of the date of
issuance of the Class A Certificates, the aggregate principal balance of the
Mortgage Loans is $94,350,062 and each Mortgage Loan has an initial Mortgage
Rate of 10.2837% per annum and an aggregate Servicing Fee Rate and Certificate
Insurance Policy premium rate of 0.7212% per annum, which are in effect until
the initial semi-annual Adjustment Date occurring in October 1995 when the
Mortgage Rate adjusts to 11.2837% per annum (based on an assumed Index of
5.9375% and a Note Margin of 5.4641%, and subject to a Periodic Rate Cap of
1.00% per annum) and the aggregate Servicing Fee Rate and Certificate Insurance
Policy premium rate remains 0.7212% per annum, an original term to maturity of
357 months and a remaining term to stated maturity of 354 months; (ii) the
scheduled monthly payment for each Mortgage Loan has been based on its
outstanding balance, interest rate and remaining term to stated maturity, such
that the Mortgage Loan will amortize in amounts sufficient for repayment
thereof over its remaining term to stated maturity; (iii) none of the
Collateral Mortgage Sellers, the Master Servicer or the Company will repurchase
any Mortgage Loan, as described under "Description of the Mortgage Pool"
herein, and the Master Servicer will not exercise any option to purchase the
Mortgage Loans and thereby cause a termination of the Trust Fund or to purchase
the Certificates other than the Residual Certificates; (iv) there are no
delinquencies or Realized Losses on the Mortgage Loans and principal payments
on the Mortgage Loans will be timely received together with prepayments, if
any, at the respective constant percentages of CPR set forth in the table; (v)
there is no Prepayment Interest Shortfall or any other interest shortfall in
any month; (vi) payments on the Certificates will be received on the 25th day
of each month, commencing July 25, 1995; (vii) payments on the Mortgage Loans
earn no reinvestment return; (viii) there are no additional ongoing Trust Fund
expenses payable out of the Trust Fund; and (ix) the Certificates will be
purchased on June 28, 1995.
The actual characteristics and performance of the Mortgage Loans will differ
from the assumptions used in constructing the table set forth below, which is
hypothetical in nature and is provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the Mortgage Loans will prepay at a constant
level of CPR until maturity or that all of the Mortgage Loans will prepay at
the same level of CPR. Moreover, the diverse remaining terms to stated maturity
of the Mortgage Loans could produce slower or faster principal distributions
than indicated in the table at the various constant percentages of CPR
specified, even if the weighted average remaining term to stated maturity of
the Mortgage Loans is as assumed. Any difference between such assumptions and
the actual characteristics and performance of the Mortgage Loans, or actual
prepayment experience, will affect the percentages of initial Certificate
Principal Balances outstanding over time and the weighted average life of the
Class A Certificates.
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<PAGE>
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of the Class A Certificates, and sets
forth the percentages of the initial Certificate Principal Balance of the
Class A Certificates that would be outstanding after each of the dates shown
at various percentages of CPR.
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF CPR
<TABLE>
<CAPTION>
CLASS A
-----------------------------
DISTRIBUTION DATE 0% 10% 15% 18% 25% 35%
- ----------------- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage.............................. 100% 100% 100% 100% 100% 100%
June 25, 1996................................... 98 88 83 80 73 63
June 25, 1997................................... 97 78 70 65 54 40
June 25, 1998................................... 96 70 58 52 40 25
June 25, 1999................................... 96 62 49 43 30 17
June 25, 2000................................... 95 55 41 35 22 11
June 25, 2001................................... 94 49 35 28 16 7
June 25, 2002................................... 94 44 29 23 12 4
June 25, 2003................................... 93 39 25 19 9 3
June 25, 2004................................... 91 35 21 15 7 1
June 25, 2005................................... 90 31 17 12 5 1
June 25, 2006................................... 89 27 15 10 3 *
June 25, 2007................................... 87 24 12 8 2 *
June 25, 2008................................... 86 21 10 6 2 0
June 25, 2009................................... 84 19 8 5 1 0
June 25, 2010................................... 82 17 7 4 1 0
June 25, 2011................................... 79 14 6 3 * 0
June 25, 2012................................... 77 13 4 2 * 0
June 25, 2013................................... 74 11 4 2 0 0
June 25, 2014................................... 70 9 3 1 0 0
June 25, 2015................................... 66 8 2 1 0 0
June 25, 2016................................... 62 7 2 * 0 0
June 25, 2017................................... 57 5 1 * 0 0
June 25, 2018................................... 52 4 1 * 0 0
June 25, 2019................................... 46 3 * 0 0 0
June 25, 2020................................... 40 2 * 0 0 0
June 25, 2021................................... 33 2 0 0 0 0
June 25, 2022................................... 25 1 0 0 0 0
June 25, 2023................................... 16 * 0 0 0 0
June 25, 2024................................... 5 0 0 0 0 0
June 25, 2025................................... 0 0 0 0 0 0
---- --- --- --- --- ---
Weighted Average
Life in Years**................................ 21.3 7.9 5.5 4.6 3.3 2.2
==== === === === === ===
</TABLE>
- --------
(*) Indicates a number that is greater than zero but less than 0.5%.
(**) The weighted average life of a Certificate 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 reductions of
Certificate Principal Balance described in (i) above.
This table has been prepared based on the assumptions described in the third
paragraph preceding this table (including the assumptions regarding the
characteristics and performance of the Mortgage Loans, which differ from the
actual characteristics and performance thereof) and should be read in
conjunction therewith.
S-46
<PAGE>
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing Agreement
(the "Pooling and Servicing Agreement") dated as of June 1, 1995, among the
Company, the Master Servicer, and The First National Bank of Chicago, as
Trustee. Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Class A Certificates. The Trustee, or
any of its affiliates, in its individual or any other capacity, may become the
owner or pledgee of Certificates with the same rights as it would have if it
were not Trustee. The Trustee will appoint Norwest Bank Minnesota, National
Association to serve as Custodian in connection with the Certificates. The
Class A Certificates will be transferable and exchangeable at the corporate
trust office of the Trustee, which will serve as Certificate Registrar and
Paying Agent. The Company will provide a prospective or actual
Certificateholder, without charge, on written request, a copy (without
exhibits) of the Pooling and Servicing Agreement. Requests should be addressed
to the President, Residential Asset Securities Corporation, 8400 Normandale
Lake Boulevard, Suite 700, Minneapolis, Minnesota 55437. In addition to the
circumstances described in the Prospectus, the Company may terminate the
Trustee for cause under certain circumstances. See "The Pooling and Servicing
Agreement--The Trustee" in the Prospectus.
THE MASTER SERVICER
Residential Funding, an indirect wholly-owned subsidiary of GMAC Mortgage and
an affiliate of the Company, will act as master servicer for the Certificates
pursuant to the Pooling and Servicing Agreement. For a general description of
Residential Funding and its activities, see "Residential Funding Corporation"
in the Prospectus and "The Mortgage Pool--Residential Funding" herein.
TRIGGER EVENTS; REMOVAL OF MASTER SERVICER
Upon determination by the Certificate Insurer that a Trigger Event (as
defined in the Pooling and Servicing Agreement) has occurred, the Trustee or
the Certificate Insurer, as applicable, will notify the Master Servicer, the
Company, the Trustee and the Rating Agencies. At any time, after the occurrence
of such event the Certificate Insurer may direct the Trustee to remove the
Master Servicer. In the absence of such direction, the Master Servicer
covenants and agrees to act as the Master Servicer for a term from the
occurrence of the Trigger Event to the end of the calendar quarter in which
such Trigger Event occurs, which term will be extendable by the Certificate
Insurer by notice to the Trustee for successive terms of three (3) calendar
months each, until the termination of the Trust Fund. The Master Servicer will,
upon its receipt of each such notice of extension (a "Servicer Extension
Notice") become bound for the duration of the term covered by such Servicer
Extension Notice to continue as the Master Servicer subject to and in
accordance with the other provisions of the Pooling and Servicing Agreement. If
as of the fifteenth (15th) day prior to the last day of any term of the Master
Servicer the Trustee shall not have received any Servicer Extension Notice from
the Certificate Insurer, the Trustee will, within five (5) days thereafter,
give written notice of such non-receipt to the Certificate Insurer and the
Master Servicer. In addition to the items specified in the Prospectus, an Event
of Default under the Pooling and Servicing Agreement will occur in the event
that any claim is made under the Certificate Insurance Policy and the
Certificate Insurer is not fully reimbursed with respect thereto, and any
subsequent claims, within six months.
S-47
<PAGE>
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fee for each Mortgage Loan is payable out of the interest
payments on such Mortgage Loan. The Servicing Fee Rate in respect of each
Mortgage Loan will be at least 0.33% per annum and not more than 0.58% per
annum of the outstanding principal balance of such Mortgage Loan. The Servicing
Fee consists of (a) servicing compensation payable to the Master Servicer in
respect of its master servicing activities, and (b) subservicing and other
related compensation payable to the Subservicer (including such compensation
paid to the Master Servicer as the direct servicer of a Mortgage Loan for which
there is no Subservicer). The primary compensation to be paid to the Master
Servicer in respect of its master servicing activities will be 0.08% per annum
of the outstanding principal balance of each Mortgage Loan. The Subservicer is
entitled to servicing compensation in a minimum amount equal to at least 0.25%
per annum and not more than 0.50% per annum of the outstanding principal
balance of each Mortgage Loan serviced by it. As of the Cut-off Date, the
weighted average of the Servicing Fee Rates for the Mortgage Loans is
approximately 0.5612% per annum. The Master Servicer is obligated to pay
certain ongoing expenses associated with the Trust Fund and incurred by the
Master Servicer in connection with its responsibilities under the Pooling and
Servicing Agreement. See "Description of the Certificates--Spread",
"--Withdrawals from the Custodial Account" and "--Spread" in the Prospectus for
information regarding other possible compensation to the Master Servicer and
the Subservicer and for information regarding expenses payable by the Master
Servicer.
VOTING RIGHTS
Certain actions specified in the Prospectus that may be taken by holders of
Certificates evidencing a specified percentage of all undivided interests in
the Trust Fund may be taken by holders of Certificates entitled in the
aggregate to such percentage of the Voting Rights. 99% of all Voting Rights
will be allocated among all holders of the Certificates (other than the
Residual Certificates) in proportion to their then outstanding Certificate
Principal Balances, and 1% of all Voting Rights will be allocated among holders
of the Residual Certificates in proportion to the Percentage Interests (as
defined in the Prospectus) evidenced by their respective Certificates. The
Pooling and Servicing Agreement will be subject to amendment without the
consent of the holders of the Residual Certificates in certain circumstances.
The Insurer will be entitled to exercise certain rights with respect to any
amendment of the Pooling and Servicing Agreement.
TERMINATION
The circumstances under which the obligations created by the Pooling and
Servicing Agreement will terminate in respect of the Class A Certificates are
described in "The Pooling and Servicing Agreement-- Termination; Retirement of
Certificates" in the Prospectus. The Master Servicer or the Company will have
the option, on any Distribution Date on which the aggregate Stated Principal
Balance of the Mortgage Loans is less than 10% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date, (i) to purchase all
remaining Mortgage Loans and other assets in the Trust Fund, thereby effecting
early retirement of the Class A Certificates, or (ii) to purchase in whole, but
not in part, the Certificates. Any such purchase of Mortgage Loans and other
assets of the Trust Fund shall be made at a price equal to the sum of (a) 100%
of the unpaid principal balance of each Mortgage Loan (or, if less than such
unpaid principal balance, the fair market appraised value of the related
underlying Mortgaged Properties with respect to Mortgage Loans as to which
title to such underlying Mortgaged Properties has been acquired) (net of any
unreimbursed Advance attributable to principal) as of the date of repurchase
plus (b) accrued interest thereon at the Net Mortgage Rate to, but not
including, the first day of the month in which such repurchase price is
distributed. Distributions on the Certificates in respect of any such optional
termination will be paid, first, to the Class A Certificates, based on their
Certificate Principal Balance, and second, except as set forth in the Pooling
and Servicing Agreement, to the Class R 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
S-48
<PAGE>
market appraised value of any underlying Mortgaged Property and such appraised
value is less than 100% of the unpaid principal balance of the related Mortgage
Loan; provided, however, with respect to the Class A Certificates, if such
amount is an Insured Payment, such amount will be paid under the Certificate
Insurance Policy. Any such purchase of Mortgage Loans and termination of the
Trust Fund requires the consent of the Certificate Insurer if it would result
in a draw on the Certificate Insurance Policy. Any such purchase of the
Certificates will be made at a price equal to 100% of the Certificate Principal
Balance thereof plus the sum of interest accrued thereon at the applicable
Pass-Through Rate and any previously unpaid Accrued Certificate Interest. Upon
the purchase of the Certificates or at any time thereafter, at the option of
the Master Servicer or the Company, the Mortgage Loans may be sold, thereby
effecting a retirement of the Certificates and the termination of the Trust
Fund, or the Certificates so purchased may be held or resold by the Master
Servicer or the Company.
Upon presentation and surrender of the Class A Certificates in connection
with the termination of the Trust Fund or a purchase of Certificates, the
holders of the Class A Certificates will receive an amount equal to the
Certificate Principal Balance of such class plus interest accrued thereon at
the then applicable Pass-Through Rate plus any previously unpaid Accrued
Certificate Interest.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class A Certificates, Thacher Proffitt & Wood,
counsel to the Company, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling and Servicing Agreement,
for federal income tax purposes, the Trust Fund will qualify as a REMIC under
the Code.
For federal income tax purposes, the Residual Certificates will constitute
the sole class of "residual interests" in the Trust Fund and the Class A
Certificates will represent ownership of "regular interests" in the REMIC and
will generally be treated as debt instruments of the REMIC. See "Certain
Federal Income Tax Consequences--REMICs" in the Prospectus.
For federal income tax reporting purposes, the Class A Certificates will 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 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 18% CPR. No representation is made that
the Mortgage Loans will prepay at that rate or at any other rate. See "Certain
Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers
of the Class A Certificates should be aware that Section 1272(a)(6) of the Code
and the OID Regulations do not adequately address certain issues relevant to,
or not applicable to, prepayable securities bearing a variable rate of interest
such as the Class A Certificates. In the absence of other authority, the Master
Servicer intends to be guided by certain principles of the OID Regulations
applicable to variable rate debt instruments in determining whether such
Certificates should be treated as issued with original issue discount and in
adapting the provisions of Section 1272(a)(6) of the Code to such Certificates
for the purpose of preparing reports furnished to Certificateholders and the
IRS. Because of the uncertainties concerning the application of Section
1272(a)(6) of the Code to such Certificates and because the rules relating to
debt instruments having a variable rate of interest are limited in their
application in ways that could preclude their application to such Certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert
that the Class A Certificates should be treated as having been issued with
original issue discount or that such Certificates should be governed by some
other method not yet set forth in regulations. Prospective purchasers of the
Class A Certificates are advised to consult their tax advisors concerning the
tax treatment of such Certificates.
S-49
<PAGE>
The Master Servicer believes that a reasonable application of the principles
of the OID Regulations to the Class A Certificates and if the IRS determines
that the Class A Certificates have been issued with original issue discount
would be to report all income with respect to such Certificates as original
issue discount for each period, computing such original issue discount (i) by
assuming that the value of the applicable index will remain constant for
purposes of determining the original yield to maturity of each such class of
Certificates and projecting future distributions on such Certificates, thereby
treating such Certificates as fixed rate instruments to which the original
issue discount computation rules described in the Prospectus can be applied,
and (ii) by accounting for any positive or negative variation in the actual
value of the applicable index in any period from its assumed value as a current
adjustment to original issue discount with respect to such period. See "Certain
Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the Prospectus.
If the rules of the OID Regulations that determine the amount and accrual of
original issue discount were applied literally to the Class A Certificates
(even though such rules are by their terms generally inapplicable to REMIC
Regular Certificates such as the Class A Certificates) and the Class A
Certificates were determined to have been issued with original issue discount,
it appears that such rules would (i) require that the stated fixed interest
rate initially payable on the Class A Certificates be replaced by a
hypothetical adjustable rate that would not cause the fair market value of the
Class A Certificates to be affected, (ii) determine the amount and accrual of
original issue discount by assuming that the Class A Certificates bore interest
at successive fixed rates equal to the closing date values of the hypothetical
and the actual adjustable rates, and (iii) make such periodic adjustments to
interest income and original issue discount as are necessary to account for the
actual interest paid on such Certificates, including differences between the
stated fixed interest rate and the rate assumed to have been paid during the
fixed rate period. This treatment could cause a holder of a Class A Certificate
to recognize income more rapidly than would occur under the Master Servicer's
method of reporting interest and original issue discount, and such a holder
should consult a tax advisor with regard to the appropriate method to recognize
interest and original issue discount with respect to the Class A Certificates.
In certain circumstances the OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, the holder of a Certificate may be
able to select a method for recognizing original issue discount that differs
from that used by the Master Servicer in preparing reports to the
Certificateholders and the IRS.
The Class A Certificates will be treated as "qualifying real property loans"
under Section 593(d) of the Code, assets described in Section 7701(a)(19)(C) of
the Code and "real estate assets" under Section 856(c)(5)(A) of the Code
generally in the same proportion that the assets of the Trust Fund would be so
treated. In addition, interest on the Class A Certificates will be treated as
"interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Code generally to the extent that such Class A Certificates
are treated as "real estate assets" under Section 856(c)(5)(A) of the Code.
Moreover, the Class A Certificates (other than the Residual Certificates) will
be "qualified mortgages" within the meaning of Section 860G(a)(3) of the Code.
However, prospective investors in Class A Certificates that will be generally
treated as assets described in Section 860G(a)(3) of the Code should note that,
notwithstanding such treatment, any repurchase of such a Certificate pursuant
to the right of the Master Servicer or the Company to repurchase such Class A
Certificates may adversely affect any REMIC that holds such Class A
Certificates if such repurchase is made under circumstances giving rise to a
Prohibited Transaction Tax. See "Pooling and Servicing Agreement--Termination"
herein and "Certain Federal Income Tax Consequences--REMICs--Characterization
of Investments in REMIC Certificates" in the Prospectus.
For further information regarding federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
S-50
<PAGE>
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement
(the "Underwriting Agreement"), dated June 22, 1995, Residential Funding
Securities Corporation (the "Underwriter") has agreed to offer the Class A
Certificates on a best efforts basis and the Company has agreed to sell to the
Underwriter such Class A Certificates when and if sold by the Underwriter. The
termination date of the offering of the Class A Certificates is the earlier to
occur of June 28, 1996, or the date on which all of such Class A Certificates
have been sold. Proceeds of the offering of the Class A Certificates will not
be placed in any escrow, trust or similar arrangement.
The Underwriter is offering the Class A Certificates on a best efforts basis
and will only be obligated to pay for and accept delivery of any of the Class A
Certificates at such time as it sells such Class A Certificates. The
Underwriter is an indirect wholly-owned subsidiary of the parent of the
Company.
In addition, the Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of its Certificates is subject to,
among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of
the Company's Registration Statement shall be in effect, and that no
proceedings for such purpose shall be pending before or threatened by the
Securities and Exchange Commission.
The Class A Certificates will be offered by the Underwriter, on a best
efforts basis, from time to time to the public, directly or through dealers, in
one or more negotiated transactions, or otherwise, at varying prices to be
determined at the time of sale. The proceeds to the Company from any sale of
the Class A Certificates will be equal to the purchase price paid by the
purchaser thereof, net of any expenses payable by the Company and any
compensation payable to the Underwriter and any such dealer. The Underwriter
may effect such transactions by selling its Class A Certificates to or through
dealers, and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Underwriter. In connection with
the sale of the Class A Certificates, the Underwriter may be deemed to have
received compensation from the Company in the form of underwriting
compensation. The Underwriter and any dealers that participate with the
Underwriter in the distribution of Class A Certificates may be deemed to be
underwriters and any profit on the resale of the Class A Certificates
positioned by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter, and under limited circumstances the Underwriter will indemnify the
Company, against certain civil liabilities under the Securities Act of 1933, or
contribute to payments required to be made in respect thereof.
There is currently no secondary market for the Class A Certificates. Neither
the Company, the Underwriter nor any other person or entity intends to create a
secondary market in the Class A Certificates. There can be no assurance that a
secondary market for the Class A Certificates will develop or, if it does
develop, that it will continue. The primary source of information available to
investors concerning the Class A Certificates will be the monthly statements as
discussed in the Prospectus under "Description of the Certificates--Reports to
Certificateholders," which will include information as to the outstanding
principal balance of the Class A Certificates and the status of the applicable
form of credit enhancement. There can be no assurance that any additional
information regarding the Class A Certificates will be available through any
other source. In addition, the Company is not aware of any source through which
price information about the Class A Certificates will be generally available on
an ongoing basis. The limited nature of such information regarding the Class A
Certificates may adversely affect the liquidity of the Class A Certificates,
even if a secondary market for the Class A Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon for
the Company and the Underwriter by Thacher Proffitt & Wood, New York, New York.
S-51
<PAGE>
EXPERTS
The audited consolidated financial statements of Financial Security Assurance
Inc. and Subsidiaries for the year ended December 31, 1994, which have been
incorporated herein by reference have been so incorporated herein in reliance
on the report of Coopers & Lybrand L.L.P., independent certified public
accountants, given on the authority of that firm as experts in accounting and
auditing. See "The Certificate Insurer--Incorporation of Certain Documents by
Reference" herein.
RATINGS
It is a condition to the issuance of the Class A Certificates that they be
rated "AAA" by Standard & Poor's and "Aaa" by Moody's.
Standard & Poor's ratings on mortgage pass-through certificates address the
likelihood of the receipt by Certificateholders of payments required under the
Pooling and Servicing Agreement. Standard & Poor's ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the Certificates, and the extent to which the payment
stream in the mortgage pool is adequate to make payments required under the
Certificates. Standard & Poor's rating on the Class A Certificates is based on
the claims paying ability of the Insurer. Standard & Poor's rating on the Class
A Certificates does not, however, constitute a statement regarding frequency of
prepayments on the mortgages. See "Certain Yield and Prepayment Considerations"
herein.
The rating assigned by Moody's to the Class A Certificates is based on the
claims paying ability of the Insurer. Ratings by Moody's address the
structural, legal and issuer related aspects associated with the certificates,
including the nature and quality of the underlying mortgage loans. Such ratings
do not represent any assessment of the likelihood of principal prepayments by
mortgagors or of the degree by which such prepayments might differ from those
originally anticipated.
The Company has not requested a rating on the Class A Certificates by any
rating agency other than Standard & Poor's and Moody's. However, there can be
no assurance as to whether any other rating agency will rate the Class A
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Class A
Certificates by Standard & Poor's and Moody's.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Class A 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 Class A Certificates.
LEGAL INVESTMENT
The Class A Certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so
long as they are rated in at least the second highest rating category by one of
the Rating Agencies, and, as such, are legal investments for certain entities
to the extent provided in SMMEA. SMMEA, however, provides that states could
override its provisions on legal investment and restrict or condition
investment in mortgage related securities by taking statutory action on or
prior to October 3, 1991. Certain states have enacted legislation which
overrides the preemption provisions of SMMEA.
The Company makes no representations as to the proper characterization of the
Class A Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase the Class A
S-52
<PAGE>
Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of the Class A Certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Class A Certificates constitutes a
legal investment or is subject to investment, capital or other restrictions.
See "Legal Investment Matters" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement subject
to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
or Section 4975 of the Code (a "Plan") or any insurance company (whether
through its general or separate accounts) or other person investing "plan
assets" of any Plan should carefully review with its legal advisors whether the
purchase or holding of Class A 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 Class A Certificates by, on behalf of, or
with "plan assets" of, a Plan may qualify, for exemptive relief under the
Exemption; however, the Exemption contains a number of conditions including the
requirement that any such Plan must be an "accredited investor" as defined in
Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under
the Securities Act of 1933, as amended. See "ERISA Considerations" in the
Prospectus.
S-53
<PAGE>
MORTGAGE AND MANUFACTURED HOUSING CONTRACT PASS-THROUGH CERTIFICATES
RESIDENTIAL ASSET SECURITIES CORPORATION
Depositor
The Mortgage and Manufactured Housing Contract Pass-Through Certificates (the
"Certificates") offered hereby may be sold from time to time in series, as
described in the related Prospectus Supplement. Each series of Certificates
will represent in the aggregate the entire beneficial ownership interest,
excluding any interest retained by Residential Asset Securities Corporation
(the "Company") or any other entity specified in the related Prospectus
Supplement, in a trust fund consisting primarily of a segregated pool of one-
to four-family, residential first mortgage loans (the "Mortgage Loans"),
manufactured housing conditional sales contracts and installment loan
agreements (the "Contracts") or interests therein (which may include Agency
Securities, as defined herein) (collectively with the Mortgage Loans and
Contracts, the "Mortgage Collateral"), acquired by the Company from one or
more affiliated or unaffiliated institutions. See "The Trust Funds." See
"Index of Principal Definitions" for the meanings of capitalized terms and
acronyms.
The Mortgage Collateral and certain other assets described herein under "The
Trust Funds" and in the related Prospectus Supplement will be held in trust
(collectively, a "Trust Fund") for the benefit of the holders of the related
series of Certificates pursuant to a pooling and servicing agreement (each, a
"Pooling and Servicing Agreement") or a trust agreement (each, a "Trust
Agreement") as described herein under "The Trust Funds" and in the related
Prospectus Supplement. Each Trust Fund will consist of one or more types of
the various types of Mortgage Collateral described under "The Trust Funds."
Information regarding each class of Certificates of a series, and the general
characteristics of the Mortgage Collateral to be evidenced by such
Certificates, will be set forth in the related Prospectus Supplement.
Each series of Certificates will include one or more classes. Each class of
Certificates of any series will represent the right, which right may be senior
or subordinate to the rights of one or more of the other classes of the
Certificates, to receive a specified portion of payments of principal or
interest (or both) on the Mortgage Collateral in the related Trust Fund in the
manner described herein and in the related Prospectus Supplement. See
"Description of the Certificates--Distributions." A series may include one or
more classes of Certificates entitled to principal distributions, with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no principal distributions. A
series may include two or more classes of Certificates which differ as to the
timing, sequential order, priority of payment, pass-through rate or amount of
distributions of principal or interest or both.
THE COMPANY'S ONLY OBLIGATIONS WITH RESPECT TO A SERIES OF CERTIFICATES WILL
BE PURSUANT TO CERTAIN LIMITED REPRESENTATIONS AND WARRANTIES MADE BY THE
COMPANY OR AS OTHERWISE PROVIDED IN THE RELATED PROSPECTUS SUPPLEMENT. THE
RELATED PROSPECTUS SUPPLEMENT MAY IDENTIFY ONE OR MORE ENTITIES AS SERVICERS
(EACH, A "SERVICER") FOR A SERIES OF CERTIFICATES SECURED BY MORTGAGE LOANS OR
CONTRACTS OR, IF SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, AN ENTITY MAY
ACT AS MASTER SERVICER WITH RESPECT TO THE CERTIFICATES (THE "MASTER
SERVICER"). IF SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, A SERIES OF
CERTIFICATES MAY HAVE A CERTIFICATE ADMINISTRATOR (THE "CERTIFICATE
ADMINISTRATOR") IN ADDITION TO, OR IN LIEU OF, A SERVICER OR A MASTER
SERVICER. THE PRINCIPAL OBLIGATIONS OF A SERVICER OR THE MASTER SERVICER, IF
ANY, WILL BE ITS CONTRACTUAL SERVICING OBLIGATIONS (WHICH MAY INCLUDE ITS
LIMITED OBLIGATION TO MAKE CERTAIN ADVANCES IN THE EVENT OF DELINQUENCIES IN
PAYMENTS ON THE MORTGAGE LOANS OR CONTRACTS). THE PRINCIPAL OBLIGATIONS OF THE
CERTIFICATE ADMINISTRATOR, IF ANY, WILL BE TO PERFORM CERTAIN OBLIGATIONS WITH
RESPECT TO THE CERTIFICATES UNDER THE TERMS OF THE POOLING AND SERVICING
AGREEMENT OR TRUST AGREEMENT, AS APPLICABLE. SEE "DESCRIPTION OF THE
CERTIFICATES."
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Certificates may include any one or any combination of a mortgage
pool insurance policy, letter of credit, bankruptcy bond, special hazard
insurance policy, reserve fund, certificate insurance policy, surety bond or
other form of credit support. In addition to or in lieu of the foregoing,
credit enhancement may be provided by means of subordination. See "Description
of Credit Enhancement."
The rate of payment of principal of each class of Certificates entitled to a
portion of principal payments on the Mortgage Collateral will depend on the
priority of payment of such class and the rate and timing of principal
payments (including prepayments, defaults, liquidations and repurchases) on
the Mortgage Collateral. A rate of principal payment lower or higher than that
anticipated may affect the yield on each class of Certificates in the manner
described herein and in the related Prospectus Supplement. See "Yield
Considerations."
For a discussion of significant matters affecting investments in the
Certificates, see "Special Considerations."
One or more separate elections may be made to treat a Trust Fund as a "real
estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. The Prospectus Supplement for a series of Certificates will specify
which class or classes of the related series of Certificates will be
considered to be regular interests in the related REMIC and which class of
Certificates or other interests will be designated as the residual interest in
the related REMIC, if applicable. See "Certain Federal Income Tax
Consequences."
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON
THE CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE COMPANY, THE MASTER SERVICER, THE CERTIFICATE ADMINISTRATOR,
GMAC MORTGAGE CORPORATION ("GMAC MORTGAGE") OR ANY OF THEIR AFFILIATES.
NEITHER THE CERTIFICATES NOR THE MORTGAGE COLLATERAL WILL BE GUARANTEED OR
INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY (EXCEPT IN THE CASE OF
FHA LOANS, FHA CONTRACTS, VA LOANS, VA CONTRACTS AND GINNIE MAE SECURITIES) OR
BY THE COMPANY, THE MASTER SERVICER, THE CERTIFICATE ADMINISTRATOR, GMAC
MORTGAGE OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Offers of the Certificates may be made through one or more different methods,
including offerings through underwriters, as more fully described under
"Methods of Distribution" and in the related Prospectus Supplement.
There will be no secondary market for any series of Certificates prior to the
offering thereof. There can be no assurance that a secondary market for any of
the Certificates will develop or, if it does develop, that it will continue.
The Certificates will not be listed on any securities exchange.
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
--------------
The date of this Prospectus is June 22, 1995.
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Certificates (the
"Registration Statement"). The Company is also subject to certain of the
information requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, accordingly, will file reports thereunder with the
Commission. The Registration Statement and the exhibits thereto, and reports
and other information filed by the Company pursuant to the Exchange Act can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain of
its Regional Offices located as follows: Chicago Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and
New York Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can also be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
Copies of Ginnie Mae's information statement and annual report can be
obtained by writing or calling the United States Department of Housing and
Urban Development, 451-7th Street S.W., Room 6210, Washington, D.C. 20410-9000
(202-708-3649). Copies of Freddie Mac's most recent offering circular for
Freddie Mac Certificates, Freddie Mac's information statement and most recent
supplement to such information statement and any quarterly report made
available by Freddie Mac can be obtained by writing or calling the Investor
Relations Department of Freddie Mac at Post Office Box 4112, Reston, Virginia
22090 (outside the Washington, D.C. metropolitan area, telephone 800-424-5401,
ext. 8160; within the Washington, D.C. metropolitan area, telephone 703-759-
8160). Copies of Fannie Mae's most recent prospectus for Fannie Mae
Certificates and Fannie Mae's annual report and quarterly financial statements,
as well as other financial information, are available from the Director of
Investor Relations of Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C.
20016 (202-537-7115). The Company does not, and will not, participate in the
preparation of Ginnie Mae's information statements or annual reports, Freddie
Mac's offering circulars, information statements or any supplements thereto or
any of its quarterly reports or Fannie Mae's prospectuses or any of its
reports, financial statements or other information and, accordingly, makes no
representations as to the accuracy or completeness of the information set forth
therein.
REPORTS TO CERTIFICATEHOLDERS
Monthly reports which contain information concerning the Trust Fund for a
series of Certificates will be sent by the Master Servicer or Certificate
Administrator, as applicable, to each holder of record of the Certificates of
the related Series. See "Description of the Certificates--Reports to
Certificateholders." The Company will file with the Commission such periodic
reports with respect to the Trust Fund for a series of Certificates as are
required under the Exchange Act, and the rules and regulations of the
Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each series of Certificates offered hereby, there are
incorporated herein and in the related Prospectus Supplement by reference all
documents and report filed or caused to be filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, prior
to the termination of the offering of the related series of Certificates, that
relate specifically to such related series of Certificates. The Company will
provide or cause to be provided without charge to each person to whom this
Prospectus and related Prospectus Supplement is delivered in connection with
the offering of one or more classes of such series of Certificates, upon
written or oral request of such person, a copy of any or all such reports
incorporated herein by reference, in each case to the extent such reports
relate to one or more of such classes of such series of Certificates, other
than the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents. Requests should be directed in
writing to Residential Asset Securities Corporation, 8400 Normandale Lake
Boulevard, Suite 700, Minnesota 55437, or by telephone at (612) 832-7000.
2
<PAGE>
No dealer, salesman, or any other person has been authorized to give any
information, or to make any representations, other than those contained in this
Prospectus or the related Prospectus Supplement and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company or any dealer, salesman, or any other person. Neither
the delivery of this Prospectus or the related Prospectus Supplement nor any
sale made hereunder or thereunder shall under any circumstances create an
implication that there has been no change in the information herein or therein
since the date hereof. This Prospectus and the related Prospectus Supplement
are not an offer to sell or a solicitation of an offer to buy any security in
any jurisdiction in which it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
ADDITIONAL INFORMATION..................................................... 2
REPORTS TO CERTIFICATEHOLDERS.............................................. 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................... 2
SUMMARY OF PROSPECTUS...................................................... 4
SPECIAL CONSIDERATIONS..................................................... 11
Risks Associated with the Mortgage Collateral............................. 11
Yield and Prepayment Considerations....................................... 12
Limited Representations and Warranties.................................... 12
Limited Liquidity......................................................... 12
Limited Obligations....................................................... 13
Limitations, Reduction and Substitution of Credit Enhancement............. 13
THE TRUST FUNDS............................................................ 14
General................................................................... 14
The Mortgage Loans........................................................ 15
The Contracts............................................................. 20
The Agency Securities..................................................... 21
Mortgage Collateral Sellers............................................... 23
Representations with Respect to Mortgage Collateral....................... 23
Repurchases of Mortgage Collateral........................................ 25
Limited Right of Substitution............................................. 26
DESCRIPTION OF THE CERTIFICATES............................................ 27
General................................................................... 27
Form of Certificates...................................................... 27
Assignment of Mortgage Loans.............................................. 28
Assignment of Contracts................................................... 29
Review of Mortgage Loan or Contract Documents............................. 30
Assignment of Agency Securities........................................... 30
Spread.................................................................... 30
Payments on Mortgage Collateral........................................... 30
Withdrawals from the Custodial Account.................................... 33
Distributions............................................................. 34
Advances.................................................................. 36
Prepayment Interest Shortfalls............................................ 37
Reports to Certificateholders............................................. 37
Servicing and Administration of Mortgage Collateral....................... 38
Realization Upon Defaulted Property....................................... 42
SUBORDINATION.............................................................. 44
DESCRIPTION OF CREDIT ENHANCEMENT.......................................... 46
General................................................................... 46
Letters of Credit......................................................... 47
Mortgage Pool Insurance Policies.......................................... 47
Special Hazard Insurance Policies......................................... 49
Bankruptcy Bonds.......................................................... 49
Reserve Funds............................................................. 50
Certificate Insurance Policies............................................ 50
Surety Bonds.............................................................. 51
</TABLE>
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
Maintenance of Credit Enhancement......................................... 51
Reduction or Substitution of Credit Enhancement........................... 52
INSURANCE POLICIES ON MORTGAGE LOANS OR CONTRACTS.......................... 52
Primary Mortgage Insurance Policies....................................... 52
Standard Hazard Insurance on Mortgaged Properties......................... 53
Standard Hazard Insurance on Manufactured Homes........................... 54
FHA Mortgage Insurance.................................................... 54
VA Mortgage Guaranty...................................................... 55
THE COMPANY................................................................ 56
RESIDENTIAL FUNDING CORPORATION............................................ 56
THE POOLING AND SERVICING AGREEMENT........................................ 56
Servicing and Administration.............................................. 56
Events of Default......................................................... 57
Rights Upon Event of Default.............................................. 57
Amendment................................................................. 58
Termination; Retirement of Certificates................................... 59
The Trustee............................................................... 59
YIELD CONSIDERATIONS....................................................... 60
MATURITY AND PREPAYMENT CONSIDERATIONS..................................... 63
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND CONTRACTS...................... 65
The Mortgage Loans........................................................ 66
The Contracts............................................................. 72
Environmental Legislation................................................. 75
Soldiers' and Sailors' Civil Relief Act of 1940........................... 75
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 76
General................................................................... 76
REMICs.................................................................... 76
STATE AND OTHER TAX CONSEQUENCES........................................... 92
ERISA CONSIDERATIONS....................................................... 93
Plan Asset Regulations.................................................... 93
Prohibited Transaction Exemption.......................................... 94
Tax-Exempt Investors...................................................... 96
Consultation with Counsel................................................. 96
LEGAL INVESTMENT MATTERS................................................... 96
USE OF PROCEEDS............................................................ 97
METHODS OF DISTRIBUTION.................................................... 98
LEGAL MATTERS.............................................................. 99
FINANCIAL INFORMATION...................................................... 99
INDEX OF PRINCIPAL DEFINITIONS............................................. 100
</TABLE>
3
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each series of Certificates contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of such series. Capitalized terms used in this summary that are not
otherwise defined shall have the meanings ascribed thereto in this Prospectus.
An index indicating where certain terms used herein are defined appears at the
end of this Prospectus.
Securities Offered.......... Mortgage and Manufactured Housing Contract Pass-
Through Certificates.
Company..................... Residential Asset Securities Corporation. See
"The Company."
Servicer or Master The related Prospectus Supplement may identify
Servicer................... one or more entities as Servicers for a series of
Certificates evidencing interests in Mortgage
Loans or Contracts or an entity may act as Master
Servicer. The Master Servicer may be Residential
Funding Corporation, an affiliate of the Company
("Residential Funding"). See "Residential Funding
Corporation" and "Description of the
Certificates--Servicing and Administration of
Mortgage Collateral."
Certificate Administrator... An entity may be named as the Certificate
Administrator in the related Prospectus
Supplement, if required in addition to or in lieu
of the Master Servicer or Servicer for a series
of Certificates. The Certificate Administrator
may be Residential Funding. See "Residential
Funding Corporation" and "Description of the
Certificates--Servicing and Administration of
Mortgage Collateral."
Trustee..................... The Trustee for each series of Certificates will
be specified in the related Prospectus
Supplement.
Certificates................ Each series of Certificates will represent in the
aggregate the entire beneficial ownership
interest, excluding any interest retained by the
Company or any other entity specified in the
related Prospectus Supplement, in a trust fund
(the "Trust Fund") consisting primarily of a
segregated pool of one- to four-family
residential first mortgage loans (the "Mortgage
Loans"), manufactured housing conditional sales
contracts and installment loan agreements (the
"Contracts") or interests therein (which may
include Agency Securities, as defined herein)
(collectively with the Mortgage Loans and
Contracts, the "Mortgage Collateral") acquired by
the Company from one or more affiliated or
unaffiliated institutions. Each series of
Certificates will be issued pursuant to a pooling
and servicing agreement (each, a "Pooling and
Servicing Agreement") or a trust agreement (each,
a "Trust Agreement") among the Company, the
Trustee and one or more of any Servicer, the
Master Servicer and the Certificate
Administrator.
4
<PAGE>
As specified in the related Prospectus
Supplement, each series of Certificates, or class
of Certificates in the case of a series
consisting of two or more classes, may have a
stated principal balance, no stated principal
balance or a notional amount and may be entitled
to distributions of interest based on a specified
interest rate or rates (each, a "Pass-Through
Rate"). Each series or class of Certificates may
have a different Pass-Through Rate, which may be
a fixed, variable or adjustable Pass-Through
Rate, or any combination of two or more of such
Pass-Through Rates. The related Prospectus
Supplement will specify the Pass-Through Rate or
Rates for each series or class of Certificates,
or the initial Pass-Through Rate or Rates and the
method for determining subsequent changes to the
Pass-Through Rate or Rates.
A series may include one or more classes of
Certificates (each, a "Strip Certificate")
entitled to (i) principal distributions, with
disproportionate, nominal or no interest
distributions, or (ii) interest distributions,
with disproportionate, nominal or no principal
distributions. In addition, a series may include
classes of Certificates which differ as to
timing, sequential order, priority of payment,
Pass-Through Rate or amount of distributions of
principal or interest or both, or as to which
distributions of principal or interest or both on
any class may be made upon the occurrence of
specified events, in accordance with a schedule
or formula, or on the basis of collections from
designated portions of the Trust Fund. In
addition, a series may include one or more
classes of Certificates ("Accrual Certificates"),
as to which certain accrued interest will not be
distributed but rather will be added to the
principal balance thereof in the manner described
in the related Prospectus Supplement. One or more
classes of Certificates in a series may be
entitled to receive principal payments pursuant
to an amortization schedule under the
circumstances described in the related Prospectus
Supplement.
If so provided in the related Prospectus
Supplement, a series of Certificates may include
one or more classes of Certificates
(collectively, the "Senior Certificates") which
are senior to one or more classes of Certificates
(collectively, the "Subordinate Certificates") in
respect of certain distributions of principal and
interest and allocations of losses on the
Mortgage Collateral. See "Subordination." If so
provided in the related Prospectus Supplement, a
series of Certificates may include one or more
classes of Certificates (collectively, the
"Mezzanine Certificates") which are Subordinate
Certificates but which are senior to other
classes of Subordinate Certificates in respect of
such distributions or losses. In addition,
certain classes of Senior Certificates may be
senior to other classes of Senior Certificates in
respect of such distributions or losses. The
Certificates will be issued in fully-registered
certificated or book-entry form in the authorized
5
<PAGE>
denominations specified in the related Prospectus
Supplement. See "Description of the
Certificates."
Neither the Certificates nor the underlying
Mortgage Collateral will be guaranteed or insured
by any governmental agency or instrumentality
(except in the case of FHA Loans, FHA Contracts,
VA Loans, VA Contracts and Ginnie Mae Securities
(each as defined herein)) or by the Company, the
Master Servicer, any Servicer, the Mortgage
Collateral Seller, the Certificate Administrator,
GMAC Mortgage or any of their affiliates. See
"Special Considerations--Limited Obligations."
Interest Distributions...... Except as otherwise specified herein or in the
related Prospectus Supplement, interest on each
class of Certificates of each series, other than
Strip Certificates or Accrual Certificates (prior
to the time when accrued interest becomes payable
thereon), will be remitted at the applicable
Pass-Through Rate on the outstanding principal
balance of such class, on the 25th day (or, if
such day is not a business day, the next business
day) of each month, commencing with the month
following the month in which the Cut-off Date (as
defined in the applicable Prospectus Supplement)
occurs (each, a "Distribution Date"). If the
Prospectus Supplement so provides, interest
distributions on any class of Certificates may be
reduced on account of negative amortization on
the Mortgage Collateral, with the Deferred
Interest (as defined herein) allocable to such
class added to the principal balance thereof,
which Deferred Interest will thereafter bear
interest at the applicable Pass-Through Rate.
Distributions, if any, with respect to interest
on Strip Certificates will be made on each
Distribution Date as described herein and in the
related Prospectus Supplement. See "Description
of the Certificates--Distributions." Strip
Certificates that are entitled to distributions
of principal only will not receive distributions
in respect of interest. Interest that has accrued
but is not yet payable on any Accrual
Certificates will be added to the principal
balance of such class on the related Distribution
Date, and will thereafter bear interest at the
applicable Pass-Through Rate. Unless otherwise
specified in the related Prospectus Supplement,
distributions of interest with respect to any
series of Certificates (or accruals thereof in
the case of Accrual Certificates), or with
respect to one or more classes included therein,
may be reduced to the extent of interest
shortfalls not covered by advances or the
applicable form of credit support, including any
Prepayment Interest Shortfalls. See "Description
of the Certificates" and "Maturity and Prepayment
Considerations."
Principal Distributions..... Except as otherwise specified in the related
Prospectus Supplement, principal distributions on
the Certificates of each series will be payable
on each Distribution Date, commencing with the
Distribution Date in the month following the
month in
6
<PAGE>
which the Cut-off Date occurs, to the holders of
the Certificates of such series, or of the class
or classes of Certificates then entitled thereto,
on a pro rata basis among all such Certificates
or among the Certificates of any such class, in
proportion to their respective outstanding
principal balances or the percentage interests
represented by such class, in the priority and
manner specified in the related Prospectus
Supplement. Strip Certificates with no principal
balance will not receive distributions in respect
of principal. Distributions of principal with
respect to any class of Certificates may be
reduced to the extent of certain delinquencies
not covered by advances or losses not covered by
the applicable form of credit enhancement. See
"The Trust Funds," "Maturity and Prepayment
Considerations" and "Description of the
Certificates."
Trust Fund.................. The Trust Fund for a series of Certificates will
consist primarily of Mortgage Loans, Contracts,
whole or partial participations in Mortgage Loans
or Contracts and/or Agency Securities, together
with certain accounts, reserve funds, insurance
policies and related agreements specified in the
related Prospectus Supplement. The Trust Fund for
a series of Certificates will also include the
Certificate Account and a Collection Account, if
applicable, and may include various forms of
credit enhancement, all as specified in the
related Prospectus Supplement. See "The Trust
Funds" and "Description of Credit Enhancement."
The Mortgage Collateral will be purchased by the
Company directly or indirectly (through
Residential Funding or other affiliates) from
affiliates, including GMAC Mortgage, an indirect
parent of the Company, or directly or indirectly
from sellers unaffiliated with the Company (each,
a "Mortgage Collateral Seller"). See "The Trust
Funds--Mortgage Collateral Sellers."
Mortgage Loans............ The Trust Fund for a series of Certificates may
include a pool of Mortgage Loans, or whole or
partial participations in Mortgage Loans (a
"Mortgage Pool"), secured by first liens on one-
to four-family residential properties (the
"Mortgaged Properties"). Such Mortgage Loans may,
as specified in the related Prospectus
Supplement, include conventional loans, FHA
Loans, VA Loans, Balloon Loans, GPM Loans, Buy-
Down Loans, Bi-Weekly Loans or Mortgage Loans
having other special payment features, as
described herein and in the related Prospectus
Supplement. See "The Trust Funds--The Mortgage
Loans." The Mortgage Loans may have fixed or
adjustable interest rates. A Mortgage Pool may
include Mortgage Loans that have been modified
prior to their inclusion in a Trust Fund. The
Mortgage Loans may include either (i) Mortgage
Loans secured by mortgages, deeds of trust or
other security instruments creating a first lien
on the Mortgaged Properties or (ii) loans secured
by an assignment by the borrower of a security
interest in shares issued by a private
cooperative
7
<PAGE>
housing association and the related proprietary
lease or occupancy agreement on a cooperative
dwelling ("Cooperative Loans"). The Mortgaged
Properties may be owner occupied or non-owner
occupied and may include vacation and second
homes. See "The Trust Funds--The Mortgage Loans."
Contracts................. The Trust Fund for a series of Certificates may
include a pool of Contracts, or whole or partial
participations in Contracts (a "Contract Pool")
originated by one or more manufactured housing
dealers, or such other entity or entities
described in the related Prospectus Supplement.
The Contracts may be conventional manufactured
housing contracts or contracts insured by the FHA
or partially guaranteed by the VA. Each Contract
will be secured by a manufactured home (each, a
"Manufactured Home," which shall also be included
in the term "Mortgaged Property"). Generally, the
Contracts will be fully-amortizing and will bear
interest at a fixed rate unless otherwise
specified in the related Prospectus Supplement.
See "The Trust Funds--The Contracts."
Agency Securities......... The Trust Fund for a series of Certificates may
include a pool of Freddie Mac Securities, Fannie
Mae Securities or Ginnie Mae Securities
(collectively, the "Agency Securities"), or a
combination of Agency Securities. Such Agency
Securities may represent whole or partial
interests in pools of (1) Mortgage Loans or
Contracts or (2) Agency Securities. Unless
otherwise set forth in the related Prospectus
Supplement, all Ginnie Mae Securities will be
backed by the full faith and credit of the United
States. None of the Freddie Mac Securities or
Fannie Mae Securities will be backed, directly or
indirectly, by the full faith and credit of the
United States. Agency Securities may be backed by
fixed or adjustable rate Mortgage Loans or other
types of Mortgage Loans or Contracts specified in
the related Prospectus Supplement. See "The Trust
Funds--The Agency Securities."
Yield and Prepayment The Mortgage Collateral supporting a series of
Considerations............. Certificates will have unique characteristics
that will affect the yield to maturity and the
rate of payment of principal on such
Certificates. See "Yield Considerations" and
"Maturity and Prepayment Considerations" herein
and in the related Prospectus Supplement.
Credit Enhancement.......... If so specified in the related Prospectus
Supplement, the Trust Fund with respect to any
series of Certificates may include any one or any
combination of a letter of credit, mortgage pool
insurance policy, special hazard insurance
policy, bankruptcy bond, reserve fund,
certificate insurance policy, surety bond or
other type of credit support to provide partial
coverage for certain defaults and losses relating
to the Mortgage Loans. Credit support also may be
provided in the form of subordination of one or
more classes of Certificates in a series under
which losses are first allocated to any
Subordinate Certificates up to a specified limit.
Any form of credit
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enhancement typically will have certain
limitations and exclusions from coverage
thereunder, which will be described in the
related Prospectus Supplement. Losses not covered
by any form of credit enhancement will be borne
by the holders of the related Certificates (or
certain classes thereof). To the extent not set
forth herein, the amount and types of coverage,
the identification of any entity providing the
coverage, the terms of any subordination and
related information will be set forth in the
Prospectus Supplement relating to a series of
Certificates. See "Description of Credit
Enhancement" and "Subordination."
Advances.................... Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer (or,
if there is no Master Servicer for such series,
the related Servicer) will be obligated to make
certain advances with respect to delinquent
scheduled payments on the Mortgage Loans or
Contracts, but only to the extent that the Master
Servicer or a Servicer believes that such amounts
will be recoverable by it. Any advance made by
the Master Servicer or a Servicer with respect to
a Mortgage Loan or a Contract is recoverable by
it as provided herein under "Description of the
Certificates--Advances" either from recoveries on
the specific Mortgage Loan or Contract or, with
respect to any advance subsequently determined to
be nonrecoverable, out of funds otherwise
distributable to the holders of the related
series of Certificates.
Optional Termination........ The Master Servicer, the Certificate
Administrator, the Company, a Servicer or, if
specified in the related Prospectus Supplement,
the holder of the residual interest in a REMIC
may at its option either (i) effect early
retirement of a series of Certificates through
the purchase of the assets in the related Trust
Fund or (ii) purchase, in whole but not in part,
the Certificates specified in the related
Prospectus Supplement; in each case under the
circumstances and in the manner set forth herein
under "The Pooling and Servicing Agreement--
Termination; Retirement of Certificates" and in
the related Prospectus Supplement.
Rating...................... At the date of issuance, as to each series, each
class of Certificates offered hereby will be
rated, at the request of the Company, in one of
the four highest rating categories by one or more
nationally recognized statistical rating agencies
(each, a "Rating Agency"). See "Ratings" in the
related Prospectus Supplement.
Legal Investment............ Unless otherwise specified in the related
Prospectus Supplement, each class of Certificates
offered hereby that is rated in one of the two
highest rating categories by at least one Rating
Agency will constitute "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"), for so long as it sustains
such a rating. See "Legal Investment Matters."
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ERISA Considerations........ A fiduciary of an employee benefit plan and
certain other retirement plans and arrangements,
including individual retirement accounts and
annuities, Keogh plans, and collective investment
funds and separate accounts in which such plans,
accounts, annuities or arrangements are invested,
which is subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Internal
Revenue Code of 1986 (the "Code"), and any other
person contemplating purchasing a Certificate
with Plan Assets (as defined herein), should
carefully review with its legal counsel whether
the purchase or holding of Certificates could
give rise to a transaction that is prohibited or
is not otherwise permissible either under ERISA
or Section 4975 of the Code. See "ERISA
Considerations" herein and in the related
Prospectus Supplement.
Certain Federal Income Tax
Consequences...............
Certificates of each series offered hereby will
constitute "regular interests" or "residual
interests" in a Trust Fund, or a portion thereof,
treated as a REMIC under Sections 860A through
860G of the Code, unless otherwise specified in
the related Prospectus Supplement. See "Certain
Federal Income Tax Consequences" herein and in
the related Prospectus Supplement.
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SPECIAL CONSIDERATIONS
Investors should consider, among other things, the following factors in
connection with the purchase of the Certificates:
RISKS ASSOCIATED WITH THE MORTGAGE COLLATERAL
The primary assets underlying a series of Certificates will be the Mortgage
Loans or Contracts (or interests therein) in the related Trust Fund or the
Mortgage Loans or Contracts that underlie the Agency Securities in a Trust
Fund. Defaults on mortgage loans and contracts may occur because of changes in
the economic status of the related borrower or because of increases in the
monthly payment for such mortgage loan or contract or decreases in the related
borrower's equity in the related Mortgaged Property. Losses upon the
foreclosure of a mortgage loan or contract may occur because the value of the
related Mortgaged Property is insufficient to recover the outstanding principal
balance of the mortgage loan or contract. Factors which may affect the value of
the related Mortgaged Property include declines in real estate values and
adverse economic conditions either generally or in the particular geographic
area in which the related Mortgaged Property is located. See "Yield
Considerations." Losses may also result from fraud in the origination of a
mortgage loan or contract.
Mortgage Loans or Contracts may have been originated using underwriting
standards that are less stringent than the underwriting standards applied by
other first mortgage loan purchase programs such as those run by Fannie Mae or
Freddie Mac or by the Company's affiliate, Residential Funding, for the purpose
of collateralizing securities issued by Residential Funding Mortgage Securities
I, Inc. For example, the Mortgage Loans or Contracts may have been made to
borrowers (the "Mortgagors") having imperfect credit histories, ranging from
minor delinquencies to bankruptcies, or Mortgagors with generally higher ratios
of monthly mortgage payments to income or higher ratios of total monthly credit
payments to income. Mortgage Loans or Contracts in a Trust Fund may also
present a greater risk of loss due to higher Loan-to-Value Ratios or lesser
amounts of primary mortgage insurance than such other lending programs.
Mortgage Loans or Contracts may have been originated one or more years prior
to the Closing Date for the related Certificates. Such seasoned Mortgage
Collateral may have higher current loan-to-value ratios than at origination if
the value of the related Mortgaged Property has declined. No assurance can be
given that values of the Mortgaged Properties have remained or will remain at
the levels existing on the dates of origination of the related Mortgage Loans
or Contracts. If a residential real estate market should experience an overall
decline in property values, or if the Mortgagors on such seasoned Mortgage
Collateral have lower incomes or poorer credit histories than at the time of
origination of the related Mortgage Loan or Contract, the actual rates of
delinquencies, foreclosures and losses could be higher than the rates otherwise
expected by an investor in the Certificates.
In addition, in the case of Mortgage Loans or Contracts that are subject to
negative amortization due to the addition to the related principal balance of
Deferred Interest, the principal balances of such Mortgage Loans or Contracts
could be increased to an amount equal to or in excess of the value of the
underlying Mortgaged Properties, thereby increasing the likelihood of default
by the Mortgagors which may result in losses on such Mortgage Loans or
Contracts. Certain other Mortgage Loans or Contracts may provide for escalating
or variable payments by the Mortgagor, as to which the Mortgagor is generally
qualified on the basis of the initial payment amount. Some of the Mortgage
Loans or Contracts may be Balloon Loans and the ability of a Mortgagor to pay
the related Balloon Amount may depend on the Mortgagor's ability to refinance
the Mortgage Loan or Contract. In some instances, Mortgagors may not be able to
make their loan payments as such payments increase and thus the likelihood of
default will increase.
Some Mortgage Loans or Contracts may be one or more months delinquent with
regard to payment of principal or interest at the time of their deposit into a
Trust Fund. Certain Mortgage Loans or Contracts may have incomplete legal files
that, as of the time of deposit into a Trust Fund, may be missing such
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documents as a note, a copy of the Mortgage or a title insurance policy, or may
contain documents that are defective because they are incomplete, contain
incorrect information, are unsigned by the appropriate parties or have other
defects.
In addition to the foregoing, from time to time certain geographic regions
will experience weaker regional economic conditions and housing markets and,
consequently, may experience higher rates of loss and delinquency than will be
experienced on mortgage loans or contracts generally. For example, a region's
economic condition and housing market may be directly, or indirectly, adversely
affected by natural disasters or civil disturbances such as earthquakes,
hurricanes, floods, eruptions or riots. The economic impact of any of these
types of events may also be felt in areas beyond the region immediately
affected by the disaster or disturbance. The Mortgage Loans or Contracts in the
Trust Fund for a series of Certificates may be concentrated in these regions,
and such concentration may present risks in addition to those generally present
for similar mortgage-backed securities without such concentration.
To the extent that losses on any item of Mortgage Collateral are not covered
by any credit enhancement, the related Certificateholders (or specific classes
thereof) will bear all risk of loss resulting from default by the Mortgagors,
and will have to look primarily to the value of the Mortgaged Properties for
recovery of the outstanding principal and unpaid interest on the defaulted
Mortgage Loans or Contracts. Specific risks, if any, associated with the
Mortgage Collateral underlying a particular series of Certificates will be
discussed in the related Prospectus Supplement. See "Special Considerations,"
if any, in the related Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Certificates of each series will depend on the
rate and timing of principal payments (including prepayments, liquidations due
to defaults, and repurchases due to conversion of ARM Loans to fixed interest
rate loans or breaches of representations and warranties) on the Mortgage Loans
or Contracts and the price paid by Certificateholders. Such yield may be
adversely affected by a higher or lower than anticipated rate of prepayments on
the related Mortgage Collateral. The yield to maturity on Strip Certificates
will be extremely sensitive to the rate of prepayments on the related Mortgage
Collateral. In addition, the yield to maturity on certain other types of
classes of Certificates, including Accrual Certificates, Certificates with a
Pass-Through Rate that fluctuates inversely with an index or certain other
classes, may be relatively more sensitive to the rate of prepayment on the
related Mortgage Collateral than other classes of Certificates. Prepayments are
influenced by a number of factors, including prevailing mortgage market
interest rates, local and regional economic conditions and homeowner mobility.
See "Yield Considerations" and "Maturity and Prepayment Considerations."
LIMITED REPRESENTATIONS AND WARRANTIES
Certain Mortgage Collateral Sellers may make more limited representations and
warranties with respect to the Mortgage Loans or Contracts that have been
acquired by the Company than would be required by Fannie Mae or Freddie Mac in
connection with their first mortgage loan purchase programs. In addition, any
item of Mortgage Collateral for which a breach of a representation or warranty
exists will remain in the related Trust Fund in the event that a Mortgage
Collateral Seller is unable, or disputes its obligation, to repurchase such
Mortgage Collateral and such a breach does not also constitute a breach of a
representation made by Residential Funding, the Company or the Master Servicer.
In either event, any resulting losses will be borne by the related form of
credit enhancement, to the extent available, and otherwise by the holders of
one or more classes of Certificates. See "The Trust Funds--Representations with
Respect to Mortgage Collateral."
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates of any
series will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment or that it will continue for
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the life of the Certificates of any series. The Prospectus Supplement for any
series of Certificates may indicate that an underwriter specified therein
intends to establish a secondary market in such Certificates, however no
underwriter will be obligated to do so. The Certificates will not be listed on
any securities exchange.
LIMITED OBLIGATIONS
The Certificates will not represent an interest in or obligation of the
Company, the Master Servicer, any Servicer, the Mortgage Collateral Seller, the
Certificate Administrator, GMAC Mortgage or any of their affiliates. The only
obligations of the foregoing entities with respect to the Certificates or any
Mortgage Collateral will be the obligations (if any) of the Company, the
related Servicer, if applicable, the Mortgage Collateral Seller, and the Master
Servicer pursuant to certain limited representations and warranties made with
respect to the Mortgage Collateral, the Master Servicer's or the applicable
Servicer's servicing obligations under the related Pooling and Servicing
Agreement (including such entity's limited obligation to make certain Advances)
and pursuant to the terms of any Agency Securities, the Certificate
Administrator's (if any) administrative obligations under the Pooling and
Servicing Agreement or the Trust Agreement, and, if and to the extent expressly
described in the related Prospectus Supplement, certain limited obligations of
the Master Servicer or the related Servicer in connection with an agreement to
purchase a Convertible Mortgage Loan upon conversion to a fixed rate. Neither
the Certificates nor the underlying Mortgage Collateral will be guaranteed or
insured by any governmental agency or instrumentality (except in the case of
FHA Loans, FHA Contracts, VA Loans, VA Contracts or Ginnie Mae Securities), or
by the Company, the Master Servicer, any Servicer, the Mortgage Collateral
Seller, the Certificate Administrator, GMAC Mortgage or any of their
affiliates. Proceeds of the assets included in the related Trust Fund
(including the Mortgage Collateral and any form of credit enhancement) will be
the sole source of payments on the Certificates, and there will be no recourse
to the Company, the Master Servicer, any Servicer, the Mortgage Collateral
Seller, the Certificate Administrator, GMAC Mortgage or any other entity in the
event that such proceeds are insufficient or otherwise unavailable to make all
payments provided for under the Certificates.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
With respect to each series of Certificates, credit enhancement may be
provided in limited amounts to cover certain types of losses on the underlying
Mortgage Collateral. Credit enhancement will be provided in one or more of the
forms referred to herein, including, but not limited to: subordination of other
classes of Certificates of the same series; a Letter of Credit; a Mortgage Pool
Insurance Policy; a Special Hazard Insurance Policy; a Bankruptcy Bond; a
Reserve Fund; a Certificate Insurance Policy; a Surety Bond; or any combination
thereof. See "Subordination" and "Description of Credit Enhancement" herein.
Regardless of the form of credit enhancement provided, the amount of coverage
will be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. Furthermore, such credit
enhancement may provide only very limited coverage as to certain types of
losses or risks, and may provide no coverage as to certain other types of
losses or risks. In the event losses exceed the amount of coverage provided by
any credit enhancement or losses of a type not covered by any credit
enhancement occur, such losses will be borne by the holders of the related
Certificates (or certain classes thereof). The Master Servicer or the
Certificate Administrator, as applicable, will generally be permitted to
reduce, terminate or substitute all or a portion of the credit enhancement for
any series of Certificates, if each Rating Agency indicates that the then-
current rating thereof will not be adversely affected. The rating of any series
of Certificates by any Rating Agency may be lowered following the initial
issuance thereof as a result of the downgrading of the obligations of any
applicable credit support provider, or as a result of losses on the related
Mortgage Collateral in excess of the levels contemplated by such Rating Agency
at the time of its initial rating analysis. None of the Company, the Master
Servicer, any Servicer, the Mortgage Collateral Seller, the Certificate
Administrator, GMAC Mortgage nor any of their affiliates will have any
obligation to replace or supplement any credit enhancement, or to take any
other action to maintain any rating of any series of Certificates. See
"Description of Credit Enhancement--Reduction or Substitution of Credit
Enhancement."
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THE TRUST FUNDS
GENERAL
A Trust Fund for a series of Certificates may include Mortgage Collateral
that consists of one or more of the following: (1) Mortgage Loans, or whole or
partial participations in Mortgage Loans, which are one- to four-family
residential mortgage loans, including loans secured by leases on cooperative
apartment units and loans to cooperative associations; (2) Contracts, or whole
or partial participations in Contracts; (3) Agency Securities which are
mortgage pass-through certificates (including those representing whole or
partial interests in pools of Mortgage Loans, Contracts or Agency Securities
(a) guaranteed and/or issued by the Government National Mortgage Association
("Ginnie Mae" and such securities, "Ginnie Mae Securities"), (b) issued by the
Federal Home Loan Mortgage Corporation ("Freddie Mac" and such securities,
"Freddie Mac Securities") or (c) issued by the Federal National Mortgage
Association ("Fannie Mae" and such securities, "Fannie Mae Securities"); and
(4) certain other related property conveyed by the Company. Each Trust Fund may
also include (i) the amounts required to be held from time to time in a trust
account (the "Certificate Account"), into which payments in respect of the
Mortgage Collateral may be deposited, maintained by the Master Servicer, a
Servicer, the Trustee or the Certificate Administrator, as the case may be,
pursuant to the Pooling and Servicing Agreement or Trust Agreement, (ii) if so
specified in the related Prospectus Supplement, a trust account (the "Custodial
Account") into which amounts to be deposited in the Certificate Account may be
deposited on a periodic basis prior to deposit in the Certificate Account,
(iii) any Mortgaged Property which initially secured a Mortgage Loan or
Contract and that is acquired by foreclosure or deed in lieu of foreclosure and
(iv) if so specified in the related Prospectus Supplement, one or more other
cash accounts, insurance policies or other forms of credit enhancement with
respect to the Certificates, the Mortgage Collateral or all or any part of the
Trust Fund, required to be maintained pursuant to the related Pooling and
Servicing Agreement or Trust Agreement. See "Description of Credit
Enhancement."
Each Certificate will evidence the interest specified in the related
Prospectus Supplement in a Trust Fund, containing a Mortgage Pool, a Contract
Pool or a pool of Agency Securities (an "Agency Securities Pool") having the
aggregate principal balance as of the date (the "Cut-off Date") specified in
the related Prospectus Supplement. Holders of Certificates
("Certificateholders") of a series will have interests only in such Mortgage
Pool, Contract Pool or Agency Securities Pool and will have no interest in the
Mortgage Pool, Contract Pool or Agency Securities Pool created with respect to
any other series of Certificates.
The related Prospectus Supplement may identify one or more entities as
Servicers for a series of Certificates evidencing interests in Mortgage Loans
or Contracts or, if so provided in the related Prospectus Supplement, an entity
may act as Master Servicer with respect to a series of Certificates. The Master
Servicer or any Servicer, as applicable, may service the Mortgage Loans or
Contracts through one or more Sub-Servicers. See "Description of the
Certificates--Servicing and Administration of Mortgage Collateral." In addition
to or in lieu of the Master Servicer or Servicer for a series of Certificates,
the related Prospectus Supplement may identify a Certificate Administrator for
the Trust Fund. The related Prospectus Supplement will identify an entity that
will serve as trustee (the "Trustee") for a series of Certificates. The Trustee
will be authorized to appoint a custodian (a "Custodian") pursuant to a
custodial agreement to maintain possession of and review documents relating to
the Mortgage Collateral as the agent of the Trustee. The identity of such
Custodian, if any, will be set forth in the related Prospectus Supplement.
The following is a brief description of the Mortgage Collateral expected to
be included in the Trust Funds. If specific information respecting the Mortgage
Collateral is not known to the Company at the time Certificates are initially
offered, more general information of the nature described below will be
provided in the Prospectus Supplement, and specific information will be set
forth in a Current Report on Form 8-K (a "Form 8-K") to be filed with the
Securities and Exchange Commission (the "Commission") within fifteen days after
the initial issuance of such Certificates. A copy of the Pooling and Servicing
Agreement or Trust Agreement, as applicable, with respect to each series will
be an exhibit to the Form 8-K. A schedule of Mortgage Collateral will be an
exhibit to the related Pooling and Servicing Agreement or Trust Agreement.
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THE MORTGAGE LOANS
Unless otherwise stated in the related Prospectus Supplement, the Mortgage
Loans included in a Trust Fund for a series will have been originated by or on
behalf of either (i) savings and loan associations, savings banks, commercial
banks, credit unions, insurance companies or similar institutions which are
supervised and/or examined by a federal or state authority, or (ii) HUD-
approved mortgagees. Each Mortgage Loan will be selected by the Company for
inclusion in a Mortgage Pool from those purchased by the Company from
Affiliated Sellers or, either directly or through its affiliates, including
GMAC Mortgage and Residential Funding, from Unaffiliated Sellers, all as
described in the related Prospectus Supplement. If a Mortgage Pool is composed
of Mortgage Loans acquired by the Company directly from Unaffiliated Sellers,
the related Prospectus Supplement will specify the extent of Mortgage Loans so
acquired. The characteristics of the Mortgage Loans will be as described in the
related Prospectus Supplement. The Mortgage Loans purchased by the Company from
a Mortgage Collateral Seller will be selected by the Company. Other mortgage
loans available for purchase by the Company may have had characteristics which
would have made them eligible for inclusion in a Mortgage Pool, but were not
selected by the Company for inclusion in such Mortgage Pool.
If so stated in the related Prospectus Supplement, all or a portion of the
Mortgage Loans that underlie a series of Certificates may have been purchased
by the Company, either directly, or indirectly through Residential Funding or
other affiliates, from Mortgage Collateral Sellers under the AlterNet mortgage
loan origination program (the "AlterNet Mortgage Program") as described below
(such Mortgage Loans, the "AlterNet Loans") .
The Mortgage Loans may include mortgage loans insured by the Federal Housing
Administration (the "FHA" and such loans, "FHA Loans"), a division of the
United States Department of Housing and Urban Development ("HUD"), mortgage
loans partially guaranteed by the Veterans Administration (the "VA" and such
loans, "VA Loans") and mortgage loans not insured or guaranteed by the FHA or
VA ("Conventional Loans"). The Mortgage Loans may have fixed interest rates or
adjustable interest rates ("Mortgage Rates") and may provide for fixed level
payments or may be Mortgage Loans pursuant to which the monthly payments by the
Mortgagor during the early years of the related Mortgage are less than the
amount of interest that would otherwise be payable thereon, with the interest
not so paid added to the outstanding principal balance of such Mortgage Loan
("GPM Loans"), Mortgage Loans subject to temporary buy-down plans ("Buy-Down
Loans"), pursuant to which the monthly payments made by the Mortgagor during
the early years of the Mortgage Loan will be less than the scheduled monthly
payments on the Mortgage Loan, Mortgage Loans that provide for payment every
other week during the term thereof ("Bi-Weekly Loans"), Mortgage Loans that
experience negative amortization, Mortgage Loans that require a larger payment
of principal upon maturity (a "Balloon Amount") that may be all or a portion of
the principal thereof ("Balloon Loans"), or Mortgage Loans with other payment
characteristics as described below or in the related Prospectus Supplement. The
Mortgage Loans may be secured by mortgages or deeds of trust or other similar
security instruments (collectively, "Mortgages") creating a first lien on the
related Mortgaged Properties. The Mortgage Loans may also include Cooperative
Loans evidenced by promissory notes secured by a lien on the shares issued by
private, non-profit, cooperative housing corporations ("Cooperatives") and on
the related proprietary leases or occupancy agreements granting exclusive
rights to occupy specific units within a Cooperative ("Cooperative Dwellings").
If so specified in the related Prospectus Supplement, a Mortgage Pool may
include Mortgage Loans that have been modified (each, a "Modified Mortgage
Loan"). Such 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,
individual condominiums, townhouses, duplexes, row houses, individual units in
planned unit developments, two- to four-family dwellings and other attached
dwelling units. Each Mortgaged Property will be located on land owned in fee
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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 a Cooperative. The proprietary lease or occupancy
agreement securing a Cooperative Loan is generally subordinate 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 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 such tenant-
stockholder. See "Certain Legal Aspects of Mortgage Loans and Contracts."
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 Mortgaged 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 for at
least the first six months of occupancy, (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 to such effect may be
qualified similarly. To the extent specified in the related Prospectus
Supplement, the Mortgaged Properties may include vacation homes, second homes
and non-owner-occupied investment properties. 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.
Certain information, including information regarding loan-to-value ratios
(each, a "Loan-to-Value Ratio") at origination (unless otherwise specified in
the related Prospectus Supplement) of the Mortgage Loans underlying each series
of Certificates, will be supplied in the related Prospectus Supplement. In the
case of most Mortgage Loans, the Loan-to-Value Ratio is defined generally as
the ratio, expressed as a percentage, of the principal amount of the Mortgage
Loan at origination to the lesser of (1) the appraised value determined in an
appraisal obtained at origination of such Mortgage Loan and (2) the sales price
for the related Mortgaged Property. In the case of certain refinanced, modified
or converted Mortgage Loans, the Loan-to-Value Ratio at origination is defined
as the ratio, expressed as a percentage, of the principal amount of such
Mortgage Loan to either the appraised value determined in an appraisal obtained
at the time of refinancing, modification or conversion or, if no such appraisal
has been obtained, to the lesser of (1) the appraised value of the related
Mortgaged Property determined at origination of the loan to be refinanced,
modified or converted and (2) the sales price of the related Mortgaged
Property. The denominator of the ratio described in the preceding sentence or
the second preceding sentence, as the case may be, is hereinafter referred to
as the "Appraised Value." Certain Mortgage Loans which are subject to negative
amortization will have Loan-to-Value Ratios which will increase after
origination as a result of such negative amortization. In the case of seasoned
Mortgage Loans, the appraisals upon which Loan-to-Value Ratios have been
calculated may no longer be accurate valuations of the Mortgaged Properties.
Certain Mortgaged Properties may be located in regions where property values
have declined significantly since the time of origination.
The Mortgage Loans may be "equity refinance" Mortgage Loans, as to which a
portion of the proceeds are used to refinance an existing mortgage loan, and
the remaining proceeds may be retained by the Mortgagor or used for purposes
unrelated to the Mortgaged Property. Alternatively, the Mortgage Loans may be
"rate and term refinance" Mortgage Loans, as to which substantially all of the
proceeds (net of related costs incurred by the Mortgagor) are used to refinance
an existing mortgage loan or loans (which may include a junior lien) primarily
in order to change the interest rate or other terms thereof. The Mortgage Loans
may be mortgage loans that have been consolidated and/or have had various terms
changed, mortgage loans that have been converted from adjustable rate mortgage
loans to fixed rate mortgage loans, or construction loans which have been
converted to permanent mortgage loans. In addition, a Mortgaged Property may be
subject to secondary financing at the time of origination of the Mortgage Loan
or thereafter.
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Mortgage Loans that have adjustable Mortgage Rates ("ARM Loans") generally
will provide for a fixed initial Mortgage Rate until the first date on which
such Mortgage Rate is to be adjusted. Thereafter, the Mortgage Rate is subject
to periodic adjustment as described in the related Prospectus Supplement,
subject to the applicable limitations, based on changes in the relevant index
(the "Index") described in the applicable Prospectus Supplement, to a rate
equal to the Index plus a fixed percentage spread over the Index established
contractually for each ARM Loan at the time of its origination (the "Gross
Margin"). The initial Mortgage Rate on an ARM Loan may be lower than the sum of
the then-applicable Index and the Gross Margin for such ARM Loan.
ARM Loans have features that provide different investment considerations than
fixed-rate mortgage loans. In particular, adjustable mortgage rates can cause
payment increases that may exceed some Mortgagors' capacity to cover such
payments. However, to the extent specified in the related Prospectus
Supplement, an ARM Loan may provide that its Mortgage Rate may not be adjusted
to a rate above the applicable maximum Mortgage Rate (the "Maximum Mortgage
Rate") or below the applicable minimum Mortgage Rate (the "Minimum Mortgage
Rate"), if any, for such ARM Loan. In addition, to the extent specified in the
related Prospectus Supplement, certain of the ARM Loans may provide for
limitations on the maximum amount by which their mortgage rates may adjust for
any single adjustment period (the "Periodic Cap"). Some ARM Loans provide for
limitations on the amount of scheduled payments of principal and interest.
Certain ARM Loans may be subject to negative amortization from time to time
prior to their maturity (such ARM Loans, "Neg-Am ARM Loans"). Such negative
amortization may result from either the adjustment of the Mortgage Rate on a
more frequent basis than the adjustment of the scheduled payment or the
application of a cap on the size of the scheduled payment. In the first case,
negative amortization results if an increase in the Mortgage Rate occurs prior
to an adjustment of the scheduled payment on the related Mortgage Loan and such
increase causes accrued monthly interest on the Mortgage Loan to exceed the
scheduled payment. In the second case, negative amortization results if an
increase in the Mortgage Rate causes accrued monthly interest on a Mortgage
Loan to exceed the limit on the size of the scheduled payment on such Mortgage
Loan. In the event that the scheduled payment is not sufficient to pay the
accrued monthly interest on a Neg-Am ARM Loan, the amount of accrued monthly
interest that exceeds the scheduled payment on such Mortgage Loans (the
"Deferred Interest") is added to the principal balance of such ARM Loan and is
to be repaid from future scheduled payments. Neg-Am ARM Loans do not provide
for the extension of their original stated maturity to accommodate changes in
their Mortgage Rate. The related Prospectus Supplement will specify whether the
ARM Loans underlying a series are Neg-Am ARM Loans.
A Mortgage Pool may contain ARM Loans which allow the Mortgagors to convert
the adjustable rates on such Mortgage Loans to a fixed rate at one or more
specified periods during the life of such Mortgage Loans (each, a "Convertible
Mortgage Loan"), generally not later than ten years subsequent to the date of
origination. If specified in the related Prospectus Supplement, upon any
conversion, the Company will repurchase or Residential Funding, the applicable
Servicer or Sub-Servicer or a third party will purchase the converted Mortgage
Loan as and to the extent set forth in the related Prospectus Supplement.
Alternatively, if specified in the related Prospectus Supplement, the Company
or Residential Funding (or another party specified therein) may agree to act as
remarketing agent with respect to such converted Mortgage Loans and, in such
capacity, to use its best efforts to arrange for the sale of converted Mortgage
Loans under specified conditions. Upon the failure of any party so obligated to
purchase any such converted Mortgage Loan, the inability of any remarketing
agent to arrange for the sale of the converted Mortgage Loan and the
unwillingness of such remarketing agent to exercise any election to purchase
the converted Mortgage Loan for its own account, the related Mortgage Pool will
thereafter include both fixed rate and adjustable rate Mortgage Loans.
If specified in the related Prospectus Supplement, certain of the Mortgage
Loans may be Buy-Down Loans pursuant to which the monthly payments made by the
Mortgagor during the early years of the
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Mortgage Loan (the "Buy-Down Period") will be less than the scheduled monthly
payments on the Mortgage Loan, the resulting difference to be made up from (i)
an amount (such amount, exclusive of investment earnings thereon, being
hereinafter referred to as "Buy-Down Funds") contributed by the seller of the
Mortgaged Property or another source and placed in an escrow account, (ii) if
the Buy-Down Funds are contributed on a present value basis, investment
earnings on such Buy-Down Funds or (iii) additional buydown funds to be
contributed over time by the Mortgagor's employer or another source.
The related Prospectus Supplement will provide material information
concerning the types and characteristics of the Mortgage Loans included in a
Trust Fund as of the related Cut-off Date. In the event that Mortgage Loans are
added to or deleted from the Trust Fund after the date of the related
Prospectus Supplement and prior to the Closing Date for the related series of
Certificates, the final characteristics of the Mortgage Pool will be noted in
the Form 8-K.
Certain Mortgage Pools may include Mortgage Loans that are one or more months
delinquent with regard to payment of principal or interest at the time of their
deposit into a Trust Fund. The related Prospectus Supplement will set forth the
percentage of Mortgage Loans that are so delinquent. In addition, the related
Prospectus Supplement will set forth the percentage of Mortgage Loans that have
been delinquent more than once during the preceding twelve months. Delinquent
Mortgage Loans are more likely to result in losses than Mortgage Loans that
have a current payment status.
Under the Pooling and Servicing Agreement for each series of Certificates,
the Company will cause the Mortgage Loans constituting each Mortgage Pool to be
assigned to the Trustee for such series of Certificates, for the benefit of the
holders of all such Certificates. Such assignment of the Mortgage Loans to the
Trustee will be without recourse. See "Description of the Certificates--
Assignment of Mortgage Loans."
UNDERWRITING POLICIES
The Company generally expects that the originator of each of the Mortgage
Loans included in a Trust Fund for a series will have applied, consistent with
applicable federal and state laws and regulations, underwriting procedures
intended to evaluate the borrower's credit standing and repayment ability
and/or the value and adequacy of the related property as collateral. If so
specified in the related Prospectus Supplement, all or a portion of the
Mortgage Loans constituting the Mortgage Pool for a series of Certificates may
have been acquired either directly or indirectly by the Company through the
AlterNet Mortgage Program. Any FHA Loans or VA Loans will have been originated
in compliance with the underwriting policies of the FHA or VA, respectively.
The underwriting criteria applied by the originators of the Mortgage Loans
included in a Mortgage Pool may vary significantly among Mortgage Collateral
Sellers. The related Prospectus Supplement will describe generally certain
underwriting criteria, to the extent known by the Company, that were applied by
the originators of such Mortgage Loans. The Company generally will have less
detailed information concerning the origination of seasoned Mortgage Loans than
it will have concerning newly-originated Mortgage Loans.
General Standards. Generally, each Mortgagor will have been required to
complete an application designed to provide to the original lender pertinent
credit information concerning the Mortgagor. As part of the description of the
Mortgagor's financial condition, such Mortgagor will have furnished information
(which may be supplied solely in such application) with respect to its assets,
liabilities, income, credit history, employment history and personal
information, and furnished an authorization to apply for a credit report which
summarizes the borrower's credit history with local merchants and lenders and
any record of bankruptcy. The Mortgagor may also have been required to
authorize verifications of deposits at financial institutions where the
Mortgagor had demand or savings accounts. In the case of investment properties,
only income derived from the Mortgaged Property may have been considered for
underwriting purposes, rather than the income of the Mortgagor from other
sources. With respect to Mortgaged Property consisting of vacation or second
homes, no income derived from the property generally will have been considered
for underwriting purposes.
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As described in the related Prospectus Supplement, certain Mortgage Loans may
have been originated under "limited documentation" or "no documentation"
programs which require less documentation and verification than do traditional
"full documentation" programs. Generally, under such a program, minimal
investigation into the Mortgagor's credit history and income profile is
undertaken by the originator and such underwriting may be based primarily or
entirely on an appraisal of the Mortgaged Property and the Loan-to-Value Ratio
at origination.
The adequacy of the Mortgaged Property as security for repayment of the
related Mortgage Loan will generally have been determined by appraisal in
accordance with pre-established appraisal procedure guidelines for appraisals
established by or acceptable to the originator. Appraisers may be staff
appraisers employed by the originator or independent appraisers selected in
accordance with pre-established guidelines established by the originator. The
appraisal procedure guidelines generally will have required the appraiser or an
agent on its behalf to personally inspect the property and to verify whether
the property was in good condition and that construction, if new, had been
substantially completed. The appraisal generally will have been based upon a
market data analysis of recent sales of comparable properties and, when deemed
applicable, an analysis based on income generated from the property or a
replacement cost analysis based on the current cost of constructing or
purchasing a similar property.
The underwriting standards applied by an originator generally require that
the underwriting officers be satisfied that the value of the property being
financed, as indicated by an appraisal or other acceptable valuation method,
currently supports and is anticipated to support in the future the outstanding
loan balance. In fact, certain states where the Mortgaged Properties may be
located have "anti-deficiency" laws requiring, in general, that lenders
providing credit on single family property look solely to the property for
repayment in the event of foreclosure. See "Certain Legal Aspects of Mortgage
Loans and Contracts." Any of these factors could change nationwide or merely
could affect a locality or region in which all or some of the Mortgaged
Properties are located. However, declining values of real estate, as
experienced recently in certain regions, or increases in the principal balances
of certain Mortgage Loans, such as GPM Loans and Neg-Am ARM Loans, could cause
the principal balance of some or all of the Mortgage Loans to exceed the value
of the Mortgaged Properties.
Based on the data provided in the application, certain verifications (if
required by the originator of the Mortgage Loan) and the appraisal or other
valuation of the Mortgaged Property, a determination will have been made by the
original lender that the Mortgagor's monthly income would be sufficient to
enable the Mortgagor to meet its monthly obligations on the Mortgage Loan and
other expenses related to the property (such as property taxes, utility costs,
standard hazard and primary mortgage insurance and, if applicable, maintenance
fees and other levies assessed by a Cooperative) and other fixed obligations
other than housing expenses. The originator's guidelines for Mortgage Loans
generally will specify that scheduled payments on a Mortgage Loan during the
first year of its term plus taxes and insurance (including primary mortgage
insurance) and all scheduled payments on obligations that extend beyond one
year (including those mentioned above and other fixed obligations) would equal
no more than specified percentages of the prospective Mortgagor's gross income.
The originator may also consider the amount of liquid assets available to the
Mortgagor after origination.
Residential Funding, on behalf of the Company, generally will review a
portion of the Mortgage Loans constituting the Mortgage Pool for a Series of
Certificates to assess the likelihood of repayment of the Mortgage Loan from
the various sources for such repayment, including the Mortgagor, the Mortgaged
Property, and primary mortgage insurance, if any. In reviewing seasoned
Mortgage Loans (those which have been outstanding for more than 12 months)
Residential Funding may also take into consideration the Mortgagor's actual
payment history in assessing a Mortgagor's current ability to make payments on
the Mortgage Loan. In addition, Residential Funding may conduct additional
procedures to assess the current value of the Mortgaged Properties. Such
procedures may consist of drive by appraisals or real estate broker's price
opinions. The Company may also consider a specific area's housing value trends.
These alternative
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valuation methods are not generally as reliable as the type of mortgagor
financial information or appraisals that are generally obtained at origination.
The Company anticipates that Mortgage Loans included in Mortgage Pools for
certain series of Certificates will have been originated based on underwriting
standards that are less stringent than for other first mortgage loan lending
programs. In such cases, borrowers may have credit histories that contain
delinquencies on mortgage and/or consumer debts. In addition, some borrowers
may have filed bankruptcy within a few years of the time of origination of the
related Mortgage Loan. Likewise, Mortgage Loans included in a Trust Fund may
have been originated in connection with a governmental program under which
underwriting standards were significantly less stringent and designed to
promote home ownership or the availability of affordable residential rental
property notwithstanding higher risks of default and losses. As discussed
above, in evaluating seasoned mortgage loans, the Company may place greater
weight on payment history or market and other economic trends and less weight
on underwriting factors generally applied to newly originated mortgage loans.
The AlterNet Program. The underwriting standards with respect to AlterNet
Loans will generally conform to those published in the AlterNet Seller Guide
(the "AlterNet Seller Guide"), as modified from time to time. The AlterNet
Seller Guide will set forth general underwriting standards relating to mortgage
loans made to borrowers having a range of imperfect credit histories, ranging
from minor delinquencies to borrower bankruptcies. The underwriting standards
set forth in the AlterNet Seller Guide are revised based on changing conditions
in the residential mortgage market and the market for the Company's mortgage
pass-through certificates and may also be waived by Residential Funding from
time to time. The Prospectus Supplement for each series of Certificates secured
by AlterNet Loans will set forth the general underwriting criteria applicable
to such Mortgage Loans.
A portion of AlterNet Loans generally will be reviewed by Residential Funding
or by a designated third party for compliance with applicable underwriting
criteria. Certain of the AlterNet Loans may be purchased in negotiated
transactions (which may be governed by agreements relating to ongoing purchases
of AlterNet Loans by Residential Funding) ("Master Commitments"), from AlterNet
Program Sellers who will represent that AlterNet Loans have been originated in
accordance with underwriting standards agreed to by Residential Funding.
Certain other AlterNet Loans will be purchased from AlterNet Program Sellers
who will represent that AlterNet Loans were originated pursuant to underwriting
standards determined by a mortgage insurance company acceptable to Residential
Funding. Residential Funding may accept a certification from such insurance
company as to an AlterNet Loan's insurability in a mortgage pool as of the date
of certification as evidence of an AlterNet Loan conforming to applicable
underwriting standards. Such certifications will likely have been issued before
the purchase of the AlterNet Loan by Residential Funding or the Company.
FHA and VA Programs. With respect to FHA Loans and VA Loans, traditional
underwriting guidelines used by the FHA and the VA, as the case may be, which
were in effect at the time of origination of each such Mortgage Loan will have
generally been applied.
THE CONTRACTS
GENERAL
The Trust Fund for a series may include a Contract Pool evidencing interests
in Contracts originated by one or more manufactured housing dealers, or such
other entity or entities described in the related Prospectus Supplement. The
Contracts may be conventional Contracts or Contracts insured by the FHA ("FHA
Contracts") or partially guaranteed by the VA ("VA Contracts"). Each Contract
will be secured by a Manufactured Home. Unless otherwise specified in the
related Prospectus Supplement, the Contracts will be fully amortizing.
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The Manufactured Homes securing the Contracts will consist of "manufactured
homes" within the meaning of 42 U.S.C. (S) 5402(6) which are treated as "single
family residences" for the purposes of the REMIC provisions of the Code.
Accordingly, a Manufactured Home will be a structure built on a permanent
chassis, which is transportable in one or more sections and customarily used at
a fixed location, has a minimum of 400 square feet of living space and minimum
width in excess of 8 1/2 feet and is designed to be used as a dwelling with or
without a permanent foundation when connected to the required utilities, and
includes the plumbing, heating, air conditioning, and electrical systems
contained therein.
The related Prospectus Supplement will provide information concerning the
types or characteristics of the Contracts included in a Trust Fund as of the
related Cut-off Date. In the event that Contracts are added to or deleted from
the Trust Fund after the date of the related Prospectus Supplement, the final
characteristics of the Contract Pool will be noted in the Form 8-K.
Certain Contract Pools may include Contracts that are one or more months
delinquent with regard to payment of principal or interest at the time of their
deposit into a Trust Fund. The related Prospectus Supplement will set forth the
percentage of Contracts that are delinquent and whether such Contracts have
been so delinquent more than once during the preceding twelve months. Contract
Pools that contain delinquent Contracts are more likely to sustain losses than
are Contract Pools that contain Contracts that have a current payment status.
UNDERWRITING POLICIES
Conventional Contracts will comply with the underwriting policies of the
applicable originator or Mortgage Collateral Seller, which will be described in
the related Prospectus Supplement. With respect to FHA Contracts and VA
Contracts, traditional underwriting guidelines used by the FHA and the VA, as
the case may be, which were in effect at the time of origination of each such
Contract will generally have been applied.
With respect to a Contract made in connection with the Mortgagor's purchase
of a Manufactured Home, the "Appraised Value" is generally the sales price of
the Manufactured Home or the amount determined by a professional appraiser. The
appraiser must personally inspect the Manufactured Home and prepare a report
which includes market data based on recent sales of comparable Manufactured
Homes and, when deemed applicable, a replacement cost analysis based on the
current cost of a similar Manufactured Home. The Loan-to-Value Ratio for a
Contract generally will be equal to the original principal amount of the
Contract divided by the lesser of the Appraised Value or the sales price for
the Manufactured Home; however, unless otherwise specified in the related
Prospectus Supplement, an appraisal of the Manufactured Home will not be
required.
THE AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
Ginnie Mae is a wholly-owned corporate instrumentality of the United States
within HUD. Section 306(g) of Title III of the National Housing Act of 1934, as
amended (the "Housing Act"), authorizes Ginnie Mae to guarantee the timely
payment of the principal of and interest on certificates representing interests
in a pool of mortgages (i) insured by the FHA, under the Housing Act or under
Title V of the Housing Act of 1949, or (ii) partially guaranteed by the VA
under the Servicemen's Readjustment Act of 1944, as amended, or under Chapter
37 of Title 38, United States Code.
Section 306(g) of the Housing Act provides that "the full faith and credit of
the United States is pledged to the payment of all amounts which may be
required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, Ginnie Mae may, under Section
306(d) of the
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Housing Act, borrow from the United States Treasury an amount that is at any
time sufficient to enable Ginnie Mae to perform its obligations under its
guarantee. See "Additional Information" for the availability of further
information regarding Ginnie Mae and Ginnie Mae Securities.
GINNIE MAE SECURITIES
Unless otherwise specified in the related Prospectus Supplement, each Ginnie
Mae Security relating to a series (which may be a "Ginnie Mae I Certificate" or
a "Ginnie Mae II Certificate" as referred to by Ginnie Mae) will be a "fully
modified pass-through" mortgage-backed certificate issued and serviced by a
mortgage banking company or other financial concern approved by Ginnie Mae,
except with respect to any stripped mortgage backed securities guaranteed by
Ginnie Mae or any REMIC securities issued by Ginnie Mae. The characteristics of
any Ginnie Mae Securities included in the Trust Fund for a series of
Certificates will be set forth in the related Prospectus Supplement.
FEDERAL HOME LOAN MORTGAGE CORPORATION
Freddie Mac is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended
(the "Freddie Mac Act"). Freddie Mac was established primarily for the purpose
of increasing the availability of mortgage credit for the financing of needed
housing. The principal activity of Freddie Mac currently consists of purchasing
first-lien, conventional, residential mortgage loans or participation interests
in such mortgage loans and reselling the mortgage loans so purchased in the
form of guaranteed mortgage securities, primarily Freddie Mac Securities. In
1981, Freddie Mac initiated its Home Mortgage Guaranty Program under which it
purchases mortgage loans from sellers with Freddie Mac Securities representing
interests in the mortgage loans so purchased. All mortgage loans purchased by
Freddie Mac must meet certain standards set forth in the Freddie Mac Act.
Freddie Mac is confined to purchasing, so far as practicable, mortgage loans
that it deems to be of such quality and type as to meet generally the purchase
standards imposed by private institutional mortgage investors. See "Additional
Information" for the availability of further information regarding Freddie Mac
and Freddie Mac Securities. Neither the United States nor any agency thereof is
obligated to finance Freddie Mac's operations or to assist Freddie Mac in any
other manner.
FREDDIE MAC SECURITIES
Unless otherwise specified in the related Prospectus Supplement, each Freddie
Mac Security relating to a series will represent an undivided interest in a
pool of mortgage loans that typically consists of conventional loans (but may
include FHA Loans and VA Loans) purchased by Freddie Mac, except with respect
to any stripped mortgage backed securities issued by Freddie Mac. Each such
pool will consist of mortgage loans (i) substantially all of which are secured
by one- to four-family residential properties or (ii) if specified in the
related Prospectus Supplement, are secured by five or more family residential
properties. The characteristics of any Freddie Mac Securities included in the
Trust Fund for a series of Certificates will be set forth in the related
Prospectus Supplement.
FEDERAL NATIONAL MORTGAGE ASSOCIATION
Fannie Mae is a federally chartered and privately owned corporation organized
and existing under the Federal National Mortgage Association Charter Act (12
U.S.C. (S) 1716 et seq.). It is the nation's largest supplier of residential
mortgage funds. Fannie Mae was originally established in 1938 as a United
States government agency to provide supplemental liquidity to the mortgage
market and was transformed into a stockholder-owned and privately managed
corporation by legislation enacted in 1968. Fannie Mae provides funds to the
mortgage market primarily by purchasing home mortgage loans from local lenders,
thereby replenishing their funds for additional lending. See "Additional
Information" for the availability of further information respecting Fannie Mae
and Fannie Mae Securities. Although the Secretary of the Treasury of the United
States has authority to lend Fannie Mae up to $2.25 billion outstanding at any
time, neither the
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United States nor any agency thereof is obligated to finance Fannie Mae's
operations or to assist Fannie Mae in any other manner.
FANNIE MAE SECURITIES
Unless otherwise specified in the related Prospectus Supplement, each Fannie
Mae Security relating to a series will represent a fractional undivided
interest in a pool of mortgage loans formed by Fannie Mae, except with respect
to any stripped mortgage backed securities issued by Fannie Mae. Mortgage loans
underlying Fannie Mae Securities will consist of (i) fixed, variable or
adjustable rate conventional mortgage loans or (ii) fixed-rate FHA Loans or VA
Loans. Such mortgage loans may be secured by either one- to four-family or
multi-family residential properties. The characteristics of any Fannie Mae
Securities included in the Trust Fund for a series of Certificates will be set
forth in the related Prospectus Supplement.
MORTGAGE COLLATERAL SELLERS
The Mortgage Collateral to be included in a Trust Fund will be purchased by
the Company directly or indirectly (through Residential Funding or other
affiliates) from Mortgage Collateral Sellers that may be (a) banks, savings and
loan associations, mortgage bankers, investment banking firms, insurance
companies, the Resolution Trust Corporation (the "RTC"), the Federal Deposit
Insurance Corporation (the "FDIC") and other mortgage loan originators or
sellers not affiliated with the Company (each, an "Unaffiliated Seller") or (b)
GMAC Mortgage, the indirect parent of the Company, and its affiliates (each, an
"Affiliated Seller"). Such purchases may occur by one or more of the following
methods: (i) one or more direct or indirect purchases from Unaffiliated
Sellers, which may occur simultaneously with the issuance of the Certificates
or which may occur over an extended period of time; (ii) multiple direct or
indirect purchases through the AlterNet Mortgage Program; or (iii) one or more
purchases from Affiliated Sellers. The Prospectus Supplement for a series of
Certificates will disclose the method or methods used to acquire the Mortgage
Collateral for such series. The Company may issue one or more classes of
Certificates to a Mortgage Collateral Seller as consideration for the purchase
of the Mortgage Collateral securing such series of Certificates, if so
described in the related Prospectus Supplement.
The Mortgage Collateral Sellers that participate in the AlterNet Mortgage
Program (each, an "AlterNet Program Seller") will have been selected by
Residential Funding on the basis of criteria set forth in the AlterNet Seller
Guide. An AlterNet Program Seller may be an affiliate of the Company and the
Company presently anticipates that GMAC Mortgage Corporation of PA, an
affiliate of the Company, will be an AlterNet Program Seller. Except in the
case of the RTC, the FDIC and investment banking firms, unless otherwise
specified in the related Prospectus Supplement, each AlterNet Program Seller
will have been a HUD-approved mortgagee or a financial institution supervised
by a federal or state authority and will have had generally a minimum of two
years' experience (which may be through a predecessor entity) in originating
mortgage loans. If an AlterNet Program Seller becomes subject to the direct or
indirect control of RTC or FDIC or if an AlterNet Program Seller's net worth,
financial performance or delinquency and foreclosure rates are adversely
impacted, such institution may continue to be treated as an AlterNet Program
Seller. Any such event may adversely affect the ability of any such AlterNet
Program Seller to repurchase Mortgage Collateral in the event of a breach of a
representation or warranty which has not been cured. See "--Repurchases of
Mortgage Collateral" below.
REPRESENTATIONS WITH RESPECT TO MORTGAGE COLLATERAL
Mortgage Collateral Sellers generally will make certain limited
representations and warranties with respect to the Mortgage Collateral that
they sell. However, Mortgage Collateral purchased from certain Unaffiliated
Sellers may be purchased with very limited representations and warranties. The
Company will assign to the Trustee for the benefit of the related
Certificateholders all of its right, title and interest in each agreement
pursuant to which it purchased any item of Mortgage Collateral from a Mortgage
Collateral Seller, to the extent such agreement relates to (i) the
representations and warranties made by a Mortgage Collateral
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Seller or Residential Funding, as the case may be, in respect of such item of
Mortgage Collateral and (ii) any remedies provided for any breach of such
representations and warranties.
With respect to any Mortgage Loan (including AlterNet Loans) or Contract
constituting a part of the Trust Fund, unless otherwise disclosed in the
related Prospectus Supplement, Residential Funding generally will represent and
warrant that: (i) as of the Cut-off Date, the information set forth in a
listing of the related Mortgage Loan or Contract was true and correct in all
material respects; (ii) except in the case of Cooperative Loans, a policy of
title insurance was effective or attorney's certificate was received at
origination, and each policy remained in full force and effect on the date of
sale of the related Mortgage Loan or Contract to the Company; (iii) to the best
of Residential Funding's knowledge, if required by applicable underwriting
standards, the Mortgage Loan or Contract is the subject of a Primary Insurance
Policy; (iv) Residential Funding had good title to the Mortgage Loan or
Contract and the Mortgage Loan or Contract is not subject to 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 Loan; (v) each Mortgaged
Property is free of material damage and in good repair; (vi) the Mortgage Loan
or Contract was not one month or more delinquent in payment of principal and
interest as of the related Cut-off Date and was not so delinquent more than
once during the twelve-month period prior to the Cut-off Date; and (vii) there
is no delinquent tax or assessment lien against the related 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 the Mortgage Loan or Contract, Residential Funding will
be obligated to repurchase any such Mortgage Loan or Contract or substitute for
such Mortgage Loan or Contract as described below. In addition, unless
otherwise specified in the related Prospectus Supplement, Residential Funding
will be obligated to repurchase or substitute for any Mortgage Loan as to which
it is discovered that the related Mortgage does not create a valid first lien
on, or in the case of a Contract a perfected security interest in, the related
Mortgaged Property, subject only to (a) liens of real property taxes and
assessments not yet due and payable, (b) covenants, conditions and
restrictions, rights of way, easements and other matters of public record as of
the date of recording of such Mortgage and certain other permissible title
exceptions and (c) other encumbrances 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, unless otherwise
specified in the related Prospectus Supplement, with respect to any Mortgage
Loan or Contract as to which the Company delivers to the Trustee an affidavit
certifying that the original Mortgage Note or Contract has been lost or
destroyed, if such Mortgage Loan or Contract subsequently is in default and the
enforcement thereof or of the related Mortgage or Contract is materially
adversely affected by the absence of the original Mortgage Note or Contract,
Residential Funding will be obligated to repurchase or substitute for such
Mortgage Loan or Contract in the manner described below. However, unless
otherwise set forth in the related Prospectus Supplement, Residential Funding
will not be required to repurchase or substitute for any Mortgage Loan or
Contract if the circumstances giving rise to such requirement also constitute
fraud in the origination of the related Mortgage Loan or Contract. Furthermore,
because the listing of the related Mortgage Collateral generally contains
information with respect to the Mortgage Collateral 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 items of Mortgage Collateral between the
Cut-off Date and the Closing Date. Neither Residential Funding nor any Seller
will be required to repurchase or substitute for any item of Mortgage
Collateral as a result of any such prepayment or modification.
All of the representations and warranties of a Mortgage Collateral Seller in
respect of an item of Mortgage Collateral will have been made as of the date on
which such Mortgage Collateral Seller sold the Mortgage Collateral to the
Company or Residential Funding or one of their affiliates. The date as of which
such representations and warranties were made generally will be a date prior to
the date of issuance of the related series of Certificates. A substantial
period of time may elapse between the date as of which the
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representations and warranties were made and the date of issuance of the
related series of Certificates. The Mortgage Collateral Seller's repurchase
obligation (or, if specified in the related Prospectus Supplement, limited
substitution option) will not arise if, after the sale of the related Mortgage
Collateral, an event occurs that would have given rise to such an obligation
had the event occurred prior to such period.
REPURCHASES OF MORTGAGE COLLATERAL
If a Mortgage Collateral Seller or Residential Funding, as the case may be,
cannot cure a breach of any representation or warranty made by it in respect of
an item of Mortgage Collateral within 90 days after notice from the Master
Servicer, the Servicer, the Certificate Administrator or the Trustee, and such
breach materially and adversely affects the interests of the Certificateholders
in such item of Mortgage Collateral, such Mortgage Collateral Seller or
Residential Funding, as the case may be, will be obligated to purchase such
item of Mortgage Collateral at a price set forth in the related Pooling and
Servicing Agreement or Trust Agreement. Likewise, as described under
"Description of the Certificates--Review of Mortgage Loan or Contract
Documents," if the Company or the Mortgage Collateral Seller, as applicable,
cannot cure certain documentary defects with respect to a Mortgage Loan or
Contract, the Company or the Mortgage Collateral Seller, as applicable, will be
required to repurchase such item of Mortgage Collateral. Unless otherwise
specified in the related Prospectus Supplement, the "Purchase Price" for any
such item of Mortgage Collateral will be equal to the principal balance thereof
as of the date of purchase plus accrued and unpaid interest to the first day of
the month following the month of repurchase (less the amount, expressed as a
percentage per annum, payable in respect of servicing or administrative
compensation and the Spread, if any). In certain limited cases, a substitution
may be made in lieu of such repurchase obligation. See "--Limited Right of
Substitution" below.
The Master Servicer, the Servicer or the Certificate Administrator, as
applicable, will be required under the applicable Pooling and Servicing
Agreement or Trust Agreement to enforce this repurchase obligation, or the
substitution right described below, 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. If, as a result of a breach of representation or warranty, a
Mortgage Collateral Seller is required, but fails, to repurchase the related
Mortgage Collateral, the Company or Residential Funding will only be required
to repurchase such Mortgage Collateral if the Company or Residential Funding
has assumed such representations and warranties. Consequently, such Mortgage
Collateral will remain in the related Trust Fund and any related losses not
borne by any applicable credit enhancement will be borne by Certificateholders.
If the Mortgage Collateral Seller fails to honor its repurchase or substitution
obligation, such obligation will not become an obligation of Residential
Funding, the Master Servicer or Servicer (although Residential Funding, the
Master Servicer or Servicer may have an independent obligation to repurchase or
substitute for such Mortgage Collateral). In instances where a Mortgage
Collateral Seller is unable or disputes its obligation to repurchase affected
Mortgage Collateral, the Master Servicer or Servicer, using practices it would
employ in its good faith business judgment and which are normal and usual in
its general mortgage servicing activities, may negotiate and enter into
settlement agreements with such Mortgage Collateral Seller that could provide
for, among other things, the repurchase of only a portion of the affected
Mortgage Collateral. Any such settlement could lead to losses on the Mortgage
Collateral which would be borne by the related Certificateholders. In
accordance with the above described practices, the Master Servicer or Servicer
will not be required to enforce any purchase obligation of a Mortgage
Collateral Seller arising from any misrepresentation by the Mortgage Collateral
Seller, if the Master Servicer or Servicer determines in the reasonable
exercise of its business judgment that the matters related to such
misrepresentation did not directly cause or are not likely to directly cause a
loss on the related Mortgage Collateral. Unless otherwise specified in the
related Prospectus Supplement, the foregoing repurchase obligations and the
limited right of substitution (described below) will constitute the sole
remedies available to Certificateholders or the Trustee for a breach of any
representation by a Mortgage Collateral Seller in its capacity as a seller of
Mortgage Collateral, or for any other event giving rise to such obligations as
described above.
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The Company and Residential Funding generally monitor which Mortgage
Collateral Sellers are under the control of the RTC or the FDIC, or are
insolvent, otherwise in receivership or conservatorship or financially
distressed. Such Mortgage Collateral Sellers may not be able or permitted to
repurchase Mortgage Collateral for which there has been a breach of
representation or warranty. Moreover, any such Mortgage Collateral Seller may
make no representations or warranties with respect to Mortgage Collateral sold
by it. The RTC or FDIC (either in their corporate capacity or as receiver for a
depository institution), may also be a Mortgage Collateral Seller, in which
event neither the RTC nor the FDIC, as applicable, nor the related depository
institution, may make representations or warranties with respect to the
Mortgage Collateral sold, or only limited representations or warranties may be
made (for example, that the related legal documents are enforceable). The RTC
or FDIC, as applicable, may have no obligation to repurchase any Mortgage
Collateral for a breach of a representation or warranty. In addition, Mortgage
Collateral that is purchased either directly or indirectly from the RTC may be
subject to a contract right of the RTC to repurchase such Mortgage Collateral
under certain limited circumstances.
LIMITED RIGHT OF SUBSTITUTION
In the case of a Mortgage Loan or Contract required to be repurchased from
the Trust Fund (a "Repurchased Mortgage Loan" or a "Repurchased Contract,"
respectively) the related Mortgage Collateral Seller or Residential Funding, as
applicable, may substitute a new Mortgage Loan or Contract (a "Qualified
Substitute Mortgage Loan" or a "Qualified Substitute Contract," respectively)
for the Repurchased Mortgage Loan or Contract that was removed from the Trust
Fund, during the limited time period described below. Any such substitution
must be effected within 120 days of the date of the issuance of the
Certificates with respect to a Trust Fund for which no REMIC election is to be
made. With respect to a Trust Fund for which a REMIC election is to be made,
except as otherwise provided in the related Prospectus Supplement, such
substitution must be effected within two years of the date of the issuance of
the Certificates, and may not be made if such substitution would cause the
Trust Fund to fail to qualify as a REMIC or result in a prohibited transaction
tax under the Code.
Except as otherwise provided in the related Prospectus Supplement, any
Qualified Substitute Mortgage Loan or Qualified Substitute Contract generally
will, on the date of substitution: (i) have an outstanding principal balance,
after deduction of the principal portion of the monthly payment due in the
month of substitution, not in excess of the outstanding principal balance of
the Repurchased Mortgage Loan or Repurchased Contract; (ii) have a Mortgage
Rate and a Net Mortgage Rate not less than (and not more than one percentage
point greater than) the Mortgage Rate and Net Mortgage Rate, respectively, of
the Repurchased Mortgage Loan or Repurchased Contract as of the date of
substitution; (iii) have a Loan-to-Value Ratio at the time of substitution no
higher than that of the Repurchased Mortgage Loan or Repurchased Contract; (iv)
have a remaining term to maturity not greater than (and not more than one year
less than) that of the Repurchased Mortgage Loan or Repurchased Contract; and
(v) comply with all of the representations and warranties set forth in the
related Pooling and Servicing Agreement as of the date of substitution. In the
event the outstanding principal balance of a Qualified Substitute Mortgage Loan
or Qualified Substitute Contract is less than the outstanding principal balance
of the related Repurchased Mortgage Loan or Repurchased Contract, the amount of
such shortfall shall be deposited into the Custodial Account in the month of
substitution for distribution to the related Certificateholders. The related
Pooling and Servicing Agreement may include additional requirements relating to
ARM Loans or other specific types of Mortgage Loans or Contracts, 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 Mortgage Collateral Seller
will have no option to substitute for a Mortgage Loan or Contract that it is
obligated to repurchase in connection with a breach of a representation and
warranty.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued in series. Each series of Certificates (or,
in certain instances, two or more series of Certificates) will be issued
pursuant to a Pooling and Servicing Agreement or, in the case of Certificates
backed by Agency Securities, a Trust Agreement, similar to one of the forms
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. Each Pooling and Servicing Agreement or Trust Agreement will be filed
with the Commission as an exhibit to a Form 8-K. The following summaries
(together with additional summaries under "The Pooling and Servicing Agreement"
below) describe certain provisions relating to the Certificates common to each
Pooling and Servicing Agreement or Trust Agreement. All references herein to a
"Pooling and Servicing Agreement" and any discussion of the provisions thereof
will also apply to Trust Agreements. The summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Pooling and Servicing Agreement for each Trust
Fund and the related Prospectus Supplement.
Each series of Certificates may consist of any one or a combination of the
following: (i) a single class of Certificates; (ii) two or more classes of
Certificates, one or more classes of which may be Senior Certificates that are
senior in right of payment to any class or classes of Mezzanine Certificates
and to any other class or classes of Subordinate Certificates, and as to which
certain classes of Senior Certificates may be senior to other classes of Senior
Certificates, as described in the respective Prospectus Supplement (any such
series, a "Senior/Subordinate Series"); (iii) one or more classes of Strip
Certificates which will be entitled to (a) principal distributions, with
disproportionate, nominal or no interest distributions or (b) interest
distributions, with disproportionate, nominal or no principal distributions;
(iv) two or more classes of Certificates which differ as to the timing,
sequential order, rate, pass-through rate or amount of distributions of
principal or interest or both, or as to which distributions of principal or
interest or both on any class may be made upon the occurrence of specified
events, in accordance with a schedule or formula (including "planned
amortization classes" and "targeted amortization classes"), or on the basis of
collections from designated portions of the Mortgage Pool or Contract Pool,
which series may include one or more classes of Accrual Certificates with
respect to which certain accrued interest will not be distributed but rather
will be added to the principal balance thereof on each Distribution Date for
the period described in the related Prospectus Supplement; or (v) other types
of classes of Certificates, as described in the related Prospectus Supplement.
Credit support for each series of Certificates will be provided by a Mortgage
Pool Insurance Policy, Special Hazard Insurance Policy, Bankruptcy Bond, Letter
of Credit, Reserve Fund, Certificate Insurance Policy or other credit
enhancement as described under "Description of Credit Enhancement," or by the
subordination of one or more classes of Certificates as described under
"Subordination" or by any combination of the foregoing.
FORM OF CERTIFICATES
As specified in the related Prospectus Supplement, the Certificates of each
series will be issued either as physical certificates or in book-entry form. If
issued as physical certificates, the Certificates will be in fully- registered
form only in the denominations specified in the related Prospectus Supplement,
and will be transferrable 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" as used herein refers to the entity whose
name appears on the records of the Certificate Registrar (or, if applicable, a
transfer agent) as the registered holder thereof, except as otherwise indicated
in the related Prospectus Supplement.
If issued in book-entry form, specified classes of a series of Certificates
will be initially issued through the book-entry facilities of The Depository
Trust Company ("DTC"). As to any such class of Certificates so issued ("DTC
Registered Certificates"), the record holder of such Certificates will be DTC's
nominee. DTC is a limited-purpose trust company organized under the laws of the
State of New York, which holds securities
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for its participating organizations ("Participants") and facilitates the
clearance and settlement of securities transactions between Participants
through electronic book-entry changes in the accounts of Participants.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. Other
institutions that are not Participants but clear through or maintain a
custodial relationship with Participants (such institutions, "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 DTC Registered Certificates (each such person, a
"Beneficial Owner") will be entitled to receive a Certificate representing such
interest in registered, certificated form, unless either (i) DTC ceases to act
as depository in respect thereof and a successor depository is not obtained or
(ii) the Company elects in its sole discretion to discontinue the registration
of such Certificates through DTC. Prior to any such event, Beneficial Owners
will not be recognized by the Trustee, the Master Servicer, any Servicer or the
Certificate Administrator as holders of the related Certificates for purposes
of the Pooling and Servicing Agreement and Beneficial Owners will be able to
exercise their rights as owners of such Certificates only indirectly through
DTC, Participants and Indirect Participants. Any Beneficial Owner that desires
to purchase, sell or otherwise transfer any interest in DTC Registered
Certificates may do so only through DTC, either directly if such Beneficial
Owner is a Participant or indirectly through Participants and, if applicable,
Indirect Participants. Pursuant to the procedures of DTC, transfers of the
beneficial ownership of any DTC Registered Certificates will be required to be
made in minimum denominations specified in the related Prospectus Supplement.
The ability of a Beneficial Owner to pledge DTC Registered Certificates to
persons or entities that are not Participants in the DTC system, or to
otherwise act with respect to such Certificates, may be limited because of the
lack of physical certificates evidencing such Certificates and because DTC may
act only on behalf of Participants.
Distributions in respect of the DTC Registered Certificates will be forwarded
by the Trustee to DTC, and DTC will be responsible for forwarding such payments
to Participants, each of which will be responsible for disbursing such payments
to the Beneficial Owners it represents or, if applicable, to 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 DTC
Registered Certificates under the Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account the DTC Registered
Certificates are credited and whose aggregate holdings represent no less than
any minimum amount of Percentage Interests or voting rights required therefor.
DTC may take conflicting actions with respect to any action of
Certificateholders of any Class to the extent that Participants authorize such
actions. None of the Master Servicer, the Certificate Administrator, the
Company, any Servicer, the Trustee or any of their respective affiliates will
have any liability for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the DTC Registered
Certificates, or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of a series of Certificates, the Company will cause
the Mortgage Loans being included in the related Trust Fund to be assigned to
the Trustee or its nominee (which may be the Custodian) together with all
principal and interest received on or with respect to such Mortgage Loans after
the Cut-off Date (other than principal and interest due on or before the Cut-
off Date and any Spread). The Trustee will, concurrently with such assignment,
deliver a series of Certificates to the Company in exchange for the Mortgage
Loans. Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the related Pooling and Servicing Agreement. Such schedule will
include, among other things, information as to the principal balance of each
Mortgage Loan as of the Cut-off Date, as well as information respecting the
Mortgage Rate, the currently scheduled monthly payment of principal and
interest, the maturity of the Mortgage Note and the Loan-to-Value Ratio at
origination or modification (without regard to any secondary financing).
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In addition, the Company will, as to each Mortgage Loan other than a Mortgage
Loan underlying any Agency Securities, deliver to the Trustee (or to the
Custodian) the legal documents relating to such Mortgage Loan that are in
possession of the Company, which may include: (i) the note evidencing such
Mortgage Loan (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, the respective security agreements and any
applicable UCC financing statements; (iii) an assignment in recordable form of
the Mortgage (or, with respect to a Cooperative Loan, an assignment of the
respective security agreements, any applicable UCC financing statements,
recognition agreements, relevant stock certificates, related blank stock powers
and the related proprietary leases or occupancy agreements); and (iv) if
applicable, any riders or modifications to such Mortgage Note and Mortgage,
together with certain other documents at such times as set forth in the related
Pooling and Servicing Agreement. Such assignments may be blanket assignments
covering Mortgages secured by Mortgaged Properties located in the same county,
if permitted by law. If so provided in the related Prospectus Supplement, the
Company may not be required to deliver one or more of such documents if such
documents are missing from the files of the party from whom such Mortgage Loans
were purchased.
In the event that, with respect to any Mortgage Loan, the Company cannot
deliver the Mortgage or any assignment with evidence of recording thereon
concurrently with the execution and delivery of the related Pooling and
Servicing Agreement because of a delay caused by the public recording office,
the Company will deliver or cause to be delivered to the Trustee or the
Custodian a true and correct photocopy of such Mortgage or assignment. The
Company will deliver or cause to be delivered to the Trustee or the Custodian
such Mortgage or assignment with evidence of recording indicated thereon after
receipt thereof from the public recording office or from the related Servicer
or Sub-Servicer.
Assignments of the Mortgage Loans to the Trustee will be recorded in the
appropriate public recording office, except in states where, in the opinion of
counsel acceptable to the Trustee, such recording is not required to protect
the Trustee's interests in the Mortgage Loan against the claim of any
subsequent transferee or any successor to or creditor of the Company or the
originator of such Mortgage Loan, or except as otherwise specified in the
related Prospectus Supplement.
ASSIGNMENT OF CONTRACTS
The Company will cause the Contracts constituting the Contract Pool to be
assigned to the Trustee or its nominee (which may be the Custodian), together
with principal and interest due on or with respect to the Contracts after the
Cut-off Date, but not including principal and interest due on or before the
Cut-off Date or any Spread. Each Contract will be identified in a schedule
appearing as an exhibit to the Pooling and Servicing Agreement. Such schedule
will specify, with respect to each Contract, among other things: the original
principal amount and the adjusted principal balance as of the close of business
on the Cut-off Date; the Mortgage Rate; the current scheduled monthly level
payment of principal and interest; and the maturity date of the Contract.
In addition, the Company, the Servicer or the Master Servicer, as to each
Contract, will deliver or cause to be delivered to the Trustee, or, as
specified in the related Prospectus Supplement, the Custodian, the original
Contract and copies of documents and instruments related to each Contract and
the security interest in the Manufactured Home securing each Contract. The
Company, the Master Servicer or the Servicer will cause a UCC-1 financing
statement to be executed by the Company identifying the Trustee as the secured
party and identifying all Contracts as collateral. However, unless otherwise
specified in the related Prospectus Supplement, the Contracts will not be
stamped or otherwise marked to reflect their assignment from the Company to the
Trust Fund and no recordings or filings will be made in the jurisdictions in
which the Manufactured Homes are located. See "Certain Legal Aspects of
Mortgage Loans and Contracts--The Contracts."
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REVIEW OF MORTGAGE LOAN OR CONTRACT DOCUMENTS
The Trustee or the Custodian will hold such documents in trust for the
benefit of the Certificateholders and, generally within 45 days after receipt
thereof, will review such documents. Unless otherwise provided in the related
Prospectus Supplement, if any such document is found to be defective in any
material respect, the Trustee or such Custodian shall immediately notify the
Master Servicer or the Servicer, if any, and the Company, and if so specified
in the related Prospectus Supplement, the Master Servicer, the Servicer or the
Trustee shall immediately notify the Mortgage Collateral Seller. If the
Mortgage Collateral Seller (or, if so specified in the related Prospectus
Supplement, the Company) cannot cure such defect within 60 days (or within such
other period specified in the related Prospectus Supplement) after notice of
the defect is given to the Mortgage Collateral Seller (or, if applicable, the
Company), the Mortgage Collateral Seller (or, if applicable, the Company) will,
not later than 90 days after such notice (or within such other period specified
in the related Prospectus Supplement), either repurchase the related Mortgage
Loan or Contract or any property acquired in respect thereof from the Trustee
or substitute for such Mortgage Loan or Contract, a new Mortgage Loan or
Contract in accordance with the standards set forth herein. See "The Trust
Funds--Repurchases of Mortgage Collateral." Unless otherwise specified in the
related Prospectus Supplement, the obligation to repurchase or substitute for a
Mortgage Loan or Contract constitutes the sole remedy available to the
Certificateholders or the Trustee for a material defect in a constituent
document.
ASSIGNMENT OF AGENCY SECURITIES
The Company will transfer, convey and assign to the Trustee or its nominee
(which may be the Custodian) all right, title and interest of the Company in
the Agency Securities and other property to be included in the Trust Fund for a
series. Such assignment will include all principal and interest due on or with
respect to the Agency Securities after the Cut-off Date specified in the
related Prospectus Supplement (except for any Spread). The Company will cause
the Agency Securities to be registered in the name of the Trustee or its
nominee, and the Trustee will concurrently authenticate and deliver the
Certificates. Unless otherwise specified in the related Prospectus Supplement,
the Trustee will not be in possession of or be assignee of record of any
underlying assets for a Agency Security. Each Agency Security will be
identified in a schedule appearing as an exhibit to the related Pooling and
Servicing Agreement, which will specify as to each Agency Security the original
principal amount and outstanding principal balance as of the Cut-off Date; the
annual pass-through rate or interest rate for each Agency Security conveyed to
the Trustee.
SPREAD
The Company, the Servicer, the Mortgage Collateral Seller, the Master
Servicer or any of their affiliates, or such other entity as may be specified
in the related Prospectus Supplement may retain or be paid a portion of
interest (the "Spread") due with respect to the related Mortgage Collateral.
The payment of any Spread will be disclosed in the related Prospectus
Supplement. The Spread may be in addition to any other payment (such as the
Servicing Fee) that any such entity is otherwise entitled to receive with
respect to the Mortgage Collateral. Any Spread in respect of an item of
Mortgage Collateral will represent a specified portion of the interest payable
thereon and will not be part of the related Trust Fund. Any partial recovery of
interest in respect of an item of Mortgage Collateral will be allocated between
the owners of any Spread and the Certificateholders entitled to payments of
interest as provided in the applicable Pooling and Servicing Agreement.
PAYMENTS ON MORTGAGE COLLATERAL
The Trustee or the Master Servicer, if any, will, as to each series of
Certificates, establish and maintain in trust the Certificate Account which
will be a separate account that may be interest bearing or non-interest bearing
in the name of the Trustee, maintained with a depository institution and in a
manner acceptable to each Rating Agency. If permitted by each such Rating
Agency, a Certificate Account may contain funds relating to one or more series
of Certificates.
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The Trustee, the Servicer or the Master Servicer, if any, will establish a
Custodial Account which will be a separate trust account, into which payments
on the Mortgage Collateral for such series may be transferred on a periodic
basis and from which funds may be transferred to the Certificate Account in
order to make payments to Certificateholders. The Custodial Account may contain
funds relating to more than one series of Certificates as well as payments
received on other mortgage loans serviced or master serviced by the Master
Servicer or the Servicer, as applicable. Amounts held in the Certificate
Account or a Custodial Account may be invested in Permitted Investments. See
"--Collection of Payments on Mortgage Loans and Contracts" below. In addition,
if so stated in such Prospectus Supplement, one or more other trust accounts,
including any Reserve Funds, will be established into which cash, certificates
of deposit or letters of credit, or a combination thereof, will be deposited by
the Company, if such assets are required to make timely distributions with
respect to the Certificates of a series, are required as a condition to the
rating of such Certificates or are required in order to provide for certain
contingencies as described in the related Prospectus Supplement.
COLLECTION OF PAYMENTS ON MORTGAGE LOANS AND CONTRACTS
Each Servicer or the Master Servicer, if any, will be required to deposit
into the Custodial Account (unless otherwise specified in the related
Prospectus Supplement) all amounts enumerated in the following paragraph in
respect of the Mortgage Loans or Contracts serviced by it, less the Servicing
Fee and Spread, if any.
The Servicer or Master Servicer, as applicable, will deposit or will cause to
be deposited into the Custodial Account certain payments and collections
received by it subsequent to the Cut-off Date (other than payments due on or
before the Cut-off Date), as specifically set forth in the related Pooling and
Servicing Agreement, which (except as otherwise provided therein) generally
will include the following:
(i) all payments on account of principal of the Mortgage Loans or
Contracts comprising a Trust Fund;
(ii) all payments on account of interest on the Mortgage Loans comprising
such Trust Fund, net of the portion of each payment thereof retained by the
Servicer or Sub-Servicer, if any, as Spread, its servicing or other
compensation;
(iii) all amounts (net of unreimbursed liquidation expenses and insured
expenses incurred, and unreimbursed Servicing Advances made, by the related
Servicer or Sub-Servicer) received and retained in connection with the
liquidation of any defaulted Mortgage Loan or Contract, by foreclosure or
otherwise ("Liquidation Proceeds"), including all proceeds of any Special
Hazard Insurance Policy, Bankruptcy Bond, Mortgage Pool Insurance Policy,
Contract Pool Insurance Policy, Primary Insurance Policy and any title,
hazard or other insurance policy covering any Mortgage Loan or Contract in
such Trust Fund (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 or Servicer's normal servicing procedures;
(iv) any Buy-Down Funds (and, if applicable, investment earnings thereon)
required to be paid to Certificateholders, as described below;
(v) all proceeds of any Mortgage Loan or Contract in such Trust Fund
purchased (or, in the case of a substitution, certain amounts representing
a principal adjustment) by the Master Servicer, the Company, Residential
Funding, any Sub-Servicer or Mortgage Collateral Seller or any other person
pursuant to the terms of the Pooling and Servicing Agreement. See "The
Trust Funds--Representations with Respect to Mortgage Collateral" and "--
Repurchases of Defective Mortgage Collateral" herein;
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(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments of funds held in the
Custodial Account, as described below; and
(vii) any amounts required to be transferred from the Certificate Account
to the Custodial Account.
Both the Custodial Account and the Certificate Account must be either (i)
maintained with a depository institution whose debt obligations at the time of
any deposit therein are rated by any Rating Agency that rated any Certificates
of the related series not less than a specified level comparable to the rating
category of such Certificates, (ii) an account or accounts the deposits in
which are fully insured to the limits established by the FDIC, provided that
any deposits not so insured shall be otherwise maintained such that, as
evidenced by an opinion of counsel, the Certificateholders have a claim with
respect to the funds in such accounts or a perfected first priority security
interest in any collateral securing such funds that is superior to the claims
of any other depositors or creditors of the depository institution with which
such accounts are maintained, (iii) in the case of the Custodial Account, a
trust account or accounts maintained in either the corporate trust department
or the corporate asset services department of a financial institution which has
debt obligations that meet certain rating criteria, (iv) in the case of the
Certificate Account, a trust account or accounts maintained with the Trustee or
(v) such other account or accounts acceptable to any applicable Rating Agency
(an "Eligible Account"). The collateral that is eligible to secure amounts in
an Eligible Account is limited to certain permitted investments, which are
generally limited to United States government securities and other investments
that are rated, at the time of acquisition, in one of the categories permitted
by the related Pooling and Servicing Agreement ("Permitted Investments").
Unless otherwise set forth in the related Prospectus Supplement, not later
than the business day preceding each Distribution Date, the Master Servicer or
Servicer, as applicable, will withdraw from the Custodial Account and deposit
into the applicable Certificate Account, in immediately available funds, the
amount to be distributed therefrom to Certificateholders on such Distribution
Date. The Master Servicer, the Servicer or the Trustee, as applicable, will
also deposit or cause to be deposited into the Certificate Account: (i) the
amount of any advances made by the Master Servicer or the Servicer as described
herein under "--Advances," (ii) any payments under any Letter of Credit, and
any amounts required to be transferred to the Certificate Account from a
Reserve Fund, as described under "Description of Credit Enhancement" below,
(iii) any amounts required to be paid by the Master Servicer or Servicer out of
its own funds due to the operation of a deductible clause in any blanket policy
maintained by the Master Servicer or Servicer to cover hazard losses on the
Mortgage Loans as described under "Insurance Policies on Mortgage Loans or
Contracts" below, (iv) any distributions received on any Agency Securities
included in the Trust Fund and (v) any other amounts as set forth in the
related Pooling and Servicing Agreement.
The portion of any payment received by the Master Servicer or the Servicer in
respect of a Mortgage Loan that is allocable to Spread will generally be
deposited into the Custodial Account, but will not be deposited in the
Certificate Account for the related series of Certificates and will be
distributed as provided in the related Pooling and Servicing Agreement.
Funds on deposit in the Custodial Account may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next Distribution Date and funds on deposit in the related Certificate Account
may be invested in Permitted Investments maturing, in general, no later than
the Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, all income and gain realized from any such investment will be for
the account of the Servicer or 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 Servicer or the Master Servicer out of its
own funds upon realization of such loss.
COLLECTION OF PAYMENTS ON AGENCY SECURITIES
The Trustee or the Certificate Administrator, as specified in the related
Prospectus Supplement, will deposit in the Certificate Account all payments on
the Agency Securities as they are received after the Cut-off
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Date. If the Trustee has not received a distribution with respect to any Agency
Security by the second business day after the date on which such distribution
was due and payable, the Trustee will request the issuer or guarantor, if any,
of such Agency Security to make such payment as promptly as possible and
legally permitted. The Trustee may take such legal action against such issuer
or guarantor as the Trustee deems appropriate under the circumstances,
including the prosecution of any claims in connection therewith. The reasonable
legal fees and expenses incurred by the Trustee in connection with the
prosecution of such legal action will be reimbursable to the Trustee out of the
proceeds of any such action and will be retained by the Trustee prior to the
deposit of any remaining proceeds in the Certificate Account pending
distribution thereof to the Certificateholders of the affected series. In the
event that the Trustee has reason to believe that the proceeds of any such
legal action may be insufficient to cover its projected legal fees and
expenses, the Trustee will notify such Certificateholders that it is not
obligated to pursue any such available remedies unless adequate indemnity for
its legal fees and expenses is provided by such Certificateholders.
WITHDRAWALS FROM THE CUSTODIAL ACCOUNT
The Servicer or the Master Servicer, as applicable, may, from time to time,
make withdrawals from the Custodial Account for certain purposes, as
specifically set forth in the related Pooling and Servicing Agreement, which
(except as otherwise provided therein) generally will include the following:
(i) to make deposits to the Certificate Account in the amounts and in the
manner provided in the Pooling and Servicing Agreement and described above
under "--Payments on Mortgage Collateral";
(ii) to reimburse itself or any Sub-Servicer for Advances, or for amounts
advanced in respect of taxes, insurance premiums or similar expenses
("Servicing Advances") as to any Mortgaged Property, out of late payments,
Insurance Proceeds, Liquidation Proceeds or collections on the Mortgage
Loan or Contract with respect to which such Advances or Servicing Advances
were made;
(iii) to pay to itself or any Sub-Servicer unpaid Servicing Fees and
subservicing fees, out of payments or collections of interest on each
Mortgage Loan or Contract;
(iv) to pay to itself as additional servicing compensation any investment
income on funds deposited in the Custodial Account, any amounts remitted by
Sub-Servicers as interest in respect of partial prepayments on the Mortgage
Loans or Contracts, and, if so provided in the Pooling and Servicing
Agreement, any profits realized upon disposition of a Mortgaged Property
acquired by deed in lieu of foreclosure or repossession or otherwise
allowed under the Pooling and Servicing Agreement;
(v) to pay to itself, a Sub-Servicer, Residential Funding, the Company or
the Mortgage Collateral Seller all amounts received with respect to each
Mortgage Loan or Contract purchased, repurchased or removed pursuant to the
terms of the Pooling and Servicing Agreement and not required to be
distributed as of the date on which the related Purchase Price is
determined;
(vi) to pay the Company or its assignee, or any other party named in the
related Prospectus Supplement, all amounts allocable to the Spread, if any,
out of collections or payments which represent interest on each Mortgage
Loan or Contract (including any Mortgage Loan or Contract as to which title
to the underlying Mortgaged Property was acquired);
(vii) to reimburse itself or any Sub-Servicer for any Advance previously
made which the Master Servicer has determined to not be ultimately
recoverable from Liquidation Proceeds, Insurance Proceeds or otherwise (a
"Nonrecoverable Advance"), subject to any limitations set forth in the
Pooling and Servicing Agreement as described in the related Prospectus
Supplement;
(viii) to reimburse itself or the Company for certain other expenses
incurred for which it or the Company is entitled to reimbursement or
against which it or the Company is indemnified pursuant to the Pooling and
Servicing Agreement; and
(ix) to clear the Custodial Account of amounts relating to the
corresponding Mortgage Loans or Contracts in connection with the
termination of the Trust Fund pursuant to the Pooling and Servicing
Agreement, as described in "The Pooling and Servicing Agreement--
Termination; Retirement of Certificates."
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DISTRIBUTIONS
Distributions of principal and interest (or, where applicable, of principal
only or interest only) on each class of Certificates entitled thereto will be
made on each Distribution Date either by the Trustee, the Master Servicer or
the Certificate Administrator acting on behalf of the Trustee or a paying agent
appointed by the Trustee (the "Paying Agent"). Such distributions will be made
to the persons who are registered as the holders of such Certificates at the
close of business on the last business day of the preceding month (the "Record
Date"). Distributions will be made in immediately available funds (by wire
transfer or otherwise) to the account of a Certificateholder at a bank or other
entity having appropriate facilities therefor, if such Certificateholder has so
notified the Trustee, the Master Servicer, the Certificate Administrator or the
Paying Agent, as the case may be, and the applicable Pooling and Servicing
Agreement provides for such form of payment, or by check mailed to the address
of the person entitled thereto as it appears on the Certificate Register. The
final distribution in retirement of the Certificates will be made only upon
presentation and surrender of the Certificates at the office or agency of the
Trustee specified in the notice to Certificateholders. Distributions will be
made to each Certificateholder in accordance with such holder's Percentage
Interest in a particular class. The "Percentage Interest" represented by a
Certificate of a particular class will be equal to the percentage obtained by
dividing the initial principal balance or notional amount of such Certificate
by the aggregate initial amount or notional balance of all the Certificates of
such class.
PRINCIPAL AND INTEREST ON THE CERTIFICATES
The method of determining, and the amount of, distributions of principal and
interest (or, where applicable, of principal only or interest only) on a
particular series of Certificates will be described in the related Prospectus
Supplement. Distributions of interest on each class of Certificates will be
made prior to distributions of principal thereon. Each class of Certificates
(other than certain classes of Strip Certificates) may have a different Pass-
Through Rate, which may be a fixed, variable or adjustable Pass-Through Rate,
or any combination of two or more such Pass-Through Rates. The related
Prospectus Supplement will specify the Pass-Through Rate or Rates for each
class, or the initial Pass-Through Rate or Rates and the method for determining
the Pass-Through Rate or Rates. Unless otherwise specified in the related
Prospectus Supplement, interest on the Certificates will 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 or the Certificate Administrator on behalf of the Trustee will
distribute or cause the Paying Agent to distribute, as the case may be, to each
holder of record on the Record Date of a class of Certificates, an amount equal
to the Percentage Interest represented by the Certificate held by such holder
multiplied by such class's Distribution Amount. The "Distribution Amount" for a
class of Certificates for any Distribution Date will be the portion, if any, of
the Principal Distribution Amount (as defined in the related Prospectus
Supplement) allocable to such class for such Distribution Date, plus, if such
class is entitled to payments of interest on such Distribution Date, one
month's interest at the applicable Pass-Through Rate on the principal balance
or notional amount of such class specified in the applicable Prospectus
Supplement, less certain interest shortfalls, which generally will include (i)
any Deferred Interest added to the principal balance of the Mortgage Loans
and/or the outstanding balance of one or more classes of Certificates on the
related Due Date, (ii) any other interest shortfalls (including, without
limitation, shortfalls resulting from application of the Relief Act or similar
legislation or regulations as in effect from time to time) allocable to
Certificateholders which are not covered by advances or the applicable credit
enhancement and (iii) unless otherwise specified in the related Prospectus
Supplement, Prepayment Interest Shortfalls, in each case in such amount that is
allocated to such class on the basis set forth in the Prospectus Supplement.
In the case of a series of Certificates which includes two or more classes of
Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of Senior Certificates or Subordinate Certificates)
shall be set forth in the related Prospectus
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Supplement. Distributions in respect of principal of any class of Certificates
will be made on a pro rata basis among all of the Certificates of such class
unless otherwise set forth in the related Prospectus Supplement.
Except as otherwise provided in the related Pooling and Servicing Agreement,
on or prior to the 20th day (or, if such day is not a business day, the next
business day) of the month of distribution (the "Determination Date"), the
Master Servicer or the Certificate Administrator, as applicable, will determine
the amounts of principal and interest which will be passed through to
Certificateholders on the succeeding Distribution Date. Prior to the close of
business on the business day succeeding each Determination Date, the Master
Servicer or the Certificate Administrator, as applicable, will furnish a
statement to the Trustee (the information in such statement to be made
available to Certificateholders by the Master Servicer or the Certificate
Administrator, as applicable, on request) setting forth, among other things,
the amount to be distributed on the next succeeding Distribution Date.
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of the flow of funds as it would
relate to a hypothetical series of Certificates issued, and with a Cut-off Date
occurring, in June 1995:
<TABLE>
<CAPTION>
DATE NOTE DESCRIPTION
---- ---- -----------
<C> <C> <S>
June 1......................... (A) Cut-off Date.
June 2-30...................... (B) The Servicers or the Sub-Servicers, as
applicable, receive any Principal
Prepayments and applicable interest
on such Principal Prepayments.
June 30........................ (C) Record Date.
July 1......................... (D) The due date for a Mortgage Loan or
Contract (the "Due Date").
July 18........................ (E) The Servicers or the Sub-Servicers, as
applicable, remit to the Master
Servicer or the Servicer, as
applicable, scheduled payments of
principal and interest due on July 1
and received or advanced by them.
July 20........................ (F) Determination Date.
July 25........................ (G) Distribution Date.
</TABLE>
Succeeding months follow the pattern of (B) through (G), except that for
succeeding months (B) will also include the first day of such month. Certain
series of Certificates may have different prepayment periods, Cut-off Dates,
Record Dates, Due Dates, remittance dates, Determination Dates and/or
Distribution Dates than those set forth above.
- --------
(A) The initial principal balance of the Mortgage Pool or Contract Pool will be
the aggregate principal balance of the Mortgage Loans or Contracts at the
close of business on June 1, 1995, after deducting principal payments due
on or before such date. Those principal payments due on or before June 1,
and the accompanying interest payments, and any Principal Prepayments
received as of the close of business on June 1, 1995 are not part of the
Mortgage Pool or Contract 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 or Servicer as
described in (E) below for distribution to Certificateholders as described
in (F) below. When a Mortgage Loan or Contract 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 or Contracts as of the
first day of the month in which the payments are made; no interest will be
paid to Certificateholders in respect of such prepaid amounts for the month
in which such partial Principal Prepayments were received.
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<PAGE>
(C) Distributions on July 25 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 on July 1 from Mortgagors will be deposited by the Sub-
Servicers in subservicing accounts or Servicers in collection accounts (or
will be otherwise managed in a manner acceptable to the Rating Agencies) as
received and will include the scheduled principal payments plus interest on
the June balances (with the exception of interest from the date of
prepayment of any Mortgage Loan or Contract prepaid in full during June and
interest on the amount of partial Principal Prepayments in June). Funds
required to be remitted from the collection accounts or the subservicing
accounts to the Master Servicer or the Servicer, as applicable, will be so
remitted on July 18 together with any required Advances by the Servicer or
the Sub-Servicers (except that Principal Prepayments in full and certain
Principal Prepayments in part received by Sub-Servicers during the month of
June will have been remitted to the Master Servicer or the Servicer, as
applicable, within five business days of receipt).
(F) On July 20, the Master Servicer or the Certificate Administrator, if any,
will determine the amounts of principal and interest which will be passed
through on July 25 to the holders of each class of Certificates. The Master
Servicer or the Certificate Administrator, if any, will be obligated to
distribute those payments due July 1 which have been received from
Servicers or Sub-Servicers prior to and including July 18, 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 25 may include certain amounts otherwise distributable to the holders
of the related Subordinate Certificates, amounts withdrawn from any Reserve
Fund and amounts advanced by the Master Servicer or the Servicer under the
circumstances described in "Subordination" and "--Advances."
(G) On July 25, the amounts determined on July 20 will be distributed to
Certificateholders.
If provided in the related Prospectus Supplement, the Distribution Date with
respect to any series of Certificates as to which the Trust Fund includes
Agency Securities may be a specified date or dates other than the 25th day of
each month in order to allow for the receipt of distributions on such Agency
Securities.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer or the applicable Servicer will agree to advance (either out of its
own funds, funds advanced to it by Servicers or Sub-Servicers, as applicable,
or funds being held in the Custodial Account for future distribution), for the
benefit of the related 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 related Determination Date on the related Mortgage Loans or
Contracts, but only to the extent that such Advances would, in the judgment of
the Master Servicer or the Servicer, be recoverable out of late payments by the
Mortgagors, Liquidation Proceeds, Insurance Proceeds or otherwise. If a Trust
Fund includes Agency Securities, any advancing obligations with respect to
underlying Mortgage Loans or Contracts will be pursuant to the terms of such
Agency Securities and may differ from the provisions relating to Advances
described herein.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to related Certificateholders. Such Advances do not
represent an obligation of the Master Servicer or the Servicer to guarantee or
insure against losses. If Advances have been made by the Master Servicer or
Servicer from cash being held for future distribution to Certificateholders,
such funds will be required to be replaced on or before any future Distribution
Date to the extent that funds in the Certificate Account on such Distribution
Date would be less than payments required to be made to Certificateholders. Any
Advances will be reimbursable to the Master Servicer or Servicer out of
recoveries on the related Mortgage Loans or Contracts for which such amounts
were advanced (e.g., late payments made by the related Mortgagor, any related
Liquidation
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<PAGE>
Proceeds and Insurance Proceeds, proceeds of any applicable form of credit
enhancement or proceeds of any Mortgage Collateral purchased by the Company,
Residential Funding, a Sub-Servicer or a Mortgage Collateral Seller under the
circumstances described above). Such Advances will also be reimbursable from
cash otherwise distributable to Certificateholders to the extent that the
Master Servicer or Servicer shall determine that any such Advances previously
made are not ultimately recoverable as described above. With respect to any
Senior/Subordinate Series, so long as the related Subordinate Certificates
remain outstanding and subject to certain limitations with respect to Special
Hazard Losses, Fraud Losses, Bankruptcy Losses and Extraordinary Losses, such
Advances may also be reimbursable out of amounts otherwise distributable to
holders of the Subordinate Certificates, if any. The Master Servicer or the
Servicer will 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 will be reimbursable to the Master Servicer or Servicer to the extent
permitted by the Pooling and Servicing Agreement. The Master Servicer's or
Servicer's obligation to make Advances may be supported by another entity, a
letter of credit or other method as may be described in the related Pooling and
Servicing Agreement. In the event that the short-term or long-term obligations
of the provider of such support are downgraded by a Rating Agency rating the
related Certificates or if any collateral supporting such obligation is not
performing or is removed pursuant to the terms of any agreement described in
the related Prospectus Supplement, the Certificates may also be downgraded.
PREPAYMENT INTEREST SHORTFALLS
When a Mortgagor prepays a Mortgage Loan or Contract in full between
scheduled Due Dates for such Mortgage Loan or Contract, the Mortgagor pays
interest on the amount prepaid only to but not including the date on which such
Principal Prepayment is made. Similarly, Liquidation Proceeds from a Mortgaged
Property will not include interest for any period after the date on which the
liquidation took place. The shortfall between a full month's interest due with
respect to a Mortgage Loan or Contract 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 Servicer or Master Servicer may make an additional payment
to Certificateholders with respect to any Mortgage Loan or Contract 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 or
Contract an amount equal to interest at the Mortgage Rate (less the Servicing
Fee and Spread, if any) for such Mortgage Loan or Contract from the date of
such prepayment or liquidation through the related Due Date (such amount,
"Compensating Interest"). Compensating Interest may be limited to the aggregate
amount (or any portion thereof) of the Servicing Fee received by the Servicer
or Master Servicer in that month in relation to the Mortgage Loans or
Contracts, or in any other manner, and, if so limited, may not be sufficient to
cover the Prepayment Interest Shortfall. If so disclosed in the related
Prospectus Supplement, Prepayment Interest Shortfalls may be applied to reduce
interest otherwise payable with respect to one or more classes of Certificates
of a series. See "Yield Considerations."
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Master Servicer or the Certificate
Administrator, as applicable, will forward or cause to be forwarded to each
Certificateholder of record a statement or statements with respect to the
related Trust Fund setting forth the information described in the related
Pooling and Servicing Agreement. Except as otherwise provided in the related
Pooling and Servicing Agreement, such information generally will include the
following (as applicable):
(i) the amount, if any, of such distribution allocable to principal;
(ii) the amount, if any, of such distribution allocable to interest and
the amount, if any, of any shortfall in the amount of interest and
principal;
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(iii) the aggregate unpaid principal balance of the Mortgage Collateral
after giving effect to the distribution of principal on such Distribution
Date;
(iv) the outstanding principal balance or notional amount of each class
of Certificates after giving effect to the distribution of principal on
such Distribution Date;
(v) based on the most recent reports furnished by Servicers or Sub-
Servicers, the number and aggregate principal balances of any items of
Mortgage Collateral in the related Trust Fund that are delinquent (a) one
month, (b) two months and (c) three months, and that are in foreclosure;
(vi) the book value of any property acquired by such Trust Fund through
foreclosure or grant of a deed in lieu of foreclosure;
(vii) the balance of the Reserve Fund, if any, at the close of business
on such Distribution Date;
(viii) the Senior Percentage, if applicable, after giving effect to the
distributions on such Distribution Date;
(ix) the amount of coverage under any Letter of Credit, Mortgage Pool
Insurance Policy or other form of credit enhancement covering default risk
as of the close of business on the applicable Determination Date and a
description of any credit enhancement substituted therefor;
(x) if applicable, the Special Hazard Amount, Fraud Loss Amount and
Bankruptcy Amount as of the close of business on the applicable
Distribution Date and a description of any change in the calculation of
such amounts;
(xi) in the case of Certificates benefiting from alternative credit
enhancement arrangements described in a Prospectus Supplement, the amount
of coverage under such alternative arrangements as of the close of business
on the applicable Determination Date; and
(xii) with respect to any series of Certificates as to which the Trust
Fund includes Agency Securities, certain additional information as required
under the related Pooling and Servicing Agreement.
Each amount set forth pursuant to clause (i) and (ii) above will be expressed
as a dollar amount per Single Certificate. As to a particular class of
Certificates, a "Single Certificate" generally will evidence a Percentage
Interest obtained by dividing $1,000 by the initial principal balance or
notional balance of all the Certificates of such class, except as otherwise
provided in the related Pooling and Servicing Agreement. In addition to the
information described above, reports to Certificateholders will contain such
other information as is set forth in the applicable Pooling and Servicing
Agreement, which may include, without limitation, information as to Advances,
reimbursements to Sub-Servicers, Servicers and the Master Servicer and losses
borne by the related Trust Fund.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Certificate Administrator, as
applicable, will furnish a report to each person that was a holder of record
any class of Certificates at any time during such calendar year. Such report
will include information as to the aggregate of amounts reported pursuant to
clauses (i) and (ii) above for such calendar year or, in the event such person
was a holder of record of a class of Certificates during a portion of such
calendar year, for the applicable portion of such year.
SERVICING AND ADMINISTRATION OF MORTGAGE COLLATERAL
GENERAL
The Master Servicer, the Certificate Administrator or any Servicer, as
applicable, that is a party to a Pooling and Servicing Agreement, will be
required to perform the services and duties specified in the related Pooling
and Servicing Agreement. The duties to be performed by the Master Servicer or
each Servicer, subject to the general supervision by the Master Servicer or the
Certificate Administrator, if any, will include the customary functions of a
servicer, including collection of payments from Mortgagors; maintenance of any
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<PAGE>
primary mortgage insurance, hazard insurance and other types of insurance;
processing of assumptions or substitutions; attempting to cure delinquencies;
supervising foreclosures; inspection and management of Mortgaged Properties
under certain circumstances; and maintaining accounting records relating to the
Mortgage Collateral. Each Servicer or the Master Servicer, if any, may be
obligated, under certain circumstances, to make Advances in respect of
delinquent installments of principal of and interest on Mortgage Loans or
Contracts and in respect of certain taxes and insurance premiums not paid on a
timely basis by Mortgagors, as described under "--Advances" above. With respect
to any series of Certificates for which the Trust Fund includes Agency
Securities, the Master Servicer's or Certificate Administrator's servicing and
administration obligations will be set forth in the related Prospectus
Supplement.
Pursuant to each Pooling and Servicing Agreement, each Servicer or the Master
Servicer, if there are no Servicers for the related series, may enter into sub-
servicing agreements (each, a "Sub-Servicing Agreement") with one or more Sub-
Servicers who will agree to perform certain functions for the Servicer or
Master Servicer relating to the servicing and administration of the Mortgage
Loans or Contracts included in the Trust Fund relating to such Sub-Servicing
Agreement. Under any Sub-Servicing Agreement, each Sub-Servicer, will agree,
among other things, to perform some or all of the Servicer's or the Master
Servicer's servicing obligations, including but not limited to, making Advances
to the related Certificateholders. The Servicer or the Master Servicer, as
applicable, will remain liable for its servicing obligations that are delegated
to a Sub-Servicer as if such Servicer or the Master Servicer alone were
servicing such Mortgage Loans or Contracts.
COLLECTION AND OTHER SERVICING PROCEDURES
Each Servicer or the Master Servicer, as applicable, will make reasonable
efforts to collect all payments called for under the Mortgage Loans or
Contracts and will, consistent with the related Pooling and Servicing Agreement
and any applicable insurance policy or other credit enhancement, follow such
collection procedures as it follows with respect to mortgage loans or contracts
serviced by it that are comparable to the Mortgage Loans or Contracts. The
Servicer or 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 or Contract, provided that the
insurance coverage for such Mortgage Loan or Contract or any coverage provided
by any alternative credit enhancement will not be adversely affected.
The Master Servicer, any Servicer or one or more Sub-Servicers with respect
to a given Trust Fund may establish and maintain an escrow account (the "Escrow
Account") in which Mortgagors will be required to deposit amounts sufficient to
pay taxes, assessments, certain mortgage and hazard insurance premiums and
other comparable items. Withdrawals from any such Escrow Account may be made to
effect timely payment of taxes, assessments, mortgage and hazard insurance, to
refund to Mortgagors amounts determined to be owed, to pay interest on balances
in any such Escrow Account, if required, to repair or otherwise protect the
Mortgaged Properties and to clear and terminate such account. The Master
Servicer or any Servicer or Sub-Servicer, as the case may be, will be
responsible for the administration of each such Escrow Account and will be
obligated to make advances to such accounts when a deficiency exists therein.
The Master Servicer, Servicer or Sub-Servicer will be entitled to reimbursement
for any such advances from the Collection Account.
Other duties and responsibilities of each Servicer, the Master Servicer and
the Certificate Administrator are described above under "--Payments on Mortgage
Collateral."
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Each Servicer, the Master Servicer or the Certificate Administrator, as
applicable, will be paid compensation for the performance of its servicing
obligations, which compensation will be part of the servicing fee (the
"Servicing Fee") specified in the related Prospects Supplement. Any Sub-
Servicer will be entitled to receive a portion of the Servicing Fee. Except as
otherwise provided in the related Prospectus
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<PAGE>
Supplement, the Servicer or the Master Servicer, if any, will deduct the
Servicing Fee with respect to the Mortgage Loans or Contracts underlying the
Certificates of a Series in an amount to be specified in the related Prospectus
Supplement. The Servicing Fee may be fixed or variable. In addition to the
Servicing Fee, unless otherwise specified in the related Prospectus Supplement,
the Master Servicer, any Servicer or the relevant Sub-Servicers, if any, will
be entitled to servicing compensation in the form of assumption fees, late
payments charges or excess proceeds following disposition of property in
connection with defaulted Mortgage Loans or Contracts and any earnings on
investments held in the Certificate Account or any Custodial Account. Any
Spread retained by a Mortgage Collateral Seller, the Master Servicer, or any
Servicer or Sub-Servicer will not constitute part of the Servicing Fee.
Notwithstanding the foregoing, with respect to a series of Certificates as to
which the Trust Fund includes Agency Securities, the compensation payable to
the Master Servicer or Certificate Administrator for servicing and
administering such Agency Securities on behalf of the holders of such
Certificates may be based on a percentage per annum described in the related
Prospectus Supplement of the outstanding balance of such Agency Securities and
may be retained from distributions of interest thereon, if so specified in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Master Servicer or the Certificate Administrator will pay from
the Servicing Fee the fees of any Sub-Servicers, certain expenses incurred in
connection with the servicing of the Mortgage Loans or Contracts, including,
without limitation, payment of certain of the insurance policy premiums, fees
or other amounts payable for any alternative credit enhancement, payment of the
fees and disbursements of the Trustee (and any Custodian selected by the
Trustee), the Certificate Registrar, any Paying Agent, independent accountants
and payment of expenses incurred in enforcing the obligations of Sub-Servicers,
Servicers and Mortgage Collateral Sellers and in preparation of reports to
Certificateholders. Certain of these expenses may be reimbursable from
Liquidation Proceeds or insurance policies and, in the case of enforcement of
the obligations of Sub-Servicers, from any recoveries in excess of amounts due
with respect to the related Mortgage Loans or Contracts or from specific
recoveries of costs. The related Pooling and Servicing Agreement may provide
that the Certificate Administrator, the Master Servicer, and any Servicer and
Sub-Servicer may obtain their respective fees by deducting them from amounts
otherwise required to be deposited into the Collection Account.
The related Trust Fund will suffer no loss by reason of the expenses of the
Servicer or Master Servicer described above to the extent claims are fully paid
from amounts in any Reserve Fund, any related insurance policies, the
Liquidation Proceeds or any applicable alternative credit enhancement described
in the related Prospectus Supplement. In the event, however, that claims are
either not made or are not fully paid from such sources, the related Trust Fund
will suffer a loss to the extent that Liquidation Proceeds, after reimbursement
of the expenses of the Master Servicer or any Servicer or Sub-Servicer, are
less than the principal balance of and accrued interest on the related Mortgage
Loan or Contract. In addition, the Master Servicer or any Servicer or Sub-
Servicer, as applicable, will be entitled to reimbursement of expenditures
incurred by it in connection with the restoration of Mortgaged Property, such
right of reimbursement being prior to the rights of the Certificateholders to
receive any payments from any Reserve Fund or from any related Insurance
Proceeds, Liquidation Proceeds or any proceeds of alternative credit
enhancement.
EVIDENCE AS TO COMPLIANCE
Each Servicer, the Master Servicer or the Certificate Administrator, as
appropriate, will, with respect to each series of Certificates, deliver to the
Trustee, on or before the date in each year specified in the related Pooling
and Servicing Agreement, an officer's certificate stating that (i) a review of
the activities of the Certificate Administrator, each Servicer or the Master
Servicer and each Sub-Servicer, as applicable, during the preceding calendar
year and of performance under such Pooling and Servicing Agreement and the
applicable Sub-Servicing Agreement, if any, has been made under the supervision
of such officer, and (ii) to the best of such officer's knowledge, based on
such review, the Certificate Administrator, each Servicer or the Master
Servicer and each Sub-Servicer, as applicable, has fulfilled all its
obligations under such Pooling and Servicing Agreement throughout such year,
or, if there has been a default in the fulfillment of any such
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obligation, specifying each such default known to such officer and the nature
and status thereof. If set forth in the Prospectus Supplement, such officer's
certificate shall be accompanied by a statement of a firm of independent public
accountants to the effect that, on the basis of an examination of certain
documents and records relating to servicing of the Mortgage Loans or Contracts,
including similar reports delivered by each Servicer or Sub-Servicer (upon
which such firm is entitled to rely), conducted in accordance with the Uniform
Single Audit Program for Mortgage Bankers or similar standards acceptable to
the Servicer, the Master Servicer or the Certificate Administrator, as
applicable, the servicing of the Mortgage Loans or Contracts was conducted in
compliance with the provisions of the related Pooling and Servicing Agreement
and the applicable Sub-Servicing Agreement, if any, except for (a) such
exceptions as such firm believes to be immaterial and (b) such other exceptions
as are set forth in such statement.
CERTAIN OTHER MATTERS REGARDING SERVICING
Each Servicer, the Master Servicer or the Certificate Administrator, as
applicable, may not resign from its obligations and duties under the related
Pooling and Servicing Agreement except with the consent of all
Certificateholders or upon a determination that its duties thereunder are no
longer permissible under applicable law. No such resignation will become
effective until the Trustee or a successor servicer or administrator has
assumed the Servicer's, the Master Servicer's or the Certificate
Administrator's obligations and duties under such Pooling and Servicing
Agreement. A Servicer, the Master Servicer or the Certificate Administrator, as
applicable, may be removed upon the occurrence of certain Events of Default
described below under "The Pooling and Servicing Agreement--Events of Default"
and "--Rights Upon Event of Default."
Each Pooling and Servicing Agreement will also provide that neither the
Servicer, the Master Servicer or the Certificate Administrator, nor any
director, officer, employee or agent thereof, will be under any liability to
the Trust Fund or the Certificateholders for any action taken or for
restraining from taking any action in good faith pursuant to the Pooling and
Servicing Agreement, or for errors in judgment. However, neither the Servicer,
the Master Servicer or the Certificate Administrator nor any such person will
be protected against any liability which would otherwise be imposed by reason
of the failure to perform its obligations in compliance with any standard of
care set forth in the Pooling and Servicing Agreement. The Servicer, the Master
Servicer or the Certificate Administrator, as applicable, may, in its
discretion, undertake any such action that 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 interest of the Certificateholders thereunder.
In such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust Fund
and the Servicer, the Master Servicer or the Certificate Administrator will be
entitled to be reimbursed therefor out of funds otherwise distributable to
Certificateholders.
The Master Servicer or Servicer may in its discretion (i) waive any late
payment charge or any prepayment charge or penalty interest in connection with
the prepayment of a Mortgage Loan or Contract and (ii) extend the Due Date for
payments due on a Mortgage Loan or Contract, if the Master Servicer or Servicer
has determined that any such waiver or extension will not impair the coverage
of any related insurance policy, materially adversely affect the lien of the
related Mortgage or, if a REMIC election has been made with respect to the
Trust Fund, adversely affect such REMIC status.
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.
A Servicer, the Master Servicer or the Certificate Administrator may have
other business relationships with the Company, any Mortgage Collateral Seller
or their affiliates.
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SPECIAL SERVICING
If provided for in the related Prospectus Supplement, the Pooling and
Servicing Agreement for a series of Certificates may name a special servicer (a
"Special Servicer"). The Special Servicer will be responsible for the servicing
of certain delinquent Mortgage Loans or Contracts as described in the
Prospectus Supplement. The Special Servicer may have certain discretion to
extend relief to 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 liquidating plan providing for repayment by the
Mortgagor, in each case without the prior approval of the Master Servicer or
the Servicer, as applicable. Other types of forbearance generally will require
the approval of the Master Servicer or Servicer, as applicable.
ENFORCEMENT OF "DUE-ON-SALE" CLAUSES
Unless otherwise specified in the related Prospectus Supplement, when any
Mortgaged Property relating to a Mortgage Loan or Contract (other than an ARM
Loan described below) is about to be conveyed by the Mortgagor, the Master
Servicer or the Servicer, as applicable, directly or through a Sub-Servicer, to
the extent it has knowledge of such proposed conveyance, generally will be
obligated to exercise the Trustee's rights to accelerate the maturity of such
Mortgage Loan or Contract under any due-on-sale clause applicable thereto. A
due-on-sale clause will be enforced only if the exercise of such rights is
permitted by applicable law and only to the extent it would not adversely
affect or jeopardize coverage under any Primary Insurance Policy or applicable
credit enhancement arrangements. See "Certain Legal Aspects of Mortgage Loans
and Contracts--The Mortgage Loans--Enforceability of Certain Provisions" and
"--The Contracts--"Due-on-Sale' Clauses." If the Master Servicer, Servicer or
Sub-Servicer is prevented from enforcing a due-on-sale clause under applicable
law or if the Master Servicer, Servicer or Sub-Servicer determines that it is
reasonably likely that a legal action would be instituted by the related
Mortgagor to avoid enforcement of such due-on-sale clause, the Master Servicer,
Servicer or Sub-Servicer will enter into an assumption and modification
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note
or Contract subject to certain specified conditions. The original Mortgagor may
be released from liability on a Mortgage Loan or Contract if the Master
Servicer, Servicer or Sub-Servicer shall have determined in good faith that
such release will not adversely affect the collectability of the Mortgage Loan
or Contract. In the event of the sale of a Mortgaged Property subject to an ARM
Loan, such ARM Loan may be assumed if it is by its terms assumable and if, in
the reasonable judgment of the Master Servicer, Servicer or Sub-Servicer, the
proposed transferee of the related Mortgaged Property establishes its ability
to repay the loan and the security for such ARM Loan would not be impaired by
the assumption. If a Mortgagor transfers the Mortgaged Property subject to an
ARM Loan without consent, such ARM Loan may be declared due and payable. In
connection with any such assumption, the Mortgage Rate borne by the related
Mortgage Note or Contract 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,
Servicer or Sub-Servicer may approve such a request if it has determined,
exercising its good faith business judgment, that such approval will not
adversely affect the security for, and the timely and full collectability of,
the related Mortgage Loan or Contract. Any fee collected by the Master
Servicer, Servicer or Sub-Servicer for entering into an assumption or
substitution of liability agreement or for processing a request for partial
release of the Mortgaged Property generally will be retained by the Master
Servicer, Servicer or Sub-Servicer as additional servicing compensation.
REALIZATION UPON DEFAULTED PROPERTY
In the event that title to any Mortgaged Property is acquired in foreclosure
or by deed in lieu of foreclosure (or, in the case of Contracts in certain
states, by repossession of the related Manufactured Home), the deed or
certificate of sale will be issued to the Trustee or to its nominee on behalf
of Certificateholders. Notwithstanding any such acquisition of title and
cancellation of the related Mortgage Loan or Contract, such Mortgage Loan (an
"REO Mortgage Loan") or Contract (an "REO Contract") will be considered for
most purposes to be an outstanding Mortgage Loan or Contract held in the Trust
Fund until such time as
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the Mortgaged Property is sold and all recoverable Liquidation Proceeds and
Insurance Proceeds have been received with respect to such defaulted Mortgage
Loan (a "Liquidated Mortgage Loan") or Contract (a "Liquidated Contract"). For
purposes of calculations of amounts distributable to Certificateholders in
respect of an REO Mortgage Loan or an REO Contract, the amortization schedule
in effect at the time of any such acquisition of title (before any adjustment
thereto by reason of any bankruptcy or any similar proceeding or any moratorium
or similar waiver or grace period) will be deemed to have continued in effect
(and, in the case of an ARM Loan, such amortization schedule will be deemed to
have adjusted in accordance with any interest rate changes occurring on any
adjustment date therefor) so long as such REO Mortgage Loan or REO Contract is
considered to remain in the Trust Fund. If a REMIC election has been made, any
Mortgaged Property so acquired by the Trust Fund must be disposed of in
accordance with applicable federal income tax regulations and consistent with
the status of the Trust Fund as a REMIC. To the extent provided in the related
Pooling and Servicing Agreement, any income (net of expenses and other than
gains described below) received by the Sub-Servicer, Servicer or Master
Servicer on such Mortgaged Property prior to its disposition will be deposited
in the Custodial Account upon receipt and will be available at such time for
making payments to Certificateholders.
With respect to a Mortgage Loan or Contract in default, the Master Servicer
or Servicer may pursue foreclosure (or similar remedies) concurrently with
pursuing any remedy for a breach of a representation and warranty. However, the
Master Servicer or Servicer is not required to continue to pursue both such
remedies if it determines that one such remedy is more likely to result in a
greater recovery. Upon the first to occur of final liquidation and a repurchase
or substitution pursuant to a breach of a representation and warranty, such
Mortgage Loan or Contract will be removed from the related Trust Fund. The
Master Servicer or Servicer may elect to treat a defaulted Mortgage Loan or
Contract as having been finally liquidated if substantially all amounts
expected to be received in connection therewith have been received. Any
additional liquidation expenses relating to such Mortgage Loan or Contract
thereafter incurred will be reimbursable to the Master Servicer or Servicer (or
any Sub-Servicer) from any amounts otherwise distributable to the related
Certificateholders, or may be offset by any subsequent recovery related to such
Mortgage Loan or Contract. 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 or Servicer may take
into account minimal amounts of additional receipts expected to be received, as
well as estimated additional liquidation expenses expected to be incurred in
connection with such defaulted Mortgage Loan or Contract.
With respect to certain series of Certificates, if so provided in the related
Prospectus Supplement, the applicable form of credit enhancement may provide,
to the extent of coverage thereunder, that a defaulted Mortgage Loan or
Contract or REO Mortgage Loan or REO Contract will be removed from the Trust
Fund prior to the final liquidation thereof. In addition, the Master Servicer
or Servicer may have the option to purchase from the Trust Fund any defaulted
Mortgage Loan or Contract after a specified period of delinquency. In the case
of a Senior/Subordinate Series, unless otherwise specified in the related
Prospectus Supplement, if a final liquidation of a Mortgage Loan or Contract
resulted in a Realized Loss and within two years thereafter the Master Servicer
or Servicer receives a subsequent recovery specifically related to such
Mortgage Loan or Contract (in connection with a related breach of a
representation or warranty or otherwise), such subsequent recovery shall be
distributed to the then-current Certificateholders of any outstanding class to
which such Realized Loss was allocated (with the amounts to be distributed
allocated among such classes in the same proportions as such Realized Loss was
allocated), provided that no such distribution shall result in distributions on
the Certificates of any such class in excess of the total amounts of principal
and interest that would have been distributable thereon if such Mortgage Loan
or Contract had been liquidated with no Realized Loss. In the case of a series
of Certificates other than a Senior/Subordinate Series, if so provided in the
related Prospectus Supplement, the applicable form of credit enhancement may
provide for reinstatement subject to certain conditions in the event that,
following the final liquidation of a Mortgage Loan or Contract and a draw under
such credit enhancement, subsequent recoveries are received. If a defaulted
Mortgage Loan or Contract or REO Mortgage Loan or REO Contract is not so
removed from
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the Trust Fund, then, upon the final liquidation thereof, if a loss is realized
which is not covered by any applicable form of credit enhancement or other
insurance, the Certificateholders will bear such loss. However, if a gain
results from the final liquidation of an REO Mortgage Loan or REO Contract
which is not required by law to be remitted to the related Mortgagor, the
Master Servicer or the Servicer will be entitled to retain such gain as
additional servicing compensation unless the related Prospectus Supplement
provides otherwise. For a description of the Certificate Administrator's, the
Master Servicer's or the Servicer's obligations to maintain and make claims
under applicable forms of credit enhancement and insurance relating to the
Mortgage Loans or Contracts, see "Description of Credit Enhancement" and
"Insurance Policies on Mortgage Loans or Contracts."
For a discussion of legal rights and limitations associated with the
foreclosure of a Mortgage Loan or Contract, see "Certain Legal Aspects of
Mortgage Loans and Contracts."
The Master Servicer or the Certificate Administrator, as applicable, will
deal with any defaulted Agency Securities in the manner set forth in the
related Prospectus Supplement.
SUBORDINATION
A Senior/Subordinate Series of Certificates will consist of one or more
classes of Senior Certificates and one or more classes of Subordinate
Certificates, as set forth in the related Prospectus Supplement. Subordination
of the Subordinate Certificates of any Senior/Subordinate Series will be
effected by the following method, unless an alternative method is specified in
the related Prospectus Supplement. In addition, certain classes of Senior (or
Subordinate) Certificates may be senior to other classes of Senior (or
Subordinate) Certificates, as specified in the related Prospectus Supplement.
With respect to any Senior/Subordinate Series, the total amount available for
distribution on each Distribution Date, as well as the method for allocating
such amount among the various classes of Certificates included in such series,
will be described in the related Prospectus Supplement. Generally, with respect
to any such series, the amount available for distribution will be allocated
first to interest on the Senior Certificates 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 or Contract that is finally
liquidated, the amount of loss realized, if any (as more fully described in the
related Pooling and Servicing Agreement, a "Realized Loss"), will equal the
portion of the Stated Principal Balance remaining after application of all
amounts recovered (net of amounts reimbursable to the Master Servicer or
Servicer for related Advances and expenses) towards interest and principal
owing on the Mortgage Loan. With respect to a Mortgage Loan or Contract, the
principal balance of which has been reduced in connection with bankruptcy
proceedings, the amount of such reduction will be treated as a Realized Loss.
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 incurred in connection with any such
Mortgage Loan will be passed through to the then outstanding Certificateholders
of the related series in the same manner as Realized Losses on Mortgage Loans
that have not been so purchased.
In the event of any Realized Losses not in excess of the limitations
described below (other than Extraordinary Losses), the rights of the
Subordinate Certificateholders to receive distributions will be subordinate to
the rights of the Senior Certificateholders.
Except as noted below, Realized Losses will be allocated to the Subordinate
Certificates of the related series until the outstanding principal balance
thereof has been reduced to zero. Additional Realized Losses, if any, will be
allocated to the Senior Certificates. If such series includes more than one
class of Senior
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Certificates, such additional Realized Losses will be allocated either on a pro
rata basis among all of the Senior Certificates in proportion to their
respective outstanding principal balances or as otherwise provided in the
related Prospectus Supplement.
With respect to certain Realized Losses resulting from physical damage to
Mortgaged Properties which are generally of the same type as are covered under
a Special Hazard Insurance Policy, the amount thereof that may be allocated to
the Subordinate Certificates of the related series may be limited to an amount
(the "Special Hazard Amount") specified in the related Prospectus Supplement.
See "Description of Credit Enhancement--Special Hazard Insurance Policies." If
so, any Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding classes of Certificates of the related series,
either on a pro rata basis in proportion to their outstanding principal
balances, or as otherwise provided in the related Prospectus Supplement. The
respective amounts of other specified types of losses (including Fraud Losses
and Bankruptcy Losses) that may be borne solely by the Subordinate Certificates
may be similarly limited to an amount (with respect to Fraud Losses, the "Fraud
Loss Amount" and with respect to Bankruptcy Losses, the "Bankruptcy Amount"),
and the Subordinate Certificates may provide no coverage with respect to
certain other specified types of losses, as described in the related Prospectus
Supplement, in which case such losses would be allocated on a pro rata basis
among all outstanding classes of Certificates. 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 that the then-current rating of the related series of
Certificates will not be adversely affected thereby.
Generally, any allocation of a Realized Loss (including a Special Hazard
Loss) to a Certificate will be made by reducing the outstanding principal
balance thereof as of the Distribution Date following the calendar month in
which such Realized Loss was incurred. At any given time, the percentage of the
outstanding principal balances of all of the Certificates evidenced by the
Senior Certificates is the "Senior Percentage," determined in the manner set
forth in the related Prospectus Supplement. The "Stated Principal Balance" of
any item of Mortgage Collateral as of any date of determination is equal to the
principal balance thereof as of the Cut-off Date, after application of all
scheduled principal payments due on or before the Cut-off Date, whether
received or not, reduced by all amounts allocable to principal that are
distributed to Certificateholders on or before the date of determination, and
as further reduced to the extent that any Realized Loss thereon has been
allocated to any Certificates on or before such date.
As set forth above, the rights of holders of the various classes of
Certificates of any series to receive distributions of principal and interest
is determined by the aggregate outstanding principal balance of each such class
(or, if applicable, the related notional amount). The outstanding principal
balance of any Certificate will be reduced by all amounts previously
distributed on such Certificate in respect of principal and by any Realized
Losses allocated thereto. If there are no Realized Losses or Principal
Prepayments on any item of Mortgage Collateral, the respective rights of the
holders of Certificates of any series to future distributions generally would
not change. However, to the extent set forth in the related Prospectus
Supplement, holders of Senior Certificates may be entitled to receive a
disproportionately larger amount of prepayments received during certain
specified periods, which will have the effect (absent offsetting losses) of
accelerating the amortization of the Senior Certificates and increasing the
respective percentage ownership interest evidenced by the Subordinate
Certificates in the related Trust Fund (with a corresponding decrease in the
Senior Percentage), thereby preserving the availability of the subordination
provided by the Subordinate Certificates. In addition, as set forth above,
certain Realized Losses generally will be allocated first to Subordinate
Certificates by reduction of the outstanding principal balance thereof, which
will have the effect of increasing the respective ownership interest evidenced
by the Senior Certificates in the related Trust Fund.
If so provided in the related Prospectus Supplement, certain amounts
otherwise payable on any Distribution Date to holders of Subordinate
Certificates may be deposited into a Reserve Fund. Amounts held in any Reserve
Fund may be applied as described under "Description of Credit Enhancement--
Reserve Funds" and in the related Prospectus Supplement.
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With respect to any Senior/Subordinate Series, the terms and provisions of
the subordination may vary from those described above. Any such variation and
any additional credit enhancement will be described in the related Prospectus
Supplement.
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
Credit support with respect to each series of Certificates may be comprised
of one or more of the following components. Each component will have a dollar
limit and will provide coverage with respect to Realized Losses that are (i)
attributable to the Mortgagor's failure to make any payment of principal or
interest as required under the Mortgage Note or Contract, but not including
Special Hazard Losses, Extraordinary Losses or other losses resulting from
damage to a Mortgaged Property, Bankruptcy Losses or Fraud Losses (any such
loss, a "Defaulted Mortgage Loss"); (ii) of a type generally covered by a
Special Hazard Insurance Policy (any such loss, a "Special Hazard Loss"); (iii)
attributable to certain actions which may be taken by a bankruptcy court in
connection with a Mortgage Loan, including a reduction by a bankruptcy court of
the principal balance of or the Mortgage Rate on a Mortgage Loan or Contract or
an extension of its maturity (any such loss, a "Bankruptcy Loss"); and (iv)
incurred on defaulted Mortgage Loans or Contracts as to which there was fraud
in the origination of such Mortgage Loans or Contracts (any such loss, a "Fraud
Loss").
Unless otherwise specified in the related Prospectus Supplement, credit
support will not provide protection against all risks of loss and will not
guarantee repayment of the entire outstanding principal balance of the
Certificates and interest thereon. If losses occur which exceed the amount
covered by credit support or which are 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 set forth below and in the related Prospectus Supplement, (i) coverage
with respect to Defaulted Mortgage Losses may be provided by a Mortgage Pool
Insurance Policy or Contract 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 such losses, in the form of
subordination of one or more classes of Certificates as described under
"Subordination," or in the form of a Certificate Insurance Policy, a Letter of
Credit, surety bonds or other types of insurance policies, certain other
secured or unsecured corporate guarantees or in such other form as may be
described in the related Prospectus Supplement, or in the form of a combination
of two or more of the foregoing. The credit support may be provided by an
assignment of the right to receive certain cash amounts, a deposit of cash into
a Reserve Fund or other pledged assets, or by banks, insurance companies,
guarantees or any combination thereof identified in the related Prospectus
Supplement.
Each Prospectus Supplement will include a description of (a) the amount
payable under the credit enhancement arrangement, if any, provided with respect
to a series, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions under which the amount payable under such credit
support may be reduced and under which such credit support may be terminated or
replaced and (d) the material provisions of any agreement relating to such
credit support. Additionally, each such Prospectus Supplement will set forth
certain information with respect to the issuer of any third-party credit
enhancement.
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The descriptions of any insurance policies, bonds or other instruments
described in this Prospectus or any Prospectus Supplement and the coverage
thereunder do not purport to be complete and are qualified in their entirety by
reference to the actual forms of such policies, copies of which will be
exhibits to the Current Report on Form 8-K to be filed with the Securities and
Exchange Commission in connection with the issuance of the related series of
Certificates.
LETTERS OF CREDIT
If any component of credit enhancement as to any series of Certificates is to
be provided by a letter of credit (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
Collateral. The Letter of Credit Bank, the amount available under the Letter of
Credit with respect to each component of credit enhancement, the expiration
date of the Letter of Credit, and a more detailed description of the Letter of
Credit will be specified in the related Prospectus Supplement. On or before
each Distribution Date, the Letter of Credit Bank will be required to make
certain payments after notification from the Trustee, to be deposited in the
related Certificate Account with respect to the coverage provided thereby. The
Letter of Credit may also provide for the payment of Advances.
MORTGAGE POOL INSURANCE POLICIES
Any pool-wide insurance policy covering losses on Mortgage Loans (each, a
"Mortgage Pool Insurance Policy") obtained by the Company for a Trust Fund will
be issued by the insurer named in the related Prospectus Supplement (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 specified in the applicable Prospectus Supplement.
As set forth under "--Maintenance of Credit Enhancement" below, the Master
Servicer, Servicer or Certificate Administrator, as applicable, will use its
best reasonable efforts to maintain the Mortgage Pool Insurance Policy and to
present claims thereunder to the Pool Insurer on behalf of itself, the Trustee
and the Certificateholders. The Mortgage Pool Insurance Policies, however, are
not blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent described below. Unless specified in the related
Prospectus Supplement, the Mortgage Pool Insurance Policies may not cover
losses due to a failure to pay or denial of a claim under a Primary Insurance
Policy, irrespective of the reason therefor.
Each Mortgage Pool Insurance Policy will provide that no claims may be
validly presented thereunder unless, among other things, (i) any required
Primary Insurance Policy is in effect for the defaulted Mortgage Loan and a
claim thereunder has been submitted and settled, (ii) hazard insurance on the
property securing such Mortgage Loan has been kept in force and real estate
taxes and other protection and preservation expenses have been paid by the
Master Servicer, Servicer or Sub-Servicer, (iii) if there has been physical
loss or damage to the Mortgaged Property, it has been restored to its condition
(reasonable wear and tear excepted) at the Cut-off Date and (iv) the insured
has acquired good and merchantable title to the Mortgaged Property free and
clear of liens except certain permitted encumbrances. Upon satisfaction of
these conditions, the Pool Insurer will have the option either (a) to purchase
the property securing the defaulted Mortgage Loan at a price equal to the
outstanding principal balance thereof plus accrued and unpaid interest at the
applicable Mortgage Rate to the date of purchase and certain expenses incurred
by the Master Servicer, Servicer or Sub-Servicer on behalf of the Trustee and
Certificateholders, or (b) to pay the amount by which the sum of the
outstanding principal balance of the defaulted Mortgage Loan plus accrued and
unpaid interest at the Mortgage Rate to the date of payment of the claim and
the aforementioned expenses exceeds the proceeds received from an approved sale
of the Mortgaged Property, in either case net of certain amounts paid or
assumed to have been paid under any related Primary Insurance Policy.
Certificateholders will experience a shortfall in the amount of interest
payable on the related Certificates in connection with the payment of claims
under a Mortgage Pool Insurance Policy because the Pool Insurer is only
required to remit unpaid interest through the date a claim is paid rather than
through the end of the month in which such
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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,
Servicer or Sub-Servicer expends funds to cover unpaid real estate taxes or to
repair the related Mortgaged Property in order to make a claim under a Mortgage
Pool Insurance Policy, as those amounts will not be covered by payments under
such policy and will be reimbursable to the Master Servicer, Servicer or Sub-
Servicer from funds otherwise payable to the Certificateholders. If any
Mortgaged Property securing a defaulted Mortgage Loan is damaged and proceeds,
if any (see "--Special Hazard Insurance Policies" below for risks which are not
covered by such policies), from the related hazard insurance policy or
applicable Special Hazard Instrument are insufficient to restore the damaged
property to a condition sufficient to permit recovery under the Mortgage Pool
Insurance Policy, the Master Servicer, Servicer or Sub-Servicer is not required
to expend its own funds to restore the damaged property unless it determines
that (a) such restoration will increase the proceeds to Certificateholders on
liquidation of the Mortgage Loan after reimbursement of the Master Servicer,
Servicer or Sub-Servicer for its expenses and (b) such expenses will be
recoverable by it through Liquidation Proceeds or Insurance Proceeds.
Unless otherwise specified in the related Prospectus Supplement, a Mortgage
Pool Insurance Policy (and certain Primary Insurance Policies) will likely not
insure against loss sustained by reason of a default arising from, among other
things, (i) fraud or negligence in the origination or servicing of a Mortgage
Loan, including misrepresentation by the Mortgagor, the Mortgage Collateral
Seller or other persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications.
Depending upon the nature of the event, a breach of representation made by a
Mortgage Collateral Seller may also have occurred. Such a breach, unless
otherwise specified in the related Prospectus Supplement, would not give rise
to a repurchase obligation on the part of the Company or Residential Funding.
The original amount of coverage under each Mortgage Pool Insurance Policy
will be reduced over the life of the related series of Certificates by the
aggregate amount of claims paid less the aggregate of the net amounts realized
by the Pool Insurer upon disposition of all foreclosed properties. The amount
of claims paid includes certain expenses incurred by the Master Servicer,
Servicer or Sub-Servicer 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 Contracts--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 or Servicer could determine that an
Advance in respect of a delinquent Mortgage Loan would be recoverable to it
from the proceeds of the liquidation of such Mortgage Loan or otherwise, the
Master Servicer or Servicer would not be obligated to make an Advance
respecting any such delinquency since the Advance would not be ultimately
recoverable to it from either the Mortgage Pool Insurance Policy or from any
other related source. See "Description of the Certificates--Advances."
Since each Mortgage Pool Insurance Policy will require that the property
subject to a defaulted Mortgage Loan be restored to its original condition
prior to claiming against the Pool Insurer, such policy will not provide
coverage against hazard losses. As set forth under "Insurance Policies on
Mortgage Loans or Contracts--Standard Hazard Insurance on Mortgaged
Properties," the hazard policies covering the Mortgage Loans typically exclude
from coverage physical damage resulting from a number of causes and, even when
the damage is covered, may afford recoveries which are significantly less than
full replacement cost of such losses. Additionally, no coverage in respect of
Special Hazard Losses, Fraud Losses or Bankruptcy Losses will cover all risks,
and the amount of any such coverage will be limited. See "--Special Hazard
Insurance Policies" below. As a result, certain hazard risks will not be
insured against and may be borne by Certificateholders.
Contract Pools may be covered by pool insurance policies (each, a "Contract
Pool Insurance Policy") that are similar to the Mortgage Pool Insurance
Policies described above.
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SPECIAL HAZARD INSURANCE POLICIES
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained for a Trust Fund will be issued by the insurer
named in the related Prospectus Supplement (the "Special Hazard Insurer"). Each
Special Hazard Insurance Policy, subject to limitations described below and in
the related Prospectus Supplement, if any, will protect the related
Certificateholders from Special Hazard Losses which are (i) losses due to
direct physical damage to a Mortgaged Property other than any loss of a type
covered by a hazard insurance policy or a flood insurance policy, if
applicable, and (ii) losses from partial damage caused by reason of the
application of the co-insurance clauses contained in hazard insurance policies.
See "Insurance Policies on Mortgage Loans or Contracts." A Special Hazard
Insurance Policy will not cover losses occasioned by war, civil insurrection,
certain governmental actions, errors in design, faulty workmanship or materials
(except under certain circumstances), nuclear reaction, chemical contamination
or waste by the Mortgagor. Aggregate claims under a Special Hazard Insurance
Policy will be limited to the amount set forth in the related Pooling and
Servicing Agreement and will be subject to reduction as set forth in such
related Pooling and Servicing Agreement. A Special Hazard Insurance Policy will
provide that no claim may be paid unless hazard and, if applicable, flood
insurance on the property securing the Mortgage Loan or Contract has been kept
in force and other protection and preservation expenses have been paid by the
Master Servicer or Servicer.
Subject to the foregoing limitations, a Special Hazard Insurance Policy will
provide that, where there has been damage to property securing a foreclosed
Mortgage Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
Servicer or Sub-Servicer, the insurer will pay the lesser of (i) the cost of
repair or replacement of such property or (ii) upon transfer of the property to
the insurer, the unpaid principal balance of such Mortgage Loan or Contract at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest at the Mortgage Rate to the date of claim
settlement and certain expenses incurred by the Master Servicer, Servicer or
Sub-Servicer with respect to such property. If the property is transferred to a
third party in a sale approved by the Special Hazard Insurer, the amount that
the Special Hazard Insurer will pay will be the amount under (ii) above reduced
by the net proceeds of the sale of the property. If the unpaid principal
balance plus accrued interest and certain expenses is paid by the Special
Hazard Insurer, the amount of further coverage under the related Special Hazard
Insurance Policy will be reduced by such amount less any net proceeds from the
sale of the property. Any amount paid as the cost of repair of the property
will further reduce coverage by such amount. Restoration of the property with
the proceeds described under (i) above will satisfy the condition under each
Mortgage Pool Insurance Policy or Contract Pool Insurance Policy that the
property be restored before a claim under such policy may be validly presented
with respect to the defaulted Mortgage Loan or Contract secured by such
property. The payment described under (ii) above will render presentation of a
claim in respect of such Mortgage Loan or Contract under the related Mortgage
Pool Insurance Policy or Contract Pool Insurance Policy unnecessary. Therefore,
so long as a Mortgage Pool Insurance Policy or Contract 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 or contract 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 or Contract Pool Insurance
Policy.
To the extent set forth in the related Prospectus Supplement, coverage in
respect of Special Hazard Losses for a series of Certificates may be provided,
in whole or in part, by a type of special hazard coverage other than a Special
Hazard Insurance Policy or by means of a representation of the Company 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 such Mortgagor at an amount
less than the then outstanding principal balance of the
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Mortgage Loan or Contract secured by such Mortgaged Property (such difference,
a "Deficient Valuation"). The amount of the secured debt could then be reduced
to such value and, thus, the holder of such Mortgage Loan or Contract would
become an unsecured creditor to the extent the outstanding principal balance of
such Mortgage Loan or Contract exceeds the value assigned to the Mortgaged
Property by the bankruptcy court. In addition, certain other modifications of
the terms of a Mortgage Loan or Contract can result from a bankruptcy
proceeding, including a reduction in the amount of the Monthly Payment on the
related Mortgage Loan (a "Debt Service Reduction"). See "Certain Legal Aspects
of Mortgage Loans and Contracts--Mortgage Loans--Anti-Deficiency Legislation
and Other Limitations on Lenders." Any Bankruptcy Bond to provide coverage for
Bankruptcy Losses resulting from proceedings under the federal Bankruptcy Code
obtained for a Trust Fund will be issued by an insurer named in the related
Prospectus Supplement. The level of coverage under each Bankruptcy Bond will be
set forth in the related Prospectus Supplement.
RESERVE FUNDS
If so specified in the related Prospectus Supplement, the Company will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash or Permitted Investments in specified amounts, or any other
instrument satisfactory to the Rating Agency or Agencies, which will be applied
and maintained in the manner and under the conditions specified in such
Prospectus Supplement. In the alternative or in addition to such deposit, to
the extent described in the related Prospectus Supplement, a Reserve Fund may
be funded through application of all or a portion of amounts otherwise payable
on any related Subordinate Certificates, from the Spread or otherwise. To the
extent that the funding of the Reserve Fund is dependent on amounts otherwise
payable on related Subordinate Certificates, Spread or other cash flows
attributable to the related Mortgage Loans or on reinvestment income, the
Reserve Fund may provide less coverage than initially expected if the cash
flows or reinvestment income on which such funding is dependent are lower than
anticipated. With respect to any series of Certificates as to which credit
enhancement includes a Letter of Credit, if so specified in the related
Prospectus Supplement, under certain circumstances the remaining amount of the
Letter of Credit may be drawn by the Trustee and deposited in a Reserve Fund.
Amounts in a Reserve Fund may be distributed to Certificateholders, or applied
to reimburse the Master Servicer or Servicer for outstanding Advances, or may
be used for other purposes, in the manner and to the extent specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, any such Reserve Fund will not be deemed to be part of
the related Trust Fund. A Reserve Fund may provide coverage to more than one
series of Certificates, if set forth in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
will have a perfected security interest for the benefit of the
Certificateholders in the assets in the Reserve Fund. However, to the extent
that the Company, any affiliate thereof or any other entity has an interest in
any Reserve Fund, in the event of the bankruptcy, receivership or insolvency of
such entity, there could be delays in withdrawals from the Reserve Fund and the
corresponding payments to the Certificateholders. Such delays could adversely
affect the yield to investors on the related Certificates.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of a
Servicer, the Master Servicer, the Certificate Administrator or any other
person named in the related Prospectus Supplement.
CERTIFICATE INSURANCE POLICIES
If so specified in the related Prospectus Supplement, the Company may obtain
one or more certificate insurance policies (each, a "Certificate Insurance
Policy"), issued by insurers acceptable to the Rating Agency or Agencies rating
the Certificates offered pursuant to such Prospectus Supplement, insuring the
holders of one or more classes of Certificates the payment of amounts due in
accordance with the terms of such class or classes of Certificates. Any
Certificate Insurance Policy will have the characteristics described in and
will be subject to such limitations and exceptions as set forth in the related
Prospectus Supplement.
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SURETY BONDS
If so specified in the related Prospectus Supplement, the Company may obtain
one or more surety bonds (each, a "Surety Bond"), issued by insurers acceptable
to the Rating Agency or Agencies rating the Certificates offered pursuant to
such Prospectus Supplement, insuring the holders of one or more classes of
Certificates the payment of amounts due in accordance with the terms of such
class or classes of Certificates. Any surety bond will have the characteristics
described in and will be subject to such limitations and exceptions as set
forth in the related Prospectus Supplement.
MAINTENANCE OF CREDIT ENHANCEMENT
If credit enhancement has been obtained for a series of Certificates, the
Master Servicer, the Servicer or the Certificate Administrator will be
obligated to exercise its best reasonable efforts to keep or cause to be kept
such credit enhancement in full force and effect throughout the term of the
applicable Pooling and Servicing Agreement or Trust 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, the Servicer or the
Certificate Administrator, as applicable, 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.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer, the Servicer or the Certificate Administrator will agree to pay the
premiums for each Mortgage Pool Insurance Policy, Contract Pool Insurance
Policy, Special Hazard Insurance Policy, Bankruptcy Bond, Certificate Insurance
Policy or Surety Bond, as applicable, on a timely basis. In the event the
related insurer ceases to be a "Qualified Insurer" because it ceases to be
qualified under applicable law to transact such insurance business or coverage
is terminated for any reason other than exhaustion of such coverage, the Master
Servicer, the Servicer or the Certificate Administrator will use its best
reasonable efforts to obtain from another Qualified Insurer a comparable
replacement insurance policy or bond with a total coverage equal to the then
outstanding coverage of such policy or bond. If the cost of the replacement
policy is greater than the cost of such policy or bond, the coverage of the
replacement policy or bond will, unless otherwise agreed to by the Company, be
reduced to a level such that its premium rate does not exceed the premium rate
on the original insurance policy. In the event that the Pool Insurer ceases to
be a Qualified Insurer because it ceases to be approved as an insurer by
Freddie Mac, Fannie Mae or any successor entity, the Master Servicer, the
Servicer or the Certificate Administrator, as applicable, 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
or Contract Pool Insurance Policy are jeopardized for reasons related to the
financial condition of the Pool Insurer. If the Master Servicer, the Servicer
or the Certificate Administrator 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 or Contract 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, Contract Pool Insurance Policy or any
related Primary Insurance Policy, the Master Servicer or the Servicer, as
applicable, is not required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to one or more classes of Certificateholders on liquidation of the
Mortgage Loan after reimbursement of the Master Servicer or the Servicer, as
applicable, for its expenses and (ii) that such expenses will be recoverable by
it through Liquidation Proceeds or Insurance Proceeds. If recovery under any
Letter of Credit, Mortgage Pool Insurance Policy, Contract Pool Insurance
Policy, other credit enhancement or any related Primary Insurance Policy is not
available because the Master Servicer or the Servicer, as applicable, has been
unable
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to make the above determinations, has made such determinations incorrectly or
recovery is not available for any other reason, the Master Servicer or the
Servicer, as applicable, is nevertheless obligated to follow such normal
practices and procedures (subject to the preceding sentence) as it deems
necessary or advisable to realize upon the defaulted Mortgage Loan and in the
event such determination has been incorrectly made, is entitled to
reimbursement of its expenses in connection with such restoration.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
Unless otherwise specified in the Prospectus Supplement, the amount of credit
support provided with respect to any series of Certificates may be reduced
under certain specified circumstances. In most cases, the amount available as
credit support will be subject to periodic reduction on a non-discretionary
basis in accordance with a schedule or formula set forth in the related Pooling
and Servicing Agreement or Trust Agreement. Additionally, in most cases, such
credit support may be replaced, reduced or terminated, and the formula used in
calculating the amount of coverage with respect to Bankruptcy Losses, Special
Hazard Losses or Fraud Losses may be changed, without the consent of the
Certificateholders, upon the written assurance from each applicable Rating
Agency that the then-current rating of the related series of Certificates will
not be adversely affected thereby. Furthermore, in the event that the credit
rating of any obligor under any applicable credit enhancement is downgraded,
the credit rating of each class of the related Certificates may be downgraded
to a corresponding level, and, unless otherwise specified in the related
Prospectus Supplement, the Master Servicer, the Servicer or the Certificate
Administrator, as applicable, will not be obligated to obtain replacement
credit support in order to restore the rating of the Certificates. The Master
Servicer, the Servicer or the Certificate Administrator, as applicable, will
also be permitted to replace such credit support with other credit enhancement
instruments issued by obligors whose credit ratings are equivalent to such
downgraded level and in lower amounts which would satisfy such downgraded
level, provided that the then-current rating of each class of the related
series of Certificates is maintained. Where the credit support is in the form
of a Reserve Fund, a permitted reduction in the amount of credit enhancement
will result in a release of all or a portion of the assets in the Reserve Fund
to the Company, the Master Servicer or such other person that is entitled
thereto. Any assets so released will not be available for distributions in
future periods.
INSURANCE POLICIES ON MORTGAGE LOANS OR CONTRACTS
Each Mortgage Loan or Contract will be required to be covered by a hazard
insurance policy (as described below) and, in certain cases, a Primary
Insurance Policy. In addition, FHA Loans and VA Loans will be covered by the
government mortgage insurance programs described below. The descriptions of any
insurance policies set forth in this Prospectus or any Prospectus Supplement
and the coverage thereunder do not purport to be complete and are qualified in
their entirety by reference to such forms of policies.
PRIMARY MORTGAGE INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, (i) each
Mortgage Loan having a Loan-to-Value Ratio at origination of over 80% will be
covered by a primary mortgage guaranty insurance policy (a "Primary Insurance
Policy") insuring against default on such Mortgage Loan as to at least the
principal amount thereof exceeding 75% of the Appraised Value of the Mortgaged
Property at origination of the Mortgage Loan, unless and until the principal
balance of the Mortgage Loan is reduced to a level that would produce a Loan-
to-Value Ratio equal to or less than 80%, and (ii) the Company or the related
Mortgage Collateral Seller will represent and warrant that, to the best of such
entity's knowledge, such Mortgage Loans are so covered. Mortgage Loans which
are subject to negative amortization will only be covered by a Primary
Insurance Policy if such coverage was so required upon their origination,
notwithstanding that subsequent negative amortization may cause such Mortgage
Loan's Loan-to-Value Ratio (based on the then-current balance) to subsequently
exceed the limits which would have required such coverage upon their
origination.
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While the terms and conditions of the Primary Insurance Policies issued by
one primary mortgage guaranty insurer (a "Primary Insurer") will differ from
those in Primary Insurance Policies issued by other Primary Insurers, each
Primary Insurance Policy generally will pay either: (i) the insured percentage
of the loss on the related Mortgaged Property; (ii) the entire amount of such
loss, after receipt by the Primary Insurer of good and merchantable title to,
and possession of, the Mortgaged Property; or (iii) at the option of the
Primary Insurer under certain Primary Insurance Policies, the sum of the
delinquent monthly payments plus any advances made by the insured, both to the
date of the claim payment and, thereafter, monthly payments in the amount that
would have become due under the Mortgage Loan if it had not been discharged
plus any advances made by the insured until the earlier of (a) the date the
Mortgage Loan would have been discharged in full if the default had not
occurred or (b) an approved sale. The amount of the loss as calculated under a
Primary Insurance Policy covering a Mortgage Loan will generally consist of the
unpaid principal amount of such Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from the related Mortgaged Property, (ii) hazard
insurance proceeds in excess of the amount required to restore such Mortgaged
Property and which have not been applied to the payment of the Mortgage Loan,
(iii) amounts expended but not approved by the Primary Insurer, (iv) claim
payments previously made on such Mortgage Loan and (v) unpaid premiums and
certain other amounts.
As conditions precedent to the filing or payment of a claim under a Primary
Insurance Policy, in the event of default by the Mortgagor, the insured will
typically be required, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
Primary Insurer, real estate taxes, protection and preservation expenses and
foreclosure and related costs; (ii) in the event of any physical loss or damage
to the Mortgaged Property, have the Mortgaged Property restored to at least its
condition at the effective date of the Primary Insurance Policy (ordinary wear
and tear excepted); and (iii) tender to the Primary Insurer good and
merchantable title to, and possession of, the Mortgaged Property.
The Pooling and Servicing Agreement for a series generally will require that
the Master Servicer or Servicer maintain, or cause to be maintained, coverage
under a Primary Insurance Policy to the extent such coverage was in place on
the Cut-off Date. In the event that the Company gains knowledge that, as of the
Closing Date, a Mortgage Loan had a Loan-to-Value Ratio at origination in
excess of 80% and was not the subject of a Primary Insurance Policy (and was
not included in any exception to such standard disclosed in the related
Prospectus Supplement) and that such Mortgage Loan has a then current Loan-to-
Value Ratio in excess of 80%, then the Master Servicer or the Servicer is
required to use its reasonable efforts to obtain and maintain a Primary
Insurance Policy to the extent that such a policy is obtainable at a reasonable
price.
Any primary mortgage insurance or primary credit insurance policies relating
to Contracts will be described in the related Prospectus Supplement.
STANDARD HAZARD INSURANCE ON MORTGAGED PROPERTIES
The terms of the Mortgage Loans require each Mortgagor to maintain a hazard
insurance policy covering the related Mortgaged Property and providing for
coverage at least equal to that of the standard form of fire insurance policy
with extended coverage customary in the state in which the property is located.
Such coverage generally will be in an amount equal to the lesser of the
principal balance of such Mortgage Loan or 100% of the insurable value of the
improvements securing the Mortgage Loan. The Pooling and Servicing Agreement
will provide that the Master Servicer or Servicer shall cause such hazard
policies to be maintained or shall obtain a blanket policy insuring against
losses on the Mortgage Loans. The ability of the Master Servicer or 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
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flood insurance policy referred to below, or upon the extent to which
information in this regard is furnished to the Master Servicer or the Servicer
by Mortgagors or Sub-Servicers.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm, hail, riot, strike and civil commotion,
subject to the conditions and exclusions specified in each policy. The policies
relating to the Mortgage Loans will be underwritten by different insurers under
different state laws in accordance with different applicable state forms and
therefore will not contain identical terms and conditions, the basic terms
thereof are dictated by respective state laws. Such policies typically do not
cover any physical damage resulting from the following: war, revolution,
governmental actions, floods and other water-related causes, earth movement
(including earthquakes, landslides and mudflows), nuclear reactions, wet or dry
rot, vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of
uninsured risks and is not intended to be all-inclusive. Where the improvements
securing a Mortgage Loan are located in a federally designated flood area at
the time of origination of such Mortgage Loan, the Pooling and Servicing
Agreement generally requires the Master Servicer or Servicer to cause to be
maintained for each such Mortgage Loan serviced, flood insurance (to the extent
available) in an amount equal in general to the lesser of the amount required
to compensate for any loss or damage on a replacement cost basis or the maximum
insurance available under the federal flood insurance program.
Since the amount of hazard insurance that Mortgagors are required to maintain
on the improvements securing the Mortgage Loans may decline as the principal
balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss. See "Subordination" above for a description of when subordination is
provided, the protection (limited to the Special Hazard Amount as described in
the related Prospectus Supplement) afforded by such subordination, and
"Description of Credit Enhancement--Special Hazard Insurance Policies" for a
description of the limited protection afforded by any Special Hazard Insurance
Policy against losses occasioned by hazards which are otherwise uninsured
against.
STANDARD HAZARD INSURANCE ON MANUFACTURED HOMES
The terms of the Pooling and Servicing Agreement will require the Servicer or
the Master Servicer, as applicable, to cause to be maintained with respect to
each Contract one or more Standard Hazard Insurance Policies which provide, at
a minimum, the same coverage as a standard form fire and extended coverage
insurance policy that is customary for manufactured housing, issued by a
company authorized to issue such policies in the state in which the
Manufactured Home is located, and in an amount which is not less than the
maximum insurable value of such Manufactured Home or the principal balance due
from the Mortgagor on the related Contract, whichever is less. Such coverage
may be provided by one or more blanket insurance policies covering losses on
the Contracts resulting from the absence or insufficiency of individual
Standard Hazard Insurance Policies. If a Manufactured Home's location was, at
the time of origination of the related Contract, within a federally designated
flood area, the Servicer or the Master Servicer also will be required to
maintain flood insurance.
If the Servicer or the Master Servicer repossesses a Manufactured Home on
behalf of the Trustee, the Servicer or the Master Servicer will either (i)
maintain at its expense hazard insurance with respect to such Manufactured Home
or (ii) indemnify the Trustee against any damage to such Manufactured Home
prior to resale or other disposition.
FHA MORTGAGE INSURANCE
The Housing Act authorizes various FHA mortgage insurance programs. Some of
the Mortgage Loans may be insured under either Section 203(b), Section 234 or
Section 235 of the Housing Act. Under Section
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203(b), FHA insures mortgage loans of up to 30 years' duration for the purchase
of one- to four-family dwelling units. Mortgage loans for the purchase of
condominium units are insured by FHA under Section 234. Loans insured under
these programs must bear interest at a rate not exceeding the maximum rate in
effect at the time the loan is made, as established by HUD, and may not exceed
specified percentages of the lesser of the appraised value of the property and
the sales price, less seller paid closing costs for the property, up to certain
specified maximums. In addition, FHA imposes initial investment minimums and
other requirements on mortgage loans insured under the Section 203(b) and
Section 234 programs.
Under Section 235, assistance payments are paid by HUD to the mortgagee on
behalf of eligible mortgagors for as long as the mortgagors continue to be
eligible for the payments. To be eligible, a mortgagor must be part of a
family, have income within the limits prescribed by HUD at the time of initial
occupancy, occupy the property and meet requirements for recertification at
least annually.
The regulations governing these programs provide that insurance benefits are
payable either (i) upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to HUD or (ii) upon assignment of the
defaulted mortgage loan to HUD. The FHA insurance that may be provided under
these programs upon the conveyance of the home to HUD is equal to 100% of the
outstanding principal balance of the mortgage loan, plus accrued interest, as
described below, and certain additional costs and expenses. When entitlement to
insurance benefits results from assignment of the mortgage loan to HUD, the
insurance payment is computed as of the date of the assignment and includes the
unpaid principal amount of the mortgage loan plus mortgage interest accrued and
unpaid to the assignment date.
When entitlement to insurance benefits results from foreclosure (or other
acquisition of possession) and conveyance, the insurance payment is equal to
the unpaid principal amount of the mortgage loan, adjusted to reimburse the
mortgagee for certain tax, insurance and similar payments made by it and to
deduct certain amounts received or retained by the mortgagee after default,
plus reimbursement not to exceed two-thirds of the mortgagee's foreclosure
costs. Any FHA insurance relating to Contracts underlying a series of
Certificates will be described in the related Prospectus Supplement.
VA MORTGAGE GUARANTY
The Servicemen's Readjustment Act of 1944, as amended, permits a veteran (or,
in certain instances, his or her spouse) to obtain a mortgage loan guaranty by
the VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit to be occupied as the veteran's home at an interest rate not
exceeding the maximum rate in effect at the time the loan is made, as
established by HUD. The program has no limit on the amount of a mortgage loan,
requires no down payment from the purchaser and permits the guaranty of
mortgage loans with terms, limited by the estimated economic life of the
property, up to 30 years. The maximum guaranty that may be issued by the VA
under this program is 50% of the original principal amount of the mortgage loan
up to a certain dollar limit established by the VA. The liability on the
guaranty is reduced or increased pro rata with any reduction or increase in the
amount of indebtedness, but in no event will the amount payable on the guaranty
exceed the amount of the original guaranty. Notwithstanding the dollar and
percentage limitations of the guaranty, a mortgagee will ordinarily suffer a
monetary loss only when the difference between the unsatisfied indebtedness and
the proceeds of a foreclosure sale of mortgaged premises is greater than the
original guaranty as adjusted. The VA may, at its option, and without regard to
the guaranty, make full payment to a mortgagee of the unsatisfied indebtedness
on a mortgage upon its assignment to the VA.
Since there is no limit imposed by the VA on the principal amount of a VA-
guaranteed mortgage loan but there is a limit on the amount of the VA guaranty,
additional coverage under a Primary Mortgage Insurance Policy may be required
by the Company for VA loans in excess of certain amounts. The amount of any
such additional coverage will be set forth in the related Prospectus
Supplement. Any VA guaranty relating to Contracts underlying a series of
Certificates will be described in the related Prospectus Supplement.
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THE COMPANY
The Company is an indirect wholly-owned subsidiary of GMAC Mortgage which is
a wholly-owned subsidiary of GMAC. The Company was incorporated in the State of
Delaware in November 1994. The Company was organized for the purpose of
acquiring mortgage loans and contracts and issuing securities backed by such
mortgage loans or contracts. The Company anticipates that it will in many cases
have acquired Mortgage Loans indirectly through Residential Funding, which is
also an indirect wholly-owned subsidiary of GMAC Mortgage. The Company does not
have, nor is it expected in the future to have, any significant assets.
The Certificates do not represent an interest in or an obligation of the
Company. The Company's only obligations with respect to a series of
Certificates will be pursuant to certain limited representations and warranties
made by the Company or as otherwise provided in the related Prospectus
Supplement.
The Company maintains its principal office at 8400 Normandale Lake Boulevard,
Suite 700, Minneapolis, Minnesota 55437. Its telephone number is (612) 832-
7000.
RESIDENTIAL FUNDING CORPORATION
Unless otherwise specified in the related Prospectus Supplement, Residential
Funding, an affiliate of the Company, will act as the Master Servicer or
Certificate Administrator for each series of Certificates.
Residential Funding buys conventional mortgage loans under several loan
purchase programs from mortgage loan originators or sellers nationwide that
meet its seller/servicer eligibility requirements and services mortgage loans
for its own account and for others. Residential Funding's principal executive
offices are located at 8400 Normandale Lake Boulevard, Suite 700, Minneapolis,
Minnesota 55437. Its telephone number is (612) 832-7000. Residential Funding
conducts operations from its headquarters in Minneapolis and from offices
located in California, Connecticut, Florida, Georgia, Rhode Island and
Washington, D.C. At September 30, 1994, Residential Funding was master
servicing a mortgage loan portfolio of approximately $23,552 million.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Certificates--General," each
series of Certificates will be issued pursuant to a Pooling and Servicing
Agreement or, if the Trust Fund for a series of Certificates contains Agency
Securities, a Trust Agreement. The discussion below covers Pooling and
Servicing Agreements, but its terms are also generally applicable to Trust
Agreements. The following summaries describe certain additional provisions
common to each Pooling and Servicing Agreement and are qualified entirely by
reference to the actual terms of the Pooling and Servicing Agreement for a
series of Certificates.
SERVICING AND ADMINISTRATION
The Pooling and Servicing Agreement for a series of Certificates will set
forth the party responsible for performing servicing functions for such series
which may be the Master Servicer or one or more Servicers. If there is more
than one Servicer and there is no Master Servicer, a Certificate Administrator
may be party to the Pooling and Servicing Agreement. The Certificate
Administrator will not be responsible for servicing Mortgage Loans or Contracts
and instead will perform certain specified administrative and reporting
functions with regard to the Trust Fund. In addition, if the Trust Fund for a
series of Certificates contains Agency Securities, generally the Certificate
Administrator will perform collection, administrative and reporting functions
pursuant to a Trust Agreement and no Master Servicer or Servicer will be
appointed for such series.
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The Master Servicer or any Servicer for a series of Certificates generally
will perform the functions set forth under "Description of the Certificates--
Servicing and Administration of Mortgage Collateral" above.
EVENTS OF DEFAULT
Events of Default under the Pooling and Servicing Agreement in respect of a
series of Certificates, unless otherwise specified in the Prospectus
Supplement, will include: (i) in the case of a Trust Fund including Mortgage
Loans or Contracts, any failure by the Certificate Administrator, the Master
Servicer or a Servicer (if such Servicer is a party to the Pooling and
Servicing Agreement) to make a required deposit to the Certificate Account or,
if the Certificate Administrator or the Master Servicer is the Paying Agent, to
distribute to the holders of any class of Certificates of such series any
required payment which continues unremedied for five days after the giving of
written notice of such failure to the Master Servicer or the Certificate
Administrator, as applicable, by the Trustee or the Company, or to the Master
Servicer, the Certificate Administrator, the Company and the Trustee by the
holders of Certificates of such class evidencing not less than 25% of the
aggregate Percentage Interests constituting such class; (ii) any failure by the
Master Servicer or the Certificate Administrator, as applicable, duly to
observe or perform in any material respect any other of its covenants or
agreements in the Pooling and Servicing Agreement with respect to such series
of Certificates which continues unremedied for 30 days (15 days in the case of
a failure to pay the premium for any insurance policy which is required to be
maintained under the Pooling and Servicing Agreement) after the giving of
written notice of such failure to the Master Servicer or the Certificate
Administrator, as applicable, by the Trustee or the Company, or to the Master
Servicer, the Certificate Administrator, the Company and the Trustee by the
holders of any class of Certificates of such series evidencing not less than
25% (33% in the case of a Trust Fund including Agency Securities) of the
aggregate Percentage Interests constituting such class; and (iii) certain
events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the Master Servicer or the
Certificate Administrator, as applicable, and certain actions by the Master
Servicer or the Certificate Administrator indicating its insolvency or
inability to pay its obligations. A default pursuant to the terms of any Agency
Securities included in any Trust Fund will not constitute an Event of Default
under the related Pooling and Servicing Agreement.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied, either the Company or the
Trustee may, and, at the direction of the holders of Certificates evidencing
not less than 51% of the aggregate voting rights in the related Trust Fund, the
Trustee shall, by written notification to the Master Servicer or the
Certificate Administrator, as applicable, and to the Company or the Trustee,
terminate all of the rights and obligations of the Master Servicer or the
Certificate Administrator under the Pooling and Servicing Agreement (other than
any rights of the Master Servicer or the Certificate Administrator as
Certificateholder) covering such Trust Fund and in and to the Mortgage
Collateral and the proceeds thereof, whereupon the Trustee or, upon notice to
the Company and with the Company's consent, its designee will succeed to all
responsibilities, duties and liabilities of the Master Servicer or the
Certificate Administrator under such Pooling and Servicing Agreement (other
than the obligation to purchase Mortgage Collateral under certain
circumstances) and will be entitled to similar compensation arrangements. In
the event that the Trustee would be obligated to succeed the Master Servicer
but is unwilling so to act, it may appoint (or if it is unable so to act, it
shall appoint) or petition a court of competent jurisdiction for the
appointment of, a Fannie Mae or Freddie Mac approved mortgage servicing
institution with a net worth of at least $10,000,000 to act as successor to the
Master Servicer under the Pooling and Servicing Agreement (unless otherwise set
forth in the Pooling and Servicing Agreement). Pending such appointment, the
Trustee is obligated to act in such capacity. The Trustee and such successor
may agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the initial Master Servicer or the Certificate
Administrator under the Pooling and Servicing Agreement.
No Certificateholder will have any right under a Pooling and Servicing
Agreement to institute any proceeding with respect to such Pooling and
Servicing Agreement unless such holder previously has given to
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the Trustee written notice of default and the continuance thereof and unless
the holders of Certificates of any class evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written
request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity and the
Trustee for 60 days after receipt of such request and indemnity has neglected
or refused to institute any such proceeding. However, the Trustee will be under
no obligation to exercise any of the trusts or powers vested in it by the
Pooling and Servicing Agreement or to institute, conduct or defend any
litigation thereunder or in relation thereto at the request, order or direction
of any of the holders of Certificates covered by such Pooling and Servicing
Agreement, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
AMENDMENT
Each Pooling and Servicing Agreement may be amended by the Company, the
Master Servicer, the Certificate Administrator or any Servicer, as applicable,
and the Trustee, without the consent of the related Certificateholders: (i) to
cure any ambiguity; (ii) to correct or supplement any provision therein which
may be inconsistent with any other provision therein or to correct any error;
(iii) to change the timing and/or nature of deposits in the Custodial Account
or the Certificate Account or to change the name in which the Custodial Account
is maintained (except that (a) deposits to the Certificate Account may not
occur later than the related Distribution Date, (b) such change may not
adversely affect in any material respect the interests of any
Certificateholder, as evidenced by an opinion of counsel, and (c) such change
may not adversely affect the then-current rating of any rated classes of
Certificates, as evidenced by a letter from each applicable Rating Agency);
(iv) if a REMIC election has been made with respect to the related Trust Fund,
to modify, eliminate or add to any of its provisions (a) to the extent
necessary to maintain the qualification of the Trust Fund as a REMIC or to
avoid or minimize the risk of imposition of any tax on the related Trust Fund,
provided that the Trustee has received an opinion of counsel to the effect that
(1) such action is necessary or desirable to maintain such qualification or to
avoid or minimize such risk and (2) such action will not adversely affect in
any material respect the interests of any related Certificateholder or (b) to
restrict the transfer of the REMIC Residual Certificates, provided that the
Company has determined that such change would not adversely affect the
applicable ratings of any classes of the Certificates, as evidenced by a letter
from each applicable Rating Agency, 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; or (v) to make any other provisions with respect
to matters or questions arising under such Pooling and Servicing Agreement
which are not materially inconsistent with the provisions thereof, so long as
such action will not adversely affect in any material respect the interests of
any Certificateholder.
The Pooling and Servicing Agreement may also be amended by the Company, the
Master Servicer, the Certificate Administrator or any Servicer, as applicable,
and the Trustee with the consent of the holders of Certificates of each class
affected thereby evidencing, in each case, not less than 66% of the aggregate
Percentage Interests constituting such class for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Pooling and Servicing Agreement or of modifying in any manner the rights
of the 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 Collateral which are required to be distributed on a Certificate of
any class without the consent of the holder of such Certificate or (ii) reduce
the percentage of Certificates of any class the holders of which are required
to consent to any such amendment unless the holders of all Certificates of such
class have consented to the change in such percentage.
Notwithstanding the foregoing, if a REMIC election has been made with respect
to the related Trust Fund, the Trustee will not be entitled to consent to any
amendment to a Pooling and Servicing Agreement without having first received an
opinion of counsel to the effect that such amendment or the exercise of any
power granted to the Master Servicer, the Certificate Administrator, any
Servicer, the Company or the
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Trustee in accordance with such amendment will not result in the imposition of
a tax on the related Trust Fund or cause such Trust Fund to fail to qualify as
a REMIC.
TERMINATION; RETIREMENT OF CERTIFICATES
The obligations created by the Pooling and Servicing Agreement for each
series of Certificates (other than certain limited payment and notice
obligations of the Trustee and the Company, respectively) will terminate upon
the payment to the related Certificateholders of all amounts held in the
Certificate Account or by the Master Servicer or any Servicer and required to
be paid to Certificateholders following the earlier of (i) the final payment or
other liquidation or disposition (or any advance with respect thereto) of the
last item of Mortgage Collateral subject thereto and all property acquired upon
foreclosure or deed in lieu of foreclosure of any Mortgage Loan or Contract and
(ii) the purchase by the Master Servicer, the Certificate Administrator, a
Servicer or the Company or, if specified in the related Prospectus Supplement,
by the holder of the REMIC Residual Certificates (see "Certain Federal Income
Tax Consequences" below) from the Trust Fund for such series of all remaining
Mortgage Collateral and all property acquired in respect of such Mortgage
Collateral. In addition to the foregoing, the Master Servicer, the Certificate
Administrator or the Company may have the option to purchase, in whole but not
in part, the Certificates specified in the related Prospectus Supplement in the
manner set forth in the related Prospectus Supplement. Upon the purchase of
such Certificates or at any time thereafter, at the option of the Master
Servicer, the Certificate Administrator or the Company, the Mortgage Collateral
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, the Certificate Administrator or the Company.
Written notice of termination of the Pooling and Servicing Agreement will be
given to each Certificateholder, and the final distribution will be made only
upon surrender and cancellation of the Certificates at an office or agency
appointed by the Trustee which will be specified in the notice of termination.
If the Certificateholders are permitted to terminate the trust under the
applicable Pooling and Servicing Agreement, a penalty may be imposed upon the
Certificateholders based upon the fee that would be foregone by the Master
Servicer, the Certificate Administrator or a Servicer, as applicable, because
of such termination.
Any such purchase of Mortgage Collateral and property acquired in respect of
Mortgage Collateral evidenced by a series of Certificates shall be made at the
option of the Master Servicer, the Certificate Administrator, a Servicer, the
Company or, if applicable, the holder of the REMIC Residual Certificates at the
price specified in the related Prospectus Supplement. The exercise of such
right will effect early retirement of the Certificates of that series, but the
right of any such entity to purchase the Mortgage Collateral and related
property will be subject to the criteria, and will be at the price, set forth
in the related Prospectus Supplement. Such early termination may adversely
affect the yield to holders of certain classes of such Certificates. If a REMIC
election has been made, the termination of the related Trust Fund will be
effected in a manner consistent with applicable federal income tax regulations
and its status as a REMIC.
THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement will be named in the
related Prospectus Supplement. The commercial bank or trust company serving as
Trustee may have normal banking relationships with the Company and/or its
affiliates, including Residential Funding.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement or if the Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Company will be obligated to appoint
a successor Trustee. The Trustee may also be removed at any time by the holders
of Certificates evidencing not less than 51% of the aggregate voting rights in
the related Trust Fund. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance
of the appointment by the successor Trustee.
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YIELD CONSIDERATIONS
The yield to maturity of a Certificate will depend on the price paid by the
holder for such Certificate, the Pass-Through Rate on any such Certificate
entitled to payments of interest (which Pass-Through Rate may vary if so
specified in the related Prospectus Supplement) and the rate and timing of
principal payments (including prepayments, defaults, liquidations and
repurchases) on the Mortgage Collateral and the allocation thereof to reduce
the principal balance of such Certificate (or notional amount thereof, if
applicable).
The rate of defaults on the Mortgage Loans or Contracts will affect the rate
and timing of principal prepayments on such Mortgage Collateral and, thus, the
yield on the Certificates. Defaults on the Mortgage Loans or Contracts may lead
to Realized Losses upon foreclosure and liquidation. To the extent Realized
Losses are not covered by any credit enhancement, they will be allocated to
Certificates as described in the related Prospectus Supplement and,
accordingly, will affect the yield on such Certificates. In general, defaults
on mortgage loans or manufactured housing contracts are expected to occur with
greater frequency in their early years. The rate of default on refinance,
limited documentation or no documentation mortgage loans, and on mortgage loans
or manufactured housing contracts with high Loan-to-Value Ratios, may be higher
than for other types of mortgage loans or manufactured housing contracts.
Likewise, the rate of default on mortgage loans or manufactured housing
contracts that have been originated pursuant to lower than traditional
underwriting standards may be higher than those originated pursuant to
traditional standards. A Trust Fund may include Mortgage Loans or Contracts
that are one month or more delinquent at the time of offering of the related
series of Certificates. In addition, the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans or Contracts will be affected
by the general economic condition of the region of the country or the locality
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. In addition,
Manufactured Homes may decline in value even in areas where real estate values
generally have not declined. Each Prospectus Supplement will highlight any
material characteristics of the Mortgage Collateral in the related Trust Fund
that may make such Mortgage Collateral more susceptible to default.
To the extent that any document relating to a Mortgage Loan or Contract is
not in the possession of the Trustee, such deficiency may make it difficult or
impossible to realize on the Mortgaged Property in the event of foreclosure
which will affect the amount of Liquidation Proceeds received by the Trustee.
See "Description of the Certificates--Assignment of Mortgage Loans" and "--
Assignment of Contracts."
The amount of interest payments with respect to each item of Mortgage
Collateral 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 calculated on the basis of such class's specified
percentage of each such payment of interest (or accrual in the case of Accrual
Certificates) and will be expressed as a fixed, adjustable or variable Pass-
Through Rate payable on the outstanding principal balance or notional amount of
such Certificate, or any combination of such Pass-Through Rates, calculated as
described herein and in the related Prospectus Supplement. See "Description of
the Certificates--Distributions." Holders of Strip Certificates or a class of
Certificates having a Pass-Through Rate that varies based on the weighted
average interest rate of the underlying Mortgage Collateral will be affected by
disproportionate prepayments and repurchases of Mortgage Collateral having
higher net interest rates or higher rates applicable to the Strip Certificates,
as applicable.
The effective yield to maturity to each holder of Certificates entitled to
payments of interest will be below that otherwise produced by the applicable
Pass-Through Rate and purchase price of such Certificate because, while
interest will accrue on each Mortgage Loan or Contract from the first day of
each month, the distribution of such interest will be made on the 25th day (or,
if such day is not a business day, the next succeeding business day) of the
month following the month of accrual or, in the case of a Trust Fund including
Agency Certificates, such other day that is specified in the related Prospectus
Supplement.
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A class of Certificates may be entitled to payments of interest at a fixed,
variable or adjustable Pass-Through Rate, or any combination of such Pass-
Through Rates, 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 Certificate Administrator fee or
Spread (each, a "Net Mortgage Rate")) of the related Mortgage Collateral for
the month preceding the Distribution Date, by reference to an index or
otherwise. The aggregate payments of interest on a class of Certificates, and
the yield to maturity thereon, will be affected by the rate of payment of
principal on the Certificates (or the rate of reduction in the notional amount
of Certificates entitled to payments of interest only) and, in the case of
Certificates evidencing interests in ARM Loans, by changes in the Net Mortgage
Rates on the ARM Loans. See "Maturity and Prepayment Considerations" below. The
yield on the Certificates will also be affected by liquidations of Mortgage
Loans or Contracts following Mortgagor defaults and by purchases of Mortgage
Collateral in the event of breaches of representations made in respect of such
Mortgage Collateral by the Company, the Master Servicer and others, or
conversions of ARM Loans to a fixed interest rate. See "The Trust Funds--
Representations with Respect to Mortgage Collateral."
In general, if a Certificate is purchased at a premium over its face amount
and payments of principal on the related Mortgage Collateral occur at a rate
faster than anticipated at the time of purchase, the purchaser's actual yield
to maturity will be lower than that assumed at the time of purchase.
Conversely, if a class of Certificates is purchased at a discount from its face
amount and payments of principal on the related Mortgage Collateral 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. If Strip
Certificates are issued evidencing a right to payments of interest only or
disproportionate payments of interest, a faster than expected rate of principal
prepayments on the Mortgage Collateral will negatively affect the total return
to investors in any such Certificates. If Strip Certificates are issued
evidencing a right to payments of principal only or disproportionate payments
of principal, a slower than expected rate of principal payments on the Mortgage
Collateral could negatively affect the anticipated yield on such Strip
Certificates. If Certificates with either of the foregoing characteristics are
issued, the total return to investors of such Certificates will be extremely
sensitive to such prepayments. In addition, the total return to investors of
Certificates evidencing a right to distributions of interest at a rate that is
based on the weighted average Net Mortgage Rate of the Mortgage Collateral from
time to time will be adversely affected by principal prepayments on Mortgage
Collateral with Mortgage Rates higher than the weighted average Mortgage Rate
on the Mortgage Collateral. In general, mortgage loans or manufactured housing
contracts with higher Mortgage Rates prepay at a faster rate than mortgage
loans or manufactured housing contracts with lower Mortgage Rates. The yield on
a class of Strip Certificates that is entitled to receive a portion of
principal or interest from each item of Mortgage Collateral in a Trust Fund
will be affected by any losses on the Mortgage Collateral because of the affect
on timing and amount of payments. In certain circumstances, rapid prepayments
may result in the failure of such holders to recoup their original investment.
In addition, the yield to maturity on certain other types of classes of
Certificates, including Accrual Certificates, Certificates with a Pass-Through
Rate that fluctuates inversely with or at a multiple of an index or certain
other classes in a series including more than one class of Certificates, may be
relatively more sensitive to the rate of prepayment on the related Mortgage
Collateral than other classes of Certificates.
The timing of changes in the rate of principal payments on or repurchases of
the Mortgage Collateral 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 Mortgage Collateral or a repurchase thereof, the
greater will be the effect on an investor's yield to maturity. As a result, the
effect on an investor's yield of principal payments and repurchases occurring
at a rate higher (or lower) than the rate anticipated by the investor during
the period immediately following the issuance of a series of Certificates would
not be fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
Unless otherwise specified in the related Prospectus Supplement, prepayments
in full or final liquidations will reduce the amount of interest distributed in
the following month to holders of Certificates entitled to
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distributions of interest because the resulting Prepayment Interest Shortfall
will not be covered by Compensating Interest. See "Description of the
Certificates--Prepayment Interest Shortfalls." Unless otherwise specified in
the related Prospectus Supplement, a partial prepayment of principal is applied
so as to reduce the outstanding principal balance of the related Mortgage Loan
or Contract as of the first day of the month in which such partial prepayment
is received. As a result, unless otherwise specified in the related Prospectus
Supplement, the effect of a partial prepayment on a Mortgage Loan or Contract
will be to reduce the amount of interest distributed to holders of Certificates
in the month following the receipt of such partial prepayment by an amount
equal to one month's interest at the applicable Pass-Through Rate or Net
Mortgage Rate, as the case may be, on the prepaid amount. See "Description of
the Certificates--Prepayment Interest Shortfalls." Neither full or partial
principal prepayments nor Liquidation Proceeds will be distributed until the
Distribution Date in the month following receipt. See "Maturity and Prepayment
Considerations."
With respect to certain ARM Loans, the Mortgage Rate at origination may be
below the rate that would result from the sum of the then-applicable Index and
Gross Margin. Under the applicable underwriting standards, the Mortgagor under
each Mortgage Loan or Contract generally will be qualified on the basis of the
Mortgage Rate in effect at origination and not the higher rate that would be
produced by the sum of the Index and Gross Margin. The repayment of any such
Mortgage Loan or Contract may thus be dependent on the ability of the Mortgagor
to make larger level monthly payments following the adjustment of the Mortgage
Rate. In addition, the periodic increase in the amount paid by the Mortgagor of
a Buy-Down 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 the applicable underwriting
guidelines, and may accordingly increase the risk of default with respect to
the related Mortgage Loan.
If so specified in the related Prospectus Supplement, a Trust Fund may
contain Neg-Am ARM Loans with fluctuating Mortgage Rates that adjust more
frequently than the monthly payment with respect to such Mortgage Loans or
Contracts. During a period of rising interest rates as well as immediately
after origination, the amount of interest accruing on the principal balance of
such Mortgage Loans may exceed the amount of the minimum scheduled monthly
payment thereon. As a result, a portion of the accrued interest on Neg-Am ARM
Loans may become Deferred Interest which will be added to the principal balance
thereof and will bear interest at the applicable Mortgage Rate. The addition of
any such Deferred Interest to the principal balance of any related class of
Certificates will lengthen the weighted average life thereof and may adversely
affect yield to holders thereof. In addition, with respect to certain Neg-Am
ARM Loans, during a period of declining interest rates, it might be expected
that each minimum scheduled monthly payment on such a Mortgage Loan would
exceed the amount of scheduled principal and accrued interest on the principal
balance thereof, and since such excess will be applied to reduce the principal
balance of the related class or classes of Certificates, the weighted average
life of such Certificates will be reduced and may adversely affect yield to
holders thereof.
If so specified in the related Prospectus Supplement, a Trust Fund may
contain GPM Loans or Buy-Down Loans which have monthly payments that increase
during the first few years following origination. Mortgagors generally will be
qualified for such loans on the basis of the initial monthly payment. To the
extent that the related Mortgagor's income does not increase at the same rate
as the monthly payment, such a loan may be more likely to default than a
mortgage loan with level monthly payments.
If so specified in the related Prospectus Supplement, a Trust Fund may
contain Balloon Loans which require a single payment of a Balloon Amount. The
payment of Balloon Amounts may result in a lower yield on Certificates than
would be the case if all such Mortgage Collateral was fully-amortizing because
the maturity of a Balloon Loan occurs earlier than that for a fully-amortizing
Mortgage Loan due to the payment of a Balloon Amount. Balloon Loans also pose a
greater risk of default than fully-amortizing Mortgage Loans because Mortgagors
are required to pay the Balloon Amount upon maturity. A Mortgagor's ability to
pay a Balloon Amount may depend on its ability to refinance the related
Mortgaged Property.
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If credit enhancement for a series of Certificates is provided by a Letter of
Credit, insurance policy or bond that is issued or guaranteed by an entity that
suffers financial difficulty, such credit enhancement may not provide the level
of support that was anticipated at the time an investor purchased its
Certificate. In the event of a default under the terms of such a Letter of
Credit, insurance policy or bond, any Realized Losses on the Mortgage
Collateral not covered by such credit enhancement will be applied to a series
of Certificates in the manner described in the related Prospectus Supplement
and may reduce an investor's anticipated yield to maturity.
The related Prospectus Supplement may set forth other factors concerning the
Mortgage Collateral securing a series of Certificates or the structure of such
series that will affect the yield on such Certificates.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Trust Funds," the original terms to maturity of
the Mortgage Collateral in a given Trust Fund will vary depending upon the type
of Mortgage Collateral included in such Trust Fund. The Prospectus Supplement
for a series of Certificates will contain information with respect to the types
and maturities of the Mortgage Collateral in the related Trust Fund. The
prepayment experience, the timing and rate of repurchases and the timing and
amount of liquidations with respect to the related Mortgage Loans or Contracts
will affect the life and yield of the related series of Certificates.
Prepayments on mortgage loans and manufactured housing contracts are commonly
measured relative to a prepayment standard or model. The Prospectus Supplement
for each series of Certificates may describe one or more such prepayment
standards or models and may contain tables setting forth the projected yields
to maturity on each class of Certificates or the weighted average life of each
class of Certificates and the percentage of the original principal amount of
each class of Certificates of such series that would be outstanding on
specified payment dates for such series based on the assumptions stated in such
Prospectus Supplement, including assumptions that prepayments on the Mortgage
Collateral are made at rates corresponding to various percentages of the
prepayment standard or model specified in the related Prospectus Supplement.
There is no assurance that prepayment of the Mortgage Collateral underlying a
series of Certificates will conform to any level of the prepayment standard or
model specified in the related Prospectus Supplement. A number of factors,
including homeowner mobility, economic conditions, changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
properties securing the mortgages, servicing decisions, enforceability of due-
on-sale clauses, mortgage market interest rates, mortgage recording taxes,
solicitations and the availability of mortgage funds, may affect prepayment
experience. The rate of prepayment with respect to conventional fixed-rate
mortgage loans and contracts has fluctuated significantly in recent years. In
general, however, if prevailing interest rates fall significantly below the
Mortgage Rates on the Mortgage Loans or Contracts underlying a series of
Certificates, the prepayment rate of such Mortgage Loans or Contracts is likely
to be higher than if prevailing rates remain at or above the rates borne by
such Mortgage Loans or Contracts. It should be noted that Certificates of a
certain series may evidence an interest in Mortgage Loans or Contracts with
different Mortgage Rates. Accordingly, the prepayment experience of these
Certificates will to some extent be a function of the range of interest rates
of such Mortgage Loans or Contracts.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans or Contracts may be prepaid without penalty in full or in part
at any time. The terms of the related Pooling and Servicing Agreement generally
will require the Servicer or Master Servicer, as the case may be, to enforce
any due-on-sale clause to the extent it has knowledge of the conveyance or the
proposed conveyance of the underlying Mortgaged Property and to the extent
permitted by applicable law, except that any enforcement action that would
impair or threaten to impair any recovery under any related insurance policy
will not be required or permitted. See "Description of the Certificates--
Servicing and Administration of Mortgage Collateral--
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Enforcement of "Due-on-Sale' Clauses" and "Certain Legal Aspects of Mortgage
Loans and Contracts--The Mortgage Loans--Enforceability of Certain Provisions"
and "--The Contracts" for a description of certain provisions of each Pooling
and Servicing Agreement and certain legal aspects that may affect the
prepayment rate of Mortgage Loans or Contracts.
Certain types of Mortgage Collateral included in a Trust Fund may have
characteristics that make it more likely to default than collateral provided
for mortgage pass-through certificates from other mortgage purchase programs.
The Company anticipates including "limited documentation" and "no
documentation" Mortgage Loans and Contracts, as well as Mortgage Loans and
Contracts that were originated in accordance with lower underwriting standards
and which may have been made to Mortgagors with imperfect credit histories and
prior bankruptcies. Likewise, a Trust Fund may include Mortgage Loans or
Contracts that are one month or more delinquent at the time of offering of the
related series of Certificates. Such Mortgage Collateral may be susceptible to
a greater risk of default and liquidation than might otherwise be expected by
investors in the related Certificates.
The Master Servicer, a Servicer, a Sub-Servicer or a Mortgage Collateral
Seller may refinance a Mortgage Loan or Contract in a Trust Fund by accepting
full prepayment thereof and making a new loan secured by a mortgage on the same
property. A Mortgagor may be legally entitled to require the Master Servicer,
Servicer, Sub-Servicer or Mortgage Collateral Seller, as applicable, to allow
such refinancing. Any such refinancing will have the same effect on the
Certificateholders as a prepayment in full of the refinanced Mortgage Loan or
Contract, thereby affecting the yield to Certificateholders.
There are no uniform statistics compiled for prepayments of contracts
relating to Manufactured Homes. Prepayments on manufactured housing contracts
may be influenced by a variety of economic, geographic, social and other facts,
including repossessions, aging, seasonality and interest rate fluctuations.
Other factors affecting prepayment of manufactured housing contracts include
changes in housing needs, job transfers, unemployment and servicing decisions.
An investment in Certificates evidencing interests in Contracts may be affected
by, among other things, a downturn in regional or local economic conditions.
These regional or local economic conditions are often volatile, and
historically have affected the delinquency, loan loss and repossession
experience of the Contracts. To the extent that losses on the Contracts are not
covered by any credit enhancement, holders of the Certificates of a series
evidencing interests in such Contracts will bear all risk of loss resulting
from default by Mortgagors and will have to look primarily to the value of the
Manufactured Homes, which generally depreciate in value, for recovery of the
outstanding principal and unpaid interest of the defaulted Contracts. See "The
Trust Funds--The Contracts."
While most manufactured housing contracts will contain "due-on-sale"
provisions permitting the holder of the contract to accelerate the maturity of
the contract upon conveyance by the Mortgagor, the Master Servicer, Servicer or
Sub-Servicer, as applicable, may permit proposed assumptions of contracts where
the proposed buyer of the Manufactured Home meets the underwriting standards
described above. Such assumption would have the effect of extending the average
life of the contract. FHA Loans, FHA Contracts, VA Loans and VA Contracts are
not permitted to contain "due-on-sale" clauses, and are freely assumable.
Although the Mortgage Rates on ARM Loans will be subject to periodic
adjustments, such adjustments generally will (i) not increase or decrease such
Mortgage Rates by more than a fixed percentage amount on each adjustment date,
(ii) not increase such Mortgage Rates over a fixed percentage amount during the
life of any ARM Loan and (iii) be based on an index (which may not rise and
fall consistently with mortgage interest rates) plus the related Gross 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 Trust Fund at any time may not equal the prevailing rates
for similar, newly originated adjustable rate mortgage loans. In certain rate
environments, the prevailing rates on fixed-rate mortgage loans may be
sufficiently low in relation to the then-current Mortgage Rates on ARM Loans
that the rate of prepayment may increase as a result of refinancings. There can
be no certainty as to the rate of prepayments on the Mortgage Collateral during
any period or over the life of any series of Certificates.
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With respect to Balloon Loans, payment of the Balloon Amount (which, based on
the amortization schedule of such Mortgage Loans, is expected to be a
substantial amount) will generally depend on the Mortgagor's ability to obtain
refinancing of such a Mortgage Loan or to sell the Mortgaged Property prior to
the maturity of the Balloon Loan. The ability to obtain refinancing will depend
on a number of factors prevailing at the time refinancing or sale is required,
including, without limitation, real estate values, the Mortgagor's financial
situation, prevailing mortgage loan interest rates, the Mortgagor's equity in
the related Mortgaged Property, tax laws and prevailing general economic
conditions. Unless otherwise specified in the related Prospectus Supplement,
none of the Company, the Master Servicer, a Servicer, a Sub-Servicer, a
Mortgage Collateral Seller nor any of their affiliates will be obligated to
refinance or repurchase any Mortgage Loan or to sell the Mortgaged Property.
An ARM Loan is assumable under certain conditions if the proposed transferee
of the related Mortgaged Property establishes its ability to repay the Mortgage
Loan and, in the reasonable judgment of the Master Servicer or the related Sub-
Servicer, 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" and "Certain Legal Aspects of Mortgage Loans and Contracts."
No assurance can be given that the value of the Mortgaged Property securing a
Mortgage Loan or Contract has remained or will remain at the level existing on
the date of origination. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans or Contracts and any secondary financing on the
Mortgaged Properties in a particular Mortgage Pool or Contract Pool become
equal to or greater than the value of the Mortgaged Properties, the actual
rates of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, the value
of property securing Cooperative Loans and the delinquency rates with respect
to Cooperative Loans could be adversely affected if the current favorable tax
treatment of cooperative tenant stockholders were to become less favorable. See
"Certain Legal Aspects of Mortgage Loans and Contracts."
To the extent that losses resulting from delinquencies, losses and
foreclosures or repossession of Mortgaged Property with respect to Mortgage
Loans or Contracts included in a Trust Fund for a series of Certificates are
not covered by the methods of credit enhancement described herein under
"Description of Credit Enhancement" or in the related Prospectus Supplement,
such losses will be borne by holders of the Certificates of such series. Even
where credit enhancement covers all Realized Losses resulting from delinquency
and foreclosure or repossession, the effect of foreclosures and repossessions
may be to increase prepayment experience on the Mortgage Collateral, thus
reducing average weighted life and affecting yield to maturity. See "Yield
Considerations."
Under certain circumstances, the Master Servicer, a Servicer, the Company or,
if specified in the related Prospectus Supplement, the holders of the REMIC
Residual Certificates may have the option to purchase the Mortgage Loans in a
Trust Fund. See "The Pooling and Servicing Agreement--Termination; Retirement
of Certificates." Any such repurchase will shorten the weighted average lives
of the related Certificates.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts that are general in nature.
Because such legal aspects are governed in part by state law (which laws may
differ substantially from state to state), the summaries do not purport to be
complete, to reflect the laws of any particular state or to encompass the laws
of all states in which the Mortgaged Properties may be situated. The summaries
are qualified in their entirety by reference to the applicable federal and
state laws governing the Mortgage Loans or Contracts.
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THE MORTGAGE LOANS
GENERAL
The Mortgage Loans (other than Cooperative Loans) will be secured by either
deeds of trust or mortgages, depending upon the prevailing practice in the
state in which the related Mortgaged Property is located. In some states, a
mortgage or deed of trust creates a lien upon the real property encumbered by
the mortgage. In other states, the mortgage or deed of trust conveys legal
title to the property to the mortgagee subject to a condition subsequent (i.e.,
the payment of the indebtedness secured thereby). It is not prior to the lien
for real estate taxes and assessments and other charges imposed under
governmental police powers. Priority with respect to such instruments depends
on their terms and in some cases on the terms of separate subordination or
inter-creditor agreements, and generally on the order of recordation of the
mortgage in the appropriate recording office. There are two parties to a
mortgage, the mortgagor, who is the borrower and homeowner, and the mortgagee,
who is the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. In the case of a land trust, there
are three parties because title to the property is held by a land trustee under
a land trust agreement of which the borrower is the beneficiary; at origination
of a mortgage loan, the borrower executes a separate undertaking to make
payments on the mortgage note. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties: the trustor, who is the
borrower/homeowner; the beneficiary, who is the lender; and a third-party
grantee called the trustee. Under a deed of trust, the borrower grants the
property, irrevocably until the debt is paid, in trust, generally with a power
of sale, to the trustee to secure payment of the obligation. 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 or mortgage and, in certain deed of
trust transactions, the directions of the beneficiary.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of
Certificates, the Mortgage Loans may include Cooperative Loans. Each debt
instrument (a "Cooperative Note") evidencing a Cooperative Loan will be secured
by a security interest in shares issued by a related cooperative housing
corporation, which is a private 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 title interest in, the shares in the cooperative's building,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement (or financing
statements related thereto) in the appropriate recording office.
Unless otherwise specified in the related Prospectus Supplement, all
cooperative apartments relating to the Cooperative Loans are located in the
State of New York. Each cooperative owns in fee or has a leasehold interest in
all the real property and owns in fee or leases the building and all separate
dwelling units therein. The cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is a blanket mortgage
(or mortgages) on the cooperative apartment building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the cooperative housing corporation, as property mortgagor or
lessee, as the case may be, is also responsible for fulfilling such mortgage or
rental obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with either the construction or purchase of the
cooperative's apartment building or the obtaining of capital by the
cooperative. The interest of the occupant under proprietary leases or occupancy
agreements as to which that cooperative is the landlord is generally
subordinate to the interest of the holder of a blanket mortgage and to the
interest of the holder of a land lease. If the cooperative is unable to meet
the payment obligations (i) arising under a blanket mortgage, the mortgagee
holding a blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (ii) arising under
its land lease, the holder of the landlord's interest under the land lease
could terminate it and all subordinate proprietary leases and occupancy
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agreements. In addition, a blanket mortgage on a cooperative may provide
financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at maturity.
The inability of the cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the cooperative to extend its term or, in the alternative, to purchase the
land, could lead to termination of the cooperative's interest in the property
and termination of all proprietary leases and occupancy agreements. In either
event, a foreclosure by the holder of a blanket mortgage or the termination of
the underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of cooperative shares or, in the case of the Mortgage Loans,
the collateral securing the Cooperative Loans.
Each cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative (which is accompanied by occupancy rights to the
related dwelling unit) 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 cooperative shares. The lender generally takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement
and a financing statement covering the proprietary lease or occupancy agreement
and the cooperative shares is filed in the appropriate state and local offices
to perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the 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.
FORECLOSURE ON MORTGAGE LOANS
Although a deed of trust may also be foreclosed by judicial action,
foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In addition to any notice requirements
contained in a deed of trust, in some states, the trustee must record a notice
of default and send a copy to the borrower/trustor and to any person who has
recorded a request for a copy of notice of default and notice of sale. In
addition, in some states, the trustee must provide notice to any other
individual having an interest of record in the real property, including any
junior lienholders. If the deed of trust is not reinstated within a specified
period, a notice of sale must be posted in a public place and, in most states,
published for a specific period of time in one or more newspapers. In addition,
some states' laws require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest of record in the real
property.
Foreclosure of a mortgage generally is accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. If the mortgagee's right to foreclose is contested, the
legal proceedings necessary to resolve the issue can be time-consuming.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
in such states, the borrower, or any other person having a junior encumbrance
on the real estate, may, during a reinstatement period, cure the default by
paying the entire amount in arrears plus the costs and expenses incurred in
enforcing the obligation.
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In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for a credit bid less than or equal to the unpaid
principal amount of the mortgage or deed of trust, accrued and unpaid interest
and the expense of foreclosure. Generally, state law controls the amount of
foreclosure costs and expenses, including attorneys' fees, which may be
recovered by a lender. Thereafter, subject to the right of the borrower in some
states to remain in possession during the redemption period, the lender will
assume the burdens of ownership, including obtaining hazard insurance and
making such repairs at its own expense as are necessary to render the property
suitable for sale. 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. Any loss
may be reduced by the receipt of any mortgage insurance proceeds or other forms
of credit enhancement for a series of Certificates. See "Description of Credit
Enhancement."
FORECLOSURE ON SHARES OF COOPERATIVES
The cooperative shares owned by the tenant-stockholder, together with the
rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as set forth in the cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged,
may be cancelled by the cooperative for failure by the tenant stockholder to
pay rent or other obligations or charges owed by such tenant-stockholder,
including mechanics' liens against the cooperative apartment building incurred
by such tenant-stockholder. Generally, rent and other obligations and charges
arising under a proprietary lease or occupancy agreement which are owed to the
cooperative are made liens upon the shares to which the proprietary lease or
occupancy agreement relates. In addition, the proprietary lease or occupancy
agreement generally permits the cooperative to terminate such lease or
agreement in the event the borrower defaults in the performance of covenants
thereunder. Typically, the lender and the cooperative enter into a recognition
agreement which, together with any lender protection provisions contained in
the proprietary lease, establishes the rights and obligations of both parties
in the event of a default by the tenant-stockholder on its obligations under
the proprietary lease or occupancy agreement. A default by the tenant-
stockholder under the proprietary lease or occupancy agreement will usually
constitute a default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the cooperative will
recognize the lender's lien against proceeds from a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement or which have become liens on the
shares relating to the proprietary lease or occupancy agreement. The total
amount owed to the cooperative by the tenant-stockholder, which the lender
generally cannot restrict and does not monitor, could reduce the amount
realized upon a sale of the collateral below the outstanding principal balance
of the Cooperative Loan and accrued and unpaid interest thereon.
Recognition agreements also generally provide that in the event the lender
succeeds to the tenant-shareholder's shares and proprietary lease or occupancy
agreement as the result of realizing upon its collateral for a Cooperative
Loan, the lender must obtain the approval or consent of the cooperative as
required by the proprietary lease before transferring the cooperative shares or
assigning the proprietary lease. Such approval or consent is usually based on
the prospective purchaser's income and net worth, among other factors, and may
significantly reduce the number of potential purchasers, which could limit the
ability of the lender to
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sell and realize upon the value of the collateral. Generally, the lender is not
limited in any rights it may have to dispossess the tenant-stockholder.
The terms of the Cooperative Loans do not require either the tenant-
stockholder or the cooperative to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
to the building also may adversely affect the marketability of the cooperative
dwelling unit in the event of foreclosure.
In New York, foreclosure on the cooperative shares is accomplished by public
sale in accordance with the provisions of Article 9 of the New York Uniform
Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given
the debtor and the method, manner, time, place and terms of the sale and the
sale price. Generally, a sale conducted according to the usual practice of
banks selling similar collateral 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 foreclosure of a
mortgage, the borrower and foreclosed junior lienors or other parties are given
a statutory period (generally ranging from six months to two years) in which to
redeem the property from the foreclosure sale. In some states, redemption may
occur only upon payment of the entire principal balance of the loan, accrued
interest and expenses of foreclosure. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The rights of redemption would defeat
the title of any purchaser subsequent to foreclosure or sale under a deed of
trust. Consequently, the practical effect of the redemption right is to force
the lender to maintain the property and pay the expenses of ownership until the
redemption period has expired.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states (including California), statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender. In
the case of a Mortgage Loan secured by a property owned by a trust where the
Mortgage Note is executed on behalf of the trust, a deficiency judgment against
the trust following foreclosure or sale under a deed of trust, even if
obtainable under applicable law, may be of little value to the mortgagee or
beneficiary if there are no trust assets against which such deficiency judgment
may be executed. Other statutes require the beneficiary or mortgagee to exhaust
the security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect
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to the security. Consequently, the practical effect of the election
requirement, in those states permitting such election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, in certain other states, statutory
provisions limit any deficiency judgment against the former borrower following
a foreclosure to the excess of the outstanding debt over the fair value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids
at the judicial sale.
In the case of cooperative loans, lenders generally realize on cooperative
shares and the accompanying proprietary lease or occupancy agreement given to
secure a cooperative loan under Article 9 of the UCC. Some courts have
interpreted Article 9 to prohibit or limit a deficiency award in certain
circumstances, including circumstances where the disposition of the collateral
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 collateral or
enforce a deficiency judgment. For example, with respect to federal bankruptcy
law, a court having federal bankruptcy jurisdiction may permit a debtor through
its Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on such debtor's residence by paying arrearages
within a reasonable time period and reinstating the original mortgage loan
payment schedule, even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's
petition. Some courts with federal bankruptcy jurisdiction have approved plans,
based on the particular facts of the reorganization case, that effected the
curing of a mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of
each monthly payment, changing the rate of interest, altering the repayment
schedule, forgiving all or a portion of the debt and reducing the lender's
security interest to the value of the residence, thus leaving the lender a
general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan. Generally, however, the
terms of a mortgage loan secured only by a mortgage on real property that is
the debtor's principal residence may not be modified pursuant to a plan
confirmed pursuant to Chapter 13 except with respect to mortgage payment
arrearages, which may be cured within a reasonable time period.
Certain tax liens arising under the Code may, in certain circumstances, have
priority over the lien of a mortgage or deed of trust. In addition, substantive
requirements are imposed upon mortgage lenders in connection with the
origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, the Mortgage Loans
generally contain due-on-sale clauses. These clauses permit the lender to
accelerate the maturity of the loan if the borrower sells, transfers or conveys
the property. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses has been limited or denied. However, the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn-St Germain Act"), preempts state
constitutional, statutory and case law that prohibit the enforcement of due-on-
sale clauses and permits
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lenders to enforce these clauses in accordance with their terms, subject to
certain limited exceptions. The Garn-St Germain Act does "encourage" lenders to
permit assumption of loans at the original rate of interest or at some other
rate less than the average of the original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act may not exercise a due-on-
sale clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the
average life of the Mortgage Loans and the number of Mortgage Loans which may
be outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have required that lenders reinstate
loans or recast payment schedules in order to accommodate borrowers who are
suffering from temporary financial disability. In other cases, courts have
limited the right of the lender to foreclose if the default under the mortgage
instrument is not monetary, such as the borrower failing to adequately maintain
the property or the borrower executing a second mortgage or deed of trust
affecting the property. Finally, some courts have been faced with the issue of
whether or not federal or state constitutional provisions reflecting due
process concerns for adequate notice require that borrowers under deeds of
trust or mortgages receive notices in addition to the statutorily prescribed
minimum. For the most part, these cases have upheld the notice provisions as
being reasonable or have found that the sale by a trustee under a deed of
trust, or under a mortgage having a power of sale, does not involve sufficient
state action to afford constitutional protections to the borrower.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980 ("Title V"), provides that state usury limitations shall not apply to
certain types of residential first mortgage loans originated by certain lenders
after March 31, 1980. A similar federal statute was in effect with respect to
mortgage loans made during the first three months of 1980. The Office of Thrift
Supervision is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. The statute authorized any
state to impose interest rate limits by adopting, before April 1, 1983, a law
or constitutional provision which expressly rejects application of the federal
law. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken action
to reimpose interest rate limits or to limit discount points or other charges.
Unless otherwise set forth in the related Prospectus Supplement, each
Mortgage Collateral Seller, or another specified party, will have represented
that each Mortgage Loan was originated in compliance with then applicable state
laws, including usury laws, in all material respects. However, the Mortgage
Rates on the Mortgage Loans will be subject to applicable usury laws as in
effect from time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders, have historically been subjected to a variety of
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restrictions. Such restrictions differed from state to state, resulting in
difficulties in determining whether a particular alternative mortgage
instrument originated by a state-chartered lender was in compliance with
applicable law. These difficulties were alleviated substantially as a result of
the enactment of Title VIII of the Garn-St Germain Act ("Title VIII"). Title
VIII provides that, notwithstanding any state law to the contrary, (i) state-
chartered banks may originate alternative mortgage instruments in accordance
with regulations promulgated by the Comptroller of the Currency with respect to
the origination of alternative mortgage instruments by national banks, (ii)
state-chartered credit unions may originate alternative mortgage instruments in
accordance with regulations promulgated by the National Credit Union
Administration with respect to origination of alternative mortgage instruments
by federal credit unions and (iii) all other non-federally chartered housing
creditors, including state-chartered savings and loan associations, state-
chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in accordance with
the regulations promulgated by the Federal Home Loan Bank Board, predecessor to
the Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII also
provides that any state may reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
THE CONTRACTS
GENERAL
A Contract evidences both (a) the obligation of the Mortgagor to repay the
loan evidenced thereby and (b) the grant of a security interest in the
Manufactured Home to secure repayment of such loan. Certain aspects of both
features of the Contracts are described below.
SECURITY INTERESTS IN MANUFACTURED HOMES
The law governing perfection of a security interest in a Manufactured Homes
varies from state to state. Security interests in manufactured homes may be
perfected either by notation of the secured party's lien on the certificate of
title or by delivery of the required documents and payments of a fee to the
state motor vehicle authority, depending on state law. In some non-title
states, perfection pursuant to the provisions of the UCC is required. The
lender, the Servicer or the Master Servicer may effect such notation or
delivery of the required documents and fees, and obtain possession of the
certificate of title, as appropriate under the laws of the state in which any
Manufactured Home securing a Contract is registered. In the event the Master
Servicer, the Servicer or the lender fails to effect such notation or delivery,
or files the security interest under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC, in a few states), the
Certificateholders may not have a first priority security interest in the
Manufactured Home securing a Contract. As manufactured homes have become larger
and often have been attached to their sites without any apparent intention to
move them, courts in many states have held that manufactured homes, under
certain circumstances, may become subject to real estate title and recording
laws. As a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the home
under applicable state real estate law. In order to perfect a security interest
in a manufactured home under real estate laws, the holder of the security
interest must make a filing under the real estate laws of the state where the
manufactured home is located. These filings must be made in the real estate
records office of the county where the manufactured home is located. Unless
otherwise provided in the related Prospectus Supplement, substantially all of
the Contracts will contain provisions prohibiting the Mortgagor from
permanently attaching the Manufactured Home to its site. So long as the
Mortgagor does not violate this agreement and a court does not hold that the
Manufactured Home is real property, a security interest in the Manufactured
Home will be governed by the certificate of title laws or the UCC, and the
notation of the security interest on the certificate of title or the filing of
a UCC financing statement will be effective to maintain the priority of the
seller's security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to its site or if a court determines
that a Manufactured Home is real property, other parties could obtain an
interest in the Manufactured Home which is prior to the
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security interest originally retained by the Mortgage Collateral Seller and
transferred to the Company. In certain cases, the Master Servicer or the
Servicer, as applicable, may be required to perfect a security interest in the
Manufactured Home under applicable real estate laws. If such real estate
filings are not required and if any of the foregoing events were to occur, the
only recourse of the Certificateholders would be against the Mortgage
Collateral Seller pursuant to its repurchase obligation for breach of
representations or warranties.
The Company will assign its security interests in the Manufactured Homes to
the Trustee on behalf of the Certificateholders. See "Description of the
Certificates--Assignment of Contracts." Unless otherwise specified in the
related Prospectus Supplement, if a Manufactured Home is governed by the
applicable motor vehicle laws of the relevant state neither the Company nor the
Trustee will amend the certificates of title to identify the Trustee as the new
secured party. Accordingly, the Company or such other entity as may be
specified in the Prospectus Supplement will continue to be named as the secured
party on the certificates of title relating to the Manufactured Homes. However,
there exists a risk that, in the absence of an amendment to the certificate of
title, such assignment of the security interest may not be held effective
against subsequent purchasers of a Manufactured Home or subsequent lenders who
take a security interest in the Manufactured Home or creditors of the assignor.
If the owner of a Manufactured Home moves it to a state other than the state
in which such Manufactured Home initially is registered and if steps are not
taken to re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home will cease to be perfected. While in many
circumstances the Trustee would have the opportunity to re-perfect its security
interest in the Manufactured Home in the state of relocation, there can be no
assurance that the Trustee will be able to do so.
When a Mortgagor under a Contract sells a Manufactured Home, the Trustee, or
the Servicer or the Master Servicer on behalf of the Trustee, must surrender
possession of the certificate of title or will receive notice as a result of
its lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related lien before release of the lien.
Under the laws of most states, liens for repairs performed on a Manufactured
Home take priority over a perfected security interest. The applicable Mortgage
Collateral Seller generally will represent that it has no knowledge of any such
liens with respect to any Manufactured Home securing payment on any Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee or Certificateholders in the event such a
lien arises and such lien would not give rise to a repurchase obligation on the
part of the party specified in the Pooling and Servicing Agreement.
To the extent that Manufactured Homes are not treated as real property under
applicable state law, contracts generally are "chattel paper" as defined in the
UCC in effect in the states in which the Manufactured Homes initially were
registered. Pursuant to the UCC, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under the
Pooling and Servicing Agreement, the Master Servicer or the Company, as the
case may be, will transfer physical possession of the Contracts to the Trustee
or its Custodian. In addition, the Master Servicer will make an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the Trustee's ownership of the Contracts. Unless otherwise specified in the
related Prospectus Supplement, the Contracts will not be stamped or marked
otherwise to reflect their assignment from the Company to the Trustee.
Therefore, if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment, the Trustee's interest in the
Contracts could be defeated. To the extent that Manufactured Homes are treated
as real property under applicable state law, Contracts will be treated in a
manner similar to that described above with regard to Mortgage Loans. See "--
The Mortgage Loans" above.
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ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Servicer or the Master Servicer on behalf of the Trustee, to the extent
required by the related Pooling and Servicing Agreement, may take action to
enforce the Trustee's security interest with respect to Contracts in default by
repossession and sale of the Manufactured Homes securing such defaulted
Contracts. So long as the Manufactured Home has not become subject to real
estate law, a creditor generally can repossess a Manufactured Home securing a
Contract by voluntary surrender, by "self-help" repossession that is "peaceful"
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The UCC and consumer protection laws
in most states place restrictions on repossession sales, including requiring
prior notice to the debtor and commercial reasonableness in effecting such a
sale. The debtor may also have a right to redeem the Manufactured Home at or
before resale.
Certain statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment. For a discussion of deficiency judgments, see "--The Mortgage Loans--
Anti-Deficiency Legislation and Other Limitations on Lenders" above.
CONSUMER PROTECTION LAWS
If the transferor of a consumer credit contract is also the seller of goods
that give rise to the transaction (and, in certain cases, related lenders and
assignees), the "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of such transferor to transfer such contract
free of notice of claims by the debtor thereunder. The effect of this rule is
to subject the assignee of such a contract to all claims and defenses that the
debtor could assert against the seller of goods. Liability under this rule is
limited to amounts paid under a Contract; however, the Mortgagor also may be
able to assert the rule to set off remaining amounts due as a defense against a
claim brought against such Mortgagor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal
Trade Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting
Act, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act
and the Uniform Consumer Credit Code. In the case of some of these laws, the
failure to comply with their provisions may affect the enforceability of the
related Contract.
"DUE-ON-SALE" CLAUSES
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Company, the Master Servicer or
the Servicer and permit the acceleration of the maturity of the Contracts by
the Company, the Master Servicer or the Servicer upon any such sale or transfer
that is not consented to. Unless otherwise specified in the related Prospectus
Supplement, the Company, the Master Servicer or the Servicer generally will
permit most transfers of Manufactured Homes and not accelerate the maturity of
the related Contracts. In certain cases, the transfer may be made by a
delinquent Mortgagor in order to avoid a repossession proceeding with respect
to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Company
desires to accelerate the maturity of the related Contract, the Company's
ability to do so will depend on the enforceability under state law of the "due-
on-sale" clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. In some states the Company or the
Master Servicer may be prohibited from enforcing a "due-on-sale" clause in
respect of certain Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V provides that, subject to certain conditions, state usury limitations
shall not apply to any loan that is secured by a first lien on certain kinds of
manufactured housing. For a discussion of Title V, see "--The Mortgage Loans--
Applicability of Usury Laws" above. Unless otherwise specified in the related
Pooling and
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Servicing Agreement, each Mortgage Collateral Seller, or another specified
party, will represent that all of the Contracts comply with applicable usury
laws.
ENVIRONMENTAL LEGISLATION
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Most environmental statutes create obligations for any
party that can be classified as the "owner" or "operator" of a "facility"
(referring to both operating facilities and to real property). Under the laws
of some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, a lender may be liable, as an "owner"
or "operator," for costs arising out of releases or threatened releases of
hazardous substances that require remedy at a mortgaged property, if agents or
employees of the lender have become sufficiently involved in the operations of
the borrower or, subsequent to a foreclosure, in the management of the
property. Such liability may arise regardless of whether the environmental
damage or threat was caused by a prior owner.
Under federal and certain state laws, contamination of a property may give
rise to a lien on the property to assure the payment of costs of clean-up.
Under federal law and in several states, such a lien has priority over the lien
of an existing mortgage against such property. If a lender is or becomes
directly liable following a foreclosure, it may be precluded from bringing an
action for contribution against the owner or operator who created the
environmental hazard. Such clean-up costs may be substantial. It is possible
that such costs could become a liability of the related Trust Fund and occasion
a loss to Certificateholders in certain circumstances described above if such
remedial costs were incurred.
Except as otherwise specified in the applicable Prospectus Supplement, at the
time the Mortgage Loans or Contracts were originated, no environmental
assessment or a very limited environment assessment of the Mortgaged Properties
will have been conducted.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Relief Act, a borrower who enters military service
after the origination of such borrower's mortgage loan or contract (including a
borrower who was in reserve status and is called to active duty after
origination of the mortgage loan or contract), may not be charged interest
(including fees and charges) above an annual rate of 6% during the period of
such borrower's active duty status, unless a court orders otherwise upon
application of the lender. The Relief Act applies to borrowers who are members
of the Air Force, Army, Marines, Navy, National Guard, Reserves or Coast Guard,
and officers of the U.S. Public Health Service assigned to duty with the
military. Because the Relief Act applies to borrowers who enter military
service (including reservists who are called to active duty) after origination
of the related mortgage loan or contract, no information can be provided as to
the number of Mortgage Loans or Contracts that may be affected by the Relief
Act. With respect to Mortgage Loans or Contracts included in a Trust Fund,
application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of the Servicer or the Master Servicer, as
applicable, to collect full amounts of interest on such Mortgage Collateral.
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 or Contracts, 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 Servicer or the Master Servicer, as applicable, to foreclose on an affected
Mortgage Loan or Contract 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 or Contract 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 or Contracts resulting from similar
legislation or regulations may result in delays in payments or losses to
Certificateholders of the related series.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of certain anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Certificates offered hereunder. This discussion has been prepared with the
advice of Orrick, Herrington & Sutcliffe and Thacher Proffitt & Wood, counsel
to the Company. This discussion is directed solely to Certificateholders that
hold the Certificates as capital assets within the meaning of Section 1221 of
the Code and does not purport to discuss all federal income tax consequences
that may be applicable to particular categories of investors, some of which
(such as banks, insurance companies and foreign investors) may be subject to
special rules. In addition, the authorities on which this discussion, and the
opinion referred to below, are based are subject to change or differing
interpretations, which could apply retroactively. Taxpayers and preparers of
tax returns (including those filed by any REMIC or other issuer) should be
aware that under applicable Treasury regulations a provider of advice on
specific issues of law is not considered an income tax return preparer unless
the advice (i) is given with respect to events that have occurred at the time
the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (ii) is directly relevant to the determination of an
entry on a tax return. Accordingly, taxpayers should consult their tax advisors
and tax return preparers regarding the preparation of any item on a tax return,
even where the anticipated tax treatment has been discussed herein or in a
Prospectus Supplement. In addition to the federal income tax consequences
described herein, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the
Certificates. See "State and Other Tax Consequences." Certificateholders are
advised to consult their tax advisors concerning the federal, state, local or
other tax consequences to them of the purchase, ownership and disposition of
the Certificates offered hereunder.
The following discussion addresses certificates (the "REMIC Certificates")
representing interests in a Trust Fund, or a portion thereof, which the Master
Servicer or Certificate Administrator, as applicable, will covenant to elect to
have treated as a "real estate mortgage investment conduit" (a "REMIC") under
Sections 860A through 860G (the "REMIC Provisions") of the Code. The Prospectus
Supplement for each series of Certificates will indicate whether a REMIC
election (or elections) will be made for the related Trust Fund and, if such an
election is to be made, will identify all "regular interests" and "residual
interests" in the REMIC. If a REMIC election will not be made for a Trust Fund,
the federal income consequences of the purchase, ownership and disposition of
the related Certificates will be set forth in the related Prospectus
Supplement. For purposes of this tax discussion, references to a
"Certificateholder" or a "holder" are to the beneficial owner of a Certificate.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271 through 1273 and Section
1275 of the Code and in the Treasury regulations issued thereunder (the "OID
Regulations"), and in part upon the REMIC Provisions and the Treasury
regulations issued thereunder (the "REMIC Regulations"). The OID Regulations do
not adequately address certain issues relevant to, and in some instances
provide that they are not applicable to, securities such as the Certificates.
REMICS
CLASSIFICATION OF REMICS
Upon the issuance of each series of REMIC Certificates, Orrick, Herrington &
Sutcliffe or Thacher Proffitt & Wood, counsel to the Company, will deliver
their opinion generally to the effect that, assuming compliance with all
provisions of the related Pooling and Servicing Agreement or Trust Agreement,
the related Trust Fund (or each applicable portion thereof) will qualify as a
REMIC and the REMIC Certificates offered with respect thereto will be
considered to evidence ownership of "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual Certificates") in that
REMIC within the meaning of the REMIC Provisions.
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If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a separate
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described below. Although
the Code authorizes the Treasury Department to issue regulations providing
relief in the event of an inadvertent termination of REMIC status, no such
regulations have been issued. Any such relief, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
Trust Fund's income for the period in which the requirements for such status
are not satisfied. The Pooling and Servicing Agreement or Trust Agreement, with
respect to each REMIC will include provisions designed to maintain the Trust
Fund's status as a REMIC under the REMIC Provisions. It is not anticipated that
the status of any Trust Fund as a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES
In general, the REMIC Certificates will be "qualifying real property loans"
within the meaning of Section 593(d) of the Code, "real estate assets" within
the meaning of Section 856(c)(5)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
underlying such Certificates would be so treated. Moreover, if 95% or more of
the assets of the REMIC qualify for any of the foregoing treatments at all
times during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and
income allocated to the class of REMIC Residual Certificates will be interest
described in Section 856(c)(3)(B) of the Code to the extent that such
Certificates are treated as "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code. In addition, the REMIC Regular Certificates will be
"qualified mortgages" within the meaning of Section 860G(a)(3)(C) of the Code
if transferred to another REMIC on its startup day in exchange for regular or
residual interests therein. The determination as to the percentage of the
REMIC's assets that constitute assets described in the foregoing sections of
the Code will be made with respect to each calendar quarter based on the
average adjusted basis of each category of the assets held by the REMIC during
such calendar quarter. The Master Servicer or the Certificate Administrator, as
applicable, 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 Collateral,
payments on Mortgage Collateral 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 Collateral, or whether such assets (to
the extent not invested in assets described in the foregoing sections)
otherwise would receive the same treatment as the Mortgage Collateral for
purposes of all of the foregoing sections. In addition, in some instances
Mortgage Collateral may not be treated entirely as assets described in the
foregoing sections. If so, the related Prospectus Supplement will describe the
Mortgage Collateral that may not be so treated. The REMIC Regulations do
provide, however, that payments on Mortgage Collateral held pending
distribution are considered part of the Mortgage Collateral for purposes of
Sections 593(d) and 856(c)(5)(A) of the Code.
TIERED REMIC STRUCTURES
For certain series of REMIC Certificates, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any
such series of REMIC Certificates, Orrick, Herrington & Sutcliffe or Thacher
Proffitt & Wood, counsel to the Company, will deliver their opinion generally
to the effect that, assuming compliance with all provisions of the related
Pooling and Servicing Agreement or Trust 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.
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Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC and not as ownership interests in the REMIC or
its assets. Moreover, holders of REMIC Regular Certificates that otherwise
report income under a cash method of accounting will be required to report
income with respect to REMIC Regular Certificates under an accrual method.
Original Issue Discount. Certain REMIC Regular Certificates may be issued
with "original issue discount" within the meaning of Section 1273(a) of the
Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in
income as it accrues, in accordance with the method described below, in advance
of the receipt of the cash attributable to such income. In addition, Section
1272(a)(6) of the Code provides special rules applicable to REMIC Regular
Certificates and certain other debt instruments issued with original issue
discount. Regulations have not been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Collateral held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner
prescribed in Treasury regulations; as noted above, those regulations have not
been issued. The Committee Report indicates that the regulations will provide
that the prepayment assumption used with respect to a REMIC Regular Certificate
must be the same as that used in pricing the initial offering of such REMIC
Regular Certificate. The Prepayment Assumption used by the Master Servicer or
the Certificate Administrator, as applicable, in reporting original issue
discount for each series of REMIC Regular Certificates will be consistent with
this standard and will be disclosed in the related Prospectus Supplement.
However, neither the Company, the Master Servicer nor the Certificate
Administrator will make any representation that the Mortgage Collateral will in
fact prepay at a rate conforming to the Prepayment Assumption or at any other
rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for such class will be treated as the
fair market value of such class on the Closing Date. Under the OID Regulations,
the stated redemption price of a REMIC Regular Certificate is equal to the
total of all payments to be made on such Certificate other than "qualified
stated interest." "Qualified stated interest" includes interest that is
unconditionally payable at least annually at a single fixed rate, or in the
case of a variable rate debt instrument, at a "qualified floating rate," an
"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate," or a
combination of "qualified floating rates" that generally does not operate in a
manner that accelerates or defers interest payments on such REMIC Regular
Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest rates,
the determination of the total amount of original issue discount and the timing
of the inclusion thereof will vary according to the characteristics of such
REMIC Regular Certificates. If the original issue discount rules apply to such
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Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied by the Master Servicer or the Certificate
Administrator, as applicable, with respect to those Certificates in preparing
information returns to the Certificateholders and the IRS.
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined herein) for original issue discount is each monthly period that begins
or ends on a Distribution Date, in some cases, as a consequence of this "long
first accrual period," some or all interest payments may be required to be
included in the stated redemption price of the REMIC Regular Certificate and
accounted for as original issue discount. Because interest on REMIC Regular
Certificates must in any event be accounted for under an accrual method,
applying this analysis would result in only a slight difference in the timing
of the inclusion in income of the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing
Date, a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns to the
Certificateholders and the IRS will be based on the position that the portion
of the purchase price paid for the interest accrued with respect to periods
prior to the Closing Date is treated as part of the overall cost of such REMIC
Regular Certificate (and not as a separate asset the cost of which is recovered
entirely out of interest received on the next Distribution Date) and that
portion of the interest paid on the first Distribution Date in excess of
interest accrued for a number of days corresponding to the number of days from
the Closing Date to the first Distribution Date should be included in the
stated redemption price of such REMIC Regular Certificate. However, the OID
Regulations state that all or some portion of such accrued interest may be
treated as a separate asset the cost of which is recovered entirely out of
interest paid on the first Distribution Date. It is unclear how an election to
do so would be made under the OID Regulations and whether such an election
could be made unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of such REMIC Regular Certificate. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original
issue discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated
principal is made, based on the product of the total amount of such de minimis
original issue discount and a fraction, the numerator of which is the amount of
such principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "--Market
Discount" for a description of such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for
each day during its taxable year on which it held such REMIC Regular
Certificate, including the purchase date but excluding the disposition date. In
the case of an original holder of a REMIC Regular Certificate, the daily
portions of original issue discount will be determined as follows.
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As to each "accrual period," that is, unless otherwise stated in the related
Prospectus Supplement, each period that begins or ends on a date that
corresponds to a Distribution Date and begins on the first day following the
immediately preceding accrual period (or in the case of the first such period,
begins on the Closing Date), a calculation will be made of the portion of the
original issue discount that accrued during such accrual period. The portion of
original issue discount that accrues in any accrual period will equal the
excess, if any, of (i) the sum of (A) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the REMIC
Regular Certificate, if any, in future periods and (B) the distributions made
on such REMIC Regular Certificate during the accrual period of amounts included
in the stated redemption price, over (ii) the adjusted issue price of such
REMIC Regular Certificate at the beginning of the accrual period. The present
value of the remaining distributions referred to in the preceding sentence will
be calculated (1) assuming that distributions on the REMIC Regular Certificate
will be received in future periods based on the Mortgage Collateral 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 Collateral being
prepaid at a rate equal to the Prepayment Assumption. The adjusted issue price
of a REMIC Regular Certificate at the beginning of any accrual period will
equal the issue price of such Certificate, increased by the aggregate amount of
original issue discount that accrued with respect to such Certificate in prior
accrual periods, and reduced by the amount of any distributions made on such
REMIC Regular Certificate in prior accrual periods of amounts included in its
stated redemption price. The original issue discount accruing during any
accrual period, computed as described above, will be allocated ratably to each
day during the accrual period to determine the daily portion of original issue
discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of
any original issue discount with respect to such Certificate. However, each
such daily portion will be reduced, if such cost is in excess of its "adjusted
issue price," in proportion to the ratio such excess bears to the aggregate
original issue discount remaining to be accrued on such REMIC Regular
Certificate. The adjusted issue price of a REMIC Regular Certificate on any
given day equals the sum of (i) the adjusted issue price (or, in the case of
the first accrual period, the issue price) of such Certificate at the beginning
of the accrual period which includes such day and (ii) the daily portions of
original issue discount for all days during such accrual period prior to such
day.
Market Discount. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price will recognize income upon receipt of each
distribution representing stated redemption price. In particular, under Section
1276 of the Code such a Certificateholder generally will be required to
allocate the portion of each such distribution representing stated redemption
price first to accrued market discount not previously included in income, and
to recognize ordinary income to that extent. A Certificateholder may elect to
include market discount in income currently as it accrues rather than including
it on a deferred basis in accordance with the foregoing. If made, such election
will apply to all market discount bonds acquired by such Certificateholder on
or after the first day of the first taxable year to which such election
applies. In addition, the OID Regulations permit a Certificateholder to elect
to accrue all interest, discount (including de minimis market or original issue
discount) and premium in income as interest, based on a constant yield method.
If such an election were made with respect to a REMIC Regular Certificate with
market discount, the Certificateholder would be deemed to have made an election
to include currently market discount in income with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election or thereafter, and possibly previously
acquired instruments. Similarly, a Certificateholder that made this election
for a Certificate that is acquired at a premium would be deemed to have made an
election to
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amortize bond premium with respect to all debt instruments having amortizable
bond premium that such Certificateholder owns or acquires. See "--Premium."
Each of these elections to accrue interest, discount and premium with respect
to a Certificate on a constant yield method or as interest would be
irrevocable.
However, market discount with respect to a REMIC Regular Certificate will be
considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect
to market discount, presumably taking into account the Prepayment Assumption.
If market discount is treated as de minimis under this rule, it appears that
the actual discount would be treated in a manner similar to original issue
discount of a de minimis amount. See "--Original Issue Discount." Such
treatment would result in discount being included in income at a slower rate
than discount would be required to be included in income using the method
described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than
one installment. Until regulations are issued by the Treasury Department,
certain rules described in the Committee Report apply. The Committee Report
indicates that in each accrual period market discount on REMIC Regular
Certificates should accrue, at the Certificateholder's option: (i) on the basis
of a constant yield method, (ii) in the case of a REMIC Regular Certificate
issued without original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the stated interest paid in the
accrual period bears to the total amount of stated interest remaining to be
paid on the REMIC Regular Certificate as of the beginning of the accrual
period, or (iii) in the case of a REMIC Regular Certificate issued with
original issue discount, in an amount that bears the same ratio to the total
remaining market discount as the original issue discount accrued in the accrual
period bears to the total original issue discount remaining on the REMIC
Regular Certificate at the beginning of the accrual period. Moreover, the
Prepayment Assumption used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. Because
the regulations referred to in this paragraph have not been issued, it is not
possible to predict what effect such regulations might have on the tax
treatment of a REMIC Regular Certificate purchased at a discount in the
secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC
Regular Certificate generally will be required to treat a portion of any gain
on the sale or exchange of such Certificate as ordinary income to the extent of
the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income.
In addition, under Section 1277 of the Code, a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest) greater
than its remaining stated redemption price will be considered to be purchased
at a premium. The holder of such a REMIC Regular Certificate may elect under
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Section 171 of the Code to amortize such premium under the constant yield
method over the life of the Certificate. If made, such an election will apply
to all debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related REMIC Regular Certificate, rather than as a
separate interest deduction. The OID Regulations also permit Certificateholders
to elect to include all interest, discount and premium in income based on a
constant yield method, further treating the Certificateholder as having made
the election to amortize premium generally. See "--Market Discount." The
Committee Report states that the same rules that apply to accrual of market
discount (which rules will require use of a Prepayment Assumption in accruing
market discount with respect to REMIC Regular Certificates without regard to
whether such Certificates have original issue discount) will also apply in
amortizing bond premium under Section 171 of the Code.
Realized Losses. Under Section 166 of the Code, both corporate holders of the
REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire such Certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their Certificates become wholly or partially
worthless as the result of one or more Realized Losses on the Mortgage
Collateral. However, it appears that a noncorporate holder that does not
acquire a REMIC Regular Certificate in connection with a trade or business will
not be entitled to deduct a loss under Section 166 of the Code until such
holder's Certificate becomes wholly worthless (i.e., until its outstanding
principal balance has been reduced to zero) and that the loss will be
characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Collateral until it can be established that any
such reduction ultimately will not be recoverable. As a result, the amount of
taxable income reported in any period by the holder of a REMIC Regular
Certificate could exceed the amount of economic income actually realized by the
holder in such period. Although the holder of a REMIC Regular Certificate
eventually will recognize a loss or reduction in income attributable to
previously accrued and included income that, as the result of a realized loss,
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
General. As residual interests, the REMIC Residual Certificates will be
subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the Mortgage Collateral or as debt instruments
issued by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to report
its daily portion of the taxable income or, subject to the limitations noted in
this discussion, the net loss of the REMIC for each day during a calendar
quarter that such holder owned such REMIC Residual Certificate. For this
purpose, the taxable income or net loss of the REMIC will be allocated to each
day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts will then be allocated among the REMIC
Residual Certificateholders in proportion to their respective ownership
interests on such day. Any amount included in the gross income or allowed as a
loss of any REMIC Residual Certificateholder by virtue of this allocation will
be treated as ordinary income or loss. The taxable income of the REMIC will be
determined under the rules described below in "--Taxable Income of the REMIC"
and will be taxable to the REMIC Residual Certificateholders without regard to
the timing or amount of cash distributions by the REMIC. Ordinary income
derived from REMIC Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Code on the deductibility of "passive losses."
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A holder of a REMIC Residual Certificate that purchased such Certificate from
a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily portion of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC
Residual Certificate. These daily portions generally will equal the amounts of
taxable income or net loss determined as described above. The Committee Report
indicates that certain modifications of the general rules may be made, by
regulations, legislation or otherwise, to reduce (or increase) the income or
loss of a holder of a REMIC Residual Certificateholder that purchased such
REMIC Residual Certificate from a prior holder of such Certificate at a price
greater than (or less than) the adjusted basis (as defined herein) such REMIC
Residual Certificate would have had in the hands of an original holder of such
Certificate. The REMIC Regulations, however, do not provide for any such
modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be
taken into account in determining the income of such holder for federal income
tax purposes. Although it appears likely that any such payment would be
includible in income immediately upon its receipt, the IRS might assert that
such payment should be included in income over time according to an
amortization schedule or according to some other method. Because of the
uncertainty concerning the treatment of such payments, holders of REMIC
Residual Certificates should consult their tax advisors concerning the
treatment of such payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions,"
residual interests without "significant value" and "noneconomic" residual
interests discussed below. The fact that the tax liability associated with the
income allocated to REMIC Residual Certificateholders may exceed the cash
distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders' after-tax rate of return.
Taxable Income of the REMIC. The taxable income of the REMIC will equal the
income from the Mortgage Collateral 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 Collateral,
bad debt deductions with respect to the Mortgage Collateral 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 or the Certificate Administrator, as applicable, intends to treat the
fair market value of the Mortgage Collateral as being equal to the aggregate
issue prices of the REMIC Regular Certificates and REMIC Residual Certificates.
Such aggregate basis will be allocated among the Mortgage Collateral
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 or the Certificate
Administrator, as applicable, may be required to estimate the fair market value
of such interests in order to determine the basis of the REMIC in the Mortgage
Collateral 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 Collateral that it holds
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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
Mortgage Collateral at a market discount must include such discount in income
currently, as it accrues, on a constant interest basis. See "--Taxation of
Owners of REMIC Regular Certificates" above, which describes a method of
accruing discount income that is analogous to that required to be used by a
REMIC as to Mortgage Collateral with market discount that it holds.
An item of Mortgage Collateral will be deemed to have been acquired with
discount (or premium) to the extent that the REMIC's basis therein, determined
as described in the preceding paragraph, is less than (or greater than) its
stated redemption price. Any such discount will be includible in the income of
the REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing
original issue discount on the REMIC Regular Certificates. It is anticipated
that each REMIC will elect under Section 171 of the Code to amortize any
premium on the Mortgage Collateral. Premium on any item of Mortgage Collateral
to which such election applies may be amortized under a constant yield method,
presumably taking into account a Prepayment Assumption.
The REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular Certificates--
Original Issue Discount," except that the de minimis rule and the adjustments
for subsequent holders of REMIC Regular Certificates (including any other class
of Certificates constituting "regular interests" in the REMIC not offered
hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess, "Issue Premium"), the
net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC Regular Certificates of such class will be
reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of the REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions and Other Possible REMIC
Taxes" below. Further, the limitation on miscellaneous itemized deductions
imposed on individuals by Section 67 of the Code (which allows such deductions
only to the extent they exceed in the aggregate two percent of the taxpayer's
adjusted gross income) will not be applied at the REMIC level so that the REMIC
will be allowed deductions for servicing, administrative and other non-interest
expenses in determining its taxable income. All such expenses will be allocated
as a separate item to the holders of REMIC Certificates, subject to the
limitation of Section 67 of the Code. See "--Possible Pass-Through of
Miscellaneous Itemized Deductions" below. If the deductions allowed to the
REMIC exceed its gross income for a calendar quarter, such excess will be the
net loss for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the related
Certificateholder and decreased (but not below zero) by distributions made, and
by net losses allocated, to such Certificateholder.
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A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of such calendar quarter (determined without regard
to such net loss). Any loss that is not currently deductible by reason of this
limitation may be carried forward indefinitely to future calendar quarters and,
subject to the same limitation, may be used only to offset income from the
REMIC Residual Certificate. The ability of holders of REMIC Residual
Certificates to deduct net losses may be subject to additional limitations
under the Code, as to which such Certificateholders should consult their tax
advisors.
Any distribution on a REMIC Residual Certificate will be treated as a non-
taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of
taxable income of the Trust Fund. However, such basis increases may not occur
until the end of the calendar quarter, or perhaps the end of the calendar year,
with respect to which such REMIC taxable income is allocated to the holders of
REMIC Residual Certificates. To the extent such Certificateholders' initial
bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount
of such distributions, gain will be recognized to such Certificateholders on
such distributions and will be treated as gain from the sale of their REMIC
Residual Certificates.
The effect of these rules is that a Certificateholder may not amortize its
basis in a REMIC Residual Certificate, but may only recover its basis through
distributions, through the deduction of its share of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such holder and the
adjusted basis such REMIC Residual Certificate would have had in the hands of
the original holder, see "--General" above.
Excess Inclusions. Any "excess inclusions" with respect to a REMIC Residual
Certificate will, with an exception discussed below for certain REMIC Residual
Certificates held by thrift institutions, be subject to federal income tax in
all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the sum
of the daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined herein) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a
calendar quarter its ratable portion of the product of the "adjusted issue
price" of the REMIC Residual Certificate at the beginning of the calendar
quarter and 120% of the "long-term federal rate" in effect on the Closing Date.
For this purpose, the adjusted issue price of a REMIC Residual Certificate as
of the beginning of any calendar quarter will be equal to the issue price of
the REMIC Residual Certificate, increased by the sum of the daily accruals for
all prior quarters and decreased (but not below zero) by any distributions made
with respect to such REMIC Residual Certificate before the beginning of such
quarter. The issue price of a REMIC Residual Certificate is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial amount of the REMIC Residual Certificates were sold. The "long-term
federal rate" is an average of current yields on Treasury securities with a
remaining term of greater than nine years, computed and published monthly by
the IRS.
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For REMIC Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates" below.
As an exception to the general rules described above, thrift institutions are
allowed to offset their excess inclusions with unrelated deductions, losses or
loss carryovers, but only if the REMIC Residual Certificates are considered to
have "significant value." The REMIC Regulations provide that in order to be
treated as having significant value, the REMIC Residual Certificates must have
an aggregate issue price at least equal to two percent of the aggregate issue
prices of all of the related REMIC's Regular and Residual Certificates. In
addition, based on the Prepayment Assumption, the anticipated weighted average
life of the REMIC Residual Certificates must equal or exceed 20% of the
anticipated weighted average life of the REMIC and on any required or permitted
clean up calls or required qualified liquidation provided for in the REMIC's
organizational documents. Although it has not done so, the Treasury also has
authority to issue regulations that would treat the entire amount of income
accruing on a REMIC Residual Certificate as an excess inclusion if the REMIC
Residual Certificates are considered not to have "significant value." The
related Prospectus Supplement will disclose whether offered REMIC Residual
Certificates may be considered to have "significant value" under the REMIC
Regulations; except that any disclosure that a REMIC Residual Certificate will
have "significant value" will be based upon certain assumptions, and the
Company will make no representation that a REMIC Residual Certificate will have
"significant value" for purposes of the above-described rules. The above-
described exception for thrift institutions applies only to those residual
interests held directly by, and deductions, losses and loss carryovers incurred
by, such institutions (and not by other members of an affiliated group of
corporations filing a consolidated income tax return) or by certain wholly-
owned direct subsidiaries of such institutions formed or operated exclusively
in connection with the organization and operation of one or more REMICs.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule
to regulated investment companies, common trust funds and certain cooperatives;
the REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was
to enable the transferor to impede the assessment or collection of tax." If
such transfer is disregarded, the purported transferor will continue to remain
liable for any taxes due with respect to the income on such "noneconomic" REMIC
Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, based on the Prepayment Assumption and on
any required or permitted clean up calls, or required qualified liquidation
provided for in the REMIC's organizational documents, (1) the present value of
the expected future distributions (discounted using the "applicable federal
rate" for obligations whose term ends on the close of the last quarter in which
excess inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) on the
REMIC Residual Certificate equals at least the present value of the expected
tax on the anticipated excess inclusions, and (2) the transferor reasonably
expects that the transferee will receive distributions with respect to the
REMIC Residual Certificate at or after the time the taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes. Accordingly, all transfers of REMIC Residual Certificates that may
constitute noneconomic residual interests
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will be subject to certain restrictions under the terms of the related Pooling
and Servicing Agreement or Trust Agreement that are intended to reduce the
possibility of any such transfer being disregarded. Such restrictions will
require each party to a transfer to provide an affidavit that no purpose of
such transfer is to impede the assessment or collection of tax, including
certain representations as to the financial condition of the prospective
transferee, as to which the transferor also is required to make a reasonable
investigation to determine such transferee's historic payment of its debts and
ability to continue to pay its debts as they come due in the future. Prior to
purchasing a REMIC Residual Certificate, prospective purchasers should consider
the possibility that a purported transfer of such REMIC Residual Certificate by
such a purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention
of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations. Any such disclosure that a REMIC Residual Certificate
will not be considered "noneconomic" will be based upon certain assumptions,
and the Company will make no representation that a REMIC Residual Certificate
will not be considered "noneconomic" for purposes of the above-described rules.
See "--Foreign Investors in REMIC Certificates" below for additional
restrictions applicable to transfers of certain REMIC Residual Certificates to
foreign persons.
Mark-to-Market Rules. On December 28, 1993, the IRS released temporary
regulations (the "Mark-to-Market Regulations") relating to the requirement that
a securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held
for investment. The Mark-to-Market Regulations provide that for purposes of
this mark-to-market requirement, a "negative value" REMIC Residual Certificate
is not treated as a security and thus generally may not be marked to market.
This exclusion from the mark-to-market requirement is expanded to include all
REMIC Residual Certificates under proposed Treasury regulations published
January 4, 1995 which provide that any REMIC Residual Certificate issued after
January 4, 1995 will not be treated as a security and therefore generally may
not be marked to market. Prospective purchasers of a REMIC Residual Certificate
should consult their tax advisors regarding the possible application of the
mark-to-market requirement to REMIC Residual Certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and expenses
of a REMIC generally will be allocated to the holders of the related REMIC
Residual Certificates. The applicable Treasury regulations indicate, however,
that in the case of a REMIC that is similar to a single class grantor trust,
all or a portion of such fees and expenses should be allocated to the holders
of the related REMIC Regular Certificates. Unless otherwise stated in the
related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates the
holders of which receive an allocation of fees and expenses in accordance with
the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts, (i) an amount equal to such individual's,
estate's or trust's share of such fees and expenses will be added to the gross
income of such holder and (ii) such individual's, estate's or trust's share of
such fees and expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of the Code, which permits
such deductions only to the extent they exceed in the aggregate two percent of
a taxpayer's adjusted gross income. In addition, Section 68 of the Code
provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (i) 3% of the excess of the individual's adjusted
gross income over such amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for the taxable year. The amount of additional taxable
income reportable by REMIC Certificateholders that are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Furthermore, in determining the alternative minimum taxable income of such a
holder of a REMIC Certificate that is an individual, estate
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or trust, or a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts, no deduction will be allowed for such holder's
allocable portion of servicing fees and other miscellaneous itemized deductions
of the REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should consult with
their tax advisors prior to making an investment in such Certificates.
SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the selling Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale
and its adjusted basis in the REMIC Certificate. The adjusted basis of a REMIC
Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under "--Taxation of
Owners of REMIC Residual Certificates--Basis Rules, Net Losses and
Distributions" above. Except as described below, any such gain or loss
generally will be capital gain or loss. The Code as of the date of this
Prospectus provides for a top marginal tax rate of 39.6% for individuals and a
maximum marginal rate for long-term capital gains of individuals of 28%. No
such rate differential exists for corporations. In addition, the distinction
between a capital gain or loss and ordinary income or loss remains relevant for
other purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does
not exceed the excess, if any, of (i) the amount that would have been
includible in the seller's income with respect to such REMIC Regular
Certificate had income accrued thereon at a rate equal to 110% of the
"applicable federal rate" (generally, a rate based on an average of current
yields on Treasury securities having a maturity comparable to that of the
Certificate, which rate is computed and published monthly by the IRS),
determined as of the date of purchase of such REMIC Regular Certificate, over
(ii) the amount of ordinary income actually includible in the seller's income
prior to such sale. In addition, gain recognized on the sale of a REMIC Regular
Certificate by a seller who purchased such REMIC Regular Certificate at a
market discount will be taxable as ordinary income to the extent of any accrued
and previously unrecognized market discount that accrued during the period the
Certificate was held. See "--Taxation of Owners of REMIC Regular Certificates--
Market Discount" above.
REMIC Certificates will be "evidences of indebtedness" within the meaning of
Section 582(c)(1) of the Code, so that gain or loss recognized from the sale of
a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that might
otherwise be capital gain may be treated as ordinary income to the extent that
such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in Certificates or
similar property that reduce or eliminate market risk, if substantially all of
the taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not
exceed the amount of interest that would have accrued on the taxpayer's net
investment at 120% of the appropriate "applicable federal rate" (which rate is
computed and published monthly by the IRS) at the time the taxpayer enters into
the conversion transaction, subject to appropriate reduction for prior
inclusion of interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for
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purposes of the limitation on the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires the Certificate, any other
residual interest in a REMIC or any similar interest in a "taxable mortgage
pool" (as defined in Section 7701(i) of the Code) within six months of the date
of such sale, the sale will be subject to the "wash sale" rules of Section 1091
of the Code. In that event, any loss realized by the REMIC Residual
Certificateholder on the sale will not be deductible, but instead will be added
to such REMIC Residual Certificateholder's adjusted basis in the newly-acquired
asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived from
"prohibited transactions" (the "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions a prohibited transaction means the
disposition of an item of Mortgage Collateral, the receipt of income from a
source other than an item of Mortgage Collateral or certain other permitted
investments, the receipt of compensation for services, or gain from the
disposition of an asset purchased with the payments on the Mortgage Collateral
for temporary investment pending distribution on the REMIC Certificates. It is
not anticipated that any REMIC will engage in any prohibited transactions in
which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on which the
REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (the
"Contributions Tax"). Each Pooling and Servicing Agreement or Trust Agreement
will include provisions designed to prevent the acceptance of any contributions
that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property," determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment
trust. Unless otherwise disclosed in the related Prospectus Supplement, it is
not anticipated that any REMIC will recognize "net income from foreclosure
property" subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer, the Certificate Administrator or the Trustee in
either case out of its own funds, provided that the Master Servicer, the
Certificate Administrator or the Trustee, as the case may be, has sufficient
assets to do so, and provided further that such tax arises out of a breach of
the Master Servicer's, the Certificate Administrator's or the Trustee's
obligations, as the case may be, under the related Pooling and Servicing
Agreement or Trust Agreement and in respect of compliance with applicable laws
and regulations. Any such tax not borne by the Master Servicer, the Certificate
Administrator or the Trustee will be payable out of the related Trust Fund
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the
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present value (discounted using the "applicable federal rate" for obligations
whose term ends on the close of the last quarter in which excess inclusions are
expected to accrue with respect to the Certificate, which rate is computed and
published monthly by the IRS) of the total anticipated excess inclusions with
respect to such REMIC Residual Certificate for periods after the transfer and
(ii) the highest marginal federal income tax rate applicable to corporations.
The anticipated excess inclusions must be determined as of the date that the
REMIC Residual Certificate is transferred and must be based on events that have
occurred up to the time of such transfer, the Prepayment Assumption and any
required or permitted clean up calls or required liquidation provided for in
the REMIC's organizational documents. Such a tax generally would be imposed on
the transferor of the REMIC Residual Certificate, except that where such
transfer is through an agent for a disqualified organization, the tax would
instead be imposed on such agent. However, a transferor of a REMIC Residual
Certificate would in no event be liable for such tax with respect to a transfer
if the transferee furnishes to the transferor an affidavit that the transferee
is not a disqualified organization and, as of the time of the transfer, the
transferor does not have actual knowledge that such affidavit is false.
Moreover, an entity will not qualify as a REMIC unless there are reasonable
arrangements designed to ensure that (i) residual interests in such entity are
not held by disqualified organizations and (ii) information necessary for the
application of the tax described herein will be made available. Restrictions on
the transfer of REMIC Residual Certificates and certain other provisions that
are intended to meet this requirement will be included in the Pooling and
Servicing Agreement or Trust Agreement, and will be discussed more fully in any
Prospectus Supplement relating to the offering of any REMIC Residual
Certificate.
In addition, if a "pass-through entity" (as defined below) includes in income
excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the
amount of excess inclusions on the REMIC Residual Certificate that are
allocable to the interest in the pass-through entity held by such disqualified
organization and (ii) the highest marginal federal income tax rate imposed on
corporations. A pass-through entity will not be subject to this tax for any
period, however, if each record holder of an interest in such pass-through
entity furnishes to such pass-through entity (i) such holder's social security
number and a statement under penalties of perjury that such social security
number is that of the record holder or (ii) a statement under penalties of
perjury that such record holder is not a disqualified organization.
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or Freddie Mac), (ii) any organization (other than a cooperative
described in Section 521 of the Code) that is exempt from federal income tax,
unless it is subject to the tax imposed by Section 511 of the Code or (iii) any
organization described in Section 1381(a)(2)(C) of the Code. For these
purposes, a "pass-through entity" means any regulated investment company, real
estate investment trust, trust, partnership or certain other entities described
in Section 860E(e)(6) of the Code. In addition, a person holding an interest in
a pass-through entity as a nominee for another person will, with respect to
such interest, be treated as a pass-through entity.
TERMINATION
A REMIC will terminate immediately after the Distribution Date following
receipt by the REMIC of the final payment in respect of the Mortgage Collateral
or upon a sale of the REMIC's assets following the adoption by the REMIC of a
plan of complete liquidation. The last distribution on a REMIC Regular
Certificate will be treated as a payment in retirement of a debt instrument. In
the case of a REMIC Residual Certificate, if the last distribution on such
REMIC Residual Certificate is less than the Certificateholder's adjusted basis
in such Certificate, such Certificateholder should be treated as realizing a
loss equal to the amount of such difference, and such loss may be treated as a
capital loss.
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REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and holders of REMIC Residual Certificates
will be treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Master Servicer or the Certificate Administrator, as
applicable, will file REMIC federal income tax returns on behalf of the related
REMIC 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 Master Servicer or the Certificate
Administrator, as applicable, subject to certain notice requirements and
various restrictions and limitations, generally will have the authority to act
on behalf of the REMIC and the holders of REMIC Residual Certificates 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.
Holders of REMIC Residual Certificates generally will be required to report
such REMIC items consistently with their treatment on the related REMIC's tax
return and may in some circumstances be bound by a settlement agreement between
the Master Servicer or the Certificate Administrator, as applicable, as tax
matters person, and the IRS concerning any such REMIC item. Adjustments made to
the REMIC tax return may require a holder of a REMIC Residual Certificate to
make corresponding adjustments on its return, and an audit of the REMIC's tax
return, or the adjustments resulting from such an audit, could result in an
audit of such Certificateholder's return. No REMIC will be registered as a tax
shelter pursuant to Section 6111 of the Code because it is not anticipated that
any REMIC will have a net loss for any of the first five taxable years of its
existence. Any person that holds a REMIC Residual Certificate as a nominee for
another person may be required to furnish to the related REMIC, in a manner to
be provided in Treasury regulations, the name and address of such person and
other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and
the IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other non-individuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30
days after the end of the quarter for which the information was requested, or
two weeks after the receipt of the request. The REMIC must also comply with
rules requiring a REMIC Regular Certificate issued with original issue discount
to disclose on its face certain information including the amount of original
issue discount and the issue date, and requiring such information to be
reported to the IRS. Reporting with respect to the REMIC Residual Certificates,
including income, excess inclusions, investment expenses and relevant
information regarding qualification of the REMIC's assets will be made as
required under the Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will include
a statement of the adjusted issue price of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of
any market discount. Because exact computation of the accrual of market
discount on a constant yield method requires information relating to the
holder's purchase price that the Master Servicer or the Certificate
Administrator will not have, such regulations only require that information
pertaining to the appropriate proportionate method of accruing market discount
be provided. See "--Taxation of Owners of REMIC Regular Certificates--Market
Discount."
The responsibility for complying with the foregoing reporting rules will be
borne by the Master Servicer or the Certificate Administrator.
Certificateholders may request any information with respect to the returns
described in Section 1.6049-7(e)(2) of the Treasury regulations. Such request
should be directed to the Master
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Servicer or the Certificate Administrator, as applicable, at Residential
Funding Corporation, 8400 Normandale Lake Boulevard, Suite 600, Minneapolis,
Minnesota 55437.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
Payments of interest and principal, as well as payments of proceeds from the
sale of REMIC Certificates, may be subject to the "backup withholding tax"
under Section 3406 of the Code at a rate of 31% if recipients of such payments
fail to furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax.
Furthermore, certain penalties may be imposed by the IRS on a recipient of
payments that is required to supply information but that does not do so in the
proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES
A REMIC Regular Certificateholder that is not a "United States person" and is
not subject to federal income tax as a result of any direct or indirect
connection to the United States in addition to its ownership of a REMIC Regular
Certificate will not be subject to United States federal income or withholding
tax in respect of a distribution on a REMIC Regular Certificate, provided that
the holder complies to the extent necessary with certain identification
requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). For these purposes, "United States person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in, or under the laws of, the United States
or any political subdivision thereof, or an estate or trust whose income from
sources without the United States is includible in gross income for United
States federal income tax purposes regardless of its connection with the
conduct of a trade or business within the United States. It is possible that
the IRS may assert that the foregoing tax exemption should not apply with
respect to a REMIC Regular Certificate held by a Certificateholder that owns
directly or indirectly a 10% or greater interest in the REMIC Residual
Certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions in respect of accrued original issue
discount, to such holder may be subject to a tax rate of 30%, subject to
reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included in
the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States persons
will be prohibited under the related Pooling and Servicing Agreement or Trust
Agreement.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of
the Certificates offered. 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.
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ERISA CONSIDERATIONS
ERISA imposes certain fiduciary and prohibited transaction restrictions on
employee pension and welfare benefit plans subject to ERISA ("ERISA Plans").
Section 4975 of the Code imposes similar prohibited transaction restrictions on
tax-qualified retirement plans described in Section 401(a) of the Code
("Qualified Retirement Plans") and on individual retirement accounts and
annuities ("IRAs") described in Section 408 of the Code (collectively, "Tax-
Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Certificates
without regard to the ERISA considerations described below, subject to the
provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving "plan assets" of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified relationships
to the Plans, unless a statutory or administrative exemption is available.
Certain Parties in Interest (or Disqualified Persons) that participate in a
prohibited transaction may be subject to a penalty (or an excise tax) imposed
pursuant to Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available.
PLAN ASSET REGULATIONS
An investment of Plan Assets in Certificates may cause the underlying
Mortgage Loans, Contracts or Agency Securities included in a Trust Fund to be
deemed "plan assets" of such Plan. The U.S. Department of Labor (the "DOL") has
promulgated regulations at 29 C.F.R. (S) 2510.3-101 (the "DOL Regulations")
concerning whether or not a Plan's assets would be deemed to include an
interest in the underlying assets of an entity (such as a Trust Fund) for
purposes of applying the general fiduciary responsibility provisions of ERISA
and the prohibited transaction provisions of ERISA and the Code, when a Plan
acquires an "equity interest" (such as a Certificate) in such entity. Because
of the factual nature of certain of the rules set forth in the DOL Regulations,
Plan Assets either may be deemed to include an interest in the assets of an
entity (such as a Trust Fund) or may be deemed merely to include its interest
in the instrument evidencing such equity interest (such as a Certificate).
Therefore, neither Plans nor such entities should acquire or hold Certificates
in reliance upon the availability of any exception under the DOL Regulations.
For purposes of this section, the term "plan assets" ("Plan Assets") or "assets
of a Plan" has the meaning specified in the DOL Regulations and includes an
undivided interest in the underlying assets of certain entities in which a Plan
invests.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Fund and cause the Company, the Master
Servicer, the Certificate Administrator, any Servicer, any Sub-Servicer, the
Trustee, the obligor under any credit enhancement mechanism or certain
affiliates thereof to be considered or become Parties in Interest or
Disqualified Persons with respect to an investing Plan (or of a Plan holding an
interest in such an entity). If so, the acquisition or holding of Certificates
by or on behalf of the investing Plan could also give rise to a prohibited
transaction under ERISA and the Code, unless some statutory or administrative
exemption is available. Certificates acquired by a Plan would be assets of that
Plan. Under the DOL Regulations, the Trust Fund, including the Mortgage Loans,
Contracts or Agency Securities and the other assets held in the Trust Fund, may
also be deemed to be assets of each Plan that acquires Certificates. Special
caution should be exercised before Plan Assets are used to acquire a
Certificate in such circumstances, especially if, with respect to such assets,
the Company, the Master Servicer,
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the Certificate Administrator, any Servicer, any Sub-Servicer, the Trustee, the
obligor under any credit enhancement mechanism or an affiliate thereof either
(i) has investment discretion with respect to the investment of Plan Assets; or
(ii) has authority or responsibility to give (or regularly gives) investment
advice with respect to Plan Assets for a fee pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect to such Plan Assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets, and any person who provides
investment advice with respect to such Plan Assets for a fee (in the manner
described above), is a fiduciary of the investing Plan. If the Mortgage Loans,
Contracts or Agency Securities were to constitute Plan Assets, then any party
exercising management or discretionary control regarding those Plan Assets may
be deemed to be a Plan "fiduciary," and thus subject to the fiduciary
requirements of ERISA and the prohibited transaction provisions of ERISA and
Section 4975 of the Code with respect to any investing Plan. In addition, if
the Mortgage Loans, Contracts or Agency Securities were to constitute Plan
Assets, then the acquisition or holding of Certificates by, on behalf of or
with Plan Assets, as well as the operation of the Trust Fund, may constitute or
involve a prohibited transaction under ERISA and the Code.
PROHIBITED TRANSACTION EXEMPTION
On March 29, 1994, the DOL issued (with an effective date of June 9, 1992) an
individual exemption (the "Exemption"), to Residential Funding and certain of
its affiliates, which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Section 4975(a) and (b) of the Code,
certain transactions, among others, relating to the servicing and operation of
pools of certain secured obligations such as Mortgage Loans, Cooperative Loans,
Contracts or Agency Securities which are held in a trust and the purchase, sale
and holding of pass-through certificates issued by such a trust as to which (i)
the Company or any of its affiliates is the sponsor if any entity which has
received from the DOL an individual prohibited transaction exemption which is
similar to the Exemption is the sole underwriter, or manager or co-manager of
the underwriting syndicate or a seller or placement agent, or (ii) the Company
or an affiliate is the underwriter, provided that certain conditions set forth
in the Exemption are satisfied. For purposes of this section, the term
"Underwriter" shall include (a) the Company and certain of its affiliates, (b)
any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with the Company and certain
of its affiliates, (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager with
respect to a class of Certificates, or (d) any entity which has received an
exemption from the DOL relating to Certificates which is similar to the
Exemption.
The Exemption sets forth six general conditions which must be satisfied for a
transaction involving the purchase, sale and holding of Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of
Certificates by a Plan or with Plan Assets must be on terms that are at least
as favorable to the Plan as they would be in an arm's-length transaction with
an unrelated party. Second, the Exemption only applies to Certificates
evidencing rights and interests that are not subordinated to the rights and
interests evidenced by the other Certificates of the same trust. Third, the
Certificates at the time of acquisition by a Plan or with Plan Assets must be
rated in one of the three highest generic rating categories by Standard &
Poor's Ratings Group, Moody's Investors Service, Inc., Duff & Phelps, Inc. or
Fitch Investors Service, Inc. Fourth, the Trustee cannot be an affiliate of any
member of the "Restricted Group" which consists of any underwriter, the
Company, the Master Servicer, the Certificate Administrator, any Servicer, any
Sub-Servicer and any mortgagor with respect to assets of a Trust Fund
constituting more than 5% of the aggregate unamortized principal balance of the
assets in the related Trust Fund as of the date of initial issuance of the
Certificates. Fifth, the sum of all payments made to and retained by the
underwriters must represent not more than reasonable compensation for
underwriting the Certificates; the sum of all payments made to and retained by
the Company pursuant to the assignment of the assets to the related Trust Fund
must represent not more than the fair market value of such obligations; and the
sum of all payments made to and retained by the Master Servicer, the
Certificate Administrator, any Servicer or any Sub-Servicer must represent not
more
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than reasonable compensation for such person's services under the related
Pooling and Servicing Agreement or Trust Agreement and reimbursement of such
person's reasonable expenses in connection therewith. Sixth, the Exemption
states that the investing Plan or Plan Asset investor must be an accredited
investor as defined in Rule 501(a)(1) of Regulation D of the Commission under
the Securities Act of 1933, as amended.
A fiduciary of or other investor of Plan Assets contemplating purchasing a
Certificate must make its own determination that the general conditions set
forth above will be satisfied with respect to such Certificate.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407
of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code) in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of
Certificates by a Plan 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 a Plan or with Plan Assets of an
Excluded Plan by any person who has discretionary authority or renders
investment advice with respect to Plan Assets of such Excluded Plan. For
purposes of the Certificates, an "Excluded Plan" is a Plan sponsored by any
member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with (1) the direct or indirect sale, exchange or
transfer of Certificates in the initial issuance of Certificates between the
Company or an Underwriter and a Plan when the person who has discretionary
authority or renders investment advice with respect to the investment of the
relevant Plan Assets in the Certificates is (a) a mortgagor with respect to 5%
or less of the fair market value of the assets of a Trust Fund or (b) an
affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of Certificates by a Plan or with Plan
Assets and (3) the holding of Certificates by a Plan or with Plan Assets.
Additionally, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by
Sections 406(a), 406(b) and 407 of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code, for
transactions in connection with the servicing, management and operation of the
Mortgage Pools and Contract Pools. The Company expects that the specific
conditions of the Exemption required for this purpose will be satisfied with
respect to the Certificates so that the Exemption would provide an exemption
from the restrictions imposed by Sections 406(a) and (b) of ERISA (as well as
the excise taxes imposed by Sections 4975(a) and (b) of the Code by reason of
Section 4975(c) of the Code) for transactions in connection with the servicing,
management and operation of the Mortgage Pools and Contract Pools, provided
that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if such restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" (within the meaning of Section 3(14) of
ERISA) or a "disqualified person" (within the meaning of Section 4975(e)(2) of
the Code) with respect to an investing Plan (or the investing entity holding
Plan Assets) by virtue of providing services to the Plan or such Plan Assets
(or by virtue of having certain specified relationships to such a person)
solely as a result of the ownership of Certificates by a Plan or such Plan
Asset investor.
Before purchasing a Certificate, a fiduciary or other investor of Plan Assets
should itself confirm (a) that the Certificates constitute "certificates" for
purposes of the Exemption and (b) that the specific and general conditions set
forth in the Exemption and the other requirements set forth in the Exemption
would be satisfied. In addition to making its own determination as to the
availability of the exemptive relief provided
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in the Exemption, the fiduciary or other investor of Plan Assets should
consider its general fiduciary obligations under ERISA in determining whether
to purchase any Certificates with Plan Assets.
Any fiduciary or other investor of Plan Assets that proposes to purchase
Certificates on behalf of or with Plan Assets should consult with its counsel
with respect to the potential applicability of ERISA and the Code to such
investment and the availability of the Exemption or any other prohibited
transaction exemption in connection therewith. In particular, in connection
with a contemplated purchase of Certificates representing a beneficial
ownership interest in a pool of single-family residential first Mortgage Loans
or Agency Certificates, such fiduciary or other Plan investor should consider
the availability of the Exemption or Prohibited Transaction Class Exemption 83-
1 ("PTCE 83-1") for certain transactions involving mortgage pool investment
trusts. The Prospectus Supplement with respect to a series of Certificates may
contain additional information regarding the application of the Exemption, PTCE
83-1, or any other exemption, with respect to the Certificates offered thereby.
However, PTCE 83-1 does not provide exemptive relief with respect to
Certificates evidencing interests in Trust Funds which include Contracts or
Cooperative Loans.
TAX-EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501 of
the Code (a "Tax-Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusions" of a REMIC allocated to a REMIC Residual Certificate held by a Tax-
Exempt Investor will be considered UBTI and thus will be subject to federal
income tax. See "Certain Federal Income Tax Consequences--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions."
CONSULTATION WITH COUNSEL
Any fiduciary or other investor of Plan Assets that proposes to acquire or
hold Certificates on behalf of or with Plan Assets of any Plan should consult
with its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment and the Exemption, the
availability of PTCE 83-1 or any other prohibited transaction exemption.
LEGAL INVESTMENT MATTERS
Each class of Certificates offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. Unless otherwise specified in
the related Prospectus Supplement, each such class that is, and continues to
be, rated in one of the two highest rating categories by at least one
nationally recognized statistical rating organization will constitute "mortgage
related securities" for purposes of 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 pursuant to or existing under the laws of the United
States or of any State whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency
or instrumentality thereof constitute legal investments for such entities.
Under SMMEA, if a State enacted legislation on or prior to October 3, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," such securities will constitute legal
investments for entities subject to such legislation only to the extent
provided therein. Certain States enacted legislation which overrides the
preemption provisions of SMMEA. SMMEA provides, however, that in no event will
the enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in "mortgage related securities," or
require the sale or other disposition of such securities, so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
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SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. (S) 24 (Seventh), subject in each case to such regulations
as the applicable federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the Office of Thrift Supervision (the
"OTS") with an effective date of February 10, 1992. The Policy Statement
generally indicates that a mortgage derivative product will be deemed to be
high risk if it exhibits greater price volatility than a standard fixed-rate
thirty-year mortgage security. According to the Policy Statement, prior to
purchase, a depository institution will be required to determine whether a
mortgage derivative product that it is considering acquiring is high-risk and,
if so, that the proposed acquisition would reduce the institution's overall
interest rate risk. Reliance on analysis and documentation obtained from a
securities dealer or other outside party without internal analysis by the
institution would be unacceptable. There can be no assurance as to which
classes of Certificates will be treated as high-risk under the Policy
Statement.
The predecessor to the OTS issued a bulletin, entitled "Mortgage Derivative
Products and Mortgage Swaps," which is applicable to thrift institutions
regulated by the OTS. The bulletin established guidelines for the investment by
savings institutions in certain "high-risk" mortgage derivative securities and
limitations on the use of such securities by insolvent, undercapitalized or
otherwise "troubled" institutions. According to the bulletin, such "high-risk"
mortgage derivative securities include securities having certain specified
characteristics, which may include certain classes of Certificates. In
addition, the National Credit Union Administration has issued regulations
governing federal credit union investments which prohibit investment in certain
specified types of securities, which may include certain classes of
Certificates. Similar policy statements have been issued by regulators having
jurisdiction over other types of depository institutions.
Certain classes of Certificates offered hereby, including any class that is
not rated in one of the two highest rating categories by at least one
nationally recognized statistical rating organization, will not constitute
"mortgage related securities" for purposes of SMMEA. Any such class of
Certificates will be identified in the related Prospectus Supplement.
Prospective investors in such classes of Certificates, in particular, should
consider the matters discussed in the following paragraph.
There may be other restrictions on the ability of certain investors either to
purchase certain classes of Certificates or to purchase any class of
Certificates representing more than a specified percentage of the investors'
assets. The Company will make no representations as to the proper
characterization of any class of Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Certificates of any class constitute
legal investments or are subject to investment, capital or other restrictions,
and, if applicable, whether SMMEA has been overridden in any jurisdiction
relevant to such investor.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of
Certificates will be applied by the Company to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the Mortgage
Collateral underlying the
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Certificates or will be used by the Company for general corporate purposes. The
Company expects that it will make additional sales of securities similar to the
Certificates from time to time, but the timing and amount of any such
additional offerings will be dependent upon a number of factors, including the
volume of mortgage loans, contracts or mortgage securities purchased by the
Company, prevailing interest rates, availability of funds and general market
conditions.
METHODS OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the net proceeds to the
Company from such sale.
The Company intends that Certificates will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular series of
Certificates may be made through a combination of two or more of these methods.
Such methods are as follows:
1. by negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
2. by placements by the Company with institutional investors through
dealers; and
3. by direct placements by the Company with institutional investors.
In addition, if specified in the related Prospectus Supplement, a series of
Certificates may be offered in whole or in part in exchange for the Mortgage
Collateral (and other assets, if applicable) that would comprise the Trust Fund
for such Certificates.
If underwriters are used in a sale of any Certificates (other than in
connection with an underwriting on a best efforts basis), such Certificates
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions, including negotiated
transactions, at fixed public offering prices or at varying prices to be
determined at the time of sale or at the time of commitment therefor. Such
underwriters may be broker-dealers affiliated with the Company whose identities
and relationships to the Company will be as set forth in the related Prospectus
Supplement. The managing underwriter or underwriters with respect to the offer
and sale of a particular series of Certificates will be set forth on the cover
of the Prospectus Supplement relating to such series and the members of the
underwriting syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of the Certificates, underwriters may receive
compensation from the Company or from purchasers of the Certificates in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Company and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of Certificates will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Company will indemnify the
several underwriters and the underwriters will indemnify the Company against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended, or will contribute to payments required to be made in respect
thereof.
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The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Company and purchasers of
Certificates of such series.
The Company anticipates that the Certificates offered hereby will be sold
primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Certificates, including dealers, may, depending on the
facts and circumstances of such purchases, be deemed to be "underwriters"
within the meaning of the Securities Act of 1933, as amended, in connection
with reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
Certain legal matters, including certain federal income tax matters, will be
passed upon for the Company by Orrick, Herrington & Sutcliffe, New York, New
York, or by Thacher Proffitt & Wood, New York, New York, as specified in the
Prospectus Supplement.
FINANCIAL INFORMATION
The Company has determined that its financial statements are not material to
the offering made hereby. The Certificates do not represent an interest in or
an obligation of the Company. The Company's only obligations with respect to a
series of Certificates will be to repurchase certain items of Mortgage
Collateral upon any breach of certain limited representations and warranties
made by the Company, or as otherwise provided in the applicable Prospectus
Supplement.
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Accrual Certificates..................................................... 5
Advance.................................................................. 36
Affiliated Seller........................................................ 23
Agency Securities........................................................ 8
Agency Securities Pool................................................... 14
AlterNet Loans........................................................... 15
AlterNet Mortgage Program................................................ 15
AlterNet Program Seller.................................................. 23
AlterNet Seller Guide.................................................... 20
Appraised Value.......................................................... 16, 21
ARM Loans................................................................ 17
Balloon Amount........................................................... 15
Balloon Loans............................................................ 15
Bankruptcy Amount........................................................ 45
Bankruptcy Loss.......................................................... 45
Beneficial Owner......................................................... 28
Bi-Weekly Loans.......................................................... 15
Buy-Down Funds........................................................... 18
Buy-Down Loans........................................................... 15
Buy-Down Period.......................................................... 18
Certificate Account...................................................... 14
Certificate Administrator................................................ 1
Certificate Insurance Policy............................................. 50
Certificate Registrar.................................................... 27
Certificateholders....................................................... 14, 26
Certificates............................................................. 1
Closing Date............................................................. 78
Code..................................................................... 10
Commission............................................................... 14
Company.................................................................. 1
Compensating Interest.................................................... 37
Contract Pool............................................................ 8
Contract Pool Insurance Policy........................................... 48
Contracts................................................................ 1, 4
Contributions Tax........................................................ 89
Conventional Loans....................................................... 15
Convertible Mortgage Loan................................................ 17
Cooperative Dwellings.................................................... 15
Cooperative Loans........................................................ 8
Cooperative Note......................................................... 66
Cooperatives............................................................. 15
Custodial Account........................................................ 14
Custodian................................................................ 14
Cut-off Date............................................................. 14
Debt Service Reduction................................................... 50
Defaulted Mortgage Loss.................................................. 46
Deferred Interest........................................................ 17
Deficient Valuation...................................................... 50
Determination Date....................................................... 35
</TABLE>
100
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Disqualified Organization.................................................. 90
Distribution Amount........................................................ 34
Distribution Date.......................................................... 6
DOL........................................................................ 93
DOL Regulations............................................................ 93
DTC........................................................................ 27
DTC Registered Certificates................................................ 28
Due Date................................................................... 34
Eligible Account........................................................... 32
ERISA...................................................................... 10
ERISA Plans................................................................ 93
Escrow Account............................................................. 39
Exchange Act............................................................... 2
Excluded Plan.............................................................. 95
Exemption.................................................................. 94
Extraordinary Losses....................................................... 46
Fannie Mae................................................................. 14
Fannie Mae Securities...................................................... 14
FDIC....................................................................... 23
FHA........................................................................ 15
FHA Contracts.............................................................. 20
FHA Loans.................................................................. 15
Form 8-K................................................................... 14
Fraud Loss................................................................. 46
Fraud Loss Amount.......................................................... 45
Freddie Mac................................................................ 14
Freddie Mac Act............................................................ 22
Freddie Mac Securities..................................................... 14
Garn-St Germain Act........................................................ 70
Ginnie Mae................................................................. 14
Ginnie Mae Securities...................................................... 14
GMAC Mortgage.............................................................. 1
GPM Loans.................................................................. 15
Gross Margin............................................................... 17
Housing Act................................................................ 21
HUD........................................................................ 15
Index...................................................................... 17
Indirect Participants...................................................... 28
Insurance Proceeds......................................................... 31
IRAs....................................................................... 93
Issue Premium.............................................................. 84
Letter of Credit........................................................... 47
Letter of Credit Bank...................................................... 47
Liquidated Contract........................................................ 43
Liquidated Mortgage Loan................................................... 43
Liquidation Proceeds....................................................... 31
Loan-to-Value Ratio........................................................ 16
Manufactured Home.......................................................... 8
Mark-to-Market Regulations................................................. 87
Master Commitments......................................................... 20
Master Servicer............................................................ 1
</TABLE>
101
<PAGE>
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Maximum Mortgage Rate.................................................... 17
Mezzanine Certificates................................................... 5
Minimum Mortgage Rate.................................................... 17
Modified Mortgage Loan................................................... 15
Mortgage Collateral...................................................... 1, 4
Mortgage Collateral Seller............................................... 7
Mortgage Loans........................................................... 1, 4
Mortgage Note............................................................ 29
Mortgage Pool............................................................ 7
Mortgage Pool Insurance Policy........................................... 47
Mortgage Rates........................................................... 15
Mortgaged Properties..................................................... 7, 8
Mortgages................................................................ 15
Mortgagor................................................................ 11
Neg-Am ARM Loans......................................................... 17
Net Mortgage Rate........................................................ 61
Nonrecoverable Advance................................................... 33
OID Regulations.......................................................... 76
OTS...................................................................... 97
Participants............................................................. 28
Parties in Interest...................................................... 93
Pass-Through Rate........................................................ 5
Paying Agent............................................................. 34
Percentage Interest...................................................... 34
Periodic Cap............................................................. 17
Permitted Investments.................................................... 32
Plan Assets.............................................................. 93
Plans.................................................................... 93
Policy Statement......................................................... 97
Pool Insurer............................................................. 47
Pooling and Servicing Agreement.......................................... 1, 4
Prepayment Interest Shortfall............................................ 37
Primary Insurance Policy................................................. 52
Primary Insurer.......................................................... 53
Principal Prepayments.................................................... 35
Prohibited Transactions Tax.............................................. 89
PTCE 83-1................................................................ 96
Purchase Price........................................................... 25
Qualified Insurer........................................................ 51
Qualified Retirement Plans............................................... 93
Qualified Substitute Contract............................................ 26
Qualified Substitute Mortgage Loan....................................... 26
Rating Agency............................................................ 9
Realized Loss............................................................ 43
Record Date.............................................................. 34
Registration Statement................................................... 2
REMIC.................................................................... 1, 76
REMIC Certificates....................................................... 76
REMIC Provisions......................................................... 76
REMIC Regular Certificates............................................... 76
REMIC Regulations........................................................ 76
</TABLE>
102
<PAGE>
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
REMIC Residual Certificates.............................................. 76
REO Contract............................................................. 42
REO Mortgage Loan........................................................ 42
Repurchased Contract..................................................... 26
Repurchased Mortgage Loan................................................ 26
Reserve Fund............................................................. 50
Residential Funding...................................................... 4
Restricted Group......................................................... 94
RTC...................................................................... 23
Senior Certificates...................................................... 5
Senior Percentage........................................................ 45
Senior/Subordinate Series................................................ 27
Servicer................................................................. 1
Servicing Advances....................................................... 33
Servicing Fee............................................................ 39
Single Certificate....................................................... 38
SMMEA.................................................................... 10, 96
Special Hazard Amount.................................................... 45
Special Hazard Insurance Policy.......................................... 49
Special Hazard Insurer................................................... 49
Special Hazard Loss...................................................... 46
Special Servicer......................................................... 42
Spread................................................................... 30
Stated Principal Balance................................................. 45
Strip Certificate........................................................ 5
Sub-Servicing Agreement.................................................. 39
Subordinate Certificates................................................. 5
Surety Bond.............................................................. 51
Tax-Exempt Investor...................................................... 96
Tax-Favored Plans........................................................ 93
Tiered REMICs............................................................ 77
Title V.................................................................. 71
Title VIII............................................................... 72
Trust Agreement.......................................................... 1, 4
Trust Fund............................................................... 1, 4
Trustee.................................................................. 14
UBTI..................................................................... 96
UCC...................................................................... 69
Unaffiliated Seller...................................................... 23
VA....................................................................... 15
VA Contracts............................................................. 20
VA Loans................................................................. 15
</TABLE>
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO
WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
----------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
<TABLE>
<S> <C>
Summary.................................................................... S-3
Risk Factors............................................................... S-13
Description of the Mortgage Pool........................................... S-14
Description of the Certificates............................................ S-31
The Certificate Insurer.................................................... S-40
Certain Yield and Prepayment Considerations................................ S-43
Pooling and Servicing Agreement............................................ S-47
Certain Federal Income Tax Consequences.................................... S-49
Method of Distribution..................................................... S-51
Legal Opinions............................................................. S-51
Experts.................................................................... S-52
Ratings.................................................................... S-52
Legal Investment........................................................... S-52
ERISA Considerations....................................................... S-53
PROSPECTUS
<CAPTION>
<S> <C>
Additional Information...................................................... 2
Reports to Certificateholders............................................... 2
Incorporation of Certain Information by Reference........................... 2
Summary of Prospectus....................................................... 4
Special Considerations...................................................... 11
The Trust Funds............................................................. 14
Description of the Certificates............................................. 27
Subordination............................................................... 44
Description of Credit Enhancement........................................... 46
Insurance Policies on Mortgage Loans or Contracts........................... 52
The Company................................................................. 56
Residential Funding Corporation............................................. 56
The Pooling and Servicing Agreement......................................... 56
Yield Considerations........................................................ 60
Maturity and Prepayment Considerations...................................... 63
Certain Legal Aspects of Mortgage Loans and Contracts....................... 65
Certain Federal Income Tax Consequences..................................... 76
State and Other Tax Consequences............................................ 92
ERISA Considerations........................................................ 93
Legal Investment Matters.................................................... 96
Use of Proceeds............................................................. 97
Methods of Distribution..................................................... 98
Legal Matters............................................................... 99
Financial Information....................................................... 99
Index of Principal Definitions.............................................. 100
</TABLE>
RESIDENTIAL ASSET SECURITIES CORPORATION
MORTGAGE PASS-THROUGH
CERTIFICATES, SERIES 1995-KS1
$94,350,062 CLASS A, ADJUSTABLE RATE
PASS-THROUGH RATE
RESIDENTIAL FUNDING
SECURITIES CORPORATION
PROSPECTUS SUPPLEMENT
JUNE 22, 1995
