<PAGE>
RULE NO. 424(b)(5)
REGISTRATION NO. 33-_____
Prospectus Supplement
(To Prospectus dated June 22, 1995)
$77,178,720
RESIDENTIAL ASSET SECURITIES CORPORATION
COMPANY
RESIDENTIAL FUNDING CORPORATION
MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1996-KS1
ADJUSTABLE RATE CLASS A CERTIFICATES
----------------
The Series 1996-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 Services ("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 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 Freddie Mac. See "Risk
Factors--Risks Associated with the Mortgage Loans" herein. The characteristics
of the Mortgage Loans are described herein under "Description of the Mortgage
Pool."
MBIA
(continued on following page)
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PROCEEDS OF THE ASSETS IN THE TRUST FUND AND PROCEEDS FROM THE 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.
----------------
For a discussion of significant matters affecting investments in the Class A
Certificates, see "Risk Factors" commencing on page S-11 herein and "Special
Considerations" in the Prospectus commencing on page 11.
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 March 28, 1997 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 March 28,
1996, against payment therefor in immediately available funds.
RESIDENTIAL FUNDING SECURITIES CORPORATION
The date of this Prospectus Supplement is March 21, 1996.
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(Continued from previous page)
The Class A Certificates will be entitled to the benefit of a certificate
guaranty insurance policy (the "Policy") to be issued by MBIA Insurance
Corporation (the "Insurer"), pursuant to which it will guarantee certain
payments to the Class A Certificateholders as described herein. See
"Description of the Certificates--Certificate Guaranty Insurance Policy"
herein.
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 April 25, 1996 (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 5.7750% 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
(AS DEFINED HEREIN). 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.
----------------
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 JUNE 19, 1996 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
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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
1996-KS1.
Company......................... Residential Asset Securities Corporation, an
affiliate of Residential Funding Corporation.
See "The Company" in the Prospectus.
Master Servicer................. Residential Funding Corporation. See "Pooling
and Servicing Agreement--The Master Servicer"
herein and "Residential Funding Corporation"
in the Prospectus.
Trustee......................... The First National Bank of Chicago, a
national banking association.
Cut-off Date.................... March 1, 1996.
Delivery Date................... On or about March 28, 1996.
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
$77,178,720. The Mortgage Loans are secured
by first liens on fee simple interests in
one- to four-family residential real
properties (each, a "Mortgaged Property")
having individual principal balances at
origination of at least $12,750 but not more
than $700,000 with an average principal
balance at origination of approximately
$132,644. 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 355 months as of
the Cut-off Date. 60.8% of the Mortgage Loans
will be refinanced mortgage loans. 0.3% of
the Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) 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. All percentages of the
Mortgage Loans described herein are
approximate percentages (except as otherwise
indicated) by aggregate principal balance of
the Mortgage Loans (except as otherwise
indicated) as of the Cut-off Date.
S-3
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The Mortgage Rate on each Mortgage Loan will
adjust: (a) semi-annually commencing either
approximately (i) six months after
origination with respect to 55.3% of the
Mortgage Loans, (ii) two years after
origination with respect to 1.5% of the
Mortgage Loans, or (iii) three years after
origination with respect to 11.4% of the
Mortgage Loans, or (b) annually commencing
either (i) one year after origination with
respect to approximately 22.3% of the
Mortgage loans or (ii) three years after
origination with respect to 9.5% of the
Mortgage Loans, in each case, 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
related 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 or annually, as applicable, 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 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 6.75% per annum but no more than
16.30% per annum, with a weighted average
Mortgage Rate of 9.7331% 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. None of the Mortgage
Loans provide that, at the option of the
related Mortgagors, the adjustable interest
rate on such Mortgage Loans may be converted
to a fixed interest rate.
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 or the Company's
affiliate, Residential Funding, for the
purpose of collateralizing securities issued
by Residential Funding Mortgage Securities I,
Inc. and Residential Accredit Loans, Inc. See
"Risk Factors--Risks Associated with the
Mortgage Loans" herein.
The Index Applicable to the
Mortgage Loans.................
With respect to 51.7% and 16.1% of the
Mortgage Loans the Index 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
(i) as of the first
S-4
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business day of the month immediately
preceding the month in which the Adjustment
Date occurs, or (ii) as of the date forty-
five days prior to the Adjustment Date,
respectively. With respect to 0.4% of the
Mortgage Loans the Index will 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. With
respect to 31.8% of the Mortgage Loans the
Index will be a per annum rate equal to the
weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of
one year, reported by the Federal Reserve
Board, as most recently available as of the
date forty-five days prior to the Adjustment
Date. In the event that the related 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 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 Class A Certificates
will have an initial principal balance of
$77,178,720.
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 5.7750% 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 0.40%; provided, however, 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, One-Month LIBOR plus 0.80% 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 the weighted average of the Net
Mortgage Rates on the then outstanding
Mortgage Loans, as adjusted for the actual
number of days in the related Accrual Period
and on a 360-day year. The Net Mortgage Rate
on each Mortgage Loan is equal to the
Mortgage Rate thereon minus the rates per
annum at which the master servicing fee,
subservicing fee and the premium
S-5
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payable with respect to the Policy 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 of the
Mortgage Loans is 8.9544% per annum, and is
expected to change thereafter because the
weighted average of the Net Mortgage Rates is
expected to change for succeeding
Distribution Dates. The Mortgage Rate on each
Mortgage Loan will be adjusted on each
Adjustment Date to equal the sum (rounded as
described herein) of the related Index and
Note Margin, subject to the Maximum Mortgage
Rate, Minimum Mortgage Rate and Periodic Rate
Cap (each, as defined herein) for such
Mortgage Loan. 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 (as defined herein) 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 Policy, interest shortfalls may be
allocated to the Class A Certificates, as
described herein. See "Description of the
Certificates--Interest Distributions" herein.
Principal Distributions......... Holders of the Class A Certificates will be
entitled to receive on each Distribution Date
an amount equal to the Class A Principal
Distribution Amount, as defined herein. 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.
In addition, on each Distribution Date, funds
received as a result of a claim under the
Policy in respect of the principal portion of
Realized Losses allocated to the Class A
Certificates will be distributed by or on
behalf of the Trustee
S-6
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to the holders of the Class A Certificates.
See "Description of the Certificates--
Certificate Guaranty Insurance Policy"
herein.
The subordination and cash flow provisions of
the Class R Certificates will result in a
limited acceleration of the principal
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 Policy (as
defined below).
Overcollateralization: The subordination and
cash flow provisions of the Class R
Certificates will result in a limited
acceleration of the Class A Certificates
relative to the amortization of the Mortgage
Loans. This acceleration feature will create
overcollateralization which results from the
excess of the aggregate principal balances of
the Mortgage Loans over the aggregate
Certificate Principal Balance of the Class A
Certificates. 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 Guaranty Insurance
Policy: The Class A Certificates will be
entitled to the benefit of a Policy to be
issued by the Insurer, which, subject to its
terms, will protect the holders of the Class
A Certificates against any interest
shortfalls (except for shortfalls in respect
of the Relief Act and any Prepayment Interest
Shortfalls (as defined herein)) allocated to
the Class A Certificates, and against the
principal portion of any Realized Losses
allocated to the Class A Certificates. See
"Description of the Certificates."
Certificate Guaranty Insurance The Insurer will issue the Policy as a means
Policy......................... of providing additional credit enhancement to
the Class A Certificates. Under the Policy,
the Insurer will, subject to the terms of the
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<PAGE>
Policy, pay the Trustee, for the benefit of
the holders of the Class A Certificates, 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, or 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 Policy is referred to herein as an
"Insured Payment." See "Description of the
Certificates--Certificate Guaranty Insurance
Policy" herein.
Advances........................ The Master Servicer is required to make
advances in respect of delinquent payments of
principal and interest on the Mortgage Loans,
subject to the limitations described herein.
See "Description of the Certificates-
Advances" herein and in the Prospectus.
Allocation of Losses; 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;
Subordination" herein. Subject to the terms
of the Policy, all Realized Losses allocated
to the Class A Certificates will be covered
by the Policy. See "Description of the
Certificates--Certificate Guaranty Insurance
Policy" herein.
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 will 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 on,
among other things, the rate and timing of
principal payments (including prepayments,
defaults, liquidations and purchases of
Mortgage Loans due to
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<PAGE>
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 substantial portion of the
Mortgage Loans 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 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.
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<PAGE>
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
anticipated at the time of purchase, the
investor's actual yield to maturity will be
lower than anticipated at the time of
purchase.
Certain Federal Income Tax An election will be made to treat the Trust
Consequences................... Fund as a 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 Code.
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
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-10
<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. and Residential Accredit Loans, 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. As of
the Cut-off Date, 5.7% of the Mortgage Loans are one month delinquent in
payment of principal or interest. 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. In particular, 24.2% of the
Mortgage Loans are mortgage loans with Loan-to-Value Ratios at origination in
excess of 80% which are not insured by primary mortgage insurance policies
that might otherwise protect against such greater risk of loss.
0.35% of the Mortgage Loans have been originated approximately two or more
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.
30.0% of the Mortgage Loans 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 Policy, as and to the
extent described herein under the caption "Description of the Certificates--
Certificate Guaranty Insurance Policy" herein. Proceeds of the assets included
in the Trust Fund (including the Mortgage Loans) and the 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-11
<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 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, among other factors, as described
herein under "Description of the Certificates--Interest Distributions" 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. The Mortgage Rate on each
Mortgage Loan will adjust: (a) semi-annually commencing either approximately
(i) six months after the date of origination with respect to 55.3% of the
Mortgage Loans, (ii) two years following the date of origination with respect
to 1.5% of the Mortgage Loans or (iii) three years after the date of
origination with respect to 11.4% of the Mortgage Loans, or (b) annually
commencing either approximately (i) one year after origination with respect to
22.3% of the Mortgage Loans or (ii) three years after origination with respect
to 9.5% of the Mortgage Loans, based upon Six-Month LIBOR (as defined herein)
with respect to the Mortgage Loans which adjust semi-annually or One-Year U.S.
Treasury (as defined herein) with respect to the Mortgage Loans which adjust
annually, whereas the Pass-Through Rate on the Class A Certificates adjusts
monthly based upon One-Month LIBOR, plus 0.40%; provided, however, 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, One-Month LIBOR plus .80%, limited by the
Available Funds Pass-Through Rate (as defined herein). In addition, One-Month
LIBOR and the related Index applicable to the Mortgage Loans may respond
differently to economic and market factors, and there is not necessarily any
correlation between them. Moreover, 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 indices on the Mortgage Loans are stable or are
falling or that, even if both One-Month LIBOR and such indices rise during the
same period, One-Month LIBOR may rise much more rapidly than such indices. See
"Description of the Certificates--Interest Distributions."
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 $77,178,720. 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 of the Mortgage Loans (except as
otherwise indicated) 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. Except for 15.2% of
the Mortgage Loans which were purchased from National Mortgage Corporation,
all of the Mortgage Loans were purchased through the AlterNet Program. 26.5%
and 15.3% of the Mortgage Loans will have been purchased from First Franklin
Financial Corporation and Chase Manhattan Mortgage Corporation respectively.
Except as described above, no Mortgage Collateral Seller sold
S-12
<PAGE>
more than 11.9% 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 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."
Subject to the terms of the Policy, certain fraud losses will be covered by
the Policy as described herein.
MORTGAGE RATE ADJUSTMENT
The Mortgage Rate on each Mortgage Loan will adjust: (a) semi-annually
commencing either approximately (i) six months after the date of origination
with respect to 55.3% of the Mortgage Loans, (ii) two years after the date of
origination with respect to 1.5% of the Mortgage Loans, or (iii) three years
after the date of origination with respect to 11.4% of the Mortgage Loans, or
(b) annually commencing either approximately (i) one year after origination
with respect to 22.3% of the Mortgage Loans or (ii) three years after
origination with respect to 9.5% of the Mortgage Loans, in each case, on the
Adjustment Date specified in the related Mortgage Note to a rate equal to the
sum rounded to the nearest multiple of 0.125% (other than 20.0% of the
Mortgage Loans which round up to the nearest multiple of 0.125%, 0.3% of the
Mortgage Loans which round to the nearest multiple of 0.250%, or 0.2% of the
Mortgage Loans which do not round) of the related 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 or annually, as
applicable, 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, 6.3% 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 (i) with
respect to the Mortgage Loans which have their initial Adjustment Date
approximately six months after the date of origination, not more than (a)
1.00% above or below the previous Mortgage Rate with respect to 28.8% of the
Mortgage Loans, and (b) 1.50% above or below the previous Mortgage Rate with
respect to 26.5% of the Mortgage Loans; provided, however, in each case
certain of such Mortgage Loans can generally adjust from 1.00% up to 7.00% for
the initial Adjustment Date, (ii) with respect to the Mortgage Loans which
have their initial Adjustment Date approximately two years or three years
after the date of origination, not more than (a) 1.00% above or below the
previous Mortgage Rate with respect to 12.0%
S-13
<PAGE>
of the Mortgage Loans, and (b) 1.00% above the previous Mortgage Rate with
respect to 0.9% of the Mortgage Loans; provided, however, in each case certain
of such Mortgage Loans can generally adjust from 1.00% up to 6.50% for the
initial Adjustment Date, (iii) with respect to the Mortgage Loans which have
their initial Adjustment Date approximately one year after the date of
origination, not more than 2.00% above or below the previous Mortgage Rate,
and (iv) with respect to the Mortgage Loans which have their initial
Adjustment Date approximately three years after the date of origination, not
more than 2.00% above or below the previous Mortgage Rate with respect to 9.3%
of the Mortgage Loans or not more than 2.00% above the previous Mortgage Rate
with respect to 0.2% of the Mortgage Loans. The Mortgage Rate on any 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 4.0% 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 of
the Mortgage Loans will range from 2.75% to 17.30%, with a weighted average
Minimum Mortgage Rate as of the Cut-off Date of 8.5144%. The Maximum Mortgage
Rates of the Mortgage Loans will range from 10.25% to 23.30%, with a weighted
average Maximum Mortgage Rate as of the Cut-off Date of 16.0169%. No Mortgage
Loan provides for payment caps on any Adjustment Date which would result in
deferred interest or negative amortization.
With respect to 51.7% and 16.1% of the Mortgage Loans the Index 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 (i) 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 (ii)
as of the date forty-five days prior to the Adjustment Date, respectively.
With respect to 0.4% of the Mortgage Loans the Index will 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. With respect to 31.8% of the
Mortgage Loans the Index will be a per annum rate equal to the weekly average
yield on U.S. Treasury securities adjusted to a constant maturity of one year
as reported by the Federal Reserve Board in statistical Release No. H.15(519)
(the "Release") as most recently available as of the date forty-five days
prior to the Adjustment Date ("One-Year U.S. Treasury"). Such average yields
reflect the yields for the week prior to that week. In the event that the
related 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.
S-14
<PAGE>
SIX-MONTH LIBOR INDEX
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 based on Six-Month LIBOR.
SIX-MONTH LIBOR
<TABLE>
<CAPTION>
ADJUSTMENT DATE 1992 1993 1994 1995 1996
- --------------- ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
January 1................................... 4.9375% 4.000% 3.500% 6.562% 5.718%
February 1.................................. 4.1875 3.625 3.500 7.000 5.531
March 1..................................... 4.250 3.375 3.375 6.687 5.281
April 1..................................... 4.375 3.312 4.000 6.437 5.312
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 6.000
September 1................................. 3.625 3.500 5.313 5.875
October 1................................... 3.625 3.437 5.313 5.906
November 1.................................. 3.250 3.375 5.750 5.968
December 1.................................. 3.625 3.437 5.937 5.875
</TABLE>
ONE-YEAR U.S. TREASURY INDEX
The One-Year U.S. Treasury Index is currently calculated based on
information reported in the Release. Listed below are the weekly average
yields on actively traded U.S. Treasury securities adjusted to a constant
maturity of one year as reported in the Release on the date that would have
been applicable to Mortgage Loans whose index was most recently available as
of the date forty-five days prior to the adjustment date and having the
following adjustment dates for the indicated years. Such average yields may
fluctuate significantly from week to week as well as over longer periods and
may not increase or decrease in a constant pattern from period to period. The
following does not purport to be representative of future average yields. No
assurance can be given as to the average yields on such U.S. Treasury
securities on any Adjustment Date or during the life of any Mortgage Loan.
ONE-YEAR U.S. TREASURY INDEX
<TABLE>
<CAPTION>
ADJUSTMENT DATE 1992 1993 1994 1995 1996
- --------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January 1......................................... 5.00% 3.64% 3.55% 6.42% 5.45%
February 1........................................ 4.44 3.72 3.60 7.10 5.35
March 1........................................... 4.06 3.60 3.63 7.24 5.17
April 1........................................... 4.19 3.41 3.85 6.79 4.85
May 1............................................. 4.73 3.39 4.28 6.54
June 1............................................ 4.25 3.31 4.71 6.28
July 1............................................ 4.25 3.27 5.49 6.00
August 1.......................................... 4.18 3.61 5.16 5.69
September 1....................................... 3.64 3.42 5.49 5.47
October 1......................................... 3.43 3.48 5.60 5.71
November 1........................................ 3.17 3.32 5.62 5.63
December 1........................................ 3.09 3.35 6.04 5.60
</TABLE>
S-15
<PAGE>
The initial Mortgage Rate in effect on a Mortgage Loan generally will be
lower, and may be significantly lower, than the sum of the related Index that
would have been applicable at origination and the Note Margin. Therefore,
unless the related 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 related Index values), Note Margins, Periodic Rate Caps, 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 related Index and Note Margin, subject to the Maximum
Mortgage Rate, Minimum Mortgage Rate and Periodic Rate Cap for such Mortgage
Loan.
BALLOON MORTGAGE LOANS
0.3% 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. Subject to the terms of the
Policy, the 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.
MORTGAGE POOL CHARACTERISTICS
The Mortgage Pool will have the following characteristics as of the Cut-off
Date:
<TABLE>
<CAPTION>
ONE-YEAR
SIX MONTH LIBOR U.S. TREASURY
--------------- ---------------
<S> <C> <C>
Number of Mortgage Loans....................... 407 176
Range of Net Mortgage Rates.................... 5.97%-15.52% 6.970%-12.845%
Mortgage Rates:
Weighted Average............................. 9.5810% 10.0593%
Range........................................ 6.75%-16.30% 7.750%-13.625%
Note Margins:
Weighted Average............................. 5.6019% 5.4822%
Range........................................ 3.25%-9.80% 2.75%-8.00%
Minimum Mortgage Rates:
Weighted Average............................. 7.9953% 9.6271%
Range........................................ 3.25%-17.30% 2.750%-13.625%
Minimum Net Mortgage Rates:
Weighted Average............................. 7.2158% 8.8502%
Range........................................ 2.47%-16.52% 1.970%-12.845%
Maximum Mortgage Rates:
Weighted Average............................. 16.0140% 16.0231%
Range........................................ 12.75%-23.30% 10.250%-19.625%
Maximum Net Mortgage Rates:
Weighted Average............................. 15.2344% 15.2462%
Range........................................ 11.97%-22.52% 9.470%-18.845%
Weighted Average Months to next Adjustment Date
after March 1, 1996 (1)....................... 9 16
</TABLE>
- --------
(1) 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 March 1, 1996.
S-16
<PAGE>
All percentages of the Mortgage Loans described herein are approximate
percentages (except as otherwise indicated) by aggregate principal balance of
the Mortgage Loans (except as otherwise indicated) as of the Cut-off Date.
None of the Mortgage Loans will have been originated prior to August 26,
1993 or will have a maturity date later than March 1, 2026. No Mortgage Loan
will have a remaining term to stated maturity as of the Cut-off Date of less
than 162 months. The weighted average remaining term to stated maturity of the
Mortgage Loans as of the Cut-off Date will be 355 months. The weighted average
original term to maturity of the Mortgage Loans as of the Cut-off Date will be
358 months.
As of the Cut-off Date, 5.7% 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.
A substantial portion of the Mortgage Loans 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.
Certain of the Mortgage Loans that were originated on or after October 1,
1995, that are not purchase money mortgage loans and that have interest rates
or origination costs in excess of certain prescribed levels (such Mortgage
Loans, the "High Cost Loans"), are subject to special rules, disclosure
requirements and other provisions that were added to the Federal Truth in
Lending Act by the Homeownership and Equity Protection Act of 1994. As of the
Cut-off Date, 0.6% of the Mortgage Loans were High Cost Loans. Purchasers or
assignees of any High Cost Loan could be liable for all claims and defenses
arising under such provisions that the borrower could assert against the
Seller. Remedies available to the borrower include monetary penalties, as well
as rescission rights if the appropriate disclosures were not given as
required. Residential Funding will represent and warrant that all of the
Mortgage Loans were originated in compliance with all applicable state and
federal laws, including without limitation truth in lending and disclosure
laws.
No Mortgage Loan provides for deferred interest or negative amortization.
None of the Mortgage Loans will be Buydown Mortgage Loans.
S-17
<PAGE>
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 of the Mortgage Loans (except as otherwise indicated) as of
the Cut-off Date. 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>
6.500- 6.999............................... 1 $ 103,547 0.13%
7.000- 7.499............................... 2 271,693 0.35
7.500- 7.999............................... 18 2,963,053 3.84
8.000- 8.499............................... 26 3,543,504 4.59
8.500- 8.999............................... 88 13,461,158 17.44
9.000- 9.499............................... 80 11,642,144 15.08
9.500- 9.999............................... 107 15,309,270 19.84
10.000-10.499............................... 85 10,635,620 13.78
10.500-10.999............................... 80 10,764,784 13.95
11.000-11.499............................... 35 3,041,722 3.94
11.500-11.999............................... 33 3,550,379 4.60
12.000-12.499............................... 13 788,604 1.02
12.500-12.999............................... 8 683,971 0.89
13.000-13.499............................... 1 45,759 0.06
13.500-13.999............................... 3 273,334 0.35
14.000-14.499............................... 2 76,790 0.10
16.000-16.499............................... 1 23,387 0.03
--- ----------- ------
Total..................................... 583 $77,178,720 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Rate of the Mortgage
Loans will be approximately 9.7331% per annum.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
ORIGINAL NUMBER OF
MORTGAGE MORTGAGE PRINCIPAL PERCENT OF
LOAN BALANCE LOANS BALANCE MORTGAGE POOL
------------ --------- ----------- -------------
<S> <C> <C> <C>
$ 0-100,000.......................... 265 $17,763,130 23.02%
100,001-200,000.......................... 219 29,888,887 38.73
200,001-300,000.......................... 69 16,894,006 21.89
300,001-400,000.......................... 18 6,268,134 8.12
400,001-500,000.......................... 7 3,160,327 4.09
500,001-600,000.......................... 1 590,088 0.76
600,001-700,000.......................... 4 2,614,147 3.39
--- ----------- ------
Total................................... 583 $77,178,720 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the Mortgage
Loans will be approximately $132,382.
S-18
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
ORIGINAL NUMBER OF
LOAN-TO-VALUE MORTGAGE PRINCIPAL PERCENT OF
RATIO (%) LOANS BALANCE MORTGAGE POOL
------------- --------- ----------- -------------
<S> <C> <C> <C>
0.01-50.00................................ 27 $ 3,256,699 4.22%
50.01-55.00................................ 14 3,037,609 3.94
55.01-60.00................................ 34 3,591,119 4.65
60.01-65.00................................ 48 5,879,948 7.62
65.01-70.00................................ 80 10,062,773 13.04
70.01-75.00................................ 91 10,987,892 14.24
75.01-80.00................................ 151 21,047,900 27.27
80.01-85.00................................ 61 9,675,309 12.54
85.01-90.00................................ 75 9,343,772 12.11
90.01-95.00................................ 2 295,700 0.38
--- ----------- ------
Total.................................... 583 $77,178,720 100.00%
=== =========== ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans will be approximately 74.67%.
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
STATE LOANS BALANCE MORTGAGE POOL
- ----- --------- ----------- -------------
<S> <C> <C> <C>
California.................................. 122 $23,121,475 29.96%
Colorado.................................... 66 9,376,876 12.15
Washington.................................. 43 5,447,342 7.06
Oregon...................................... 33 3,836,212 4.97
Massachusetts............................... 30 3,779,940 4.90
New Jersey.................................. 23 3,514,630 4.55
New York.................................... 17 3,360,657 4.35
Florida..................................... 27 3,108,892 4.03
Illinois.................................... 36 3,016,441 3.91
Utah........................................ 26 2,390,148 3.10
Other(/1/).................................. 160 16,226,109 21.02
--- ----------- ------
Total..................................... 583 $77,178,720 100.00%
=== =========== ======
</TABLE>
- --------
(1) Other includes states and the District of Columbia with under 3%
concentrations individually.
No more than 1.3% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area in California and no more than
1.4% of the Mortgage Loans will be secured by Mortgaged Properties located in
any one zip code area outside California.
S-19
<PAGE>
MORTGAGE LOAN PURPOSE
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
LOAN PURPOSE LOANS BALANCE MORTGAGE POOL
- ------------ --------- ----------- -------------
<S> <C> <C> <C>
Purchase.................................... 232 $30,260,787 39.21%
Rate/Term Refinance......................... 99 15,718,878 20.37
Equity Refinance............................ 252 31,199,055 40.42
--- ----------- ------
Total..................................... 583 $77,178,720 100.00%
=== =========== ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of rate and term
refinance Mortgage Loans will be 73.94%. The weighted average Loan-to-Value
Ratio at origination of equity refinance Mortgage Loans will be 70.00%.
MORTGAGE LOAN DOCUMENTATION TYPES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
DOCUMENTATION TYPE LOANS BALANCE MORTGAGE POOL
- ------------------ --------- ----------- -------------
<S> <C> <C> <C>
Full Documentation.......................... 475 $59,385,692 76.95%
Reduced Documentation....................... 108 17,793,028 23.05
--- ----------- ------
Total..................................... 583 $77,178,720 100.00%
=== =========== ======
</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
64.94%. No more than 20.1% 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........................... 524 $71,377,529 92.48%
Second/Vacation............................. 8 953,868 1.24
Non Owner-occupied.......................... 51 4,847,323 6.28
--- ----------- ------
Total..................................... 583 $77,178,720 100.00%
=== =========== ======
</TABLE>
MORTGAGED PROPERTY TYPES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
PROPERTY TYPE LOANS BALANCE MORTGAGE POOL
- ------------- --------- ----------- -------------
<S> <C> <C> <C>
Single-family detached...................... 491 $64,397,554 83.44%
Planned Unit Developments (detached)........ 31 5,879,011 7.62
Two- to four-family units................... 34 3,772,629 4.89
Condo Low-Rise (less than 5 stories)........ 17 1,780,848 2.31
Condo Mid-Rise (5 to 8 stories)............. 1 79,900 0.10
Townhouse................................... 1 134,880 0.17
Townhouse (2 to 4 family units)............. 1 83,919 0.11
Planned Unit Developments (attached)........ 7 1,049,978 1.36
--- ----------- ------
Total..................................... 583 $77,178,720 100.00%
=== =========== ======
</TABLE>
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................................. 115 $16,658,536 21.58%
Category 1.................................. 220 32,608,252 42.25
Category 2.................................. 131 16,205,068 21.00
Category 3.................................. 83 8,610,364 11.16
Category 4.................................. 34 3,096,501 4.01
--- ----------- ------
Total..................................... 583 $77,178,720 100.00%
=== =========== ======
</TABLE>
SCHEDULED MORTGAGE TERM
<TABLE>
<CAPTION>
SCHEDULED NUMBER OF
MORTGAGE MORTGAGE PRINCIPAL PERCENT OF
TERM LOANS BALANCE MORTGAGE POOL
- --------- --------- ----------- -------------
<S> <C> <C> <C>
162........................................ 2 $ 103,117 0.13%
163........................................ 3 178,767 0.23
164........................................ 1 45,984 0.06
165........................................ 1 33,100 0.04
166........................................ 1 30,113 0.04
167........................................ 1 33,128 0.04
168........................................ 4 222,073 0.29
169........................................ 3 102,140 0.13
179........................................ 2 207,797 0.27
330........................................ 1 270,537 0.35
338........................................ 1 138,844 0.18
342........................................ 1 87,753 0.11
343........................................ 1 99,062 0.13
345........................................ 3 471,171 0.61
346........................................ 3 394,799 0.51
347........................................ 2 663,770 0.86
348........................................ 4 312,777 0.41
349........................................ 3 210,676 0.27
350........................................ 2 124,689 0.16
351........................................ 9 987,134 1.28
352........................................ 6 713,232 0.92
353........................................ 8 852,558 1.10
354........................................ 18 2,523,971 3.27
355........................................ 33 3,993,571 5.17
356........................................ 71 9,150,648 11.86
357........................................ 113 15,592,471 20.20
358........................................ 137 19,679,935 25.50
359........................................ 97 12,187,053 15.79
360........................................ 52 7,767,850 10.06
--- ----------- ------
Total.................................... 583 $77,178,720 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the weighted average Scheduled Term to Maturity will
be approximately 355 months.
S-21
<PAGE>
The following tables set forth certain additional characteristics as of the
Cut-off Date of the Mortgage Loans based on Six-Month LIBOR (by principal
balance of such Mortgage Loans in each specified range relative to the
aggregate principal balance of such Mortgage Loans).
MORTGAGE RATES
(BASED ON SIX-MONTH LIBOR)
<TABLE>
<CAPTION>
NUMBER OF PERCENT
MORTGAGE PRINCIPAL OF SUCH
MORTGAGE RATES (%) LOANS BALANCE MORTGAGE LOANS
- ------------------ --------- ----------- --------------
<S> <C> <C> <C>
6.500- 6.999.............................. 1 $ 103,547 0.20%
7.000- 7.499.............................. 2 271,693 0.52
7.500- 7.999.............................. 16 2,651,457 5.04
8.000- 8.499.............................. 18 2,148,381 4.08
8.500- 8.999.............................. 75 11,145,513 21.18
9.000- 9.499.............................. 62 8,584,794 16.31
9.500- 9.999.............................. 79 11,016,768 20.93
10.000-10.499.............................. 50 6,587,162 12.52
10.500-10.999.............................. 43 5,454,656 10.36
11.000-11.499.............................. 21 1,716,842 3.26
11.500-11.999.............................. 23 2,131,307 4.05
12.000-12.499.............................. 9 488,190 0.93
12.500-12.999.............................. 3 150,253 0.29
13.000-13.499.............................. 1 45,759 0.09
13.500-13.999.............................. 1 30,400 0.06
14.000-14.499.............................. 2 76,790 0.15
16.000-16.499.............................. 1 23,387 0.04
--- ----------- ------
Total.................................... 407 $52,626,899 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Rate of such Mortgage
Loans based on Six-Month LIBOR will be approximately 9.5810% per annum.
NOTE MARGINS
(BASED ON SIX-MONTH LIBOR)
<TABLE>
<CAPTION>
NUMBER OF PERCENT
MORTGAGE PRINCIPAL OF SUCH
NOTE MARGINS (%) LOANS BALANCE MORTGAGE LOANS
- ---------------- --------- ----------- --------------
<S> <C> <C> <C>
3.000-3.499................................ 2 $ 207,517 0.39%
3.500-3.999................................ 6 956,492 1.82
4.000-4.499................................ 34 4,039,412 7.68
4.500-4.999................................ 50 6,580,158 12.50
5.000-5.499................................ 82 11,180,060 21.24
5.500-5.999................................ 84 10,813,308 20.55
6.000-6.499................................ 69 9,715,769 18.46
6.500-6.999................................ 51 6,164,947 11.71
7.000-7.499................................ 19 2,114,891 4.02
7.500-7.999................................ 4 426,462 0.81
8.000-8.499................................ 5 404,496 0.77
9.500-9.999................................ 1 23,387 0.04
--- ----------- ------
Total.................................... 407 $52,626,899 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the weighted average Note Margin of such Mortgage
Loans based on Six-Month LIBOR will be approximately 5.6019% per annum.
S-22
<PAGE>
MAXIMUM MORTGAGE RATES
(BASED ON SIX-MONTH LIBOR)
<TABLE>
<CAPTION>
MAXIMUM NUMBER OF PERCENT OF
MORTGAGE RATES MORTGAGE PRINCIPAL SUCH
(%) LOANS BALANCE MORTGAGE LOANS
-------------- --------- ----------- --------------
<S> <C> <C> <C>
12.000-12.999............................ 1 $ 103,547 0.20%
13.000-13.999............................ 4 835,137 1.59
14.000-14.999............................ 51 7,791,353 14.80
15.000-15.999............................ 140 18,488,070 35.13
16.000-16.999............................ 128 18,049,013 34.30
17.000-17.999............................ 54 5,369,241 10.20
18.000-18.999............................ 17 1,338,897 2.54
19.000-19.999............................ 9 551,463 1.05
20.000-20.999............................ 2 76,790 0.15
23.000-23.999............................ 1 23,387 0.04
--- ----------- ------
Total.................................. 407 $52,626,899 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the weighted average Maximum Mortgage Rate of such
Mortgage Loans based on Six-Month LIBOR will be approximately 16.0140% per
annum.
MINIMUM MORTGAGE RATES
(BASED ON SIX-MONTH LIBOR)
<TABLE>
<CAPTION>
MINIMUM NUMBER OF PERCENT OF
MORTGAGE RATES MORTGAGE PRINCIPAL SUCH
(%) LOANS BALANCE MORTGAGE LOANS
-------------- --------- ----------- --------------
<S> <C> <C> <C>
3.000- 3.999............................ 4 $ 307,285 0.58%
4.000- 4.999............................ 38 5,835,571 11.09
5.000- 5.999............................ 52 7,613,854 14.47
6.000- 6.999............................ 52 8,604,760 16.35
7.000- 7.999............................ 14 2,134,358 4.06
8.000- 8.999............................ 46 5,727,532 10.88
9.000- 9.999............................ 75 9,021,897 17.14
10.000-10.999............................ 76 9,703,459 18.44
11.000-11.999............................ 27 2,378,106 4.52
12.000-12.999............................ 15 965,620 1.83
13.000-13.999............................ 5 234,280 0.45
14.000-14.999............................ 2 76,790 0.15
17.000-17.999............................ 1 23,387 0.04
--- ----------- ------
Total.................................. 407 $52,626,899 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the weighted average Minimum Mortgage Rate of such
Mortgage Loans based on Six-Month LIBOR will be approximately 7.9953% per
annum.
S-23
<PAGE>
NEXT INTEREST RATE ADJUSTMENT DATES
(BASED ON SIX-MONTH LIBOR)
<TABLE>
<CAPTION>
NEXT
INTEREST NUMBER OF PERCENT
ADJUSTMENT MORTGAGE PRINCIPAL OF SUCH
DATE LOANS BALANCE MORTGAGE LOANS
- ---------- --------- ----------- --------------
<S> <C> <C> <C>
April 1996................................ 15 $ 1,795,087 3.41%
May 1996.................................. 22 3,296,110 6.26
June 1996................................. 73 9,216,135 17.51
July 1996................................. 84 12,068,819 22.93
August 1996............................... 88 10,554,992 20.06
September 1996............................ 40 5,744,787 10.92
October 1996.............................. 1 99,062 0.19
January 1997.............................. 1 200,058 0.38
March 1997................................ 1 83,694 0.16
September 1997............................ 3 190,870 0.36
October 1997.............................. 3 178,767 0.34
November 1997............................. 1 45,984 0.09
December 1997............................. 1 33,100 0.06
January 1998.............................. 1 30,113 0.06
February 1998............................. 2 80,488 0.15
March 1998................................ 10 1,091,314 2.07
April 1998................................ 3 102,140 0.19
August 1998............................... 1 116,648 0.22
September 1998............................ 3 184,662 0.35
October 1998.............................. 2 428,736 0.81
November 1998............................. 2 225,056 0.43
December 1998............................. 12 1,332,463 2.53
January 1999.............................. 15 2,325,822 4.42
February 1999............................. 10 1,024,843 1.95
March 1999................................ 13 2,177,150 4.14
--- ----------- ------
Total................................... 407 $52,626,899 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the weighted average Months to Next Interest Rate
Adjustment Date of such Mortgage Loans based on Six-Month LIBOR will be
approximately 9.
S-24
<PAGE>
The following tables set forth certain additional characteristics as of the
Cut-off Date of the Mortgage Loans based on One-Year U.S. Treasury (by
principal balance of such Mortgage Loans in each specified range relative to
the aggregate principal balance of such Mortgage Loans).
MORTGAGE RATES
(BASED ON ONE-YEAR U.S. TREASURY)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
MORTGAGE PRINCIPAL SUCH
MORTGAGE RATES (%) LOANS BALANCE MORTGAGE LOANS
- ------------------ --------- ----------- --------------
<S> <C> <C> <C>
7.500- 7.999.............................. 2 $ 311,596 1.27%
8.000- 8.499.............................. 8 1,395,123 5.68
8.500- 8.999.............................. 13 2,315,645 9.43
9.000- 9.499.............................. 18 3,057,350 12.45
9.500- 9.999.............................. 28 4,292,503 17.48
10.000-10.499.............................. 35 4,048,458 16.49
10.500-10.999.............................. 37 5,310,128 21.63
11.000-11.499.............................. 14 1,324,881 5.40
11.500-11.999.............................. 10 1,419,072 5.78
12.000-12.499.............................. 4 300,415 1.22
12.500-12.999.............................. 5 533,718 2.17
13.500-13.999.............................. 2 242,934 0.99
--- ----------- ------
Total.................................... 176 $24,551,822 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Rate of such Mortgage
Loans based on One-Year U.S. Treasury will be approximately 10.0593% per
annum.
NOTE MARGINS
(BASED ON ONE-YEAR U.S. TREASURY)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
MORTGAGE PRINCIPAL SUCH
NOTE MARGINS (%) LOANS BALANCE MORTGAGE LOANS
- ---------------- --------- ----------- --------------
<S> <C> <C> <C>
2.500-2.999................................ 1 $ 270,537 1.10%
3.000-3.499................................ 7 476,285 1.94
4.000-4.499................................ 6 1,410,339 5.74
4.500-4.999................................ 22 3,548,199 14.45
5.000-5.499................................ 36 4,818,816 19.63
5.500-5.999................................ 55 7,595,422 30.94
6.000-6.499................................ 29 3,605,773 14.69
6.500-6.999................................ 12 1,678,223 6.84
7.000-7.499................................ 7 891,737 3.63
8.000-8.499................................ 1 256,490 1.04
--- ----------- ------
Total.................................... 176 $24,551,822 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the weighted average Note Margin of such Mortgage
Loans based on One-Year U.S. Treasury will be approximately 5.4822% per annum.
S-25
<PAGE>
MAXIMUM MORTGAGE RATES
(BASED ON ONE-YEAR U.S. TREASURY)
<TABLE>
<CAPTION>
MAXIMUM NUMBER OF PERCENT OF
MORTGAGE RATES MORTGAGE PRINCIPAL SUCH
(%) LOANS BALANCE MORTGAGE LOANS
-------------- --------- ----------- --------------
<S> <C> <C> <C>
10.000-10.999............................ 1 $ 270,537 1.10%
13.000-13.999............................ 2 311,596 1.27
14.000-14.999............................ 21 3,601,032 14.67
15.000-15.999............................ 44 6,904,135 28.12
16.000-16.999............................ 72 9,358,587 38.12
17.000-17.999............................ 25 3,028,869 12.34
18.000-18.999............................ 9 834,133 3.40
19.000-19.999............................ 2 242,934 0.99
--- ----------- ------
Total.................................. 176 $24,551,822 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the weighted average Maximum Mortgage Rate of such
Mortgage Loans based on One-Year U.S. Treasury will be approximately 16.0231%
per annum.
MINIMUM MORTGAGE RATES
(BASED ON ONE-YEAR U.S. TREASURY)
<TABLE>
<CAPTION>
MINIMUM NUMBER OF PERCENT OF
MORTGAGE RATES MORTGAGE PRINCIPAL SUCH
(%) LOANS BALANCE MORTGAGE LOANS
-------------- --------- ----------- --------------
<S> <C> <C> <C>
2.000- 2.999............................ 1 $ 270,537 1.10%
4.000- 4.999............................ 2 901,325 3.67
5.000- 5.999............................ 4 753,882 3.07
6.000- 6.999............................ 2 326,407 1.33
7.000- 7.999............................ 1 171,794 0.70
8.000- 8.999............................ 18 2,895,745 11.79
9.000- 9.999............................ 44 6,904,135 28.12
10.000-10.999............................ 69 8,506,977 34.65
11.000-11.999............................ 24 2,743,952 11.18
12.000-12.999............................ 9 834,133 3.40
13.000-13.999............................ 2 242,934 0.99
--- ----------- ------
Total.................................. 176 $24,551,822 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the weighted average Minimum Mortgage Rate of such
Mortgage Loans based on One-Year U.S. Treasury will be approximately 9.6271%
per annum.
S-26
<PAGE>
NEXT INTEREST RATE ADJUSTMENT DATES
(BASED ON ONE-YEAR U.S. TREASURY)
<TABLE>
<CAPTION>
NEXT
INTEREST NUMBER OF PERCENT
ADJUSTMENT MORTGAGE PRINCIPAL OF SUCH
DATE LOANS BALANCE MORTGAGE LOANS
- ---------- --------- ----------- --------------
<S> <C> <C> <C>
April 1996................................ 2 $ 121,707 0.50%
May 1996.................................. 2 124,689 0.51
July 1996................................. 1 64,798 0.26
September 1996............................ 5 851,454 3.47
October 1996.............................. 7 837,280 3.41
November 1996............................. 20 2,817,258 11.47
December 1996............................. 23 4,034,578 16.43
January 1997.............................. 42 6,009,587 24.48
February 1997............................. 6 1,718,472 7.00
March 1997................................ 5 663,992 2.70
December 1997............................. 1 99,308 0.40
January 1998.............................. 1 69,595 0.28
June 1998................................. 2 183,476 0.75
July 1998................................. 2 248,056 1.01
August 1998............................... 3 250,094 1.02
September 1998............................ 2 300,156 1.22
October 1998.............................. 10 1,021,438 4.16
November 1998............................. 28 2,951,068 12.02
December 1998............................. 14 2,184,815 8.90
--- ----------- ------
Total................................... 176 $24,551,822 100.00%
=== =========== ======
</TABLE>
As of the Cut-Off Date, the weighted average Months to Next Interest Rate
Adjustment Date of such Mortgage Loans based on One-Year U.S. Treasury will be
approximately 16.
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, 8 Mortgage Loans
with a Loan-to-Value Ratio at origination in excess of 80%, representing 0.8%
of the Mortgage Loans (and, representing 3.3% of such Mortgage Loans with
Loan-to-Value Ratios 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 or Commonwealth Mortgage Assurance
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, 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-27
<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 significant special risk features (which generally provides
the basis for underwriting Mortgage Loans that serve as the assets for
securities issued by Residential Funding's affiliates, Residential Funding
Mortgage Securities I, Inc. and Residential Accredit Loans, 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, either the appraised value
determined at origination or, if applicable, 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 its behalf to
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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, open collections and
charge-offs in excess of $200 must be paid down to zero at closing). As to
each mortgagor in this Risk Category, 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 90% is permitted (except in the case of one Mortgage
Loan for which a Loan-to-Value Ratio of 95% was allowed) 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
50% or less which, in the case of adjustable rate mortgage loans will be based
on the initial rate on the mortgage loan plus 2% per annum unless the initial
rate would not be subject to change for an extended period.
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, open collections and 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 90% (or 80% for mortgage loans originated
under a limited documentation program) is permitted for a mortgage loan on an
owner-occupied property (except in the case of one Mortgage Loan for which a
Loan-to-Value Ratio of 91% was allowed). A maximum Loan-to-Value Ratio of 75%
(or 70% 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 which, in the case of
adjustable rate mortgage loans will be based on an initial rate on the
mortgage loan plus 2% per annum unless the initial rate would not be subject
to change for an extended period.
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 six 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, open
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collections and charge-offs must be paid down to an amount not in excess of
$500 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 average to good condition. A
maximum Loan-to-Value Ratio of 90% (or 80% 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 85% (or 70% 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 which, in the case of adjustable rate mortgage
loans will be based on the initial rate on the mortgage loan plus 2% per annum
unless the initial rate would not be subject to change for an extended period.
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, open collections and
charge-offs must be paid down to an amount not in excess of $1,000 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 Ratio of 70% is permitted for
mortgage loans originated under a full or limited documentation program 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 55% or less which, in the case of adjustable rate
mortgage loans will be based on the initial rate on the mortgage loan plus 2%
per annum unless the initial rate would not be subject to change for an
extended period.
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
collections and 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 70% 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 65% 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 which, in the case of adjustable rate mortgage
loans will be based on the initial rate on the mortgage loan plus 2% per annum
unless the initial rate would not be subject to change for an extended period.
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 65%
or less 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%.
The foregoing risk grade classifications are based on factors which are
exclusive of the additional protection against loss which primary mortgage
insurance customarily provides on loans which have Loan-to-Value Ratios in
excess of 80%. Substantially all of the Mortgage Loan with Loan-to-Value
Ratios in excess of 80% Loan-to-Value Ratio do not have such coverage.
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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 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 otherwise originates loans on behalf of 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 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.
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
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. Residential Funding serves as the master
servicer for transactions backed by most of such higher quality mortgage loans
and, as of December 31, 1995, Residential Funding was master servicing
approximately 112,237 of such mortgage loans, totaling approximately $26.9
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. 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 LSI Financial Group on a contract
basis for 72.9% of the Mortgage Loans. The remainder of the Mortgage Loans
will be serviced by various Mortgage Collateral Sellers.
LSI Financial Group is a privately held Arkansas corporation which is
actively engaged in the servicing of various financial instruments, including
auto receivables, and second and first mortgage loans. It has entered into an
agreement by which it will provide the primary servicing for various risk
featured mortgage loans which had been acquired by Residential Funding. LSI
Financial Group is an approved HUD Title I and Title II servicer. LSI services
several securitized and whole loan portfolios comprised of single family
mortgage products. LSI's
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corporate offices are located at 415 North McKinley Street, Suite 1250, Little
Rock, Arkansas 72205. LSI commenced mortgage servicing operations in 1990 and
since then has managed and serviced sub-prime conduit programs, distressed RTC
portfolios, and third-party mortgage loan portfolios. The data presented below
was provided by LSI Financial Group as representative servicing information
for generally comparable sub-prime credit quality mortgage loans and is
presented for informational purposes only. None of the Company, the Master
Servicer or the Underwriter make any representation or warranties as to the
accuracy or completeness of such information.
LSI MORTGAGE PORTFOLIO DELINQUENCY HISTORY
<TABLE>
<CAPTION>
FEBRUARY 28, 1995 FEBRUARY 29, 1996
----------------- -----------------
<S> <C> <C>
Total Number of Loans....................... 215 5,477
Total Dollar Amount of Loans................ $16,605,622.43 $481,132,651.97
Weighted Average Maturity................... 293.67 295.35
Weighted Average Coupon Rate................ 7.7% 10.50%
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28, 1995 FEBRUARY 29, 1996
------------------- -------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
DELINQUENCY SUMMARY
30-59 days................................ 7 3.25% 67 1.22%
60-89 days................................ 2 0.93% 36 0.67%
90-119 days............................... 0 0.00% 30 0.55%
Over 120 days............................. 1(1) 0.46% 51(2) 0.93%
Total Delinquent Loans.................... 10(1) 4.65% 184(2) 3.37%
Loans in Foreclosure...................... 1 0.46% 34 0.62%
</TABLE>
- --------
(1) Does not include mortgage loans in Foreclosure
(2) Does include mortgage loans in Foreclosure
The above information is for sub prime credit mortgage loans for which LSI
has been serving as the primary servicer. The mortgage loans were originated
and underwritten according to standards judged to be similar to the Mortgage
Loans. There is no certainty that past history is indicative of future
results. The information in the above table may vary for similar types of
mortgage loans due to various factors including differing underwriting
guidelines and economic conditions of the originating area.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the mortgage portfolio set forth in the foregoing table. The statistics shown
above represent the delinquency experience for the indicated mortgage
servicing portfolio 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 portfolio 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.
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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 1996-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 certificate guaranty insurance policy (the "Policy") to be
issued by MBIA Insurance Corporation (the "Insurer"), which will, subject to
its terms, 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 Policy is part of the Trust Fund. See "Description
of the Certificates--Certificate Guaranty Insurance Policy."
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 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. 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.
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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 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
(as defined below), subject to reduction only in the event of shortfalls
caused by the Relief Act 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, subject to the terms
of the Policy, the amount of such allocated shortfall will be drawn under the
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 Policy, any interest
shortfalls may be allocated to the Class A Certificates as described below.
See "Description of the Certificates--Certificate Guaranty Insurance Policy."
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, (iii) the interest portion of
any Advances that were made with respect to delinquencies that were ultimately
determined to be Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary Losses, and (iv) any other interest
shortfalls not covered by Subordination, including interest shortfalls
relating to the Relief Act or similar legislation or regulations, all
allocated as described below. With respect to each Distribution Date, interest
payable on the Class A Certificates will accrue during the 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
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<PAGE>
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.
The Pass-Through Rate on the Class A Certificates on the first Distribution
Date will be 5.7750% 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 0.40%; provided, however, 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, One-Month LIBOR plus 0.80% 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 the weighted average of the Net Mortgage Rates on the
then outstanding Mortgage Loans, as adjusted for the actual number of days in
the related Accrual Period and a 360-day year. The Net Mortgage Rate on each
Mortgage Loan is equal to the Mortgage Rate thereon minus the rates per annum
at which the master servicing fee and subservicing fee (collectively, the
related "Servicing Fee Rate") accrues and the per annum rate at which the
Premium Fee 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 of the Mortgage Loans is approximately
8.9544% per annum, and is expected to change thereafter because the weighted
average of the Net Mortgage Rates is expected to change for succeeding
Distribution Dates. The Mortgage Rate on each Mortgage Loan will be adjusted
on each Adjustment Date to equal the sum (rounded as described herein) of the
related Index and Note Margin, subject to the Maximum Mortgage Rate, Minimum
Mortgage Rate and Periodic Rate Cap for such Mortgage Loan. See "The Mortgage
Pool" herein.
On any Distribution Date, the amount of the premium (the "Premium Fee")
payable to the Insurer with respect to the Policy 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.
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 5.7750% 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
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<PAGE>
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 Accrual
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 Accrual
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
(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, Liquidation Proceeds and Insurance Proceeds (excluding
proceeds paid in respect of the Policy), to the extent not distributed
in the preceding month;
(iv) the principal portion of any Realized Losses incurred (or deemed
to have been incurred) on any Mortgage Loans in the calendar month
preceding such Distribution Date to the extent covered by Net Monthly
Excess Cash Flow for such Distribution Date; and
(v) the amount of any Subordination Increase Amount (as defined
herein) for such Distribution Date;
minus
(vi) 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.
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In addition, on each Distribution Date, funds received as a result of a
claim under the Policy in respect of the principal portion of Realized Losses
allocated to Class A Certificates will be distributed by or on behalf of the
Trustee to the holders of the Class A Certificates. See "Description of the
Certificates--Certificate Guaranty Insurance Policy" herein.
On each Distribution Date, the Insurer shall be entitled to receive, after
payment to the Class A Certificateholders of the Interest Distribution Amount
and the Class A Principal Distribution Amount (but before application of any
Subordination Increase Amount), from the Available Distribution Amount
remaining, the aggregate of any payment ("Cumulative Insurance Payments") by
the Insurer under the Policy to the extent not previously reimbursed, plus
interest thereon. The Class R Certificates shall be entitled to the amount
remaining on such Distribution Date, if any (after allocation of any
Subordination Increase Amounts to the Class A Certificates), following the
foregoing distributions. See "--Certificate Guaranty Insurance Policy."
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 clauses (b)(i)-(iii) of the
definition of "Class A Principal Distribution Amount" 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 Insurer or to cover the principal portion of Realized
Losses on the Mortgage Loans 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 Balance of
the Class A Certificates as of such date (after taking into account the
payment of the amounts described in clauses (b)(i)-(iv) of the definition of
"Class A Principal Distribution Amount" on such Distribution Date) is the
"Subordinated Amount" as of such Distribution Date. The Pooling and Servicing
Agreement requires that the Net Monthly Excess Cashflow, as reduced by the
principal portion of any Realized Losses included in clause (b)(iv) of the
definition of "Class A Principal Distribution Amount," will be applied as an
accelerated payment of principal on the Class A Certificates to the extent the
Required Subordinated Amount exceeds the Subordinated Amount as of such
Distribution Date. 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 3.55%
of the Stated Principal Balance of the Mortgage Loans as of the Cut-off Date
until the later to occur of (i) the 31st month following the Cut-off Date and
(ii) the first Distribution Date on which the Stated Principal Balance of the
Mortgage Loans is equal to or less than 50% of the aggregate Stated Principal
Balance of the Mortgage Loans as of the Cut-off Date. Thereafter, subject to
certain triggers, the Required Subordinated Amount with respect to
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a Distribution Date will be equal to the lesser of (a) the initial Required
Subordinated Amount and (b) 7.10% of the then outstanding Stated Principal
Balance of the Mortgage Loans immediately preceding such Distribution Date
(but not less than 0.5% of the Stated Principal Balance of the Mortgage Loans
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 on such Distribution Date
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 GUARANTY INSURANCE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy. The
following information regarding the Policy has been supplied by the Insurer
for inclusion herein.
The Insurer, in consideration of the payment of the premium and subject to
the terms of the Policy, thereby unconditionally and irrevocably guarantees to
any Owner (as defined below) that an amount equal to each full and complete
Insured Payment will be received by the Trustee, or its successor, on behalf
of the Owners from the Insurer, for distribution by the Trustee to each Owner
of each Owner's proportionate share of the Insured Payment. The Insurer's
obligations under the Policy with respect to a particular Insured Payment
shall be discharged to the extent funds equal to the applicable Insured
Payment are received by the Trustee from the Insurer, whether or not such
funds are properly applied by the Trustee. Insured Payments shall be made only
at the time set forth in the Policy, and no accelerated Insured Payments shall
be made regardless of any acceleration of the Class A Certificates, unless
such acceleration is at the sole option of the Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust Fund, the REMIC
or the Trustee for withholding taxes, if any (including interest and penalties
in respect of any such liability).
The Insurer will pay any amounts payable under the Policy no later than
12:00 noon, New York City time, on the later of the Distribution Date on which
the related Deficiency Amount (as defined below) is due or the Business Day
following receipt in New York, New York on a Business Day by State Street Bank
and Trust Company, N.A., as Insurer's Fiscal Agent or any successor fiscal
agent appointed by the Insurer (the "Insurer's Fiscal Agent") of a Notice (as
described below); provided that if such Notice is received after 12:00 noon,
New York City time, on such Business Day, it will be deemed to be received on
the following Business Day. If any such Notice received by the Insurer's
Fiscal Agent is not in proper form or is otherwise insufficient for the
purpose of making claim under the Policy, it shall be deemed not to have been
received by the Insurer's Fiscal Agent for purposes of this paragraph, and the
Insurer or the Insurer's Fiscal Agent, as the case may be, shall promptly so
advise the Trustee and the Trustee may submit an amended Notice.
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<PAGE>
Insured Payments due under the Policy, unless otherwise stated therein, will
be disbursed by the Insurer's Fiscal Agent to the Trustee on behalf of the
Owners by wire transfer of immediately available funds in the amount of the
Insured Payment.
The Insurer's Fiscal Agent is the agent of the Insurer only and the
Insurer's Fiscal Agent shall in no event be liable to Owners for any acts of
the Insurer's Fiscal Agent or any failure of the Insurer to deposit, or cause
to be deposited, sufficient funds to make payments due under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Agreement" means the Pooling and Servicing Agreement dated as of March 1,
1996, among Residential Asset Securities Corporation, as company, Residential
Funding Corporation, as master servicer, and the Trustee, as trustee, without
regard to any amendment or supplement thereto.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City or in the city in which the
corporate trust office of the Trustee under the Agreement or the Insurer is
located are authorized or obligated by law or executive order to close.
"Deficiency Amount" means, with respect to the Class A Certificates as of
any Distribution Date (i) any shortfall in amounts available in the
Certificate Account to pay interest for the related Accrual Period 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 and allocated to the Class
A Certificates, (ii) the principal portion of any Realized Loss allocated to
the Class A Certificates and (iii) the Certificate Principal Balance of the
Class A Certificates to the extent unpaid on the final Distribution Date or
earlier termination of the Trust Fund pursuant to the terms of the Agreement.
"Insured Payment" means, as of any Distribution Date, any Deficiency Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached to the
Policy, the original of which is subsequently delivered by registered or
certified mail from the Trustee specifying the Insured Payment which shall be
due and owing on the applicable Distribution Date.
"Owner" means each Holder (as defined in the Agreement) of a Class A
Certificate who, on the applicable Distribution Date, is entitled under the
terms of the applicable Certificate to payment thereunder.
Capitalized terms used in the Policy and not otherwise defined in the Policy
shall have the respective meanings set forth in the Agreement as of the date
of execution of the Policy, without giving effect to any subsequent amendment
or modification to the Agreement unless such amendment or modification has
been approved in writing by the Insurer.
Any notice under the Policy or service of process on the Insurer's Fiscal
Agent may be made at the address listed below for the Insurer's Fiscal Agent
or such other address as the Insurer shall specify in writing to the Trustee.
The notice address of the Insurer's Fiscal Agent is 15th Floor, 61 Broadway,
New York, New York, 10006, Attention: Municipal Registrar and Paying Agency,
or such other address as the Insurer's Fiscal Agent shall specify to the
Trustee in writing.
The Policy is being issued under and pursuant to and shall be construed
under, the laws of the State of New York, without giving effect to the
conflict of laws principles thereof.
The insurance provided by the Policy is not covered by the Property/Casualty
Insurance Security Fund specified in Article 76 of the New York Insurance Law.
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<PAGE>
The Policy is not cancelable for any reason. The premium on the Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to maturity of the Class A Certificates.
ALLOCATION OF LOSSES; SUBORDINATION
To the extent provided in the Policy, the Policy will cover all Realized
Losses allocated to the Class A Certificates. Notwithstanding the foregoing,
if payments are not made as required under the 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.
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
overcollateralization as described herein will also maximize the likelihood of
distribution of full amounts of interest and principal to holders of 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 $1,398,653. As of any date of determination following
the Cut-off Date, the Special Hazard Amount shall equal
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<PAGE>
$1,398,653 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 Cash Flow otherwise
distributable to the Class R Certificateholders in connection with Fraud
Losses (the "Fraud Loss Amount") through Subordination shall initially be
equal to $2,315,362. 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.
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
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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 or 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 INSURER
The following information has been supplied by MBIA Insurance Corporation
(the "Insurer") for inclusion in this Prospectus Supplement. No representation
is made by the Company or the Underwriter as to the accuracy and completeness
of such information.
The Insurer, formerly known as Municipal Bond Investors Assurance
Corporation, is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange-listed company. MBIA Inc. is not obligated to pay the debts of
or claims against the Insurer. The Insurer is domiciled in the State of New
York and licensed to do business in all 50 states, the District of Columbia,
the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana
Islands, the Virgin Islands of the United States and the Territory of Guam.
The Insurer has one European branch in the Republic of France.
All information regarding the Insurer, a wholly owned subsidiary of MBIA
Inc., including the financial statements of the Insurer for the year ended
December 31, 1994, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of MBIA Inc. for the
year ended December 31, 1994, is hereby incorporated by reference into this
Prospectus Supplement and shall be deemed to be a part hereof. Any statement
contained in a document incorporated by reference herein shall be modified or
superseded for purposes of this Prospectus Supplement to the extent that a
statement contained herein or in any other subsequently filed document which
also is incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus
Supplement.
The tables below present selected financial information of the Insurer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP").
<TABLE>
<CAPTION>
SAP
--------------------------
DECEMBER 31, SEPTEMBER 30,
1994 1995
(AUDITED) (UNAUDITED)
------------ -------------
(IN MILLIONS)
<S> <C> <C>
Admitted Assets...................................... $3,401 $3,678
Liabilities.......................................... 2,291 2,484
Capital and Surplus.................................. 1,110 1,194
</TABLE>
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<TABLE>
<CAPTION>
GAAP
--------------------------
DECEMBER 31, SEPTEMBER 30,
1994 1995
(AUDITED) (UNAUDITED)
------------ -------------
(IN MILLIONS)
<S> <C> <C>
Assets............................................... $3,759 $4,257
Liabilities.......................................... 1,704 1,895
Shareholder's Equity................................. 2,055 2,362
</TABLE>
Audited financial statements of the Insurer as of December 31, 1994 and 1993
and for each of the three years in the period ended December 31, 1994 are
included herein as Appendix A. Unaudited financial statements of the Insurer
for the six-month period ended September 30, 1995 are included herein as
Appendix B. Such financial statements have been prepared on the basis of
generally accepted accounting principles. Copies of the Insurer's 1994 year-
end audited financial statements prepared in accordance with statutory
accounting practices are available from the Insurer.
A copy of the Annual Report on Form 10-K of MBIA Inc. is available from the
Insurer or the Securities and Exchange Commission. The address of the Insurer
is 113 King Street, Armonk, New York 10504.
The Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Policy and the Insurer set forth under the
headings "Description of the Certificates--Certificate Guaranty Insurance
Policy," "The Insurer," and in Appendices A and B.
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
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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 Class A 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, as increases in the monthly payments to an amount in excess of the
monthly payment required 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. Accordingly, if market interest rates or market
yields for securities similar to the Class A Certificates were to rise, the
market value of the Class A Certificates may decline. Furthermore, 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. and
Residential Accredit Loans, 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 Policy or by the Master Servicer as described herein. If
payments were not made as required under the 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. For a discussion of
the Pass-Through Rate Risk applicable to the Class A Certificates, see "Risk
Factors--Pass-Through Rate Risk" herein. 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
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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 anticipated 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 or annually, as applicable,
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 a Mortgage
Loan will result in a lower monthly payment and in a larger percentage of each
monthly payment being allocated to principal and a smaller percentage being
allocated to interest.
The assumed final Distribution Date with respect to the Class A Certificates
is March 25, 2026, 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 21% 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, as of the date of
issuance of the Class A Certificates: (i)(a) with respect to each Mortgage
Loan which adjusts semi-annually commencing approximately six months after the
date of origination, the aggregate principal balance of such Mortgage Loans is
$42,675,930 and each such Mortgage Loan has an initial Mortgage Rate of
9.4608% per annum, which is in effect until the initial semi-annual Adjustment
Date occurring in July, 1996 when the Mortgage Rate adjusts to 10.6894% per
annum (based on an assumed Index of 5.4375% and a Note Margin of 5.6485%, and
subject to a Periodic Rate Cap of 1.2286% per annum) and continues to adjust
accordingly every six months until it reaches a fully-indexed rate, an initial
aggregate Servicing Fee Rate and Policy premium rate of 0.7795% per annum, an
original term to maturity of 359 months and a remaining term to stated
maturity of 357 months; (b) with respect to each Mortgage Loan which adjusts
semi-annually commencing either two years or three years after the date of
origination, the aggregate principal balance of such Mortgage Loans is
$9,950,969 and each such Mortgage Loan has an initial Mortgage Rate of
10.0967% per annum, which is in effect until the initial semi-annual
Adjustment Date occurring in October, 1998 when the Mortgage Rate adjusts to
10.8392% per annum (based on an assumed Index of 5.4375% and a Note Margin of
5.4017% and subject to a Periodic Rate Cap of 3.6808% per annum) and continues
to adjust accordingly every six months until it reaches a fully-indexed rate,
an initial aggregate Servicing Fee Rate and Policy premium rate of 0.7800% per
annum, an original term to maturity of 346 months and a remaining term to
stated maturity of 343 months; (c) with respect to each Mortgage Loan which
adjusts annually commencing approximately twelve months after the date of
origination, the aggregate principal balance
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of such Mortgage Loans is $17,243,816 and each such Mortgage Loan has an
initial Mortgage Rate of 9.7826% per annum, which is in effect until the
initial annual Adjustment Date occurring in December, 1996 when the Mortgage
Rate adjusts to 10.8614% per annum (based on an assumed Index of 5.4500% and a
Note Margin of 5.4114% and subject to a Periodic Rate Cap of 2.000% per annum)
and continues to adjust accordingly every twelve months until it reaches a
fully-indexed rate, an initial aggregate Servicing Fee Rate and Policy premium
rate of 0.7756% per annum, an original term to maturity of 360 months and a
remaining term to stated maturity of 356 months; (d) with respect to each
Mortgage Loan which adjusts annually commencing three years after the date of
origination, the aggregate principal balance of such Mortgage Loans is
$7,308,006 and each such Mortgage Loan has an initial Mortgage Rate of
10.7122% per annum, which is in effect until the initial annual Adjustment
Date occurring in October, 1998 when the Mortgage Rate adjusts to 11.0992% per
annum (based on an assumed Index of 5.4500% and a Note Margin of 5.6492%, and
subject to a Periodic Rate Cap of 2.9621% per annum) and continues to adjust
accordingly every twelve months thereafter until it reaches a fully-indexed
rate, an initial aggregate Servicing Fee Rate and Policy premium rate of
0.7800% per annum, an original term to maturity of 360 months and a remaining
term to stated maturity of 355 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 April
25, 1996; (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 March 28, 1996.
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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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% 21% 25% 35%
- ----------------- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage.............................. 100% 100% 100% 100% 100% 100%
March 25, 1997.................................. 96 86 81 75 71 62
March 25, 1998.................................. 95 77 68 58 52 38
March 25, 1999.................................. 95 68 57 45 38 25
March 25, 2000.................................. 94 61 47 35 29 16
March 25, 2001.................................. 93 54 40 28 21 10
March 25, 2002.................................. 93 48 34 22 16 7
March 25, 2003.................................. 92 42 28 17 12 4
March 25, 2004.................................. 91 38 24 13 9 3
March 25, 2005.................................. 89 33 20 10 6 1
March 25, 2006.................................. 88 30 17 8 5 1
March 25, 2007.................................. 87 26 14 6 3 *
March 25, 2008.................................. 85 23 12 5 2 *
March 25, 2009.................................. 83 21 10 4 2 0
March 25, 2010.................................. 82 18 8 3 1 0
March 25, 2011.................................. 79 16 7 2 1 0
March 25, 2012.................................. 77 14 5 1 * 0
March 25, 2013.................................. 74 12 4 1 * 0
March 25, 2014.................................. 71 10 4 1 0 0
March 25, 2015.................................. 68 9 3 * 0 0
March 25, 2016.................................. 64 8 2 * 0 0
March 25, 2017.................................. 60 6 2 0 0 0
March 25, 2018.................................. 55 5 1 0 0 0
March 25, 2019.................................. 50 4 1 0 0 0
March 25, 2020.................................. 44 3 * 0 0 0
March 25, 2021.................................. 38 2 * 0 0 0
March 25, 2022.................................. 31 2 0 0 0 0
March 25, 2023.................................. 24 1 0 0 0 0
March 25, 2024.................................. 15 * 0 0 0 0
March 25, 2025.................................. 6 0 0 0 0 0
March 25, 2026.................................. 0 0 0 0 0 0
---- --- --- --- --- ---
Weighted Average
Life in Years**................................ 20.7 7.7 5.4 3.9 3.2 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.
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<PAGE>
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement dated as of March 1, 1996, 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 Insurer that a Trigger Event (as defined in the
Pooling and Servicing Agreement) has occurred, the Trustee or the 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 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 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 Insurer, the Trustee will, within five (5) days
thereafter, give written notice of such non-receipt to the 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 Policy and the Insurer is not fully
reimbursed with respect thereto, and to any subsequent claims, within six
months.
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
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<PAGE>
annum of the outstanding principal balance of each Mortgage Loan. With the
exception of two Mortgage Loans, representing 0.3% of the Mortgage Loans, as
to which the Subservicer is entitled to servicing compensation in an amount
equal to 0.25% per annum, and six Mortgage Loans, representing 0.5% of the
Mortgage Loans, as to which the Subservicer is entitled to servicing
compensation in an amount equal to 0.375% per annum, each Subservicer is
entitled to servicing compensation in an amount equal to 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 0.5787% 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," and "--Withdrawals from the Custodial Account" 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.
Notwithstanding the foregoing, so long as there does not exist a failure by
the Insurer to make a required payment under the Policy, the Insurer shall
have the right to exercise all rights of the holders of the 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 Insurer except as provided in the Pooling and Servicing
Agreement.
TERMINATION
The circumstances under which the obligations created by the Pooling and
Servicing Agreement will terminate in respect of the 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 and (c) any amounts due to the Insurer pursuant to the Insurance
Agreement. 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 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 Policy
subject to the terms thereof. Any such purchase of Mortgage Loans and
termination of the Trust Fund requires the consent of the Insurer if it would
result in a draw on the 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
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<PAGE>
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 original
issue discount, market discount, and premium, if any, for federal income tax
purposes will be based on the assumption that subsequent to the date of any
determination the Mortgage Loans will prepay at a rate equal to 20% 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 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.
The Master Servicer believes that a reasonable application of the principles
of the OID Regulations to the Class A Certificates 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.
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<PAGE>
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.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement
(the "Underwriting Agreement"), dated March 21, 1996, 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 March 28, 1997, 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
S-51
<PAGE>
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
and enforceability of the Policy will be passed upon by Kutak Rock, Omaha,
Nebraska, special counsel to the Insurer.
EXPERTS
The consolidated financial statements of the Insurer, MBIA Insurance
Corporation (formerly known as Municipal Bond Investors Assurance
Corporation), as of December 31, 1994 and 1993 and for the years ended
December 31, 1994, 1993, and 1992, included as Appendix A to this Prospectus
Supplement have been audited by Coopers & Lybrand L.L.P., independent
auditors, as set forth in their report thereon appearing in this Prospectus
Supplement and are included in reliance upon the authority of such firm as
experts in accounting and auditing.
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
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<PAGE>
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 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 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 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>
APPENDIX A
AUDITED FINANCIAL STATEMENTS OF THE INSURER
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE
CORPORATION and SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1994 and 1993
and for the years ended
December 31, 1994, 1993 and 1992
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
----------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION:
We have audited the accompanying consolidated balance sheets of
Municipal Bond Investors Assurance Corporation and Subsidiaries
as of December 31, 1994 and 1993, and the related consolidated
statements of income, changes in shareholder's equity and cash
flows for each of the three years in the period ended December
31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Municipal Bond Investors Assurance
Corporation and Subsidiaries as of December 31, 1994 and 1993,
and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December
31, 1994 in conformity with generally accepted accounting
principles.
As discussed in Note 7 to the consolidated financial statements,
effective January 1, 1993 the Company adopted Statement of
Financial Accounting Standards No. 109 "Accounting for Income
Taxes." As discussed in Note 2 to the consolidated financial
statements, effective January 1, 1994 the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
/s/ COOPERS & LYBRAND L. L. P.
-------------------------------
New York, New York
February 1, 1995
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
December 31, 1994 December 31, 1993
----------------- -----------------
ASSETS
Investments:
Fixed maturity securities,
at amortized cost (market
value $2,971,369) $ --- $2,753,974
Fixed maturity securities
held as available-for-sale
at market (amortized
cost $3,123,838) 3,051,906 ---
Short-term investments,
at amortized cost (which
approximates market value) 121,384 104,205
Other investments 11,970 98,215
---------- ----------
TOTAL INVESTMENTS 3,185,260 2,956,394
Cash and cash equivalents 1,332 747
Accrued investment income 55,347 51,514
Deferred acquisition costs 133,048 120,484
Prepaid reinsurance premiums 186,492 170,551
Goodwill (less accumulated
amortization of $32,437
and $27,476) 110,543 115,504
Property and equipment, at cost
(less accumulated depreciation
of $9,501 and $3,452) 39,648 37,574
Receivable for investments sold 945 1,949
Other assets 46,552 18,912
---------- ----------
TOTAL ASSETS $3,759,167 $3,473,629
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $1,512,211 $1,402,807
Loss and loss adjustment
expense reserves 40,148 33,735
Current income taxes payable --- 1,771
Deferred income taxes 97,828 106,686
Payable for investments purchased 6,552 33,340
Other liabilities 46,925 37,547
---------- ----------
TOTAL LIABILITIES 1,703,664 1,615,886
---------- ----------
Shareholder's Equity
Common stock, par value
$150 per share; authorized,
issued and outstanding
- 100,000 shares 15,000 15,000
Additional paid-in capital 953,655 943,794
Retained earnings 1,134,061 895,312
Cumulative translation adjustment 427 (1,203)
Unrealized (depreciation)
appreciation of investments,
net of deferred income tax
(benefit) provision of
$(25,334) and $2,606 (47,640) 4,840
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 2,055,503 1,857,743
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $3,759,167 $3,473,629
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
-2-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Years ended December 31
------------------------------
1994 1993 1992
-------- -------- --------
Revenues:
Gross premiums written $361,523 $479,390 $368,732
Ceded premiums (49,281) (47,552) (32,588)
-------- -------- --------
Net premiums written 312,242 431,838 336,144
Increase in deferred premium revenue (93,226) (200,519) (173,203)
-------- -------- --------
Premiums earned (net of ceded
premiums of $33,340, $41,409
and $28,276) 219,016 231,319 162,941
Net investment income 193,966 175,329 149,359
Net realized gains 10,335 8,941 11,419
Other income 1,539 3,996 2,001
-------- -------- --------
Total revenues 424,856 419,585 325,720
-------- -------- --------
Expenses:
Losses and loss
adjustment expenses 8,093 7,821 5,619
Underwriting and operating expenses 41,044 38,006 34,092
Policy acquisition costs, net 21,845 25,480 18,119
-------- -------- --------
Total expenses 70,982 71,307 57,830
-------- -------- --------
Income before income taxes and
cumulative effect of accounting
changes 353,874 348,278 267,890
Provision for income taxes 77,125 86,684 54,802
-------- -------- --------
Income before cumulative effect
of accounting changes 276,749 261,594 213,088
Cumulative effect of accounting changes --- 12,923 ---
-------- -------- --------
Net income $276,749 $274,517 $213,088
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
For the years ended December 31, 1994, 1993 and 1992
(Dollars in thousands except per share amounts)
Unrealized
Common Stock Additional Cumulative Appreciation
------------ Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
------ ------ --------- -------- ----------- --------------
Balance,
January 1,
1992 100,000 $ 2,500 $776,544 $ 479,707 $ (126) $ 143
Increase in
par value
of common
stock --- 12,500 (12,500) --- --- ---
Net income --- --- --- 213,088 --- ---
Change in
foreign
currency
translation --- --- --- --- (348) ---
Change in
unrealized
appreciation of
investments net
of change in
deferred income
taxes of
$(1,151) --- --- --- --- --- 2,236
Dividends
declared (per
common share
$220.00) --- --- --- (22,000) --- ---
Capital
contribution
from MBIA Inc. --- --- 163,368 --- --- ---
Tax reduction
related to
MBIA Inc.'s
Stock Option
Plan --- --- 4,531 --- --- ---
------- ------- -------- ---------- ----- --------
Balance,
December 31,
1992 100,000 15,000 931,943 670,795 (474) 2,379
------- ------- -------- ---------- ----- --------
Net income --- --- --- 274,517 --- ---
Change in
foreign
currency
translation --- --- --- --- (729) ---
Change in
unrealized
appreciation
of investments
net of change
in deferred
income taxes
of $(1,381) --- --- --- --- --- 2,461
Dividends
declared (per
common share
$500.00) --- --- --- (50,000) --- ---
Tax reduction
related to
tax sharing
agreement
with MBIA Inc. --- --- 11,851 --- --- ---
------- ------- -------- ---------- ----- --------
Balance,
December 31,
1993 100,000 15,000 943,794 895,312 (1,203) 4,840
------- ------- -------- ---------- ----- --------
Net income --- --- --- 276,749 --- ---
Change in
foreign
currency
translation --- --- --- --- 1,630 ---
Change in
unrealized
depreciation
of investments
net of change
in deferred
income taxes
of $27,940 --- --- --- --- --- (52,480)
Dividends
declared (per
common share
$380.00) --- --- --- (38,000) --- ---
Tax reduction
related to
tax sharing
agreement with
MBIA Inc. --- --- 9,861 --- --- ---
------- ------- -------- ---------- ----- --------
Balance,
December 31,
1994 100,000 $15,000 $953,655 $1,134,061 $ 427 $(47,640)
======= ======= ======== ========== ===== ========
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended December 31
----------------------------------
1994 1993 1992
----------- --------- ---------
Cash flows from operating activities:
Net income $ 276,749 $274,517 $ 213,088
Adjustments to reconcile net income to
net cash provided by operating
activities:
Increase in accrued investment income (3,833) (5,009) (8,869)
Increase in deferred acquisition costs (12,564) (10,033) (13,278)
Increase in prepaid reinsurance premiums (15,941) (6,143) (4,312)
Increase in deferred premium revenue 109,167 206,662 177,515
Increase in loss and loss adjustment
expense reserves 6,413 8,225 4,337
Depreciation 1,607 1,259 685
Amortization of goodwill 4,961 5,001 5,095
Amortization of bond premium
(discount), net 621 (743) 647
Net realized gains on sale of
investments (10,335) (8,941) (11,419)
Deferred income taxes 19,082 7,503 8,217
Other, net (8,469) 15,234 (2,385)
----------- --------- ---------
Total adjustments to net income 90,709 213,015 156,233
----------- --------- ---------
Net cash provided by operating
activities 367,458 487,532 369,321
----------- --------- ---------
Cash flows from investing activities:
Purchase of fixed maturity securities,
net of payable for investments
purchased (1,060,033) (786,510) (913,643)
Sale of fixed maturity securities,
net of receivable for investments
sold 515,548 205,342 371,693
Redemption of fixed maturity
securities, net of receivable
for investments redeemed 128,274 225,608 40,947
Sale (purchase) of short-term
investments, net 3,547 (40,461) 28,206
Sale (purchase) of other
investments 87,456 (37,777) (30,005)
Capital expenditures, net of disposals (3,665) (3,601) (8,029)
----------- --------- ---------
Net cash used in investing activities (328,873) (437,399) (510,831)
----------- --------- ---------
Cash flows from financing activities:
Capital contribution from MBIA Inc. --- --- 163,368
Dividends paid (38,000) (50,000) (22,000)
----------- --------- ---------
Net cash (used) provided by
financing activities (38,000) (50,000) 141,368
----------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 585 133 (142)
Cash and cash equivalents -
beginning of year 747 614 756
------------- --------- ---------
Cash and cash equivalents -
end of year $ 1,332 $ 747 $ 614
============= ========= =========
Supplemental cash flow disclosures:
Income taxes paid $ 53,569 $ 52,967 $ 40,997
The accompanying notes are an integral part of the
consolidated financial statements.
-5-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
- -----------------------------
Municipal Bond Investors Assurance Corporation ("MBIA Corp.") is
a wholly-owned subsidiary of MBIA Inc. MBIA Inc. was
incorporated in Connecticut on November 12, 1986 as a licensed
insurer and, through the following series of transactions during
December 1986, became the successor to the business of the
Municipal Bond Insurance Association (the "Association"), a
voluntary unincorporated association of insurers writing
municipal bond and note insurance as agent for the member
insurance companies:
. MBIA Inc. acquired for $17 million all of the outstanding
common stock of a New York domiciled insurance company and
changed the name of the insurance company to MBIA Corp.
Prior to the acquisition, all of the obligations of this
company were reinsured and/or indemnified by the former
owner.
. Four of the five member companies of the Association
together with their affiliates purchased all of the
outstanding common stock of MBIA Inc. and entered into
reinsurance agreements whereby they ceded to MBIA Inc.
substantially all of the net unearned premiums on existing
and future Association business and the interest in, or
obligation for, contingent commissions resulting from their
participation in the Association. MBIA Inc.'s reinsurance
obligations were then assumed by MBIA Corp. The
participation of these four members aggregated approximately
89% of the net insurance in force of the Association. The
net assets transferred from the predecessor included the
cash transferred in connection with the reinsurance
agreements, the related deferred acquisition costs and
contingent commissions receivable, net of the related
unearned premiums and contingent commissions payable. The
deferred income taxes inherent in these assets and
liabilities were recorded by MBIA Corp. Contingent
commissions receivable (payable) with respect to premiums
earned prior to the effective date of the reinsurance
agreements by the Association in accordance with statutory
accounting practices, remained as assets (liabilities) of
the member companies.
Effective December 31, 1989, MBIA Inc. acquired for $288 million
all of the outstanding stock of Bond Investors Group, Inc.
("BIG"), the parent company of Bond Investors Guaranty Insurance
Company ("BIG Ins."), which was subsequently renamed MBIA
Insurance Corp. of Illinois ("MBIA Illinois").
-6-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 1990, MBIA Illinois ceded its portfolio of net insured
obligations in exchange for cash and investments equal to its
unearned premium reserve of $153 million to MBIA Corp.
Subsequent to this cession, MBIA Inc. contributed the common
stock of BIG to MBIA Corp. resulting in additional paid-in
capital of $200 million. The insured portfolio acquired from BIG
consists of municipal obligations with risk characteristics
similar to those insured by MBIA Corp. On December 31, 1990, BIG
was merged into MBIA Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. ("MBIA
Assurance"), a wholly-owned, French subsidiary, to write
financial guarantee insurance in the international community.
MBIA Assurance provides insurance for public infrastructure
financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA
Assurance was contributed to MBIA Corp. in 1991 resulting in
additional paid-in capital of $6 million. Pursuant to a
reinsurance agreement with MBIA Corp., a substantial amount of
the risks insured by MBIA Assurance is reinsured by MBIA Corp.
In 1993, MBIA Inc. formed a wholly-owned subsidiary, MBIA
Investment Management Corp. ("IMC"), with the principal purpose
of providing guaranteed investment agreements guaranteed as to
principal and interest for states, municipalities and municipal
authorities. IMC commenced operations in August 1993. MBIA
Corp. insures IMC's outstanding investment agreement liabilities.
In 1993, MBIA Corp. assumed the remaining business from the fifth
member of the Association.
2. SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------
The consolidated financial statements have been prepared on the
basis of generally accepted accounting principles ("GAAP").
Significant accounting policies are as follows:
-7-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONSOLIDATION
The consolidated financial statements include the accounts of
MBIA Corp., MBIA Illinois, MBIA Assurance and BIG Services, Inc.
All significant intercompany balances have been eliminated.
Certain amounts have been reclassified in prior years' financial
statements to conform to the current presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand
deposits with banks.
INVESTMENTS
Effective January 1, 1994, MBIA Corp. adopted Statement of
Financial Accounting Standards ("SFAS") 115. In accordance with
SFAS 115, MBIA Corp. reclassified its entire investment portfolio
(including "Fixed maturity securities" and its "Municipal
investment agreement portfolio") as "available-for-sale."
Pursuant to SFAS 115, securities classified as available-for-sale
are required to be reported in the financial statements at market
value, with unrealized gains and losses reflected as a separate
component of shareholders' equity. The cumulative effect of MBIA
Corp.'s adoption of SFAS 115 was a decrease in shareholders'
equity at December 31, 1994 of $46.8 million, net of taxes. The
adoption of SFAS 115 had no effect on MBIA Corp.'s earnings. As
required under SFAS 115, prior years' financial statements have
not been restated. Accordingly, Fixed maturity securities
reported in MBIA Corp.'s consolidated balance sheet at December
31, 1993 are reflected at amortized cost, based on MBIA Corp.'s
then stated intention to hold such securities to maturity.
Bond discounts and premiums are amortized on the effective-yield
method over the remaining term of the securities. For pre-
refunded bonds the remaining term is determined based on the
contractual refunding date. Short-term investments are carried
at amortized cost, which approximates market value. Investment
income is recorded as earned. Realized gains or losses on the
sale of investments are determined by specific identification and
are included as a separate component of revenues.
Other investments consist of MBIA Corp.'s interest in limited
partnerships and a mutual fund which invests principally in
marketable equity securities. MBIA Corp. records dividends from
its investment in marketable equity securities and its share of
limited partnerships and mutual funds as a component of
investment income. In addition, MBIA Corp. records its share
-8-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of the unrealized gains and losses on these investments, net of
applicable deferred income taxes, as a separate component of
shareholder's equity.
PREMIUM REVENUE RECOGNITION
Premiums are earned pro rata over the period of risk. Premiums
are allocated to each bond maturity based on par amount and are
earned on a straight-line basis over the term of each maturity.
When an insured issue is retired early, is called by the issuer,
or is in substance paid in advance through a refunding or
defeasance accomplished by placing U.S. Government securities in
escrow, the remaining deferred premium revenue, net of the
portion which is credited to a new policy in those cases where
MBIA Corp. insures the refunding issue, is earned at that time,
since there is no longer risk to MBIA Corp. Accordingly,
deferred premium revenue represents the portion of premiums
written that is applicable to the unexpired risk of insured bonds
and notes.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate
primarily to, and vary with, premium production. For business
produced directly by MBIA Corp., such costs include compensation
of employees involved in marketing, underwriting and policy
issuance functions, certain rating agency fees, state premium
taxes and certain other underwriting expenses, reduced by ceding
commission income on premiums ceded to reinsurers. For business
assumed from the Association, such costs were comprised of
management fees, certain rating agency fees and marketing and
legal costs, reduced by ceding commissions received by the
Association on premiums ceded to reinsurers. Policy acquisition
costs are deferred and amortized over the period in which the
related premiums are earned.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses ("LAE") are
established in an amount equal to MBIA Corp.'s estimate of the
identified and unidentified losses, including costs of settlement
on the obligations it has insured.
To the extent that specific insured issues are identified as
currently or likely to be in default, the present value of
expected payments, including loss and loss adjustment expenses
associated with these issues, net of expected recoveries, is
allocated within the total loss reserve as case basis reserves.
Management of MBIA Corp. periodically evaluates its estimates for
losses and LAE and any resulting adjustments are reflected in
current earnings. Management believes that the reserves are
adequate to cover the ultimate net cost of claims, but the
reserves are necessarily based on estimates and
-9-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
there can be no assurance that the ultimate liability will not
exceed such estimates.
CONTINGENT COMMISSIONS
Contingent commissions may be receivable from MBIA Corp.'s and
the Association's reinsurers under various reinsurance treaties
and are accrued as the related premiums are earned.
INCOME TAXES
MBIA Corp. is included in the consolidated tax return of MBIA
Inc. The tax provision for MBIA Corp. for financial reporting
purposes is determined on a stand alone basis. Any benefit
derived by MBIA Corp. as a result of the tax sharing agreement
with MBIA Inc. and its subsidiaries is reflected directly in
shareholder's equity for financial reporting purposes.
Deferred income taxes are provided in respect of temporary
differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse.
The Internal Revenue Code permits financial guarantee insurance
companies to deduct from taxable income additions to the
statutory contingency reserve subject to certain limitations.
The tax benefits obtained from such deductions must be invested
in non-interest bearing U. S. Government tax and loss bonds.
MBIA Corp. records purchases of tax and loss bonds as payments of
Federal income taxes. The amounts deducted must be restored to
taxable income when the contingency reserve is released, at which
time MBIA Corp. may present the tax and loss bonds for redemption
to satisfy the additional tax liability.
PROPERTY AND EQUIPMENT
Property and equipment consists of MBIA Corp.'s headquarters and
equipment and MBIA Assurance's furniture, fixtures and equipment,
which are recorded at cost and, exclusive of land, are
depreciated on the straight-line method over their estimated
service lives ranging from 4 to 31 years. Maintenance and
repairs are charged to expenses as incurred.
GOODWILL
Goodwill represents the excess of the cost of the acquired and
contributed subsidiaries over the tangible net assets at the time
of acquisition or contribution. Goodwill attributed to the
acquisition of the licensed insurance company includes
recognition of the value of the state licenses held by that
-10-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
company, and is amortized by the straight-line method
over 25 years. Goodwill related to the wholly-owned subsidiary
of MBIA Inc. contributed in 1988 is amortized by the
straight-line method over 25 years. Goodwill attributed to the
acquisition of MBIA Illinois is amortized according to the
recognition of future profits from its deferred premium revenue
and installment premiums, except for a minor portion attributed
to state licenses, which is amortized by the straight-line method
over 25 years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are
translated at current exchange rates. Operating results are
translated at average rates of exchange prevailing during the
year. Unrealized gains or losses resulting from translation are
included as a separate component of shareholder's equity.
3. STATUTORY ACCOUNTING PRACTICES
- ----------------------------------
The financial statements have been prepared on the basis of GAAP,
which differs in certain respects from the statutory accounting
practices prescribed or permitted by the insurance regulatory
authorities. Statutory accounting practices differ from GAAP in
the following respects:
. premiums are earned only when the related risk has
expired rather than over the period of the risk;
. acquisition costs are charged to operations as incurred
rather than as the related premiums are earned;
. contingent commissions are accrued when the related
earned premiums are recognized;
. a contingency reserve is computed on the basis of
statutory requirements and reserves for losses and LAE are
established, at present value, for specific insured issues
which are identified as currently or likely to be in
default, while under GAAP reserves are established based
on MBIA Corp.'s reasonable estimate of the identified and
unidentified losses and LAE on the insured obligations it
has written;
-11-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
. Federal income taxes are only provided on taxable income
for which income taxes are currently payable, while under
GAAP deferred income taxes are provided with respect to
temporary differences;
. fixed maturity securities are reported at amortized cost
rather than market;
. tax and loss bonds purchased are reflected as admitted
assets as well as payments of income taxes; and
. certain assets designated as "non-admitted assets" are
charged directly against surplus but are reflected as
assets under GAAP.
The following is a reconciliation of consolidated shareholder's
equity presented on a GAAP basis to statutory capital and surplus
for MBIA Corp. and its subsidiaries, MBIA Illinois and MBIA
Assurance:
As of December 31
--------------------------------------
In thousands 1994 1993 1992
---------- ---------- ----------
GAAP shareholder's equity $2,055,503 $1,857,743 $1,619,643
Premium revenue recognition (296,524) (242,577) (210,179)
Deferral of acquisition costs (133,048) (120,484) (110,451)
Unrealized losses 71,932 --- ---
Contingent commissions (1,706) (1,880) (2,185)
Contingency reserve (620,988) (539,103) (403,875)
Loss and loss adjustment
expense reserves 18,181 26,262 11,085
Deferred income taxes 90,328 99,186 90,303
Tax and loss bonds 50,471 25,771 31,454
Goodwill (110,543) (115,503) (120,505)
Other (13,568) (11,679) (9,297)
---------- ---------- ----------
Statutory capital
and surplus $1,110,038 $ 977,736 $ 895,993
========== ========== ==========
Consolidated net income of MBIA Corp. determined in accordance
with statutory accounting practices for the years ended December
31, 1994, 1993 and 1992 was $224.9 million, $258.4 million and
$189.6 million, respectively.
-12-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
- --------------------------------------------------
Premiums earned include $53.0 million, $85.6 million and $43.1
million for 1994, 1993 and 1992 respectively, related to refunded
and called bonds.
5. INVESTMENTS
- ---------------
MBIA Corp.'s investment objective is to optimize long-term,
after-tax returns while emphasizing the preservation of capital
and claims-paying capability through maintenance of high quality
investments with adequate liquidity and by the avoidance of
excessive interest rate risk exposure through prudent maturity
selection. MBIA Corp.'s investment policies limit the amount of
credit exposure to any one issuer. The fixed maturity portfolio
comprises high quality (average Double-A) taxable and tax-exempt
investments of diversified maturities.
The following tables set forth the amortized cost and market
value of the fixed maturities included in the consolidated
investment portfolio of MBIA Corp. as of December 31, 1994 and
1993.
Gross Gross
Amortized Unrealized Unrealized
In thousands Cost Gains Losses Market Value
- ------------------------------------------------------------------------------
DECEMBER 31, 1994
Taxable bonds
United States Treasury
and Government Agency $ 258,531 $ 3,012 $ 10,663 $ 250,880
Corporate and other
obligations 468,923 2,387 25,301 446,009
Tax-exempt bonds
State and municipal
obligations 2,396,384 36,631 77,998 2,355,017
---------- ------- -------- ----------
Total fixed
maturities $3,123,838 $42,030 $113,962 $3,051,906
========== ======= ======== ==========
-13-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gross Gross
Amortized Unrealized Unrealized
In thousands Cost Gains Losses Market Value
- -----------------------------------------------------------------------------
DECEMBER 31, 1993
Taxable bonds
United States Treasury
and Government Agency $ 334,729 $ 17,326 $ 354 $ 351,701
Corporate and other
obligations 365,660 25,326 1,493 389,493
Tax-exempt bonds
State and municipal
obligations 2,053,585 177,285 695 2,230,175
---------- -------- ------ ----------
Total fixed maturities $2,753,974 $219,937 $2,542 $2,971,369
========== ======== ====== ==========
Fixed maturity investments carried at market value of $7.4
million at December 31, 1994 and at amortized cost of $7.6
million at December 31, 1993, were on deposit with various
regulatory authorities to comply with insurance laws.
The table below sets forth the distribution by expected maturity
of the fixed maturities and short-term investments at amortized
cost and market value at December 31, 1994. Expected maturities
may differ from contractual maturities because borrowers may have
the right to call or prepay obligations.
Amortized Market
In thousands Cost Value
- --------------------------------------------------------------------
Maturity
Within 1 year $ 121,428 $121,384
Beyond 1 year but within 5 years 512,741 526,119
Beyond 5 years but within 10 years 1,387,250 1,351,090
Beyond 10 years but within 15 years 788,742 762,187
Beyond 15 years but within 20 years 397,700 377,225
Beyond 20 years 37,361 35,285
---------- ----------
Total fixed maturities and short-term
investments $3,245,222 $3,173,290
========== ==========
-14-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. INVESTMENT INCOME AND GAINS AND LOSSES
- ------------------------------------------
Investment income consists of:
Years ended December 31
--------------------------------
In thousands 1994 1993 1992
- -------------------------------------------------------------------------
Fixed maturities $193,729 $173,070 $147,598
Short-term investments 3,003 2,844 2,749
Other investments 12 2,078 1,265
-------- -------- --------
Gross investment income 196,744 177,992 151,612
Investment expenses 2,778 2,663 2,253
-------- -------- --------
Net investment income 193,966 175,329 149,359
Net realized gains (losses):
Fixed maturities 784 8,326 11,798
Other investments 9,551 615 (379)
-------- -------- --------
Net realized gains (losses) 10,335 8,941 11,419
-------- -------- --------
Total investment income $204,301 $184,270 $160,778
======== ======== ========
Unrealized gains (losses) consist of:
As of December 31
---------------------
In thousands 1994 1993
- --------------------------------------------------------------------------
Fixed maturities:
Gains $ 42,030 $219,937
Losses (113,962) (2,542)
--------- --------
Net (71,932) 217,395
Other investments:
Gains --- 7,446
Losses (1,042) ---
--------- --------
Net (1,042) 7,446
Total (72,974) 224,841
Deferred income tax (benefit) (25,334) 2,606
--------- --------
Unrealized (losses) gains - net $ (47,640) $222,235
========= ========
The deferred tax benefit in 1994 relates primarily to unrealized
losses on MBIA Corp.'s fixed maturity investments, which are
reflected in shareholders' equity in 1994 in accordance with MBIA
Corp.'s adoption of SFAS 115.
-15-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The change in net unrealized gains (losses) consists of:
Years ended December 31
----------------------------------
In thousands 1994 1993 1992
- --------------------------------------------------------------------------
Fixed maturities $(71,932) $101,418 $19,118
Other investments (8,488) 3,842 3,387
-------- -------- -------
Total (80,420) 105,260 22,505
Deferred income tax (benefit) (27,940) 1,381 1,151
-------- -------- -------
Unrealized (losses) gains, net $(52,480) $103,879 $21,354
======== ======== =======
7. INCOME TAXES
- ----------------
Effective January 1, 1993, MBIA Corp. changed its method of
accounting for income taxes from the income statement-based
deferred method to the balance sheet-based liability method
required by SFAS 109. MBIA Corp. adopted the new pronouncement
on the cumulative catch-up basis and recorded a cumulative
adjustment, which increased net income and reduced the deferred
tax liability by $13.0 million. The cumulative effect represents
the impact of adjusting the deferred tax liability to reflect the
January 1, 1993 tax rate of 34% as opposed to the higher tax
rates in effect when certain of the deferred taxes originated.
As permitted under the new rules, prior years' financial
statements have not been restated.
SFAS 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax
returns. Under this method, deferred taxes assets and
liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences
are expected to reverse. The effect on tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
-16-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tax effects of temporary differences that give rise to
deferred tax assets and liabilities at December 31, 1994 and 1993
are as presented below:
In thousands 1994 1993
- --------------------------------------------------------------------------
Deferred tax assets
Tax and loss bonds $ 50,332 $ 24,168
Unrealized losses 25,334 ---
Alternative minimum tax credit carry forwards 22,391 7,570
Loss and loss adjustment expense reserves 6,363 9,192
Other 3,981 3,084
-------- -------
Total gross deferred tax assets 108,401 44,014
-------- -------
Deferred tax liabilities
Contingency reserve 91,439 47,621
Deferred premium revenue 54,523 45,903
Deferred acquisition costs 48,900 44,502
Unrealized gains --- 2,606
Contingent commissions 4,746 4,744
Other 6,621 5,324
-------- --------
Total gross deferred tax liabilities 206,229 150,700
-------- --------
Net deferred tax liability $ 97,828 $106,686
======== ========
Under SFAS 109, a change in the Federal tax rate requires a
restatement of deferred tax assets and liabilities. Accordingly,
the restatement for the change in the 1993 Federal tax rate
resulted in a $5.4 million increase in the tax provision, of
which $3.2 million resulted from the recalculation of deferred
taxes at the new Federal rate.
The provision for income taxes is composed of:
Years ended December 31
----------------------------
In thousands 1994 1993 1992
-----------------------------------------------------------------
Current $58,043 $66,086 $46,585
Deferred 19,082 20,598 8,217
------- ------- -------
Total $77,125 $86,684 $54,802
======= ======= =======
-17-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes gives effect to permanent
differences between financial and taxable income. Accordingly,
MBIA Corp.'s effective income tax rate differs from the statutory
rate on ordinary income. The reasons for MBIA Corp.'s lower
effective tax rates are as follows:
Years ended December 31
-----------------------
1994 1993 1992
- ------------------------------------------------------------------
Income taxes computed on pre-tax
financial income at statutory rates 35.0% 35.0% 34.0%
Increase (reduction) in taxes
resulting from:
Tax-exempt interest (12.0) (10.6) (11.3)
Benefit from tax sharing agreement --- --- (3.0)
Amortization of goodwill 0.5 0.5 0.7
Other (1.7) --- 0.1
---- ---- ----
Provision for income taxes 21.8% 24.9% 20.5%
==== ==== ====
8. DIVIDENDS AND CAPITAL REQUIREMENTS
- --------------------------------------
Under New York Insurance Law, MBIA Corp. may pay a dividend only
from earned surplus subject to the maintenance of a minimum
capital requirement and the dividends in any 12-month period may
not exceed the lesser of 10% of its policyholders' surplus as
shown on its last filed statutory-basis financial statements, or
of adjusted net investment income, as defined, for such 12-month
period, without prior approval of the Superintendent of the New
York State Insurance Department.
In accordance with such restrictions on the amount of dividends
which can be paid in any 12-month period, MBIA Corp. had
approximately $73 million available for the payment of dividends
as of December 31, 1994. In 1994, 1993 and 1992, MBIA Corp.
declared and paid dividends of $38 million, $50 million and $22
million, respectively, to MBIA Inc.
Under Illinois Insurance Law, MBIA Illinois may pay a dividend
from unassigned surplus, and the dividends in any 12-month period
may not exceed the greater of 10% of policyholders' surplus
(total capital and surplus) at the end of the preceding calendar
year, or the net income of the preceding calendar year without
prior approval of the Illinois State Insurance Department.
-18-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In accordance with such restrictions on the amount of dividends
which can be paid in any 12-month period, MBIA Illinois may pay a
dividend only with prior approval as of December 31, 1994.
The insurance departments of New York State and certain other
states and the agencies which rate the bonds insured by MBIA
Corp. have various requirements with which MBIA Corp. was in
compliance as of December 31, 1994, relating to the maintenance
of certain minimum ratios of statutory capital and reserves to
net insurance in force.
9. LINES OF CREDIT
- -------------------
MBIA Corp. has a standby line of credit commitment in the amount
of $600 million with a group of major banks to provide loans to
MBIA Corp. after it has incurred cumulative losses (net of any
recoveries) from September 30, 1994 in excess of the greater of
$500 million and 6.25% of average annual debt service. The
obligation to repay loans made under this agreement is a limited
recourse obligation payable solely from, and collateralized by, a
pledge of recoveries realized on defaulted insured obligations
including certain installment premiums and other collateral.
This commitment has a seven-year term and expires on September
30, 2001 but, subject to approval by the banks, may be annually
renewed to extend the term to seven years beyond the renewal
date.
MBIA Corp. and MBIA Inc. maintain bank liquidity facilities
aggregating $250 million.
At December 31, 1994, $17 million was outstanding under these
facilities.
10. NET INSURANCE IN FORCE
- ---------------------------
MBIA Corp. guarantees the timely payment of principal and
interest on municipal and certain non-municipal bonds and notes.
MBIA Corp.'s ultimate exposure to credit loss in the event of
nonperformance by the insured is represented by the insurance in
force as set forth below.
The insurance policies issued by MBIA Corp. are unconditional
commitments to guarantee timely payment on the bonds and notes to
bondholders. The creditworthiness of each insured issue is
evaluated prior to the issuance of insurance and each insured
issue must comply with MBIA Corp.'s
-19-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
underwriting guidelines. Further, the payments to be made by the
issuer on the bonds or notes may be backed by a pledge of revenues,
reserve funds, letters of credit, investment contracts or collateral
in the form of mortgages or other assets. The right to such money
or collateral would typically become MBIA Corp.'s upon the
payment of the insured amount by MBIA Corp.
As of December 31, 1994, insurance in force, net of cessions to
reinsurers, has a range of maturity of 1-40 years. Net insurance
in force includes international business of $2.5 billion
representing 18 issues and $0.3 billion representing 5 issues at
December 31, 1994 and 1993, respectively. The distribution of
net insurance in force by state and type of bond, including IMC's
$1,526.1 million and $493.0 million municipal investment
agreement liability guaranteed by MBIA Corp. in 1994 and 1993,
respectively, is set forth in the tables below:
As of December 31
----------------------------------------------------------------
1994 1993
------------------------------- -------------------------------
Net Number % of Net Net Number % of Net
Insurance of Issues Insurance Insurance of Issues Insurance
In Force Outstanding In Force In Force Outstanding In Force
--------- ----------- --------- --------- ----------- --------
(in billions) (in billions)
California $ 43.9 2,832 14.3% $ 37.9 2,410 14.2%
Florida 25.4 1,805 8.3 22.9 1,716 8.6
New York 25.0 4,447 8.2 21.5 4,116 8.0
Pennsylvania 19.5 2,108 6.4 17.7 1,889 6.6
Texas 18.6 2,102 6.1 17.5 1,784 6.5
New Jersey 15.0 1,590 4.9 11.9 1,298 4.5
Illinois 14.7 1,139 4.8 12.2 1,120 4.6
Massachusetts 8.6 1,064 2.8 7.4 959 2.8
Ohio 8.3 996 2.7 7.0 915 2.6
Georgia 7.4 978 2.4 5.9 815 2.2
All others 119.6 10,723 39.1 105.4 10,130 39.4
------ ------ ----- ------ ------ -----
$306.0 29,784 100.0% $267.3 27,152 100.0%
====== ====== ===== ====== ====== =====
-20-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31
---------------------------------------------------------------
1994 1993
------------------------------- -------------------------------
Net Number % of Net Net Number % of Net
Insurance of Issues Insurance Insurance of Issues Insurance
In Force Outstanding In Force In Force Outstanding In Force
--------- ----------- --------- --------- ----------- ---------
(in billions) (in billions)
Municipal
General
Obligation $ 84.2 11,029 27.5% $ 72.7 10,310 27.2%
Utilities 56.0 5,087 18.3 50.8 4,640 19.0
Health Care 50.6 2,670 16.5 47.7 2,558 17.8
Special Revenue 22.7 1,291 7.4 20.6 1,153 7.7
Transportation 21.3 1,486 7.0 19.1 1,431 7.1
Industrial
development
and pollution
control
revenue 15.1 1,016 4.9 11.2 1,058 4.2
Higher education 14.0 1,208 4.6 12.7 1,119 4.8
Housing 13.6 2,663 4.5 14.7 2,614 5.5
Other 3.8 124 1.2 2.4 68 0.9
------ ------ ----- ------ ------ -----
281.3 26,574 91.9 251.9 24,951 94.2
------ ------ ----- ------ ------ -----
Non-municipal
Asset/mortgage-
backed 12.8 151 4.2 8.5 94 3.2
Investor-owned
utilities 5.7 2,918 1.9 4.5 2,056 1.7
Other 6.2 141 2.0 2.4 51 0.9
------ ------ ----- ------ ------ -----
24.7 3,210 8.1 15.4 2,201 5.8
------ ----- ----- ------ ------ -----
$306.0 29,784 100.0% $267.3 27,152 100.0%
====== ====== ===== ====== ====== =====
11. REINSURANCE
- ----------------
MBIA Corp. reinsures portions of its risks with other insurance
companies through various quota and surplus share reinsurance
treaties and facultative agreements. In the event that any or
all of the reinsurers were unable to meet their obligations, MBIA
Corp. would be liable for such defaulted amounts.
Amounts deducted from gross insurance in force for reinsurance
ceded by MBIA Corp. and MBIA Illinois were $42.6 billion and
$36.8 billion, at December 31, 1994 and 1993, respectively.
Ceded insurance in force includes international business of $0.7
billion representing two issues at December 31, 1994. The
distribution of ceded insurance in force by state and type of
bond is set forth in the tables below:
-21-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31
------------------------------------------------
1994 1993
---------------------- ----------------------
Ceded % of Ceded Ceded % of Ceded
Insurance Insurance Insurance Insurance
State In Force In Force In Force In Force
- -------------------------------------------------------------------------
(in billions) (in billions)
California $ 7.5 17.6% $ 5.7 15.5%
New York 4.9 11.5 4.2 11.4
Pennsylvania 2.6 6.1 2.7 7.3
Texas 2.5 5.9 2.6 7.1
Illinois 2.3 5.4 1.9 5.2
Florida 2.1 4.9 1.9 5.2
New Jersey 2.0 4.7 0.9 2.4
District of Columbia 1.6 3.8 0.9 2.4
Washington 1.2 2.8 1.1 3.0
Puerto Rico 1.1 2.6 1.1 3.0
Ohio 0.9 2.1 0.7 1.9
Massachusetts 0.9 2.1 0.8 2.2
All others 13.0 30.5 12.3 33.4
----- ----- ----- -----
$42.6 100.0% $36.8 100.0%
===== ===== ===== =====
As of December 31
------------------------------------------------
1994 1993
---------------------- ----------------------
Ceded % of Ceded Ceded % of Ceded
Insurance Insurance Insurance Insurance
Type of Bond In Force In Force In Force In Force
- -------------------------------------------------------------------------
(in billions) (in billions)
Municipal
General obligation $ 9.7 22.8% $ 8.3 22.5%
Utilities 8.5 20.0 8.8 23.9
Health care 6.5 15.3 6.8 18.5
Transportation 4.5 10.6 3.1 8.4
Industrial development
and pollution
control revenue 2.9 6.8 0.3 0.8
Special revenue 2.7 6.3 2.6 7.1
Higher education 1.2 2.8 0.9 2.4
Housing 1.0 2.3 1.2 3.3
Other 1.5 3.5 1.8 4.9
----- ----- ----- -----
38.5 90.4 33.8 91.8
----- ----- ----- -----
Non-municipal
Asset/mortgage-backed 2.7 6.3 2.1 5.7
Other 1.4 3.3 0.9 2.5
----- ----- ----- -----
4.1 9.6 3.0 8.2
----- ----- ----- -----
$42.6 100.0% $36.8 100.0%
===== ===== ===== =====
-22-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Included in gross premiums written are assumed premiums from
other insurance companies of $6.3 million, $20.4 million and
$10.1 million for the years ended December 31, 1994, 1993 and
1992, respectively. The percentages of the amounts assumed to
net premiums written were 2.0%, 4.7% and 3.0% in 1994, 1993 and
1992, respectively.
Gross premiums written include $0.2 million in 1994, $5.4 million
in 1993 and $5.0 million in 1992 related to the reassumption by
MBIA Corp. of reinsurance previously ceded. Also included in
gross premiums in 1993 is $10.8 million of premiums assumed from
a member of the Association. Ceded premiums written are net of
$1.6 million in 1994, $2.5 million in 1993 and $4.7 million in
1992 related to the reassumption of reinsurance previously ceded
by MBIA Corp.
Effective January 1, 1993, MBIA Corp. adopted SFAS 113. Under
SFAS 113, assets and liabilities relating to reinsurance
contracts must be shown gross of the effects of reinsurance.
SFAS 113 also established guidelines to determine whether risk is
transferred under a reinsurance contract. If risk is
transferred, the conditions for reinsurance accounting are met.
If risk is not transferred, the contract is accounted for as a
deposit.
12. EMPLOYEE BENEFITS
- ----------------------
MBIA Corp. participates in MBIA Inc.'s pension plan covering all
eligible employees. The pension plan is a defined contribution
plan and MBIA Corp. contributes 10% of each eligible employee's
annual total compensation. Pension expense for the years ended
December 31, 1994, 1993 and 1992 was $3.0 million, $3.1 million
and $2.7 million, respectively. MBIA Corp. also has a profit
sharing/401(k) plan which allows eligible employees to contribute
up to 10% of eligible compensation. MBIA Corp. matches employee
contributions up to the first 5% of total compensation. MBIA
Corp. contributions to the profit sharing plan aggregated $1.4
million, $1.3 million and $0.9 million for the years ended
December 31, 1994, 1993 and 1992, respectively. The 401(k) plan
amounts are invested in common stock of MBIA Inc. Amounts
relating to the above plans that exceed limitations established
by Federal regulations are contributed to a non-qualified
deferred compensation plan. Of the above amounts for the pension
and profit sharing plans, $2.6 million, $2.6 million and $2.2
million for the years ended December 31, 1994, 1993 and 1992,
respectively, are included in policy acquisition costs.
-23-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MBIA Corp. also participates in MBIA Inc.'s common stock
incentive plan which enables employees of MBIA Corp. to acquire
shares of MBIA Inc. or to benefit from appreciation in the price
of the common stock of MBIA Inc. Certain key employees of MBIA
Corp. were granted Stock Appreciation Rights ("SARs"). On
March 29, 1991, those MBIA Corp. employees who had previously
been granted SARS agreed to the cancellation of such SARs.
Effective January 1, 1993, MBIA Corp. adopted SFAS 106. Under
SFAS 106, companies are required to accrue the cost of employee
post-retirement benefits other than pensions during the years
that employees render service. Prior to January 1, 1993, MBIA
Corp. had accounted for these post-retirement benefits on a cash
basis. In 1993, MBIA Corp. adopted the new pronouncement on the
cumulative catch-up basis and recorded a cumulative effect
adjustment which decreased net income and increased other
liabilities by $0.1 million. As of January 1, 1994, MBIA Corp.
eliminated these post-retirement benefits.
13. RELATED PARTY TRANSACTIONS
- -------------------------------
The business assumed from the Association, relating to insurance
on unit investment trusts sponsored by two members of the
Association, includes deferred premium revenue of $1.9 million
and $2.3 million at December 31, 1994 and 1993, respectively.
In 1993, MBIA Corp. assumed the balance of $10.8 million of
deferred premium revenue from a member of the Association which
had not previously ceded its insurance portfolio to MBIA Corp.
Also in 1993, MBIA Corp. assumed $0.4 million of deferred premium
revenue relating to one of the trusts which was previously ceded
to an affiliate of an Association member.
Since 1989, MBIA Corp. has executed five surety bonds to
guarantee the payment obligations of the members of the
Association, one of which is a principal shareholder of MBIA
Inc., which had their Standard & Poor's claims-paying rating
downgraded from Triple-A on their previously issued Association
policies. In the event that they do not meet their Association
policy payment obligations, MBIA Corp. will pay the required
amounts directly to the paying agent instead of to the former
Association member as was previously required. The aggregate
amount payable by MBIA Corp. on these surety bonds is limited to
$340 million. These surety bonds remain outstanding as of
December 31, 1994.
-24-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MBIA Corp. has investment management and advisory agreements with
an affiliate of a principal shareholder of MBIA Inc., which
provides for payment of fees on assets under management. Total
related expenses for the years ended December 31, 1994, 1993 and
1992 amounted to $2.6 million, $2.4 million and $2.1 million,
respectively.
MBIA Corp. has various insurance coverages provided by a
principal shareholder of MBIA Inc., the cost of which was $1.9
million, $2.0 million and $2.2 million for the years ended
December 31, 1994, 1993 and 1992, respectively.
Included in other assets at December 31, 1993 is $3.2 million of
net receivables from MBIA Inc. and other subsidiaries. Included
in other liabilities at December 31, 1992 is $2.8 million of net
payables to MBIA Inc. and other subsidiaries.
14. Fair Value of Financial Instruments
- ----------------------------------------
The estimated fair value amounts of financial instruments shown
in the following table have been determined by MBIA Corp. using
available market information and appropriate valuation
methodologies. However, in certain cases considerable judgment
is necessarily required to interpret market data to develop
estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amount MBIA Corp.
could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
FIXED MATURITY SECURITIES - The fair value of fixed maturity
securities equals quoted market price, if available. If a quoted
market price is not available, fair value is estimated using
quoted market prices for similar securities.
SHORT-TERM INVESTMENTS - Short-term investments are carried at
amortized cost which, because of their short duration, is a
reasonable estimate of fair value.
-25-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OTHER INVESTMENTS - Other investments consist of MBIA Corp.'s
interest in limited partnerships and a mutual fund which invests
principally in marketable equity securities. The fair value of
other investments is based on quoted market prices.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND
PAYABLE FOR INVESTMENTS PURCHASED - The carrying amounts of
these items are a reasonable estimate of their fair value.
PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s
prepaid reinsurance premiums is based on the estimated cost of
entering into an assumption of the entire portfolio with third
party reinsurers under current market conditions.
DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s
deferred premium revenue is based on the estimated cost of
entering into a cession of the entire portfolio with third party
reinsurers under current market conditions.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount
is composed of the present value of the expected cash flows for
specifically identified claims combined with an estimate for
unidentified claims. Therefore, the carrying amount is a
reasonable estimate of the fair value of the reserve.
INSTALLMENT PREMIUMS - The fair value is derived by
calculating the present value of the estimated future cash flow
stream at MBIA Corp.'s estimated cost of capital.
-26-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31,
-----------------------------------------------
1994 1993
--------------------- ---------------------
Carrying Estimated Carrying Estimated
In thousands Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------
ASSETS:
Fixed maturity
securities $3,051,906 $3,051,906 $2,753,974 $2,971,369
Short-term investments 121,384 121,384 104,205 104,205
Other investments 11,970 11,970 98,215 98,215
Cash and cash equivalents 1,332 1,332 747 747
Prepaid reinsurance
premiums 186,492 159,736 170,551 141,441
Receivable for
investments sold 945 945 1,949 1,949
LIABILITIES:
Deferred premium
revenue 1,512,211 1,295,305 1,402,807 1,173,882
Loss and loss adjustment
expense reserves 40,148 40,148 33,735 33,735
Payable for investments
purchased 6,552 6,552 33,340 33,340
OFF-BALANCE-SHEET
INSTRUMENTS:
Installment premiums --- 176,944 --- 186,490
-27-
<PAGE>
APPENDIX B
UNAUDITED FINANCIAL STATEMENTS OF THE INSURER
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
AND FOR THE THREE AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1995 AND 1994
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
---------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets - September 30, 1995 (Unaudited)
and December 31, 1994 (Audited) 3
Consolidated Statements of Income - Three months and
nine months ended September 30, 1995 and 1994 (Unaudited) 4
Consolidated Statement of Changes in Shareholder's
Equity - Nine months ended September 30, 1995 (Unaudited) 5
Consolidated Statements of Cash Flows
- Nine months ended September 30, 1995 and 1994 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
</TABLE>
2
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturity securities held as available-for-sale
at market (amortized cost $3,332,939 and $3,123,838) $3,480,987 $3,051,906
Short-term investments, at amortized cost
(which approximates market value) 173,529 121,384
Other investments 13,228 11,970
---------- ----------
TOTAL INVESTMENTS 3,667,744 3,185,260
Cash and cash equivalents 2,202 1,332
Accrued investment income 57,092 55,347
Deferred acquisition costs 138,132 133,048
Prepaid reinsurance premiums 195,146 186,492
Goodwill (less accumulated amortization of
$36,134 and $32,437) 106,846 110,543
Property and equipment, at cost (less accumulated
depreciation of $11,457 and $9,501) 40,839 39,648
Receivable for investments sold 776 945
Other assets 48,050 46,552
---------- ----------
TOTAL ASSETS $4,256,827 $3,759,167
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $1,598,597 $1,512,211
Loss and loss adjustment expense reserves 45,246 40,148
Deferred income taxes 184,053 97,828
Payable for investments purchased 10,333 6,552
Other liabilities 56,694 46,925
---------- ----------
TOTAL LIABILITIES 1,894,923 1,703,664
---------- ----------
Shareholder's Equity
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares 15,000 15,000
Additional paid-in capital 963,645 953,655
Retained earnings 1,285,606 1,134,061
Cumulative translation adjustment 2,464 427
Unrealized appreciation (depreciation) of
investments, net of deferred income tax provision
(benefit) of $51,786 and $(25,334) 95,189 (47,640)
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 2,361,904 2,055,503
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $4,256,827 $3,759,167
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
1995 1994 1995 1994
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues:
Gross premiums written $ 92,362 $ 80,313 $270,139 $274,841
Ceded premiums (13,077) (12,011) (32,206) (38,686)
-------- -------- -------- --------
Net premiums written 79,285 68,302 237,933 236,155
Increase in deferred premium revenue (23,336) (13,358) (76,422) (72,829)
-------- -------- -------- --------
Premiums earned (net of ceded
premiums of $8,900, $11,719,
$23,552 and $26,087) 55,949 54,944 161,511 163,326
Net investment income 55,988 49,676 162,836 144,070
Net realized gains 2,902 751 6,324 9,659
Other income 421 887 1,553 1,505
-------- -------- -------- --------
Total revenues 115,260 106,258 332,224 318,560
-------- -------- -------- --------
Expenses:
Losses and loss adjustment expenses 3,211 1,626 7,954 5,665
Underwriting and operating expenses 10,554 10,820 29,553 30,466
Policy acquisition costs, net 5,511 5,232 15,781 16,292
-------- -------- -------- --------
Total expenses 19,276 17,678 53,288 52,423
-------- -------- -------- --------
Income before income taxes 95,984 88,580 278,936 266,137
Provision for income taxes 20,811 19,293 60,891 59,070
-------- -------- -------- --------
Net income $ 75,173 $ 69,287 $218,045 $207,067
======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Common Stock Additional Cumulative Appreciation
----------------------- Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
-------- ------- -------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 100,000 $15,000 $953,655 $1,134,061 $ 427 $(47,640)
Net income -- -- -- 218,045 -- --
Change in foreign currency translation -- -- -- -- 2,037 --
Change in unrealized appreciation of
investments net of change in deferred
income taxes of $77,120 -- -- -- -- -- 142,829
Dividends declared (per common share $665) -- -- -- (66,500) -- --
Tax reduction related to tax sharing
agreement with MBIA Inc. -- -- 9,990 -- -- --
------- ------- -------- ---------- ------ --------
Balance, September 30, 1995 100,000 $15,000 $963,645 $1,285,606 $2,464 $ 95,189
======= ======= ======== ========== ====== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30
---------------------
1995 1994
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $218,045 $207,067
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (1,745) (1,214)
Increase in deferred acquisition costs (5,084) (7,560)
Increase in prepaid reinsurance premiums (8,654) (12,599)
Increase in deferred premium revenue 85,076 85,499
Increase in loss and loss adjustment
expense reserves 5,098 5,076
Depreciation 1,975 1,027
Amortization of goodwill 3,697 3,721
Amortization of bond discount, net (1,389) (3)
Net realized gains on sale of investments (6,324) (9,659)
Deferred income taxes 9,105 13,807
Other, net 21,247 (4,339)
-------- --------
Total adjustments to net income 103,002 73,756
-------- --------
Net cash provided by operating activities 321,047 280,823
-------- --------
Cash flows from investing activities:
Purchase of fixed maturity securities, net
of payable for investments purchased (664,949) (824,635)
Sale of fixed maturity securities, net of
receivable for investments sold 376,589 355,441
Redemption of fixed maturity securities,
net of receivable for investments redeemed 55,513 91,793
(Purchase) sale of short-term investments, net (17,035) 30,897
(Purchase) sale of other investments (664) 87,376
Capital expenditures, net of disposals (3,131) (132)
-------- --------
Net cash used in investing activities (253,677) (259,260)
-------- --------
Cash flows from financing activities:
Dividends paid (66,500) (21,000)
-------- --------
Net cash used by financing activities (66,500) (21,000)
-------- --------
Net increase in cash and cash equivalents 870 563
Cash and cash equivalents-beginning of period 1,332 747
-------- --------
Cash and cash equivalents-end of period $ 2,202 $ 1,310
======== ========
Supplemental cash flow disclosures:
Income taxes paid $ 40,290 $ 41,530
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
- -------------------------
The accompanying consolidated financial statements are unaudited and include the
accounts of MBIA Insurance Corporation and its Subsidiaries (the "Company").
The statements do not include all of the information and disclosures required by
generally accepted accounting principles. These statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto for the year ended December 31, 1994. The accompanying consolidated
financial statements have not been audited by independent accountants in
accordance with generally accepted auditing standards but in the opinion of
management such financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to summarize fairly the Company's
financial position and results of operations. The results of operations for the
nine months ended September 30, 1995 may not be indicative of the results that
may be expected for the year ending December 31, 1995. The December 31, 1994
condensed balance sheet data was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles.
2. DIVIDENDS DECLARED
- ----------------------
Dividends declared by the Company during the nine months ended September 30,
1995 were $66.5 million.
7
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.
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.
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
Caption Page
ADDITIONAL INFORMATION.......................2
REPORTS TO CERTIFICATEHOLDERS................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.........................12
Limitations, Reduction and Substitution
of Credit Enhancement.......................13
THE TRUST FUNDS.............................13
General.....................................13
The Mortgage Loans..........................14
The Agency Securities.......................21
Mortgage Collateral Sellers.................22
Representations with Respect to
Mortgage Collateral.........................23
Repurchases of Mortgage Collateral..........24
Limited Right of Substitution...............25
DESCRIPTION OF THE CERTIFICATES.............25
General.....................................25
Form of Certificates........................26
Assignment of Mortgage Loans................27
Assignment of Contracts.....................28
Review of Mortgage Loan or
Contract Documents..........................28
Assignment of Agency Securities.............28
Spread......................................29
Payments on Mortgage Collateral.............29
Withdrawals from the Custodial Account......31
Distributions...............................32
Advances....................................35
Prepayment Interest Shortfalls..............35
Reports to Certificateholders...............36
Servicing and Administration
of Mortgage Collateral......................37
Realization Upon Defaulted Property.........41
SUBORDINATION...............................42
DESCRIPTION OF CREDIT ENHANCEMENT...........44
General.....................................44
Letters of Credit...........................45
Mortgage Pool Insurance Policies............45
Special Hazard Insurance Policies...........46
Bankruptcy Bonds............................47
Reserve Funds...............................47
Certificate Insurance Policies..............48
Surety Bonds................................48
Maintenance of Credit Enhancement...........48
Reduction or Substitution of
Credit Enhancement..........................49
INSURANCE POLICIES ON
MORTGAGE LOANS OR CONTRACTS.................50
Primary Mortgage Insurance Policies.........50
Standard Hazard Insurance on Mortgaged
Properties..................................51
Standard Hazard Insurance
on Manufactured Homes.......................51
FHA Mortgage Insurance......................52
VA Mortgage Guaranty........................52
THE COMPANY.................................53
RESIDENTIAL FUNDING CORPORATION.............53
THE POOLING AND SERVICING AGREEMENT.........53
Servicing and Administration................54
Events of Default...........................54
Rights Upon Event of Default................54
Amendment...................................55
Termination; Retirement of Certificates.....56
The Trustee.................................56
YIELD CONSIDERATIONS........................57
MATURITY AND PREPAYMENT CONSIDERATIONS......60
CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS AND CONTRACTS.........................62
The Mortgage Loans..........................62
The Contracts...............................68
Environmental Legislation...................71
Soldiers' and Sailors' Civil
Relief Act of 1940..........................71
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....72
General.....................................72
REMICs......................................72
STATE AND OTHER TAX CONSEQUENCES............87
ERISA CONSIDERATIONS........................87
Plan Asset Regulations......................88
Prohibited Transaction Exemption............88
Tax-Exempt Investors........................90
Consultation with Counsel...................90
LEGAL INVESTMENT MATTERS....................90
USE OF PROCEEDS.............................92
METHODS OF DISTRIBUTION.....................92
LEGAL MATTERS...............................93
FINANCIAL INFORMATION.......................93
INDEX OF PRINCIPAL DEFINITIONS..............94
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
Servicer................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
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.
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 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 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 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
Considerations......The Mortgage Collateral supporting
a series of Certificates will have
unique characteristics that will
affect the yield to maturity and
the rate of payment of principal on
such Certificates. See "Yield
Considerations" and "Maturity and
Prepayment Considerations" herein
and in the related Prospectus
Supplement.
Credit
Enhancement.........If so specified in the related
Prospectus Supplement, the Trust
Fund with respect to any series of
Certificates may include any one or
any combination of a letter of
credit, mortgage pool insurance
policy, special hazard insurance
policy, bankruptcy bond, reserve
fund, certificate insurance policy,
surety bond or other type of credit
support to provide partial coverage
for certain defaults and losses
relating to the Mortgage Loans.
Credit support also may be provided
in the form of subordination of one
or more classes of Certificates in
a series under which losses are
first allocated to any Subordinate
Certificates up to a specified
limit. Any form of credit
enhancement typically will have
certain limitations and exclusions
from coverage thereunder, which
will be described in the related
Prospectus Supplement. Losses not
covered by any form of credit
enhancement will be borne by the
holders of the related Certificates
(or certain classes thereof). To
the extent not set forth herein,
the amount and types of coverage,
the identification of any entity
providing the coverage, the terms
of any subordination and related
information will be set forth in
the Prospectus Supplement relating
to a series of Certificates. See
"Description of Credit Enhancement"
and "Subordination."
Advances............Unless otherwise specified in the
related Prospectus Supplement, the
Master Servicer (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."
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.
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
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 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."
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.
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
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.
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 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.
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 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.
The Manufactured Homes securing the Contracts will
consist of "manufactured homes" within the meaning of
42 U.S.C. Section 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 8.5
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 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. Section 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
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 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 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.
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.
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 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).
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."
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.
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;
(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 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."
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 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:
Date Note Description
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.
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.
(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 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;
(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 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
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 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.
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 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 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 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.
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.
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
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.
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 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.
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 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.
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 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 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.
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.
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
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 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.
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.
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 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.
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-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.
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.
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 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.
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 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 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 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 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
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 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.
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 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.
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.
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.
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
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.
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
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 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."
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 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.
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.
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 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 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 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
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.
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 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.
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. Section 2510.3-101 (the "DOL Regulations") concerning
whether or not a Plan's assets would be deemed to
include an interest in the underlying assets of an
entity (such as a Trust Fund) for purposes of applying
the general fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of
ERISA and 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, 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
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
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.
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. Section 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
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.
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.
INDEX OF PRINCIPAL DEFINITIONS
Accrual Certificates..............................5
Advance..........................................35
Affiliated Seller................................22
Agency Securities.................................8
Agency Securities Pool...........................14
AlterNet Loans...................................15
AlterNet Mortgage Program........................15
AlterNet Program Seller..........................22
AlterNet Seller Guide............................19
Appraised Value..............................16, 20
ARM Loans........................................16
Balloon Amount...................................15
Balloon Loans....................................15
Bankruptcy Amount................................43
Bankruptcy Loss..................................44
Beneficial Owner.................................26
Bi-Weekly Loans..................................15
Buy-Down Funds...................................17
Buy-Down Loans...................................15
Buy-Down Period..................................17
Certificate Account..............................14
Certificate Administrator.........................1
Certificate Insurance Policy.....................48
Certificate Registrar............................26
Certificateholders14,............................26
Certificates......................................1
Closing Date.....................................74
Code.............................................10
Commission.......................................14
Company...........................................1
Compensating Interest............................36
Contract Pool.....................................8
Contract Pool Insurance Policy...................46
Contracts......................................1, 4
Contributions Tax................................84
Conventional Loans...............................15
Convertible Mortgage Loan........................17
Cooperative Dwellings............................15
Cooperative Loans.................................8
Cooperative Note.................................63
Cooperatives.....................................15
Custodial Account................................14
Custodian........................................14
Cut-off Date.....................................14
Debt Service Reduction...........................47
Defaulted Mortgage Loss..........................44
Deferred Interest................................17
Deficient Valuation..............................47
Determination Date...............................33
Disqualified Persons.............................87
Distribution Amount..............................33
Distribution Date.................................6
DOL..............................................88
DOL Regulations..................................88
DTC..............................................26
DTC Registered Certificates......................26
Due Date.........................................33
Eligible Account.................................30
ERISA............................................10
ERISA Plans......................................87
Escrow Account...................................38
Exchange Act......................................2
Excluded Plan....................................89
Exemption........................................88
Extraordinary Losses.............................44
Fannie Mae.......................................14
Fannie Mae Securities............................14
FDIC.............................................22
FHA..............................................15
FHA Contracts....................................20
FHA Loans........................................15
Form 8-K.........................................14
Fraud Loss.......................................44
Fraud Loss Amount................................43
Freddie Mac......................................13
Freddie Mac Act..................................21
Freddie Mac Securities...........................13
Garn-St Germain Act..............................67
Ginnie Mae.......................................13
Ginnie Mae Securities............................13
GMAC Mortgage.....................................1
GPM Loans........................................15
Gross Margin.....................................16
Housing Act......................................21
HUD..............................................15
Index............................................16
Indirect Participants............................26
Insurance Proceeds...............................30
IRAs.............................................87
Issue Premium....................................79
Letter of Credit.................................45
Letter of Credit Bank............................45
Liquidated Contract..............................41
Liquidated Mortgage Loan.........................41
Liquidation Proceeds.............................30
Loan-to-Value Ratio..............................16
Manufactured Home.................................8
Mark-to-Market Regulations.......................82
Master Commitments...............................19
Master Servicer...................................1
Maximum Mortgage Rate............................16
Mezzanine Certificates............................5
Minimum Mortgage Rate............................16
Modified Mortgage Loan...........................15
Mortgage Collateral............................1, 4
Mortgage Collateral Seller........................7
Mortgage Loans.................................1, 4
Mortgage Note....................................27
Mortgage Pool.....................................7
Mortgage Pool Insurance Policy...................45
Mortgage Rates...................................15
Mortgaged Properties..............................7
Mortgages........................................15
Mortgagor........................................11
Neg-Am ARM Loans.................................16
Net Mortgage Rate................................57
Nonrecoverable Advance...........................32
OID Regulations..................................72
OTS..............................................91
Participants.....................................26
Parties in Interest..............................87
Pass-Through Rate.................................5
Paying Agent.....................................32
Percentage Interest..............................32
Periodic Cap.....................................16
Permitted Investments............................30
Plan Assets......................................88
Plans............................................87
Policy Statement.................................91
Pool Insurer.....................................45
Pooling and Servicing Agreement................1, 4
Prepayment Interest Shortfall....................35
Primary Insurance Policy.........................50
Primary Insurer..................................50
Principal Prepayments............................34
Prohibited Transactions Tax......................84
PTCE 83-1........................................90
Purchase Price...................................24
Qualified Insurer................................49
Qualified Retirement Plans.......................87
Qualified Substitute Contract....................25
Qualified Substitute Mortgage Loan...............25
Rating Agency....................................10
Realized Loss....................................42
Record Date......................................32
Registration Statement............................2
REMIC.........................................1, 72
REMIC Certificates...............................72
REMIC Provisions.................................72
REMIC Regular Certificates.......................72
REMIC Regulations................................72
REMIC Residual Certificates......................72
REO Contract.....................................41
REO Mortgage Loan................................41
Repurchased Contract.............................25
Repurchased Mortgage Loan........................25
Reserve Fund.....................................47
Residential Funding...............................4
Restricted Group.................................89
RTC..............................................22
Senior Certificates...............................5
Senior Percentage................................43
Senior/Subordinate Series........................26
Servicer..........................................1
Servicing Advances...............................31
Servicing Fee....................................38
Single Certificate...............................37
SMMEA........................................10, 91
Special Hazard Amount............................43
Special Hazard Insurance Policy..................46
Special Hazard Insurer...........................46
Special Hazard Loss..............................44
Special Servicer.................................40
Spread...........................................29
Stated Principal Balance.........................43
Strip Certificate.................................5
Sub-Servicing Agreement..........................37
Subordinate Certificates..........................5
Surety Bond......................................48
Tax-Exempt Investor..............................90
Tax-Favored Plans................................87
Tiered REMICs....................................73
Title V..........................................67
Title VIII.......................................68
Trust Agreement................................1, 4
Trust Fund.....................................1, 4
Trustee..........................................14
UBTI.............................................90
UCC..............................................65
Unaffiliated Seller..............................22
VA...............................................15
VA Contracts.....................................20
VA Loans.........................................15
<PAGE>
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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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................... S-3
Risk Factors............................................................... S-11
Description of the Mortgage Pool........................................... S-12
Description of the Certificates............................................ S-33
The Insurer................................................................ S-42
Certain Yield and Prepayment Considerations................................ S-43
Pooling and Servicing Agreement............................................ S-48
Certain Federal Income Tax Consequences.................................... S-50
Method of Distribution..................................................... S-51
Legal Opinions............................................................. S-52
Experts.................................................................... S-52
Ratings.................................................................... S-52
Legal Investment........................................................... S-53
ERISA Considerations....................................................... S-53
Appendix A................................................................. A-1
Appendix B................................................................. B-1
PROSPECTUS
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>
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RESIDENTIAL ASSET SECURITIES
CORPORATION
MORTGAGE PASS-THROUGH
CERTIFICATES, SERIES 1996-KS1
$77,178,720
ADJUSTABLE RATE CLASS A CERTIFICATES
RESIDENTIAL FUNDING
SECURITIES CORPORATION
PROSPECTUS SUPPLEMENT
MARCH 21, 1996
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