November 12, 1997
Mr. Dominic J. Minore
Senior Counsel
Securities and Exchange Commission
Mail Stop 4-9
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Residential Asset Securities Corporation
Amendment No. 2 to Registration Statement on Form S-3
Filed July 3, 1997
Registration No. 333-28791
Dear Mr. Minore:
On behalf of Residential Asset Securities Corporation (the
"Registrant") this letter responds to your letter dated October 3, 1997 (the
"Comment Letter No. 2"), providing comments on the Pre-Effective Amendment No. 1
to the above-referenced Registration Statement ("Amendment No. 1," and, as
amended, the "Registration Statement"). For your convenience, each comment from
Comment Letter No. 2 has been reproduced below, followed by the Registrant's
response to such comment. All references in each response refer to Pre-Effective
Amendment No. 2 to the Registration Statement ("Amendment No. 2"), which has
been marked to show changes from Amendment No. 1. Capitalized terms used in the
response have the meanings assigned to them in the core prospectus, unless
otherwise noted.
Registration Statement - General
Comment 1. We note your response to prior comment number 2. Because it appears
that either 1) not all Trust Funds will include Mexico Mortgage loans, or 2) a
Trust Fund is not limited to a maximum of 10% (per the terms of the prospectus),
by aggregate principal balance, of Mexico Mortgage Loans, we believe that a
separate core prospectus/prospectus supplement should be provided for each type
of offering [that is, 1) & 2) above] permissible under the registration
statement.
Response 1. We have revised the disclosure to provide that no more than 10% of a
Mortgage Pool (by initial aggregate principal balance) shall be comprised of
Mexico Mortgage Loans. Accordingly, we believe that it would be confusing to
investors to include two core prospectuses for offerings where a small
NY1-241975.1
<PAGE>
Mr. Dominic J. Minore
November 12, 1997
Page 2
portion of the Mortgage Loans will be Mexico Mortgage Loans. In addition, we do
not believe it will be confusing to investors in offerings that do not include
Mexico Mortgage Loans, because the Prospectus clearly states that a Mortgage
Pool will include Mexico Mortgage Loans only if and to the extent specified in
the Prospectus Supplement.
General, page 15
Comment 2. We note your response to prior comment #7. Please expand the
disclosure to identify and describe, with specificity, the "other related
property conveyed by the Company."
Response 2. The disclosure has been revised in response to Comment 2.
The Mortgage Loans, pages 16-20
Comment 3. We note your response to prior comment number 8. As you are aware,
the "investment grade securities" criterion is only one of the eligibility
requirements specified in General Instruction I.B.5 to Form S-3. The securities
must also be backed by a discrete pool of financial assets that by their terms
convert into cash within a finite time period. We believe that delinquent loans
are not necessarily converting to cash by their terms. However, it is unclear
from your response whether you believe that all loans or only certain loans
which are delinquent at the time that they are included in a discrete pool, as
of the applicable cut-off date, ultimately convert into cash by their terms and,
therefore, can be used to service asset-backed securities registered on Form
S-3. Please clarify, with specificity, what was contemplated by your response
and provide support for your conclusion.
Response 3. We are aware of your response, dated October 16, 1997, to a request
for interpretive guidance from The Bond Market Association on the subject of the
availability of Form S-3 for asset-backed securities backed by delinquent
receivables. The Registrant is prepared to comply with the position set forth in
that letter.
NY1-241975.1
<PAGE>
Mr. Dominic J. Minore
November 12, 1997
Page 3
Purchase Obligation, page 57
Comment 4. Please revise the discussion on page 57 so that it conforms with your
response to prior comment number 15. We may have further comment.
Response 4. Disclosure has been added in response to Comment 4.
Foreclosure in Mexico Loans, page 73
Comment 5. Reconcile your response to prior comment number 17 with the
prospectus (for example page 15) which indicates that a Mortgagor may maintain
its principal residence outside of the United States at the time a loan is made.
We may have further comment.
Response 5. Although at the time of our prior response, dated September 23,
1997, the Registrant did not anticipate purchasing Mexico Mortgage Loans made to
mortgagors whose principal residence at the time of origination was outside of
the United States, the Registrant currently has an opportunity to purchase loans
of that type. We have revised the disclosure regarding the remedies available to
the lender when a Mortgagor does not maintain a principal residence in the
United States at the time of origination.
Methods of Distribution, page 104
Comment 6. We disagree with the analysis and conclusions set forth in your
response prior comment number 19. However, the staff will not comment further on
this issue in connection with this registration statement.
Response 6. The Registrant notes Comment 6.
NY1-241975.1
<PAGE>
Mr. Dominic J. Minore
November 12, 1997
Page 4
If you should have any questions or comments concerning the
contents of this response letter, please do not hesitate to call the undersigned
at (212) 506-5070.
Sincerely,
/s/ Katharine I. Crost
Katharine I. Crost
KIC/mb
cc: Bryan Brown, SEC - Mail Stop 4-9
Paula Dubberly, SEC - Mail Stop 4-9
William E. Waldusky
Michael Seats
Robert Schwartz
Richard Kent
Steven Kudenholdt
Paul Tvetenstrand
NY1-241975.1
<PAGE>
As filed with the Securities and Exchange Commission on ^ November 12, 1997
Registration No. 333-30789
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. ^ 2
to
FORM S-3
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
RESIDENTIAL ASSET SECURITIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
51-0362653
(I.R.S. employer identification number)
Residential Asset Securities Corporation
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
(612) 832-7000
(Address, including zip code, and telephone number, including area code, of
registrant's principle executive offices)
William B. Acheson
Residential Asset Securities Corporation
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
(612) 832-7000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Robert L. Schwartz, Esq.
GMAC Mortgage Group, Inc.
3031 West Grand Boulevard
Detroit, Michigan 48232
Steven S. Kudenholdt, Esq.
Katharine I. Crost, Esq. Paul D. Tvetenstrand, Esq.
Orrick, Herrington & Sutcliffe LLP Thacher Proffitt & Wood
666 Fifth Avenue Two World Trade Center
New York, New York 10103 New York, New York 10048
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective as determined
by market conditions.
If any of the securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act Registration Statement number of the earlier effective Registration
Statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
================================================================================================================================
Amount to be Proposed Maximum Proposed Maximum Amount of
Title of Securities to be Registered Registered(1) Aggregate Price Per Unit Aggregate Offering Price Registration Fee
- - --------------------------------------------------------------------------------------------------------------------------------
Mortgage and Manufactured Housing
<S> <C> <C> <C> <C> <C>
Contract Pass-Through Certificates $1,200,000,000 100%(2) $1,200,000,000(2) $363,637(3)
(Issuable in Series)
================================================================================================================================
</TABLE>
(1) $2,076,448,176 aggregate principal amount of Mortgage and Manufactured
Housing Contract Pass-Through Certificates registered by the Registrant
under Registration Statement No. 333-28791 on Form S-3 referred to
below and not previously sold are consolidated into this Registration
Statement pursuant to Rule 429. All registration fees in connection
with such unsold amount of Mortgage and Manufactured Housing Contract
Pass-Through Certificates have been previously paid by the Registrant
under the foregoing Registration Statement. Accordingly, the total
amount registered under this Registration Statement as so consolidated
as of the date of this filing is $3,276,448,176.
(2) Estimated solely for the purpose of calculating the registration fee. (3)
Previously paid.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 of the General Rules and Regulations under the
Securities Act of 1933, the prospectus that is part of this Registration
Statement is a combined prospectus and includes all the information currently
required in a prospectus relating to the securities covered by Registration
Statement No. 333-28791 Form S-3 previously filed by the Registrant. This
Registration Statement, which relates to $3,276,448,176 aggregate principal
amount of Mortgage and Manufactured Housing Contract Pass-Through Certificates,
constitutes Post-Effective Amendment No. 1 to Registration Statement No.
333-28791 on Form S-3.
<PAGE>
PROSPECTUS (Subject to Completion Dated , 1997)
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 or junior lien closed-end 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. To the extent specified in
the related Prospectus Supplement, the Mortgage Collateral may include mortgage
loans secured by interests in residential properties located in Mexico and
mortgage loans made to citizens or residents of countries other than the United
States. 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 C 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
NY1-241975.1
<PAGE>
described 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 "Risk Factors" commencing herein on page 11.
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 "United States 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
GROUP, INC. ("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
NY1-241975.1
<PAGE>
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 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 , 1997.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates (the "Registration Statement"). The
Company is also subject to certain of the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act "), and,
accordingly, will file reports thereunder with the Commission. The Registration
Statement and the exhibits thereto, and reports and other information filed by
the Company pursuant to the Exchange Act can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at certain of its Regional Offices located as
follows: Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048, at prescribed rates and
NY1-241975.1
<PAGE>
electronically through the Commission's Electronic Data Gathering, Analysis and
Retrieval system at the Commission's Web site (http://www.sec.gov).
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 C Reports to
Certificateholders." Any reports forwarded to holders will contain financial
information that has not been examined or reported upon by an independent
certified public accountant. The Company will file with the Commission such
periodic reports with respect to the Trust Fund for a series of Certificates as
are required under the Exchange Act, and the rules and regulations of the
Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each series of Certificates offered hereby, there are
incorporated herein and in the related Prospectus Supplement by reference all
documents and report filed or caused to be filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, prior
to the termination of the offering of the related series of Certificates, that
relate specifically to such related series of Certificates. The Company will
provide or cause to be provided without charge to each person to whom this
Prospectus and related Prospectus Supplement is delivered in connection with the
offering of one or more classes of such series of Certificates, upon written or
oral request of such person, a copy of any or all such reports incorporated
herein by reference, in each case to the extent such reports relate to one or
more of such classes of such series of Certificates, other than the exhibits to
such documents, unless such exhibits are specifically incorporated by reference
in such documents.
NY1-241975.1
<PAGE>
Requests should be directed in writing to Residential Asset Securities
Corporation, 8400 Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota
55437, or by telephone at (612) 832-7000.
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.
NY1-241975.1
<PAGE>
TABLE OF CONTENTS
Caption Page
ADDITIONAL INFORMATION................................................. 3
REPORTS TO CERTIFICATEHOLDERS.......................................... 4
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE.................................................. 4
SUMMARY OF PROSPECTUS.................................................. 12
RISK FACTORS........................................................... 21
Risks Associated with the Mortgage
Collateral........................................... 21
Yield and Prepayment Considerations........................... 25
Limited Representations and Warranties........................ 25
Limited Liquidity............................................. 26
Limited Obligations........................................... 26
Limitations, Reduction and Substitution of
Credit Enhancement................................... 26
Swaps and Yield Supplement Agreements......................... 27
THE TRUST FUNDS ....................................................... 27
General ..................................................... 27
The Mortgage Loans............................................ 29
The Contracts.......................................................... 38
General ..................................................... 38
The Agency Securities......................................... 39
Mortgage Collateral Sellers................................... 41
Representations with Respect to Mortgage
Collateral........................................... 42
Repurchases of Mortgage Collateral............................ 43
Limited Right of Substitution................................. 45
DESCRIPTION OF THE CERTIFICATES ....................................... 46
General ..................................................... 46
Form of Certificates.......................................... 47
Assignment of Mortgage Loans.................................. 50
Assignment of Contracts....................................... 51
Review of Mortgage Loan or Contract
Documents............................................ 52
Assignment of Agency Securities............................... 52
Spread ..................................................... 52
Payments on Mortgage Collateral............................... 53
Withdrawals from the Custodial Account........................ 56
Distributions................................................. 57
Advances ..................................................... 61
Prepayment Interest Shortfalls................................ 62
Funding Account............................................... 62
Reports to Certificateholders................................. 63
Servicing and Administration of Mortgage
Collateral........................................... 64
Realization Upon Defaulted Property........................... 70
SUBORDINATION.......................................................... 72
Overcollateralization......................................... 74
DESCRIPTION OF CREDIT ENHANCEMENT ..................................... 74
General ..................................................... 74
Letters of Credit............................................. 76
Mortgage Pool Insurance Policies.............................. 76
Special Hazard Insurance Policies............................. 78
Bankruptcy Bonds.............................................. 79
Reserve Funds................................................. 80
Surety Bonds.................................................. 81
Maintenance of Credit Enhancement............................. 81
Reduction or Substitution of Credit
Enhancement.......................................... 82
OTHER FINANCIAL OBLIGATIONS RELATED TO
THE CERTIFICATES.............................................. 83
Swaps and Yield Supplement Agreements......................... 83
Caption Page
Purchase Obligations.......................................... 83
INSURANCE POLICIES ON MORTGAGE LOANS
OR CONTRACTS.................................................. 84
Primary Mortgage Insurance Policies........................... 84
Standard Hazard Insurance on Mortgaged
Properties........................................... 86
Standard Hazard Insurance on Manufactured
Homes................................................ 87
FHA Mortgage Insurance........................................ 87
VA Mortgage Guaranty.......................................... 88
THE COMPANY............................................................ 89
RESIDENTIAL FUNDING CORPORATION........................................ 89
THE POOLING AND SERVICING AGREEMENT.................................... 89
Servicing and Administration.................................. 90
Events of Default............................................. 90
Rights Upon Event of Default.................................. 91
Amendment..................................................... 91
Termination; Retirement of Certificates....................... 92
The Trustee................................................... 93
YIELD CONSIDERATIONS .................................................. 94
MATURITY AND PREPAYMENT
CONSIDERATIONS................................................ 99
CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS AND CONTRACTS...........................................102
The Mortgage Loans............................................102
The Contracts.................................................115
Environmental Legislation.....................................118
Soldiers' and Sailors' Civil Relief Act of
1940.................................................119
Default Interest and Limitations on
Prepayments..........................................120
Forfeitures in Drug and RICO Proceedings......................120
Negative Amortization Loans...................................120
UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES..................................................121
General .....................................................121
REMICs .....................................................122
STATE AND OTHER TAX CONSEQUENCES.......................................142
ERISA CONSIDERATIONS...................................................142
Plan Asset Regulations........................................143
Prohibited Transaction Exemption..............................144
Insurance Company General Accounts............................147
Representation from Investing Plans...........................148
Tax-Exempt Investors..........................................148
Consultation with Counsel.....................................149
LEGAL INVESTMENT MATTERS...............................................149
USE OF PROCEEDS........................................................151
METHODS OF DISTRIBUTION................................................151
LEGAL MATTERS..........................................................152
FINANCIAL INFORMATION..................................................152
INDEX OF PRINCIPAL DEFINITIONS.........................................154
NY1-241975.1
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each series of Certificates contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of such series. Capitalized terms used in this summary that are not
otherwise defined shall have the meanings ascribed thereto in this Prospectus.
An index indicating where certain terms used herein are defined appears at the
end of this Prospectus.
Securities Offered Mortgage and Manufactured Housing Contract Pass-Through
Certificates.
Company Residential Asset Securities Corporation. See "The Company."
Servicer or Master 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 consisting primarily of 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 or 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.
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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 specified in the related
Prospectus Supplement, a series of
Certificates may include one or more
classes of Certificates
(collectively, the "Senior
Certificates") which are senior to
one or more classes of Certificates
(collectively, the " Subordinate
Certificates") in respect of certain
distributions of principal and
interest and allocations of losses
on the Mortgage Collateral. See
"Subordination." If so specified in
the related Prospectus Supplement, a
series of Certificates may include
one or more classes of Certificates
(collectively, the "Mezzanine
Certificates") which are Subordinate
Certificates but which are senior to
certain other classes of Subordinate
Certificates in respect of such
distributions or losses. In
addition, certain classes of Senior
Certificates may be senior to other
classes of Senior Certificates in
respect of such distributions or
losses. The Certificates will be
issued in fully-registered
certificated or book-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 "Risk
Factors -- 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 specifies, interest distributions
NY1-241975.1
<PAGE>
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."
Funding Account If so specified in the related Prospectus Supplement, a portion
of the proceeds of the sale of one or more Classes of Certificates of a
Series or a portion of collections on the Mortgage Loans in respect of
principal may be deposited in a segregated account to be applied to acquire
additional Mortgage Loans from the Sellers, subject to the limitations set
forth herein under "Description of the Certificates --Funding Account." The
times and requirements for the acquisition of such Mortgage Loans will be
set forth in the related Pooling and Servicing Agreement or other agreement
with the Sellers. Monies on deposit in the Funding Account and not applied
to acquire such additional Mortgage Loans within the time set forth in the
related Pooling and Servicing Agreement or other applicable agreement may
be treated as principal and applied in the manner described in the related
Prospectus Supplement.
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<PAGE>
TrustFund 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 HomeComings
Financial Network, Inc., Residential
Money Centers, Inc. and GMAC
Mortgage Corporation, 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 or junior liens on or certain other
interests in one- to four-family residential properties (each, a "Mortgaged
Property"). The Mortgaged Properties may be located in any of the 50
States, the District of Columbia, the Commonwealth of Puerto Rico, or
Mexico. 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 or
junior lien on the Mortgaged Properties, (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, which constitute first or
junior liens on such property (" Cooperative Loans"), and (iii) loans
secured by a beneficial interest in a trust, the principal asset of which
is residential real property located in Mexico (the "Mexico Mortgage
Loans"). All of the Mexico Mortgage Loans will be United States
dollar-denominated loans originated by a lender located and doing business
in the United States, Canada or Mexico. The Mortgaged Properties may be
owner occupied or non-owner occupied and may include vacation and second
homes and investment properties. The borrowers (the "Mortgagors") of the
Mortgage Loans, including the Mexico Mortgage Loans, may include persons
who are citizens and residents of the United States or permanent resident
aliens residing in the United States (the " U.S. Borrowers"), or citizens
and/or residents of countries other than the United States, including
Mexico, United States citizens employed abroad, non-permanent resident
aliens
NY1-241975.1
<PAGE>
employed in the United States, and foreign
corporations formed for the purpose of
owning real estate, but not including
permanent resident aliens residing in the
United States (collectively, the "
International Borrowers"). Mortgage Loans
secured by Mortgaged Properties located in
Puerto Rico are sometimes referred to herein
as "Puerto Rico Mortgage Loans." See "The
Trust Funds --The Mortgage Loans."
Contracts The Trust Fund for a series of Certificates may include a pool of
Contracts, or whole or partial participations in Contracts (a " Contract
Pool") originated by one or more manufactured housing dealers, or such
other entity or entities described in the related Prospectus Supplement.
The Contracts may be conventional manufactured housing contracts or
contracts insured by the FHA or partially guaranteed by the VA. Each
Contract will be secured by a manufactured home (each, a " Manufactured
Home," which shall also be included in the term "Mortgaged Property").
Generally, the Contracts will be fully-amortizing and will bear interest at
a fixed rate unless otherwise specified in the related Prospectus
Supplement. See "The Trust Funds -- The Contracts."
Agency Securities The Trust Fund for a series of Certificates may include a pool
of Freddie Mac Securities, Fannie Mae Securities or Ginnie Mae Securities
(collectively, the " Agency Securities"), or a combination of Agency
Securities. Such Agency Securities may represent whole or partial interests
in pools of (1) Mortgage Loans or Contracts or (2) Agency Securities.
Unless otherwise set forth in the related Prospectus Supplement, all Ginnie
Mae Securities will be backed by the full faith and credit of the United
States. None of the Freddie Mac Securities or Fannie Mae Securities will be
backed, directly or indirectly, by the full faith and credit of the United
States. Agency Securities may be backed by fixed or adjustable rate
Mortgage Loans or other types of Mortgage Loans or Contracts specified in
the related Prospectus Supplement. See "The Trust Funds -- The Agency
Securities."
Yield and Prepayment The Mortgage Collateral supporting a series of Certificates
Considerations 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
NY1-241975.1
<PAGE>
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.
LegalInvestment If so specified in the related Prospectus Supplement, certain
classes of Certificates offered hereby and by the related Prospectus
Supplement that are rated in one of the two highest rating categories by at
least one Rating Agency will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"), for so long as such classes sustain such a rating. See
"Legal Investment Matters."
ERISAConsiderations A fiduciary of an employee benefit plan and certain other
retirement plans and arrangements, including individual retirement accounts
and annuities, Keogh plans, bank collective investment funds, insurance
company general and separate accounts and certain other entities in which
such plans, accounts, annuities or arrangements are invested, which is
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Internal Revenue Code of 1986 (the
"Code"), and any other person contemplating purchasing a Certificate with
Plan Assets (as defined herein), should carefully review with its legal
counsel whether the purchase or holding of Certificates could give rise to
a transaction that is prohibited or is
NY1-241975.1
<PAGE>
not otherwise permissible either
under ERISA or Section 4975 of the
Code. See "ERISA Considerations"
herein and in the related Prospectus
Supplement.
Certain United States Federal Certificates of each series offered hereby will
constitute Income Tax Consequences "royalty 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 "United States Federal Income Tax Consequences" herein and in
the related Prospectus Supplement.
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Certificates:
Risks Associated with the Mortgage Collateral
General
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 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, the Mortgagors may not be able to
make their loan payments as such payments increase and thus the likelihood of
default will increase.
Underwriting Standards
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
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<PAGE>
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.
Mortgage Loans or Contracts may have been originated using underwriting
standards that are less stringent than the underwriting standards applied by
other 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. or Residential Accredit Loans, Inc. For example, the Mortgage Loans or
Contracts may have been made to borrowers 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, the
absence of primary mortgage insurance, or lesser amounts of primary mortgage
insurance than such other lending programs. Unless otherwise specified in the
related Prospectus Supplement, the underwriting standards applied to the
origination of Mexico Mortgage Loans and Puerto Rico Mortgage Loans, to the
extent they relate to the creditworthiness of the borrower, will be consistent
with such other mortgage loan purchase programs.
International Borrowers
Mortgage Loans made to International Borrowers may also present risks
generally not associated with mortgage loans made to U.S. Borrowers, including
the difficulty in locating and serving borrowers in a foreclosure proceeding,
the risk of adverse economic and political developments in the country of the
International Borrower's citizenship or residence, and the possibility of the
imposition of withholding taxes on the payments made by borrowers. In the case
of each Mortgage Loan (other than a Mexico Mortgage Loan) made to an
International Borrower, Residential Funding will represent that withholding
taxes will not be required to be paid on payments made by the borrower on the
related Mortgage Loan. In the case of a Mexico Mortgage Loan, withholding taxes
will be imposed on payments made by borrowers who are residents of Mexico for
Mexican tax purposes, for example, because the borrower's principal residence is
or becomes located in Mexico or because the borrower has spent more than a
certain period of time (currently 182 days during the previous year) in Mexico.
In such event, the borrower will be required to increase the amount of the
monthly payment by the amount of the taxes required to be withheld. Any such
increase could in turn increase the likelihood of default by the borrower,
particularly if the borrower was approved for the loan on the basis of a lower
monthly payment. In addition, if the borrower fails to pay the amount of the
withholding tax, in some jurisdictions, a tax lien or other impediment to
realization on the collateral may decrease the amount of proceeds realized by
the related Trust Fund in the event of a default by the borrower on the related
Mortgage Loan.
Mexico Mortgage Loans
If so specified in the related Prospectus Supplement, certain of the
Mortgage Loans may be Mexico Mortgage Loans. The percentage of Mexico Mortgage
Loans in any Mortgage Pool will not exceed 10% by aggregate principal balance as
of the Cut-off Date. The value of Mortgaged Properties located in Mexico (the "
Mexican Properties") may be subject to certain risks not associated with
mortgage loans secured by properties located in the United States. For example,
the value of properties located in Mexico may decline in relation to the United
States dollar as a result of adverse political and economic developments in
Mexico. Developments in Mexico that could adversely affect the value of the
Mortgaged Properties located in Mexico may include currency devaluation, high
inflation, high unemployment, social and political unrest, expropriation of the
Mexican Properties, moratoriums or other limitations on the enforceability of
lenders' rights, and a change in the law to prohibit indirect ownership through
trusts by non-Mexicans of those properties. Such factors could also affect the
ability of the Mortgagor of a Mexico Mortgage Loan to repay the loan,
particularly where the Mortgagor is a resident of, and employed in, Mexico.
The method of ownership of the Mexican Properties may present
uncertainty in realizing on the Mortgaged Property. The Company is not aware of
any other mortgage loan programs involving mortgage loans that are secured in a
manner similar to the Mexico Mortgage Loans. There may be uncertainty and delays
in foreclosing
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<PAGE>
on the beneficial interest in the trust. For example, if a Mortgagor residing in
the United States moves its principal residence from the state in which the
financing statements filed to perfect the lender's security interest have been
filed and the lender, because it has no knowledge of the relocation of the
Mortgagor or otherwise, fails to refile in the state to which the Mortgagor has
moved within four months after relocation or if the Mortgagor no longer resides
in the United States, the lender's security interest in the Mortgaged Property
will become unperfected. If the Mortgagor maintains its principal residence
outside of the United States at the time the loan is made, the Lender's interest
in the Mortgaged Property may not be able to be perfected. Additional
uncertainty and delays could result to the extent that any actions are brought
in the courts in Mexico, including eviction proceedings, defending actions
brought by the defaulting borrower, and enforcement actions. Because marketing
ownership of the Mexican Properties through the sale of beneficial interests in
a trust may be less common than other methods of marketing ownership interests
in Mexican Properties, the market value of the beneficial interests upon a
foreclosure may be lower than would otherwise be the case. Finally, the costs of
foreclosing on the Lender's interest in the Mortgaged Property and transferring
ownership of such property may be substantially higher than the costs associated
with foreclosure sales with respect to ^ real estate located in the United
States, and may include transfer taxes, notary public fees, trustee fees ^ and
capital gains and other taxes on the proceeds of sale. Any such additional
foreclosure costs may make the cost of foreclosing on the collateral
uneconomical, which may increase the risk of loss on the Mexico Mortgage Loans
substantially. For additional information regarding the Mexico Mortgage Loans
and the procedure for realizing on the related collateral, see "The Trust Funds
- - -- The Mortgage Loans" and "Certain Legal Aspects of Mortgage Loans and
Contracts -- The Mortgage Loans".
Junior Mortgage Loans
The Mortgage Loans may be secured by junior liens on the related
Mortgaged Properties ("Junior Mortgage Loans") that will be subordinate to the
rights of the mortgagee under the related senior mortgage or mortgages.
Accordingly, the holder of a Junior Mortgage Loan will be subject to a loss of
its mortgage if the holder of a senior mortgage is successful in foreclosure of
its mortgage and its claim, including any related foreclosure costs, is not paid
in full, since no junior liens or encumbrances survive such a foreclosure. Also,
due to the priority of the senior mortgage, the holder of a Junior Mortgage Loan
may not be able to control the timing, method or procedure of any foreclosure
action relating to the Mortgaged Property. Investors should be aware that any
liquidation, insurance or condemnation proceeds received in respect of such
Junior Mortgage Loans will be available to satisfy the outstanding balance of
such Mortgage Loans only to the extent that the claims of the holders of such
senior mortgages have been satisfied in full, including any related foreclosure
costs. For Mortgage Loans secured by junior liens that have low Junior Mortgage
Ratios, foreclosure costs may be substantial relative to the outstanding balance
of the Mortgage Loan, and therefore the amount of any liquidation proceeds
available to Certificateholders may be smaller as a percentage of the
outstanding balance of the Mortgage Loan than would be the case in a typical
pool of first lien residential loans. In addition, the holder of a Junior
Mortgage Loan may only foreclose on the property securing the related Mortgage
Loan subject to any senior mortgages, in which case such holder must either pay
the entire amount due on the senior mortgages to the senior mortgagees at or
prior to the foreclosure sale or undertake the obligation to make payments on
the senior mortgages. The Trust Fund will not have any source of funds to
satisfy the senior mortgages or make payments due to the senior mortgagees,
although the Master Servicer or Subservicer may, at its option, advance such
amounts to the extent deemed recoverable and prudent. In the event that proceeds
from a foreclosure or similar sale of the related Mortgaged Property are
insufficient to satisfy all senior liens and the Mortgage Loan in the aggregate,
the Trust Fund, as the holder of the junior lien, and, accordingly, Holders of
one or more classes of the Certificates, are likely to (i) incur losses in
jurisdictions in which a deficiency judgment against the borrower is not
available, and (ii) incur losses if any deficiency judgment obtained is not
realized upon. In the event that such proceeds are insufficient to satisfy all
senior liens and to reimburse the Master Servicer or Subservicer for any
advances made in respect thereof, such losses could exceed the amount of the
Junior Mortgage Loan.
With respect to Junior Mortgage Loans in general, and in particular
those having high Combined Loan-to-Value Ratios or low Junior Mortgage Ratios,
the foregoing considerations may result in circumstances under which it would be
uneconomical to foreclose on the property securing the related Mortgaged Loan in
the event of a default. The actual Junior Mortgage Ratio at any time may be
lower than indicated in the Prospectus Supplement as a result of any reductions
in the Stated Principal Balance thereof. In addition, the actual Combined
Loan-to-Value
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Ratio at any time may be higher than indicated in the Prospectus Supplement if
the Junior Mortgage Loan or any senior mortgage loan is subject to negative
amortization or if the value of the related Mortgaged Property has declined. In
such circumstances, repayment of the Junior Mortgage Loan would depend solely on
the credit of the Mortgagor, and the ability to obtain repayment of the Mortgage
Loan may be generally similar to that which would be experienced if the Mortgage
Loan were an unsecured consumer loan. Moreover, while in most jurisdictions a
mortgagee would be permitted to elect to either foreclose or sue to collect the
debt evidenced by the Mortgage Note, in some jurisdictions suits to collect the
debt are prohibited until the mortgagee has sought to foreclose against the
security, so that the mortgagee may be forced to foreclose first and thereafter
obtain a deficiency judgment. In addition, in some jurisdictions, where the
mortgagee has chosen to sue on the debt in lieu of foreclosure, the mortgagee
will be barred from foreclosing against the security.
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
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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."
To the extent that losses on any item of Mortgage Collateral are not
covered by any credit enhancement, the Certificateholders of the related Series
(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 "Risk Factors," if any, in
the related Prospectus Supplement.
Swaps and Yield Supplement Agreements
The Trustee on behalf of the Trust may enter into interest rate swaps
and related caps, floors and collars to minimize the risk to Certificateholders
of adverse changes in interest rates, and other yield supplement agreements or
similar yield maintenance arrangements. There can be no assurance that the
Trustee will be able to enter into or offset swaps or such other arrangements at
any specific time or at prices or on other terms that are advantageous or to
terminate a swap or other arrangement when it would be economically advantageous
to the Trust Fund to do so. See "Other Financial Obligations Related to the
Certificates" herein.
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THE TRUST FUNDS
General
A Trust Fund for a series of Certificates may include Mortgage
Collateral that consists of one or more of the following: (1) Mortgage Loans, or
whole or partial participations in Mortgage Loans, which are one- to four-family
residential mortgage loans, including loans secured by first or junior mortgages
or leases on cooperative apartment units and loans to cooperative associations,
and which are closed-end loans that do not permit revolving debt; (2) Contracts,
or whole or partial participations in Contracts; and (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 ^
will include related property conveyed by the Company, including payments made
by the Mortgagors, hazard insurance policies on the Mortgaged Properties and
primary mortgage insurance policies, if any, on the Mortgage Loans. The
Mortgaged Properties may be located in any of the 50 States, the District of
Columbia, the Commonwealth of Puerto Rico, or Mexico. 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 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, a pool of Agency Securities (an "Agency Securities Pool") or any
combination thereof, having the aggregate principal balance as of the date (the
"Cut-off Date") specified in the related Prospectus Supplement.
Certificateholders of a series will have interests only in such Mortgage Pool,
Contract Pool or Agency Securities Pool or combination thereof 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
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
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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. If so specified in the related Prospectus Supplement,
the Mortgage Collateral Sellers may include state or local government housing
finance agencies. 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 HomeComings
Financial Network, Inc., GMAC Mortgage Corporation 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 under Residential Funding's mortgage loan origination
program for sub-prime mortgage loans (the "AlterNet Mortgage Program") as
described below (such Mortgage Loans, the "AlterNet Loans"). The Company does
not expect to purchase Mexico Mortgage Loans through the AlterNet Mortgage
Program.
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
provide for the reduction of the interest rate based on the payment performance
of the Mortgage 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, deeds
to secure debt or other similar security instruments (collectively, "Mortgages")
creating a first or junior lien on or other interests in the related Mortgaged
Properties. The Mortgage Loans may also include Cooperative Loans evidenced by
promissory notes secured by a first or junior 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").
Each Mexico Mortgage Loan will be made by the lender of the Mexico
Mortgage Loan to the Mortgagor, pursuant to a Loan and Security Agreement or
similar agreement (the "Mexico Loan Agreement"), and will be secured by the
beneficial ownership interest in a separate trust, the sole asset of which is a
residential property
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located in Mexico (the "Mexican Property"). The residential property may be a
second home, vacation home or the primary residence of the Mortgagor. The
Mortgagor of a Mexico Mortgage Loan may be a U.S. Borrower or an International
Borrower.
Because of the uncertainty and delays in foreclosing on real property
interests in Mexico and because non-Mexican citizens are prohibited from owning
real property located in certain areas of Mexico, the nature of the security
interest and the manner in which the Mexico Mortgage Loans are secured differ
from that of mortgage loans typically made in the United States. Unless
otherwise specified in the related Prospectus Supplement, record ownership and
title to the Mexican Property will be held in the name of a Mexican financial
institution acting as trustee (the "Mexican Trustee") for a trust (the "Mexican
Trust") under the terms of a trust agreement (the "Mexico Trust Agreement"). The
Mexico Trust Agreement will be governed by Mexican law and will be filed (in
Spanish) in the real property records in the jurisdiction in which the property
is located. The original term of the Mexican Trust will be 50 years and will be
renewable at the option of the Mortgagor. To secure the repayment of the Mexico
Mortgage Loan, the lender is named as a beneficiary of the Mexican Trust. The
lender's beneficial interest in the Mexican Trust (the "Lender's Beneficial
Interest") grants to the lender the right to direct the Mexican Trustee to
direct the sale of the Mortgagor's beneficial interest in the Mexican Trust (the
"Mortgagor's Beneficial Interest") or to terminate the Mexican Trust and sell
the Mexican Property. The Mortgagor's Beneficial Interest grants to the
Mortgagor the right to use, occupy and enjoy the Mexican Property so long as it
is not in default of its obligations in respect of the Mexico Mortgage Loan.
As security for repayment of the Mexico Mortgage Loan, pursuant to the
Mexico Loan Agreement, the Mortgagor grants to the lender a security interest in
the Mortgagor's Beneficial Interest. If the Mortgagor is domiciled in the United
States, the Mortgagor's Beneficial Interest should be considered under
applicable state law to be an interest in personal property, not real property,
and, accordingly, the lender will file UCC financing statements in the
appropriate state to perfect the lender's security interest. If the lender
conducts its principal lending activities in the United States the Mexico Loan
Agreement will provide that rights and obligations of such a Mortgagor and the
lender under the Mexico Loan Agreement will be governed under applicable state
law. ^ If a Mortgagor is not a resident of the United States, the lender's
security interest in the Mortgagor's Beneficial Interest ^ may be unperfected.
See "Certain Legal Aspects of Mortgage Loans and Contracts -- The Mortgage
Loans." ^
In connection with the assignment of a Mexico Mortgage Loan into a
Trust Fund, the Depositor will transfer to the Trustee, on behalf of the
Certificateholders, all of its right, title and interest in the Mortgage Note,
the Lender's Beneficial Interest, the lender's security interest in the
Mortgagor's Beneficial Interest, and its interest in any policies of insurance
on the Mexico Mortgage Loan or the Mexican Property. The percentage of Mortgage
Loans, if any, that are Mexico Mortgage Loans will be specified in the related
Prospectus Supplement.
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,
Cooperative 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 (other than
a Cooperative Dwelling) will be located on land owned in fee simple by the
Mortgagor or, if specified in the related Prospectus Supplement, land leased by
the Mortgagor, provided that ownership of Mexican Properties will be held by the
Mexican Trust. 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
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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.
With respect to any Junior Mortgage Loan, the "Combined Loan-to-Value
Ratio" generally will be the ratio, expressed as a percentage, of the sum of (i)
the Cut-off Date Principal Balance of such Junior Mortgage Loan and (ii) the
principal balance of any related mortgage loans that constitute liens senior to
the lien of the Junior Mortgage Loan on the related Mortgaged Property, at the
time of the origination of such Junior Mortgage Loan (or, if appropriate, at the
time of an appraisal subsequent to origination), to the lesser of (A) the
appraised value of the related Mortgaged Property determined in the appraisal
used in the origination of such Junior Mortgage Loan (or, if appropriate, the
value determined in an appraisal obtained subsequent to origination) and (B) if
applicable under the corresponding program, the sales price of each Mortgaged
Property. With respect to each Junior Mortgage Loan, the "Junior Mortgage Ratio"
generally will be the ratio, expressed as a percentage, of the Cut-off Date
Principal Balance of such Junior Mortgage Loan to the sum of (i) the Cut-off
Date Principal Balance of such Junior Mortgage Loan and (ii) the principal
balance of any mortgage loans senior to the Junior Mortgage Loan at the time of
the origination of such Junior Mortgage Loan.
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
NY1-241975.1
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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. Investors should be aware that a Junior Mortgage Loan may be
subordinate to a negatively amortizing senior mortgage loan. An increase in the
principal balance of such senior mortgage loan may cause the sum of the
outstanding principal balance of the senior mortgage loan and the outstanding
principal balance of the Junior Mortgage Loan to exceed the sum of such
principal balances at the time of origination of the Junior Mortgage Loan. The
related Prospectus Supplement will specify whether the ARM Loans underlying a
series are Neg-Am ARM Loans and the percentage of any Junior Mortgage Loans that
are subordinate to any related senior mortgage loan that is negatively
amortizing.
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
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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. 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 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 aspects of the underwriting criteria,
to the extent known by the Company, that were applied by the originators of such
Mortgage Loans. The Company generally will have less detailed information
concerning the origination of seasoned Mortgage Loans than it will have
concerning newly-originated Mortgage Loans.
General Standards. Generally, each Mortgagor will have been required to
complete an application designed to provide to the original lender pertinent
credit information concerning the Mortgagor. As part of the description of the
Mortgagor's financial condition, such Mortgagor will have furnished information
(which may be supplied solely in such application) with respect to its assets,
liabilities, income, credit history, employment history and personal
information, and furnished an authorization to apply for a credit report which
summarizes the borrower's credit history with local merchants and lenders and
any record of bankruptcy. The Mortgagor may also have been required to authorize
verifications of deposits at financial institutions where the Mortgagor had
demand or savings accounts. In the case of investment properties, only income
derived from the Mortgaged Property may have been considered for underwriting
purposes, rather than the income of the Mortgagor from other sources. With
respect to Mortgaged Property consisting of vacation or second homes, no income
derived from the property generally will have been considered for underwriting
purposes.
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As described in the related Prospectus Supplement, certain Mortgage
Loans may have been originated under "limited documentation" or "no
documentation" programs which require less documentation and verification than
do traditional "full documentation" programs. Generally, under such a program,
minimal investigation into the Mortgagor's credit history and income profile is
undertaken by the originator and such underwriting may be based primarily or
entirely on an appraisal of the Mortgaged Property and the Loan-to-Value Ratio
at origination.
The adequacy of the Mortgaged Property as security for repayment of the
related Mortgage Loan will generally have been determined by appraisal in
accordance with pre-established appraisal procedure guidelines for appraisals
established by or acceptable to the originator. Appraisers may be staff
appraisers employed by the originator or independent appraisers selected in
accordance with pre-established guidelines established by the originator. The
appraisal procedure guidelines generally will have required the appraiser or an
agent on its behalf to personally inspect the property and to verify whether the
property was in good condition and that construction, if new, had been
substantially completed. The appraisal generally will have been based upon a
market data analysis of recent sales of comparable properties and, when deemed
applicable, an analysis based on income generated from the property or a
replacement cost analysis based on the current cost of constructing or
purchasing a similar property.
The underwriting standards applied by an originator generally require
that the underwriting officers be satisfied that the value of the property being
financed, as indicated by an appraisal or other acceptable valuation method,
currently supports and is anticipated to support in the future the outstanding
loan balance. In fact, certain states where the Mortgaged Properties may be
located have "anti-deficiency" laws requiring, in general, that lenders
providing credit on single family property look solely to the property for
repayment in the event of foreclosure. See "Certain Legal Aspects of Mortgage
Loans and Contracts." Any of these factors could change nationwide or merely
could affect a locality or region in which all or some of the Mortgaged
Properties are located. However, declining values of real estate, as experienced
recently in certain regions, or increases in the principal balances of certain
Mortgage Loans, such as GPM Loans and Neg-Am ARM Loans, could cause the
principal balance of some or all of the Mortgage Loans to exceed the value of
the Mortgaged Properties.
Based on the data provided in the application, certain verifications
(if required by the originator of the Mortgage Loan) and the appraisal or other
valuation of the Mortgaged Property, a determination will have been made by the
original lender that the Mortgagor's monthly income would be sufficient to
enable the Mortgagor to meet its monthly obligations on the Mortgage Loan and
other expenses related to the property (such as property taxes, utility costs,
standard hazard and primary mortgage insurance and, if applicable, maintenance
fees and other levies assessed by a Cooperative) and other fixed obligations
other than housing expenses including, in the case of Junior Mortgage Loans,
payments required to be made on any senior mortgage. 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.
The level of review by Residential Funding, if any, will vary depending
on a number of factors. 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 for conformity with the applicable underwriting standards
and 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. In its
underwriting analysis, Residential Funding may also consider the applicable
credit
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score of the related Mortgagor used in connection with the origination of the
Mortgage Loan (as determined based on a credit scoring model acceptable to the
Company.)
The Company anticipates that Mortgage Loans (other than the Mexico
Mortgage Loans and certain Puerto Rico 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 mortgage loan
lending programs. In such cases, borrowers may have credit histories that
contain delinquencies on mortgage and/or consumer debts. Some borrowers may have
filed bankruptcy within a few years of the time of origination of the related
Mortgage Loan. In addition, certain Mortgage Loans with Loan-to-Value Ratios
over 80% will not be required to have the benefit of primary mortgage insurance.
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.
With respect to the Company's underwriting standards, as well as any
other underwriting standards that may be applicable to any Mortgage Loans, such
underwriting standards generally include a set of specific criteria pursuant to
which the underwriting evaluation is made. However, the application of such
underwriting standards does not imply that each specific criterion was satisfied
individually. Rather, a Mortgage Loan will be considered to be originated in
accordance with a given set of underwriting standards if, based on an overall
qualitative evaluation, the loan is in substantial compliance with such
underwriting standards. For example, a Mortgage Loan may be considered to comply
with a set of underwriting standards, even if one or more specific criteria
included in such underwriting standards were not satisfied, if other factors
compensated for the criteria that were not satisfied or if the Mortgage Loan is
considered to be in substantial compliance with the underwriting standards.
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 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")
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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. ss. 5402(6) which are
treated as "single family residences" for the purposes of the REMIC provisions
of the Code. Accordingly, a Manufactured Home will be a structure built on a
permanent chassis, which is transportable in one or more sections and
customarily used at a fixed location, has a minimum of 400 square feet of living
space and minimum width in excess of 8 1/2 feet and is designed to be used as a
dwelling with or without a permanent foundation when connected to the required
utilities, and includes the plumbing, heating, air conditioning, and electrical
systems contained therein.
The related Prospectus Supplement will provide information concerning
the types or characteristics of the Contracts included in a Trust Fund as of the
related Cut-off Date. In the event that Contracts are added to or deleted from
the Trust Fund after the date of the related Prospectus Supplement, the final
characteristics of the Contract Pool will be noted in the Form 8-K.
Certain Contract Pools may include Contracts that are one or more
months delinquent with regard to payment of principal or interest at the time of
their deposit into a Trust Fund. The related Prospectus Supplement will set
forth the percentage of Contracts that are delinquent and whether such Contracts
have been so delinquent more than once during the preceding twelve months.
Contract Pools that contain delinquent Contracts are more likely to sustain
losses than are Contract Pools that contain Contracts that have a current
payment status.
Underwriting Policies
Conventional Contracts will comply with the underwriting policies of
the applicable originator or Mortgage Collateral Seller, which will be described
in the related Prospectus Supplement. With respect to FHA Contracts and VA
Contracts, traditional underwriting guidelines used by the FHA and the VA, as
the case may be, which were in effect at the time of origination of each such
Contract will generally have been applied.
With respect to a Contract made in connection with the Mortgagor's
purchase of a Manufactured Home, the "Appraised Value" is generally the sales
price of the Manufactured Home or the amount determined by a professional
appraiser. The appraiser must personally inspect the Manufactured Home and
prepare a report which includes market data based on recent sales of comparable
Manufactured Homes and, when deemed applicable, a replacement cost analysis
based on the current cost of a similar Manufactured Home. The Loan-to-Value
Ratio for a Contract generally will be equal to the original principal amount of
the Contract divided by the lesser of the Appraised Value or the sales price for
the Manufactured Home; however, unless otherwise specified in the related
Prospectus Supplement, an appraisal of the Manufactured Home will not be
required.
The Agency Securities
Government National Mortgage Association
Ginnie Mae is a wholly-owned corporate instrumentality of the United
States within HUD. Section 306(g) of Title III of the National Housing Act of
1934, as amended (the "Housing Act"), authorizes Ginnie Mae to guarantee the
timely payment of the principal of and interest on certificates representing
interests in a pool of mortgages (i) insured by the FHA, under the Housing Act
or under Title V of the Housing Act of 1949, or (ii) partially guaranteed by the
VA under the Servicemen's Readjustment Act of 1944, as amended, or under Chapter
37 of Title 38, United States Code.
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, Ginnie Mae may, under Section
306(d) of the Housing Act, borrow from the United States Treasury an amount that
is at any time sufficient to enable Ginnie Mae to perform
NY1-241975.1
<PAGE>
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. ss. 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
NY1-241975.1
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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 Federal Deposit Insurance Corporation (the "FDIC") and
other mortgage loan originators or sellers not affiliated with the Company
(each, an "Unaffiliated Seller") or (b) HomeComings Financial Network, Inc. and
GMAC Mortgage Corporation 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) one or more direct or indirect purchases through
the AlterNet Mortgage Program; or (iii) one or more purchases from Affiliated
Sellers. Certain of the Mortgage Loans may be purchased pursuant to agreements
relating to ongoing purchases of Mortgage Loans by Residential Funding ("Master
Commitments"). 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, HomeComings
Financial Network, Inc. and Residential Money Centers, Inc., each an affiliate
of the Company, will be AlterNet Program Sellers. Each AlterNet Program Seller
generally will have been a HUD-approved mortgagee or a financial institution
supervised by a federal or state authority and will have demonstrated, in the
judgment of the Company, sufficient 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 the 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
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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 or more months delinquent in payment of principal and
interest as of the related 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 lien having at
least the priority represented and warranted in the related Pooling and
Servicing Agreement or, in the case of a Contract a perfected security interest
in, the related Mortgaged Property (or, with respect to a Cooperative Loan, the
related shares of stock and proprietary lease, and with respect to a Mexico
Mortgage Loan, the Mortgagor's Beneficial Interest), 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, (c) liens of any senior mortgages, in the case of
Junior Mortgage Loans and (d) 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
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<PAGE>
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 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 FDIC (either in
its corporate capacity or as receiver for a depository institution), may also be
a Mortgage Collateral Seller, in which event neither
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the FDIC 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 FDIC may have no obligation to repurchase any
Mortgage Collateral for a breach of a representation or warranty.
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; (v) be
secured by Mortgaged Property located in the United States, unless the
Repurchased Mortgage Loan was a Mexico Mortgage Loan or a Puerto Rico Mortgage
Loan, in which case the Qualified Substitute Mortgage Loan may be a Mexico
Mortgage Loan or a Puerto Rico Mortgage Loan, respectively; and (vi) 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
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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"), or Cedel Bank, societe anonyme ("CEDEL") or
the Euroclear System (" Euroclear") (in Europe) if they are participants of such
systems, or indirectly through organizations which are participants in such
systems, or through such other depository or facility as may be specified in the
related Prospectus Supplement. As to any such class of Certificates so issued ("
Book-Entry Certificates"), the record holder of such Certificates will be DTC's
nominee. CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective depositaries (the "Depositaries "), which
in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, which holds securities for its participating organizations
("DTC Participants," and together with the CEDEL and Euroclear participating
organizations, " Participants") and facilitates the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in the accounts of Participants. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Other institutions that are not Participants but
clear through or maintain a custodial relationship with Participants (such
institutions, "Indirect Participants") have indirect access to DTC's clearance
system.
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Unless otherwise specified in the related Prospectus Supplement, no
person acquiring an interest in any Book-Entry Certificate (each such person, a
"Beneficial Owner") will be entitled to receive a Certificate representing such
interest in registered, certificated form, unless either (i) DTC ceases to act
as depository in respect thereof and a successor depository is not obtained or
(ii) the Company elects in its sole discretion to discontinue the registration
of such Certificates through DTC. Prior to any such event, Beneficial Owners
will not be recognized by the Trustee, 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 Book-Entry Certificates
may do so only through DTC, either directly if such Beneficial Owner is a
Participant or indirectly through Participants and, if applicable, Indirect
Participants. Pursuant to the procedures of DTC, transfers of the beneficial
ownership of any Book-Entry Certificates will be required to be made in minimum
denominations specified in the related Prospectus Supplement. The ability of a
Beneficial Owner to pledge Book-Entry Certificates to persons or entities that
are not Participants in the DTC system, or to otherwise act with respect to such
Certificates, may be limited because of the lack of physical certificates
evidencing such Certificates and because DTC may act only on behalf of
Participants.
Because of time zone differences, the securities account of a CEDEL or
Euroclear participant as a result of a transaction with a DTC Participant (other
than a depositary holding on behalf of CEDEL or Euroclear) will be credited
during subsequent securities settlement processing day (which must be a business
day for CEDEL or Euroclear, as the case may be) immediately following the DTC
settlement date. Such credits or any transactions in such securities settled
during such processing will be reported to the relevant Euroclear Participant or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant to a DTC Participant (other than the depositary for CEDEL or
Euroclear) will be received with value on the DTC settlement date, but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected by DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant Depositaries; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC. CEDEL
Participants and Euroclear Participants may not deliver instructions directly to
the Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, checkering corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
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<PAGE>
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 31 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian co-operative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission. Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions in respect of the Book-Entry Certificates will be
forwarded by the Trustee to DTC, and DTC will be responsible for forwarding such
payments to Participants, each of which will be responsible for disbursing such
payments to the Beneficial Owners it represents or, if applicable, to Indirect
Participants. Accordingly, Beneficial Owners may experience delays in the
receipt of payments in respect of their Certificates. Under DTC's procedures,
DTC will take actions permitted to be taken by holders of any class of
Book-Entry Certificates under the Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account the Book-Entry
Certificates are credited and whose aggregate holdings represent no less than
any minimum amount of Percentage Interests or voting rights required therefor.
DTC may take conflicting actions with respect to any action of
Certificateholders of any Class to the extent that Participants authorize such
actions. None of the Master Servicer, any Servicer, the Company, the Certificate
Administrator, the Trustee or any of their respective affiliates will have any
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Book-Entry Certificates, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Assignment of 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 or
Combined Loan-to-Value Ratio and Junior Mortgage Ratio, as applicable, at
origination or modification (without regard to any secondary financing).
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<PAGE>
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 or a Mexico Mortgage 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
with respect to a Mexico Mortgage Loan, an assignment of the Mortgagor's
Beneficial Interest); 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.
With respect to any Puerto Rico Mortgage Loans, the Mortgages with
respect to such Mortgage Loans either (i) secure a specific obligation for the
benefit of a specified person (a " Direct Puerto Rico Mortgage") or (ii) secure
an instrument transferable by endorsement (an "Endorsable Puerto Rico Mortgage
"). Endorsable Puerto Rico Mortgages do not require an assignment to transfer
the related lien. Rather, transfer of such mortgages follows an effective
endorsement of the related Mortgage Note and, therefore, delivery of the
assignment referred to in clause (iii) of the second preceding paragraph would
be inapplicable. Direct Puerto Rico Mortgages, however, require an assignment to
be recorded with respect to any transfer of the related lien and such assignment
would be delivered to the Trustee (or the Custodian).
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
NY1-241975.1
<PAGE>
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.
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<PAGE>
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
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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.
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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
incurred in connection with acquiring by foreclosure or deed in lieu of
foreclosure property securing a Mortgage Loan, including, if the Master Servicer
and any affiliate of the Master Servicer provides services such as appraisals
and brokerage services that are customarily provided by persons other than
servicers of mortgage loans, reasonable compensation for such services
("Servicing Advances") as to any such property, out of late payments, Insurance
Proceeds, Liquidation Proceeds, any proceeds in respect of any REO Mortgage Loan
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 property securing a Mortgage
Loan 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 property was acquired);
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(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;
(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."; and
(x) to make deposits to the Funding Account in the amounts and in the
manner provided in the Pooling and Servicing Agreement, if applicable.
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 accrue during
each calendar month and will be payable on the Distribution Date in the
following calendar month. 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 amount to be distributed to such class for such Distribution Date in
respect of principal, plus, if such class is entitled
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to payments of interest on such Distribution Date, interest accrued during the
related interest accrual period at the applicable Pass-Through Rate on the
principal balance or notional amount of such class specified in the applicable
Prospectus Supplement, less certain interest shortfalls, which generally will
include (i) any Deferred Interest added to the principal balance of the Mortgage
Loans and/or the outstanding balance of one or more classes of Certificates on
the related Due Date, (ii) any other interest shortfalls (including, without
limitation, shortfalls resulting from application of the Relief Act or similar
legislation or regulations as in effect from time to time) allocable to
Certificateholders which are not covered by advances or the applicable credit
enhancement and (iii) unless otherwise specified in the related Prospectus
Supplement, Prepayment Interest Shortfalls, 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 July 1997:
Date Note Description
July 1 (A) Cut-off Date.
July 2-31 (B) The Servicers or the
Sub-Servicers, as applicable,
receive any Principal Prepayments
and applicable interest on such
Principal Prepayments.
July 31 (C) Record Date.
July 2-August 1 (D) The dates on which scheduled payments on a Mortgage Loan or
Contract are due (each, a "Due Date" and collectively, the "Due Period").
August 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 during the related Due Period and received or
advanced by them. August 20 (F) Determination Date.
August 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,
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Record Dates, Due Periods, remittance dates, Determination Dates and/or
Distribution Dates than those set forth above.
(A) The initial principal balance of the Mortgage Pool or Contract Pool
will be the aggregate principal balance of the Mortgage Loans or
Contracts at the close of business on July 1, after deducting principal
payments due on or before such date. Those principal payments due on or
before July 1, and the accompanying interest payments, and any
Principal Prepayments received as of the close of business on July 1
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 for a
Mortgage Loan 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 August 25 will be made to Certificateholders of record at
the close of business on July 30.
(D) Scheduled principal and interest payments are due from Mortgagors.
(E) Payments due from Mortgagors during the related Due Period will be
deposited by the 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 principal balances immediately prior to such
payment. 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 August 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 July will have been remitted to the
Master Servicer or the Servicer, as applicable, within five business days
of receipt).
(F) On August 20, the Master Servicer or the Certificate Administrator, if any,
will determine the amounts of principal and interest which will be passed
through on August 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 during the related Due Period which have
been received from Servicers or Sub-Servicers prior to and including August
18, as well as all Principal Prepayments received on Mortgage Loans in July
(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 August 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 August 25, the amounts determined on August 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.
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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 was
prepaid 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
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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."
Funding Account
If so specified in the related Prospectus Supplement, a Pooling and
Servicing Agreement or other agreement may provide for the transfer by the
Sellers of additional Mortgage Loans to the related Trust after the Closing Date
for the related Certificates. Such additional Mortgage Loans will be required to
conform to the requirements set forth in the related Pooling and Servicing
Agreement or other agreement providing for such transfer. As specified in the
related Prospectus Supplement, such transfer may be funded by the establishment
of a Funding Account (a "Funding Account"). If a Funding Account is established,
all or a portion of the proceeds of the sale of one or more Classes of
Certificates of the related Series or a portion of collections on the Mortgage
Loans in respect of principal will be deposited in such account to be released
as additional Mortgage Loans are transferred. Unless otherwise specified in the
related Prospectus Supplement, a Funding Account will be required to be
maintained as an Eligible Account, all amounts therein will be required to be
invested in Permitted Investments and the amount held therein shall at no time
exceed 25% of the aggregate outstanding principal balance of the Certificates.
Unless otherwise specified in the related Prospectus Supplement, the related
Pooling and Servicing Agreement or other agreement providing for the transfer of
additional Mortgage Loans will provide that all such transfers must be made
within 90 days, and that amounts set aside to fund such transfers (whether in a
Funding Account or otherwise) and not so applied within the required period of
time will be deemed to be principal prepayments and applied in the manner set
forth in such Prospectus Supplement.
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;
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(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 of
any class of Certificates at any time during such calendar year. Such report
will include information as to the aggregate of amounts reported pursuant to
clauses (i) and (ii) above for such calendar year or, in the event such person
was a holder of record of a class of Certificates during a portion of such
calendar year, for the applicable portion of such year.
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
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one or more sub-servicers (each, a "Sub-Servicer") 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.
In connection with any significant partial prepayment of a Mortgage
Loan, the Master Servicer, to the extent not inconsistent with the terms of the
Mortgage Note and local law and practice, may permit the Mortgage Loan to be
re-amortized such that the monthly payment is recalculated as an amount that
will fully amortize the remaining principal amount thereof by the original
maturity date based on the original Mortgage Rate, provided that such
re-amortization shall not be permitted if it would constitute a modification of
the Mortgage Loan for federal income tax purposes.
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 unless, in the case of Junior Mortgage
Loans, the Mortgagor is required to escrow such amounts pursuant to the senior
mortgage documents. 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 Prospectus 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
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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 (i) the fees of any Sub-Servicers, (ii) 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, reimbursement of
expenses incurred in connection with a foreclosure or deed in lieu of
foreclosure upon property securing a Mortgaged Loan, 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 (iii) expenses related to the 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, any proceeds in respect of an REO Mortgage Loan (with
respect to expenses incurred in connection with a foreclosure or deed in lieu of
foreclosure) 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 Pooling and Servicing Agreement will provide that the Master
Servicer or 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 Master Servicer
(or the Certificate Administrator) during the preceding calendar year relating
to its servicing of mortgage loans and its performance under pooling and
servicing agreements, including such Pooling and Servicing Agreement has been
made under the supervision of such officer, (ii) to the best of such officer's
knowledge, based on such review, the Master Servicer (or the Certificate
Administrator) has complied in all material respects with the minimum servicing
standards set forth in the Uniform Single Attestation Program for Mortgage
Bankers and has fulfilled all its obligations under such Pooling and Servicing
Agreement throughout such year, or, if there has been material noncompliance
with such servicing standards or a material default in the fulfillment of any
such obligation, such statement shall include a description of such
noncompliance or specify each such default known to such officer and the nature
and status thereof and (iii) to the best of such officer's knowledge, each
Sub-Servicer has complied in all material respects with the minimum servicing
standards set forth in the Uniform Single Attestation Program for Mortgage
Bankers and has fulfilled all of its material obligations under its
Sub-Servicing Agreement in all material respects throughout such year, or, if
there has been material noncompliance with such servicing standards or a
material default in the fulfillment of such obligations, such statement shall
include a description of such noncompliance or specify each such default, as the
case may be, known to such officer and
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the nature and status thereof. In addition, each Pooling and Servicing Agreement
will provide that the Master Servicer or the Certificate Administrator, as the
case may be, will cause a firm of independent public accountants which is a
member of the American Institute of Certified Public Accountants to furnish a
report stating its opinion that, on the basis of an examination conducted by
such firm substantially in accordance with standards established by the American
Institute of Certified Public Accountants, the assertions made regarding
compliance with the minimum servicing standards set forth in the Uniform Single
Attestation Program for Mortgage Bankers during the preceding calendar year are
fairly stated in all material respects, subject to such exceptions and other
qualifications that, in the opinion of such firm, such accounting standards
require it to report. In rendering such statement, such firm may rely, as to
matters relating to the direct servicing of mortgage loans by Subservicers, on
comparable statements prepared in connection with examinations conducted in
similar manners.
Certain 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 unless each Rating Agency has confirmed in
writing that the resignation will not qualify, reduce or cause to be withdrawn
the then current ratings on the Certificates 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 or
Servicer may also waive or modify any term of a Mortgage Loan so long as the
Master Servicer or Servicer has determined that such waiver or modification is
not materially adverse to any Certificateholder, taking into account any
estimated loss that may result absent such action.
The Master Servicer will be required to maintain a fidelity bond and
errors and omissions policy with respect to its officers and employees and other
persons acting on behalf of the Master Servicer in connection with its
activities under the Pooling and Servicing Agreement.
A Servicer, the Master Servicer or the Certificate Administrator may
have other business relationships with the Company, any Mortgage Collateral
Seller or their affiliates.
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Special Servicing
If provided for in the related Prospectus Supplement, the Pooling and
Servicing Agreement for a series of Certificates may name a special servicer (a
"Special Servicer"). The Special Servicer will be responsible for the servicing
of certain delinquent Mortgage Loans or Contracts as described in the Prospectus
Supplement. The Special Servicer may have certain discretion to extend relief to
Mortgagors whose payments become delinquent. The Special Servicer may be
permitted to grant a period of temporary indulgence to a Mortgagor or may enter
into a liquidating plan providing for repayment by the Mortgagor, in each case
without the prior approval of the Master Servicer or the Servicer, as
applicable. Other types of forbearance generally will require the approval of
the Master Servicer or Servicer, as applicable.
Enforcement of "Due-on-Sale" Clauses
Unless otherwise specified in the related Prospectus Supplement, when
any Mortgaged Property relating to a Mortgage Loan or Contract (other than an
ARM Loan described below) is about to be conveyed by the Mortgagor, the Master
Servicer or the Servicer, as applicable, directly or through a Sub-Servicer, to
the extent it has knowledge of such proposed conveyance, generally will be
obligated to exercise the Trustee's rights to accelerate the maturity of such
Mortgage Loan or Contract under any due-on-sale clause applicable thereto. A
due-on-sale clause will be enforced only if the exercise of such rights is
permitted by applicable law and only to the extent it would not adversely affect
or jeopardize coverage under any Primary Insurance Policy or applicable credit
enhancement arrangements. See "Certain Legal Aspects of Mortgage Loans and
Contracts -- The Mortgage Loans -- Enforceability of Certain Provisions" and
"--The Contracts -- 'Due-on-Sale' Clauses." If the Master Servicer, Servicer or
Sub-Servicer is prevented from enforcing a due-on-sale clause under applicable
law or if the Master Servicer, Servicer or Sub-Servicer determines that it is
reasonably likely that a legal action would be instituted by the related
Mortgagor to avoid enforcement of such due-on-sale clause, the Master Servicer,
Servicer or Sub-Servicer will enter into an assumption and modification
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note
or Contract subject to certain specified conditions. The original Mortgagor may
be released from liability on a Mortgage Loan or Contract if the Master
Servicer, Servicer or Sub-Servicer shall have determined in good faith that such
release will not adversely affect the collectability of the Mortgage Loan or
Contract. In the event of the sale of a Mortgaged Property subject to an ARM
Loan, such ARM Loan may be assumed if it is by its terms assumable and if, in
the reasonable judgment of the Master Servicer, Servicer or Sub-Servicer, the
proposed transferee of the related Mortgaged Property establishes its ability to
repay the loan and the security for such ARM Loan would not be impaired by the
assumption. If a Mortgagor transfers the Mortgaged Property subject to an ARM
Loan without consent, such ARM Loan may be declared due and payable. In
connection with any such assumption, the Mortgage Rate borne by the related
Mortgage Note or Contract may not be altered. Mortgagors may, from time to time,
request partial releases of the Mortgaged Properties, easements, consents to
alteration or demolition and other similar matters. The Master Servicer,
Servicer or Sub-Servicer may approve such a request if it has determined,
exercising its good faith business judgment, that such approval will not
adversely affect the security for, and the timely and full collectability of,
the related Mortgage Loan or Contract. Any fee collected by the Master Servicer,
Servicer or Sub-Servicer for entering into an assumption or substitution of
liability agreement or for processing a request for partial release of the
Mortgaged Property generally will be retained by the Master Servicer, Servicer
or Sub-Servicer as additional servicing compensation.
Realization Upon Defaulted Property
With respect to a Mortgage Loan in default, the Master Servicer or the
related Subservicer will decide whether to foreclose upon the Mortgage Property
or write off the principal balance of the Mortgage Loan or Contract as a bad
debt. In connection with such decision, the Master Servicer or the related
Subservicer will, following usual practices in connection with senior and junior
mortgage servicing activities, estimate the proceeds expected to be received and
the expenses expected to be incurred in connection with such foreclosure to
determine whether a foreclosure proceeding is appropriate. With respect to any
Junior Mortgage Loan, following any default thereon, in the event that the
senior mortgage holder commences a foreclosure action it is likely that such
Mortgage Loan will be written off as bad debt with no foreclosure proceeding
unless foreclosure proceeds for such Mortgage
NY1-241975.1
<PAGE>
Loan are expected to at least satisfy the related senior mortgage loan in full
and to pay foreclosure costs. Similarly, the expense and delay that may be
associated with foreclosing on the Mortgagor's Beneficial Interest following a
default on a Mexico Mortgage Loan, particularly if eviction or other proceedings
are required to be commenced in the Mexican courts, may make attempts to realize
on the Mortgaged Property uneconomical, thus significantly increasing the amount
of the loss on the Mexico Mortgage Loan. See "Risk Factors -- Risks Associated
with the Mortgage Collateral" herein.
In the event that title to any property securing a Mortgaged Loan 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 related 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 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 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) subject to any
senior loan positions and certain other restrictions pertaining to junior loans
as described under "Certain Legal Aspects of Mortgage Loans and Related Matters
- - -- Foreclosure on Mortgage Loans" 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. 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
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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 amount of the Realized Loss that was allocated to such
class. 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 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.
If so specified in the related Prospectus Supplement, 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.
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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.
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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.
Overcollateralization
If so specified in the related Prospectus Supplement, interest
collections on the Mortgage Collateral may exceed interest payments on the
Certificates for the related Distribution Date. To the extent such excess
interest is applied as principal payments on the Certificates, the effect will
be to reduce the principal balance of the Certificates relative to the
outstanding balance of the Mortgage Loans, thereby creating "
Overcollateralization" and additional protection to the Certificateholders, as
specified in the related Prospectus Supplement.
DESCRIPTION OF CREDIT ENHANCEMENT
General
Credit support with respect to each series of Certificates may be
comprised of one or more of the following components. Each component will have a
dollar limit and will provide coverage with respect to Realized Losses that are
(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
losses, " Defaulted Mortgage Losses"); (ii) of a type generally covered by a
Special Hazard Insurance Policy (any such losses, "Special Hazard Losses");
(iii) attributable to certain actions which may be taken by a bankruptcy court
in connection with a Mortgage Loan, including a reduction by a bankruptcy court
of the principal balance of or the Mortgage Rate on a Mortgage Loan or Contract
or an extension of its maturity (any such losses, " Bankruptcy Losses"); 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 losses,
"Fraud Losses").
Unless otherwise specified in the related Prospectus Supplement, credit
support will not provide protection against all risks of loss and will not
guarantee repayment of the entire outstanding principal balance of the
Certificates and interest thereon. If losses occur 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
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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
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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
NY1-241975.1
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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.
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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 first and junior
liens 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 a Mortgage Loan or Contract would become an
unsecured creditor to the extent the outstanding principal balance of such
Mortgage Loan (together with any senior mortgage loan, with respect to a Junior
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
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<PAGE>
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
NY1-241975.1
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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.
OTHER FINANCIAL OBLIGATIONS RELATED TO THE CERTIFICATES
Swaps and Yield Supplement Agreements
The Trustee on behalf of the Trust Fund may enter into interest rate
swaps and related caps, floors and collars to minimize the risk of
Certificateholders from adverse changes in interest rates (collectively,
"Swaps"), and other yield supplement agreements or similar yield maintenance
arrangements that do not involve swap agreements or other notional principal
contracts (collectively, "Yield Supplement Agreements").
An interest rate Swap is an agreement between two parties
("Counterparties") to exchange a stream of interest payments on an agreed
hypothetical or "notional" principal amount. No principal amount is exchanged
between the Counterparties to an interest rate Swap. In the typical Swap, one
party agrees to pay a fixed rate on a notional principal amount, while the
Counterparty pays a floating rate based on one or more reference interest rates
such as the London Interbank Offered Rate ("LIBOR "), a specified bank's prime
rate or U.S. Treasury Bill rates. Interest rate Swaps also permit Counterparties
to exchange a floating rate obligation based upon one reference interest rate
(such as LIBOR) for a floating rate obligation based upon another referenced
interest rate (such as U.S.
Treasury Bill rates).
The Swap market has grown substantially in recent years with a
significant number of banks and financial service firms acting both as
principals and as agents utilizing standardized Swap documentation. Caps, floors
and collars are more recent innovations, and they are less liquid than other
Swaps.
Yield Supplement Agreements may be entered into to supplement the
interest rate or rates on one or more classes of the Certificates of any Series.
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There can be no assurance that the Trustee will be able to enter into
or offset Swaps or enter into Yield Supplement Agreements at any specific time
or at prices or on other terms that are advantageous. In addition, although the
terms of Swaps and Yield Supplement Agreements may provide for termination under
certain circumstances, there can be no assurance that the Trustee will be able
to terminate a Swap or Yield Supplement Agreement when it would be economically
advantageous to the Trust Fund to do so.
Purchase Obligations
Certain types of Mortgage Collateral and certain classes of
Certificates of any series, as specified in the related Prospectus Supplement,
may be subject to a purchase obligation (a "Purchase Obligation") that would
become applicable on one or more specified dates, or upon the occurrence of one
or more specified events, or on demand made by or on behalf of the applicable
Certificateholders. A Purchase Obligation may be in the form of a conditional or
unconditional purchase commitment, liquidity facility, maturity guaranty, put
option or demand feature. The terms and conditions of each Purchase Obligation,
including the purchase price, timing and payment procedure, will be described in
the related Prospectus Supplement. The purchase price will not be determined by
reference to the value of the assets in the Trust Fund. A Purchase Obligation
with respect to Mortgage Collateral may apply to that Mortgage Collateral or to
the related Certificates. Each Purchase Obligation may be a secured or unsecured
obligation of the provider thereof, which may include a bank or other financial
institution or an insurance company. Each Purchase Obligation will be evidenced
by an instrument delivered to the Trustee for the benefit of the applicable
Certificateholders of the related series. ^ Unless otherwise specified in the
related Prospectus Supplement, each Purchase Obligation with respect to Mortgage
Collateral will be payable solely to the Trustee for the benefit of the
Certificateholders of the related series. Other Purchase Obligations may be
payable to the Trustee or directly to the holders of the Certificates to which
such obligations relate.
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 (or, in the case of a Junior
Mortgage Loan, a Combined 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 (or, in the case of a Junior Mortgage Loan, a Combined
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. Unless otherwise
specified in the Prospectus Supplement, the Company will have the ability to
cancel any Primary Insurance Policy if the Loan-to-Value Ratio (or Combined
Loan-to-Value Ratio) of the Mortgage Loan is reduced below 80% (or a lesser
specified percentage) based on an appraisal of the Mortgaged Property after the
related Closing Date or as a result of principal payments that reduce the
principal balance of the Mortgage Loan after such Closing Date. Mortgage Loans
which are subject to negative amortization will only be covered by a Primary
Insurance Policy if such coverage was so required upon their origination,
notwithstanding that subsequent negative amortization may cause such Mortgage
Loan's Loan-to-Value Ratio (or Combined Loan-to-Value Ratio), (based on the
then-current balance), to subsequently exceed the limits which would have
required such coverage upon their origination. Junior Mortgage Loans generally
will not be required by the Company to be covered by a primary mortgage guaranty
insurance policy insuring against default on such Mortgage Loan. Generally,
Mexico Mortgage Loans will have Loan-to-Value Ratios of less than 80% and will
not be insured
NY1-241975.1
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under a Primary Insurance Policy. Primary mortgage insurance or similar credit
enhancement on a Mexico Mortgage Loan may be issued by a private corporation or
a governmental agency and may be in the form of a guarantee, insurance policy or
another type of credit enhancement.
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 received by
the insured (other than the proceeds of hazard insurance) that are derived from
the related Mortgaged Property, (ii) hazard insurance proceeds received by the
insured in excess of the amount required to restore such Mortgaged Property and
which have not been applied to the payment of the Mortgage Loan, (iii) amounts
expended but not approved by the Primary Insurer, (iv) claim payments previously
made on such Mortgage Loan and (v) unpaid premiums and certain other amounts.
As conditions precedent to the filing or payment of a claim under a
Primary Insurance Policy, in the event of default by the Mortgagor, the insured
will typically be required, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
Primary Insurer, real estate taxes, protection and preservation expenses and
foreclosure and related costs; (ii) in the event of any physical loss or damage
to the Mortgaged Property, have the Mortgaged Property restored to at least its
condition at the effective date of the Primary Insurance Policy (ordinary wear
and tear excepted); and (iii) tender to the Primary Insurer good and
merchantable title to, and possession of, the Mortgaged Property.
The Pooling and Servicing Agreement for a series generally will require
that, to the extent coverage is available and for so long as a Primary Insurance
Policy is required to be maintained, the Master Servicer or Servicer shall
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 and the Master
Servicer or Servicer had knowledge of such Primary Insurance Policy.
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 (i)
the principal balance of such Mortgage Loan and, in the case of Junior Mortgage
Loans, the principal balance of any senior mortgage loans, or (ii) 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. If Junior
Mortgage Loans are included within any Trust Fund, investors should also
consider the application of hazard
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insurance proceeds discussed herein under "Certain Legal Aspects of the Mortgage
Loans and Contracts -- The Mortgage Loans -- Junior Mortgages, Rights of Senior
Mortgages."
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.
Hazard insurance on the Mexican Properties will generally be provided
by insurers located in Mexico. The Company may not be able to obtain as much
information about the financial condition of the companies issuing hazard
insurance in Mexico as it is able to obtain with respect to companies based in
the United States. The ability of such insurers to pay claims also may be
affected by, among other things, adverse political and economic developments in
Mexico.
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.
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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
NY1-241975.1
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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 General Motors Acceptance Corporation. 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 600, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000.
RESIDENTIAL FUNDING CORPORATION
Unless otherwise specified in the related Prospectus Supplement,
Residential Funding, an affiliate of the Company, will act as the Master
Servicer or 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 600, Minneapolis, Minnesota
55437. Its telephone number is (612) 832-7000. Residential Funding conducts
operations from its headquarters in Minneapolis and from offices located in
California, Florida, Georgia, Maryland and New York. At March 31, 1997
Residential Funding was master servicing a first lien loan portfolio of
approximately $34.8 billion and a second lien loan portfolio of approximately
$1.8 billion.
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
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<PAGE>
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.
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<PAGE>
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 modify the provisions regarding the
transferability of the REMIC Residual Certificates, provided that the Company
has determined that such change would not adversely affect the applicable
ratings of any classes of the Certificates, as evidenced by a letter from each
applicable Rating Agency, 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.
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<PAGE>
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 "United States 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
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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 or Combined
Loan-to-Value Ratios, as applicable, may be higher than for other types of
mortgage loans or manufactured housing contracts. See "Risk Factors -- Risks
Associated with the Mortgage Collateral." 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. The risk of
loss may also be greater on mortgage loans or contracts with Loan-to-Value
Ratios or Combined Loan-to-Value Ratios greater than 80% and no Primary
Insurance Policies. 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 and loss.
Because of the uncertainty, delays and costs that may be associated
with realizing on collateral securing the Mexico Mortgage Loans, as well as the
additional risks of a decline in the value and marketability of such collateral,
the risk of loss with respect to Mexico Mortgage Loans may be greater than with
respect to Mortgage Loans secured by Mortgaged Properties located in the United
States. The risk of loss on Mortgage Loans made to International Borrowers and
on Puerto Rico Mortgage Loans may also be greater than Mortgage Loans that are
made to U.S. Borrowers or that are secured by properties located in the United
States. See "Risk Factors -- Risks Associated with the Mortgage Collateral" and
"Certain Legal Aspects of Mortgage Loans and Contracts."
The application of any withholding tax on payments made by borrowers of
Mexico Mortgage Loans residing outside of the United States may increase the
risk of default because the borrower may have qualified for the loan on the
basis of the lower mortgage payment, and may have difficulty making the
increased payments required to cover the withholding tax payments. The
application of withholding tax may increase the risk of loss because the
applicable taxing authorities may be permitted to place a lien on the mortgaged
property or effectively prevent the transfer of an interest in the mortgaged
property until any delinquent withholding taxes have been paid.
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
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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)
NY1-241975.1
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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.
For any Junior Mortgage Loans, the inability of the Mortgagor to pay
off the balance thereof may affect the ability of the Mortgagor to obtain
refinancing of any related senior mortgage loan, thereby preventing a potential
improvement in the Mortgagor's circumstances. Furthermore, if so specified in
the related Prospectus Supplement, under the applicable Pooling and Servicing
Agreement the Master Servicer may be restricted or prohibited from consenting to
any refinancing of any related senior mortgage loan, which in turn could
adversely affect the Mortgagor's circumstances or result in a prepayment or
default under the corresponding Junior 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.
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<PAGE>
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.
If the Pooling and Servicing Agreement for a Series of Certificates
provides for a Funding Account or other means of funding the transfer of
additional Mortgage Loans to the related Trust, as described under "Description
of the Certificates; Funding Account" herein, and the Trust is unable to acquire
such additional Mortgage Loans within any applicable time limit, the amounts set
aside for such purpose may be applied as principal distributions on one or more
Classes of Certificates of such Series.
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
NY1-241975.1
<PAGE>
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. The Company is not aware of any historical prepayment experience with
respect to mortgage loans secured by properties located in Mexico or Puerto Rico
and, accordingly, prepayments on such loans may not occur at the same rate or be
affected by the same factors as more traditional mortgage loans.
An increase in the amount of the monthly payments owed on a Mexico
Mortgage Loan due to the imposition of withholding taxes may increase the risk
of prepayment on such loan if alternative financing is available on more
favorable terms.
Generally, junior mortgage loans are not viewed by Mortgagors as
permanent financing. Accordingly, Junior Mortgage Loans may experience a higher
rate of prepayment than typical first lien mortgage loans.
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, Mexico Mortgage Loans, Puerto Rico Mortgage Loans
and Mortgage Loans and Contracts that were made to International Borrowers or
that 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
manufactured housing 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."
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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. The value of
any Mexican Property could also be adversely affected by, among other things,
adverse political and economic developments in Mexico. 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,
NY1-241975.1
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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 and Mexico Mortgage
Loans) will be secured by deeds of trust, mortgages or deeds to secure debt,
depending upon the prevailing practice in the state in which the related
Mortgaged Property is located. In some states, a mortgage, deed of trust or deed
to secure debt creates a lien upon the real property encumbered by the mortgage.
In other states, the mortgage, deed of trust or deed to secure debt conveys
legal title to the property to the mortgagee subject to a condition subsequent
(i.e., the payment of the indebtedness secured thereby). It is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers. Priority with respect to such instruments depends on
their terms and in some cases on the terms of separate subordination or
inter-creditor agreements, and generally on the order of recordation of the
mortgage in the appropriate recording office. There are two parties to a
mortgage, the mortgagor, who is the borrower and homeowner, and the mortgagee,
who is the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. In the case of a land trust, there
are three parties because title to the property is held by a land trustee under
a land trust agreement of which the borrower is the beneficiary; at origination
of a mortgage loan, the borrower executes a separate undertaking to make
payments on the mortgage note. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties: the trustor, who is the
borrower/homeowner; the beneficiary, who is the lender; and a third-party
grantee called the trustee. Under a deed of trust, the borrower grants the
property, irrevocably until the debt is paid, in trust, generally with a power
of sale, to the trustee to secure payment of the obligation. A deed to secure
debt typically has two parties, pursuant to which the borrower, or grantor,
conveys title to the real property to the grantee, or lender, generally with a
power of sale, until such time as the debt is repaid. The trustee's authority
under a deed of trust and the mortgagee's authority under a mortgage or a deed
to secure debt are governed by the law of the state in which the real property
is located, the express provisions of the deed of trust, mortgage or deed to
secure debt and, in certain deed of trust transactions, the directions of the
beneficiary.
Cooperative Loans
If specified in the Prospectus Supplement relating to a series of
Certificates, the Mortgage Loans may include Cooperative Loans. Each debt
instrument (a "Cooperative Note") evidencing a Cooperative Loan will be secured
by a security interest in shares issued by 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 security interest in, the cooperative shares and proprietary leases
or occupancy agreements, the priority of which will depend on the terms of the
particular security agreement
NY1-241975.1
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as well as the order of recordation of the agreement (or the filing of the
financing statements related thereto) in the appropriate recording office or the
taking of possession of the cooperative shares, depending on the law of the
state in which the cooperative is located. Such a lien or security interest is
not, in general, prior to liens in favor of the cooperative corporation for
unpaid assessments or common charges.
Unless otherwise specified in the related Prospectus Supplement, all
cooperative 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.
Mexico Mortgage Loans
If specified in the related Prospectus Supplement, the Mortgage Loans
may include Mexico Mortgage Loans. See "The Trust Funds -- The Mortgage Loans"
for a description of the security for the Mexico Mortgage Loans.
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Foreclosure on Mortgage Loans
Although a deed of trust or a deed to secure debt may also be
foreclosed by judicial action, foreclosure of a deed of trust or a deed to
secure debt is generally accomplished by a non-judicial trustee's sale under a
specific provision in the deed of trust which authorizes the trustee or lender,
as applicable, to sell the property upon any default by the borrower under the
terms of the note or deed of trust or a deed to secure debt. In addition to any
notice requirements contained in a deed of trust, in some states, the trustee
must record a notice of default and send a copy to the borrower/trustor and to
any person who has recorded a request for a copy of notice of default and notice
of sale. In addition, in some states, the trustee or lender, as applicable, must
provide notice to any other individual having an interest of record in the real
property, including any junior lienholders. If the deed of trust is not
reinstated within a specified period, a notice of sale must be posted in a
public place and, in most states, published for a specific period of time in one
or more newspapers. In addition, some states' laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the real property.
Foreclosure of a mortgage generally is accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties, including borrowers, such as certain International Borrowers,
located outside the jurisdiction in which the mortgaged property is located.
Difficulties in foreclosing on mortgaged properties owned by International
Borrowers may result in increased foreclosure costs, which may reduce the amount
of proceeds from the liquidation of the related mortgage loan available to be
distributed to the Certificateholders of the related series. If the mortgagee's
right to foreclose is contested, the legal proceedings necessary to resolve the
issue can be time-consuming.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
In the case of foreclosure under a mortgage, a deed of trust or deed to
secure debt, the sale by the referee or other designated officer or by the
trustee is a public sale. However, because of the difficulty a potential buyer
at the sale 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, deed of trust or deed to secure debt, 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. In some cases, a deficiency judgment may be pursued in lieu of
foreclosure. Any loss may be reduced by the receipt of any mortgage insurance
proceeds or other forms of credit enhancement for a series of Certificates. See
"Description of Credit Enhancement."
A junior mortgagee may not foreclose on the property securing a Junior
Mortgage Loan unless it forecloses subject to the senior mortgages, in which
case it must either pay the entire amount due on the senior mortgages to the
senior mortgagees prior to or at the time of the foreclosure sale or undertake
the obligation to make payments on the senior mortgages in the event the
mortgagor is in default thereunder, in either event adding the amounts expended
to the balance due on the junior loan, and may be subrogated to the rights of
the senior mortgagees. In addition, in the event that the foreclosure by a
junior mortgagee triggers the enforcement of a "due-on-sale" clause in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees (to avoid a default with respect
thereto). Accordingly, with respect to such Junior Mortgage
NY1-241975.1
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Loans, if the junior lender purchases the property, the lender's title will be
subject to all senior liens and claims and certain governmental liens. The
proceeds received by the referee or trustee from the sale are applied first to
the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds are
generally payable to the mortgagor or trustor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceedings.
See "Risk Factors -- Risks Associated with the Mortgage Collateral" and
"Description of the Certificates -- Realization Upon Defaulted Property" herein.
Foreclosure on Mexico Mortgage Loans
Foreclosure on the Mortgagor's Beneficial Interest, where the Mortgagor
is residing in the United States, generally is expected to be accomplished by
public sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to that
Beneficial Interest. 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. Pursuant to the Trust Agreement, the lender may direct the Mexican
Trustee to transfer the Mortgagor's Beneficial Interest to the purchaser upon
completion of the public sale and notice from the lender. Such purchaser will be
entitled to rely on the terms of the Mexico Trust Agreement to direct the
Mexican Trustee to transfer the Mortgagor's Beneficial Interest into the name of
the purchaser or its nominee, or the trust may be terminated and a new trust may
be established.
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. If there are proceeds
remaining, the lender must account to the borrower for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the borrower is generally
responsible for the deficiency. However, certain states limit the rights of
lenders to obtain deficiency judgments. See "--Anti-Deficiency Legislation and
Other Limitations on Lenders" below. The costs of sale may be substantially
higher than the costs associated with foreclosure sales with respect to property
located in the United States, and may include transfer taxes, notary public
fees, trustee fees, capital gains and other taxes on the proceeds of sale, and
the cost of amending or terminating the Mexico Trust Agreement and preparing a
new trust agreement. Additional costs associated with realizing on the
collateral may include eviction proceedings, the costs of defending actions
brought by the defaulting borrower and enforcement actions. Any such additional
foreclosure costs may make the cost of foreclosing on the collateral
uneconomical, which may increase the risk of loss on the Mexico Mortgage Loans
substantially.
Where the Mortgagor does not maintain its principal residence in the
United States, ^ or, if a Mortgagor residing in the United States moves its
principal residence from the state in which the UCC financing statements have
been filed and the lender, because it has no knowledge of the relocation of the
Mortgagor or otherwise, fails to refile in the state to which the Mortgagor has
moved within four months after relocation or if the Mortgagor no longer resides
in the United States, the lender's security interest in the Mortgaged Property ^
may be unperfected. In such circumstances, if the Mortgagor defaults on the
Mexico Mortgage Loan, the Mexico Loan Agreement will nonetheless permit the
lender to terminate the Borrower's rights to occupy the Mexican Property, and
the Mexico Trust Agreement will permit the lender to instruct the Mexican
Trustee to transfer the Mexican Property to a subsequent purchaser or to
recognize the subsequent purchaser as the beneficiary of the Mortgagor's
Beneficial Interest. However, because the lender's security interest in the
Mortgagor's Beneficial Interest will be unperfected, no assurance can be given
that the lender will be successful in realizing on its interest in the
collateral under such circumstances.
The Company is not aware of any other mortgage loan programs involving
mortgage loans that are secured in a manner similar to the Mexico Mortgage
Loans. As a result, there may be uncertainty and delays in the process of
attempting to realize on the Mortgage Collateral and gaining possession of the
Mortgaged Property, and the
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process of marketing the Mortgagor's Beneficial Interest in the trust to persons
interested in purchasing a Mexican Property may be difficult.
Mortgaged Properties Located in the Commonwealth of Puerto Rico
Under the laws of the Commonwealth of Puerto Rico the foreclosure of a
real estate mortgage usually follows an ordinary "civil action" filed in the
Superior Court for the District where the mortgaged property is located. If the
defendant does not contest the action filed, a default judgment is rendered for
the plaintiff and the mortgaged property is sold at public auction, after
publication of the sale for two weeks, by posting written notice in three public
places in the municipality where the auction will be held, in the tax collection
office and in the public school of the municipality where the mortgagor resides,
if known. If the residence of the mortgagor is not known, publication in one of
the newspapers of general circulation in the Commonwealth must be made at least
once a week for two weeks. There may be as many as three public sales of the
mortgaged property. If the defendant contests the foreclosure, the case may be
tried and judgment rendered based on the merits of the case.
There are no redemption rights after the public sale of a foreclosed
property under the laws of the Commonwealth. Commonwealth law provides for a
summary proceeding for the foreclosure of a mortgage, but it is very seldom used
because of concerns regarding the validity of such actions. The process may be
expedited if the mortgagee can obtain the consent of the defendant to the
execution of a deed in lieu of foreclosure.
Under Commonwealth law, in the case of the public sale upon foreclosure
of a mortgaged property that (a) is subject to a mortgage loan that was obtained
for a purpose other than the financing or refinancing of the acquisition,
construction or improvement of such property and (b) is occupied by the
mortgagor as his principal residence, the mortgagor of such property has a right
to be paid the first $1,500 from the proceeds obtained on the public sale of
such property. The mortgagor can claim this sum of money from the mortgagee at
any time prior to the public sale or up to one year after such sale. Such
payment would reduce the amount of sales proceeds available to satisfy the
Mortgage Loan and may increase the amount of the loss.
Foreclosure on Shares of Cooperatives
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
NY1-241975.1
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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 and assigning the proprietary lease. Such approval or consent
is usually based on the prospective purchaser's income and net worth, among
other factors, and may significantly reduce the number of potential purchasers,
which could limit the ability of the lender to sell and realize upon the value
of the collateral. Generally, the lender is not limited in any rights it may
have to dispossess the tenant-stockholder.
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.
A foreclosure on the cooperative shares is accomplished by public sale
in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a sale has been
conducted in a "commercially reasonable" manner will depend on the facts in each
case. In determining commercial reasonableness, a court will look to the notice
given the debtor and the method, manner, time, place and terms of the sale and
the sale price. Generally, a sale conducted according to the usual practice of
creditors selling similar collateral in the same area will be considered
reasonably conducted.
Where the lienholder is the junior lienholder, any foreclosure may be
delayed until the junior lienholder obtains actual possession of such
cooperative shares . Additionally, if the lender does not have a first priority
perfected security interest in such cooperative shares, any foreclosure sale
would be subject to the rights and interests of any creditor holding senior
interests therein. Also, a junior lienholder may not be able to obtain a
recognition agreement from a cooperative since many cooperatives do not permit
subordinate financing. Without a recognition agreement, the junior lienholder
will not be afforded the usual lender protections (i.e., notice of default and
opportunity to cure) from the cooperative which are generally provided for in
recognition agreements.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "--Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
Rights of Redemption
In some states, after sale pursuant to a deed of trust, a deed to
secure debt or foreclosure of a mortgage, the borrower and foreclosed junior
lienors or other parties are given a statutory period (generally ranging from
six months to two years) in which to redeem the property from the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The rights
of redemption would defeat the title of any purchaser subsequent to foreclosure
or sale under a deed of trust or a deed to secure debt. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired.
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Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage
or a deed to secure debt. In some states (including California), statutes limit
the right of the beneficiary or mortgagee to obtain a deficiency judgment
against the borrower following foreclosure. A deficiency judgment is a personal
judgment against the former borrower equal in most cases to the difference
between the net amount realized upon the public sale of the real property and
the amount due to the lender. In the case of a Mortgage Loan secured by a
property owned by a trust where the Mortgage Note is executed on behalf of the
trust, a deficiency judgment against the trust following foreclosure or sale
under a deed of trust, even if obtainable under applicable law, may be of little
value to the mortgagee or beneficiary if there are no trust assets against which
such deficiency judgment may be executed. Other statutes require the beneficiary
or mortgagee to exhaust the security afforded under a deed of trust, deed to
secure debt or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower. In certain other states,
the lender has the option of bringing a personal action against the borrower on
the debt without first exhausting such security; however, in some of these
states, the lender, following judgment on such personal action, may be deemed to
have elected a remedy and may be precluded from exercising remedies with respect
to the security. Consequently, the practical effect of the election requirement,
in those states permitting such election, is that lenders will usually proceed
against the security first rather than bringing a personal action against the
borrower. Finally, in certain other states, statutory provisions limit any
deficiency judgment against the 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, deed to secure debt 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
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federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
Certain of the Mortgage Loans may be subject to special rules,
disclosure requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Homeownership and Equity Protection Act of 1994
(such Mortgage Loans, "High Cost Loans"), if such Mortgage Loans were originated
on or after October 1, 1995, are not mortgage loans made to finance the purchase
of the mortgaged property and have interest rates or origination costs in excess
of certain prescribed levels. Purchasers or assignees of any High Cost Loan,
including any Trust Fund, could be liable for all claims and subject to all
defenses arising under such provisions that the borrower could assert against
the originator thereof. Remedies available to the borrower include monetary
penalties, as well as recision rights if the appropriate disclosures were not
given as required.
Enforceability of Certain Provisions
Unless the Prospectus Supplement indicates otherwise, the Mortgage
Loans generally contain due-on-sale clauses. These clauses permit the lender to
accelerate the maturity of the loan if the borrower sells, transfers or conveys
the property. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses has been limited or denied. However, the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn-St Germain Act") preempts state
constitutional, statutory and case law that prohibit the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. The Garn-St Germain Act
does "encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of a prepayment penalty upon the acceleration of a loan pursuant
to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, which may have an impact upon the
average life of the Mortgage Loans and the number of Mortgage Loans which may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have required that lenders reinstate
loans or recast payment schedules in order to accommodate borrowers who are
suffering from temporary financial disability. In other cases, courts have
limited the right of the lender to foreclose if the default under the mortgage
instrument is not monetary, such as the borrower failing to adequately maintain
the property. Finally, some courts have been faced with the issue of whether or
not federal or state constitutional provisions reflecting due process concerns
for adequate notice require that borrowers under deeds of trust, deeds to secure
debt or mortgages receive notices in addition to the statutorily prescribed
minimum. For the most part, these cases have upheld the notice provisions as
being reasonable or have found that the sale by a trustee under a deed of trust,
or under a deed to secure debt or a mortgage having a power of sale, does not
involve sufficient state action to afford constitutional protections to the
borrower.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 ("Title V") provides that state usury limitations shall not
apply to certain types of residential first mortgage loans originated by certain
lenders after March 31, 1980. A similar federal statute was in effect with
respect to mortgage loans made during
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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.
Usury limits may apply to junior mortgage loans and Mexico Mortgage
Loans in many states. Any applicable usury limits in effect at origination will
be reflected in the maximum Mortgage Rates on ARM Loans, which will be set forth
in the related Prospectus Supplement.
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.
Junior Mortgages; Rights of Senior Mortgagees
The Mortgage Loans included in the Trust Fund may be junior to other
mortgages, deeds to secure debt or deeds of trust held by other lenders. The
rights of the Trust Fund (and therefore the Certificateholders), as mortgagee
under a junior mortgage, are subordinate to those of the mortgagee under the
senior mortgage, including the prior rights of the senior mortgagee to receive
hazard insurance and condemnation proceeds and to cause the property securing
the Mortgage Loan to be sold upon default of the mortgagor, which may extinguish
the junior mortgagee's lien unless the junior mortgagee asserts its subordinate
interest in the property in foreclosure litigation and, in certain cases, either
reinstates or satisfies the defaulted senior loan or loans. A junior mortgagee
may satisfy a defaulted senior loan in full or, in some states, may cure such
default and bring the senior loan current thereby reinstating the senior loan,
in either event usually adding the amounts expended to the balance due on the
junior loan. In most states, absent a provision in the mortgage, deed to secure
debt or deed of trust, no notice of default is required to be given to a junior
mortgagee. Where applicable law or the terms of the senior mortgage, deed to
secure debt or deed of trust do not require notice of default to the junior
mortgagee, the lack of any such notice may prevent the junior mortgagee from
exercising any right to reinstate the loan which applicable law may provide.
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The standard form of the mortgage, deed to secure debt or deed of trust
used by most institutional lenders confers on the mortgagee the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with condemnation proceedings, and to apply such proceeds and
awards to any indebtedness secured by the mortgage, deed to secure debt or deed
of trust, in such order as the mortgagee may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the property is taken by condemnation, the mortgagee or
beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of junior mortgages in the order of their priority.
Another provision sometimes found in the form of the mortgage, deed to
secure debt or deed of trust used by institutional lenders obligates the
mortgagor to pay before delinquency all taxes and assessments on the property
and, when due, all encumbrances, charges and liens on the property which are
prior to the mortgage or deed of trust, to provide and maintain fire insurance
on the property, to maintain and repair the property and not to commit or permit
any waste thereof, and to appear in and defend any action or proceeding
purporting to affect the property or the rights of the mortgagee under the
mortgage. Upon a failure of the mortgagor to perform any of these obligations,
the mortgagee or beneficiary is given the right under certain mortgages or deeds
of trust to perform the obligation itself, at its election, with the mortgagor
agreeing to reimburse the mortgagee for any sums expended by the mortgagee on
behalf of the mortgagor. All sums so expended by a senior mortgagee become part
of the indebtedness secured by the senior mortgage. Also, since most senior
mortgages require the related Mortgagor to make escrow deposits with the holder
of the senior mortgage for all real estate taxes and insurance premiums, many
junior mortgagees will not collect and retain such escrows and will rely upon
the holder of the senior mortgage to collect and disburse such escrows.
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
Home 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 record a mortgage,
deed of trust or deed to secure debt, as applicable, 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
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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 recordings are not required and
if any of the foregoing events were to occur, the only recourse of the
Certificateholders would be against the Mortgage Collateral Seller pursuant to
its repurchase obligation for breach of representations or warranties.
The Company will assign its security interests in the Manufactured
Homes to the Trustee on behalf of the Certificateholders. See "Description of
the Certificates -- Assignment of Contracts." Unless otherwise specified in the
related Prospectus Supplement, if a Manufactured Home is governed by the
applicable motor vehicle laws of the relevant state neither the Company nor the
Trustee will amend the certificates of title to identify the Trustee as the new
secured party. Accordingly, the Company or such other entity as may be specified
in the Prospectus Supplement will continue to be named as the secured party on
the certificates of title relating to the Manufactured Homes. However, there
exists a risk that, in the absence of an amendment to the certificate of title,
such assignment of the security interest may not be held effective against
subsequent purchasers of a Manufactured Home or subsequent lenders who take a
security interest in the Manufactured Home or creditors of the assignor.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered and if steps are
not taken to re-perfect the Trustee's security interest in such state, the
security interest in the Manufactured Home will cease to be perfected. While in
many circumstances the Trustee would have the opportunity to re-perfect its
security interest in the Manufactured Home in the state of relocation, there can
be no assurance that the Trustee will be able to do so.
When a Mortgagor under a Contract sells a Manufactured Home, the
Trustee, or the Servicer or the Master Servicer on behalf of the Trustee, must
surrender possession of the certificate of title or will receive notice as a
result of its lien noted thereon and accordingly will have an opportunity to
require satisfaction of the related lien before release of the lien.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority over a perfected security interest. The
applicable Mortgage Collateral Seller generally will represent that it has no
knowledge of any such liens with respect to any Manufactured Home securing
payment on any Contract. However, such liens could arise at any time during the
term of a Contract. No notice will be given to the Trustee or Certificateholders
in the event such a lien arises and such lien would not give rise to a
repurchase obligation on the part of the party specified in the Pooling and
Servicing Agreement.
To the extent that Manufactured Homes are not treated as real property
under applicable state law, contracts generally are "chattel paper" as defined
in the UCC in effect in the states in which the Manufactured Homes initially
were registered. Pursuant to the UCC, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under the
Pooling and Servicing Agreement, the Master Servicer or the Company, as the case
may be, will transfer physical possession of the Contracts to the Trustee or its
Custodian. In addition, the Master Servicer will make an appropriate filing of a
UCC-1 financing statement in the appropriate states to give notice of the
Trustee's ownership of the Contracts. Unless otherwise specified in the related
Prospectus Supplement, the Contracts will not be stamped or marked otherwise to
reflect their assignment from the Company to the Trustee. Therefore, if a
subsequent purchaser were able to take physical possession of the Contracts
without notice of such assignment, the Trustee's interest in the Contracts could
be defeated. To the extent that Manufactured Homes are treated as real property
under applicable state law, Contracts will be treated in a manner similar to
that described above with regard to Mortgage Loans. See "--The Mortgage Loans"
above.
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Enforcement of Security Interests in Manufactured Homes
The Servicer or the Master Servicer on behalf of the Trustee, to the
extent required by the related Pooling and Servicing Agreement, may take action
to enforce the Trustee's security interest with respect to Contracts in default
by repossession and sale of the Manufactured Homes securing such defaulted
Contracts. So long as the Manufactured Home has not become subject to real
estate law, a creditor generally can repossess a Manufactured Home securing a
Contract by voluntary surrender, by "self-help" repossession that is "peaceful"
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The UCC and consumer protection laws
in most states place restrictions on repossession sales, including requiring
prior notice to the debtor and commercial reasonableness in effecting such a
sale. The debtor may also have a right to redeem the Manufactured Home at or
before resale.
Certain statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment. For a discussion of deficiency judgments, see "--The Mortgage Loans --
Anti-Deficiency Legislation and Other Limitations on Lenders" above.
Consumer Protection Laws
If the transferor of a consumer credit contract is also the seller of
goods that give rise to the transaction (and, in certain cases, related lenders
and assignees), the "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of such transferor to transfer such contract
free of notice of claims by the debtor thereunder. The effect of this rule is to
subject the assignee of such a contract to all claims and defenses that the
debtor could assert against the seller of goods. Liability under this rule is
limited to amounts paid under a Contract; however, the Mortgagor also may be
able to assert the rule to set off remaining amounts due as a defense against a
claim brought against such Mortgagor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
"Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Company, the Master Servicer or
the Servicer and permit the acceleration of the maturity of the Contracts by the
Company, the Master Servicer or the Servicer upon any such sale or transfer that
is not consented to. Unless otherwise specified in the related Prospectus
Supplement, the Company, the Master Servicer or the Servicer generally will
permit most transfers of Manufactured Homes and not accelerate the maturity of
the related Contracts. In certain cases, the transfer may be made by a
delinquent Mortgagor in order to avoid a repossession proceeding with respect to
a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the
Company desires to accelerate the maturity of the related Contract, the
Company's ability to do so will depend on the enforceability under state law of
the "due-on-sale" clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. In some states the Company or the
Master Servicer may be prohibited from enforcing a "due-on-sale" clause in
respect of certain Manufactured Homes.
Applicability of Usury Laws
Title V provides that, subject to certain conditions, state usury
limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. For a discussion of Title V, see "--The
Mortgage Loans -- Applicability of Usury Laws" above. Unless otherwise specified
in the related Pooling and Servicing
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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 ("CERCLA"), 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.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 (the "Conservation Act") amended, among other things, the provisions of
CERCLA with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the mortgaged property. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the mortgagor's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of substantially all of the operational functions of the
mortgaged property. The Conservation Act also provides that a lender will
continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
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
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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.
Default Interest and Limitations on Prepayments
Notes and mortgages may contain provisions that obligate the borrower
to pay a late charge or additional interest if payments are not timely made, and
in some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states. Most conventional single-family mortgage loans may be prepaid in full or
in part without penalty. The regulations of the Federal Home Loan Bank Board, as
succeeded by the OTS, prohibit the imposition of a prepayment penalty or
equivalent fee for or in connection with the acceleration of a loan by exercise
of a due-on-sale clause. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly with respect to Mortgage Loans having higher mortgage
rates, may increase the likelihood of refinancing or other early retirements of
the Mortgage Loans.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
Negative Amortization Loans
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980 ("DIDMC") and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The holding was limited to the effect of DIDMC on state laws regarding
the compounding of interest and the court did not address the applicability of
the Alternative Mortgage Transaction Parity Act of 1982, which authorizes a
lender to make residential mortgage loans that provide for negative
amortization. As a result, the
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enforceability of compound interest on mortgage loans that provide for negative
amortization is unclear. The First Circuit's decision is binding authority only
on Federal District Courts in Maine, New Hampshire, Massachusetts, Rhode Island
and Puerto Rico.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of anticipated material United
States 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 LLP 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 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 LLP 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
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"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 "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 Section 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 LLP or
Thacher Proffitt & Wood, counsel to the Company, will deliver their opinion
generally to the effect that, assuming compliance with all provisions of the
related Pooling and Servicing Agreement or Trust Agreement, the Tiered REMICs
will each qualify as a REMIC and the REMIC Certificates issued by the Tiered
REMICs, respectively, will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
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Solely for purposes of determining whether the REMIC Certificates will
be "qualifying real property loans" under Section 593(d) of the Code, "real
estate assets" within the meaning of Section 856(c)(5)(A) of the Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC. The Small Business Job Protection Act of 1996 repealed the application of
Section 593(d) of the Code to any taxable year beginning after December, 1995.
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 Conference Committee Report (the "Committee Report") accompanying the Tax
Reform Act of 1986 indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The Prepayment Assumption used by the Master Servicer 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
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Certificate Administrator, as applicable, with respect to those Certificates in
preparing information returns to the Certificateholders and the Internal Revenue
Service (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
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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.
The OID Regulations suggest that original issue discount with respect
to securities that represent multiple uncertificated REMIC regular interests, in
which ownership interests will be issued simultaneously to the same buyer and
which may be required under the related Pooling and Servicing Agreement to be
transferred together, should be computed on an aggregate method. In the absence
of further guidance from the IRS, original issue discount with respect to
securities that represent the ownership of multiple uncertificated REMIC regular
interests will be reported to the IRS and the Certificateholders on an aggregate
method based on a single overall constant yield and the prepayment assumption
stated in the related Prospectus Supplement, treating all such uncertificated
regular interests as a single debt instrument as set forth in the OID
Regulations, so long as the Pooling and Servicing Agreement requires that such
uncertificated regular interests be transferred together.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price," in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals (i)
the adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Certificate at the beginning of the accrual period which includes
such day plus (ii) the daily portions of original issue discount for all days
during such accrual period prior to such day minus (iii) any principal payments
made during such accrual period prior to such day with respect to such
certificates.
Market Discount. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price will recognize income upon receipt of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code such a Certificateholder generally will be required to allocate the portion
of each such distribution representing stated redemption price first to accrued
market discount not previously included in income, and to recognize ordinary
income to that extent. A Certificateholder may elect to include market discount
in income currently as it accrues rather than including it on a deferred basis
in accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the first
day of the first taxable year to which such election applies. In addition, the
OID Regulations permit a Certificateholder to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method. If such an election were
made with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to
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amortize bond premium with respect to all debt instruments having amortizable
bond premium that such Certificateholder owns or acquires. See "--Premium." Each
of these elections to accrue interest, discount and premium with respect to a
Certificate on a constant yield method or as interest may not be revoked without
the consent of the IRS.
However, market discount with respect to a REMIC Regular Certificate
will be considered to be de minimis for purposes of Section 1276 of the Code if
such market discount is less than 0.25% of the remaining stated redemption price
of such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "--Original Issue Discount." Such treatment may
result in discount being included in income at a slower rate than discount would
be required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more 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
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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
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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
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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.
A REMIC will be allowed deductions for interest (including original
issue discount) on the REMIC Regular Certificates (including any other class of
REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby) equal to the deductions that would be allowed if the REMIC Regular
Certificates (including any other class of REMIC Certificates constituting
"regular interests" in the REMIC not offered hereby) were indebtedness of the
REMIC. Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular Certificates --
Original Issue Discount," except that the de minimis rule and the adjustments
for subsequent holders of REMIC Regular Certificates (including any other class
of Certificates constituting "regular interests" in the REMIC not offered
hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess
of the stated redemption price of such class (such excess, "Issue Premium"), the
net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC Regular Certificates of such class will be
reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount."
As a general rule, the taxable income of the REMIC will be determined
in the same manner as if the REMIC were an individual having the calendar year
as its taxable year and using the accrual method of accounting. However, no item
of income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions and Other Possible REMIC
Taxes" below. Further, the limitation on miscellaneous itemized deductions
imposed on individuals by Section 67 of the Code (which allows such deductions
only to the extent they exceed in the aggregate two percent of the taxpayer's
adjusted gross income) will not be applied at the REMIC level so that the REMIC
will be allowed deductions for servicing, administrative and other non-interest
expenses in determining its taxable income. All such expenses will be allocated
as a separate item to the holders of REMIC Residual Certificates, subject to the
limitation of Section 67 of the Code. See "--Possible Pass-Through of
Miscellaneous Itemized Deductions" 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
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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 be subject to United States federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the sum
of the daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined herein) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses, brokers and underwriters) at which a substantial
amount of the REMIC Residual Certificates were sold. If less than a substantial
amount of a particular class of REMIC Residual Certificates is sold for cash on
or prior to the Closing Date, the issue price of such class will be treated as
the fair market value of such class on the Closing Date. The "long-term federal
rate" is an average of current yields on Treasury securities with a remaining
term of greater than nine years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (i) will not
be permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates" below. Furthermore, for purposes of the
alternative minimum tax, (i) excess inclusions will not be permitted to be
offset by the alternative tax net operating loss deduction and (ii) alternative
minimum taxable income may not be less than the taxpayer's excess inclusions;
provided, however, that for purposes of (ii), alternative minimum taxable income
is determined without regard to the special rule that taxable income cannot be
less than excess inclusions. The latter rule has the effect of preventing
nonrefundable tax credits from reducing the taxpayer's income tax to an amount
lower than the alternative minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could
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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 24, 1996, the IRS released final
regulations (the "Mark-to-Market Regulations") relating to the requirement that
a securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held for
investment. The Mark-to-Market Regulations provide that for purposes of this
mark-to-market requirement, a REMIC Residual Certificate acquired on or after
January 4, 1995 is not treated as a security and thus may not be marked to
market. Prospective purchasers of a REMIC Residual Certificate should consult
their tax advisors regarding the possible application of the mark-to-market
requirement to REMIC Residual Certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of such fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Unless otherwise stated in
the related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular
Certificates the holders of which receive an allocation of fees and expenses in
accordance with the preceding discussion, if any holder thereof is an
individual, estate or trust, or a "pass-through entity" beneficially owned by
one or more individuals, estates or trusts, (i) an amount equal to such
individual's, estate's or trust's share of such fees and expenses will be added
to
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<PAGE>
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
NY1-241975.1
<PAGE>
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.
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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, including provisions (a) requiring any transferee of a REMIC
Residual Certificate to provide an affidavit representing that it is not a
"disqualified organization" and is not acquiring the REMIC Residual Certificate
on behalf of a "disqualified organization," undertaking to maintain such status
and agreeing to obtain a similar affidavit from any person to whom it shall
transfer the REMIC Residual Certificate, (b) providing that any transfer of a
REMIC Residual Certificate to a "disqualified person" shall be null and void and
(c) granting to the Master Servicer or Certificate Administrator, as applicable,
the right, without notice to the holder or any prior holder, to sell to a
purchaser of its choice any REMIC Residual Certificate that shall become owned
by a "disqualified organization" despite (a) and (b) above.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization. For taxable years beginning after
December 31, 1997, notwithstanding the preceding two sentences, in the case of a
REMIC Residual Certificate held by an "electing large partnership," all
interests in such partnership shall be treated as held by disqualified
organizataions (without regard to whether the record holders of the partnership
furnish statements described in the preceding sentence) and the amount that is
subject to tax under the second preceding sentence is excluded from the gross
income of the partnership allocated to the partners (in lieu of allocating to
the partners a deduction for such tax paid by the partners).
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or Freddie Mac), (ii) any organization (other than a cooperative
described in Section 521 of the Code) that is exempt from federal income tax,
unless it is subject to the tax imposed by Section 511 of the Code 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.
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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."
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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 (except in the case of a Partnership, to the
extent provided in the Regulations), or an estate whose income is subject to
United States federal income tax regardless of its source, or a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. To the extent
prescribed in regulations by the Secretary of the Treasury, which regulations
have not yet been issued, a trust which was in existence on August 20, 1996
(other than a trust as owned by the grantor under subpart E of part I of
subchapter J of chapter 1 of the Code), and which was treated as a United States
person on August 19, 1996, may elect to continue to be treated as a United
States person notwithstanding the previous sentence. It is possible that the IRS
may assert that the foregoing tax exemption should not apply with respect to a
REMIC Regular Certificate held by a 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.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the United States federal income tax consequences
described in "United States Federal Income Tax Consequences," potential
investors should consider the state and local tax consequences of the
acquisition, ownership, and disposition of the Certificates offered. State tax
law may differ substantially from the corresponding federal tax law, and the
discussion above does not purport to describe any aspect of the tax laws of any
state or other jurisdiction. Therefore, prospective investors should consult
their tax advisors with respect to the various tax consequences of investments
in the Certificates offered hereby.
ERISA CONSIDERATIONS
Sections 404 and 406 of ERISA impose certain fiduciary and prohibited
transaction restrictions on employee pension and welfare benefit plans subject
to ERISA ("ERISA Plans") and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans, bank
collective investment funds and insurance company general and separate accounts
in which such ERISA Plans are invested. Section 4975 of the Code imposes
essentially the same prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code and on individual
retirement accounts described in Section 408 of the Code (collectively,
"Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA) and, if no election has been made under Section
410(d) of the Code, church plans (as defined in Section 3(33) of ERISA), are not
subject to the ERISA requirements discussed herein. Accordingly, assets of such
plans may be invested in Certificates without regard to the ERISA considerations
described below, subject to the provisions of applicable federal and state law.
Any such plan that is a tax-qualified plan and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those
of investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving "plan assets" of ERISA Plans and Tax-Favored Plans (collectively,
"Plans") and persons ("Parties in Interest" under ERISA or "Disqualified
Persons" under the Code, collectively, " Parties in Interest") who have certain
specified relationships to the Plans, unless a statutory or administrative
exemption is available. Certain Parties in Interest that participate in a
prohibited transaction may be subject to a penalty (or an excise tax) imposed
pursuant to Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available with respect to any such
transaction.
Plan Asset Regulations
An investment of Plan Assets in Certificates may cause the underlying
Mortgage Loans, Contracts, Agency Securities or any other assets included in a
Trust Fund to be deemed "plan assets" of such Plan. The U.S. Department of Labor
(the "DOL") has promulgated regulations at 29 C.F.R. Section 2510.3-101 (the "
DOL Regulations") concerning whether or not a Plan's assets would be deemed to
include an interest in the underlying assets of an entity (such as a Trust Fund)
for purposes of applying the general fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Code, when a Plan acquires an "equity interest" (such as a Certificate) in such
entity. Because of the factual nature of certain of the rules set forth in the
DOL Regulations, Plan Assets either may be deemed to include an interest in the
assets of an entity (such as a Trust Fund) or may be deemed merely to include
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.
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<PAGE>
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 with respect
to an investing Plan (or of a Plan holding an interest in such an entity). If
so, the acquisition or holding of Certificates by or on behalf of the investing
Plan could also give rise to a prohibited transaction under ERISA and/or Section
4975 of the Code, unless some statutory or administrative exemption is
available. Certificates acquired by a Plan would be assets of that Plan. Under
the DOL Regulations, a Trust Fund, including the Mortgage Loans, Contracts,
Agency Securities or any other assets held in such Trust Fund, may also be
deemed to be assets of each Plan that acquires Certificates. Special caution
should be exercised before Plan Assets are used to acquire a Certificate in such
circumstances, especially if, with respect to such 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,
Agency Securities or any other assets in a Trust Fund were to constitute Plan
Assets, then any party exercising management or discretionary control with
respect to those Plan Assets may be deemed to be a Plan "fiduciary," and thus
subject to the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to any investing
Plan. In addition, if the Mortgage Loans, Contracts, Agency Securities or any
other assets in a Trust Fund were to constitute Plan Assets, then the
acquisition or holding of Certificates by, or on behalf of a Plan or with Plan
Assets, as well as the operation of such Trust Fund, may constitute or involve a
prohibited transaction under ERISA and the Code.
Prohibited Transaction Exemption
The DOL issued an individual exemption, Prohibited Transaction
Exemption ("PTE") 94-29, (59 Fed. Reg. 14,674, March 29, 1994), as amended by
PTE 97-34, 62 Fed.Reg. 39021 (July 21, 1997) (the "Exemption"), to Residential
Funding and certain of its affiliates, which generally exempts from the
application of the prohibited transaction provisions of Section 406 of ERISA,
and the excise taxes imposed on such prohibited transactions pursuant to Section
4975(a) and (b) of the Code, certain transactions, among others, relating to the
servicing and operation of pools of certain secured obligations, such as
Mortgage 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 Services, Moody's
Investors Service Inc., Duff & Phelps Credit Rating Co. or Fitch Investors
Service, L.P. (collectively, the "Exemption Rating
NY1-241975.1
<PAGE>
Agencies"). Fourth, the Trustee cannot be an affiliate of any other member of
the "Restricted Group" which consists of any Underwriter, the Company, the
Master Servicer, the Certificate Administrator, any Servicer, any Sub-Servicer,
the Trustee and any mortgagor with respect to assets of a Trust Fund
constituting more than 5% of the aggregate unamortized principal balance of the
assets in the related Trust Fund as of the date of initial issuance of the
Certificates. Fifth, the sum of all payments made to and retained by the
underwriters must represent not more than reasonable compensation for
underwriting the Certificates; the sum of all payments made to and retained by
the Company pursuant to the assignment of the assets to the related Trust Fund
must represent not more than the fair market value of such obligations; and the
sum of all payments made to and retained by the Master Servicer, 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. In addition, except as otherwise specified in the
respective Prospectus Supplement, the exemptive relief afforded by the Exemption
may not apply to any Certificates where the related Trust Fund contains a Swap
or Mexico Mortgage Loans.
The Exemption also requires that each Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) certificates evidencing
interests in such other investment pools must have been rated in one of the
three highest categories of one of the Exemption Rating Agencies for at least
one year prior to the acquisition of Certificates by or on behalf of a Plan or
with Plan Assets; and (iii) certificates in such other investment pools must
have been purchased by investors other than Plans for at least one year prior to
any acquisition of Certificates by or on behalf of a Plan or with Plan Assets.
A fiduciary or other investor of Plan Assets contemplating purchasing a
Certificate must make its own determination that the general conditions set
forth above will be satisfied with respect to such Certificate.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA, 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, as well as the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code, in
connection with (1) the direct or indirect sale, exchange or transfer of
Certificates in the initial issuance of Certificates between the Company or an
Underwriter and a Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of the relevant Plan
Assets in the Certificates is (a) a mortgagor with respect to 5% or less of the
fair market value of the assets of a Trust Fund or (b) an affiliate of such a
person, (2) the direct or indirect acquisition or disposition in the secondary
market of Certificates by a Plan or with Plan Assets and (3) the holding of
Certificates by a Plan or with Plan Assets.
Additionally, if certain specific conditions of the Exemption are
satisfied, the Exemption may provide an exemption from the restrictions imposed
by Sections 406(a), 406(b) and 407(a) of ERISA, as well as 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
NY1-241975.1
<PAGE>
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, as well as 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 with respect to an
investing Plan (or the investing entity holding Plan Assets) by virtue of
providing services to the Plan (or by virtue of having certain specified
relationships to such a person) solely as a result of the Plan's ownership of
Certificates.
Before purchasing a Certificate, a fiduciary or other investor of Plan
Assets should itself confirm (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 or second Mortgage Loans,
Contracts or Agency Certificates, such fiduciary or other Plan investor should
consider the availability of the Exemption or Prohibited Transaction Class
Exemption ("PTCE") 83-1 ("PTCE 83-1 ") for certain transactions involving
mortgage pool investment trusts. However, PTCE 83-1 does not provide exemptive
relief with respect to Certificates evidencing interests in Trust Funds that
include Mortgage Loans secured by third or more junior liens, Contracts or
Cooperative Loans. In addition, such fiduciary or other Plan investor should
consider the availability of other class exemptions granted by the DOL, which
provide relief from certain of the prohibited transaction provisions of ERISA
and the related excise tax provisions of Section 4975 of the Code, including
Sections I and III of PTCE 95-60, regarding transactions by insurance company
general accounts. The respective Prospectus Supplement may contain additional
information regarding the application of the Exemption, PTCE 83-1, PTCE 95-60 or
other DOL class exemptions with respect to the Certificates offered thereby.
There can be no assurance that any of these exemptions will apply with respect
to any particular Plan's or other Plan Asset investor's investment in the
Certificates or, even if an exemption were deemed to apply, that any exemption
would apply to all prohibited transactions that may occur in connection with
such an investment.
Insurance Company General Accounts
In addition to any exemptive relief that may be available under PTCE
95-60 for the purchase and holding of the Certificates by an insurance company
general account, the Small Business Job Protection Act of 1996 added a new
Section 401(c) to ERISA, which provides certain exemptive relief from the
provisions of Part 4 of Title I of ERISA and Section 4975 of the Code, including
the prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by Section 4975 of the Code, for transactions involving an
insurance company general account. Pursuant to Section 401(c) of ERISA, the DOL
is required to issue final regulations (the "401(c) Regulations") no later than
December 31, 1997 which are to provide guidance for the purpose of determining,
in cases where insurance policies supported by an insurer's general account are
issued to or for the benefit of a Plan on or before December 31, 1998, which
general account assets constitute Plan Assets. Section 401(c) of ERISA generally
provides that, until the date which is 18 months after the 401(c) Regulations
become final, no person shall be subject to liability under Part 4 of Title I of
ERISA and Section 4975 of the Code on the basis of a claim that the assets of an
insurance company general account constitute Plan Assets, unless (i) as
otherwise provided by the Secretary of Labor in the 401(c) Regulations to
prevent avoidance of the regulations or (ii) an action is brought by the
Secretary of Labor for certain breaches of fiduciary duty which would also
constitute a violation of federal or state criminal law. Any assets of an
insurance company general account which support insurance policies issued to a
Plan after December 31, 1998 or issued to Plans on or before December 31, 1998
for which the insurance
NY1-241975.1
<PAGE>
company does not comply with the 401(c) Regulations may be treated as Plan
Assets. In addition, because Section 401(c) does not relate to insurance company
separate accounts, separate account assets are still treated as Plan Assets of
any Plan invested in such separate account. Insurance companies contemplating
the investment of general account assets in the Certificates should consult with
their legal counsel with respect to the applicability of Sections I and III of
PTCE 95-60 and Section 401(c) of ERISA, including the general account's ability
to continue to hold the Certificates after the date which is 18 months after the
date the 401(c) Regulations become final.
Representation from Investing Plans
The exemptive relief afforded by the Exemption will not apply to the
purchase, sale or holding of any class of Subordinate Certificates. To the
extent Certificates are Subordinate Certificates or the related Trust Fund
contains a Swap or Mexico Mortgage Loans, except as otherwise specified in the
respective Prospectus Supplement, transfers of such Certificates to a Plan, to a
trustee or other person acting on behalf of any Plan, or to any other person
using Plan Assets to effect such acquisition will not be registered by the
Trustee unless the transferee provides the Company, the Trustee and the Master
Servicer with an opinion of counsel satisfactory to the Company, the Trustee and
the Master Servicer, which opinion will not be at the expense of the Company,
the Trustee or the Master Servicer, that the purchase of such Certificates by or
on behalf of such Plan is permissible under applicable law, will not constitute
or result in any non-exempt prohibited transaction under ERISA or Section 4975
of the Code and will not subject the Company, the Trustee and the Master
Servicer to any obligation in addition to those undertaken in the Pooling and
Servicing Agreement. In lieu of such opinion of counsel, except as otherwise
specified in the respective Prospectus Supplement, the transferee may provide a
certification of facts substantially to the effect that the purchase of such
Certificates by or on behalf of such Plan is permissible under applicable law,
will not constitute or result in a non-exempt prohibited transaction under ERISA
or Section 4975 of the Code, will not subject the Company, the Trustee or the
Master to any obligation in addition to those undertaken in the Pooling and
Servicing Agreement, and the following conditions are met: (a) the source of
funds used to purchase such Certificates is an "insurance company general
account" (as such term is defined in PTCE 95-60) and (b) the conditions set
forth in Sections I and III of PTCE 95-60 have been satisfied as of the date of
the acquisition of such Certificates. Tax-Exempt Investors
A Plan that is exempt from federal income taxation pursuant to Section
501 of the Code (a "Tax-Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusions" of a REMIC allocated to a REMIC Residual Certificate held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to federal
income tax. See "United States Federal Income Tax Consequences-Taxation of
Owners of REMIC Residual Certificates -- Excess Inclusions."
Consultation with Counsel
There can be no assurance that the Exemption or any other DOL exemption
will apply with respect to any particular Plan that acquires the Certificates
or, even if all the conditions specified therein were satisfied, that the
exemption would apply to transactions involving a Trust Fund. Prospective Plan
investors should consult with their legal counsel concerning the impact of ERISA
and the Code and the potential consequences to their specific circumstances
prior to making an investment in the Certificates.
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 Section 4975 of the Code to the proposed investment and the Exemption,
the availability of exemptive relief under the PTCE 83-1, Sections I and III of
PTCE 95-60 or any other DOL class exemption.
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<PAGE>
LEGAL INVESTMENT MATTERS
Each class of Certificates offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. If so specified in the related
Prospectus Supplement certain classes that are, and continue to be, rated in one
of the two highest rating categories by at least one nationally recognized
statistical rating organization will constitute "mortgage related securities"
for purposes of SMMEA, and, as such, will be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any State whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Under
SMMEA, if a State enacted legislation on or prior to October 3, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," such securities will constitute legal
investments for entities subject to such legislation only to the extent provided
therein. Certain States enacted legislation which overrides the preemption
provisions of SMMEA. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in "mortgage related securities," or
require the sale or other disposition of such securities, so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. (S) 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the Office of Thrift Supervision (the
"OTS") with an effective date of February 10, 1992. The Policy Statement
generally indicates that a mortgage derivative product will be deemed to be high
risk if it exhibits greater price volatility than a standard fixed-rate
thirty-year mortgage security. According to the Policy Statement, prior to
purchase, a depository institution will be required to determine whether a
mortgage derivative product that it is considering acquiring is high-risk and,
if so, that the proposed acquisition would reduce the institution's overall
interest rate risk. Reliance on analysis and documentation obtained from a
securities dealer or other outside party without internal analysis by the
institution would be unacceptable. There can be no assurance as to which classes
of Certificates will be treated as high-risk under the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled "Mortgage
Derivative Products and Mortgage Swaps," which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Certificates. In addition, the National Credit Union Administration has issued
regulations governing federal credit union investments which prohibit investment
in certain specified types of securities, which may include certain classes of
Certificates. Similar policy statements have been issued by regulators having
jurisdiction over other types of depository institutions.
Prospective investors in the Certificates, including in particular the
classes of Certificates that do not constitute "mortgage related securities" for
purposes of SMMEA, should consider the matters discussed in the following
paragraph.
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<PAGE>
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.
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<PAGE>
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 United States federal income
tax matters, will be passed upon for the Company by Orrick, Herrington &
Sutcliffe LLP, 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.
NY1-241975.1
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Caption Page
401(c) Regulations.....................................................147
Accrual Certificates....................................................13
Advance ......................................................61
Affiliated Seller ......................................................41
Agency Securities ......................................................17
Agency Securities Pool..................................................28
AlterNet Loans ......................................................29
AlterNet Mortgage Program...............................................29
AlterNet Program Seller.................................................41
AlterNet Seller Guide...................................................37
Appraised Value ......................................................39
ARM Loans ......................................................33
Balloon Amount ......................................................30
Balloon Loans ......................................................30
Bankruptcy Amount ......................................................73
Bankruptcy Losses ......................................................75
Beneficial Owner ......................................................47
Bi-Weekly Loans ......................................................30
Book-Entry Certificates.................................................47
Buy-Down Funds ......................................................34
Buy-Down Loans ......................................................29
Buy-Down Period ......................................................34
CEDEL ......................................................47
CEDEL Participants......................................................48
CERCLA .....................................................118
Certificate Account.....................................................28
Certificate Insurance Policies..........................................80
Certificate Insurance Policy............................................80
Certificate Registrar...................................................47
Certificateholder ......................................................47
Certificates .......................................................1
Combined Loan-to-Value Ratio............................................32
Commission .......................................................3
Committee Report .....................................................124
Company .......................................................1
Compensating Interest...................................................62
Conservation Act .....................................................118
Contract Pool ......................................................17
Contract Pool Insurance Policy..........................................78
Contracts .......................................................1
Contributions Tax .....................................................137
Conventional Loans......................................................29
Convertible Mortgage Loan...............................................34
Cooperative ......................................................49
Cooperative Dwellings...................................................30
Cooperative Loans ......................................................17
Cooperative Note .....................................................103
Cooperatives ......................................................30
Counterparties ......................................................83
Crime Control Act .....................................................120
NY1-241975.1
<PAGE>
Custodial Account .....................................................28
Custodian .....................................................28
Cut-off Date .....................................................28
Debt Service Reduction.................................................79
Defaulted Mortgage Losses..............................................74
Deferred Interest .....................................................33
Deficient Valuation....................................................79
Depositaries .....................................................47
Determination Date.....................................................58
DIDMC ....................................................120
Direct Puerto Rico Mortgage............................................51
Disqualified Persons..................................................143
Distribution Amount....................................................58
Distribution Date .....................................................14
DOL ....................................................143
DOL Regulations ....................................................143
DTC .....................................................47
DTC Participants .....................................................47
Due Date .....................................................59
Due Period .....................................................59
Eligible Account .....................................................54
Endorsable Puerto Rico Mortgage........................................51
ERISA .....................................................20
ERISA Plans ....................................................142
Escrow Account .....................................................65
Euroclear .....................................................47
Euroclear Operator.....................................................49
Euroclear Participants.................................................49
Exchange Act ......................................................3
Excluded Plan ....................................................146
Exemption ....................................................144
Exemption Rating Agencies.............................................145
Extraordinary Losses...................................................75
Fannie Mae .....................................................28
Fannie Mae Securities..................................................28
FDIC .....................................................41
FHA .....................................................29
FHA Contracts .....................................................38
FHA Loans .....................................................29
Form 8-K .....................................................29
Fraud Loss Amount .....................................................73
Fraud Losses .....................................................75
Freddie Mac .....................................................28
Freddie Mac Act .....................................................40
Freddie Mac Securities.................................................28
Funding Account .....................................................62
Garn-St Germain Act...................................................112
Ginnie Mae .....................................................28
Ginnie Mae Securities..................................................28
GPM Loans .....................................................29
Gross Margin .....................................................33
High Cost Loans ....................................................111
Housing Act .....................................................39
HUD .....................................................29
NY1-241975.1
<PAGE>
Index .......................................................33
Indirect Participants....................................................47
Insurance Proceeds.......................................................54
International Borrowers..................................................17
IRS ......................................................125
Issue Premium ......................................................132
Junior Mortgage Loans....................................................24
Junior Mortgage Ratio....................................................32
Lender's Beneficial Interest.............................................30
Letter of Credit .......................................................76
Letter of Credit Bank....................................................76
LIBOR .......................................................83
Liquidated Contract......................................................70
Liquidated Mortgage Loan.................................................70
Liquidation Proceeds.....................................................54
Loan-to-Value Ratio......................................................32
Manufactured Home .......................................................17
Master Commitments.......................................................41
Maximum Mortgage Rate....................................................33
Mexican Properties.......................................................23
Mexican Property .......................................................30
Mexican Trust .......................................................30
Mexican Trustee .......................................................30
Mexico Loan Agreement....................................................30
Mexico Mortgage Loans....................................................17
Mexico Trust Agreement...................................................30
Mezzanine Certificates...................................................14
Minimum Mortgage Rate....................................................33
Modified Mortgage Loan...................................................31
Mortgage Collateral.......................................................1
Mortgage Collateral Seller...............................................16
Mortgage Loans ........................................................1
Mortgage Note .......................................................50
Mortgage Pool .......................................................16
Mortgage Pool Insurance Policy...........................................76
Mortgage Rates .......................................................29
Mortgaged Property.......................................................17
Mortgages .......................................................30
Mortgagor's Beneficial Interest..........................................30
Mortgagors .......................................................17
Neg-Am ARM Loans .......................................................33
Net Mortgage Rate .......................................................95
Nonrecoverable Advance...................................................57
OID Regulations ......................................................122
OTS ......................................................150
Overcollateralization....................................................74
Participants .......................................................47
Parties in Interest.....................................................143
Pass-Through Rate .......................................................13
Paying Agent .......................................................57
Percentage Interest......................................................57
Periodic Cap .......................................................33
Permitted Investments....................................................55
Plan Assets ......................................................143
NY1-241975.1
<PAGE>
Plans .......................................................143
Policy Statement .......................................................150
Pool Insurer ........................................................76
Pooling and Servicing Agreement............................................1
Prepayment Interest Shortfall.............................................62
Primary Insurance Policy..................................................84
Primary Insurer ........................................................85
Principal Prepayments.....................................................59
Prohibited Transactions Tax..............................................137
PTCE .......................................................147
PTCE 83-1 .......................................................147
PTE .......................................................144
Purchase Obligation.......................................................83
Purchase Price ........................................................44
Qualified Insurer ........................................................81
Qualified Substitute Contract.............................................45
Qualified Substitute Mortgage Loan........................................45
Rating Agency ........................................................19
Realized Loss ........................................................72
Record Date ........................................................57
Registration Statement.....................................................3
REMIC .........................................................2
REMIC Certificates.......................................................121
REMIC Provisions .......................................................121
REMIC Regular Certificates...............................................122
REMIC Regulations .......................................................122
REMIC Residual Certificates..............................................122
REO Contract ........................................................70
REO Mortgage Loan ........................................................70
Repurchased Contract......................................................45
Repurchased Mortgage Loan.................................................45
Reserve Fund ........................................................80
Residential Funding.......................................................12
Restricted Group .......................................................145
Senior Certificates.......................................................13
Senior Percentage ........................................................73
Senior/Subordinate Series.................................................46
Servicing Advances........................................................56
Servicing Fee ........................................................66
Single Certificate........................................................64
SMMEA ........................................................19
Special Hazard Amount.....................................................73
Special Hazard Insurance Policy...........................................78
Special Hazard Insurer....................................................78
Special Hazard Losses.....................................................75
Special Servicer ........................................................69
Spread ........................................................52
Stated Principal Balance..................................................73
Strip Certificate ........................................................13
Sub-Servicer ........................................................64
Sub-Servicing Agreement...................................................64
Subordinate Certificates..................................................13
Surety Bond ........................................................81
Swaps ........................................................83
NY1-241975.1
<PAGE>
Tax-Favored Plans .........................................................143
Terms and Conditions........................................................49
Tiered REMICs .........................................................123
Title V .........................................................113
Title VIII .........................................................113
Trust Agreement ...........................................................1
Trust Fund ...........................................................1
Trustee ..........................................................28
U.S. Borrowers ..........................................................17
UBTI .........................................................148
Unaffiliated Seller.........................................................41
Underwriter .........................................................145
VA ..........................................................29
VA Contracts ..........................................................38
VA Loans ..........................................................29
NY1-241975.1
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SUPPLEMENT SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
SUBJECT TO COMPLETION, DATED ^ NOVEMBER 12, 1997
Prospectus Supplement Version I-A
(to Prospectus dated _______ __, 199_)
RESIDENTIAL ASSET SECURITIES CORPORATION
Depositor
[Name of [Master] Servicer[s]]
[Master] Servicer
[Mortgage][Manufactured Housing Contract] Pass-Through Certificates, Series
[199_-_]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
$__________ ____% Class A-1 Certificates $ 0 Variable Rate (2) Class A-5 Certificates
$__________ ____% Class A-2 Certificates $__________ ____% Class R Certificates
$__________ 0% (1) Class A-4 Certificates $__________ ____% Class M Certificates
</TABLE>
(1) The Class A-4 Certificates will be Principal Only Certificates and will
not be entitled to received distributions of interest.
(2) Based on the Notional Amount (as described herein under "Description of
the Offered Certificates--Interest Distributions"). The Class A-5 Certificates
will be Stripped Interests Certificates and will not be entitled to receive
distributions of principal. ----------------------
The Series [199_-_] [Mortgage] [Manufactured Housing Contract] Pass-Through
Certificates (the "Certificates") will include (i) six classes of senior
certificates (collectively, the "Senior Certificates"): Class A-1, Class A-2,
Class A-3 (the "Accrual Certificates"), Class A-4 (the "Principal Only
Certificates"), Class A-5 (the "Stripped Interests Certificates") and Class R
(the "Residual Certificates"); and (ii) two classes of subordinate certificates:
the Class M Certificates and the Class B Certificates (collectively, the "
Subordinate Certificates"). Only the Senior Certificates (other than the Accrual
Certificates) and the Class M Certificates (collectively, the "Offered
Certificates") are being offered hereby. See "Index of Principal Definitions" in
the Prospectus for meanings of capitalized terms and acronyms not otherwise
defined herein.
(continued on following page)
----------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST IN
OR OBLIGATION OF THE COMPANY, THE [MASTER] SERVICER[S], GMAC MORTGAGE OR ANY OF
THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE UNDERLYING [MORTGAGE
LOANS] [CONTRACTS] ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY [(EXCEPT IN THE CASE OF FHA [LOANS] [CONTRACTS], AND VA [LOANS]
[CONTRACTS])] OR BY THE COMPANY, THE [MASTER] SERVICER[S], GMAC MORTGAGE OR ANY
OF THEIR AFFILIATES. ----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- - ----------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
For a discussion of significant matters affecting investments in the
Certificates, see "Risk Factors" [commencing on page S-18 herein and] commencing
in the Prospectus on page [__].
----------------------
___________________________ (the "Underwriter") intends to make a secondary
market in the Offered Certificates (other than the Residual Certificates and
Class M Certificates), but has no obligation to do so. There can be no assurance
that a secondary market for the Offered Certificates will develop or, if it does
develop, that it will continue. The Offered Certificates will not be listed on
any securities exchange.
The Offered Certificates will be purchased from the Company by the Underwriter
and will be offered by the Underwriter 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 proceeds to the Company from the sale of
the Offered Certificates will be equal to ____% of the initial aggregate
principal balance of the Offered Certificates, plus accrued interest thereon
from __________ 1, 19__ (the "Cut-off Date"), net of any expenses payable by the
Company to the Underwriter and any dealer. The Offered Certificates are offered
by the Underwriter subject to prior sale, when, as and if delivered to and
accepted by the Underwriter and subject to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify such offer and to
reject any order in whole or in part. It is expected that delivery of the
Offered Certificates will be made on or about __________, 199_ [at the office of
________________________________________] [through the facilities of The
Depository Trust Company] against payment therefor in immediately available
funds.
[The Principal Only Certificates, Stripped Interests Certificates, Residual
Certificates and Class M Certificates may be offered by the Company from time to
time to the public, either directly or through an underwriter or agent, in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale[, except that a de minimis portion of the Residual Certificate will
be held by Residential Funding and such portion is not offered hereby].
[Proceeds to the Company from the sale of the Principal Only Certificates,
Stripped Interest Certificates, Residual Certificates or Class M 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 any underwriter
or agent.]
[Name of Underwriter]
The date of this Prospectus Supplement is _________ __, 199_.
<PAGE>
(continued from previous page)
It is a condition to the issuance of the Offered Certificates that the Senior
Certificates and the Class M Certificates be rated "___" and "___",
respectively, by ____________ and "___" and "___", respectively, by
____________.
The Senior Certificates in the aggregate and the Class M Certificates will
evidence initial undivided interests of approximately ____% and ____%,
respectively, in a trust fund (the "Trust Fund") consisting primarily of a pool
of [[fixed] [adjustable] rate [conventional] [FHA-insured] [VA-guaranteed] one-
to four-family, [first] [second] [junior] lien mortgage loans (the "Mortgage
Loans")][manufactured housing conditional sales contracts and installment loan
agreements (the "Contracts")] to be deposited by Residential Asset Securities
Corporation (the "Company") into the Trust Fund. See "Description of the Trust
Fund" herein. As described herein and in the Prospectus, the rights of the
holders of the Class M Certificates and the Class B Certificates to receive
distributions with respect to the [Mortgage Loans] [Contracts] will be
subordinate to the rights of the holders of the Senior Certificates; in
addition, the rights of the holders of the Class B Certificates to receive
distributions with respect to the [Mortgage Loans] [Contracts] will be
subordinate to the rights of the holders of the Class M Certificates. See
"Description of the Offered Certificates--Allocation of Losses; Subordination"
herein.
As described herein, a REMIC election will be made in connection with the Trust
Fund for federal income tax purposes. Each class of Offered Certificates (other
than the Residual Certificates) will constitute "regular interests" and the
Residual Certificates will constitute "residual interests" in the REMIC. See
"Certain Federal Income Tax Consequences" herein and in the Prospectus.
Distributions on the Offered Certificates will be made on the 25th day of each
month (or, if such day is not a business day, the next business day), commencing
on __________, 199_. As described herein under "Description of the Offered
Certificates-- Interest Distributions," interest distributions on the Offered
Certificates will be based on the Certificate Principal Balance or the Notional
Amount thereof and the then-applicable Pass-Through Rate thereof, which will be
variable for the Stripped Interests Certificates and fixed for all other classes
of Certificates. Distributions in respect of principal will be allocated among
the various classes of the Offered Certificates as described herein under
"Description of the Offered Certificates--Principal Distributions on the Senior
Certificates" and "-- Principal Distributions on the Class M Certificates."
The yield to maturity on the Offered Certificates will depend on the rate of
payment of principal (including prepayments, defaults and liquidations) on the
[Mortgage Loans] [Contracts]. The yield to maturity on the Offered Certificates
will be extremely sensitive to losses due to defaults on the [Mortgage Loans]
[Contracts] (and the timing thereof), to the extent losses are not covered by
the classes of Certificates with a lower payment priority. The yield to
investors on the Offered Certificates will be adversely affected by any
shortfalls in interest collected on the [Mortgage Loans] [Contracts] due to
prepayments, liquidations or otherwise. Shortfalls in interest collected on the
[Mortgage Loans] [Contracts] due to prepayments in full will be offset by the
[Master] Servicer[s] to the extent described herein under "Description of the
Offered Certificates--Interest Distributions." The yield to investors on the
Stripped Interests Certificates will be [extremely] sensitive to the rate and
timing of principal payments (including prepayments, defaults and liquidations)
on the [Mortgage Loans] [Contracts], which rate may fluctuate significantly over
time. A rapid rate of principal payments on the [Mortgage Loans] [Contracts]
could result in the failure of investors in the Stripped Interests Certificates
to recover their initial investments. Because amounts payable with respect to
the Principal Only Certificates are derived only from principal payments on the
[Mortgage Loans] [Contracts] with Net Mortgage Rates that are lower than ____%,
the yield on the Principal Only Certificates will be adversely affected by
slower than expected payments of principal on such [Mortgage Loans] [Contracts].
See "Summary--Special Prepayment Considerations" and "--Special Yield
Considerations," and "Certain Yield and Prepayment Considerations" herein and
"Yield Considerations" in the Prospectus. ----------------------
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE COMPANY PURSUANT TO ITS
PROSPECTUS DATED __________ __, 199_, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A
PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING NOT CONTAINED HEREIN AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE CONSUMMATED
UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
----------------------
UNTIL [_____ __, 199_ (90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT)],
ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED 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. ----------------------
[IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
NY1-241975.1
S-2
<PAGE>
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET, SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.]
NY1-241975.1
S-3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus. See "Index of Principal Definitions" in the
Prospectus.
Titleof Securities..................................... [Mortgage]
[Manufactured Housing Contract] Pass-Through Certificates, Series [199_-_].
Company................................................. Residential Asset
Securities Corporation, a corporation organized under the laws of the State
of Delaware, an affiliate of Residential Funding, which is an indirect
wholly-owned subsidiary of GMAC Mortgage. See "The Company" in the
Prospectus.
[Master] Servicer[s].................................... [Residential Funding
(the "Master Servicer")] [__________, a __________, organized under the
laws of __________ (the "Servicer[s]")]. See "Pooling and Servicing
Agreement--The [Master] Servicer[s]" herein [and "Residential Funding
Corporation" in the Prospectus.]
Trustee................................................. , a [national bank]
[[state bank] [trust company] ------------------ organized under the laws
of __________] (the "Trustee"). See "The Pooling and Servicing
Agreement--The Trustee" in the Prospectus.
Cut-off Date............................................ ____________ 1, 199_
(the "Cut-off Date").
Delivery Date........................................... On or about
____________, 19__ (the "Delivery Date").
Distribution Date....................................... The 25th day of each
month (or, if such day is not a business day, the next business day),
beginning on ________ __, 199_, (each, a "Distribution Date").
The [Mortgage] [Contract] Pool.......................... The Certificates, in
the aggregate, will evidence the entire beneficial interest in the Trust
Fund which consists of the Mortgage Collateral with an aggregate principal
balance of $__________. [____% of the Mortgage Loans are secured by junior
liens, and ____% of the Mortgage Loans are secured by first liens.] The
Mortgage Collateral will be conveyed to the Trust Fund by the Company
pursuant to the Pooling and Servicing Agreement (as defined herein). The
[Mortgage Loans] [Contracts] are [fixed] [adjustable] rate [conventional]
[FHA-insured] [VA-guaranteed] [fully amortizing] [balloon] loans. [The
Mortgage Loans are ARM Loans (as described in the Prospectus under "The
Trust Fund--The Mortgage Loans") with Mortgage Rates based on __________
(the "Index").]
......................................................The Mortgaged Properties
have individual principal balances at origination of at least $__________,
but not more than $__________, with an average principal balance at
origination of approximately $__________. The [Mortgage Loans] [Contracts]
have terms to maturity from the date of origination or
NY1-241975.1
S-4
<PAGE>
modification of not more
than ____ years, and a
weighted average
remaining term to
maturity of
approximately ____
months as of the Cut-off
Date. The [Mortgage
Loans] [Contracts] will
bear interest at
Mortgage Rates that
ranged of from ____% to
____% per annum as of
the Cut-off Date, with a
weighted average
Mortgage Rate of
approximately ____% per
annum as of the Cut-off
Date. [Approximately
____% of the [Mortgage
Loans] [Contracts] will
be refinance [Mortgage
Loans] [Contracts].] The
[Mortgage Loans]
[Contracts] were
purchased by the
Company[, through
[Residential Funding]
[affiliates,]] from
[____ sellers
unaffiliated with the
Company] [GMAC Mortgage,
an indirect parent of
the Company, and its
affiliates].
[[All][____%] of the
[Mortgage Loans] were
purchased by the Company
indirectly through
[Residential
Funding][affiliates],
from [___ sellers]
[_______] ([each, a]
[the] "Mortgage
Collateral Seller")
under the AlterNet
Mortgage Program.
[INSERT OTHER
CHARACTERISTICS AS
APPROPRIATE] See
"Description of the
[Mortgage] [Contract]
Pool" herein and "The
Trust Funds" in the
Prospectus.
The Offered Certificates................................ The Senior
Certificates in the aggregate and the Class M Certificates will evidence
initial undivided interests of approximately ____% and ____%, respectively,
in the Trust Fund. The Offered Certificates will have the following
Pass-Through Rates and Certificate Principal Balances as of the Cut-off
Date:
Class A-1 Certificates ____% $_______ Senior
Class A-2 Certificates ____% $_______ Senior
Class A-4 Certificates 0% $_______ Principal Only
Class A-5 Certificates Variable Rate $ 0 Stripped
Interests
Class R Certificates ____% $_______ Residual
Class M Certificates ____% $_______ Mezzanine
[Certificate Registration............................... The Senior
Certificates, (other than the [Principal Only, Stripped Interests and
Residual Certificates]) will be represented by one or more certificates
registered in the name of Cede & Co., as nominee of DTC. No person
acquiring an interest in the Senior Certificates, (other than the
[Principal Only, Stripped Interests and Residual Certificates]) will be
entitled to receive a Certificate of such class in fully registered,
certificated form except under the limited circumstances described in the
Prospectus under "Description of the Certificates--Form of Certificates."
The [Principal Only, Stripped Interests, Residual and Class M Certificates]
will be offered in fully registered, certificated form. See "Description of
the Certificates--Form of Certificates" in the Prospectus.]
Pass-Through Rates on the Offered Certificates.............................. The
Pass-Through Rates on all classes of the Offered Certificates (other than
the Principal Only Certificates, which are not entitled
NY1-241975.1
S-5
<PAGE>
to distributions of
interest, and the
Stripped Interests
Certificates) [will
be fixed and] are set
forth on the cover
hereof.
......................................................On each Distribution Date,
the Pass-Through Rate on the Stripped Interests Certificates will equal the
weighted average of the Pool Strip Rates on each [Mortgage Loan] [Contract]
with a Net Mortgage Rate in excess of ____% per annum. The Pool Strip Rates
on the [Mortgage Loans] [Contracts] range from ____% to ____% per annum.
The initial Pass-Through Rate on the Stripped Interests Certificates is
approximately ____% per annum. The Stripped Interests Certificates have no
Certificate Principal Balance and will accrue interest at the
then-applicable Pass-Through Rate on the Notional Amount. The "Notional
Amount" of the Stripped Interests Certificates as of any date of
determination will be equal to the aggregate Certificate Principal Balance
of the Certificates of all classes as of such date.
...................................................... [The Pass-Through Rate on
the Offered Certificates on the first Distribution Date will be [______]%
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.]
......................................................See "Description of the
Offered Certificates--Interest Distributions" herein.
The Class B Certificates................................ The Class B
Certificates have an aggregate initial Certificate Principal Balance of
approximately $__________, evidencing an initial undivided interest of
approximately ____% in the Trust Fund, and a Pass-Through Rate of ____% per
annum. The Class B Certificates are not being offered hereby. [The Company
expects that the Class B Certificates will be privately placed directly or
indirectly with one or more institutional investors.]
Accrual Certificates.................................... The Accrual
Certificates have an initial Certificate Principal Balance of $___________
and a Pass-Through Rate equal to ____% per annum. The Accrual Certificates
are not being offered hereby.
Interest Distributions.................................. Holders of each class
of Offered Certificates (the "Certificateholders") (other than the holders
of the Principal Only Certificates) will be entitled to receive
distributions in an amount equal to the Accrued Certificate Interest on
such class on each Distribution Date in the manner and priority set forth
herein.
......................................................With respect to any
Distribution Date,
"Accrued Certificate
Interest" will be equal
to (a) in the case of
each class of Offered
Certificates (other than
the Principal Only
Certificates and the
Stripped Interests
Certificates), one
month's interest accrued
on the Certificate
Principal Balance of
such class, at the
Pass-Through Rate on
such class, and (b) in
the case of the
NY1-241975.1
S-6
<PAGE>
Stripped Interests
Certificates, one
month's interest accrued
on the Notional Amount
thereof at the
Pass-Through Rate on
such class for such
Distribution Date; in
each case less any
interest shortfalls not
covered with respect to
such class by
Subordination (as
defined herein) or by
the [Master] Servicer[s]
(as described below),
including any Prepayment
Interest Shortfall (as
defined herein), to the
extent allocated thereto
for such Distribution
Date. The Principal Only
Certificates are not
entitled to receive any
distribution of
interest.
......................................................See "Description of the
Offered Certificates--Interest Distributions" herein.
Principal Distributions................................. Holders of the Senior
Certificates (other than the Principal Only Certificates and Stripped
Interest Certificates) will be entitled to receive a distribution of
principal on each Distribution Date, in the manner and priority set forth
herein, to the extent of the portion of the Available Distribution Amount
remaining after the Senior Interest Distribution Amount and Principal Only
Distribution Amount (each as defined herein) are distributed. Holders of
the Principal Only Certificates will be entitled to receive a distribution
of principal on each Distribution Date, in the manner and priority set
forth herein, to the extent of the excess of the Available Distribution
Amount over the Senior Interest Distribution Amount.
......................................................Holders of the Class M
Certificates will be
entitled to receive a
distribution of
principal on each
Distribution Date, in
the manner and priority
set forth herein, to the
extent of the portion of
the Available
Distribution Amount
remaining after (i)
distributions in respect
of interest and
principal to the holders
of the Senior
Certificates, (ii)
reimbursements for
certain Advances to the
[Master] Servicer[s],
and (iii) distributions
in respect of interest
to the holders of the
Class M Certificates.
......................................................The Stripped Interests
Certificates will not receive any principal distributions.
......................................................See "Description of the
Offered Certificates--Principal Distributions on the Senior Certificates"
and "-- Principal Distributions on the Class M Certificates" herein.
[Advances............................................... The [Master]
Servicer[s] [is] [are] required to make Advances in respect of delinquent
payments of principal and interest on the [Mortgage Loans] [Contracts]
subject to the limitations described herein. See "Description of the
Offered Certificates--Advances" herein.]
Allocation of Losses; Subordination.................... Subject to the
limitations set forth below, Realized Losses (as defined herein) on the
[Mortgage Loans] [Contracts] will be allocated as follows: first, to the
Class B Certificates; second, to the Class M Certificates until, in each
case, the Certificate Principal Balance of each such class has been reduced
to zero;
NY1-241975.1
S-7
<PAGE>
and thereafter, if
any such Realized
Loss is on Discount
Mortgage Collateral,
to the Principal Only
Certificates in an
amount equal to the
related Discount
Fraction of the
principal portion of
such Realized Loss,
and the remainder of
such Realized Losses
and the entire amount
of such Realized
Losses on
Non-Discount Mortgage
Collateral to the
remaining classes of
Senior Certificates
on a pro rata basis,
as described herein
under "Description of
the Offered
Certificates--
Allocation of Losses;
Subordination." The
Subordination
provided to the
Senior Certificates
by the Class B
Certificates and
Class M Certificates
and the Subordination
provided to the Class
M Certificates by the
Class B Certificates
will cover Realized
Losses on the
[Mortgage Loans]
[Contracts] that are
Defaulted Mortgage
Losses, Fraud Losses,
Bankruptcy Losses and
Special Hazard Losses
up to the limits set
forth below. The
aggregate amounts of
Realized Losses which
may be allocated by
means of
Subordination to
cover Fraud Losses,
Bankruptcy Losses and
Special Hazard Losses
Defaulted Mortgage
Losses, are initially
limited to
$[_________],
$[________] and
$[_________],
respectively.] [All
of the foregoing
amounts are subject
to periodic reduction
as described herein
under "Description of
the Offered
Certificates--
Allocation of Losses;
Subordination" and
may be further
reduced.]
......................................................If the Certificate
Principal Balances of the Class B Certificates and Class M Certificates are
reduced to zero, all additional losses (including, without limitation, all
Defaulted Mortgage Losses, Special Hazard Losses, Fraud Losses and
Bankruptcy Losses) will be allocated among the Senior Certificates pro
rata, as more fully described herein. See "Description of the Offered
Certificates--Allocation of Losses; Subordination."
......................................................In addition, any Special
Hazard Losses, Fraud Losses and Bankruptcy Losses in excess of the
respective amounts of coverage therefor and any Extraordinary Losses on any
items of Non-Discount Mortgage Collateral will be allocated on a pro rata
basis among the Senior Certificates (other than the Principal Only
Certificates), Class M Certificates and Class B Certificates. The principal
portion of such losses on items of Discount Mortgage Collateral will be
allocated to the Principal Only Certificates in an amount equal to the
related Discount Fraction thereof, and the remainder of such losses on
Discount Mortgage Collateral will be allocated among the remaining
Certificates on a pro rata basis as described above. See "Description of
the Offered Certificates--Allocation of Losses; Subordination" herein.
......................................................Neither the Offered
Certificates nor the [Mortgage Loans] [Contracts] are insured or guaranteed
by any governmental agency or instrumentality [(except in the case of [FHA]
[VA] [Loans [Contracts])] or by the Company, the [Master] Servicer[s], GMAC
Mortgage or any affiliate thereof. See "Risk Factors-- Limited Obligations"
in the Prospectus.
NY1-241975.1
S-8
<PAGE>
[Optional Termination................................... At its option, on any
Distribution Date when the aggregate principal balance of the [Mortgage
Loans] [Contracts] is less than ___% of the aggregate principal balance of
the [Mortgage Loans] [Contracts] as of the Cut-off Date, the [Master]
Servicer[s] or the Company may (i) purchase all remaining Mortgage
Collateral from the Trust Fund and other assets thereof, and thereby effect
early retirement of the Certificates or (ii) purchase in whole, but not in
part, the Certificates. See "The Pooling and Servicing
Agreement--Termination" herein and "The Pooling and Servicing
Agreement--Termination; Retirement of Certificates" in the Prospectus.]
Special Prepayment Considerations....................... The rate of principal
payments on the Offered Certificates, collectively, will depend on the rate
and timing of principal payments (including prepayments, defaults and
liquidations) on the Mortgage Collateral. As is the case with
mortgage-backed securities generally, the Offered Certificates are subject
to substantial inherent cash-flow uncertainties because any of the
[Mortgage Loans] [Contracts] may be prepaid at any time. Generally, when
prevailing mortgage interest rates are increasing, prepayment rates on
[mortgage loans] [manufactured housing contracts] tend to decrease,
resulting in a reduced return of principal to investors at a time when
reinvestment at such higher prevailing rates would be desirable.
Conversely, when prevailing mortgage interest rates are declining,
prepayment rates on [mortgage loans] [manufactured housing contracts] tend
to increase, resulting in a greater return of principal to investors at a
time when reinvestment at comparable yields may not be possible. See
"Certain Yield and Prepayment Considerations-- General" herein.
......................................................[Certain types of
[Mortgage Loans] [Contracts] included in the [Trust Fund] have
characteristics that may make them more likely to default than other
[mortgage loans] [manufactured housing contracts]. [Since a [significant
portion] of the Mortgage Loans are secured by junior deeds of trust or
mortgages subordinate to the rights of the lenders under the related senior
deeds of trust or mortgages, a decline in real estate values would
adversely affect the position of the Trust Fund as a junior lender before
having such an effect on that of the related senior lender. A primary risk
to holders of Junior Mortgage Loans is the possibility that adequate funds
will not be received in connection with a foreclosure of any related senior
lien to satisfy fully any such senior liens and the Junior Mortgage Loan.
[CHARACTERISTICS OF MORTGAGE COLLATERAL THAT MAY POSE INCREASED RISKS OF
DEFAULT TO BE INSERTED AS NECESSARY.] [Such [Mortgage Loans] [Contracts]
pose a greater risk of default and liquidation than might otherwise be
expected by investors in the Certificates. See "Risk Factors" herein.]
NY1-241975.1
S-9
<PAGE>
......................................................The multiple class
structure of the Offered Certificates results in the allocation of
prepayments among certain classes as follows [TO BE INCLUDED AS
APPROPRIATE]:
......................................................[Sequentially paying
classes: [All] classes of the Senior Certificates are subject to various
priorities for payment of principal as described herein under "Description
of the Offered Certificates--Principal Distributions on the Senior
Certificates. Distributions on classes having an earlier priority of
payment will be immediately affected by the rate of prepayment of the
[Mortgage Loans] [Contracts] early in the life of the [Mortgage] [Contract]
Pool. Distributions on classes with a later priority of payment will not be
directly affected by the rate of prepayment until such time as principal is
distributable on such classes; however, the timing of commencement of
principal distributions and the weighted average lives of such classes will
be affected by the rate of prepayment experienced both before and after the
commencement of principal distributions on such classes.]
......................................................[Planned Amortization
Class Certificates ("PAC Certificates"): Principal distributions on the PAC
Certificates will be payable in amounts determined based on schedules as
described herein under "Description of the Offered Certificates--Principal
Distributions on the Senior Certificates," provided that the rate of
prepayment of the [Mortgage Loans] [Contracts] each month remains between
approximately ____% SPA (as defined herein) and ____% SPA. However, as
discussed herein, actual principal distributions may be greater or less
than the described amounts. If the rate of prepayment of the [Mortgage
Loans] [Contracts] is consistently higher than ____% SPA, then the
Companion Certificates will be retired before all of the PAC Certificates
are retired, and the rate of principal distributions and the weighted
average lives of the remaining PAC Certificates will become significantly
more sensitive to changes in the rate of prepayment of the [Mortgage Loans]
[Contracts] and principal distributions thereon will be more likely to
deviate from the described amounts.]
......................................................[Targeted Amortization
Certificates ("TAC Certificates"): Principal distributions on the TAC
Certificates would be payable in amounts determined based on schedules as
described herein under "Description of the Offered Certificates--Principal
Distributions on the Senior Certificates," if the rate of prepayment of the
[Mortgage Loans] [Contracts] were to remain at a constant level of
approximately ____% SPA. However, as discussed herein, actual principal
distributions are likely to deviate from the described amounts, because it
is unlikely that the actual rate of prepayment of the [Mortgage Loans]
[Contracts] each month will remain at or near ____% SPA. If the Companion
Certificates are retired before all of the TAC Certificates are retired,
the rate of principal distributions and the weighted average lives of the
remaining TAC Certificates will become significantly more sensitive to
changes in the rate of
NY1-241975.1
S-10
<PAGE>
prepayment of the
[Mortgage Loans]
[Contracts], and
principal distributions
thereon will be more
likely to deviate from
the described amounts.]
......................................................[Companion Certificates:
Because of the application of amounts available for principal distributions
among the Senior Certificates in any given month, first to the [PAC] [TAC]
Certificates up to the described amounts and then to the Companion
Certificates, the rate of principal distributions and the weighted average
lives of the Companion Certificates will be extremely sensitive to changes
in the rate of prepayment of the [Mortgage Loans] [Contracts]. The weighted
average lives of the Companion Certificates will be significantly more
sensitive to changes in the rate of prepayment than that of either the
[PAC] [TAC] Certificates or a fractional undivided interest in the
[Mortgage Loans] [Contracts].]
......................................................[Accrual Certificates: A
high rate of prepayments on the [Mortgage Loans] [Contracts] could result
in the reduction of the Certificate Principal Balances of the Senior
Certificates (other than the Accrual Certificates and Principal Only
Certificates) to zero (and the occurrence of the Accretion Termination
Date) earlier than anticipated. The accrual of interest on the Accrual
Certificates may end and the reduction of the Certificate Principal Balance
of the Accrual Certificates may commence earlier than anticipated.]
......................................................[Subordination features:
As described herein under "Description of the Offered
Certificates--Principal Distributions on the Senior Certificates" and
"--Principal Distributions on the Class M Certificates," during certain
periods all or a disproportionately large percentage of principal
prepayments on the [Mortgage Loans] [Contracts] will be allocated among the
Senior Certificates, and during certain periods no such prepayments or,
relative to the related Class M Percentage, a disproportionately small or
large percentage of such prepayments will be distributed to the Class M
Certificates. To the extent that no such prepayments are distributed on the
Class M Certificates, the Subordination afforded to the Senior Certificates
by the Class M Certificates (together with the Class B Certificates), in
the absence of offsetting Realized Losses allocated thereto, will be
increased.]
......................................................See "Description of the
Offered
Certificates--Principal
Distributions on the
Senior Certificates,"
"-- Principal
Distributions on the
Class M Certificates"
and "Certain Yield and
Prepayment
Considerations" herein,
and "Maturity and
Prepayment
Considerations" in the
Prospectus. For further
information regarding
the effect of principal
prepayments on the
weighted average lives
of the Offered
Certificates (other than
the Stripped Interests
Certificates), see the
table entitled
"Percentage of Initial
Certificate Balance
Outstanding at the
Following Percentages of
SPA" herein.
NY1-241975.1
S-11
<PAGE>
Special Yield Considerations............................ The yield to maturity
on each respective class of the Offered Certificates will depend on the
rate and timing of principal payments (including payments due to
prepayments, defaults and liquidations) on the [Mortgage Loans] [Contracts]
and the allocation thereof (and of any losses on the [Mortgage Loans]
[Contracts]) to reduce the Certificate Principal Balance or Notional Amount
of such class, as well as other factors such as the Pass-Through Rate (and,
in the case of the Stripped Interests Certificates, any adjustments
thereto) and the purchase price for such Certificates. The yield to
investors on any class of Offered Certificates may be adversely affected by
any allocation thereto of Prepayment Interest Shortfalls on the [Mortgage
Loans] [Contracts], which shortfalls are expected to result from
distribution of interest to the date of prepayment only (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 a calendar month will not adversely affect the yield to investors in the
Offered Certificates to the extent such Prepayment Interest Shortfalls do
not exceed the Servicing Fee for such month.
......................................................In general, if a class
of Offered Certificates
is purchased at a
premium and principal
distributions thereon
occur at a rate faster
than anticipated at the
time of purchase, the
investor's actual yield
to maturity will be
lower than that assumed
at the time of purchase.
Conversely, if a class
of Offered Certificates
is purchased at a
discount and principal
distributions thereon
occur at a rate slower
than that assumed at the
time of purchase, the
investor's actual yield
to maturity will be
lower than that
originally anticipated.
......................................................The Senior Certificates
were structured based on
a number of assumptions,
including a prepayment
assumption of ____% SPA
and weighted average
lives corresponding
thereto as set forth
herein under "--Special
Prepayment
Considerations." The
yield assumptions for
the respective classes
that are to be offered
hereunder will vary as
determined at the time
of sale.
......................................................The multiple class
structure of the Offered
Certificates causes the
yield of certain classes
to be particularly
sensitive to changes in
the rate of prepayment
of the [Mortgage Loans]
[Contracts] and other
factors, as follows [TO
BE INCLUDED AS
APPROPRIATE]:
......................................................[Principal Only
Certificates: Generally, the amounts payable with respect to the Principal
Only Certificates are derived only from principal payments on the Discount
Mortgage Collateral. As a result, the yield on the Principal Only
Certificates will be adversely affected by slower than expected payments of
principal (including prepayments, defaults and liquidations) on the
Discount Mortgage Collateral. Because the Discount Mortgage Collateral have
lower Net Mortgage Rates than the Non-Discount
NY1-241975.1
S-12
<PAGE>
Mortgage Collateral, and
because the Mortgage
Collateral with lower
Net Mortgage Rates are
likely to have lower
Mortgage Rates, the
Discount Mortgage
Collateral are generally
likely to prepay at a
slower rate than the
Non-Discount Mortgage
Collateral. See "Certain
Yield and Prepayment
Considerations,"
especially "--Principal
Only Certificate and
Stripped Interests
Certificate Yield
Considerations" herein.]
......................................................[Interest strip and
inverse floater classes: The yield to investors on the Class [_]
Certificates will be extremely sensitive to the rate and timing of
principal payments on the Mortgage Collateral (including prepayments,
defaults and liquidations), which may fluctuate significantly over time. A
rapid rate of principal payments on the [Mortgage Loans] [Contracts] could
result in the failure of investors in the Class [_] Certificates to recover
their initial investments, and a slower than anticipated rate of principal
payments on the [Mortgage Loans] [Contracts] could adversely affect the
yield to investors on the Class [_] Certificates.]
......................................................[Stripped Interests
Certificates: In addition to the foregoing, the yield on the Stripped
Interests Certificates will be materially adversely affected to a greater
extent than the yields on the other Senior Certificates if the [Mortgage
Loans] [Contracts] with higher Mortgage Rates prepay faster than the
[Mortgage Loans] [Contracts] with lower Mortgage Rates, because holders of
the Stripped Interests Certificates generally have rights to relatively
larger portions of interest payments on the [Mortgage Loans] [Contracts]
with higher Mortgage Rates than on [Mortgage Loans] [Contracts] with lower
Mortgage Rates.]
......................................................[Adjustable rate
(including inverse floater) classes: The yield on the Class [_]
Certificates will be sensitive, and the yield on the Class [_] Certificates
will be extremely sensitive, to fluctuations in the level of the Index. The
Pass-Through Rate on the Class [_] Certificates will vary inversely with,
and at a multiple of, the Index.]
......................................................[Inverse floater companion
classes: In addition to the foregoing, in the event of relatively low
prevailing interest rates (including the Index) and relatively high rates
of principal prepayments over an extended period, while investors in the
[identify inverse floater companion classes] may then be experiencing a
high current yield on such Certificates, such yield may be realized only
over a relatively short period, and it is unlikely that such investors
would be able to reinvest such principal prepayments on such Certificates
at a comparable yield.]
......................................................[Accrual Certificates:
Interest shortfalls allocated to the Accrual Certificates will reduce the
amount of Accrued Certificate Interest added to the Certificate Principal
Balance thereof and, therefore, will reduce the amount of interest that
NY1-241975.1
S-13
<PAGE>
will accrue in the
future on such
Certificates than would
otherwise be the case
absent such shortfalls.
Because Accrual
Certificates are not
entitled to receive any
distributions of
interest until the
Accretion Termination
Date, the Accrual
Certificates will likely
experience greater price
and yield volatility
than would pass-through
certificates which are
otherwise similar but
which are entitled to
current distributions of
interest.]
......................................................[Certificates with
Subordination features: The yield to maturity on the Class M Certificates
will be extremely sensitive to losses due to defaults on [Mortgage Loans]
[Contracts] (and the timing thereof) after the Certificate Principal
Balance of the Class B Certificates has been reduced to zero, because the
entire amount of such losses will be allocable to the Class M Certificates,
as described herein under "Description of the Offered
Certificates--Allocation of Losses; Subordination." Furthermore, as
described herein under "Certain Yield and Prepayment Considerations," the
timing of the receipt of principal and interest by the Class M Certificates
may be adversely affected by losses on the [Mortgage Loans] [Contracts]
even if such class does not ultimately bear such loss.]
......................................................[Residual Certificates:
Holders of the Residual Certificates are entitled to receive distributions
of principal and interest as described herein under "Description of the
Offered Certificates--Interest Distributions" and "--Principal
Distributions on the Senior Certificates," however, holders of such
Certificates may have tax liabilities with respect to their Certificates
during the early years of their term that substantially exceed the
principal and interest payable thereon during such periods. In addition,
such distributions will be reduced to the extent that they are subject to
United States federal income tax withholding.]
......................................................See "Certain Yield and
Prepayment Considerations" herein. Certain Federal Income
Tax Consequences...................................... [An election will be
made to treat the Trust Fund as a REMIC for federal income tax purposes.
Upon the issuance of the Offered Certificates, [Orrick, Herrington &
Sutcliffe LLP] [Thacher Proffitt & Wood], New York, New York, counsel to
the Company, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling and Servicing
Agreement, 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 be the sole class of "residual
interests" in the Trust Fund and the Offered Certificates (other than the
Residual Certificates) [and the __________ Certificates] will represent
ownership of "regular interests" in the Trust Fund and will generally be
treated as representing ownership of debt instruments issued by the Trust
Fund.]
NY1-241975.1
S-14
<PAGE>
......................................................[Under the REMIC
Regulations (as defined herein), the Residual Certificates will not be
regarded as having "significant value" for purposes of applying the rules
relating to "excess inclusions." In addition, the Residual Certificates may
constitute "noneconomic" residual interests for purposes of the REMIC
Regulations. Transfers of the Residual Certificates will be restricted
under the Pooling and Servicing Agreement to United States persons (as
defined in the Prospectus under "Certain Federal Income Tax
Consequences--REMICs--Foreign Investors in REMIC Certificates") in a manner
designed to prevent a transfer of a noneconomic residual interest from
being disregarded under the REMIC Regulations. See "Certain Federal Income
Tax Consequences--Special Tax Considerations Applicable to Residual
Certificates" herein and "Certain Federal Income Tax Consequences--REMICs--
Taxation of Owners of REMIC Residual Certificates--Excess Inclusions" and
"--Noneconomic REMIC Residual Certificates" in the Prospectus.]
......................................................[The Residual
Certificateholders may be required to report an amount of taxable income
with respect to the early years of the REMIC's term that significantly
exceeds distributions on the Residual Certificates during such years, with
corresponding tax deductions or losses deferred until the later years of
the REMIC's term. Accordingly, on a present value basis, the tax detriments
occurring in the earlier years may substantially exceed the sum of any tax
benefits in the later years. As a result, the Residual Certificateholders'
after-tax rate of return may be zero or negative, even if their pre-tax
rate of return is positive.]
......................................................[See "Certain Yield and
Prepayment Considerations," especially "-- Additional Yield Considerations
Applicable Solely to the Residual Certificates" and "Certain Federal Income
Tax Consequences--Special Tax Considerations Applicable to Residual
Certificates" herein.]
......................................................For further information
regarding the federal income tax consequences of investing in the Offered
Certificates, see "Certain Federal Income Tax Consequences" herein and in
the Prospectus.
ERISAConsiderations.................................... [ERISA CONSIDERATIONS
TO BE INCLUDED AS NECESSARY] See "ERISA Considerations" [herein and] in the
Prospectus.
Ratings................................................. It is a condition of
the issuance of the Senior Certificates and the Class M Certificates that
they be rated "___" and "___", respectively, by ________________________
and "___" and "___", respectively, by _________________________. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating
organization. A security rating does not address the frequency of
prepayments of the [Mortgage Loans] [Contracts], or the corresponding
effect on yield to
NY1-241975.1
S-15
<PAGE>
investors. The rating
of the Stripped
Interests
Certificates does not
address the
possibility that the
holders thereof may
fail to fully recover
their initial
investment. See
"Certain Yield and
Prepayment
Considerations" and
"Ratings" herein and
"Yield
Considerations" in
the Prospectus.
LegalInvestment Matters................................ The [Senior]
Certificates will [not] 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 nationally recognized statistical rating
organization, and, as such, will be legal investments for certain entities
to the extent provided in SMMEA] [because the Mortgage Pool includes
Mortgage Loans that are secured by junior liens on the related Mortgaged
Properties]. [The Class M Certificates will not constitute "mortgage
related securities" for purposes of SMMEA.] Institutions whose investment
activities are subject to legal investment laws and regulations or to
review by regulatory authorities should consult with their legal advisors
in determining whether and to what extent the Offered Certificates
constitute legal investments under SMMEA or are subject to restrictions on
investment, capital requirements or otherwise. See "Legal Investment
Matters" herein and in the Prospectus.
NY1-241975.1
S-16
<PAGE>
RISK FACTORS
[Prospective Certificateholders should consider, among other things,
the items discussed under "Risk Factors" in the Prospectus and the following
factors in connection with the purchase of the Certificates:]
[APPROPRIATE RISK FACTORS REGARDING MORTGAGE COLLATERAL TO BE INSERTED AS
NECESSARY]
DESCRIPTION OF THE [MORTGAGE] [CONTRACT] POOL
General
The Offered Certificates will evidence ownership interests in the Trust
Fund created by the Company, which will consist of a pool of [fixed]
[adjustable] rate [conventional] [FHA-insured] [VA-guaranteed] [Mortgage
Loans][Contracts] and certain other property. The Mortgage Loans are secured by
[mortgages] [deeds of trust] [deeds to secure debt] creating [first] [second]
[junior] liens on the related Mortgaged Properties.The Mortgage Collateral will
be conveyed by the Company to the Trust Fund pursuant to a pooling and servicing
agreement, dated as of ______ __, 199_ (the "Pooling and Servicing Agreement"),
by and among the Company, the [Master] Servicer[s] and the Trustee. A copy of
the Pooling and Servicing Agreement will be filed with the Securities and
Exchange Commission as an exhibit to a Current Report on Form 8-K to be filed
within 15 days after the issuance of the Certificate.
The Mortgage Collateral will be assigned to the Trustee pursuant to the
Pooling and Servicing Agreement together with all principal and interest due on
or with respect to the [Mortgage Loans] [Contracts] after the Cut-off Date. The
Trustee will, concurrently with such assignment, authenticate and deliver the
Certificates.
[Residential Funding] [__________] will act as [Master] Servicer[s] for
the Trust Fund (in such capacity, [each a] [the] "[Master] Servicer"). The
[Master] Servicer[s] will service the [Mortgage Loans] [Contracts] [directly]
[through one or more Sub-Servicers] [who will provide customary servicing
functions with respect to the [Mortgage Loans] [Contracts] pursuant to the terms
set forth in the [Pooling and Servicing Agreement] [respective Sub-Servicing
Agreements].
The [Mortgage Loans] [Contracts] were acquired [directly] [indirectly
through Residential Funding] by the Company [on _________ __, 199_] [from time
to time] from [NAME OF SELLER] [unaffiliated Mortgage Collateral Sellers]
[pursuant to the AlterNet Mortgage Program]. [See "--The AlterNet Mortgage
Program" below.] [__]% of the Mortgage Loans were purchased from [_____] and
[____%] of the Mortgage Loans were purchased from [________], both [affiliates
of the Company] [Unaffiliated Sellers]. Except as set forth above, no Mortgage
Collateral Seller sold more than 10.0% of the Mortgage Loans to Residential
Funding.
None of the [Mortgage Loans] [Contracts] were originated prior to
_______ __, 19__ or will have a maturity date later than _______ __, ____. No
[Mortgage Loan] [Contract] will have a remaining term to maturity as of the
Cut-off Date of less than ____ months. The weighted average remaining term to
maturity of the [Mortgage Loans] [Contracts] as of the Cut-off Date will be
approximately ____ months. The weighted average original term to maturity of the
[Mortgage Loans] [Contracts] as of the Cut-off Date will be approximately ____
months. All of the [Mortgage Loans] [Contracts] have principal and interest
payable monthly [on the ______ day of each month] (the "Due Date") [on a level
debt service basis] [subject to change due to adjustment in the Mortgage Rate].
[As of the Cut-off Date, no [Mortgage Loan] [Contract] will be one month or more
delinquent in payment of principal and interest.] Defaults on mortgage loans are
expected to occur with greater frequency in their early years. [The rate of
default of Junior Mortgage Loans may be greater than that of mortgage loans
secured by first liens on comparable properties.]
NY1-241975.1
S-17
<PAGE>
[Approximately ___% of the Mortgage Loans are secured by a first lien
on the related Mortgaged Property, approximately ___% of the Mortgage Loans are
secured by a second lien on the related Mortgaged Property and approximately
___% of the Mortgage Loans are secured by a more junior lien on the related
Mortgaged Property.]
[In connection with each Mortgage Loan that is secured by a leasehold
interest, the related Mortgage Collateral Seller will have represented to the
Company that, among other things: (i) the use of leasehold estates for
residential properties is an accepted practice in the area where the related
Mortgaged Property is located; (ii) residential property in such area consisting
of leasehold estates is readily marketable; (iii) the lease is recorded and no
party is in any way in breach of any provision of such lease; (iv) the leasehold
is in full force and effect and is not subject to any prior lien or encumbrance
by which the leasehold could be terminated or subject to any charge or penalty;
and (v) the remaining term of the lease does not terminate less than ten years
after the maturity date of each such Mortgage Loans.]
[Mortgage Rate Adjustment]
[The Mortgage Rate on each Mortgage Loan will adjust semi-annually on
the Adjustment Date specified in the related Mortgage Note to a rate equal to
the sum (rounded to the nearest multiple of ___%) of the Index described below
and a fixed percentage set forth in the related Mortgage Note (the "Gross
Margin"), subject to certain limitations described herein. The amount of the
monthly payment on each Mortgage Loan will be adjusted semi-annually on the
first day of the month following the month in which the Adjustment Date occurs
to equal the amount necessary to pay interest at the then-applicable Mortgage
Rate and fully amortize the outstanding principal balance of the Mortgage Loan
over its remaining term to stated maturity. As of the Cut-off Date, ___% of the
Mortgage Loans will have reached their first Adjustment Date. The Mortgage Loans
will have different Adjustment Dates, Gross Margins and limitations on the
Mortgage Rate adjustments, as described below.]
[Each Mortgage Note contains a Periodic Cap which limits the adjustment
of the Mortgage Rate to not more than ___% above or below the previous Mortgage
Rate. The Mortgage Rate on a Mortgage Loan may not exceed the Maximum Mortgage
Rate or be less than the Minimum Mortgage Rate specified for such Mortgage Loan
in the related Mortgage Note. The Minimum Mortgage Rate for each Mortgage Loan
will be equal to the Gross Margin. The Minimum Mortgage Rates will range from
___% to ___%, with a weighted average Minimum Mortgage Rate as of the Cut-off
Date of ___%. The Maximum Mortgage Rates will range from ___% to ___%, with a
weighted average Maximum Mortgage Rate as of the Cut-off Date of ___%. No
Mortgage Loan provides for payment caps on any Adjustment Date which would
result in deferred interest or negative amortization.]
[The Index applicable to the Mortgage Loans will be a per annum rate
equal to the average of interbank offered rates for six-month U.S.
dollar-denominated deposits in the London market based on quotations of major
banks ("LIBOR") as published by Fannie Mae and as most recently available as of
the date forty-five days prior to the Adjustment Date, or, with respect to _____
Mortgage Loans, representing approximately ___% of the Mortgage Loans, the Index
shall be LIBOR as published in The Wall Street Journal and as most recently
available as of the first business day of the month immediately preceding the
month in which the Adjustment Date occurs. In the event that the Index is no
longer available, an index reasonably acceptable to the Trustee that is based on
comparable information will be selected by the Master Servicer.]
[Listed below are levels of LIBOR as published by Fannie Mae that are
or would have been applicable to mortgage loans 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 LIBOR published in The Wall Street Journal for the corresponding
periods would have been at the same levels as those set forth below. The
following does not purport to be representative of future levels of LIBOR (as
published by Fannie Mae or The Wall Street Journal). No assurance can be given
as to the level of LIBOR on any Adjustment Date or during the life of any
Mortgage Loan.]
NY1-241975.1
S-18
<PAGE>
<TABLE>
LIBOR
<CAPTION>
Adjustment Date 1990 1991 1992 1993 1994
- - --------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January 1.............................. 8.438% 8.063% 5.359% 3.641% 3.500%
February 1............................. 8.313 8.375 4.938 3.891 3.516
March 1................................ 8.313 7.563 4.250 3.641 3.500
April 1................................ 8.438 7.125 4.250 3.438 3.391
May 1.................................. 8 .438 6.891 4.375 3.328 4.000
June 1................................. 8.688 6.531 4.547 3.375 4.250
July 1................................. 9 .000 6.313 4.266 3.313 4.625
August 1............................... 8.500 6.188 4.250 3.438 5.000
September 1........................... 8.438 6.563 4.125 3.563 5.250
October 1.............................. 8.047 6.313 3.625 3.563 5.328
November 1............................. 8.188 5.875 3.625 3.438 5.328
December 1............................. 8.422 5.688 3.313 3.375 5.688
</TABLE>
[The initial Mortgage Rate in effect on a Mortgage Loan generally will
be lower, and may be significantly lower, than the sum of the Index that would
have been applicable at origination and the Gross Margin. Therefore, unless the
Index declines after origination of a Mortgage Loan, the related Mortgage Rate
will generally increase on the first Adjustment Date following origination of
such Mortgage Loan subject to the Periodic Rate Cap. The repayment of the
Mortgage Loans will be dependent on the ability of the Mortgagors to make larger
monthly payments following adjustments of the Mortgage Rate. Mortgage Loans that
have the same initial Mortgage Rate may not always bear interest at the same
Mortgage Rate because such Mortgage Loans may have different Adjustment Dates
(and the Mortgage Rates therefore may reflect different Index values), Gross
Margins, Maximum Mortgage Rates and Minimum Mortgage Rates. 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.
The Net Mortgage Rate on each Mortgage Loan will be adjusted on each Adjustment
Date to equal the sum of the Index as specified in the related Mortgage Note
(rounded to the nearest multiple of ___%) and a the Gross Margin, provided that
the Net Mortgage Rate on any Mortgage Loan on any Adjustment Date may not
increase or decrease by more than the Periodic Rate Cap. The Gross Margins for
the Mortgage Loans will be at least ___% per annum but not more than ___% per
annum as of the Cut-off Date. The Net Mortgage Rate on any Mortgage Loan may not
exceed the Maximum Net Mortgage Rate or be less than the Minimum Net Mortgage
Rate for such Mortgage Loan.]
Mortgage Pool Characteristics
[The Mortgage Pool will have the following characteristics as of the Cut-off
Date:]
[Number of Mortgage Loans.................................................____
Initial Pass-Through Rate on the Certificates (1)........................____%
Range of Net Mortgage Rates (2) .................................____% - ____%
Mortgage Rates:
Weighted Average...........................................____%
Range..............................................____% - ____%
Gross Margins:
Weighted Average...........................................____%
Range..............................................____% - ____%
Minimum Mortgage Rates:
Weighted Average.......................................... ____%
Range..............................................____% - ____%
Minimum Net Mortgage Rates:
Weighted Average...........................................____%
Range..............................................____% - ____%
Maximum Mortgage Rates:
Weighted Average.......................................... ____%
Range..............................................____% - ____%
Maximum Net Mortgage Rates:
Weighted Average...........................................____%
Range.............................................. ____ - ____%
Weighted Average Months to next Adjustment Date
after October 1, 1994 (3) ................................... 3]
- - --------------------
(1) The Pass-Through Rate on the Certificates will be equal to the weighted
average of the Net Mortgage Rates on the Mortgage Loans.
(2) The Net Mortgage Rates are calculated as described under "Description of
the Certificates--Interest Distributions" herein, and the Net Mortgage Rate
as to each Mortgage Loan on and after its initial Adjustment Date will be
generally equal to the Index plus the Gross Margin, rounded as described
herein, subject to the Periodic Rate Cap, Maximum Net Mortgage Rate and
Minimum Net Mortgage Rate. The Net Mortgage Rates may be less than or
greater than the sum of the Index and the Gross Margin during certain
periods as a result of the Periodic Rate Caps and Maximum Net Mortgage
Rates and Minimum Net Mortgage Rates.
(3) The Weighted Average Months to next Adjustment Date will be equal to
the weighted average of the number of months until the Adjustment Date
next following __________, 199__.
NY1-241975.1
S-19
<PAGE>
[The following table sets forth the number, aggregate principal balance
and percentage of Mortgage Loans as of the Cut-off Date having their next
Adjustment Dates in the months and years set forth below.]
[Month and Year of Number of Aggregate Principal Percentage of
Next Adjustment Dates Mortgage Loans Balance Mortgage Loans
January 199_............. ___ $ __________ ______%
February 199_............ ___ __________ _______
March 199_............... ___ __________ _______
April 199_............... ___ __________ _______
- - ----------------......... --- ---------- -------
- - ----------------.........
Total.. ___ $ __________ _____%]
[All percentages of the Mortgage Loans described herein are approximate
percentages (except as otherwise indicated) by aggregate principal balance as of
the Cut-off Date.]
[None of the Mortgage Loans will have been originated prior to
__________, 199_ or will have a maturity date later than ___________, ____. No
Mortgage Loan will have a remaining term to stated maturity as of the Cut-off
Date of less than ___ months. The weighted average remaining term to stated
maturity of the Mortgage Loans as of the Cut-off Date will be ___ months. The
weighted average original term to maturity of the Mortgage Loans as of the
Cut-off Date will be ___ months.]
[As of the Cut-off Date, no Mortgage Loan will be ___ month [s] 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.]
[No Mortgage Loan provides for deferred interest or negative amortization.]
[None of the Mortgage Loans will be Buydown Mortgage Loans.]
[___% of the Mortgage Loans are Mexico Mortgage Loans.]
[Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Cut-off Date (except as otherwise indicated).
All percentages of the Mortgage Loans are approximate percentages by aggregate
principal balance as of the Cut-off Date (except as otherwise indicated). Unless
otherwise specified, all principal balances of the Mortgage Loans are as of the
Cut-off Date and are rounded to the nearest dollar.]
[Set forth below is a description of certain additional characteristics
of the [Mortgage Loans] [Contracts] as of the Cut-off Date (expressed as a
percentage of the outstanding aggregate principal balance of the [Mortgage
Loans] [Contracts] having such characteristics relative to the outstanding
aggregate principal balance of all [Mortgage Loans] [Contracts]). Unless
otherwise specified, all principal balances of the [Mortgage Loans] [Contracts]
are as of the Cut-off Date and are rounded to the nearest dollar.]
NY1-241975.1
S-20
<PAGE>
Mortgage Rates
Percentage of
Mortgage Rates Number Principal Balance [Mortgage] [Contract] Pool
$ . . %
. .
Total............ $ . . %
==== ====================
As of the Cut-off Date, the weighted average Mortgage Rate of the
[Mortgage Loans] [Contracts] was approximately _________% per annum.
[Net Mortgage Rates
Percentage of
et Mortgage Rates Number Principal Balance [Mortgage] [Contract] Pool
$ . . %
. .
Total............... $ . . %
==== ====================
As of the Cut-off Date, the weighted average Net Mortgage Rate of the
[Mortgage Loans] [Contracts] was approximately ____% per annum.]
NY1-241975.1
S-21
<PAGE>
[Gross Margins
Percentage of
[Mortgage] [Contract]
Gross Margins Number Principal Balance Pool
$ . . %
. .
Total.......... $ . . %
==== ====================
As of the Cut-off Date, the weighted average Gross Margin on the
[Mortgage Loans] [Contracts] was approximately ____%.]
[[Minimum] [Maximum] Mortgage Rates
[Minimum] [Maximum] Percentage of
Mortgage Rates Number Principal Balance [Mortgage] [Contract] Pool
$ . . %
. .
Total............. $ . . %
==== ====================
As of the Cut-off Date, the weighted average [minimum] [maximum]
Mortgage Rate of the [Mortgage Loans] [Contracts] was approximately _________%
per annum.]
NY1-241975.1
S-22
<PAGE>
Original [Mortgage Loan] [Contract] Principal Balances
Percentage of
Principal Balance Number Principal Balance [Mortgage] [Contract] Pool
$ . $ . . %
. .
Total............. $ . . %
==== ====================
As of the Cut-off Date, the average unpaid principal balance of the
[Mortgage Loans] [Contracts] will be approximately $_______.
NY1-241975.1
S-23
<PAGE>
[Remaining Months to Maturity
Remaining Months Percentage of
to Maturity Number Principal Balance [Mortgage] [Contract] Pool
$ . . %
. .
Total............ $ . . %
==== ====================
As of the Cut-off Date, the weighted average remaining months to
maturity of the [Mortgage Loans] [Contracts] was approximately ____ months.]
[Months Since Origination
Months Percentage of
Since Origination Number Principal Balance [Mortgage] [Contract] Pool
$ . . %
. .
Total............ $ . . %
==== ====================
As of the Cut-off Date, the weighted average months since origination
of the [Mortgage Loans] [Contracts] was approximately ____ months.]
NY1-241975.1
S-24
<PAGE>
Original Loan-To-Value Ratios
Percentage of
Loan-to-Value Ratio Number Principal Balance [Mortgage] [Contract] Pool
$ . . %
. .
Total........... $ . . %
==== ===
The weighted average Loan-to-Value Ratio at origination of the
[Mortgage Loans] [Contracts] will have been approximately __.__%.
NY1-241975.1
S-25
<PAGE>
Original Combined Loan-To-Value Ratios for Mortgage Loans Secured by Junior
Liens
Number of Percentage of
Combined Loan-to-Value Mortgage Loans Principal Balance Mortgage Pool
Ratio (%)
....................... $ %
.......................
.......................
.......................
.......................
.......................
.......................
.......................
....................... .
Total............. $ . %
==== ============== =======
The weighted average Combined Loan-to-Value Ratio at origination of the
Junior Mortgage Loans will have been approximately ____%.
Junior Mortgage Ratios
Number of Percentage of
Junior Mortgage Ratio (%)Mortgage Loans Principal Balance Mortgage Pool
......................... $ %
.........................
.........................
.........................
.........................
.........................
.........................
.........................
......................... .
Total............... $ . %
==== ============== =======
The weighted average Junior Mortgage Ratio as of the Cut-off Date will
have been approximately ____%.
NY1-241975.1
S-26
<PAGE>
Geographic Distributions of Mortgaged Properties
Percentage of
State Number Principal Balance [Mortgage] [Contract] Pool
$ . . %
. .
Total......... $ . . %
==== ===
- - -----------------------
[(1) "Other" includes states that contain less than [__]% of the [Mortgage]
[Contract] Pool.]
[No more than _____% of the [Mortgage Loans] [Contracts] will be
secured by Mortgaged Properties located in any one zip code area.]
NY1-241975.1
S-27
<PAGE>
Mortgaged Property Types
Percentage of
Property Number incipal Balance Mortgage Pool
Single-family detached......... $ . . %
Planned Unit Developments
(detached).....................
Two- to four-family units......
Condo Low-Rise (less than 5
stories).......................
Condo Mid-Rise (5 to 8
stories).......................
Condo High-Rise (9 stories or
more...........................
Townhouse.....................
Planned Unit Developments
(attached)..................... . .
-- -
Total................. $ . . %]
==== ==
[[Mortgage Loan] [Contracts] Purposes
Percentage of
Loan Purpose Number Principal Balance Mortgage] [Contract] Pool
------------ ------ ----------------- -------------------------
Purchase..............
Rate/Term Refinance... $ . . %
Equity Refinance...... . .
--- -
Total........ $ . . %]
==== ===
[The weighted average Loan-to-Value Ratio at origination of [Mortgage
Loans] [Contracts] made to finance the purchase of the related Mortgaged
Properties will have been approximately _____%. The weighted average
Loan-to-Value Ratio at origination of equity refinance [Mortgage Loans]
[Contracts] will have been approximately _____%. The weighted average
Loan-to-Value Ratio at origination of rate and term refinance [Mortgage Loans]
[Contracts] will have been approximately _____%.]
[Mortgage Loan] Documentation
Percentage of
Type of Program umber Principal Balance [Mortgage] [Contract] Pool
Full Documentation...... $ . . %
Limited Documentation...
No Documentation........ . .
--- -
Total.......... $ . . %]
==== ==
NY1-241975.1
S-28
<PAGE>
Occupancy Types
Percentage of
Occupancy Number Principal Balance [Mortgage] [Contract] Pool
Primary Residence.... $ . . %
Second/Vacation......
Non Owner-occupied... . .
--- --
Total....... $ . . %
==== ===
[Specific information with respect to the [Mortgage Loans] [Contracts]
will be available to purchasers of the Certificates on or before the time of
issuance of such Certificates (the " Closing Date"). If not included in the
Prospectus Supplement, such information will be included in the Form 8-K.]
Representations and Warranties
[Pursuant to the terms of the Pooling and Servicing Agreement, the Company
will assign the representations and warranties made by the Mortgage Collateral
Seller[s] to the Trustee for the benefit of the Certificateholders. These
representatives and warranties include: [LIST OF SPECIFIC REPRESENTATIONS AND
WARRANTIES].
[In addition, [the Company] [Residential Funding] will make certain limited
representations and warranties regarding the [Mortgage Loans] [Contracts], as of
the date of issuance of the Certificates. [DISCLOSE DEVIATIONS FROM LIST OF
SPECIFIC REPRESENTATIONS AND WARRANTIES IN "THE TRUST FUNDS - REPRESENTATIONS
WITH RESPECT TO MORTGAGE COLLATERAL"].
[To the extent that the related Mortgage Collateral Seller[s] does not
repurchase a [Mortgage Loan][Contract] in the event of a breach of its
representations and warranties with respect to such [Mortgage Loan][Contract],
neither the Company nor Residential Funding will be required to repurchase such
[Mortgage Loan][Contract] unless such breach also constitutes a breach of one of
the Company's or Residential Funding's representations and warranties with
respect to such [Mortgage Loan][Contract] and such breach materially and
adversely affects the interests of the Certificateholders in any such [Mortgage
Loan][Contract]. See "The Trust Funds--Repurchases of Mortgage Collateral" and
"--Limited Right of Substitution" in the Prospectus. In addition, neither the
Company nor Residential Funding will be required to repurchase any [Mortgage
Loan][Contract] in the event of a breach of its representations and warranties
with respect to such [Mortgage Loan][Contract] if the substance of any such
breach also constitutes fraud in the origination of such affected [Mortgage
Loan][Contract]. A limited amount of losses on [Mortgage Loans][Contracts] as to
which there was fraud in the origination of such [Mortgage Loans][Contracts]
will be covered by the Subordination (as defined herein) provided by the Class M
Certificates and Class B Certificates as described herein under "Description of
the Offered Certificates--Allocation of Losses; Subordination."]
[The AlterNet Mortgage Program
General. In June, 1994 Residential Funding commenced the AlterNet
Mortgage Program primarily for the purchase of mortgage loans that would not
qualify for other mortgage purchase programs such as those run by Fannie Mae or
Freddie Mac or by Residential Funding in connection with securities issued by
the Company's affiliate, Residential Funding Mortgage Securities I, Inc. For
example, borrowers of AlterNet Loans may have imperfect credit histories or
higher debt to income ratios than mortgagors in such other programs and the
AlterNet Loans may have characteristics that present certain other risks to
investors that are not generally present in those other programs. [All][____%]
of the Mortgage Loans are AlterNet Loans originated under the AlterNet Mortgage
Program. The AlterNet Loans were underwritten in conformity with or in a manner
generally consistent with the standards described below. The AlterNet Mortgage
Program is administered by Residential Funding on behalf of the Company.
NY1-241975.1
S-29
<PAGE>
Qualifications of AlterNet Program Sellers. Each AlterNet Program
Seller has been selected by Residential Funding on the basis of criteria set
forth in the AlterNet Seller Guide or as otherwise approved by the Company. Each
AlterNet Program Seller is required to be a HUD-approved mortgagee or a
financial institution supervised by a federal or state authority with a minimum
net worth of $[500,000] and a minimum of [two] years' experience originating
mortgage loans [similar to the Mortgage Loans]. [OTHER QUALIFICATIONS TO BE
LISTED AS APPLICABLE.]
AlterNet Underwriting Standards. In accordance with the AlterNet Seller
Guide, the AlterNet Program Seller is required to review 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 is required to furnish information (which may have been supplied
solely in such application) with respect to its assets, liabilities, income,
credit history and employment history, and to furnish 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 be
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 be considered for
underwriting purposes. With respect to mortgaged property consisting of a
vacation or second home, generally no income derived from the property is
considered for underwriting purposes.
Based on the data provided in the application and certain verifications
(if required by the originator of the mortgage loan), a determination is made by
the original lender that the mortgagor's monthly income will 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. Generally, 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 consider 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 is undertaken
by the originator and the underwriting for such mortgage loans places a greater
emphasis on the value of the mortgaged property.]
The adequacy of the mortgaged property as security for repayment of the
related mortgage loan generally is determined by an appraisal in accordance with
appraisal procedure guidelines set forth in the AlterNet Seller Guide.
[Appraisers may be staff appraisers employed by the originator.] The appraisal
procedure guidelines generally require the appraiser or an agent on its behalf
to personally inspect the property and to verify whether the property is in good
condition and that construction, if new, has been substantially completed. The
appraiser is required to consider 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 is based on the appraised value as indicated on a review
appraisal conducted by the Mortgage Collateral Seller or originator. As used in
this section, "Loan-to-Value Ratio" shall generally mean the 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 of the Mortgage Loan, or in the case of a
refinanced or modified Mortgage Loan, either the lesser of the sales price and
the appraised value determined at origination of the Mortgage Loan or, if
applicable, the appraisal at the time of the refinancing or modification of the
Mortgage Loan.
Prior to assigning the Mortgage Loans to the Depositor, Residential
Funding reviews the underwriting documentation for [each] Mortgage Loan[s]
[purchased from AlterNet Program Sellers] and determines that [each] [the]
Mortgage Loan[s] [was] [were] originated in accordance with or in a manner
generally consistent with the underwriting standards set forth in the AlterNet
Seller Guide.
NY1-241975.1
S-30
<PAGE>
All of the Mortgage Loans have risk features that generally distinguish
such loans from the more stringent underwriting requirements of Fannie Mae and
Freddie Mac, and from the more stringent underwriting standards set forth in
Residential Funding's Seller Guide for mortgage loan collateral that does not
present special risk features (which generally provides the basis for
underwriting Mortgage Loans that serve as the assets for securities issued by
Residential Funding's affiliate, Residential Funding Mortgage Securities I,
Inc.). For purposes of the AlterNet Program, Residential Funding has established
risk categories by which it could aggregate acceptable loans into groupings
considered to have progressively greater risk characteristics. The risk
categories established by Residential Funding and applicable to all of the
AlterNet Loans are expressed herein as Risk Categories 1A, 2 and 3.
Risk Category 1A: Under Risk Category 1A, the prospective mortgagor
must have repaid installment or revolving debt according to its terms.
Outstanding debts which are in a collection status and are not in excess of $500
are permitted on non-mortgage obligations provided they are paid down to zero by
the closing. As to each mortgagor in this Risk Category, any bankruptcies must
have been discharged at least two years prior to the closing and there must be
evidence that the mortgagor 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 80% is permitted for a mortgage loan on a single family
owner-occupied property. A maximum Loan-to-Value Ratio of 70% is permitted for a
mortgage loan on a non-owner occupied property. The mortgagor's debt
service-to-income ratio generally is 45% or less [based on the initial rate on
the mortgage loan plus 2% per annum]. At the time of purchase by Residential
Funding, the mortgagor may have made two 30-day late payments but no 60-day or
90-day late payments within the last 12 months.
Risk Category 2: Under Risk Category 2, the prospective mortgagor is
required to have generally repaid all previous or existing installment or
revolving debt according to its terms. Outstanding debts which are in a
collection status and are not in excess of $1,500 are permitted on non-mortgage
obligations provided they are paid down to zero by the closing. Any prior
bankruptcies must have been discharged at least two years prior to the closing
and there must be evidence that the mortgagor 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 70% is permitted for a mortgage loan on an
owner-occupied property. A maximum Loan-to-Value Ratio of 65% is permitted for a
mortgage loan on a non-owner occupied property. The debt service-to-income ratio
generally is 50% or less [based on an initial rate on the mortgage loan plus 2%
per annum]. At the time of purchase by Residential Funding, the mortgagor may
have made a maximum of four 30-day late payments or one 60-day but no 90-day
late payments within the last 12 months.
Risk Category 3: Under Risk Category 3, the prospective mortgagor may
not have paid all previous or existing installment or revolving debt according
to its terms. Outstanding debts which are in a collection status and are not in
excess of $1,500 are permitted on non-mortgage obligations provided they are
paid down to zero by the closing. Any prior bankruptcies must have been
discharged at least two years prior to closing and 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
70% is permitted for a mortgage loan on an owner-occupied property. A maximum
Loan-to-Value Ratio of 60% is permitted for a mortgage loan on a
non-owner-occupied property. The debt service-to-income ratio generally is 55%
or less [based on the initial rate on the mortgage loan plus 2% per annum]. At
the time of purchase by Residential Funding, the mortgagor may have made a
maximum of six 30-day, two 60-day or one 90-day late payment within the last 12
months.
[Add Additional Risk Categories, if appropriate]
Because of the underwriting standards described above, AlterNet 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.]
NY1-241975.1
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<PAGE>
[Underwriting Standards]
[DESCRIBE UNDERWRITING STANDARDS FOR [MORTGAGE LOANS] [CONTRACTS] NOT PURCHASED
THROUGH ALTERNET PROGRAM IF APPROPRIATE]
[Delinquency and Foreclosure Experience]
[INSERT MORTGAGE COLLATERAL SELLER'S PORTFOLIO DELINQUENCY AND LOSS EXPERIENCE
IF APPROPRIATE.]
[[Mortgage Collateral Seller], which originated __% of the Mortgage
Loans, has sold the servicing rights to substantially all of the mortgage loans
that it has originated using the underwriting standards described above to
various servicers. Accordingly, the delinquency and loss experience for those
mortgage loans is not available.]
[Mexico Mortgage Loans]
[INSERT DISCLOSURE REGARDING MEXICO MORTGAGE LOANS IF APPROPRIATE]
DESCRIPTION OF THE OFFERED CERTIFICATES
General
[The Offered Certificates, together with the Accrual Certificates and
the Class B Certificates] will evidence the entire beneficial ownership interest
in the Trust Fund. The Trust Fund will consist of (1) the [Mortgage Loans]
[Contracts]; (2) such assets as from time to time are identified as deposited in
respect of the [Mortgage Loans] [Contracts] in the Custodial Account and in the
Certificate Account and belonging to the Trust Fund; (3) property acquired by
foreclosure of such [Mortgage Loans] [Contracts] [or by a deed in lieu of
foreclosure]; and (4) any applicable Primary Insurance Policies and all proceeds
thereof (collectively, the "Mortgage Collateral").
The Principal Only Certificates will be entitled to payments based on
the Discount Fraction of the Discount Mortgage Collateral. "Discount Mortgage
Collateral" is any [Mortgage Loan] [Contract] with a Net Mortgage Rate less than
[___]%. With respect to each item of Discount Mortgage Collateral, the "Discount
Fraction" is equal to a fraction, expressed as a percentage, the numerator of
which is [___]% minus the Net Mortgage Rate for such Discount Mortgage
Collateral and the denominator of which is [___]%. The Mortgage Collateral other
than the Discount Mortgage Collateral are referred to herein as the
"Non-Discount Mortgage Collateral."
Available Distribution Amount
The "Available Distribution Amount" for any Distribution Date is equal
to (i) the aggregate amount of scheduled payments on the [Mortgage
Loans][Contracts] due on the related Due Date and received on or prior to the
related Determination Date, after deduction of the related servicing fees and
any subservicing fees (collectively, the "Servicing Fees"), (ii) certain
unscheduled payments, including Mortgagor prepayments on the [Mortgage
Loans][Contracts], Insurance Proceeds, Liquidation Proceeds and proceeds from
repurchases of and substitutions for the [Mortgage Loans][Contracts] 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[s] [and any Subservicer]. In addition to the foregoing
amounts, with respect to unscheduled collections, not including Mortgagor
prepayments, the [Master] Servicer[s] may elect to treat such amounts as
included in the Available Distribution Amount for the Distribution Date in the
month of receipt, but is not obligated to do so. With respect to any
Distribution Date, (a) the Due Date is the first day of the month in which such
Distribution Date occurs and (b) 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 next business day).
NY1-241975.1
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<PAGE>
Interest Distributions
Holders of each class of Offered Certificates (other than Principal
Only Certificates) will be entitled to receive interest distributions in an
amount equal to the Accrued Certificate Interest on such class on each
Distribution Date, to the extent of the Available Distribution Amount (as
defined below) for such Distribution Date, commencing on the first Distribution
Date in the case of all classes of Senior Certificates [other than the Accrual
Certificates and commencing on the Accretion Termination Date (as defined below)
in the case of the Accrual Certificates]. Holders of the Class M Certificates
will be entitled to receive interest distributions in an amount equal to the
Accrued Certificate Interest on each Distribution Date, to the extent of the
Available Distribution Amount for such Distribution Date after distributions of
interest and principal to the Senior Certificates [and reimbursements for
certain Advances to the [Master] Servicer[s]].
With respect to any Distribution Date, "Accrued Certificate Interest"
will be equal to (a) in the case of each class of Offered Certificates (other
than the Principal Only Certificates and the Stripped Interests Certificates),
one month's interest accrued on the Certificate Principal Balance of the
Certificates of such class at the Pass-Through Rate on such class and (b) in the
case of the Stripped Interests Certificates, one month's interest accrued on the
Notional Amount of the Certificates of such class at the then-applicable
Pass-Through Rate on such class. In each case less interest shortfalls, if any,
for such Distribution Date not covered by the Subordination, including in each
case (i) any Prepayment Interest Shortfall (as defined below) to the extent not
covered by the [Master] Servicer[s], 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 Amount ("Excess Fraud Losses"), Bankruptcy Losses in excess of the
Bankruptcy Amount ("Excess Bankruptcy Losses") and losses occasioned by war,
civil insurrection, certain governmental actions, nuclear reaction and certain
other risks ( "Extraordinary Losses") not covered by the Subordination, (iii)
the interest portion of any Advances that were made with respect to
delinquencies that were ultimately determined to be Excess Special Hazard
Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses
and (iv) any interest shortfalls not covered by Subordination, including
interest shortfalls relating to the Relief Act or similar legislation or
regulations, all allocated among all the Certificates in proportion to the
respective amounts of Accrued Certificate Interest for such Distribution Date on
each such class. In the case the Class M Certificates, Accrued Certificate
Interest will be further reduced by the allocation of the interest portion of
certain losses thereto, if any, as described below under "--Allocation of
Losses; Subordination." Accrued Certificate Interest is calculated on the basis
of a 360-day year consisting of twelve 30-day months. The distributions of
interest on any Distribution Date for all classes of Certificates will reflect
interest accrued, and receipts with respect thereto, on the [Mortgage
Loans][Contracts] for the preceding calendar month, as may be reduced by any
Prepayment Interest Shortfall and other shortfalls in the collections of
interest as described below.
[The Accretion Termination Date for the Accrual Certificates is the
earlier to occur of (i) the Distribution Date on which the Certificate Principal
Balances of the Class A-1 and Class A-2 have been reduced to zero and (ii) the
Credit Support Depletion Date (as defined herein). On each Distribution Date
preceding the Accretion Termination Date, an amount equal to the amount of
Accrued Certificate Interest on the Accrual Certificates for such date will be
added to the Certificate Principal Balance thereof, and such amount will be
distributed to the holders of the then outstanding Senior Certificates (other
than the Principal Only Certificates) in reduction of the Certificate Principal
Balances thereof, as described herein. On each Distribution Date on or after the
Accretion Termination Date, the entire amount of Accrued Certificate Interest on
the Accrual Certificates for such date will be payable to the holders of the
Accrual Certificates, to the extent not required to fully retire the remaining
Senior Certificates on the Accretion Termination Date; provided, however, that
if the Accretion Termination Date is the Credit Support Depletion Date, the
entire amount of Accrued Certificate Interest on the Accrual Certificates for
such Distribution Date will be payable to the holders of the Accrual
Certificates.]
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] [Contracts] during the preceding calendar month. Such
shortfalls will result because interest on prepayments in full is distributed
only to the date of prepayment, and because no interest is distributed on
prepayments in part, as such prepayments are applied to reduce the outstanding
principal balance of the related
NY1-241975.1
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<PAGE>
[Mortgage Loans] [Contracts] as of the Due Date in the month of prepayment.
[With respect to any Distribution Date, any Prepayment Interest Shortfalls
resulting from prepayments in full for such Distribution Date will be offset by
the [Master] Servicer[s], but only to the extent such Prepayment Interest
Shortfalls do not exceed an amount equal to [one-twelfth of 0.___% of the Stated
Principal Balance of the [Mortgage Loans][Contracts] immediately preceding such
Distribution Date]. Prepayment Interest Shortfalls will be offset by the Master
Servicer first, by a reduction in the Servicing Fee and second, by a reduction
in other servicing compensation of the [Master] Servicer[s].
If on any Distribution Date the Available Distribution Amount is less
than Accrued Certificate Interest on the Senior Certificates for such
Distribution Date, the shortfall will be allocated among the holders of all
classes of Senior Certificates (other than the Principal Only Certificates) in
proportion to the respective amounts of Accrued Certificate Interest for such
Distribution Date on each such class. In addition, the amount of any interest
shortfalls that are covered by Subordination (specifically, interest shortfalls
not described in clauses (i) through (iv) in the third preceding paragraph) will
be unpaid Accrued Certificate Interest and will be distributable to holders of
the Certificates of such classes entitled to such amounts on subsequent
Distribution Dates, to the extent of available funds after interest
distributions as required herein. Such shortfalls could occur, for example, if
delinquencies on the [Mortgage Loans][Contracts] were exceptionally high and
were concentrated in a particular month and Advances by the [Master] Servicer[s]
did not cover the shortfall. Any such amounts so carried forward will not bear
interest.
[Prior to the Accretion Termination Date, interest shortfalls to be
allocated to the Accrual Certificates will be so allocated by reducing the
amount that is added to the Certificate Principal Balance of the Accrual
Certificates in respect of Accrued Certificate Interest on such Distribution
Date. This reduction will correspondingly reduce the amount distributed in
respect of principal on the applicable Distribution Date to the holders of the
Senior Certificates (other than the Principal Only Certificates) and will cause
the Certificate Principal Balances of the outstanding Senior Certificates (other
than the Principal Only Certificates) to be reduced to zero later than would
otherwise be the case.]
The Pass-Through Rates on each class of Offered Certificates, other
than the Principal Only Certificates (which are not entitled to distributions of
interest) and the Stripped Interests Certificates, are fixed and are set forth
on the cover hereof. The Pass-Through Rate on the Stripped Interests
Certificates on each Distribution Date will equal the weighted average, as of
the Due Date in the month preceding the month in which such Distribution Date
occurs, of the Pool Strip Rates on each [Mortgage Loan][Contract] with a Net
Mortgage Rate in excess of [___]% per annum. The "Pool Strip Rate" on each
[Mortgage Loan][Contract] is equal to the Net Mortgage Rate thereon minus
[___]%. The "Net Mortgage Rate" on each [Mortgage Loan][Contract] is equal to
the Mortgage Rate thereon minus the Servicing Fee Rate. The Pool Strip Rates on
the [Mortgage Loans][Contracts] range from [___]% to [___]% per annum. The
initial Pass-Through Rate on the Stripped Interests Certificates is
approximately [___]% per annum.
[The Pass-Through Rate on each class of the Offered Certificates for
any Distribution Date will equal the weighted average of the Net Mortgage Rates
on the outstanding [Mortgage Loans] [Contracts] for the month preceding such
Distribution Date, determined as of the close of business on the Due Date
occurring in such month (or, with respect to the first Distribution Date, as of
the Cut-off Date). The Net Mortgage Rate with respect to each [Mortgage Loan]
[Contract] as of the Cut-off Date will be set forth in the [Mortgage Loan]
[Contract] Schedule attached to the Pooling and Servicing Agreement. As of the
Cut-off Date, the weighted average Net Mortgage Rate will be [______]% per
annum. Accordingly, the initial Pass-Through Rate on the Offered Certificates
will be [______]% per annum.]
[On each Adjustment Date applicable to each [Mortgage Loan] [Contract],
the Net Mortgage Rate on such [Mortgage Loan] [Contract] will be adjusted to a
rate equal to the sum of the Index (rounded to the nearest multiple of [_____]%)
and a fixed percentage per annum for each [Mortgage Loan] [Contract] as set
forth in the [Mortgage Loan] [Contract] Schedule attached to the Pooling and
Servicing Agreement; provided that the Net Mortgage Rate on any [Mortgage Loan]
[Contract] on any Adjustment Date may not increase or decrease by more than
[____]% (the "Periodic Rate Cap"), except with respect to one [Mortgage Loan]
[Contract], constituting [___]% of the [Mortgage Loans] [Contracts], on the
first Adjustment Date thereof the Net Mortgage Rate thereon may not adjust
NY1-241975.1
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<PAGE>
to a rate lower than the related Gross Margin. The Net Mortgage Rate on any
[Mortgage Loan] [Contract] may not exceed the Maximum Net Mortgage Rate or
decrease below the Minimum Net Mortgage Rate applicable to such [Mortgage Loan]
[Contract] as specified in the Pooling and Servicing Agreement. The Gross
Margins for the [Mortgage Loans] [Contracts] will be at least [_____]% per annum
but not more than [_____]% per annum as of the Cut-off Date, with an initial
weighted average Gross Margin of [______]% per annum. The Net Mortgage Rate on
each Converted [Mortgage Loan] [Contract] remaining in the [Mortgage] [Contract]
Pool will be equal to the Mortgage Rate thereon less [_____]% per annum.]
As described herein, the Accrued Certificate Interest allocable to each
class of Offered Certificates is based on the Certificate Principal Balance
thereof or, in the case of the Stripped Interests Certificates, on the Notional
Amount. The Certificate Principal Balance of any Offered Certificate, as of any
date of determination is equal to the initial Certificate Principal Balance
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
under "--Allocation of Losses; Subordination"; provided that, after the
Certificate Principal Balance of the Class B Certificates has been reduced to
zero, the Certificate Principal Balance of the Class M Certificates shall equal
the excess, if any, of (a) the then aggregate Stated Principal Balance (as
defined herein) of all of the [Mortgage Loans][Contracts] over (b) the then
aggregate Certificate Principal Balance of all classes of Senior Certificates
then outstanding. The "Notional Amount" of the Stripped Interests Certificates
as of any date of determination is equal to the aggregate Certificate Principal
Balance of the Certificates of all classes as of such date. Reference to the
Notional Amount of a Stripped Interests Certificate is solely for convenience in
certain calculations and does not represent the right to receive any
distributions allocable to principal.
Principal Distributions on the Senior Certificates
Except as otherwise provided below, holders of the Senior Certificates
(other than the Stripped Interests, which are not entitled to receive any
principal distributions, and the Principal Only Certificates) will be entitled
to receive on each Distribution Date, to the extent of the portion of the
Available Distribution Amount remaining after the Senior Interest Distribution
Amount is distributed to such holders and the Class A-4 Principal Distribution
Amount (as described below) is so distributed, a distribution allocable to
principal in the following amount:
(i) the product of (a) the then-applicable Senior Percentage and
(b) the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly
payments on the [Mortgage Loans] [Contracts] (other than the
related Discount Fraction of the principal portion of such
payments, with respect to each item of Discount Mortgage
Collateral due on the related Due Date, whether or not received
on or prior to the related Determination Date, less the
principal portion of Debt Service Reductions (as defined below)
which, together with other Bankruptcy Losses, are in excess of
the Bankruptcy Amount;
(2) the principal portion of all proceeds of the
repurchase of a [Mortgage Loan] [Contract] (or, in the case of a
substitution, certain amounts representing a principal
adjustment) (other than the related Discount Fraction of the
principal portion of such proceeds, with respect to each item of
Discount Mortgage Collateral) as required by the Pooling and
Servicing Agreement during the preceding calendar month;
(3) the principal portion of all other unscheduled
collections received during the preceding calendar month (other
than full and partial Principal Prepayments made by the
respective Mortgagors and any amounts received in connection
with a Final Disposition (as defined below) of a [Mortgage Loan]
[Contract] described in clause (ii) below), to the extent
applied as recoveries of principal (other than the related
Discount Fraction of the principal portion of such proceeds,
with respect to each item of Discount Mortgage Collateral);
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<PAGE>
(ii) in connection with the Final Disposition of a [Mortgage
Loan] [Contract] (a) that occurred in the preceding calendar month and
(b) that did not result in any Excess Special Hazard Losses, Excess
Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses, an
amount equal to the lesser of (1) the then-applicable Senior Percentage
of the Stated Principal Balance of such [Mortgage Loan] [Contract]
(other than the related Discount Fraction of the principal portion of
such proceeds, with respect to each item of Discount Mortgage
Collateral) and (2) the then-applicable Senior Accelerated Distribution
Percentage (as defined below) of the related collections, including
Insurance Proceeds and Liquidation Proceeds, to the extent applied as
recoveries of principal (other than the related Discount Fraction of
the principal portion of such proceeds, with respect to each item of
Discount Mortgage Collateral);
(iii) the then-applicable Senior Accelerated Distribution
Percentage of the aggregate of all full and partial Principal
Prepayments made by the respective Mortgagors (other than the related
Discount Fraction of the principal portion of such proceeds, with
respect to each item of Discount Mortgage Collateral) during the
preceding calendar month;
(iv) any Excess Subordinate Principal Amount (as defined below)
for such Distribution Date;
(v) if such Distribution Date is on or prior to the Accretion
Termination Date, the Accrued Certificate Interest on the Accrual
Certificates for such Distribution Date, to the extent added to the
Certificate Principal Balance thereof; and
(vi) any amounts allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i) through (iii) and
(v) above) that remain undistributed to the extent that any such
amounts are not attributable to Realized Losses which are allocated to
the Subordinate Certificates.
With respect to any Distribution Date, "Senior Principal Distribution
Amount" is equal to the lesser of (a) the Available Distribution Amount
remaining after the Senior Interest Distribution Amount and the Class A-4
Principal Distribution Amount are distributed and (b) the sum of the amounts
described in clauses (i) through (vi) of the immediately preceding paragraph.
With respect to any Distribution Date on which the Certificate Principal Balance
of the most subordinate class or classes of Certificates then outstanding is to
be reduced to zero and on which Realized Losses are to be allocated to such
class or classes, the "Excess Subordinate Principal Amount" is equal to the
amount, if any, by which (1) the amount that would otherwise be distributable in
respect of principal on such class or classes of Certificates on such
Distribution Date is greater than (2) the excess, if any, of the aggregate of
the Certificate Principal Balance of such class or classes of Certificates
immediately prior to such Distribution Date over the aggregate amount of
Realized Losses to be allocated to such class or classes of Certificates on such
Distribution Date.
Holders of the Principal Only Certificates will be entitled to receive
on each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after the Senior Interest Distribution Amount is
distributed, a distribution allocable to principal equal to the Class A-4
Principal Distribution Amount. The Class A-4 Principal Distribution Amount is
equal to the aggregate of:
(i) the related Discount Fraction of the principal portion of the
scheduled monthly payment on each item of Discount Mortgage Collateral
due on the related Due Date, whether or not received on or prior to the
related Determination Date, less the Discount Fraction of the principal
portion of any related Debt Service Reductions (as defined below) which
together with other Bankruptcy Losses are in excess of the Bankruptcy
Amount;
(ii) the related Discount Fraction of the principal portion of all
unscheduled collections on each item of Discount Mortgage Collateral
received during the preceding calendar month (other than amounts
received in connection with a Final Disposition of an item of Discount
Mortgage Collateral described in clause (iii) below), including full
and partial Principal Prepayments, repurchases of Discount Mortgage
Collateral (or, in the case of a substitution, certain amounts
representing a principal adjustment) as required
NY1-241975.1
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<PAGE>
by the Pooling and Servicing Agreement, Liquidation Proceeds and Insurance
Proceeds, to the extent applied as recoveries of principal;
(iii) in connection with the Final Disposition of an item of
Discount Mortgage Collateral that did not result in any Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses, an amount equal to the applicable Discount
Fraction of the Stated Principal Balance of such Discount Mortgage
Collateral immediately prior to such Distribution Date net of the
principal portion of any related Realized Loss allocated to the
Principal Only Certificates on such Distribution Date; and
(iv) any amounts, allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i) through (iii)
above), that remain undistributed.
A "Final Disposition" of a defaulted [Mortgage Loan] [Contract] is
deemed to have occurred upon a determination by the [Master] Servicer[s] that it
has received all Insurance Proceeds, Liquidation Proceeds and other payments or
cash recoveries which the [Master] Servicer[s] reasonably and in good faith
expects to be finally recoverable with respect to such [Mortgage Loan]
[Contract].
The "Stated Principal Balance" of a [Mortgage Loan] [Contract] as of
any date of determination is equal to the principal balance thereof as of the
Cut-off Date, after application of all scheduled principal payments due on or
before the Cut-off Date, whether or not received, reduced by all amounts
allocable to principal that have been distributed to Certificateholders with
respect to such [Mortgage Loan] [Contract] on or before such date, and as
further reduced to the extent that any Realized Loss thereon has been allocated
to one or more classes of Certificates on or before the date of determination.
The "Senior Percentage," which initially will equal approximately
[____]% and will in no event exceed 100%, will be adjusted for each Distribution
Date to be the percentage equal to the aggregate Certificate Principal Balance
of the Senior Certificates (other than the Principal Only Certificates)
immediately prior to such Distribution Date divided by the aggregate Stated
Principal Balance of the aggregate amount of all the [Mortgage Loans]
[Contracts] (other than the Discount Fraction of the Discount Mortgage
Collateral) immediately prior to such Distribution Date. The "Subordinate
Percentage" as of any date of determination is equal to 100% minus the Senior
Percentage as of such date. The initial Senior Percentage is less than the
initial percentage interest in the Trust Fund evidenced by the Senior
Certificates (including the Principal Only Certificates) in the aggregate,
because the Senior Percentage is calculated without regard to either the
Certificate Principal Balance of the Principal Only Certificates or the Discount
Fraction of the Stated Principal Balance of each item of Discount Mortgage
Collateral.
The Senior Accelerated Distribution Percentage for any Distribution
Date occurring prior to [__________ __, ____] Distribution Date will equal 100%.
Thereafter, the Senior Accelerated Distribution Percentage will be subject to
gradual reduction as described in the following paragraph. This disproportionate
allocation of certain unscheduled payments in respect of principal will have the
effect of accelerating the amortization of the Senior Certificates while, in the
absence of Realized Losses allocated to the Subordinate Certificates, increasing
the proportionate interest in the Trust Fund evidenced by the Subordinate
Certificates. Increasing the proportionate interest of the Subordinate
Certificates relative to that of the Senior Certificates is intended to preserve
the availability of the Subordination provided by the Subordinate Certificates.
The "Senior Accelerated Distribution Percentage" for any Distribution
Date occurring after the [__________ __, ____] Distribution Date will be as
follows: for any Distribution Date falling in the [__________] year after the
Delivery Date, the Senior Percentage for such Distribution Date plus [__]% of
the Subordinate Percentage (as defined below) for such Distribution Date; for
any Distribution Date falling in the [__________] year after the Delivery Date,
the Senior Percentage for such Distribution Date plus __% of the Subordinate
Percentage for such Distribution Date; for any Distribution Date falling in the
[__________] year after the Delivery Date, the Senior Percentage for such
Distribution Date plus __% of the Subordinate Percentage for such Distribution
Date; for any Distribution Date falling in the [__________] year after the
Delivery Date, the Senior Percentage for such Distribution Date plus __% of the
Subordinate Percentage for such Distribution Date; and for any Distribution Date
NY1-241975.1
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<PAGE>
after the [__________] year after the Delivery Date, the Senior Percentage for
such Distribution Date (unless on any such Distribution Date the Senior
Percentage exceeds the initial Senior Percentage, in which case the Senior
Accelerated Distribution Percentage for such Distribution Date will once again
equal 100%). Any scheduled reduction to the Senior Accelerated Distribution
Percentage described above shall not be made as of any Distribution Date unless
either (a)(i) the outstanding principal balance of [Mortgage Loans][Contracts]
delinquent [____] days or more averaged over the last [____] months, as a
percentage of the aggregate outstanding principal balance of all [Mortgage
Loans][Contracts] averaged over the last [____] months, does not exceed [____]%
and (ii) Realized Losses on the [Mortgage Loans][Contracts] to date for such
Distribution Date if occurring during the [____], [____], [____], [____] or
[____] year (or any year thereafter) after the Delivery Date are less than
[___]%, [___]%, [___]%, [___]% or [___]%, respectively, of the sum of the
initial Certificate Principal Balances of the Subordinate Certificates or (b)(i)
the outstanding principal balance of [Mortgage Loans][Contracts] delinquent
[___] days or more averaged over the last [___] months, as a percentage of the
aggregate outstanding principal balance of all [Mortgage Loans][Contracts]
averaged over the last [___] months, does not exceed [___]% and (ii) Realized
Losses on the [Mortgage Loans][Contracts] to date are less than [___]% of the
sum of the initial Certificate Principal Balances of the Subordinate
Certificates. Notwithstanding the foregoing, upon reduction of the Certificate
Principal Balances of the Senior Certificates (other than the Principal Only
Certificates) to zero, the Senior Accelerated Distribution Percentage will equal
0%.
Distributions of principal on the Senior Certificates (other than the
Stripped Interests Certificates) on each Distribution Date will be made (after
distribution of the Senior Interest Distribution Amount as described herein
under "--Interest Distributions"), as follows:
(i) Prior to the occurrence of the Credit Support Depletion
Date (as defined below):
(a) the Class A-4 Principal Distribution Amount shall
be distributed to the Principal Only Certificates, in
reduction of the Certificate Principal Balance thereof, until
such Certificate Principal Balance is reduced to zero;
(b) the Senior Principal Distribution Amount shall be
distributed to the Residual Certificates, in reduction of the
Certificate Principal Balance thereof, until such Certificate
Principal Balance is reduced to zero; and
(c) the balance of the Senior Principal Distribution
Amount remaining after the distributions described in clauses
(i) and (ii) above shall be distributed in reduction of the
Certificate Principal Balances of the classes set forth below
as follows:
(1) first, [____.___]% and [___.______]% of
such amount, concurrently, to the Class A-1
Certificates and Class A-2 Certificates,
respectively, until the Certificate Principal
Balances thereof are reduced to zero; and
(2) second, to the Class A-3 Certificates
until the Certificate Principal Balance thereof is
reduced to zero.
(ii) On or after the occurrence of the Credit Support
Depletion Date, all priorities relating to distributions as described
above in respect of principal among the various classes of Senior
Certificates (other than the Principal Only Certificates) will be
disregarded, an amount equal to the Discount Fraction of the principal
portion of scheduled payments and unscheduled collections received or
advanced in respect of Discount Mortgage Collateral will be distributed
to the Principal Only Certificates, and the Senior Principal
Distribution Amount will be distributed to all classes of Senior
Certificates (other than the Principal Only Certificates) pro rata in
accordance with their respective outstanding Certificate Principal
Balances and the Senior Interest Distribution Amount will be
distributed as described under "--Interest Distributions."
NY1-241975.1
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<PAGE>
(iii) If the Certificate Principal Balances of the Senior
Certificates (other than the Principal Only Certificates) have been
reduced to zero prior to the occurrence of the Credit Support Depletion
Date, the Senior Certificates (other than the Principal Only
Certificates) will be entitled to no further distributions of principal
thereon and the Available Distribution Amount will be paid solely to
the holders of the Principal Only Certificates, the Stripped Interests
Certificates and the Subordinate Certificates, in each case as
described herein.
The "Credit Support Depletion Date" is the first Distribution Date on
which the Senior Percentage equals 100%.
[The following table sets forth for each Distribution Date the
applicable Planned Principal Balances and Targeted Principal Balances for each
class of PAC and TAC Certificates and for the PAC and TAC Principal Components.
There is no assurance that sufficient funds will be available on any
Distribution Date to reduce the Certificate Principal Balances of the PAC and
TAC Certificates and the amounts of the PAC and TAC Principal Components to
their corresponding Planned Principal Balances or Targeted Principal Balances,
as applicable, for such Distribution Date, or that distributions on such PAC and
TAC Certificates and PAC and TAC Principal Components will not be made in excess
of such amounts for such Distribution Date.
NY1-241975.1
S-39
<PAGE>
<TABLE>
<CAPTION>
Planned Principal Balances and Targeted Principal Balances
Planned Principal Balances Targeted Principal Balances
----------------------------------------------------- ----------------------------------
Class [__] Class [___]
PAC Principal TAC Principal
Distribution Date Class [__] Component Component Class [ ]
<S> <C> <C> <C> <C>
Initial Balance...........
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_]................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
</TABLE>
(Table continued on next page.)
NY1-61845.9
S-40
<PAGE>
[___ 25, 199_].................
[___ 25, 199_]................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__]................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
NY1-241975.1
(Table continued from previous page.)
NY1-61845.9
S-41
<PAGE>
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__]................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__ and thereafter]..
S-42
<PAGE>
The Planned Principal Balances and Targeted Principal Balances for each
Distribution Date set forth in the table above were calculated based on certain
assumptions, including the assumption that prepayments on the [Mortgage Loans]
[Contracts] occur each month at a constant level between approximately [__]% SPA
and approximately [___]% SPA, in the case of the Planned Principal Balances and
that prepayments on the [Mortgage Loans] [Contracts] occur at a constant level
of approximately [___]% SPA in the case of the Targeted Principal Balances. The
actual characteristics and performance of the [Mortgage Loans] [Contracts] will
differ from the assumptions used in determining the Planned Principal Balances
and Targeted Principal Balances. The Planned Principal Balances and Targeted
Principal Balances set forth in the table above are final and binding regardless
of any error or alleged error in making such calculations.
There can be no assurance that funds available for distributions of principal
on the PAC and TAC Certificates and the PAC and TAC Principal Components will be
sufficient to cover, or will not be in excess of, the related PAC Principal
Amount and TAC Principal Amount for any Distribution Date. Distributions in
reduction of the Certificate Principal Balance of any class of PAC or TAC
Certificates or in reduction of the amount of the PAC or TAC Principal
Components may commence significantly earlier (other than as to any class or
Component for which the above table reflects a distribution on the first
Distribution Date) or later than the first Distribution Date for such class or
Component shown in the above table. Distributions on any of the PAC and TAC
Certificates and the PAC and TAC Principal Components may end significantly
earlier or later than the last Distribution Date for such class or Component
shown in the above table. See "Prepayment and Yield Considerations" herein for a
further discussion of the assumptions used to produce the above table and the
effect of prepayments on the [Mortgage Loans] [Contracts] on the rate of
payments of principal and on the weighted average lives of such Certificates.]
The [Master] Servicer[s] 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 and the Senior Principal Distribution Amount for the
Distribution Date in the month of receipt, but is not obligated to do so. If the
[Master] Servicer[s] 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.
Principal Distributions on the Class M Certificates
Holders of each class of the Class M Certificates will be entitled to receive
on each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after (A) the sum of the Senior Interest
Distribution Amount and the Senior Principal Distribution Amount is distributed
to holders of the Senior Certificates, (B) reimbursement is made to the [Master]
Servicer[s] for certain Advances remaining unreimbursed following the final
liquidation of the related [Mortgage Loan] [Contract] to the extent described
below under "--Advances," (C) the aggregate amount of Accrued Certificate
Interest and principal required to be distributed to holders of Class M
Certificates and (D) the aggregate amount of Accrued Certificate Interest
required to be distributed on such class of Class M Certificates on such
Distribution Date is distributed to such Class M Certificates, a distribution
allocable to principal in the following amounts:
(i) the product of (a) the then-applicable Class M Percentage
and (b) the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments
on the [Mortgage Loans] [Contracts] due on the related Due
Date, whether or not received on or prior to the related
Determination Date, less the principal portion of Debt Service
Reductions together with other Excess Bankruptcy Losses;
(2) the principal portion of all proceeds of the repurchase
of a [Mortgage Loan] [Contract] (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; and
NY1-IN61845.9
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<PAGE>
(3) the principal portion of all other unscheduled
collections received during the preceding calendar month
(other than full and partial Principal Prepayments made by the
respective Mortgagors and any amounts received in connection
with a Final Disposition of a [Mortgage Loan] [Contract]
described in clause (ii) below), to the extent applied as
recoveries of principal;
(ii) such Class M Certificate's pro rata share, based on the
Certificate Principal Balance of the Class M Certificate relative to
the aggregate Certificate Principal Balance of the Class M and Class B
Certificates then outstanding, of all amounts received in connection
with the Final Disposition of a [Mortgage Loan][Contracts] (other than
the related Discount Fraction of such amounts with respect to any item
of Discount Mortgage Collateral) (1) that occurred during the preceding
calendar month and (2) that did not result in any Excess Special Hazard
Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary
Losses, to the extent applied as recoveries of principal and to the
extent not otherwise payable to the Senior Certificates;
(iii) the portion of full and partial Principal Prepayments
(other than the Discount Fraction of such Principal Prepayments with
respect to any item of Discount Mortgage Collateral) made by the
respective Mortgagors during the preceding calendar month allocable to
the Class M Certificates, as described below;
(iv) an amount equal to the Excess Subordinate Principal
Amount; and
(v) any amounts allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i), (ii) and (iii)
above) that remain undistributed to the extent that any such amounts
are not attributable to Realized Losses which were allocated to the
Class B Certificates.
As to the Class M Certificates, on any Distribution Date, any Accrued
Certificate Interest thereon remaining unpaid from any previous Distribution
Date will be distributable to the extent of available funds. Notwithstanding the
foregoing, if the Certificate Principal Balances of the Class B Certificates
have been reduced to zero, on any Distribution Date, with respect to the Class M
Certificates outstanding on such Distribution Date, Accrued Certificate Interest
thereon remaining unpaid from any previous Distribution Date (except in the
limited circumstances provided in the Pooling and Servicing Agreement) will not
be distributable.
As to the Class M Certificates, on any Distribution Date, any Accrued
Certificate Interest thereon remaining unpaid from any previous Distribution
Date will be distributable to the extent of available funds. Notwithstanding the
foregoing, if the Certificate Principal Balances of the Class B Certificates
have been reduced to zero, on any Distribution Date, with respect to the Class M
Certificates outstanding on such Distribution Date, Accrued Certificate Interest
thereon remaining unpaid from any previous Distribution Date (except as in the
limited circumstances provided in the Pooling and Servicing Agreement) will not
be distributable.
From the Distribution Date occurring in [__________ ____] (or if the
Certificate Principal Balances of the Senior Certificates (other than the
Principal Only Certificates) have been reduced to zero prior to such
Distribution Date, the Distribution Date on which such reduction occurred) to,
but not including the later to occur of the Distribution Date occurring in
[__________ ____] and the Distribution Date on which the Class B Percentage
first equals or exceeds [____]% (approximately twice the sum of the initial
Class B Percentages) before giving effect to distributions on such Distribution
Date, the Class M Certificates (if outstanding) will be entitled to receive 100%
of any Principal Prepayments not otherwise distributable to the Senior
Certificates. Thereafter, all Principal Prepayments not otherwise distributable
to the Senior Certificates will be allocated to the Class M Certificates and
Class B Certificates for which certain loss levels established for such
Subordinate Certificates in the Pooling and Servicing Agreement have not been
exceeded. The related loss level on any Distribution Date would be satisfied as
to the Class B Certificates, only if the sum of the current percentage interests
in the Trust Fund evidenced by such class and each class, if any, subordinate
thereto were at least equal to the sum of the initial percentage interests
evidenced by such class and each class, if any, subordinate thereto.
As stated above under "--Principal Distributions on the Senior
Certificates," the Senior Accelerated Distribution Percentage will be 100%
during the first [___] years after the Delivery Date (unless the Certificate
Principal Balances of the Senior Certificates (other than the Principal Only
Certificates) are reduced to zero before
NY1-IN61845.9
S-44
<PAGE>
the end of such period), and will thereafter equal 100% whenever the Senior
Percentage exceeds the initial Senior Percentage. Furthermore, as set forth
herein, the Senior Accelerated Distribution Percentage will exceed the Senior
Percentage during the [___] through [___] years following the Delivery Date, and
scheduled reductions to the Senior Accelerated Distribution Percentage are
subject to postponement based on the loss and delinquency experience of the
[Mortgage Loans] [Contracts]. Accordingly, the Class M Certificates will not be
entitled to any prepayments for at least the first [___] years after the
Delivery Date (unless the Certificate Principal Balances of the Senior
Certificates (other than the Principal Only Certificates) are reduced to zero
before the end of such period), and may receive no prepayments or a
disproportionately large or small portion of prepayments (relative to the Class
M Percentage) during certain periods thereafter. See "--Principal Distributions
on the Senior Certificates" herein.
Allocation of Losses; Subordination
The Subordination provided to the Senior Certificates by the Class B
Certificates and Class M Certificates and the Subordination provided to the
Class M Certificates by the Class B Certificates will cover Realized Losses on
the [Mortgage Loans] [Contracts] that are Defaulted [Mortgage] [Contract]
Losses, Fraud Losses, Bankruptcy Losses (each as defined in the Prospectus) and
Special Hazard Losses (as defined herein), to the extent described herein. Any
Realized Losses which do not constitute Excess Special Hazard Losses, Excess
Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses will be allocated
first, to the Class B Certificates; second, to the Class M Certificates, in each
case until the Certificate Principal Balance of the Class M Certificates have
been reduced to zero; and third, if any such Realized Losses are on any item of
Discount Mortgage Collateral, to the Principal Only Certificates in an amount
equal to the related Discount Fraction of the principal portion of such Realized
Losses, and the remainder of such Realized Losses and the entire amount of such
Realized Losses on Non-Discount Mortgage Collateral will be allocated to the
remaining classes of Senior Certificates on a pro rata basis. 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. In addition, any
such allocation of a Realized Loss to a Class M Certificate may also be made by
operation of the payment priority to the Senior Certificates set forth under
"--Principal Distributions on the Senior Certificates" and the Class M
Certificates. 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.
Allocations of the principal portion of Debt Service Reductions to the
Class M Certificates and the Class B Certificates will result from the priority
of distributions of the Available Distribution Amount as described herein under
"-- Principal Distributions on the Senior Certificates" and "-- Principal
Distributions on the Class M Certificates," which distributions shall be made
first to the Senior Certificates and then to the Class M Certificates. An
allocation of the interest portion of a Realized Loss as well as the principal
portion of Debt Service Reductions will not reduce the level of Subordination,
as such term is defined herein, until an amount in respect thereof has been
actually disbursed to the Senior Certificateholders or the Class M
Certificateholders, as applicable. The holders of the Offered Certificates will
not be entitled to any additional payments with respect to Realized Losses from
amounts otherwise distributable on any classes of Certificates subordinate
thereto (except in limited circumstances in respect of any Excess Subordinate
Principal Amount and, in the case of the Principal Only Certificates, because an
amount equal to the Discount Fraction of the Stated Principal Balance of an item
of Discount Mortgage Collateral will be paid to the Principal Only Certificates
as described in clause (3) of the definition of "Class A-4 Principal
Distribution Amount"). Accordingly, the Subordination provided to the Senior
Certificates (other than the Principal Only Certificates) and to the Class M
Certificates by the Class B Certificates with respect to Realized Losses
allocated on any Distribution Date will be effected primarily by increasing the
Senior Percentage or the Class M Percentage of future distributions of principal
of the remaining [Mortgage Loans] [Contracts]. Because the Discount Fraction of
the Discount Mortgage Collateral will not change over time, the protection from
losses provided to the Principal Only Certificates by the Subordinate
Certificates is limited to the prior right of the Principal Only Certificates to
receive distributions in respect of principal as described herein under "--
Principal Distributions on the Senior Certificates". Furthermore, principal
losses on the [Mortgage Loans]
NY1-IN61845.9
S-45
<PAGE>
[Contracts] that are not covered by Subordination will be allocated to the
Principal Only Certificates only to the extent they occur on any item of
Discount Mortgage Collateral and only to the extent of the related Discount
Fraction of such losses. Such allocation of principal losses on the Discount
Mortgage Collateral may result in such losses being allocated in an amount that
is greater or less than would have been the case had such losses been allocated
in proportion to the Certificate Principal Balance of the Principal Only
Certificates. Thus, the Senior Certificates (other than the Principal Only
Certificates) will bear the entire amount of losses that are not covered by
Subordination other than the amount allocable to the Principal Only
Certificates, which losses will be allocated among all classes of Senior
Certificates other than the Principal Only Certificates on a pro rata basis in
proportion to their respective Certificate Principal Balances.
Any Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses, Extraordinary Losses or other losses of a type not covered by
the Subordination on Non-Discount Mortgage Collateral will be allocated on a pro
rata basis among the Senior Certificates (other than the Principal Only
Certificates), Class M Certificates and Class B Certificates (any such Realized
Losses so allocated to the Senior Certificates (other than the Principal Only
Certificates) or Class M Certificates will be allocated without priority among
the various classes of Senior Certificates (other than the Principal Only
Certificates) or Class M Certificates). The principal portion of such losses on
Discount Mortgage Collateral will be allocated to the Principal Only
Certificates in an amount equal to the related Discount Fraction thereof, and
the remainder of such losses on Discount Mortgage Collateral will be allocated
among the remaining Certificates on a pro rata basis. An allocation of a
Realized Loss on a "pro rata basis" among two or more classes of Certificates
means an allocation to each 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] [Contract] 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]
[Contract] was finally liquidated, after application of all amounts recovered
(net of amounts reimbursable to the [Master] Servicer[s] [or the Subservicer]
for Advances and expenses, including attorneys' fees) towards interest and
principal owing on the [Mortgage Loan] [Contract]. 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 the
Senior Interest Distribution Amount, the Class A-4 Principal Distribution Amount
and the Senior Principal Distribution Amount, on each Distribution Date, holders
of Senior Certificates have a right to distributions of the Available
Distribution Amount that is prior to the rights of the holders of the
Subordinate Certificates, to the extent necessary to satisfy the Senior Interest
Distribution Amount, the Class A-4 Principal Amount and the Senior Principal
Distribution Amount. Similarly, holders of the Class M Certificates have a right
to distributions of the Available Distribution Amount prior to the rights of
holders of the Class B Certificates.
The application of the Senior Accelerated Distribution Percentage (when
it exceeds the Senior Percentage) to determine the Senior Principal Distribution
Amount will accelerate the amortization of the Senior Certificates (other than
the Principal Only Certificates) relative to the actual amortization of the
[Mortgage Loans] [Contracts]. The Principal Only Certificates will not receive
more than the Discount Fraction of any unscheduled payment relating to any item
of Discount Mortgage Collateral. To the extent that the Senior Certificates
(other than the Principal Only Certificates) are amortized faster than the
[Mortgage Loans] [Contracts], in the absence of offsetting Realized Losses
allocated to the Certificates, the percentage interest evidenced by the Senior
Certificates (other than the Principal Only Certificates) in the Trust Fund will
be decreased (with a corresponding increase in the interest in the Trust Fund
evidenced by the Subordinate Certificates), thereby increasing, relative to
their respective Certificate Principal Balances, the Subordination afforded to
the Senior Certificates by the Subordinate Certificates collectively.
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses (the "Special Hazard Amount") through
Subordination shall initially be equal to $[__________]. As of any date
NY1-IN61845.9
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<PAGE>
of determination following the Cut-off Date, the Special Hazard Amount shall
equal $[__________] less the sum of (i) any amounts allocated through
Subordination in respect of Special Hazard Losses and (ii) 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 the
Subordination will not cover Extraordinary Losses, and Special Hazard Losses
will not exceed the lesser of the cost of repair or replacement of the related
Mortgaged Properties.
The aggregate amount of Realized Losses which may be allocated in
connection with Fraud Losses (the "Fraud Loss Amount") through Subordination
shall initially be equal to $[__________]. As of any date of determination after
the Cut-off Date, the Fraud Loss Amount shall equal (i) prior to the first
anniversary of the Cut-off Date an amount equal to [____]% of the aggregate
principal balance of all of the [Mortgage Loans] [Contracts] as of the Cut-off
Date minus the aggregate amounts allocated through Subordination with respect to
Fraud Losses up to such date of determination and (ii) from the [__________] to
the [__________] anniversary of the Cut-off Date, an amount equal to (a) the
lesser of (1) the Fraud Loss Amount as of the most recent anniversary of the
Cut-off Date and (2) [____]% of the aggregate principal balance of all of the
[Mortgage Loans] [Contracts] as of the most recent anniversary of the Cut-off
Date minus (b) the aggregate amounts 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 [__________] anniversary of the
Cut-off Date the Fraud Loss Amount shall be zero and Fraud Losses shall not be
allocated through Subordination.
The aggregate amount of Realized Losses which may be allocated in
connection with Bankruptcy Losses (the "Bankruptcy Amount") through
Subordination will initially be equal to $[__________]. As of any date of
determination on or after the [__________] anniversary of the Cut-off Date, the
Bankruptcy Amount will equal the excess, if any, of (i) the lesser of (a) the
Bankruptcy Amount as of the business day next preceding the most recent
anniversary of the Cut-off Date (the "Relevant Anniversary") and (b) an amount
calculated pursuant to the terms of the Pooling and Servicing Agreement, which
amount as calculated will provide for a reduction in the Bankruptcy Amount, over
(ii) the aggregate amount of Bankruptcy Losses allocated solely to the
Subordinate Certificates through Subordination since the Relevant Anniversary.
Notwithstanding the foregoing, the provisions relating to Subordination
will not be applicable in connection with a Bankruptcy Loss so long as the
[Master] Servicer[s] [has] [have] notified the Trustee in writing that the
[Master] Servicer[s] [is] [are] diligently pursuing any remedies that may exist
in connection with the representations and warranties made regarding the related
[Mortgage Loan] [Contract] and either (i) the related [Mortgage Loan] [Contract]
is not in default with regard to payments due thereunder or (ii) delinquent
payments of principal and interest under the related [Mortgage Loan] [Contract]
and any premiums on any applicable Primary Hazard Insurance Policy and any
related escrow payments in respect of such [Mortgage Loan] [Contract] are being
advanced on a current basis by the [Master] Servicer[s] or a Subservicer.
[The Special Hazard Amount, Fraud Amount and Bankruptcy Amount are
subject to further reduction with consent of the Rating Agencies.]
[Advances]
[Prior to each Distribution Date, the [Master] Servicer[s] [is] [are]
required to make Advances (out of its own funds[, advances made by a
Subservicer] or funds held in the Custodial Account (as described in the
Prospectus) for future distribution or withdrawal) with respect to any payments
of principal and interest (net of the related Servicing Fees) which were due on
the [Mortgage Loans] [Contracts] 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[s] to be recoverable from related late
collections, Insurance Proceeds, Liquidation Proceeds or amounts otherwise
payable to the holders of the Subordinate Certificates. The purpose of making
such Advances is to maintain a regular cash flow to the Certificateholders,
rather than to guarantee or insure against losses. The [Master] Servicer[s] will
not be required to make any Advances with respect to reductions in the amount of
the monthly
NY1-IN61845.9
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<PAGE>
payments on the [Mortgage Loans] [Contracts] due to Debt Service Reductions or
the application of the Relief Act or similar legislation or regulation. Any
failure by the [Master] Servicer[s] 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[s], 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[s] on a
first priority basis from either (a) late collections, Insurance Proceeds and
Liquidation Proceeds from the [Mortgage Loans] [Contracts] as to which such
unreimbursed Advance was made or (b) as to any Advance that remains unreimbursed
following the final liquidation of the related item of [Mortgage Loans]
[Contracts], from amounts otherwise distributable on the Subordinate
Certificates; provided, however, that only the Subordinate Percentage of such
Advances are reimbursable from amounts otherwise distributable on the
Subordinate Certificates in the event that such Advances were made with respect
to delinquencies which ultimately were determined to be Excess Special Hazard
Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses
and the Senior Percentage of such Advances which may not be so reimbursed from
amounts otherwise distributable on the Subordinate Certificates may be
reimbursed to the [Master] Servicer[s] out of any funds in the Custodial Account
or Certificate Account prior to distributions on the Senior Certificates. In the
latter event, the aggregate amount otherwise distributable on the Senior
Certificates will be reduced by an amount equal to the Senior Percentage of such
Advances. In addition, if the Certificate Principal Balance of the Subordinate
Certificates has been reduced to zero, any Advances previously made which are
deemed by the [Master] Servicer[s] to be nonrecoverable from related late
collections, Insurance Proceeds and Liquidation Proceeds may be reimbursed to
the [Master] Servicer[s] out of any funds in the Custodial Account or
Certificate Account prior to distributions on the Senior Certificates.]
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
General
The yields to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by the rate and timing of principal
payments on the [Mortgage Loans] [Contracts] and the amount and timing of
Mortgagor defaults resulting in Realized Losses. Such yields may be adversely
affected by a higher or lower than anticipated rate of principal payments on the
[Mortgage Loans] [Contracts] in the Trust Fund. The rate of principal payments
on such [Mortgage Loans] [Contracts] will in turn be affected by the
amortization schedules of the [Mortgage Loans] [Contracts], the rate and timing
of principal prepayments thereon by the Mortgagors, liquidations of defaulted
[Mortgage Loans] [Contracts] and repurchases of [Mortgage Loans] [Contracts] due
to certain breaches of representations. The timing of changes in the rate of
prepayments, liquidations and repurchases of the [Mortgage Loans] [Contracts]
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] [Contracts] 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 Offered Certificates.
The [Mortgage Loans] [Contracts] may be prepaid by the Mortgagors at
any time without payment of any prepayment fee or penalty. The [Mortgage Loans]
[Contracts] contain due-on-sale clauses. As described under "Description of the
Certificates-- Principal Distributions on the Senior Certificates" and "--
Principal Distributions on the Class M Certificates" herein, during certain
periods all or a disproportionately large percentage of principal prepayments on
the [Mortgage Loans] [Contracts] will be allocated among the Senior Certificates
(other than the Principal Only Certificates) and, during certain periods, no
principal prepayments or a disproportionately small or large portion of
principal prepayments on the [Mortgage Loans] [Contracts] relative to the Class
M Percentage will be distributed on the Class M Certificates. Prepayments,
liquidations and purchases of the [Mortgage Loans] [Contracts] will result in
distributions to holders of the Offered Certificates of principal amounts that
would otherwise be distributed over the remaining terms of the [Mortgage Loans]
[Contracts]. Factors affecting prepayment (including defaults and liquidations)
of [mortgage loans] [manufactured housing contracts] include changes in
borrowers' housing needs, job transfers, unemployment, borrowers' net equity in
the mortgaged properties, changes
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in the value of the mortgaged properties, mortgage market interest rates,
solicitations and servicing decisions. In addition, if prevailing mortgage
interest rates fell significantly below the Mortgage Rates on the [Mortgage
Loans] [Contracts], the rate of prepayments (including refinancings) would be
expected to increase. Conversely, if prevailing mortgage interest rates rose
significantly above the Mortgage Rates on the [Mortgage Loans] [Contracts], the
rate of prepayments on the [Mortgage Loans] [Contracts] would be expected to
decrease.
The rate of defaults on the [Mortgage Loans] [Contracts] will also
affect the rate and timing of principal payments on the [Mortgage Loans]
[Contracts]. In general, defaults on [mortgage loans] [manufactured housing
contracts] are expected to occur with greater frequency in their early years.
[Although little data is available with respect to the rate of default on Junior
Mortgage Loans, the rate of default of such Mortgage Loans may be greater than
that of mortgage loans secured by first liens on comparable properties.] The
rate of default on [Mortgage Loans] [Contracts] which are refinance or limited
documentation mortgage loans, and on [Mortgage Loans] [Contracts] with high
[Combined] Loan-to-Value Ratios, may be higher than for other types of [Mortgage
Loans] [Contracts]. Furthermore, the rate and timing of prepayments, defaults
and liquidations on the [Mortgage Loans] [Contracts] 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.
After the Certificate Principal Balances of the Class B Certificates
have been reduced to zero, the yield to maturity on the class of Class M
Certificates will be extremely sensitive to losses on the [Mortgage Loans]
[Contracts] (and the timing thereof) because the entire amount of losses that
are covered by Subordination will be allocated to such Class M Certificates.
Furthermore, because principal distributions are paid to certain classes of
Senior Certificates before other classes, holders of classes having a later
priority of payment bear a greater risk of losses than holders of classes having
earlier priorities for distribution of principal.
Because the Mortgage Rates on the [Mortgage Loans] [Contracts] and the
Pass-Through Rates on the Offered Certificates (other than the Stripped
Interests Certificates) are fixed, such rates will not change in response to
changes in market interest rates. The Pass-Through Rate on the Stripped
Interests Certificates is based on the weighted average of the Pool Strip Rates
on the [Mortgage Loans] [Contracts] and such Pool Strip Rates will not change in
response to changes in market interest rates. Accordingly, if market interest
rates or market yields for securities similar to the Offered Certificates were
to rise, the market value of the Offered Certificates may decline.
[Although the Mortgage Rates on the [Mortgage Loans] [Contracts] will
adjust annually, such increases and decreases will be limited by the Periodic
Rate Cap, the Maximum Mortgage Rate and the Minimum Mortgage Rate, if
applicable, on each [Mortgage Loan] [Contract], and will be based on the Index
(which may not rise and fall consistently with prevailing mortgage rates) plus
the related Gross Margin (which may be different from the prevailing margins on
other mortgage loans). As a result, the Mortgage Rates on the [Mortgage Loans]
[Contracts] at any time may not equal the prevailing rates for other
adjustable-rate loans and accordingly, the rate of prepayment may be lower or
higher than would otherwise be anticipated. In addition, because all of the
[Mortgage Loans] [Contracts] have Maximum Mortgage Rates, if prevailing mortgage
rates were to increase above the Maximum Mortgage Rates, the rate of prepayment
on the [Mortgage Loans] [Contracts] may be expected to decrease, and the yield
to investors may be less than prevailing mortgage rates. In general, if
prevailing mortgage rates fall significantly below the Mortgage Rates on the
[Mortgage Loans] [Contracts], the rate of prepayments (including refinancings)
will be expected to increase. Conversely, if prevailing mortgage rates rise
significantly above the Mortgage Rates on the [Mortgage Loans] [Contracts], the
rate of prepayment on the [Mortgage Loans] [Contracts] will be expected to
decrease.]
As described above under "Description of the Offered
Certificates--Allocation of Losses; Subordination" and "--Advances," amounts
otherwise distributable to the Class M Certificates may be made available to
protect the holders of the Senior Certificates against interruptions in
distributions due to certain Mortgagor delinquencies, to the extent not covered
by Advances. Such delinquencies may affect the yields to investors in the Class
M Certificates, and, even if subsequently cured, may affect the timing of the
receipt of distributions by the holders of the Class M Certificates.
Furthermore, the Principal Only Certificates will share in the principal portion
of Realized Losses on the [Mortgage Loans] [Contracts] only to the extent that
they are incurred with respect to Discount
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Mortgage Collateral and only to the extent of the related Discount Fraction;
thus, after the Class B Certificates and the Class M Certificates are retired or
in the case of Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses and Extraordinary Losses, the Senior Certificates (other than
the Principal Only Certificates) may be affected to a greater extent by losses
on Non-Discount Mortgage Collateral than losses on Discount Mortgage Collateral.
In addition, a higher than expected rate of delinquencies or losses will also
affect the rate of principal payments on the Class M Certificates if such
delinquencies or losses cause the scheduled reduction of the Senior Accelerated
Distribution Percentage to be delayed.
The amount of interest otherwise payable to holders of the Offered
Certificates will be reduced by any interest shortfalls to the extent not
covered by Subordination or by the [Master] Servicer[s] as described below,
including Prepayment Interest Shortfalls and, in the case of each class of the
Class M Certificates, the interest portions of Realized Losses allocated solely
to such class of Certificates. See "Yield Considerations" in the Prospectus and
"Description of the Offered Certificates-- Interest Distributions" herein for a
discussion of the effect of principal prepayments on the [Mortgage Loans]
[Contracts] on the yields to maturity of the Offered Certificates and certain
possible shortfalls in the collection of interest. [Prior to the Accretion
Termination Date, interest shortfalls allocated to the Accrual Certificates will
reduce the amount added to the Certificate Principal Balance thereof in respect
of Accrued Certificate Interest and will result in a corresponding reduction of
the amount available for distributions in respect of principal on the Senior
Certificates. Furthermore, because such interest shortfalls will result in the
Certificate Principal Balance of the Accrual Certificates being less than it
would be in the absence of such interest shortfalls, the amount of interest that
will accrue in the future on the Accrual Certificates and be available for
distributions in respect of principal on the Senior Certificates will be
reduced. Accordingly, the weighted average lives and assumed final Distribution
Dates of the Senior Certificates will be extended.]
With respect to any Distribution Date, Prepayment Interest Shortfalls
resulting from prepayments in full for such Distribution Date will be offset by
the [Master] Servicer[s] to the extent such Prepayment Interest Shortfalls do
not exceed [one-twelfth of _____% of the Stated Principal Balance of the
[Mortgage Loans] [Contracts] immediately preceding such Distribution Date].
Thus, the yield to investors in the Offered Certificates generally will not be
affected by Prepayment Interest Shortfalls allocable thereto resulting from
prepayments in full in the month preceding any Distribution Date to the extent
that such shortfalls do not exceed the amount offset by the [Master]
Servicer[s].
The yield to maturity on each class of the Offered Certificates will
depend on the prices paid by the holders of the Offered Certificates and the
related Pass-Through Rate. The extent to which the yield to maturity of an
Offered Certificate is sensitive to prepayments will depend, in part, upon the
degree to which it is purchased at a discount or premium. In general, if a class
of Offered Certificates is purchased at a premium and principal distributions
thereon occur at a rate faster than anticipated at the time of purchase, the
investor's actual yield to maturity will be lower than that assumed at the time
of purchase. Conversely, if a class of Offered Certificates is purchased at a
discount and principal distributions thereon occur at a rate slower than that
assumed at the time of purchase, the investor's actual yield to maturity will be
lower than that assumed at the time of purchase. For additional considerations
relating to the yield on the Certificates, see "Yield Considerations" and
"Maturity and Prepayment Considerations" in the Prospectus.
[A number of factors affect the performance of the Index and may cause
the Index to move in a manner different from other indices. To the extent that
the Index may reflect changes in the general level of interest rates less
quickly than other indices, in a period of rising interest rates, increases in
the yield to Offered Certificateholders due to such rising interest rates may
occur later than that which would be produced by other indices, and in a period
of declining rates, the Index may remain higher than other market interest rates
which may result in a higher level of prepayments of the [Mortgage Loans]
[Contracts], which adjust in accordance with the Index, than of [mortgage loans]
[contracts] which adjust in accordance with other indices.]
The assumed final Distribution Date with respect to each class of the
Offered Certificates is [_____ __, ____] which is the Distribution Date
[immediately] [___ months] following the latest scheduled maturity date for any
[Mortgage Loan] [Contract]. No event of default, change in the priorities for
distribution among the various classes or other provisions under the Pooling and
Servicing Agreement will arise or become applicable solely by
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reason of the failure to retire the entire Certificate Principal Balance of any
class of Certificates on or before its assumed final Distribution Date.
"Weighted Average Life" 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 Offered
Certificates will be influenced by, among other things, the rate at which
principal of the [Mortgage Loans] [Contracts] is paid, which may be in the form
of scheduled amortization, prepayments or liquidations.
[Prepayments on [mortgage loans] [manufactured housing contracts] are
commonly measured relative to a prepayment standard or model. The model used in
this Prospectus Supplement, the standard prepayment assumption ("SPA"),
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of new [mortgage loans] [manufactured
housing contracts]. A prepayment assumption of 100% SPA assumes constant
prepayment rates of [___]% per annum of the then outstanding principal balance
of such mortgage loans in the first month of the life of the mortgage loans and
an additional [___]% per annum in each month thereafter until the thirtieth
month. Beginning in the thirtieth month and in each month thereafter during the
life of the [mortgage loans] [manufactured housing contracts], 100% SPA assumes
a constant prepayment rate of [___]% per annum each month. As used in the table
below, "0% SPA" assumes prepayment rates equal to 0% of SPA (no prepayments).
Correspondingly, "[___]% SPA" assumes prepayment rates equal to [___]% of SPA,
and so forth. SPA does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
[mortgage loans] [manufactured housing contracts], including the [Mortgage
Loans] [Contracts].]
Modeling Assumptions
The table set forth below has been prepared on the basis of certain
assumptions (the "Modeling Assumptions") as described below regarding the
weighted average characteristics of the [Mortgage Loans] [Contracts] that are
expected to be included in the Trust Fund as described under "Description of the
[Mortgage] [Contract] Pool" herein and the performance thereof. The table
assumes, among other things, that: (i) as of the date of issuance of the Offered
Certificates, the aggregate principal balance of the Discount Mortgage
Collateral is $[__________] and each item of Discount Mortgage Collateral has a
Mortgage Rate of [___]% per annum, an original term to maturity of [___] months,
a remaining term to maturity of [___] months and a related Servicing Fee Rate of
approximately [___]% per annum, and the aggregate principal balance of the
Non-Discount Mortgage Collateral is $[___________] and each item of Non-Discount
Mortgage Collateral has a Mortgage Rate of [___]% per annum, an original term to
maturity of [___] months, a remaining term to maturity of [___] months and a
related Servicing Fee Rate of approximately [___]% per annum; (ii) the scheduled
monthly payment for each [Mortgage Loan] [Contract] has been based on its
outstanding balance, interest rate and remaining term to maturity, such that the
[Mortgage Loan] [Contract] will amortize in amounts sufficient for repayment
thereof over its remaining term to maturity; (iii) none of the Mortgage
Collateral Sellers, the [Master] Servicer[s] or the Company will repurchase any
[Mortgage Loan] [Contract] and neither the [Master] Servicer[s] nor the Company
exercises any option to purchase the [Mortgage Loans] [Contracts] and thereby
cause a termination of the Trust Fund; (iv) there are no delinquencies or
Realized Losses on the [Mortgage Loans] [Contracts], and principal payments on
the [Mortgage Loans] [Contracts] will be timely received together with
prepayments, if any, at the respective constant percentages of SPA 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 [________ 25, 199_]; (vii) payments on
the [Mortgage Loans] [Contracts] 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 [_____ __, 199_].
SOME OF THE FOREGOING MODELING ASSUMPTIONS REGARDING THE
CHARACTERISTICS OF THE [MORTGAGE LOANS] [CONTRACTS] AND THE CERTIFICATES
DIFFER FROM ACTUAL CHARACTERISTICS THEREOF.
The actual characteristics and performance of the [Mortgage Loans]
[Contracts] will differ from the Modeling Assumptions used in constructing the
table set forth below, which is hypothetical in nature and is provided
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only to give a general sense of how the principal cash flows might behave under
varying prepayment scenarios. For example, it is unlikely that the [Mortgage
Loans] [Contracts] will prepay at a constant level of SPA until maturity or that
all of the [Mortgage Loans] [Contracts] will prepay at the same level of SPA.
Moreover, the diverse remaining terms to maturity of the [Mortgage Loans]
[Contracts] could produce slower or faster principal distributions than
indicated in the table at the various constant percentages of SPA specified,
even if the weighted average remaining term to maturity of the [Mortgage Loans]
[Contracts] is as assumed. Any difference between such Modeling Assumptions and
the actual characteristics and performance of the [Mortgage Loans] [Contracts],
or actual prepayment or loss experience, will affect the percentages of initial
Certificate Principal Balances outstanding over time and the weighted average
lives of the classes of Offered Certificates.
Subject to the foregoing discussion and assumptions, the following
table indicates the Weighted Average Life of each class of Offered Certificates
(other than the Stripped Interests Certificates [and Residual Certificates]) and
sets forth the percentages of the initial Certificate Principal Balance of each
such class of Offered Certificates that would be outstanding after each of the
dates shown at various percentages of SPA.
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Percent of Initial Certificate Principal Balance Outstanding at the Following
Percentages of SPA
Distribution Date Class A-1 Class A-2
- - -----------------
---------------------
--------------------- -------------------
0%[ ]%[ ]%[ ][ ]% 0%[ ][ ][ ]% [ ]%
--------------------- ---------------------
Class A-4 Class M
Initial Percentage
----------------- ---------------------
0% [ [% ][ [% ]% 0%[ ][ ][ ][ ]%
-- --------------- -------------------
Weighted Average
Life Years**
* Indicates a number that is greater than zero but less than 0.5%.
** [The Weighted Average Life of a Certificate of any class is determined by
(i) multiplying the amount of each distribution in reduction of
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding
the results, and (iii) dividing the sum by the initial Certificate
Principal Balance of the Certificate.]
This table has been prepared based on the Modeling Assumptions (including the
assumptions regarding the characteristics and performance of the [Mortgage
Loans] [Contracts], which differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
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Principal Only Certificate and Stripped Interests Certificate Yield
Considerations
The amounts payable with respect to the Principal Only Certificates
derive only from principal payments on the Discount Mortgage Collateral. As a
result, the yield on the Principal Only Certificates will be adversely affected
by slower than expected payments of principal (including prepayments, defaults
and liquidations) on the Discount Mortgage Collateral.
The yield to maturity on the Stripped Interests Certificates will be
extremely sensitive to both the timing of receipt of principal prepayments and
the overall rate of principal prepayments and defaults on the [Mortgage Loans]
[Contracts], which rate may fluctuate significantly over time. Investors in the
Stripped Interests Certificates should fully consider the risk that a rapid rate
of principal prepayments on the [Mortgage Loans] [Contracts] could result in the
failure of such investors to fully recover their investments.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Principal Only Certificates and Stripped Interests Certificates
to various constant rates of prepayment on the [Mortgage Loans] [Contracts] by
projecting the monthly aggregate payments on the Principal Only Certificates and
Stripped Interests Certificates and computing the corresponding pre-tax yields
to maturity on a corporate bond equivalent basis, based on the assumptions
described in clauses (i) through (ix) of the Modeling Assumptions, including the
assumptions regarding the characteristics and performance of the [Mortgage
Loans] [Contracts], which differ from the actual characteristics and performance
thereof and assuming the aggregate purchase prices set forth below and assuming
further the Pass-Through Rate and Notional Amount of the Stripped Interests
Certificates are as set forth herein. Any differences between the Modeling
Assumptions and the actual characteristics and performance of the [Mortgage
Loans] [Contracts] and of the Certificates may result in yields being different
from those shown in such tables. Discrepancies between assumed and actual
characteristics and performance underscore the hypothetical nature of the
tables, which are provided only to give a general sense of the sensitivity of
yields in varying prepayment scenarios.
Pre-Tax Yield to Maturity of the Principal Only
Certificates at the Following Percentages of SPA
Assumed Purchase Price 0% [ ]% [ ]%
- - ---------------------- ----- ------- -------
$[------------] [----]% [----]% [----]%
[ ]% [ ]% [ ]%
- - -------- ------- -------
[----]% [----]%
Pre-Tax Yield to Maturity of the Stripped Interests
Certificates at the Following Percentages of SPA
Assumed Purchase Price 0% [ ]% [ ]%
- - ---------------------- ----- ------- -------
$[------------] [----]% [----]% [----]% [----]%
[ ]% [ ]% [ ]%
- - ------- ------- -------
[----]% [----]%
Each pre-tax yield to maturity set forth in the preceding tables was calculated
by determining the monthly discount rate which, when applied to the assumed
stream of cash flows to be paid on the Principal Only Certificates or Stripped
Interests Certificates, as applicable, would cause the discounted present value
of such assumed stream of cash flows to equal the assumed purchase price listed
in the related table. Accrued interest is included in the assumed purchase price
of the Stripped Interests Certificates and is used in computing the corporate
bond equivalent yields shown in the table relating to the Stripped Interests
Certificates. These yields do not take into account the different interest rates
at which investors may be able to reinvest funds received by them as
distributions on the Principal Only Certificates and
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Stripped Interests Certificates, and thus do not reflect the return on any
investment in such Certificates when any reinvestment rates other than the
discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the [Mortgage Loans] [Contracts] will be
prepaid according to one particular pattern. For this reason, and because the
timing of cash flows is critical to determining yields, the pre-tax yields to
maturity on the Principal Only Certificates and Stripped Interests Certificates
are likely to differ from those shown in the tables, even if all of the
[Mortgage Loans] [Contracts] prepay at the indicated constant percentages of SPA
over any given time period or over the entire life of the Certificates. A lower
than anticipated rate of principal prepayments on the Discount Mortgage
Collateral will have a material adverse effect on the yield to maturity of the
Principal Only Certificates. The rate and timing of principal prepayments on the
Discount Mortgage Collateral may differ from the rate and timing of principal
prepayments on the [Mortgage] [Contract] Pool. In addition, because the Discount
Mortgage Collateral have Net Mortgage Rates that are lower than the Net Mortgage
Rates of the Non-Discount Mortgage Collateral, and because [Mortgage Loans]
[Contracts] with lower Net Mortgage Rates are likely to have lower Mortgage
Rates, the Discount Mortgage Collateral is generally likely to prepay under most
circumstances at a lower rate than the Non-Discount Mortgage Collateral. In
addition, holders of the Stripped Interests Certificates generally have rights
to relatively larger portions of interest payments on [Mortgage Loans]
[Contracts] with higher Mortgage Rates; thus, the yield on the Stripped
Interests Certificates will be materially adversely affected to a greater extent
than on the other Offered Certificates if the [Mortgage Loans] [Contracts] with
higher Mortgage Rates prepay faster than the [Mortgage Loans] [Contracts] with
lower Mortgage Rates. Because [Mortgage Loans] [Contracts] having higher Pool
Strip Rates generally have higher Mortgage Rates, such [Mortgage Loans]
[Contracts] are generally more likely to be prepaid under most circumstances
than are [Mortgage Loans] [Contracts] having lower Pool Strip Rates.
There can be no assurance that the [Mortgage Loans] [Contracts] will
prepay at any particular rate or that the yields on the Principal Only
Certificates and Stripped Interests Certificates will conform to the yields
described herein. Moreover, the various remaining terms to maturity of the
[Mortgage Loans] [Contracts] could produce slower or faster principal
distributions than indicated in the preceding tables at the various constant
percentages of SPA specified, even if the weighted average remaining term to
maturity of the [Mortgage Loans] [Contracts] is as assumed. Investors are urged
to make their investment decisions based on their determinations as to
anticipated rates of prepayment under a variety of scenarios. Investors in the
Stripped Interests Certificates should fully consider the risk that a rapid rate
of prepayments on the [Mortgage Loans] [Contracts] could result in the failure
of such investors to fully recover their investments.
For additional considerations relating to the yields on the
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
Additional Yield Considerations Applicable Solely to the Residual Certificates
The Residual Certificateholders' after-tax rate of return on their
Residual Certificates will reflect their pre-tax rate of return, reduced by the
taxes required to be paid with respect to the Residual Certificates. Holders of
Residual Certificates may have tax liabilities with respect to their Residual
Certificates during the early years of the REMIC's term that substantially
exceed any distributions payable thereon during any such period. In addition,
holders of Residual Certificates may have tax liabilities with respect to their
Residual Certificates the present value of which substantially exceeds the
present value of distributions payable thereon and of any tax benefits that may
arise with respect thereto. Accordingly, the after-tax rate of return on the
Residual Certificates may be negative or may otherwise be significantly
adversely affected. The timing and amount of taxable income attributable to the
Residual Certificates will depend on, among other things, the timing and amounts
of prepayments and losses experienced with respect to the [Mortgage] [Contract]
Pool.
The Residual Certificateholders should consult their tax advisors as to
the effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Residual Certificates on after-tax rates of
return on the Residual Certificates. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
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POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Senior Certificates. [The Trustee will
appoint ______________________ to serve as Custodian in connection with the
Certificates.] The Senior Certificates will be transferable and exchangeable at
the corporate trust office of the Trustee, which will serve as Certificate
Registrar and Paying Agent. The Company will provide a prospective or actual
Certificateholder without charge, on written request, a copy (without exhibits)
of the Pooling and Servicing Agreement. Requests should be addressed to the
[__________] of Residential Assets Securities Corporation,
[____________________]. 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 Servicer[s]]
[_________] [Various Servicers approved by the Master Servicer] will
provide customary servicing functions with respect to the [Mortgage Loans]
[Contracts] pursuant to [a] [the Pooling and] Servicing Agreement[s]. [Among
other things, the Servicer[s] are obligated, under certain circumstances, to
advance delinquent payments of principal and interest with respect to [Mortgage
Loans] [Contracts].]
[Approximately _______% of the [Mortgage Loans] [Contracts] will be
serviced by _________.] [The following information was obtained from the
Servicer[s].
[The following tables set forth certain information concerning the
delinquency experience (including pending foreclosures) on one- to four-family
residential mortgage loans that were being serviced by [Servicer] on __________
__, 199_, __________ __, 199_ and __________ __, 199_.
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Total Loan Portfolio Delinquency Experience
At , 199 At
By No. By Dollar By No.
of Amount of of
Loans Loans Loans
Total Loan Portfolio.......... $
Period of Delinquency
31 to 59 days........
60 to 89 days........
90 days or more (1)..
Foreclosures Pending..........
REO Property..................
Total Delinquent Loans........ $
======= =========== =====
Percent of Loan Portfolio % % %
, 199 At , 199
By Dollar By No. By Dollar
Amount of of Amount of
Loans Loans Loans
(Dollar Amounts in Thousands)
Total Loan Portfolio............. $ $
Period of Delinquency
31 to 59 days...........
60 to 89 days...........
90 days or more (1).....
Foreclosures Pending.............
REO Property.....................
Total Delinquent Loans........... $ $
=========== ====== =
Percent of Loan Portfolio % % %
(1) Does not include foreclosures pending.
The following tables set forth certain information concerning
foreclosed mortgage loans and loan loss experience of [Servicer] as of ________
__, 199_, ________ __, 199_ and ________ __, 199_ with respect to the mortgage
loans referred to above.
Total Loan Portfolio Foreclosure Experience
At or for At or for At or for
the year ended the year ended the year ended
-------- --, -------- --, -------- --,
199 199_ 199
------------------------------------------------
(Dollar Amounts in Thousands)
Total Loan Portfolio...... $ $ $
Average Portfolio Balance. $ $ $
Gross Loss(1)............. $ $ $
Net Loss(2) .............. $ $ $
- - ----------------------
(1) Gross Loss is the sum of gross losses less net recoveries on all mortgage
loans liquidated during the period indicated.
(2) Net Loss is Gross Loss minus all proceeds received in connection with
liquidated mortgage loans from mortgage pool insurance, special hazard insurance
or other insurance and proceeds received from or losses borne by other credit
enhancement, including subordinated certificates, but not including primary
mortgage insurance, hazard insurance or other insurance with respect to specific
mortgaged properties for the period indicated.
There can be no assurance that the delinquency and foreclosure
experience set forth above will be representative of the results that may be
experienced with respect to the Mortgage Loans.]
[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 the Master Servicer and its activities, see "The
Pooling and Servicing Agreement" in the Prospectus.]
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Servicing and Other Compensation and Payment of Expenses
The Servicing Fees for each [Mortgage Loan] [Contract] are payable out
of the interest payments on such [Mortgage Loan] [Contract]. The Servicing Fees
in respect of each [Mortgage Loan] [Contract] will be at least [____]% and not
more than [____]% per annum of the outstanding principal balance of each
[Mortgage Loan] [Contract]. The Servicing Fees consist of (a) servicing
compensation payable to the [Master] Servicer[s] 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[s] as the direct servicer of a [Mortgage Loan] [Contract] for which
there is no subservicer]. The primary compensation to be paid to the [Master]
Servicer[s] in respect of its servicing activities will be [____]% per annum
(the "Servicing Fee Rate") of the outstanding principal balance of each item of
Mortgage Collateral. As described more fully in the Prospectus, a Subservicer is
entitled to servicing compensation in a minimum amount equal to [____]% per
annum of the outstanding principal balance of each item of Mortgage Collateral
serviced by it. The [Master] Servicer[s] is obligated to pay certain ongoing
expenses associated with the Trust Fund and incurred by the [Master] Servicer[s]
in connection with its responsibilities under the Pooling and Servicing
Agreement. See "Description of the Certificates--Servicing and Administration of
Mortgage Collateral" in the Prospectus for information regarding other possible
compensation to the [Master] Servicer[s] and subservicers and for information
regarding expenses payable by the [Master] Servicer[s].
Voting Rights
Certain actions specified in the Prospectus that may be taken by the
Certificateholders evidencing a specified percentage of all undivided interests
in the Trust Fund may be taken by holders of Certificates entitled in the
aggregate to such percentage of the Voting Rights. [__]% of all Voting Rights
will be allocated among all holders of the Certificates (other than the Stripped
Interests Certificates and Residual Certificates) in proportion to their then
outstanding Certificate Principal Balances, and [_]% and [_]% of all Voting
Rights will be allocated among holders of the Stripped Interests Certificates
and the Residual Certificates, in proportion to the percentage interests
evidenced by their respective Certificates.
[Termination]
[The circumstances under which the obligations created by the Pooling
and Servicing Agreement will terminate in respect of the Offered Certificates
are described in "Pooling and Servicing Agreement-- Termination; Retirement of
Certificates" in the Prospectus. The [Master] Servicer[s] or the Company will
have the option on any Distribution Date on which the aggregate principal
balance of the [Mortgage Loans] [Contracts] is less than [__]% of the aggregate
principal balance of the [Mortgage Loans] [Contracts] as of the Cut-off Date
either (i) to purchase all remaining [Mortgage Loans] [Contracts] and other
assets in the Trust Fund, thereby effecting early retirement of the Offered
Certificates or (ii) purchase in whole, but not in part, the Certificates. Any
such purchase of [Mortgage Loans] [Contracts] 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 item of [Mortgage Loans] [Contracts] (or, the fair market value
of the related underlying Mortgaged Properties with respect to defaulted
[Mortgage Loans] [Contracts] as to which title to such underlying Mortgaged
Properties has been acquired if such fair market value is less than such unpaid
principal balance) (net of any unreimbursed Advance attributable to principal)
as of the Distribution Date on which the purchase proceeds are to be distributed
plus (b) accrued interest thereon at the Net Mortgage Rate to, but not
including, the first day of the month of repurchase. Distributions on the
Certificates in respect of any such optional termination will be paid, first, to
the Senior Certificates and the Class M Certificates, pro rata, based on their
respective Certificate Principal Balances, second, to the Class B Certificates.
The proceeds of any such distribution may not be sufficient to distribute the
full amount to each class of Certificates if the purchase price is based in part
on the fair market 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] [Contract]. 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 one month's interest 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[s] or the Company, the [Mortgage Loans] [Contract] 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[s] or the Company.]
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Upon presentation and surrender of the Offered Certificates in
connection with the termination of the Trust Fund or a purchase of Certificates
under the circumstances described above, the holders of the Offered Certificates
will be entitled to receive, subject to the priorities set forth above, an
amount equal to the Certificate Principal Balance of such class plus one month's
interest thereon (or with respect to the Stripped Interests Certificates, one
month's interest on the Notional Amount) at the applicable Pass-Through Rate
plus any previously unpaid Accrued Certificate Interest.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, ______________________,
counsel to the Company, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling and Servicing Agreement,
for federal income tax purposes, the Trust Fund will qualify as a REMIC under
the Code.
For federal income tax purposes, the Residual Certificates will be the
sole class of "residual interests" in the Trust Fund and the Offered
Certificates (other than the Residual Certificates) and Class B Certificates
will represent ownership of "regular interests" in the Trust Fund and will
generally be treated as representing ownership of debt instruments of the Trust
Fund. See "Certain Federal Income Tax Consequences--REMICs" in the Prospectus.
The Certificates will not be treated as having been issued with original
issue discount for federal income tax reporting purposes. The Certificates will,
be treated as having been issued with original issue discount for federal income
tax reporting purposes. The prepayment assumption that will be used in
determining the rate of accrual of original issue discount, market discount and
premium, if any, for federal income tax purposes will be based on the assumption
that subsequent to the date of any determination the [Mortgage Loans]
[Contracts] will prepay at a rate equal to ___% SPA. No representation is made
that the [Mortgage Loans] [Contracts] will prepay at that rate or at any other
rate. See "Certain Federal Income Tax Consequences--REMICs--Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount" in the Prospectus.
The OID Regulations suggest that original issue discount with respect
to securities such as the Stripped Interests Certificates that represent
multiple uncertificated REMIC regular interests, in which ownership interests
will be issued simultaneously to the same buyer and which are required under the
Pooling and Servicing Agreement to be transferred together, should be computed
on an aggregate method. In the absence of further guidance from the IRS,
original issue discount with respect to the uncertificated regular interests
represented by the Stripped Interests Certificates will be reported to the IRS
and the Certificateholders on an aggregate method based on a single overall
constant yield and the prepayment assumption stated above, treating all such
uncertificated regular interests as a single debt instrument as set forth in the
OID Regulations.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder (in particular, the Stripped Interests Certificateholders),
the amount of original issue discount allocable to such period would be zero and
such Certificateholder will be permitted to offset such negative amount only
against future original issue discount (if any) attributable to such
Certificates. Although the matter is not free from doubt, a Stripped Interests
Certificateholder may be permitted to deduct a loss to the extent that his or
her respective remaining basis in such Certificate exceeds the maximum amount of
future payments to which such Certificateholder is entitled, assuming no further
prepayments of the [Mortgage Loans] [Contracts]. Any such loss might be treated
as a capital loss.
Although they are unclear on the issue, in certain circumstances the
OID Regulations appear to permit the holder of a debt instrument to recognize
original issue discount under a method that differs from that used by the
issuer. Accordingly, it is possible that the holder of a Certificate may be able
to select a method for recognizing original issue discount that differs from
that used by the [Master] Servicer[s] in preparing reports to the
Certificateholders and the IRS.
Certain classes of the Offered Certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
such a class of Certificates will be treated as holding a certificate with
amortizable bond premium will depend on such Certificateholder's purchase price
and the distributions remaining to be made on such Certificate
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at the time of its acquisition by such Certificateholder. Holders of such
classes of Certificates should consult their tax advisors regarding the
possibility of making an election to amortize such premium. See "Certain Federal
Income Tax Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates" and "--Premium" in the Prospectus.
The Offered Certificates will be treated as "qualifying real property
loans" under Section 593(d) of the Code, assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(5)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Offered Certificates will be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code generally to the extent that such Offered
Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of
the Code. Moreover, the Offered Certificates (other than the Residual
Certificates) will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. However, prospective investors in Offered Certificates
that will be generally treated as assets described in Section 860G(a)(3) of the
Code should note that, notwithstanding such treatment, any repurchase of such a
Certificate pursuant to the right of the [Master] Servicer[s] or the Company to
repurchase such Offered Certificates may adversely affect any REMIC that holds
such Offered Certificates if such repurchase is made under circumstances giving
rise to a Prohibited Transaction Tax. See "The Pooling and Servicing
Agreement--Termination" herein and "Certain Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Certificates" in
the Prospectus.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
Special Tax Considerations Applicable to Residual Certificates
The REMIC Regulations significantly affect holders of Residual
Certificates. The REMIC Regulations impose restrictions on the transfer or
acquisition of certain residual interests, including the Residual Certificates.
In addition, the REMIC Regulations contain restrictions that apply to: (i)
thrift institutions holding residual interests lacking "significant value" and
(ii) the transfer of "noneconomic" residual interests to United States persons.
Pursuant to the Pooling and Servicing Agreement, the Residual Certificates may
not be transferred to non-United States persons.
The REMIC Regulations provide for the determination of whether a
residual interest has "significant value" for purposes of applying the rules
relating to "excess inclusions" with respect to residual interests. Based on the
REMIC Regulations, the Residual Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess inclusions
with respect to the Residual Certificates, which will be in an amount equal to
all or virtually all of the taxable income includible by holders of the Residual
Certificates. See "Certain Federal Income Tax Consequences-- REMICs--Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, unless "no significant purpose of the
transfer was to impede the assessment or collection of tax." Based on the REMIC
Regulations, the Residual Certificates may constitute noneconomic residual
interests during some or all of their terms for purposes of the REMIC
Regulations and, accordingly, unless no significant purpose of a transfer is to
impede the assessment or collection of tax, transfers of the Residual
Certificates may be disregarded and purported transferors may remain liable for
any taxes due with respect to the income on the Residual Certificates. All
transfers of the Residual Certificates will be subject to certain restrictions
under the terms of the Pooling and Servicing Agreement that are intended to
reduce the possibility of any such transfer being disregarded to the extent that
the Residual Certificates constitute noneconomic residual interests. See
"Certain Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Residual Certificates--Noneconomic REMIC Residual Certificates" in the
Prospectus.
The Residual Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the Trust Fund's
term that significantly exceeds the amount of cash distributions received by
such Residual Certificateholders from the Trust Fund with respect to such
periods. Furthermore, the tax on such income may exceed the cash
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distributions with respect to such periods. Consequently, Residual
Certificateholders should have other sources of funds sufficient to pay any
federal income taxes due in the earlier years of the Trust Funds' term as a
result of their ownership of the Residual Certificates. In addition, the
required inclusion of this amount of taxable income during the Trust Fund's
earlier accrual periods and the deferral of corresponding tax losses or
deductions until later accrual periods or until the ultimate sale or disposition
of a Residual Certificate (or possibly later under the "wash sale" rules of
Section 1091 of the Code) may cause the Residual Certificateholders' after-tax
rate of return to be zero or negative even if the Residual Certificateholders'
pre-tax rate of return is positive. That is, on a present value basis, the
Residual Certificateholders' resulting tax liabilities could substantially
exceed the sum of any tax benefits and the amount of any cash distributions on
such Residual Certificates over their life.
[[Residential Funding[] will be designated as the "tax matters person"
with respect to the Trust Fund as defined in the REMIC Provisions (as defined in
the Prospectus), and in connection therewith will be required to hold not less
than 0.01% of the Residual Certificates.]
Purchasers of the Residual Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in such
Residual Certificates.
For further information regarding the federal income tax consequences
of investing in the Residual Certificates, see "Certain Yield and Prepayment
Considerations--Additional Yield Considerations Applicable Solely to the
Residual Certificates" herein and "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
[FOR TRUSTS TREATED AS GRANTOR TRUSTS]
[Upon the issuance of the Offered Certificates [Orrick, Herrington &
Sutcliffe LLP] [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 be classified as a grantor trust under subpart E,
part I of subchapter J of the Code and not as a partnership or as an association
taxable as a corporation. Accordingly, each holder of a Certificate generally
will be treated as the owner of an interest in the Mortgage Collateral included
in the Trust Fund.
For purposes of the following discussion, the [Class ____ and Class
____] Certificates, a Grantor Trust, which represent an undivided equitable
ownership interest in the principal of the Mortgage Collateral, together with
interest thereon at the Applicable Pass-Through Rate, will be referred to as a
"Grantor Trust Fractional Interest Certificate." The [Class ___ and Class ___]
Certificates, which represent ownership of all or a portion of the difference
between interest paid on the Mortgage Collateral (net of Servicing Fees and any
Spread) and interest paid to the holders of Grantor Trust Fractional Interest
Certificates will be referred to as a "Grantor Trust Strip Certificate." A
Grantor Trust Strip Certificate may also evidence a nominal ownership interest
in the principal of the Mortgage Collateral.
Characterization of Investments in Grantor Trust Certificates
Grantor Trust Fractional Interest Certificates. In the case of Grantor
Trust Fractional Interest Certificates[, subject to the discussion below with
respect to Buy-Down Loans], counsel to the Company will deliver an opinion upon
issuance of the offered certificates that, in general, Grantor Trust Fractional
Interest Certificates will represent interests in (i) "qualifying real property
loans" within the meaning of Section 593(d) of the Code [(except to the extent
representing a Contract secured by a Manufactured Home that is not permanently
fixed to real property)]; (ii) "loans . . . secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code [(except
to the extent representing a Contract secured by a Manufactured Home used on a
transient basis)]; (iii) "obligation[s] (including any participation or
certificate of beneficial ownership therein) which . . . [are] principally
secured by an interest in real property" within the meaning of Section
860G(a)(3)(A) of the Code; and (iv) "real estate assets" within the meaning of
Section 856(c)(5)(A) of the Code. In addition, counsel to the Company will
deliver an opinion that interest on Grantor Trust Fractional Interest
Certificates will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Section
856(c)(3)(B) of the Code.
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[The Mortgage Collateral includes Buy-Down Loans. The characterization
of an investment in Buy-Down Loans will depend upon the precise terms of the
related Buy-Down Agreement, but to the extent that such Buy-Down Loans are
secured by a bank account or other personal property, they may not be treated in
their entirety as assets described in the foregoing sections of the Code. No
directly applicable precedents exist with respect to the federal income tax
treatment or the characterization of investments in Buy-Down Loans. Accordingly,
holders of Grantor Trust Fractional Interest Certificates should consult their
tax advisors with respect to the characterization of investments in Grantor
Trust Fractional Interest Certificates.].
Grantor Trust Strip Certificates. Even if Grantor Trust Strip
Certificates evidence an interest in a Grantor Trust Fund consisting of
[Mortgage Loans] [Contracts] that are "loans . . . secured by an interest in
real property" within the meaning of Section 7701(a)(19)(C)(v) of the Code,
"qualifying real property loans" within the meaning of Section 593(d) of the
Code, and "real estate assets" within the meaning of Section 856(c)(5)(A) of the
Code, and the interest on which is "interest on obligations secured by mortgages
on real property" within the meaning of Section 856(c)(3)(B) of the Code, it is
unclear whether the Grantor Trust Strip Certificates, and the income therefrom,
will be so characterized. The policies underlying such sections (namely, to
encourage or require investments in mortgage loans by thrift institutions and
real estate investment trusts), however, may suggest that such characterization
is appropriate. Counsel to the Company will not deliver any opinion on these
questions. Prospective purchasers to which such characterization of an
investment in Grantor Trust Strip Certificates is material should consult their
tax advisors regarding whether the Grantor Trust Strip Certificates, and the
income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including
any participation or certificate of beneficial ownership therein) which . . .
[are] principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
Taxation of Owners of Grantor Trust Fractional Interest Certificates
Holders of a Grantor Trust Fractional Interest Certificates generally
will be required to report on their federal income tax returns their shares of
the entire income from the Mortgage Collateral (including amounts used to pay
reasonable servicing fees and other expenses) and will be entitled to deduct
their shares of any such reasonable servicing fees and other expenses. Because
of stripped interests, market or original issue discount, or premium, the amount
includible in income on account of a Grantor Trust Fractional Interest
Certificate may differ significantly from the amount distributable thereon
representing interest on the Mortgage Collateral. Under Section 67 of the Code,
an individual, estate or trust holding a Grantor Trust Fractional Interest
Certificate directly or through certain pass-through entities will be allowed a
deduction for such reasonable servicing fees and expenses only to the extent
that the aggregate of such holder's miscellaneous itemized deductions exceeds
two percent of such holder'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 holders of Grantor Trust Fractional Interest Certificates
who are subject to the limitations of either Section 67 or Section 68 of the
Code may be substantial. In addition, Certificateholders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holder's alternative
minimum taxable income. [If multiple classes of Grantor Trust Certificates]
[Although it is not entirely clear, it appears that such fees and expenses
should be allocated among the classes of Grantor Trust Certificates using a
method that recognizes that each such class benefits from the related services.
In the absence of statutory or administrative clarification as to the method to
be used, it currently is intended to base information returns or reports to the
Internal Revenue Service (the "IRS") and Certificateholders on a method that
allocates such expenses among classes of Grantor Trust Certificates with respect
to each period based on the distributions made to each such class during that
period.]
[The IRS has ruled that an unreasonably high servicing fee retained by
a seller or servicer will be treated as a retained ownership interest in
mortgages that constitutes a stripped coupon. For purposes of determining what
constitutes reasonable servicing fees for various types of mortgages the IRS has
established certain "safe harbors." The servicing fees paid with respect to the
Mortgage Collateral are higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing
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compensation. [Information regarding servicing fees paid to the Master Servicer,
the Certificate Administrator, any Servicer, any Sub-Servicer or their
respective affiliates necessary to determine whether the preceding "safe harbor"
rules apply].
[If Certificates subject to the "stripped bond" rules of Section 1286
of the Code.] [Each Grantor Trust Fractional Interest Certificate will be
treated as having been issued with "original issue discount" within the meaning
of Section 1273(a) of the Code, subject, however, to the discussion below
regarding the treatment of certain stripped bonds as market discount bonds and
the discussion regarding de minimis market discount. See "Market Discount"
below. Under the stripped bond rules, the holder of a Grantor Trust Fractional
Interest Certificate (whether a cash or accrual method taxpayer) will be
required to report interest income from its Grantor Trust Fractional Interest
Certificate for each month in an amount equal to the income that accrues on such
Certificate in that month calculated under a constant yield method, in
accordance with the rules of the Code relating to original issue discount.
Application of Strip Bond Rules. The original issue discount on a
Grantor Trust Fractional Interest Certificate will be the excess of such
Certificate's stated redemption price over its issue price. The issue price of a
Grantor Trust Fractional Interest Certificate as to any purchaser will be equal
to the price paid by such purchaser for the Grantor Trust Fractional Interest
Certificate. The stated redemption price of a Grantor Trust Fractional Interest
Certificate will be the sum of all payments to be made on such Certificate, as
well as such Certificate's share of reasonable servicing fees and other
expenses[, other than payments of fixed interest payable periodically (not less
than annually)]. In general, the amount of such income that accrues in any month
would equal the product of such holder's adjusted basis in such Grantor Trust
Fractional Interest Certificate at the beginning of such month (see "Sales of
Grantor Trust Certificates") and the yield of such Grantor Trust Fractional
Interest Certificate to such holder. Such yield would be computed at the rate
(assuming compounding based on the regular interval between payment dates) that,
if used to discount the holder's share of future payments on the Mortgage
Collateral, would cause the present value of those future payments to equal the
price at which the holder purchased such Certificate. In computing yield under
the stripped bond rules, a Certificateholder's share of future payments on the
Mortgage Collateral will not include any payments made in respect of any
ownership interest in the Mortgage Collateral retained by the Company, the
Master Servicer, the Certificate Administrator, any Servicer, any Sub-Servicer
or their respective affiliates, but will include such Certificateholder's share
of any reasonable servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions to the Grantor Trust
Fractional Interest Certificates. It is unclear whether those provisions would
be applicable to the Grantor Trust Fractional Interest Certificates or whether
use of a prepayment assumption may be required or permitted in the absence of
such regulations. It is also uncertain, if a prepayment assumption is used,
whether the assumed prepayment rate would be determined based on conditions at
the time of the first sale of the Grantor Trust Fractional Interest Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Fractional Interest Certificate by that holder. Certificateholders
are advised to consult their tax advisors concerning reporting original issue
discount in general and, in particular, whether a prepayment assumption should
be used in reporting original issue discount with respect to Grantor Trust
Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired
at a price equal to the principal amount of the Mortgage Collateral allocable to
such Certificate, the use of a prepayment assumption would not ordinarily have
any significant effect on the yield used in calculating accruals of interest
income. In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a prepayment assumption would
increase or decrease such yield, and thus accelerate or decelerate,
respectively, the reporting of income.
If a prepayment assumption is not used, then when an item of Mortgage
Collateral prepays in full, the holder of a Grantor Trust Fractional Interest
Certificate acquired at a discount or a premium generally will recognize
ordinary income or loss equal to the difference between the portion of the
prepaid principal amount of the item of Mortgage Collateral that is allocable to
such Certificate and the portion of the adjusted basis of such Certificate that
is allocable to such Certificateholder's interest in the Mortgage Collateral. If
a prepayment assumption is used, it appears that no separate item of income or
loss
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should be recognized upon a prepayment. Instead, a prepayment should be treated
as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "Certain Federal Income Tax Consequences -- Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount" in the Prospectus. It is
unclear what other adjustments would be required to reflect differences between
an assumed prepayment rate and the actual rate of prepayments.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. 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 such Prepayment Assumption or any other rate and
Certificateholders should bear in mind that the use of a representative initial
offering price will mean that such information returns or reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders of each series who bought at that price.
Under Treasury regulation Section 1.1286-1T, certain stripped bonds are
to be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). [Specify if interest payable on a Grantor Trust Fractional Interest
Certificate is more than one percentage point lower than the gross interest rate
payable on the Mortgage Collateral disclose that fact.] If the original issue
discount or market discount on a Grantor Trust Fractional Interest Certificate
determined under the stripped bond rules is less than 0.25% of the stated
redemption price multiplied by the weighted average maturity of the Mortgage
Collateral, then such original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "If Stripped Bond Rules Do Not
Apply" and "Market Discount."]
[If Stripped Bond Rules Do Not Apply. Subject to the discussion below
on original issue discount, [if the stripped bond rules do not apply to a
Grantor Trust Fractional Interest Certificate,] the Certificateholder will be
required to report its share of the interest income on the Mortgage Collateral
in accordance with such Certificateholder's normal method of accounting. The
original issue discount rules will apply to a Grantor Trust Fractional Interest
Certificate to the extent it evidences an interest in Mortgage Collateral issued
with original issue discount.
The original issue discount, if any, on the Mortgage Collateral will
equal the difference between the stated redemption price of such Mortgage
Collateral and its issue price. Under the OID Regulations, the stated redemption
price is equal to the total of all payments to be made on such Mortgage
Collateral other than "qualified stated interest." "Qualified stated interest"
includes interest that is unconditionally payable at least annually at a single
fixed rate, or 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 Mortgage Collateral. In general, the issue price of a
Mortgage Loan or Contract will be the amount received by the borrower from the
lender under the terms of the Mortgage Loan or Contract, less any "points" paid
by the borrower, and the stated redemption price of a Mortgage Loan will equal
its principal amount, unless the Mortgage Loan or Contract provides for an
initial below-market rate of interest or the acceleration or the deferral of
interest payments.
[Describe the manner in which such rules will be applied with respect
to those Mortgage Collateral by the Trustee in preparing information returns to
the Certificateholders and the IRS.]
Notwithstanding the general definition of original issue discount,
original issue discount will be considered to be de minimis if such original
issue discount is less than 0.25% of the stated redemption price multiplied by
the weighted average
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maturity of the Mortgage Collateral. For this purpose, the weighted average
maturity of the Mortgage Collateral will be computed as the sum of the amounts
determined, as to each payment included in the stated redemption price of such
Mortgage Collateral, 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 by (ii) a fraction, the numerator of which is the amount of the payment and
the denominator of which is the stated redemption price of the Mortgage
Collateral. 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" rate or 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 each such payment and the denominator of which is the
outstanding stated principal amount of the Mortgage Collateral. The OID
Regulations also permit a Certificateholder to elect to accrue de minimis
original issue discount into income currently based on a constant yield method.
See "Market Discount" below.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to the Mortgage Collateral will be required
to be accrued and reported in income each month, based on a constant yield. The
OID Regulations suggest that no prepayment assumption is appropriate in
computing the yield on prepayable obligations issued with original issue
discount. In the absence of statutory or administrative clarification, it
currently is not intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. Section 1272(a)(6) of the Code, however, may
require that a prepayment assumption be used in computing yield with respect to
all mortgage-backed securities. Certificateholders are advised to consult their
tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. [Describe manner by which the original issue discount
rules will apply to Mortgage Collateral in such series.]
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Collateral will also be required to include in
gross income such Certificate's daily portions of any original issue discount
with respect to such Mortgage Collateral. However, each such daily portion will
be reduced, if the cost of such Grantor Trust Fractional Interest Certificate to
such purchaser is in excess of such Certificate's allocable portion of the
aggregate "adjusted issue prices" of the Mortgage Collateral, approximately in
proportion to the ratio such excess bears to such Certificate's allocable
portion of the aggregate original issue discount remaining to be accrued on the
Mortgage Collateral. The adjusted issue price of an item of Mortgage Collateral
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 item of Mortgage
Collateral at the beginning of the accrual period that includes such day and
(ii) the daily portions of original issue discount for all days during such
accrual period prior to such day. The adjusted issue price of an item of
Mortgage Collateral at the beginning of any accrual period will equal the issue
price of such Mortgage Collateral, increased by the aggregate amount of original
issue discount with respect to such Mortgage Collateral that accrued in prior
accrual periods, and reduced by the amount of any payments made on such Mortgage
Collateral in prior accrual periods of amounts included in its stated redemption
price.
The Master Servicer will provide to any holder of a Grantor Trust
Fractional Interest Certificate such information as such holder may reasonably
request from time to time with respect to original issue discount accruing on
Grantor Trust Fractional Interest Certificates. Such requests may be directed to
[Residential Funding] [principal executive office]. [See "Residential Funding
Corporation" in the Prospectus.] See "Grantor Trust Reporting" below.]
Market Discount. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in Mortgage Collateral is considered to have been purchased at a
"market discount," that is, in the case of Mortgage Collateral issued without
original issue discount, at a purchase price less than its remaining stated
redemption price (as defined above), or in the case of Mortgage Collateral
issued with original issue discount, at a purchase price less than its adjusted
issue price (as defined above). If market discount is in excess of a de minimis
amount (as described below), the holder generally will be required to include in
income in each month the amount of such discount that has accrued (under the
rules described in the next paragraph) through such month that has not
previously been included in income, but limited, in the case of the portion of
such discount that is allocable to any Mortgage Collateral, to the payment of
stated redemption price on such Mortgage Collateral
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that is received by (or, in the case of accrual basis Certificateholders, due
to) the Trust Fund in that month. A Certificateholder may elect to include
market discount in income currently as it accrues (under a constant yield method
based on the yield of the Certificate to such holder) 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
during or after the first taxable year to which such election applies. In
addition, the OID Regulations would 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 Mortgage Collateral with market
discount, the Certificateholder would be deemed to have made an election to
include market discount in income currently with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election and thereafter, and possibly previously
acquired instruments. Similarly, a Certificateholder that made this election for
a Certificate 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 "Certain Federal
Income Tax Consequences--Taxation of Owners of REMIC Regular
Certificates--Premium" in the Prospectus. Each of these elections to accrue
interest, discount and premium with respect to a Certificate on a constant yield
method or as interest is irrevocable.
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 such time as regulations are issued by the Treasury
Department, certain rules described in the Conference Committee Report (the
"Committee Report") accompanying the Tax Reform Act of 1986 will apply. Under
those rules, in each accrual period market discount on the Mortgage Collateral
should accrue, at the Certificateholder's option: (i) on the basis of a constant
yield method, (ii) in the case of Mortgage Collateral 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 stated interest remaining to be paid on the Mortgage Collateral as of the
beginning of the accrual period, or (iii) in the case of Mortgage Collateral
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 at the
beginning of the accrual period. The prepayment assumption, if any, used in
calculating the accrual of original issue discount is to be used in calculating
the accrual of market discount. The effect of using a prepayment assumption
could be to accelerate the reporting of such discount income. 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 Mortgage Collateral purchased at a discount in the secondary market.
Since the Mortgage Collateral will provide for periodic payments of
stated redemption price, such discount may be required to be included in income
at a rate that is not significantly slower than the rate at which such discount
would be included in income if it were original issue discount.
Market discount with respect to Mortgage Collateral generally will be
considered to be de minimis if it is not greater than or equal to 0.25% of the
stated redemption price of the Mortgage Collateral 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 used, if any. The effect of using a prepayment assumption
could be to accelerate the reporting of such discount income. If market discount
is treated as de minimis under the foregoing rule, it appears that actual
discount would be treated [in a manner similar to original issue discount of a
de minimis amount. See "If Stripped Bond Rules Do Not Apply."]
Further, under the rules described in "Certain Federal Income Tax
Consequences -- Taxation of Owners of REMIC Regular Certificates--Market
Discount" in the Prospectus, any discount that is not original issue discount
and exceeds a de minimis amount may require the deferral of interest expense
deductions attributable to accrued market discount not yet includible in income,
unless an election has been made to report market discount currently as it
accrues.
Premium. If a Certificateholder is treated as acquiring the underlying
Mortgage Collateral at a premium, that is, at a price in excess of their
remaining stated redemption price, such Certificateholder may elect under
Section 171 of the Code to amortize such premium using a constant yield method.
Amortizable premium is treated as an offset to interest income on
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the related Mortgage Collateral rather than as a separate interest deduction.
Premium allocable to Mortgage Collateral for which an amortization election is
not made should be allocated among the payments on the Mortgage Collateral
representing stated redemption price and be allowed as an ordinary deduction as
such payments are made (or, for a Certificateholder using the accrual method of
accounting, when such payments are due).
It is unclear whether a prepayment assumption should be used in
computing amortization of premium allowable under Section 171 of the Code. If
premium is not subject to amortization using a prepayment assumption and an item
of Mortgage Collateral prepays in full, the holder of a Grantor Trust Fractional
Interest Certificate acquired at a premium should recognize a loss, equal to the
difference between the portion of the prepaid principal amount of the Mortgage
Collateral that is allocable to the Certificate and the portion of the adjusted
basis of the Certificate that is allocable to the Mortgage Collateral. If a
prepayment assumption is used to amortize such premium, it appears that such a
loss would be unavailable. Instead, if a prepayment assumption is used, a
prepayment should be treated as a partial payment of the stated redemption price
of the Grantor Trust Fractional Interest Certificate and accounted for under a
method similar to that described for taking account of original issue discount
on REMIC Regular Certificates. See "Certain Federal Income Tax Consequences --
Taxation of Owners of REMIC Regular Certificates--Original Issue Discount" in
the Prospectus. It is unclear what other adjustments would be required to
reflect differences between an assumed prepayment rate and the actual rate of
prepayments.
Taxation of Owners of Grantor Trust Strip Certificates
The "stripped coupon" rules of Section 1286 of the Code will apply to
the Grantor Trust Strip Certificates. Except as described above in "Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules
Apply," no regulations or published rulings under Section 1286 of the Code have
been issued and some uncertainty exists as to how it will be applied to
securities such as the Grantor Trust Strip Certificates. Accordingly, holders of
Grantor Trust Strip Certificates should consult their tax advisors concerning
the method to be used in reporting income or loss with respect to such
Certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "Possible Application of Proposed Contingent Payment Rules"
below, and assumes that the holder of a Grantor Trust Strip Certificate will not
own any Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue
discount will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate to such holder. Such yield would be calculated
based on the price paid for that Grantor Trust Strip Certificate by its holder
and the payments remaining to be made thereon at the time of the purchase, plus
an allocable portion of the servicing fees and expenses to be paid with respect
to the Mortgage Collateral. See "Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a
prepayment assumption be used in computing the accrual of original issue
discount with respect to certain categories of debt instruments, and that
adjustments be made in the amount and rate of accrual of such discount when
prepayments do not conform to such prepayment assumption. Regulations could be
adopted applying those provisions to the Grantor Trust Strip Certificates. It is
unclear whether those provisions would be applicable to the Grantor Trust Strip
Certificates or whether use of a prepayment assumption may be required or
permitted in the absence of such regulations. It is also uncertain, if a
prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Strip Certificate or, with respect to any subsequent holder, at the time
of purchase of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial
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offering price for each class of Certificates. 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 and Certificateholders should bear in
mind that the use of a representative initial offering price will mean that such
information returns or reports, even if otherwise accepted as accurate by the
IRS, will in any event be accurate only as to the initial Certificateholders of
each series who bought at that price. Prospective purchasers of the Grantor
Trust Strip Certificates should consult their tax advisors regarding the use of
the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of an
item of Mortgage Collateral will give rise to a loss to the holder of a Grantor
Trust Strip Certificate. If a Grantor Trust Strip Certificate is treated as a
single instrument (rather than an interest in discrete mortgage loans or
contracts) and the effect of prepayments is taken into account in computing
yield with respect to such Grantor Trust Strip Certificate, it appears that no
loss may be available as a result of any particular prepayment unless
prepayments occur at a rate faster than the Prepayment Assumption. However, if a
Grantor Trust Strip Certificate is treated as an interest in discrete Mortgage
Collateral, or if the Prepayment Assumption is not used, then when an item of
Mortgage Collateral is prepaid, the holder of a Grantor Trust Strip Certificate
should be able to recognize a loss equal to the portion of the adjusted issue
price of the Grantor Trust Strip Certificate that is allocable to such Mortgage
Collateral.
Possible Application of Proposed Contingent Payment Rules
The coupon stripping rules' general treatment of stripped coupons is to
regard them as newly issued debt instruments in the hands of each purchaser. To
the extent that payments on the Grantor Trust Strip Certificates would cease if
the Mortgage Collateral were prepaid in full, the Grantor Trust Strip
Certificates could be considered to be debt instruments providing for contingent
payments. Under the OID Regulations, debt instruments providing for contingent
payments are not subject to the same rules as debt instruments providing for
noncontingent payments, but no final regulations have been promulgated with
respect to contingent payment debt instruments. Proposed regulations were
promulgated in 1986 regarding contingent payment debt instruments, but have not
been made final and are likely to be substantially revised before being made
final. Moreover, like the OID Regulations, such proposed regulations do not
specifically address securities, such as the Grantor Trust Strip Certificates,
that are subject to the stripped bond rules of Section 1286 of the Code.
If the contingent payment rules under the regulations proposed in 1986
were to apply, the holder of a Grantor Trust Strip Certificate would be required
to include as interest income in each month a portion of the periodic payment
(the "Accrued Periodic Payment") due on the Grantor Trust Strip Certificate.
That portion (the "Periodic Income Amount") would equal the product of (i) the
adjusted issue price of the Grantor Trust Strip Certificate at the beginning of
the period and (ii) a specified yield (as further described below). The excess
of the Accrued Periodic Payment over the Periodic Income Amount first would
reduce the adjusted issue price of the Grantor Trust Strip Certificate and, to
that extent, would be treated as a return of capital and not as interest income;
after the adjusted issue price had been reduced to zero, the entire Accrued
Periodic Payment would be treated as interest income.
The specified yield referred to in clause (ii) above would equal the
"applicable federal rate" (expressed as a monthly rate) in effect at the time of
purchase of the Grantor Trust Strip Certificate by that holder, which rate is
computed monthly by the IRS. It is unclear whether a prepayment assumption
should be made in determining which Treasury securities (short-term, mid-term or
long-term) should be used to determine the "applicable federal rate" for this
purpose.
Income accrual with respect to a Grantor Trust Strip Certificate will
generally be slower if the foregoing contingent payment rules apply than if they
do not. However, as noted above, there is substantial doubt that the contingent
payment rules of the proposed regulations in their current form will be
permitted to be applied to instruments such as the Grantor Trust Strip
Certificates and revised contingent payment regulations are expected to be
proposed. Certificateholders should consult their tax advisors concerning the
possible application of the contingent payment rules to the Grantor Trust Strip
Certificates.]
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Sales of Grantor Trust Certificates
Except as described below, any gain or loss recognized on the sale of a
Grantor Trust Certificate generally will be capital gain or loss, and will be
equal to the difference between the amount realized on the sale of a Grantor
Trust Certificate and its adjusted basis. The adjusted basis of a Grantor Trust
Certificate generally will equal its cost, increased by any income (including
original issue discount and market discount income) recognized by the seller and
reduced (but not below zero) by any previously reported losses, amortized
premium and distributions with respect to such Grantor Trust Certificate. The
Code currently provides for a top marginal tax rate applicable to ordinary
income of individuals of 39.6% while maintaining a maximum marginal rate for the
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 or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in certain circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income, as will gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Code. Furthermore, a portion of
any gain that might otherwise be capital gain may be treated as ordinary income
to the extent that the Grantor Trust 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 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 that 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.
Grantor Trust Reporting
The Trustee will furnish to each holder of a Grantor Trust Certificate
with each distribution a statement setting forth the amount of such distribution
allocable to principal on the underlying [Mortgage Loans] [Contracts] and to
interest thereon at the related Pass-Through Rate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the Master Servicer or the Certificate Administrator, as applicable,
the Trustee will furnish to each Certificateholder during such year such
customary factual information as the Trustee deems necessary or desirable to
enable holders of Grantor Trust Certificates to prepare their tax returns and
will furnish comparable information to the IRS as and when required by law to do
so. Because the rules for accruing discount and amortizing premium with respect
to the Grantor Trust Certificates are uncertain in various respects, there is no
assurance the IRS will agree with the Trustee's information reports of such
items of income and expense. Moreover, such information reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders who bought their Certificates at the
representative initial offering price used in preparing such reports.
Backup Withholding
In general, the rules described in "Certain Federal Income Tax
Consequences -- Backup Withholding with Respect to REMIC Certificates" in the
Prospectus will also apply to Grantor Trust Certificates.
Foreign Investors
In general, the discussion with respect to REMIC Regular Certificates
in "Certain Federal Income Tax Consequences -- Foreign Investors in REMIC
Certificates" in the Prospectus applies to Grantor Trust Certificates.
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To the extent that interest on a Grantor Trust Certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Code from United States
withholding tax, and the Grantor Trust Certificate is not held in connection
with a Certificateholder's trade or business in the United States, such Grantor
Trust Certificate will not be subject to United States estate taxes in the
estate of a non-resident alien individual.]
[ERISA CONSIDERATIONS]
[A description of whether there will be any exemption from "plan asset"
treatment will be available with respect to the Series to be included as
appropriate.]
[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 Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. The exemptive relief afforded by the Exemption, as described under
"ERISA Considerations -- Prohibited Transaction Exemptions" in the Prospectus,
will not likely apply to the purchase, sale or holding of the Class M
Certificates (because of the subordinate nature thereof) or Residual
Certificates. The purchase or holding of the Offered Certificates (other than
the Class M Certificates or Residual 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. In addition, because it is not likely that the Class M
Certificates or Residual Certificates will qualify for exemptive relief under
the Exemption, the similar exemptions issued to the Underwriter or PTCE 83-1,
purchases of such Certificates by, on behalf of or with "plan assets" of any
Plan are not to be registered unless the transferee provides an opinion of
counsel satisfactory to the Master Servicer, the Company and the Trustee that
the purchase of any such Certificate by, on behalf of or with "plan assets" of
any Plan is permissible under applicable law, will not result in any non-exempt
prohibited transaction under ERISA or Section 4975 of the Code, and will not
subject the Master Servicer, the Company or the Trustee to any obligation in
addition to those undertaken in the Pooling and Servicing Agreement. Purchasers
using insurance company general account funds to effect such purchase should
consider the availability of Prohibited Transaction Class Exemption 95-60 (60
Fed. Reg. 35925, July 12, 1995) issued by the U.S. Department of Labor. See
"ERISA Considerations" in the Prospectus.]
[To qualify for exemption under PTCE 83-1 (see "ERISA
Considerations--Prohibited Transaction Class Exemptions" in the Prospectus), a
Certificate of an Exempt Series must not be subordinated and must entitle its
holder to pass-through payments of both principal and interest on the Mortgage
Loans. Because the Subordinate Certificates are subordinated to the Senior
Certificates and the Principal Only Certificates and Stripped Interests
Certificates are only entitled to payments of principal and interest,
respectively, PTCE 83-1 will not provide an exemption from the prohibited
transaction rules of ERISA for Plans that acquire Subordinate Certificates. Any
Plan fiduciary who proposes to cause a Plan to purchase Certificates should
consult with its counsel with respect to the potential consequences under ERISA
and Section 4975 of the Code of the Plan's acquisition and ownership of
Certificates. However, the other PTCEs or the Underwriter's PTE may be
applicable. See "ERISA Considerations" in the Prospectus.]
[A description of one or more important aspects of the Exemption to be included
if appropriate.]
LEGAL INVESTMENT MATTERS
The [Senior] Certificates will [not] 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 nationally recognized statistical
rating organization, and, as such, will be legal investments for certain
entities to the extent provided in the SMMEA][because the Mortgage Pool includes
Mortgage Loans that are secured by junior liens on the related Mortgaged
Properties]. [The Class M Certificates will not constitute "mortgage related
securities" for purposes of SMMEA.] Institutions whose investment activities are
subject to legal investment laws and regulations or to review by regulatory
authorities should consult with their legal advisors in
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determining whether and to what extent the Offered Certificates constitute legal
investments under SMMEA or are subject to restrictions on investment, capital
requirements or otherwise. See "Legal Investment Matters" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement dated [_______ __, 199_], (the "Underwriting Agreement") the
Underwriter has agreed to purchase, and the Company has agreed to sell to the
Underwriter, each class of the Offered Certificates [except that a de minimis
portion of the Residual Certificates will be retained by Residential Funding and
such portion is not offered hereby].
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Offered Certificates is
subject to, among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
Company's Registration Statement shall be in effect, and that no proceedings for
such purpose shall be pending before or threatened by the Securities and
Exchange Commission.
The distribution of the Offered Certificates by the Underwriter may be
effected, from time to time, in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds to
the Company from the sale of the Offered Certificates, before deducting expenses
payable by the Company, will be [______]% of the aggregate Certificate Principal
Balance of the Offered Certificates plus accrued interest thereon from the
Cut-off Date. The Underwriter may effect such transactions by selling the
Offered Certificates to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriter for whom they act as agent. In connection with the sale of
the Offered Certificates, the Underwriter may be deemed to have received
compensation from the Company in the form of underwriting compensation. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any profit on the resale of the Offered Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter, and under limited circumstances the Underwriter will indemnify the
Company, against certain civil liabilities under the Securities Act of 1933 or
contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates-- Reports to Certificateholders," which will
include information as to the outstanding principal balance of the Offered
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Offered
Certificates will be available through any other source. In addition, the
Company is not aware of any source through which price information about the
Offered Certificates will be generally available on an ongoing basis. The
limited nature of such information regarding the Offered Certificates may
adversely affect the liquidity of the Offered Certificates, even if a secondary
market for the Offered Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be
passed upon for the Company by [Orrick, Herrington & Sutcliffe LLP] [Thacher
Proffitt & Wood], New York, New York and for the Underwriter by
[------------------------------].
NY1-IN61845.9
S-71
<PAGE>
RATINGS
It is a condition to the issuance of the Senior Certificates (other
than the Accrual Certificates) and the Class M Certificates that they be rated
not lower than "[___]" and "[___]", respectively by
[____________________________ ("_______")] and "[___]" and "[___]",
respectively, by [________________________ ("_______")].
[[________________] ratings on pass-through certificates address the
likelihood of the receipt by Certificateholders of payments required under the
Pooling and Servicing Agreement. [_______________] ratings take into
consideration the credit quality of the [Mortgage] [Contract] Pool, structural
and legal aspects associated with the Certificates, and the extent to which the
payment stream in the [Mortgage] [Contract] Pool is adequate to make payments
required under the Certificates. [_______________] rating on the Certificates
does not, however, constitute a statement regarding frequency of prepayments on
the [Mortgage Loans] [Contracts]. See "Certain Yield and Prepayment
Considerations" herein.] [The "r" of the "AAAr" rating of the Class [__]
Certificates by [________________] is attached to highlight derivative, hybrid,
and certain other obligations that [________________] believes may experience
high volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.]
[The ratings of [____] on pass-through certificates [also] address the
likelihood of the receipt by Certificateholders of all distributions on the
underlying [mortgage loans] [manufactured housing contracts] to which they are
entitled. The rating process addresses the structural and legal aspects
associated with the Certificates, including the nature of the underlying
[mortgage loans] [contracts]. The ratings assigned to pass-through certificates
do not represent any assessment of the likelihood or rate of principal
prepayments. The rating does not address the possibility that Certificateholders
might suffer a lower than anticipated yield.]
[The ratings of [_____] assigned to pass-through certificates [also]
address the likelihood of the receipt by Certificateholders of all distributions
to which such Certificateholders are entitled. [_____] ratings on pass-through
certificates do not represent any assessment of the likelihood that principal
prepayments will be made by the mortgagors or the degree to which such
prepayments differ from that originally anticipated. The ratings assigned to
pass-through certificates do not represent any assessment of the likelihood or
rate of principal prepayments. The rating does not address the possibility that
Certificateholders might suffer a lower than anticipated yield or that rapid
rates of principal prepayments could result in a failure of the holders of the
Stripped Interests Certificates to fully recover their initial investment.]
The Company has not requested a rating on the Offered Certificates by
any rating agency other than [__________] and [__________]. However, there can
be no assurance as to whether any other rating agency will rate the Offered
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 Offered
Certificates by [_________] and [__________].
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. The rating of the Principal Only
Certificates, Stripped Interests Certificates or the Class M Certificates does
not address the possibility that the holders of such Certificates may fail to
fully recover their initial investment. In the event that the rating initially
assigned to the Offered Certificates is subsequently lowered for any reason, no
person or entity is obligated to provide any additional support or credit
enhancement with respect to the Offered Certificates.
NY1-IN61845.9
S-72
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by the Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
TABLE OF CONTENTS
Prospectus Supplement Page
Summary.............................................. S-
Description of the [Mortgage] [Contract] Pool........ S-
Description of the Offered Certificates.............. S-
Certain Yield and Prepayment Considerations.......... S-
Pooling and Servicing Agreement...................... S-
Certain Federal Income Tax Consequences..............
Method of Distribution............................... S-
Legal Opinions....................................... S-
Ratings.............................................. S-
Legal Investment..................................... S-
ERISA Considerations................................. S-
Prospectus
Summary of Prospectus................................
Risk Factors.........................................
The Trust Funds......................................
Description of the Certificates......................
Subordination........................................
Description of Credit Enhancement....................
Insurance Policies on Mortgage
Loans or Contracts..............................
The Company..........................................
Residential Funding Corporation......................
The Pooling and Servicing Agreement..................
Yield Considerations.................................
Maturity and Prepayment Considerations...............
Certain Legal Aspects of Mortgage
Loans and Contracts.............................
Certain Federal Income Tax Consequences..............
State and Other Tax Consequences.....................
ERISA Considerations.................................
Legal Investment Matters.............................
Use of Proceeds
Methods of Distribution..............................
Legal Matters........................................
Financial Information................................
Additional Information...............................
Index of Principal Definitions.......................
Residential Asset Securities
Corporation
[Mortgage] [Manufactured Housing Contract]
Pass-Through Certificates, Series [199_-___]
Class A-1 Certificates ____% $
Class A-2 Certificates ____% $
Class A-4 Certificates 0% $
Class A-5 Certificates Variable Rate $ 0
Class R Certificates ____% $
Class M Certificates ____% $
[Name of Underwriter[s]]
PROSPECTUS SUPPLEMENT
________________, 199_
NY1-IN61845.9
<PAGE>
NY1-IN61845.9
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SUPPLEMENT SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
SUBJECT TO COMPLETION, DATED ^ NOVEMBER 12, 1997
Version I-B
Prospectus Supplement
(To Prospectus dated [_______ __, 199_])
$[------------]
Residential Asset Securities Corporation
Depositor
[Name of Certificate Administrator]
Certificate Administrator
Mortgage Pass-Through Certificates, Series [199_-_]
$[__________] [____]% Class A-1 Certificates
Certificates
$[__________] [____]% Class A-2 Certificates
Certificates
$[__________] [____]% Class A-3 Certificates
$ 0 [____]%(1) Class S
$[________] [____]% Class R
- - ----------------------
(1) Based upon the related Notional Amount, (as described herein under
"Description of the Offered Certificates- Interest Distributions"). The
Class S Certificates will be Fixed Strip Certificates and will not be
entitled to receive distributions of principal.
The Series [199_-_] Mortgage Pass-Through Certificates offered hereby will
include the following five classes (the "Offered Certificates"): (i) Class A-1
Certificates, Class A-2 Certificates and Class A-3 Certificates, (ii) Class S
Certificates (the "Fixed Strip Certificates") and (iii) Class R Certificates
(the "Residual Certificates"). The Offered Certificates in the aggregate will
represent the entire beneficial ownership interest in a trust fund (the "Trust
Fund") consisting primarily of Ginnie Mae Securities (the "Underlying Agency
Securities"). Each Underlying Agency Security is a ["fully modified
pass-through" mortgage-backed certificate] [issued and serviced by a mortgage
banking company or other financial concern approved by Ginnie Mae (a "Ginnie Mae
Issuer")] based on and backed by a pool of mortgage loans (each, a "Mortgage
Pool") which may consist of FHA-insured or VA-guaranteed mortgage loans secured
by one- to four-family residential properties and eligible for inclusion in
mortgage pools underlying Ginnie Mae Securities, which may be level payment or
graduated payment first lien mortgage loans with terms to maturity of not more
than 30 years (collectively, the "Mortgage Loans"). Certain characteristics of
the Underlying Agency Securities are described herein under "Description of the
Underlying Agency Securities." See "Index of Principal Definitions" in the
Prospectus for meanings of capitalized terms and acronyms not otherwise defined
herein.
(Continued on following page)
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST IN
OR OBLIGATION OF THE COMPANY, THE CERTIFICATE ADMINISTRATOR, GMAC MORTGAGE
CORPORATION ("GMAC MORTGAGE") OR ANY OF THEIR AFFILIATES. ALTHOUGH PAYMENT OF
PRINCIPAL AND INTEREST ON THE UNDERLYING AGENCY SECURITIES IS GUARANTEED BY
GINNIE MAE, THE OFFERED CERTIFICATES ARE NOT INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, 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 SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF
THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
For a discussion of significant matters affecting investments in the
Certificates, see "Risk Factors" [commencing on page S-11 herein and] commencing
in the Prospectus on page [__].
[Name of Underwriter] (the "Underwriter") intends to make a secondary market in
the Offered Certificates, but has no obligation to do so. There can be no
assurance that a secondary market for the Offered Certificates will develop or,
if it does develop, that it will continue. The Offered Certificates will not be
listed on any securities exchange.
The Offered Certificates will be purchased from the Company by the Underwriter,
and will be offered by the Underwriter 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 proceeds to the Company from the sale of
the Offered Certificates, before deducting expenses payable by the Company, will
be equal to approximately [____]% of the initial aggregate principal balance of
the Offered Certificates, plus accrued interest thereon from [__________ __,
199_] (the "Reference Date"). The Offered Certificates are offered by the
Underwriter subject to prior sale, when, as and if delivered to and accepted by
the Underwriter and subject to certain other
<PAGE>
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject any order in whole or in part. It is expected that
delivery of the Offered Certificates will be made on or about [__________ __,
199_], [at the offices of [ ]], [through the facilities of The Depository Trust
Company], against payment therefor in immediately available funds.
[Name of Underwriter]
[__________ __, 199_]
NY1-IN61845.9
<PAGE>
(Continued from previous page)
It is a condition to the issuance of the Offered Certificates that the
Class A-1, Class A-2, Class A-3, Fixed Strip and Residual Certificates be rated
"[__]" by [_______] and "[__]" by [________].
As described herein, a "real estate mortgage investment conduit" (a
"REMIC") election will be made in connection with the Trust Fund for federal
income tax purposes. Each class of the Offered Certificates (other than the
Residual Certificates) will represent ownership of "regular interests" in the
REMIC and the Residual Certificates will be the sole class of "residual
interests" in the REMIC. See "Certain Federal Income Tax Consequences" herein
and in the Prospectus. [Transfers of the Residual Certificates may be made only
to "qualified institutional buyers" as defined in Rule 144A under the Securities
Act of 1933, as amended, and will be prohibited to any non-United States person,
and will be subject to certain additional transfer restrictions described under
"Certain Federal Income Tax Consequences--Special Tax Considerations Applicable
to Residual Certificates" herein and in the Prospectus under "Certain Federal
Income Tax Consequences--REMICs--Tax and Restrictions on Transfers of REMIC
Residual Certificates to Certain Organizations" and "--Taxation of Owners of
REMIC Residual Certificates--Noneconomic REMIC Residual Certificates."]
Distributions on the Offered Certificates will be made on the third
business day following each distribution date for the Underlying Agency
Securities (each, a "Distribution Date"), commencing on [__________ __, 199_]
for the Offered Certificates other than the Class A-3 Certificates, and
commencing on the Accretion Termination Date (as defined herein) for the Class
A-3 Certificates. With respect to any of the Underlying Agency Securities, the
distribution date is the [15th day of each calendar month in the case of a GNMA
I Certificate] [the 20th day of each calendar month in the case of a GNMA II
Certificate] (or, if such day is not a business day, the next business day)
(each, an "Underlying Security Distribution Date"). As described herein under
"Description of the Offered Certificates-Interest Distributions," interest
distributions on the Offered Certificates will be based on the Certificate
Principal Balance thereof (or the Notional Amount (as defined herein) in the
case of the Fixed Strip Certificates) and the applicable Pass-Through Rate
thereof, which will be fixed for all classes of Offered Certificates.
Distributions in respect of principal of the Offered Certificates will be
allocated among the various classes of the Offered Certificates (other than the
Fixed Strip Certificates), as described herein under "Description of the Offered
Certificates--Principal Distributions."
The yield to maturity on the Offered Certificates will depend on the rate
and timing of principal payments on the Underlying Agency Securities, which in
turn will be affected by the rate and timing of principal payments on the
Mortgage Loans. The yield to investors on the Fixed Strip Certificates will be
extremely sensitive to the rate and timing of principal payments on the related
Underlying Agency Securities, which in turn will be affected by the rate and
timing on the Mortgage Loans which may fluctuate significantly over time. An
extremely rapid rate of principal payments on the Mortgage Loans could result in
the failure of investors in the Fixed Strip Certificates to recover their
initial investments. See "Summary--Special Prepayment Considerations,"
"--Special Yield Considerations" and "Certain Yield and Prepayment
Considerations" herein and "Yield Considerations" in the Prospectus.
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF
A SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE COMPANY PURSUANT TO ITS
PROSPECTUS DATED [__________ __, 199_], OF WHICH THIS PROSPECTUS SUPPLEMENT IS A
PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING NOT CONTAINED HEREIN AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE CONSUMMATED
UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
UNTIL [__________ __, 199_] (90 DAYS AFTER THE DATE OF THIS PROSPECTUS
SUPPLEMENT), ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED 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.
[IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET, SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.]
NY1-IN61845.9
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus. See "Index of Principal Definitions" in the
Prospectus.
Titleof Securities.............................. Mortgage Pass-Through
Certificates, Series [199_-_] (the "Certificates").
Company.......................................... Residential Asset Securities
Corporation (the "Company"), a corporation organized under the laws of the
State of Delaware which is an affiliate of Residential Funding Corporation
("Residential Funding"), and an indirect wholly-owned subsidiary of GMAC
Mortgage. See "The Company" in the Prospectus.
Certificate Administrator........................ [Residential Funding] [ ] in
its capacity as certificate -------- administrator (the "Certificate
Administrator"). See "Trust Agreement--The Certificate Administrator"
herein [and "Residential Funding Corporation" in the Prospectus.]
Trustee.......................................... [Name of Trustee], a [national
bank] [[state bank] [trust company] organized under the laws of __________]
(the "Trustee"). See "The Pooling and Servicing Agreement--The Trustee" in
the Prospectus.
Reference Date................................... [__________ 1, 199_] (the
"Reference Date").
Delivery Date.................................... On or about [__________ __,
199_] (the "Delivery Date").
Distribution Date................................ The third business day
following each distribution date for the Underlying Agency Securities
commencing on [__________ __, 199_] (each, a "Distribution Date"). With
respect to any of the Underlying Agency Securities, the distribution date
is the [15th day of each calendar month in the case of a GNMA I
Certificate] [the 20th day of each calendar month in the case of a GNMA II
Certificate] (or, if such day is not a business day, the next business day)
(each, an "Underlying Security Distribution Date").
The Trust Fund................................... The Trust Fund, in which the
Offered Certificates in the aggregate represent the entire beneficial
ownership interest, consists primarily of the Underlying Agency Securities.
The Offered Certificates will be issued pursuant to a Trust Agreement (the
"Trust Agreement"), dated as of the Reference Date, among the Company, the
Certificate Administrator and the Trustee. See "Description of the Offered
Certificates--General" herein.
The Underlying Agency Securities. . . . The Underlying Agency Securities are
[GNMA] [I] [II] Certificates. Each Underlying Agency Security is a ["fully
modified pass-through" mortgage-backed certificate] [issued and serviced by
a mortgage banking company or other financial concern approved by Ginnie
Mae (a "Ginnie Mae Issuer")] based on and backed by a pool of FHA-insured
or VA-guaranteed mortgage loans secured by one- to four-family residential
properties and eligible for inclusion in mortgage pools underlying Ginnie
Mae Securities, which may be level payment or graduated payment first lien
mortgage loans with
NY1-IN61845.9
<PAGE>
terms to maturity of not
more than 30 years (the
"Mortgage Loans").
Information relating to
the Underlying Agency
Securities is provided
as of the Reference
Date.
................................................. The Underlying Agency
Securities will have an aggregate outstanding principal balance of
approximately $[ ], ------- pass-through rates of [ ]% and a weighted
average remaining term -- to stated maturity of approximately [ ] months as
of the Reference --- Date.
................................................. The Underlying Agency
Securities are guaranteed as to full and timely payment of principal and
interest by Ginnie Mae. The guaranty of Ginnie Mae is backed by the full
faith and credit of the United States. For a further description of the
underlying Agency Securities, see "Description of the Underlying Agency
Securities" herein.
The Offered Certificates......................... The Offered Certificates in
the aggregate will represent the entire beneficial ownership interest in
the Trust Fund. The Offered Certificates will have the following
Pass-Through Rates, Certificate Principal Balances and other features as of
the Reference Date:
Class A-1 Certificates [____]% $[_________] Fixed
Class A-2 Certificates [____]% $[_________] Fixed
Class A-3 Certificates [____]% $[_________] Fixed/Accrual
Class S Certificates [____]% $ 0 Fixed Strip
[Class R Certificates [____]% $[_________] Residual]
Residual Certificates............................ The Class R Certificates are
designated as the "Residual Certificates." [The Residual Certificates have
no Certificate Principal Balance and no Pass-Through Rate. The Residual
Certificates represent the right to receive certain distributions, if any,
of amounts which are in excess of the amounts required to be distributed to
all other classes of Offered Certificates following the retirement of all
of the Offered Certificates.] [The Residual Certificates are not being
offered hereby.]
................................................. [Residential Funding initially
will retain [a de minimis portion of] the Residual Certificates; however,
the Residual Certificates held by Residential Funding may be sold at any
time in accordance with the terms of the Trust Agreement.]
Denominations.................................... The Class A-1, Class A-2 and
Class A-3 Certificates will be offered in registered form, in minimum
denominations of $[ ] and -------- integral multiples of $[ ] in excess
thereof [, with one Class ----------- [____] Certificate evidencing the sum
of an authorized denomination thereof plus the remainder of the aggregate
initial Certificate Principal Balance of such class]. The Fixed Strip
Certificates and Residual Certificates will be offered in registered form
in minimum denominations of a [____]% Percentage Interest [, except, in the
case of the Residual Certificates, as otherwise set forth herein under
"Certain Federal Income Tax Consequences."]
[Certificate Registration........................ The Offered Certificates
(other than the [Fixed Strip and Residual] Certificates) will be
represented by one or more certificates
NY1-IN61845.9
<PAGE>
registered in the name
of Cede & Co., as
nominee of The
Depository Trust Company
("DTC"). No person
acquiring an interest in
the Offered Certificates
(other than the [Fixed
Strip and Residual]
Certificates) will be
entitled to receive a
Certificate of such
class in fully
registered, certificated
form, except under the
limited circumstances
described in the
Prospectus under
"Description of the
Certificates--Form of
Certificates." The
[Fixed Strip and
Residual] Certificates
will be offered in fully
registered, certificated
form. See "Description
of the
Certificates--Form of
Certificates" in the
Prospectus.]
Pass-Through Rates on the Offered Certificates........................... The
Pass-Through Rates on all classes of the Offered Certificates are the fixed
rates set forth above. The Fixed Strip Certificates have no Certificate
Principal Balance and will accrue interest at the applicable Pass-Through
Rate on the related Notional Amount (as defined herein).
Interest Distributions on the Offered Certificates..........................
Holders of each class of Offered Certificates (the "Certificateholders")
will be entitled to receive interest distributions in an amount equal to
the Accrued Certificate Interest on such class on each Distribution Date,
(i) in the case of the Class A-1 Certificates, Class A-2 Certificates,
Fixed Strip Certificates and Residual Certificates, to the extent of the
amount available for interest distributions (as described herein under
"Description of the Offered Certificates-Interest Distributions") for such
Distribution Date and (ii) in the case of the Class A-3 Certificates, to
the extent of the Available Distribution Amount for such Distribution Date
after distributions of interest and principal to the Class A-1
Certificates, Class A-2 Certificates, Fixed Strip Certificates and Residual
Certificates, commencing on the first Distribution Date in the case of all
classes of Offered Certificates (other than the Class A-3 Certificates) and
commencing on the Accretion Termination Date (as defined below) in the case
of the Class A-3 Certificates.
................................................. With respect to any
Distribution Date, "Accrued Certificate Interest" will be equal to (a) in
the case of each class of Offered Certificates (other than the Fixed Strip
Certificates), one month's interest accrued on the related Certificate
Principal Balance of such class, at the Pass-Through Rate on such class and
(b) in the case of the Fixed Strip Certificates, one month's interest
accrued on the related Notional Amount thereof at the Pass-Through Rate set
forth below; [in each case less the class's pro rata portion of any
Prepayment Interest Shortfall (as defined herein) allocated to any of the
Underlying Agency Securities].
................................................. The "Notional Amount" of the
Fixed Strip Certificates with respect to any Distribution Date is equal to
the aggregate Certificate Principal Balance of the Underlying Agency
Securities immediately prior to the most recent Underlying Security
Distribution Date.
NY1-IN61845.9
<PAGE>
................................................. The Accretion Termination Date
is the first Distribution Date to occur on which the Certificate Principal
Balance of the Residual, Class A-1 and Class A-2 Certificates have been
reduced to zero. On each Distribution Date preceding the Accretion
Termination Date, an amount equal to the Accrued Certificate Interest on
the Class A-3 Certificates will be added to the Certificate Principal
Balance thereof (the "Accretion Amount") and will thereafter accrue
interest at the applicable Pass-Through Rate. On each Distribution Date on
or after the Accretion Termination Date, Accrued Certificate Interest will
generally be payable to the holders of the Class A-3 Certificates, as
described herein. See "Description of the Offered Certificates--Interest
Distributions" herein.
Principal Distributions on the Offered Certificates.........................
Holders of the Offered Certificates (other than the Fixed Strip
Certificates) will be entitled to receive, in the aggregate, on each
Distribution Date, to the extent of the portion of the Available
Distribution Amount (as defined herein) remaining after the aggregate
amount of Accrued Certificate Interest to be distributed to the holders of
the Offered Certificates is distributed, a distribution allocable to
principal which will be equal to the sum of (i) the aggregate amount
distributed in respect of principal on all of the Underlying Agency
Securities on the immediately preceding Underlying Security Distribution
Date and (ii) the Accretion Amount. Distributions of principal on the
Offered Certificates will be made first to the Residual Certificates,
second to Class A-1 Certificates, third to the Class A-2 Certificates and
fourth to the Class A-3 Certificates, in each case until the Certificate
Principal Balance thereof is reduced to zero. The Fixed Strip Certificates
have no Certificate Principal Balance and, accordingly, will not be
entitled to any principal distributions. See "Description of the Offered
Certificates-Principal Distributions herein.
................................................. As to each of the Underlying
Agency Securities, principal distributions will be made thereon on each
Underlying Security Distribution Date in the respective amounts described
herein under "Description of the Underlying Agency Securities."
Optional Termination............................. At its option, the Certificate
Administrator or the Company may repurchase from the Trust Fund all of the
Underlying Agency Securities remaining in the Trust Fund, and thereby
effect early retirement of the Offered Certificates, at such time as the
aggregate Certificate Principal Balance of the Underlying Agency Securities
is less than [____]% of the aggregate Certificate Principal Balance thereof
as of the Delivery Date, as described herein. See "Trust
Agreement--Termination" herein and "The Pooling and Servicing ^ Agreement-
Termination; Retirement of Certificates" in the Prospectus.
NY1-IN61845.9
<PAGE>
Special Prepayment Considerations................................ The rate and
timing of principal payments on the Offered Certificates will depend, among
other things, on the rate and timing of principal payments on the
Underlying Agency Securities, which in turn will be affected by the rate
and timing of principal payments on the Mortgage Loans. As is the case with
mortgage-backed securities generally, the Underlying Agency Securities and,
as a result, the Offered 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.
................................................. The allocation of prepayments
among certain classes of the Offered Certificates will be affected by
certain other factors, as follows:
................................................. Distributions of principal to
the Offered Certificates will be made first to the Residual Certificates,
second, to the Class A-1 Certificates, third, to the Class A-2 Certificates
and fourth, to the Class A-3 Certificates, in each case until the
Certificate Principal Balance thereof is reduced to zero. The timing of
commencement of principal distributions and the weighted average lives of
the Class A-2 Certificates and Class A-3 Certificates will be affected by
the rates of prepayment experienced both before and after the commencement
of principal distributions on such classes.
................................................. See "Description of the
Offered Certificates--Principal Distributions," "Description of the
Underlying Agency Securities" 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 lives of the Offered Certificates
(other than the Fixed Strip Certificates and Residual Certificates), see
the table entitled "Percent of Initial Certificate Principal Balance
Outstanding at the Following Percentages of SPA" herein.
Special Yield Considerations..................... The yield to maturity on each
class of the Offered Certificates will depend, among other things, on the
rate and timing of principal payments on the Underlying Agency Securities,
which in turn will be affected by the rate and timing of principal payments
on the Mortgage Loans and the allocation thereof to reduce the Certificate
Principal Balance or Notional Amount of such class. The yield to maturity
on each class of Offered Certificates will also depend on the Pass-Through
Rate and the purchase price for such class. [The yield to investors on any
class of Offered Certificates will be adversely affected by any allocation
thereto of Prepayment Interest Shortfalls on the Mortgage Loans, which are
expected to result from the distribution of interest only to the date of
prepayment (rather than a full month's interest) in connection with
prepayments in full,
NY1-IN61845.9
<PAGE>
and the lack of any distribution of interest on the amount of any partial
prepayments.]
................................................. In general, if a class of
Offered Certificates is purchased at a premium and principal distributions
thereon occur at a rate faster than anticipated at the time of purchase,
the investor's actual yield to maturity will be lower than that assumed at
the time of purchase. Conversely, if a class of Offered Certificates is
purchased at a discount and principal distributions thereon occur at a rate
slower than that assumed at the time of purchase, the investor's actual
yield to maturity will be lower than that assumed at the time of purchase.
................................................. The Offered Certificates were
structured assuming, among other things, a prepayment assumption of [____]%
SPA (as defined herein) and corresponding weighted average lives as
described herein under "Description of the Underlying Agency Securities."
The prepayment, yield and other assumptions to be used for pricing purposes
for the respective classes that are to be offered hereunder may vary as
determined at the time of sale.
................................................. The yield of certain classes
of the Offered Certificates will be particularly sensitive to changes in
the rates of prepayment of the Mortgage Loans and other factors, as
follows:
................................................. The yield to investors on the
Fixed Strip Certificates will be extremely sensitive to the rate and timing
of principal payments on the Underlying Agency Securities, which in turn
will be affected by the rate and timing of principal payments on the
Mortgage Loans included in the related Mortgage Pools, which rate may
fluctuate significantly over time. [In addition, Prepayment Interest
Shortfalls allocated to the Underlying Agency Securities, will be allocated
to the Fixed Strip Certificates and each other class of Offered
Certificates on a pro rata basis based on the aggregate Accrued Certificate
Interest thereon, regardless, in the case of the Fixed Strip Certificates,
of whether such Prepayment Interest Shortfalls are attributable to those
Underlying Agency Securities used for purposes of determining the related
Notional Amount.] An extremely rapid rate of principal payments on the
Underlying Agency Securities could result in the failure of investors in
the Fixed Strip Certificates to recover their initial investments.
................................................. Because the Class A-3
Certificates do not receive any distribution of interest until the
Accretion Termination Date, the Class A-3 Certificates will likely
experience greater price and yield volatility than would mortgage
pass-through certificates which are otherwise similar but that are entitled
to current distributions of interest. Investors should consider whether
such volatility is in accordance with their investment needs.
................................................. Holders of the Residual
Certificates are entitled to receive distributions of principal and
interest as described herein under "Description of the Offered
Certificates-Interest Distributions" and "-Principal Distributions";
however, holders of such Certificates may have tax liabilities with respect
to their Certificates during the
NY1-IN61845.9
<PAGE>
early years of the term
of the Trust Fund that
substantially exceed the
principal and interest
payable thereon during
such periods.
................................................. See "Certain Yield and
Prepayment Considerations," especially "--Fixed Strip Certificate Yield
Considerations" and "--Additional Yield Considerations Applicable Solely to
the Residual Certificates" herein, "Certain Federal Income Tax
Consequences" herein and in the Prospectus and "Yield Considerations" in
the Prospectus.
Certain Federal Income Tax Consequences.................................. A
"real estate mortgage investment conduit" (a "REMIC") election will be made
with respect to the Trust Fund for federal income tax purposes. Upon the
issuance of the Offered Certificates, [Orrick, Herrington & Sutcliffe LLP]
[Thacher Proffitt & Wood], New York, New York, tax counsel to the Company,
will deliver its opinion generally to the effect that, assuming compliance
with all provisions of the Trust Agreement, the Trust Fund will qualify as
a REMIC under Sections 860A through 860G of the Internal Revenue Code of
1986 (the "Code").
................................................. [ADDITIONAL TAX CONSEQUENCES
TO BE INCLUDED AS APPROPRIATE.]
................................................. For further information
regarding the federal income tax consequences of investing in the Offered
Certificates, see "Certain Federal Income Tax Consequences" herein and in
the Prospectus.
ERISAConsiderations............................. [ERISA CONSIDERATIONS TO BE
INCLUDED AS NECESSARY.] See "ERISA Considerations" [herein and] in the
Prospectus.
Ratings.......................................... It is a condition to the
issuance of the Offered Certificates that the Class A-1, Class A-2, Class
A-3, Fixed Strip and Class R Certificates be rated "[__]" by [__________]
and "[__]" by [________]. A security rating is not a recommendation to buy,
sell or hold securities and may be subject to revision or withdrawal at any
time by the assigning rating organization. A security rating does not
address the frequency of prepayments of Mortgage Loans, or the
corresponding effect on yield to investors. The rating of the Fixed Strip
Certificates does not address the possibility that the holders of such
Certificates may fail to fully recover their initial investments. See
"Certain Yield and Prepayment Considerations" and "Ratings" herein and
"Yield Considerations" in the Prospectus.
LegalInvestment Matters......................... The Offered Certificates will
constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as amended ("SMMEA"), for so long
as they are rated in one of the two highest rating categories by at least
one nationally recognized statistical rating organization, and, as such,
will be legal investments for certain entities to the extent provided in
SMMEA. Institutions whose investment activities are subject to legal
investment laws and regulations or review by regulatory authorities should
consult with their legal advisors in determining whether and
NY1-IN61845.9
<PAGE>
to what extent the Offered Certificates constitute legal investments under SMMEA
or are subject to restriction on investment, capital requirements or otherwise.
See "Legal Investment Matters" herein and in the Prospectus.
NY1-IN61845.9
<PAGE>
[RISK FACTORS]
[Prospective Certificateholders should consider, among other things,
the items discussed under "Risk Factors" in the Prospectus and the following
factors in connection with the purchase of the Certificates:]
[APPROPRIATE RISK FACTORS REGARDING MORTGAGE COLLATERAL TO BE INSERTED AS
NECESSARY]
DESCRIPTION OF THE OFFERED CERTIFICATES
General
The Series [199_-_] Mortgage Pass-Through Certificates will include the
following five classes (the "Offered Certificates"): (i) Class A-1 Certificates,
Class A-2 Certificates and Class A-3 Certificates, (ii) the Class S Certificates
(the "Fixed Strip Certificates") and (iii) the Class R Certificates (the
"Residual Certificates").
The Offered Certificates in the aggregate will represent the entire
beneficial ownership interest in the Trust Fund. The Trust Fund will consist of:
(i) the Underlying Agency Securities, including all distributions thereon
payable after the Delivery Date; and (ii) such assets as from time to time are
identified as deposited in respect of the Underlying Agency Securities in the
Certificate Account and belonging to the Trust Fund.
Available Distribution Amount
The "Available Distribution Amount" with respect to the Offered
Certificates for any Distribution Date will be equal to the aggregate amount of
distributions on the Underlying Agency Securities on the immediately preceding
Underlying Security Distribution Date, after deduction of the related Servicing
Fee (as described herein under "Trust Agreement--Compensation of Certificate
Administrator").
Interest Distributions
Holders of each class of Offered Certificates will be entitled to
receive interest distributions in an amount equal to the Accrued Certificate
Interest on such class on each Distribution Date, (i) in the case of the Class
A-1 Certificates, Class A-2 Certificates, Fixed Strip Certificates and Residual
Certificates, to the extent of the Available Distribution Amount for such
Distribution Date and (ii) in the case of the Class A-3 Certificates to the
extent of the Available Distribution Amount for such Distribution Date after
distributions of interest and principal on the Class A-1 Certificates, Class A-2
Certificates, Fixed Strip Certificates and Residual Certificates, commencing on
the first Distribution Date in the case of all classes of Offered Certificates
(other than the Class A-3 Certificates) and commencing on the Accretion
Termination Date in the case of the Class A-3 Certificates. Notwithstanding the
foregoing sentence, the amount available for interest distributions on the
Offered Certificates on any Distribution Date shall not exceed the aggregate
amounts distributed on the Underlying Agency Securities on the preceding
Underlying Security Distribution Date in respect of interest, reduced by the
Servicing Fee (as defined herein), which is calculated at a rate of [____]% per
annum.
With respect to any Distribution Date, "Accrued Certificate Interest"
will be equal to (a) in the case of each class of Offered Certificates (other
than the Fixed Strip Certificates) one month's interest accrued on the
Certificate Principal Balance of such class at the Pass-Through Rate set forth
on the cover hereof and (b) in the case of the Fixed Strip Certificates, one
month's interest accrued on the Notional Amount at the applicable Pass-Through
Rate[; in each case minus the aggregate amount of Prepayment Interest Shortfalls
for such Distribution Date as described in the following sentence, which shall
be allocated among the Offered Certificates (including the Fixed Strip
Certificates and, in the case of such Certificates, without regard to the source
of such Prepayment Interest Shortfalls in proportion to the total amount of
Accrued Certificate Interest that would have been paid thereon absent such
reductions]. [For purposes of the foregoing, the aggregate amount of Prepayment
Interest Shortfalls for any Distribution Date will be equal to the aggregate
amount of Prepayment Interest Shortfalls, if any, allocated to each of the
Underlying Agency Securities for the immediately preceding Underlying Security
Distribution Date.] [Any Prepayment Interest Shortfalls will not be offset by a
reduction of the servicing compensation of the Certificate
NY1-IN61845.9
<PAGE>
Administrator or otherwise.] Accrued Certificate Interest is calculated on the
basis of a 360-day year consisting of twelve 30-day months.
The "Accretion Termination Date" for the Class A-3 Certificates is the
first Distribution Date on or after the Certificate Principal Balances of the
Residual Certificates, Class A-1 Certificates and Class A-2 Certificates have
been reduced to zero. On each Distribution Date preceding the Accretion
Termination Date, an amount equal to the amount of Accrued Certificate Interest
on the Class A-3 Certificates for such date will be added to the Certificate
Principal Balance thereof (the "Accretion Amount"), and such amount will be
distributed to the holders of the Offered Certificates, other than the Class A-3
Certificates, as described herein, in reduction of the Certificate Principal
Balances thereof, as described herein. On each Distribution Date on or after the
Accretion Termination Date, the entire amount of Accrued Certificate Interest on
the Class A-3 Certificates for such Distribution Date will be payable to the
holders of the Class A-3 Certificates, to the extent not required to fully
retire the remaining Offered Certificates (other than the Class A-3
Certificates) on the Accretion Termination Date.
The Pass-Through Rates on all classes of Offered Certificates are the
fixed rates set forth on the cover hereof. The Fixed Strip Certificates have no
Certificate Principal Balance and will accrue interest at the applicable
Pass-Through Rate on the Notional Amount.
As described herein, the Accrued Certificate Interest allocable to each
class of Offered Certificates is based on the Certificate Principal Balance
thereof or, in the case of the Fixed Strip Certificates, on the Notional Amount.
The "Certificate Principal Balance" of any Offered Certificate as of any date of
determination is equal to the initial Certificate Principal Balance thereof,
reduced by the aggregate of all amounts allocable to principal previously
distributed with respect to such Offered Certificate and, in the case of the
Class A-3 Certificates, increased by the amount of any Accrued Certificate
Interest added to the Certificate Principal Balance of such class. The "Notional
Amount" of the Fixed Strip Certificates is initially $[__________] and with
respect to any Distribution Date is equal to the aggregate Certificate Principal
Balance of the Underlying Agency Securities immediately prior to the most recent
Underlying Security Distribution Date.
Principal Distributions
Holders of the Offered Certificates (other than the Fixed Strip
Certificates, which are not entitled to receive any principal distributions)
will be entitled to receive, in the aggregate on each Distribution Date, to the
extent of the portion of the Available Distribution Amount remaining after
Accrued Certificate Interest has been distributed to the holders of the Class
A-1 Certificates, Class A-2 Certificates, Fixed Strip Certificates and Residual
Certificates for such Distribution Date (and, in the case of any payments of
principal to the Class A-3 Certificates, after Accrued Certificate Interest has
been distributed to the holders thereof for such Distribution Date), a
distribution allocable to principal which will be equal to the sum of (i) the
aggregate amount distributed in respect of principal on all of the Underlying
Agency Securities on the immediately preceding Underlying Security Distribution
Date and (ii) the Accretion Amount (together, the "Principal Distribution
Amount").
On each Distribution Date, the Principal Distribution Amount shall be
distributed as follows:
(i) first, to the holders of the Residual Certificates, until the Certificate
Principal Balance thereof is reduced to zero;
(ii) second, to the holders of the Class A-1 Certificates,
until the Certificate Principal Balance thereof is reduced to zero;
(iii) third, to the holders of the Class A-2 Certificates,
until the Certificate Principal Balance thereof is reduced to zero; and
(iv) fourth, to the holders of the Class A-3 Certificates,
until the Certificate Principal Balance thereof is reduced to zero.
NY1-IN61845.9
<PAGE>
DESCRIPTION OF THE UNDERLYING AGENCY SECURITIES
[Each Underlying Agency Security (which may be a GNMA I Certificate or
a GNMA II Certificate as referred to by Ginnie Mae) underlying the Series
[199_-_] Certificates will be a "fully-modified pass-through" mortgage-backed
certificate issued and serviced by a mortgage banking company or other financial
concern (a "Ginnie Mae Issuer") approved by Ginnie Mae as a seller-servicer of
FHA Loans and VA Loans.
The mortgage loans underlying Ginnie Mae Securities may consist of FHA
Loans or VA Loans secured by one- to four-family residential properties and
eligible for inclusion in mortgage pools underlying Ginnie Mae Securities, which
may be level payment first lien mortgage loans (including "buy-down" mortgage
loans) or graduated payment first lien mortgage loans.
Ginnie Mae has approved the issuance of each Underlying Agency Security
in accordance with a guarantee agreement (a "Guarantee Agreement") between
Ginnie Mae and the Ginnie Mae Issuer. Pursuant to its Guarantee Agreement, a
Ginnie Mae Issuer will be required to advance its own funds in order to make
timely payments of all amounts due on each Underlying Agency Security, even if
the payments received by the Ginnie Mae Issuer on the Mortgage Loans relating to
each Underlying Agency Security are less than the amounts due on each such
Underlying Agency Security.
The full and timely payment of principal and interest on each
Underlying Agency Security will be guaranteed by Ginnie Mae, which obligation is
backed by the full faith and credit of the United States. See "The Agency
Securities--Government National Mortgage Association" and "--Ginnie Mae
Securities" in the Prospectus. Each Underlying Agency Security will have an
original maturity of not more than 30 years. Each Underlying Agency Security
will be based on and backed by a Mortgage Pool and will provide for the payment
by or on behalf of the Ginnie Mae Issuer to the registered holder of such
Underlying Agency Security of fixed monthly payments of principal and interest
equal to the aggregate amount of the scheduled monthly principal and interest
payments on the Mortgage Loans relating to such Underlying Agency Security, less
a servicing and guarantee fee of 0.5% and up to 1.5% per annum of the
outstanding principal balance for such GNMA I Certificates and GNMA II
Certificates, respectively. In addition, each payment will include any
prepayments of principal of the Mortgage Loans relating to such Underlying
Agency Security and liquidation proceeds in the event of a foreclosure or other
disposition of any such Mortgage Loans.
Mortgage loans underlying a particular GNMA I Certificate must have the
same annual interest rate (except for pools of mortgage loans secured by mobile
homes). The annual pass-through rate on each GNMA I Certificate is the annual
interest rate on the mortgage loans included in the pool of mortgages backing
such GNMA I Certificate less 0.5% per annum of the unpaid principal balance of
such loans. This amount consists of 0.44% to be paid to the Ginne Mae Issuer of
the GNMA I Certificate (or its agent) as a fee for servicing the loans and the
GNMA I Certificates and a guaranty fee of 0.06%, which must be paid out to
Ginnie Mae by the Ginnie Mae Issuer. Mortgage loans underlying a particular GNMA
II Certificate may have annual interest rates that vary from each other by up to
1%. The annual pass-through rate on each GNMA II Certificate will be between
0.5% and 1.5% per annum less than the highest annual interest rate on the
mortgage loans included in the pool of mortgages backing such GNMA II
Certificate. The difference between the GNMA II Certificate rate and rates on
the underlying mortgages consists of a guaranty fee of 0.06% which must be paid
to Ginnie Mae by the Ginnie Mae Issuer and a servicing fee of between 0.44% and
1.44% to be paid to the Ginnie Mae Issuer (or its agent).
All Ginnie Mae Securities underlying the Series [199_-_] Certificates
will have original maturities of not more than 30 years (but may have original
maturities of substantially less than 30 years). In general, Ginnie Mae requires
that at least 90% of the original principal amount of the mortgage pool
underlying a Ginnie Mae Security must be mortgages with maturities of 20 years
or more. However, in certain circumstances, Ginnie Mae Securities may be backed
by pools of mortgage loans at least 90% of the original principal amount of
which have original maturities of at least 15 years. Each mortgage loan
underlying a Ginnie Mae Security, at the time Ginnie Mae issues its guarantee
commitment, must be originated no more than 12 months prior to such commitment
date.
No Ginnie Mae Issuer will insure or guarantee the Offered Certificates
or the Underlying Agency Securities. Each Ginnie Mae Issuer will be obligated
under its Guarantee Agreement with Ginnie Mae to service
NY1-IN61845.9
<PAGE>
the pooled Mortgage Loans in accordance with FHA and VA requirements and with
generally accepted practices in the mortgage lending industry. Each Ginnie Mae
Issuer's responsibilities with respect to the pooled Mortgage Loans will include
collection of all principal and interest payments and payments made by borrowers
toward escrows established for taxes and insurance premiums; maintenance of
necessary hazard insurance policies; institution of all actions necessary to
foreclose on, or take other appropriate action with respect to, loans in
default; and collection of FHA insurance and VA guarantee benefits.
If a Ginnie Mae Issuer is unable to make the payments on an Underlying
Agency Security as it becomes due, it must promptly notify Ginnie Mae and
request Ginnie Mae to make such payment. Upon notification and request, Ginnie
Mae will make such payments directly to the registered holder of such Underlying
Agency Security. In the event no payment is made by a Ginnie Mae Issuer and the
Ginnie Mae Issuer fails to notify and request Ginnie Mae to make such payment,
the holder of such Underlying Agency Security will have recourse only against
Ginnie Mae to obtain such payment. The Trustee or its nominee, as registered
holder of the Underlying Agency Security, will have the right to proceed
directly against Ginnie Mae under the terms of the Guaranty Agreement relating
to such Underlying Agency Security for any amounts that are not paid when due.
Regular monthly installment payments on each Underlying Agency Security
will be comprised of interest due as specified on such Underlying Agency
Security plus the scheduled principal payments on the related Mortgage Loans due
on the first day of the month in which the scheduled monthly installment on such
Underlying Agency Security is due. Such regular monthly installments on each
such Underlying Agency Security will be paid to the Trustee as registered holder
by the 15th day of each month in the case of a GNMA I Certificate and will be
mailed to the Trustee by the 20th day of each month in the case of a GNMA II
Certificate (each, an "Underlying Security Distribution Date"). Any principal
prepayments on any Mortgage Loans underlying an Underlying Agency Security or
any other early recovery of principal of such loans will be passed through to
the Trustee as the registered holder of the Underlying Agency Security.
Pools of non-graduated payment mortgages evidenced by certain of the
Ginnie Mae Securities may consist of level payment mortgages for which funds
have been provided (and deposited in escrow accounts) by one or more Ginnie Mae
Issuers, their affiliates or other persons to reduce the borrowers' monthly
payments during the early years of such mortgage loans. Payments due the
registered holders of such "buy down" Ginnie Mae Securities, however, will be
computed in the same manner as payments derived from level payment non-buy down
Ginnie Mae Securities and will include amounts to be collected from both the
borrowers and the escrow accounts under the control of the Ginnie Mae Issuer.
The obligations of Ginnie Mae and the Ginnie Mae Issuer with respect to such buy
down Ginnie Mae Security will be the same as with respect to non-buy down Ginnie
Mae Securities.]
The Underlying Agency Securities had an aggregate outstanding principal
balance of approximately $[___________], pass-through rates of [___]% and a
weighted average remaining term to stated maturity of approximately [_____]
months as of the Reference Date.
[INSERT ADDITIONAL DESCRIPTION OF UNDERLYING AGENCY SECURITIES AS APPROPRIATE]
A Current Report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed, together with the Trust Agreement, with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
General
The yield to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by the rate and timing of principal
payments on the Underlying Agency Securities, which in turn will be affected by
the rate and timing of principal payments on the Mortgage Loans. 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, the rate and timing of principal prepayments thereon by the
Mortgagors and liquidations of defaulted Mortgage Loans. The timing of changes
in the rate of prepayments and liquidations of the Mortgage Loans may
NY1-IN61845.9
<PAGE>
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 under
"Yield Considerations" and "Maturity and Prepayment Considerations" and in the
Prospectus), no assurance can be given as to such rate or the timing of
principal payments on the Offered Certificates.
The Mortgage Loans generally may be prepaid by the Mortgagors at any
time without payment of any prepayment fee or penalty. The Mortgage Loans
generally contain due-on-sale clauses. Prepayments (to the extent of
distributions thereof on the related Underlying Agency Securities) and
liquidations of the Mortgage Loans will result in distributions to holders of
the Offered Certificates of principal amounts which would otherwise be
distributed over the remaining terms of the Mortgage Loans. Factors affecting
prepayment of mortgage loans include changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties,
changes in the value of the mortgaged properties, mortgage market interest
rates, solicitations and servicing decisions. In addition, if prevailing
mortgage rates fall significantly below the Mortgage Rates on the Mortgage
Loans, the rate of prepayments (including refinancings) would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans would be expected to decrease.
[The aggregate amount of interest otherwise payable to holders of the
Offered Certificates will be reduced by any Prepayment Interest Shortfalls with
respect to the Underlying Agency Securities.] [In addition, Prepayment Interest
Shortfalls allocated to the Underlying Agency Securities, will be allocated to
the Fixed Strip Certificates and each other class of Offered Certificates on a
pro rata basis based on the aggregate Accrued Certificate Interest thereon,
regardless, in the case of the Fixed Strip Certificates, of whether such
Prepayment Interest Shortfalls are attributable to those Underlying Agency
Securities used for purposes of determining the notional amount.] Such
Prepayment Interest Shortfalls will not be offset by a reduction in the
Servicing Fee payable to the Certificate Administrator or otherwise. See "Yield
Considerations" in the Prospectus and "Description of the Offered
Certificates--Interest Distributions" and "Description of the Underlying Agency
Securities" herein for a discussion of the effect of principal prepayments on
the Mortgage Loans on the yield to maturity of the Offered Certificates.
The yield to maturity of the Offered Certificates will depend on the
price paid by the holders of the Offered Certificates and the related
Pass-Through Rate. The extent to which the yield to maturity of an Offered
Certificate is sensitive to prepayments will depend, in part, upon the degree to
which it is purchased at a discount or premium. In general, if a class of
Offered Certificates is purchased at a premium and principal distributions
thereon occur at a rate faster than anticipated at the time of purchase, the
investor's actual yield to maturity will be lower than that assumed at the time
of purchase. Conversely, if a class of Offered Certificates is purchased at a
discount and principal distributions thereon occur at a rate slower than that
assumed at the time of purchase, the investor's actual yield to maturity will be
lower than that assumed at the time of purchase. For additional considerations
relating to the yield on the Offered Certificates, see "Yield Considerations"
and "Maturity and Prepayment Considerations" in the Prospectus.
The yield to maturity on the Offered Certificates will be less that the
yield that would otherwise be produced by the applicable Pass-Through Rate and
the applicable purchase price because, while interest on the Mortgage Loans will
accrue monthly and will be payable of the first day of each month, distributions
on the Underlying Agency Certificates will be made on the [15th][20th] day of
each month (or, if such day is not a business day, the next business day) and
distributions on the Offered Certificates will not be made until the third
business day following such distribution date.
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 Offered
Certificates will be influenced by, among other things, the rate at which
principal of the Mortgage Loans is paid, which may be in the form of scheduled
amortization, prepayments or liquidations.
The assumed final Distribution Date with respect to each class of the
Offered Certificates is [__________ __, 20__] which is the Distribution Date
[immediately] [____ months] following the latest scheduled maturity date for any
Mortgage Loan. No event of default, change in the priorities for distribution
among the various classes or
NY1-IN61845.9
<PAGE>
other provisions under the Trust Agreement will arise or become applicable
solely by reason of the failure to retire the entire Certificate Principal
Balance of any class of Offered 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
standard prepayment assumption ("SPA"), represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of new
mortgage loans. A prepayment assumption of 100% SPA assumes constant prepayment
rates of 0.2% per annum of the then outstanding principal balance of such
mortgage loans in the first month of the life of the mortgage loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Beginning in the thirtieth month and in each month thereafter during the life of
the mortgage loans, 100% SPA assumes a constant prepayment rate of 6% per annum
each month. As used in the table below, "0% SPA" assumes prepayment rates equal
to 0% of SPA (i.e., no prepayments). Correspondingly, "[___]% SPA" assumes
prepayment rates equal to [___]% of SPA, and so forth. SPA does not purport to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans.
As described herein under "Certain Federal Income Tax Consequences,"
the prepayment assumption with respect to the Underlying Agency Securities that
will be used in determining the rate of accrued original issue discount, market
discount and premium, if any, on the Offered Certificates for federal income tax
purposes will be [____]% SPA. The original prepayment assumption for each series
of the Underlying Security is indicated in the corresponding Term Sheet.
Modeling Assumptions
The table set forth below entitled "Percent of Initial Certificate
Principal Balance Outstanding at the Following Percentage of SPA" has been
prepared on the basis of certain assumptions as described below (the "Modeling
Assumptions") regarding the weighted average characteristics of the Mortgage
Loans that are included in the Mortgage Pools and the performance thereof.
Modeling Assumptions include among other things, that as of the Reference Date,
the characteristics of the Mortgage Loans in each respective Mortgage Pool and
the Pass-Through Rate for the related Underlying Agency Securities are as set
forth in the following table:
NY1-IN61845.9
<PAGE>
Aggregate
Outstanding Weighted
Principal Balance of Weighted Average Average
Series the Mortgage Loans Mortgage Rate Servicing Fee
$
Aggregate... $
=
- - ------------------
(1) In months.
Pass-Through
Weighted Weighted Rate on the
Average Average Term Underlying
Original Term to Scheduled Agency
to Maturity(1) Maturity(1) Securities
% %
Aggregate... $
=
- - ------------------
(1) In months.
In addition, the Modeling Assumptions, among other things, assume that: (i) the
Underlying Agency Security Principal Balance is $[_______________]; (ii) the
scheduled monthly payment for a Mortgage Loan in each respective Mortgage Pool
has been based on its outstanding balance, interest rate and term to scheduled
maturity, such that the Mortgage Loan will amortize in amounts sufficient for
repayment thereof over its remaining term to maturity; (iii) the [Ginnie Mae
Issuer] will not repurchase any Mortgage Loan or exercise any option to purchase
the remaining Mortgage Loans in any Mortgage Pool, and neither the Certificate
Administrator nor the Company will exercise any option to purchase the
Underlying Agency Securities and thereby cause a termination of the Trust Fund;
(iv) there are no delinquencies 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 SPA set forth in the table; (v) there is
no Prepayment Interest Shortfall or any other interest shortfall in any month;
(vi) as of the date of issuance of the Offered Certificates, the Underlying
Agency Securities are as described herein under "Description of the Underlying
Agency Securities" and in the corresponding Term Sheet; (vii) payments on the
Offered Certificates will be received on the 28th day of each month, commencing
[__________ __, 199_]; (viii) payments on the Mortgage Loans earn no
reinvestment return; (ix) there are no additional ongoing Trust Fund expenses
payable out of the Trust Fund; and (x) the Offered Certificates will be
purchased on [__________ __, 19__].
The actual characteristics and performance of the Mortgage Loans differ
from the Modeling 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 SPA until maturity or that all of the Mortgage Loans will
prepay at the same level of SPA. Moreover, the diverse remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the table at the various constant percentages of
SPA specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Any difference between the Modeling Assumptions
and the actual characteristics and performance of the Mortgage Loans, or actual
prepayment or loss experience, will affect the percentages of initial
Certificate Principal Balances outstanding over time and the weighted average
lives of the classes of Offered Certificates.
Subject to the foregoing discussion and the Modeling Assumptions, the
following table indicates the weighted average lives of the Class A-1, Class A-2
and Class A-3 Certificates, and sets forth the percentages of the initial
Certificate Principal Balance of each such Class A-1, Class A-2 and Class A-3
Certificate that would be outstanding after each of the dates shown at various
percentages of SPA.
NY1-IN61845.9
<PAGE>
<TABLE>
Percent of Initial Certificate Principal Balance
Outstanding at the Following Percentages of SPA
<CAPTION>
Class A-1 Class A-2 Class A-3
--------------------------------- -------------------------------
<S> <C> <C> <C>
Distribution Date 0% % % % % 0% % % % % 0% % % % %
- - -----------------
-------------------- --------- ------------------ ----- ------ ------ ------ ------ ------ -------
Initial Percentage..
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Weighted Average Life
in Years**
</TABLE>
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a Certificate of any class is determined
by (i) multiplying the amount of each net distribution in reduction of
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii)
adding the results, and (iii) dividing the sum by the aggregate of the
net distributions described in clause (i) above.
This table has been prepared based on the Modeling Assumptions (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.
NY1-IN61845.9
<PAGE>
Fixed Strip Certificate Yield Considerations
The yield to maturity on each class of the Fixed Strip Certificates
will be extremely sensitive to the rate and timing of receipt of principal
payments on the Underlying Agency Securities, which in turn will be affected by
the rate and timing of principal payments (including prepayments, defaults and
liquidations) on the Mortgage Loans included in the corresponding Mortgage
Pools, which rate may fluctuate significantly over time.
The following table indicates the sensitivity of the yield to maturity
on each class of the Fixed Strip Certificates to various constant rates of
prepayment by projecting the monthly aggregate payments of interest on the Fixed
Strip Certificates and computing the corresponding pre-tax yields to maturity on
a corporate bond equivalent basis, based on the Modeling Assumptions including
the assumptions regarding the characteristics and performance of the Mortgage
Loans included in the corresponding Mortgage Pools which differ from the actual
characteristics and performance thereof, and assuming further that the
Pass-Through Rate and Notional Amount on the Fixed Strip Certificates are as set
forth herein. Any differences between the Modeling Assumptions and the actual
characteristics and performance of the corresponding Mortgage Loans may result
in yields being different from those shown in such table. Discrepancies between
assumed and actual characteristics and performance underscore the hypothetical
nature of the table, which is provided only to give a general sense of the
sensitivity of yields in varying prepayment scenarios.
Pre-Tax Yield to Maturity of the Fixed Strip
Certificates at the Following
Percentages of SPA
Assumed
Purchase
Price 0% [___]% [___]% [___]% [___]%
--------- ----- ------ ------ ------ ------
$[----------] [----]% [----]% [----]% [----]% [----]%
Each pre-tax yield to maturity set forth in the preceding table was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Fixed Strip Certificates, would
cause the discounted present value of such assumed stream of cash flows to equal
the assumed purchase price listed in the table for such class of Fixed Strip
Certificates. Accrued interest is included in the purchase prices shown and is
used in computing the corporate bond equivalent yields shown. These yields do
not take into account the different interest rates at which investors may be
able to reinvest funds received by them as distributions on the Fixed Strip
Certificates, and thus do not reflect the return on any investment in the Fixed
Strip Certificates when any reinvestment rates other than the discount rates are
considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
table, it is highly unlikely that the Mortgage Loans included in the
corresponding Mortgage Pools will be prepaid according to one particular
pattern. For this reason, and because the timing of cash flows is critical to
determining yields, the pre-tax yields to maturity on the Fixed Strip
Certificates are likely to differ from those shown in the table, even if all of
the corresponding Mortgage Loans prepay at the indicated constant percentages of
SPA over any given time period or over the entire life of the Offered
Certificates.
There can be no assurance that the corresponding Mortgage Loans will
prepay at any particular rate or that the yield on the Fixed Strip Certificates
will conform to the yields described herein. Moreover, the various remaining
terms to maturity of the corresponding Mortgage Loans could produce slower or
faster principal distributions than indicated in the preceding table at the
various constant percentages of SPA specified, even if the weighted average
remaining term to maturity of the corresponding Mortgage Loans is as assumed.
Investors are urged to make their investment decisions based on their
determinations as to anticipated rates of prepayment under a variety of
scenarios. Investors in the Fixed Strip Certificates should fully consider the
risk that a rapid rate of prepayments on the Mortgage Loans could result in the
failure of such investors to fully recover their investments.
NY1-IN61845.9
<PAGE>
For additional considerations relating to the yield on the Offered
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
Additional Yield Considerations Applicable Solely to the Residual Certificates
The Residual Certificateholders' after-tax rate of return on their
Residual Certificates will reflect their pre-tax rate of return, reduced by the
taxes required to be paid with respect to the Residual Certificates. Holders of
Residual Certificates may have tax liabilities with respect to their Residual
Certificates during the early years of the Trust Fund's term that substantially
exceed any distributions payable thereon during any such period. In addition,
holders of Residual Certificates may have tax liabilities with respect to their
Residual Certificates the present value of which substantially exceeds the
present value of distributions payable thereon and of any tax benefits that may
arise with respect thereto. Accordingly, the after-tax rate of return on the
Residual Certificates may be negative or may otherwise be significantly
adversely affected. The timing and amount of taxable income attributable to the
Residual Certificates will depend on, among other things, the timing and amounts
of prepayments and losses experienced with respect to the Mortgage Loans
underlying the Underlying Agency Securities.
The Residual Certificateholders should consult their tax advisors as to
the effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Residual Certificates on after-tax rates of
return on the Residual Certificates. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
TRUST AGREEMENT
General
The Certificates will be issued pursuant to a Trust Agreement (the
"Trust Agreement"), dated as of [__________ __, 199_], among the Company, the
Certificate Administrator, and [ ], as Trustee. Reference is made to the
Prospectus for important information in addition to that set forth herein
regarding the terms and conditions of the Trust Agreement and the Offered
Certificates. The Offered Certificates will be transferable and exchangeable at
the corporate trust office of the Trustee, which will serve as Certificate
Registrar and Paying Agent. The Company will provide a prospective or actual
Certificateholder without charge, on written request, a copy of the Trust
Agreement (without exhibits) . Requests should be addressed to the [__________],
Residential Asset Securities Corporation,
[_________________________________________________].
The Certificate Administrator
[Residential Funding, an indirect wholly-owned subsidiary of GMAC
Mortgage and an affiliate of the Company], [__________] will act as certificate
administrator with respect to the Offered Certificates pursuant to the Trust
Agreement. [For a general description of Residential Funding and its activities,
see "Residential Funding Corporation" in the Prospectus.]
Assignment of the Underlying Agency Securities
On the Delivery Date, the Company will deliver to the Trustee, with
respect to each class of Underlying Agency Securities, the Certificate for such
class registered in the name of the Trustee, evidencing the entire interest in
such class. The Trustee will be entitled to receive distributions in respect of
each Underlying Agency Security beginning with the distributions thereon in
[__________, 199_]. A Certificate Account will be established as part of the
Trust Fund, which shall be an Eligible Account as described in the Prospectus
under "Description of the Certificates--Payments on Mortgage Collateral," into
which the Trustee shall deposit all amounts received as distributions on the
Underlying Agency Securities (net of the Servicing Fee described below), pending
distributions on the Offered Certificates on each Distribution Date.
NY1-IN61845.9
<PAGE>
Compensation of Certificate Administrator
The primary compensation to be paid to the Certificate Administrator in
respect of its certificate administration activities in respect of the Offered
Certificates pursuant to the Trust Agreement will be [____]% per annum of the
aggregate outstanding Certificate Principal Balance of the Underlying Agency
Securities (the "Servicing Fee"), payable monthly out of the interest
distributions on such Underlying Agency Securities. The Certificate
Administrator is obligated to pay certain ongoing expenses associated with the
Trust Fund and incurred by the Certificate Administrator in connection with its
responsibilities under the Trust Agreement. See "Description of the
Certificates-- Servicing and Administration of Mortgage Collateral" in the
Prospectus for information regarding other possible compensation to the
Certificate Administrator and for information regarding expenses payable by the
Certificate Administrator.
Actions in Respect of the Underlying Agency Securities
If at any time the Trustee, in its capacity as the registered holder of
the Underlying Agency Securities, is requested to take any action or to give any
consent, approval or waiver, the Trust Agreement provides that the Trustee, in
its capacity as holder of the Underlying Agency Securities, may take action in
connection with the enforcement of any rights and remedies available to it in
such capacity with respect thereto, will promptly notify all of the holders of
the Offered Certificates and will act only in accordance with the written
directions of holders of the Offered Certificates evidencing at least 51% of the
voting rights.
Voting Rights
Certain actions specified in the Prospectus that may be taken by
holders of Offered Certificates evidencing a specified percentage of all
undivided interests in the Trust Fund may be taken by holders of Offered
Certificates entitled in the aggregate to such percentage of the voting rights.
[____]% of all voting rights will be allocated among all holders of the Class
A-1, Class A-2 and Class A-3 Certificates in proportion to their
then-outstanding Certificate Principal Balances and [____]% and [____]% of all
voting rights will be allocated among holders of the Class S Certificates and
Residual Certificates, respectively, in proportion to the Percentage Interests
(as defined in the Prospectus) evidenced by their respective Certificates. The
Trust Agreement will be subject to amendment without the consent of the holders
of the Residual Certificates in certain circumstances.
Termination
Either the Certificate Administrator or the Company may, at its option,
repurchase from the Trust Fund all of the Underlying Agency Securities remaining
in such Trust Fund and other assets thereof, and thereby effect early retirement
of the Offered Certificates at such time as the aggregate of the Certificate
Principal Balances of such Underlying Agency Securities is less than [____]% of
the aggregate of the Certificate Principal Balances of the Underlying Agency
Securities as of the Closing Date. In the event such option is exercised, the
purchase price distributed with respect to each of the Offered Certificates will
be 100% of its then outstanding Certificate Principal Balance plus interest
thereon at the Pass-Through Rate.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, [Orrick, Herrington &
Sutcliffe LLP] [Thacher Proffitt & Wood], counsel to the Company, will deliver
its opinion generally to the effect that, assuming compliance with all
provisions of the Trust Agreement, 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 be the
sole class of "residual interests" in the Trust Fund and the Offered
Certificates (other than the Residual Certificates) will represent ownership of
"regular interests" in the Trust Fund and will be generally treated as debt
instruments of the Trust Fund. See "Certain Federal Income Tax Consequences" in
the Prospectus.
[ADDITIONAL TAX CONSIDERATIONS TO BE INCLUDED AS APPROPRIATE]
NY1-IN61845.9
<PAGE>
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences" in the Prospectus.
ERISA CONSIDERATIONS
[A description of whether there will be any exemption from "plan asset"
treatment will be available with respect to the Series to be included as
appropriate.]
[To qualify for exemption under PTCE 83-1 (see "ERISA
Considerations--Prohibited Transaction Exemption" in the Prospectus), a
Certificate of an Exempt Series must entitle its holder to pass-through payments
of both principal and interest on the Mortgage Loans. Any Plan fiduciary who
proposes to cause a Plan to purchase Offered Certificates should consult with
its counsel with respect to the potential consequences under ERISA and Section
4975 of the Code of the Plan's acquisition and ownership of Offered
Certificates. See "ERISA Considerations" in the Prospectus.]
[A description of one or more important aspects of the Exemption to be included
if appropriate.]
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement dated [__________ __, 199_] (the "Underwriting Agreement"), the
Underwriter has agreed to purchase and the Company has agreed to sell to the
Underwriter the Offered Certificates. It is expected that delivery of the
Offered Certificates will be [made at the offices of [___________________]]
[through the book-entry facilities of The Depository Trust Company] on or about
[____________ __, 199_], against payment therefor in immediately available
funds.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Offered Certificates is
subject to, among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
Company's Registration Statement shall be in effect, and that no proceedings for
such purpose shall be pending before or threatened by the Securities and
Exchange Commission.
The distribution of the Offered Certificates by the Underwriter may be
effected, from time to time, in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds to
the Company from the sale of the Offered Certificates, before deducting expenses
payable by the Company, will be approximately [ ]% of the aggregate Certificate
Principal Balance of the Offered Certificates plus accrued interest thereon from
the Reference Date. The Underwriter may effect such transactions by selling its
Certificates to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
Underwriter for whom they act as agent. In connection with the sale of the
Offered Certificates, the Underwriter may be deemed to have received
compensation from the Company in the form of underwriting compensation. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any profit on the resale of the Offered Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
The Underwriting Agreement provides that the 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, as
amended, or contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
Certificates will be the monthly statements provided to the Certificateholders
as of each Distribution Date, which will include information as to the
Certificate Principal Balance or Notional Amount, as applicable, of the Offered
Certificates. There can be no assurance that any additional information
regarding the Offered Certificates will be available through any other source.
In addition, the Company is not aware of any source through which price
information about the Offered Certificates will be generally available on an
ongoing basis. The limited nature of
NY1-IN61845.9
<PAGE>
such information regarding the Offered Certificates may adversely affect the
liquidity of the Offered Certificates, even if a secondary market for the
Offered Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be
passed upon for the Company by [Orrick, Herrington & Sutcliffe LLP] [Thacher
Proffitt & Wood], New York, New York and for the Underwriter by
[--------------------], [--------------------].
RATING
It is a condition to the issuance of the Offered Certificates that the
Class A-1, Class A-2, Class A-3, Fixed Strip and Class R Certificates be rated
"[__]" by [____________] and "[__]" by [________].
[[_________________] ratings on mortgage pass-through certificates
address the likelihood of the receipt by Certificateholders of payments required
under the Trust Agreement. [________________] ratings take into consideration
the credit quality of the Mortgage Pool, structural and legal aspects associated
with the Certificates, and the extent to which the payment stream in the
Mortgage Pool is adequate to make payments required under the Certificates.
[________________] rating on the Certificates does not, however, constitute a
statement regarding frequency of prepayments on the Mortgage Loans. See "Certain
Yield and Prepayment Considerations" herein.] [The "r" of the "AAAr" rating of
the Class [__] Certificates by [_________________] is attached to highlight
derivative, hybrid, and certain other obligations that [_________________]
believes may experience high volatility or high variability in expected returns
due to non-credit risks. Examples of such obligations are: securities whose
principal or interest return is indexed to equities, commodities, or currencies;
certain swaps and options; and interest only and principal only mortgage
securities. The absence of an "r" symbol should not be taken as an indication
that an obligation will exhibit no volatility or variability in total return.]
[The ratings of [______] on mortgage pass-through certificates [also]
address the likelihood of the receipt by Certificateholders of all distributions
on the Mortgage Loans to which they are entitled. The rating process addresses
the structural and legal aspects associated with the Certificates, including the
nature of the Mortgage Loans. The ratings assigned to mortgage pass-through
certificates do not represent any assessment of the likelihood or rate of
principal prepayments. The rating does not address the possibility that
Certificateholders might suffer a lower than anticipated yield.]
[The ratings of [________] assigned to mortgage pass-through
certificates [also] address the likelihood of the receipt by Certificateholders
of all distributions to which such Certificateholders are entitled. [________]
ratings on mortgage pass-through certificates do not represent any assessment of
the likelihood that principal prepayments will be made by the mortgagors or the
degree to which such prepayments differ from that originally anticipated. The
ratings assigned to mortgage pass-through certificates do not represent any
assessment of the likelihood or rate of principal prepayments. The rating does
not address the possibility that Certificateholders might suffer a lower than
anticipated yield or that rapid rates of principal prepayments could result in a
failure of the holders of the Fixed Strip Certificates to fully recover their
initial investment.]
The Company has not requested a rating on the Offered Certificates by
any rating agency other than [__________] and [__________]. However, there can
be no assurance as to whether any other rating agency will rate the Offered
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 Offered
Certificates by [_________] and [__________].
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. The rating of the Fixed Strip
Certificates does not address the possibility that the holders of such
Certificates may fail to fully recover their initial investment. In the event
that the rating initially assigned to the Offered Certificates is subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to the Offered
Certificates.
NY1-IN61845.9
<PAGE>
LEGAL INVESTMENT MATTERS
[The Offered Certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"), for so long as they are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization, and, as such, will be legal investments for certain entities to
the extent provided in SMMEA. SMMEA provides, however, that states could
override its provisions on legal investment and restrict or condition investment
in mortgage related securities by taking statutory action on or prior to October
3, 1991. Certain states have enacted legislation which overrides the preemption
provisions of SMMEA.]
The Company makes no representations as to the proper characterization
of any class of the Offered Certificates for legal investment or other purposes,
or as to the ability of particular investors to purchase any class of the
Offered Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent any class of the
Offered Certificates constitutes a legal investment or is subject to investment,
capital or other restrictions.
See "Legal Investment Matters" in the Prospectus.
NY1-IN61845.9
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by the Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
TABLE OF CONTENTS
Page
Prospectus Supplement
Summary.............................................. S-
Description of the Offered Certificates.............. S-
Description of the Underlying Agency Securities...... S-
Certain Yield and Prepayment Considerations.......... S-
Trust Agreement...................................... S-
Certain Federal Income Tax Consequences.............. S-
ERISA Considerations................................. S-
Method of Distribution............................... S-
Legal Opinions....................................... S-
Rating............................................... S-
Legal Investment Matters............................. S-
Prospectus
Summary of Prospectus................................
Risk Factors.........................................
The Trust Funds......................................
Description of the Certificates......................
Subordination........................................
Description of Credit Enhancement....................
Insurance Policies on Mortgage Loans or Contracts....
The Company..........................................
Residential Funding Corporation......................
The Pooling and Servicing Agreement..................
Yield Considerations.................................
Maturity and Prepayment Considerations...............
Certain Legal Aspects of Mortgage
Loans and Contracts.............................
Certain Federal Income Tax Consequences..............
State Tax Consequences...............................
ERISA Considerations.................................
Legal Investment Matters.............................
Use of Proceeds......................................
Methods of Distribution..............................
Legal Matters........................................
Financial Information................................
Additional Information...............................
Index of Principal Definitions.......................
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Other Expenses of Issuance and Distribution (Item 14 of Form S-3).
The expenses expected to be incurred in connection with the issuance
and distribution of the Certificates being registered, other than underwriting
compensation, are as set forth below.
All such expenses, except for the filing fee, are estimated.
Filing Fee for Registration Statement................. $ 363,637
Legal Fees and Expenses............................... 350,000
Accounting Fees and Expenses.......................... 150,000
Trustee's Fees and Expenses
(including counsel fees)........................... 37,500
Blue Sky Fees and Expenses............................ 20,000
Printing and Engraving Expenses....................... 125,000
Rating Agency Fees.................................... 812,500
Miscellaneous ........................................ 40,000
-----------------
Total................................................. $ 1,898,637
----------
Indemnification of Directors and Officers (Item 15 of Form S-3).
The Pooling and Servicing Agreements or the Trust Agreements, as
applicable, will provide that no director, officer, employee or agent of the
Registrant is liable to the Trust Fund or the Certificateholders, except for
such person's own willful misfeasance, bad faith, gross negligence in the
performance of duties or reckless disregard of obligations and duties. The
Pooling and Servicing Agreements or the Trust Agreements, as applicable, will
further provide that, with the exceptions stated above, a director, officer,
employee or agent of the Registrant is entitled to be indemnified against any
loss, liability or expense incurred in connection with legal action relating to
such Pooling and Servicing Agreements or the Trust Agreements, as applicable,
and related Certificates other than such expenses related to particular Mortgage
Loans or Contracts.
Any underwriters who execute an Underwriting Agreement in the form
filed as Exhibit 1.1 to this Registration Statement will agree to indemnify the
Registrant's directors and its officers who signed this Registration Statement
against certain liabilities which might arise under the Securities Act of 1933
from certain information furnished to the Registrant by or on behalf of such
indemnifying party.
Subsection (a) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another
<PAGE>
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification or advancement of expenses provided
for by Section 145 shall not be deemed exclusive of any other rights to which
the indemnified party may be entitled; and empowers the corporation to purchase
and maintain insurance on behalf of a director, officer, employee or agent of
the corporation against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
The By-Laws of the Registrant provide, in effect, that to the extent
and under the circumstances permitted by subsections (a) and (b) of Section 145
of the General Corporation Law of the State of Delaware, the Registrant (i)
shall indemnify and hold harmless each person who was or is a party or is
threatened to be made a party to any action, suit or proceeding described in
subsections (a) and (b) by reason of the fact that he is or was a director or
officer, or his testator or intestate is or was a director or officer of the
Registrant, against expenses, judgments, fines and amounts paid in settlement,
and (ii) shall indemnify and hold harmless each person who was or is a party or
is threatened to be made a party to any such action, suit or proceeding if such
person is or was serving at the request of the Registrant as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
Certain controlling persons of the Registrant may also be entitled to
indemnification from General Motors Acceptance Corporation, an indirect parent
of the Registrant. Under sections 7015 and 7018-7023 of the New York Banking
Law, General Motors Acceptance Corporation may or shall, subject to various
exceptions and limitations, indemnify its directors or officers and may purchase
and maintain insurance as follows:
<PAGE>
(a) If the director is made or threatened to be made a party
to an action by or in the right of General Motors Acceptance
Corporation to procure a judgment in its favor, by reason of the fact
that such person is or was a director or officer of General Motors
Acceptance Corporation or is or was serving at the request of General
Motors Acceptance Corporation as a director or officer of some other
enterprise, General Motors Acceptance Corporation may indemnify such
person against amounts paid in settlement of such action or an appeal
therein, if such director or officer acted, in good faith, for a
purpose which such person reasonably believed to be in (or, in the case
of service for any other enterprise, not opposed to) the best interests
of General Motors Acceptance Corporation, except that no
indemnification is available under such statutory provisions in respect
of a threatened action or a pending action which is settled or
otherwise disposed of, or any claim or issue or matter as to which such
person is found liable to General Motors Acceptance Corporation, unless
in each such case a court determined that such person is fairly and
reasonably entitled to indemnity for such amount as the court deems
proper.
(b) With respect to any action or proceeding other than one by
or in the right of General Motors Acceptance Corporation to procure a
judgment in its favor, if a director or officer is made or threatened
to be made a party by reason of the fact that such person was a
director or officer of General Motors Acceptance Corporation, or served
some other enterprise at the request of General Motors Acceptance
Corporation, General Motors Acceptance Corporation may indemnify such
person against judgments, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees, incurred as a result of
such action or proceeding or an appeal therein, if such person acted in
good faith for a purpose which such person reasonably believed to be in
(or, in the case of service for any other enterprise, not opposed to)
the best interests of General Motors Acceptance Corporation and, in
criminal actions or proceedings, in addition, had no reasonable cause
to believe that such person's conduct was unlawful.
(c) A director or officer who has been wholly successful, on
the merits or otherwise, in the defense of a civil or criminal action
or proceeding of the character described in paragraphs (a) or (b)
above, shall be entitled to indemnification as authorized in such
paragraphs.
(d) General Motors Acceptance Corporation may purchase and
maintain insurance to indemnify directors and officers in instances in
which they may not otherwise be indemnified by General Motors
Acceptance Corporation under the provisions of the New York Banking
Law, provided that the contract of insurance provides for a retention
amount and for co-insurance, except that no such insurance may provide
for any payment, other than cost of defense, to or on behalf of any
director or officer if a judgment or other final adjudication adverse
to such director or officer establishes that such person's acts of
active and deliberate dishonesty were material to the cause of action
so adjudicated or that such person personally gained in fact a
financial profit or other advantage to which such person was not
legally entitled.
The foregoing statement is subject to the detailed provisions of
sections 7015 and 7018-7023 of the New York Banking Law.
<PAGE>
As a subsidiary of General Motors Corporation, General Motors
Acceptance Corporation is insured against liabilities which it may incur by
reason of the foregoing provisions of the New York Banking Law and directors and
officers of General Motors Acceptance Corporation are insured against some
liabilities which might arise out of their employment and not be subject to
indemnification under said Banking Law.
Pursuant to resolutions adopted by the Board of Directors of General
Motors Corporation, that company to the fullest extent permissible under law
will indemnify, and has purchased insurance on behalf of, directors or officers
of the company, or any of them, who incur or are threatened with personal
liability, including expenses, under Employee Retirement Income Security Act of
1974 or any amendatory or comparable legislation or regulation thereunder.
Exhibits (Item 16 of Form S-3).
*1.1 Form of Underwriting Agreement (Incorporated by reference to
Exhibit 1 to Registration Statement No. 33-56893).
*3.1 Certificate of Incorporation (Incorporated by reference to Exhibit
3.1 to Registration Statement No. 33-56893).
*3.2 By-Laws (Incorporated by reference to Exhibit 3.2 to Registration
Statement No. 33-56893).
*4.1 Form of Pooling and Servicing Agreement (Incorporated by
reference to Exhibit 4.1 to Registration Statement No. 33-56893).
*4.2 Form of Trust Agreement (Incorporated by reference to Exhibit
4.2 to Registration Statement No. 33-56893).
**5.1 Opinion of Orrick, Herrington & Sutcliffe LLP with respect to
legality.
**5.2 Opinion of Thacher Proffitt & Wood with respect to legality.
**8.1 Opinion of Orrick, Herrington & Sutcliffe LLP with respect to
certain tax matters.
**8.2 Opinion of Thacher Proffitt & Wood with
respect to certain tax matters (included as
part of Exhibit 5.2).
**23.1 Consent of Orrick, Herrington & Sutcliffe
LLP (included as part of Exhibit 5.1 and
Exhibit 8.1).
**23.2 Consent of Thacher Proffitt & Wood (included as part of Exhibit
5.2 and Exhibit 8.2).
<PAGE>
**24.1 Power of Attorney.
**24.2 Certified Copy of the Resolutions of the Board of Directors of the
Registrant.
- - ---------------
* Not filed herewith.
** As previously filed.
Undertakings (Item 17 of Form S-3).
The Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts
or events arising after the effective date of this
Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in
this Registration Statement. Notwithstanding the foregoing,
any increase or decrease in the volume of securities offered
(if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the
low or high and of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
(iii) to include any material information
with respect to the plan of distribution not previously
disclosed in this Registration Statement or any material
change to such information in this Registration Statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The Registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange
<PAGE>
Act of 1934) that is incorporated by reference in this Registration Statement
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3, reasonably believes that the
security rating requirement referred to in Transaction Requirement B.2 or B.5 of
Form S-3 will be met by the time of sale of the securities registered hereby,
and has duly caused this Amendment No. ^ 2 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Minneapolis, State of Minnesota, on ^ November 12, 1997.
RESIDENTIAL ASSET SECURITIES
CORPORATION
By: /s/William B. Acheson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. ^ 2 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
Signature Title Date
/s/William B. Acheson President and Chief ^ November 12, 1997
- - --------------------------- ============
William B. Acheson Executive Officer
(Principal Executive
Officer)
* Director, Treasurer and ^ November 12, 1997
- - ------------------------- ============
Davee L. Olson Chief Financial Officer
(Principal Financial Officer
and Principal Accounting
Officer)
* Director ^ November 12, 1997
Bruce J. Paradis
* Director ^ November 12, 1997
- - ------------------
Dennis W. Sheehan, Jr.
<PAGE>
* By:/s/William B. Acheson
William B. Acheson
Attorney-in-fact pursuant
to a power of attorney filed
with the Registration
Statement
<PAGE>
