<PAGE>
Prospectus supplement dated September 23, 1999 (to prospectus dated September
23, 1999)
$1,450,000,000
RASC SERIES 1999-KS3 TRUST
ISSUER
RESIDENTIAL ASSET SECURITIES CORPORATION
DEPOSITOR
RESIDENTIAL FUNDING CORPORATION
MASTER SERVICER
MORTGAGE ASSET-BACKED PASS-THROUGH CERTIFICATES, SERIES 1999-KS3
The trust will hold two loan groups of one- to four-family residential first
mortgage loans and junior mortgage loans.
The trust will issue these classes of certificates that are offered under this
prospectus supplement:
10 classes of Class A Certificates.
Credit enhancement for all of these certificates will be provided by excess
interest payments on the mortgage loans, overcollateralization represented by
the excess of the balance of the mortgage loans in a group over the balance of
the related Class A Certificates, cross collateralization and two certificate
guaranty insurance policies issued by Ambac Assurance Corporation.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-11 IN THIS
PROSPECTUS SUPPLEMENT.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Prudential Securities Incorporated, Morgan Stanley & Co. Incorporated and
Salomon Smith Barney Inc. will offer to the public the Class A-I Certificates at
varying prices to be determined at the time of sale. The proceeds to the
depositor from the sale of such underwritten certificates will be approximately
99.75% of the principal balance of such underwritten certificates plus accrued
interest, before deducting expenses.
Residential Funding Securities Corporation, an affiliate of the depositor,
will offer to the public the Class A-II Certificates on a best efforts basis,
from time to time, directly through dealers. The termination of Residential
Funding Securities Corporation's offering will be either September 29, 2000 or
the date on which all the Class A-II Certificates have been sold, whichever is
earlier. Proceeds from such offering will not be placed in escrow, trust or
similar arrangement. The proceeds to the depositor from any sale of the Class
A-II Certificates will be equal to the purchase price paid by the purchaser, net
of any expenses payable by the depositor and any compensation payable to
Residential Funding Securities Corporation and any dealer.
PRUDENTIAL SECURITIES
RESIDENTIAL FUNDING SECURITIES CORPORATION
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
UNDERWRITERS
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We provide information to you about the Class A Certificates in two separate
documents that provide progressively more detail:
the prospectus, which provides general information, some of which may not
apply to your series of certificates; and
this prospectus supplement, which describes the specific terms of your
series of certificates.
IF THE DESCRIPTION OF YOUR CERTIFICATES IN THIS PROSPECTUS SUPPLEMENT DIFFERS
FROM THE RELATED DESCRIPTION IN THE PROSPECTUS, YOU SHOULD RELY ON THE
INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
The depositor's principal offices are located at 8400 Normandale Lake Boulevard,
Suite 600, Minneapolis, Minnesota 55437 and its phone number is (612) 832-7000.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary...................... S-4
Risk Factors................. S-11
Risk of Loss........... S-11
Limited Obligations.... S-13
Liquidity Risks........ S-13
Special Yield and
Prepayment
Considerations...... S-14
Introduction................. S-18
Description of the Mortgage
Pool...................... S-18
General................ S-18
Mortgage Pool
Characteristics..... S-19
Group I Loans.......... S-20
Group II Loans......... S-25
Standard Hazard
Insurance and
Primary Mortgage
Insurance........... S-38
Underwriting
Standards........... S-39
The AlterNet Program... S-42
Residential Funding.... S-42
Servicing.............. S-43
Additional
Information......... S-43
Description of the
Certificates.............. S-43
General................ S-43
Book-Entry Registration
of the Class A
Certificates........ S-45
Glossary of Terms...... S-45
Multiple Loan Group
Structure........... S-51
<CAPTION>
PAGE
----
<S> <C>
Interest
Distributions....... S-52
Determination of
One-Month LIBOR..... S-53
Principal Distributions
on the Class A
Certificates........ S-54
Overcollateralization
Provisions.......... S-54
Basis Risk Reserve
Funds............... S-56
Description of the
Policies............ S-56
Allocation of Losses;
Subordination....... S-56
Advances............... S-59
Year 2000 Considerations..... S-59
Overview of the Year
2000 Issue.......... S-59
Overview of Residential
Funding's Y2K
Project............. S-59
Y2K Project Status..... S-60
Risks Related to Y2K... S-61
The Insurer.................. S-62
Certain Yield and Prepayment
Considerations............ S-64
General................ S-64
TAC Certificates....... S-67
Class A-I-6
Certificates........ S-68
Class A-I-7
Certificates........ S-68
Scheduled Final
Distribution Date... S-69
Weighted Average
Life................ S-69
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pooling and Servicing
Agreement................. S-75
General................ S-75
The Master Servicer.... S-75
Servicing and Other
Compensation and
Payment of
Expenses............ S-77
Voting Rights.......... S-77
Termination............ S-78
Material Federal Income Tax
Consequences.............. S-79
<CAPTION>
PAGE
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<S> <C>
Method of Distribution....... S-81
Legal Opinions............... S-82
Experts...................... S-82
Ratings...................... S-82
Legal Investment............. S-83
ERISA Considerations......... S-83
</TABLE>
S-3
<PAGE>
SUMMARY
The following summary is a very general overview of the certificates and
does not contain all of the information that you should consider in making your
investment decision. To understand the terms of the offered certificates, you
should carefully read this entire document and the prospectus.
<TABLE>
<S> <C>
Issuer.................................... RASC Series 1999-KS3 Trust.
Title of securities....................... Mortgage Asset-Backed Pass-Through
Certificates, Series 1999-KS3.
Depositor................................. Residential Asset Securities Corporation, an
affiliate of Residential Funding Corporation.
Master servicer........................... Residential Funding Corporation.
Trustee................................... Bank One, National Association, a national
banking association.
Insurer................................... Ambac Assurance Corporation.
Mortgage pool............................. 16,053 fixed and adjustable rate first
mortgage loans and junior mortgage loans with
an aggregate principal balance of
approximately $1,450,013,700 as of the cut-off
date.
Cut-off date.............................. September 1, 1999.
Closing date.............................. On or about September 29, 1999.
Distribution dates........................ Beginning on October 25, 1999 and thereafter,
on the 25th of each month or, if the 25th is
not a business day, on the next business day.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Scheduled final distribution
date................................... A-I-1A July 25, 2014 A-I-5 March 25, 2028
A-I-1B July 25, 2014 A-I-6 October 25, 2030
A-I-2 September 25, 2020 A-I-7 October 25, 2030
A-I-3 January 25, 2025 A-II-1 October 25, 2030
A-I-4 December 25, 2025 A-II-2 October 25, 2030
The actual final distribution date could be
substantially earlier.
</TABLE>
<TABLE>
<S> <C>
Form of certificates...................... Book-entry.
See 'Description of the
Certificates -- Book-Entry Registration' in
this prospectus supplement.
Minimum denominations..................... $25,000.
</TABLE>
S-4
<PAGE>
OFFERED CERTIFICATES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
INITIAL INITIAL
PASS-THROUGH PRINCIPAL RATING
CLASS RATE BALANCE (MOODY'S/S&P) DESIGNATIONS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A CERTIFICATES:
- --------------------------------------------------------------------------------------------
A-I-1A Adjustable Rate $ 155,000,000 Aaa/AAA Senior/Floating Rate
- --------------------------------------------------------------------------------------------
A-I-1B 6.960% $ 75,000,000 Aaa/AAA Senior/Fixed Rate
- --------------------------------------------------------------------------------------------
A-I-2 7.075% $ 110,000,000 Aaa/AAA Senior/TAC/Fixed Rate
- --------------------------------------------------------------------------------------------
A-I-3 7.180% $ 110,000,000 Aaa/AAA Senior/TAC/Fixed Rate
- --------------------------------------------------------------------------------------------
A-I-4 7.380% $ 30,000,000 Aaa/AAA Senior/TAC/Fixed Rate
- --------------------------------------------------------------------------------------------
A-I-5 7.570% $ 85,000,000 Aaa/AAA Senior/TAC/Fixed Rate
- --------------------------------------------------------------------------------------------
A-I-6 Adjustable Rate $ 65,000,000 Aaa/AAA Senior/Companion/
Floating Rate
- --------------------------------------------------------------------------------------------
A-I-7 7.505% $ 70,000,000 Aaa/AAA Senior/Lockout/Fixed Rate
- --------------------------------------------------------------------------------------------
A-II-1 Adjustable Rate $ 350,000,000 Aaa/AAA Senior/Floating Rate
- --------------------------------------------------------------------------------------------
A-II-2 Adjustable Rate $ 400,000,000 Aaa/AAA Senior/Floating Rate
- --------------------------------------------------------------------------------------------
Total Class A Certificates: $ 1,450,000,000
- --------------------------------------------------------------------------------------------
NON-OFFERED CERTIFICATES
- --------------------------------------------------------------------------------------------
CLASS SB AND CLASS R CERTIFICATES:
- --------------------------------------------------------------------------------------------
SB-I NA $ 2,497 NA Subordinate
- --------------------------------------------------------------------------------------------
SB-II NA $ 11,203 NA Subordinate
- --------------------------------------------------------------------------------------------
R-I NA $ 0 NA Residual
- --------------------------------------------------------------------------------------------
R-II NA $ 0 NA Residual
- --------------------------------------------------------------------------------------------
R-III NA $ 0 NA Residual
- --------------------------------------------------------------------------------------------
TOTAL CLASS SB AND
CLASS R CERTIFICATES: $ 13,700
- --------------------------------------------------------------------------------------------
Total offered and
non-offered certificates: $ 1,450,013,700
- --------------------------------------------------------------------------------------------
</TABLE>
S-5
<PAGE>
OTHER INFORMATION
The pass-through rate on each of the Class A-I-1A, Class A-I-6, Class A-II-1 and
Class A-II-2 Certificates will adjust from time to time based on the following
formula: One-Month LIBOR + applicable spread. The pass-through rate on each of
the Class A-I-1A, Class A-I-5, Class A-I-6, Class A-I-7, Class A-II-1 and
Class A-II-2 Certificates is subject to a maximum rate described in this
prospectus supplement under 'Description of the Certificates -- Interest
Distributions.'
The applicable spreads are as follows:
<TABLE>
<S> <C>
Class A-I-1A 0.22%
Class A-I-6 0.63%
Class A-II-1 0.39%
Class A-II-2 0.34%
</TABLE>
The applicable spreads for the Class A-I-6, Class A-II-1 and Class A-II-2
Certificates will double if the related loan group is not optionally terminated
as described in this prospectus supplement under 'Pooling and Servicing
Agreement -- Termination.'
S-6
<PAGE>
THE TRUST
The depositor will establish a trust to issue the Series 1999-KS3 Certificates,
under a pooling and servicing agreement. On the closing date, the depositor will
deposit the pool of mortgage loans described in this prospectus supplement into
the trust. Each certificate will represent a partial ownership interest in the
trust.
The trust will also include credit enhancement for the Class A Certificates in
the form of two certificate guaranty insurance policies provided by Ambac
Assurance Corporation.
THE MORTGAGE POOL
The mortgage loans to be deposited in the trust will be divided into two loan
groups. Loan Group I consists of fixed rate loans and Loan Group II consists of
adjustable rate loans. The mortgage loans have the following characteristics as
of the cut-off date:
<TABLE>
<CAPTION>
WEIGHTED
LOAN GROUP I RANGE AVERAGE
------------ ----- --------
<S> <C> <C>
Principal balance $2,348 to $649,697 $78,511*
Mortgage rates 6.24% to 18.05% 10.2109%
Remaining terms to 45 to 360 334
maturity (months)
LOAN GROUP II
-------------
Principal balance $8,443 to $632,743 $105,088*
Mortgage rates 7.49% to 14.54% 10,0790%
Remaining terms to 175 to 360 357
maturity (months)
</TABLE>
* Indicates average principal balances
The interest rate on the adjustable rate mortgage loans will adjust on each
adjustment date to equal the sum of the related index and the note margin on
such mortgage, subject to a maximum and minimum interest rate.
The mortgage loans were originated using less restrictive underwriting standards
than the underwriting standards applied by some other first and junior mortgage
loan purchase programs, including the programs of Fannie Mae, Freddie Mac and
the depositor's affiliate, Residential Funding Mortgage Securities I, Inc.
For additional information regarding the mortgage pool see 'Description of the
Mortgage Pool' in this prospectus supplement.
DISTRIBUTIONS ON THE CLASS A CERTIFICATES
Amount available for monthly distribution. On each monthly distribution date,
the trustee will make distributions to investors. The amount available for
distribution will be calculated on a loan group basis and will include:
collections of monthly payments on the related mortgage loans, including
prepayments and other unscheduled collections plus
advances for delinquent payments on the mortgage loans in the related loan
group minus
the fees and expenses of the subservicers and the master servicer for the
applicable loan group, including reimbursement for advances minus
the premium paid to the certificate insurer for the related certificate
guaranty insurance policy.
See 'Description of the Certificates -- Glossary of Terms -- Available
Distribution Amount' in this prospectus supplement.
S-7
<PAGE>
Priority of distributions. Distributions on the Class A Certificates will be
made from available amounts from the related loan group as follows:
Distribution of interest to the Class A Certificates
Distributions of principal to the Class A Certificates entitled to
principal
Distributions of principal to the Class A Certificates for specified
losses on the mortgage loans
Reimbursement to the certificate insurer for payments made by the
certificate insurer to the Class A Certificates
Payments of excess interest payments on the mortgage loans to make
principal payments on the Class A Certificates, until the amount of
overcollateralization reaches the required amount
Distributions of interest for specified interest shortfalls on the
Class A Certificates
Distribution of remaining funds to the Class SB and Class R Certificates
Interest distributions. The amount of interest owed to each class of Class A
Certificates on each distribution date will equal:
the pass-through rate for that class of certificates multiplied by
the principal balance of that class of certificates as of the day
immediately prior to the related distribution date multiplied by
1/12, in the case of the fixed rate certificates or the actual number of
days in the interest accrual period divided by 360, in the case of the
adjustable rate certificates minus
the share of some types of interest shortfalls allocated to that class.
See 'Description of the Certificates -- Interest Distributions' in this
prospectus supplement.
Allocations of principal. Principal distributions on the certificates will be
allocated among the various classes of Class A Certificates as described in this
prospectus supplement. Not all outstanding Class A Certificates will receive
principal on each distribution date.
In addition, the Class A Certificates will receive a distribution of principal,
to the extent of any net monthly excess cash flow available to cover losses and
then to increase the amount of overcollateralization for the related loan
group until the required amount of overcollateralization for that loan group
is reached. The Class A Certificates also may receive a distribution of
principal to cover losses from the net monthly excess cashflows for the other
loan group. In addition, the Class A Certificates will receive a distribution of
principal from the related certificate guaranty insurance policy to cover
losses on the mortgage loans allocated to the Class A Certificates.
See 'Description of the Certificates -- Principal Distributions on the Class A
Certificates' in this prospectus supplement.
CREDIT ENHANCEMENT
ALLOCATION OF LOSSES. Losses on the mortgage loans will be covered by net
monthly excess cash flow, overcollateralization, cross collateralization and
the certificate guaranty insurance policies as follows.
First, losses will be covered by a distribution from any net monthly excess
cash flow for a loan group to the related Class A Certificates,
Second, losses will be covered by a distribution from any remaining net
monthly excess cashflow for the other
S-8
<PAGE>
loan group to the Class A Certificates,
Third, losses will result in a decrease in the level of
overcollateralization for the related loan group, until the level of
overcollateralization is reduced to zero,
Fourth, losses will result in a decrease in the level of
overcollateralization for the other loan group, until the level of
overcollateralization is reduced to zero, and
Fifth, losses will be allocated to the related Class A Certificates, to
reduce their certificate principal balance; these losses will be covered by
the related certificate guaranty insurance policy.
Not all losses will be allocated in the priority described in the preceding
paragraph. Losses due to natural disasters such as floods and earthquakes, fraud
by a mortgagor or bankruptcy of a mortgagor will be so allocated only up to
specified amounts. Losses of these types in excess of the specified amount for a
loan group and losses due to other extraordinary events for a loan group will be
allocated to the related Class A Certificates. Any of these losses will be
covered by the related certificate guaranty insurance policy.
See 'Description of the Certificates -- Allocation of Losses; Subordination' in
this prospectus supplement.
THE CERTIFICATE GUARANTY INSURANCE POLICIES. Ambac Assurance Corporation will
issue two certificate guaranty insurance policies as a means of providing
additional credit enhancement to the Class A Certificates. Under each policy,
the certificate insurer will pay an amount that will cover any shortfalls in
amounts available to pay the interest distribution amount for the Class A
Certificates on any distribution date, the principal portion of any losses on
the mortgage loans allocated to the Class A Certificates and any unpaid
certificate principal balance of the Class A Certificates on the final
distribution date. The policies will not provide coverage for certain interest
shortfalls.
See 'Description of the Certificates -- Description of the Policies' and 'The
Insurer' in this prospectus supplement.
ADVANCES
For any month, if the master servicer does not receive the full scheduled
payment on a mortgage loan, the master servicer will advance funds to cover the
amount of the scheduled payment that was not made. However, the master servicer
will advance funds only if it determines that the advance will be recoverable
from future payments or collections on that mortgage loan.
See 'Description of the Certificates -- Advances' in this prospectus supplement.
OPTIONAL TERMINATION
On any distribution date on which the aggregate outstanding principal balance of
the mortgage loans as of the related determination date in a loan group is less
than 10% of their principal balance as of the cut-off date, the master servicer
or the depositor will have the option to:
purchase from the trust all remaining mortgage loans in that loan group
causing an early retirement of the related certificates;
or
purchase all the certificates related to that loan group.
Under either type of optional purchase, holders of the outstanding certificates
will receive the outstanding principal balance of the certificates in full with
accrued
S-9
<PAGE>
interest. However, no purchase of the mortgage loans or certificates will be
permitted if it would result in a draw under the related certificate guaranty
insurance policy unless the certificate insurer consents to the termination.
See 'Pooling and Servicing Agreement -- Termination' in this prospectus
supplement and 'The Pooling and Servicing Agreement -- Termination; Retirement
of Certificates' in the prospectus.
RATINGS
When issued, the Class A Certificates will receive ratings which are not lower
than those set forth on page S-5 of this prospectus supplement. The ratings on
the Class A Certificates address the likelihood that holders of the Class A
Certificates will receive all distributions on the underlying mortgage loans to
which they are entitled. A security rating is not a recommendation to buy, sell
or hold a security and is subject to change or withdrawal at any time by the
assigning rating agency. The ratings also do not address the rate of principal
prepayments on the mortgage loans or the likelihood of reimbursement for
interest shortfalls not covered by the certificate guaranty insurance policies.
See 'Ratings' in this prospectus supplement.
LEGAL INVESTMENT
The Class A Certificates will not be 'mortgage related securities' for purposes
of the Secondary Mortgage Market Enhancement Act of 1984. You should consult
your legal advisors in determining whether and to what extent the Class A
Certificates constitute legal investments for you.
See 'Legal Investment' in this prospectus supplement for important information
concerning possible restrictions on ownership of the Class A Certificates by
regulated institutions.
ERISA CONSIDERATIONS
The Class A Certificates may be purchased by persons investing assets of
employee benefit plans or individual retirement accounts, subject to important
considerations.
See 'ERISA Considerations' in this prospectus supplement and in the prospectus.
TAX STATUS
For federal income tax purposes, the depositor will elect to treat the trust as
three real estate mortgage investment conduits. The Class A Certificates,
excluding the rights to receive payments of Class A-I-6 Basis Risk Shortfalls
and Class A-II Basis Risk Shortfalls, will represent ownership of regular
interests in the trust and will be treated as representing ownership of debt for
federal income tax purposes. You will be required to include in income all
interest and original issue discount, if any, on your regular interest in
accordance with the accrual method of accounting regardless of your usual method
of accounting. For federal income tax purposes, the residual certificates will
be the sole residual interest in one of the three real estate mortgage
investment conduits.
For further information regarding the federal income tax consequences of
investing in the Class A Certificates, see 'Material Federal Income Tax
Consequences' in this prospectus supplement and in the prospectus.
S-10
<PAGE>
RISK FACTORS
The Class A Certificates are not suitable investments for all investors. In
particular, you should not purchase any class of Class A Certificates unless you
understand the prepayment, credit, liquidity and market risks associated with
that class.
The Class A Certificates are complex securities. You should possess, either
alone or together with an investment advisor, the expertise necessary to
evaluate the information contained in this prospectus supplement and the
accompanying prospectus in the context of your financial situation and tolerance
for risk.
You should carefully consider, among other things, the following factors in
connection with the purchase of the Class A Certificates:
<TABLE>
<S> <C>
RISK OF LOSS
THE RETURN ON YOUR Losses on the mortgage loans may occur due to a wide variety of causes,
CERTIFICATES MAY BE including a decline in real estate values and adverse changes in the
AFFECTED BY LOSSES ON THE borrower's financial condition. A decline in real estate values or
MORTGAGE LOANS, WHICH COULD economic conditions nationally or in the regions where the mortgaged
OCCUR DUE TO A VARIETY OF properties are located may increase the risk of losses on the mortgage
CAUSES loans.
UNDERWRITING STANDARDS MAY The mortgage loans have been originated using underwriting standards that
AFFECT RISK OF LOSS ON THE are less restrictive than the underwriting standards applied by some
MORTGAGE LOANS other first or junior mortgage loan purchase programs, including the
programs of Fannie Mae, Freddie Mac and the depositor's affiliate,
Residential Funding Mortgage Securities I, Inc. Applying less restrictive
underwriting standards creates additional risks that losses on the
mortgage loans will be allocated to certificateholders.
Examples include:
mortgage loans made to borrowers having imperfect credit histories;
mortgage loans where the amount of the loan at origination is 80% or more
of the value of the mortgaged property;
mortgage loans made to borrowers with low credit scores;
mortgage loans made to borrowers who have other debt that represents a
large portion of his or her income; and
mortgage loans made to borrowers whose income is not required to be
disclosed or verified.
The foregoing characteristics of the mortgage loans may adversely affect
the performance of the mortgage pool and the value of the Class A
Certificates as compared to other mortgage pools and other series of
mortgage pass-through certificates issued by the depositor and its
affiliates.
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
Investors should note that 52.7% of the cut-off date principal balance of
the mortgage loans were made to borrowers that had credit scores of less
than 600, excluding credit scores that were not available. The mortgage
loans with higher loan-to-value ratios may also present a greater risk of
loss. 37.5% of the cut-off date principal balance of the mortgage loans
are mortgage loans with loan-to-value ratios at origination in excess of
80% and are not insured by a primary mortgage insurance policy.
SOME OF THE MORTGAGE LOANS As of the cut-off date, 0.8% of the cut-off date principal balance of the
INCLUDED IN THE TRUST ARE mortgage loans are 30 to 59 days delinquent in payment of principal and
EITHER CURRENTLY DELINQUENT interest. Mortgage loans with a history of delinquencies are more likely
OR HAVE BEEN DELINQUENT IN to experience delinquencies in the future, even if such mortgage loans
THE PAST, WHICH MAY are current as of the cut-off date.
INCREASE THE RISK OF LOSS See 'Description of the Mortgage Pool -- Mortgage Pool Characteristics'
ON THE MORTGAGE LOANS and ' -- Underwriting Standards' in this prospectus supplement. For a
description of the methodology used to categorize mortgage loans as
delinquent, see 'Pooling and Servicing Agreement -- The Master Servicer'
in this prospectus supplement.
ORIGINATION DISCLOSURE Approximately 1.4% of the cut-off date principal balance of the mortgage
PRACTICES FOR THE MORTGAGE loans included in the mortgage pool are subject to special rules,
LOANS COULD CREATE disclosure requirements and other regulatory provisions because they are
LIABILITIES THAT MAY AFFECT high cost loans. Purchasers or assignees of these high cost loans could
THE RETURN ON YOUR be exposed to all claims and defenses that the mortgagors could assert
CERTIFICATES against the originators of the mortgage loans. Remedies available to the
mortgagor include monetary penalties, as well as recission rights if the
appropriate disclosures were not given as required.
See 'Certain Legal Aspects of Mortgage Loans and Contracts -- The
Mortgage Loans -- Anti-Deficiency Legislation and Other Limitations on
Lenders' in the prospectus.
THE RETURN ON YOUR One risk associated with investing in mortgage-backed securities is
CERTIFICATES MAY BE created by any concentration of the related properties in one or more
PARTICULARLY SENSITIVE TO geographic regions. Approximately 10.8% of the cut-off date principal
CHANGES IN REAL ESTATE balance of the mortgage loans are located in California. If the regional
MARKETS IN SPECIFIC AREAS economy or housing market weakens in California, or in any other region
having a significant concentration of properties underlying the mortgage
loans, the mortgage loans in that region may experience high rates of
loss and delinquency, resulting in losses to Class A Certificateholders.
A region's economic condition and housing market may be adversely
affected by a
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
variety of events, including natural disasters such as earthquakes,
hurricanes, floods and eruptions, and civil disturbances such as riots.
SOME OF THE MORTGAGE LOANS Approximately 9.1% of the cut-off date principal balance of the mortgage
PROVIDE FOR LARGE PAYMENTS loans are not fully amortizing over their terms to maturity and, thus,
AT MATURITY will require substantial principal payments, sometimes called a balloon
amount, at their stated maturity. Mortgage loans which require payment of
a balloon amount involve a greater degree of risk because the ability of
a mortgagor to pay a balloon amount typically will depend upon the
mortgagor's ability either to timely refinance the loan or to sell the
related mortgaged property.
See 'Description of the Mortgage Pool' in this prospectus supplement.
SOME OF THE MORTGAGE LOANS Approximately 0.9% of the cut-off date principal balance of the mortgage
ARE SECURED BY JUNIOR LOANS loans are junior in priority to other loans which are not included in the
trust. If a property is liquidated after default by a borrower, there may
not be enough proceeds to pay both the first mortgage and the junior
mortgage. In that case, the trust, as holder of the junior mortgage,
would suffer a loss.
THE RETURN ON YOUR The only credit enhancement for the Class A Certificates will be:
CERTIFICATES WILL BE the net monthly excess cash flow on the mortgage loans,
REDUCED IF LOSSES EXCEED overcollateralization represented by the excess of the balance of the
THE CREDIT ENHANCEMENT mortgage loans in a loan group over the balance of the related Class A
AVAILABLE TO YOUR Certificates,
CERTIFICATES cross-collateralization of the two loan groups, and
two certificate guaranty insurance policies issued by Ambac Assurance
Corporation.
LIMITED OBLIGATIONS
PAYMENTS ON THE MORTGAGE The Class A Certificates represent interests only in the RASC Series
LOANS ARE THE PRIMARY 1999-KS3 Trust. The Class A Certificates do not represent an interest in
SOURCE OF PAYMENTS ON YOUR or obligation of the depositor, the master servicer or any of their
CERTIFICATES affiliates. If proceeds from the assets of the RASC Series 1999-KS3 Trust
are not sufficient to make all payments provided for under the pooling
and servicing agreement, investors will have no recourse to the
depositor, the master servicer or any of their affiliates.
LIQUIDITY RISKS
YOU MAY HAVE TO HOLD YOUR A secondary market for the Class A Certificates may not develop. Even if
CERTIFICATES TO THEIR a secondary market does develop, it may not continue or it may be
MATURITY IF THEIR illiquid. Neither the
</TABLE>
S-13
<PAGE>
<TABLE>
<S> <C>
MARKETABILITY IS LIMITED underwriters nor any other person will have any obligation to make a
secondary market in your certificates. Illiquidity means you may not be
able to find a buyer to buy your securities readily or at prices that
will enable you to realize a desired yield. Illiquidity can have a severe
adverse effect on the market value of your certificates.
Any class of Class A Certificates may experience illiquidity, although
generally illiquidity is more likely for classes that are especially
sensitive to prepayment, credit or interest rate risk, or that have been
structured to meet the investment requirements of limited categories of
investors.
SPECIAL YIELD AND PREPAYMENT CONSIDERATIONS
THE YIELD ON YOUR The yield to maturity on each class of Class A Certificates will depend
CERTIFICATES WILL VARY on a variety of factors, including:
DEPENDING ON THE RATE OF the rate and timing of principal payments on the mortgage loans in the
PREPAYMENTS related loan group, including prepayments, defaults and liquidations, and
repurchases due to breaches of representations or warranties or upon
conversion of an adjustable rate mortgage loan into a fixed rate mortgage
loan;
the pass-through rate for that class;
interest shortfalls due to mortgagor prepayments; and
the purchase price of that class.
The rate of prepayments is one of the most important and least
predictable of these factors.
In general, if you purchase a certificate at a price higher than its
outstanding principal balance and principal distributions on your
certificate occur faster than assumed at the time of purchase, your yield
will be lower than you anticipated. Conversely, if you purchase a
certificate at a price lower than its outstanding principal balance and
principal distributions on that class occur more slowly than you assumed
at the time of purchase, your yield will be lower than you anticipated.
THE RATE OF PREPAYMENTS ON Because mortgagors can typically prepay their mortgage loans at any time,
THE MORTGAGE LOANS WILL the rate and timing of principal distributions on the Class A
VARY DEPENDING ON FUTURE Certificates are highly uncertain. Typically, when market interest rates
MARKET CONDITIONS AND OTHER increase, borrowers are less likely to prepay their mortgage loans. This
FACTORS could result in a slower return of principal to you at a time when you
might have been able to reinvest your funds at a higher rate of interest
than the applicable pass-through rate on your class of Class A
Certificates. On the other hand, when market interest rates decrease,
borrowers
</TABLE>
S-14
<PAGE>
<TABLE>
<S> <C>
are generally more likely to prepay their mortgage loans. This could
result in a faster return of principal to you at a time when you might
not be able to reinvest such funds at an interest rate as high as the
applicable pass-through rate on your class of Class A Certificates.
Approximately 2.8% of the cut-off date principal balance of the mortgage
loans in Group II permit the mortgagor to convert the adjustable rate on
the mortgage loan to a fixed rate. Upon the conversion, the seller will
repurchase the mortgage loan which will have the same effect as a
prepayment in full. Mortgagors may be more likely to exercise their
conversion options when interest rates are rising. As a result, the
Class A-II Certificates may receive greater prepayments at a time when
prepayments would not normally be expected.
Refinancing programs, which may involve soliciting all or some of the
mortgagors to refinance their mortgage loans, may increase the rate of
prepayments on the mortgage loans. These refinancing programs may be
offered by the master servicer, any subservicer or their affiliates, and
may include streamlined documentation programs as well as programs under
which a mortgage loan is modified to reduce the interest rate.
See 'Maturity and Prepayment Considerations' in the prospectus.
THE YIELD ON YOUR The Class A Certificates of each class have different yield
CERTIFICATES WILL BE considerations and different sensitivities to the rate and timing of
AFFECTED BY THE SPECIFIC principal distributions. The following is a general discussion of yield
CASHFLOW ATTRIBUTES OF THAT considerations and prepayment sensitivities of each class.
CLASS, DISCUSSED BELOW
See 'Certain Yield and Prepayment Considerations' in this prospectus
supplement.
CLASS A-I CERTIFICATES The Class A-I Certificates are subject to various priorities for payment
of principal. Distributions of principal on the Class A-I Certificates
with an earlier priority of payment will be affected by the rates of
prepayment of the related mortgage loans early in the life of the
mortgage pool. Those classes of Class A-I Certificates with a later
priority of payment will be affected by the rates of prepayment of the
related mortgage loans experienced both before and after the commencement
of principal distributions on those classes.
See 'Description of the Certificates -- Principal Distributions on the
Class A Certificates' in this prospectus supplement.
TARGETED AMORTIZATION The Class A-I-2, Class A-I-3, Class A-I-4 and Class A-I-5 Certificates
CERTIFICATES will generally receive payments of
</TABLE>
S-15
<PAGE>
<TABLE>
<S> <C>
principal on each distribution date in amounts determined by using the
table on page S-50 and S-51 in this prospectus supplement entitled
'Targeted Principal Balances,' assuming, among other things, a certain
rate of prepayment on the Group I loans as described under 'Description
of the Certificates -- Distributions of Principal.' However, if
prepayments occur at a rate slower than the rate described, the amount of
funds available for distribution of principal on these certificates will
likely not be sufficient to reduce the principal balances thereof to the
amounts set forth in the table, and as a result, the weighted average
lives of the Class A-I-2, Class A-I-3, Class A-I-4 and Class A-I-5
Certificates will be extended. Conversely, if prepayments occur at a rate
faster than the rate described, and if the principal balance of the
Class A-I-6 Certificates is reduced to zero, the principal balances of
these classes of certificates may be reduced below the amounts set forth
in the table, and as a result, the weighted average lives of these
certificates will be reduced.
CLASS A-I-6 CERTIFICATES Investors in the Class A-I-6 Certificates should be aware that those
certificates may receive varying distributions of principal on each
distribution date to the extent necessary to stabilize the amount of
principal needed to reduce the principal balances of the Class A-I-2,
Class A-I-3, Class A-I-4 and Class A-I-5 Certificates to the respective
amounts set forth in the table entitled 'Targeted Principal Balances.'
Due to the companion nature of the Class A-I-6 Certificates, those
certificates will likely experience price and yield volatility. You
should consider whether such volatility is suitable to your investment
needs.
CLASS A-I-7 CERTIFICATES It is not expected that the Class A-I-7 Certificates will receive any
distributions of principal until the distribution date in October 2002.
Until the distribution date in October 2002, the Class A-I-7 Certificates
may receive a portion of principal prepayments that is smaller than its
pro rata share of principal prepayments.
ADJUSTABLE RATE The pass-through rates on the Class A-I-1A, Class A-I-6, Class A-II-1
CERTIFICATES and Class A-II-2 Certificates will vary with One-Month LIBOR. Therefore,
the yields to investors on those classes of certificates will be
sensitive to fluctuations in the level of One-Month LIBOR. You should
consider whether this volatility is suitable to your investment needs.
The Class A-I-1A, Class A-I-6, Class A-II-1 or Class A-II-2 Certificates
may not always receive interest at a rate equal to One-Month LIBOR plus
the applicable
</TABLE>
S-16
<PAGE>
<TABLE>
<S> <C>
spread. If the weighted average of the net mortgage rates on the mortgage
loans in the related loan group is less than One-Month LIBOR plus the
applicable spread, the pass-through rate on the Class A-I-1A,
Class A-I-6, Class A-II-1 or Class A-II-2 Certificates will be reduced
to the related weighted average rate. Thus, the yield to investors in the
Class A-I-1A, Class A-I-6, Class A-II-1 or Class A-II-2 Certificates may
be adversely affected by the application of the weighted average net
mortgage rate on the related mortgage loans. The prepayment of the
mortgage loans in the related loan group with higher net mortgage rates
may result in a lower weighted average net rate. If on any distribution
date the application of the weighted average net rate results in an
interest payment lower than One-Month LIBOR plus the applicable spread on
the Class A-I-1A, Class A-I-6, Class A-II-1A or Class A-II-2 Certificates
during the related interest accrual period, the value of those
certificates may be temporarily or permanently reduced.
In a rising interest rate environment, the Class A-I-1A, Class A-I-6,
Class A-II-1 or Class A-II-2 Certificates may receive interest at the
weighted average net rate for a protracted period of time. In addition,
in that situation, there would be less net monthly excess cash flow to
cover losses and to create overcollateralization.
BASIS RISK SHORTFALLS MAY If the weighted average net rate is paid on the Class A-I-6 or the
BE PAID ON THE CLASS A-I-6 Class A-II Certificates, the difference between the rate of One-Month
AND CLASS A-II LIBOR plus the applicable spread, but not more than 14% in the case of
CERTIFICATES, BUT WILL NOT the Class A-I-6 Certificates, and the weighted average net rate of the
BE PAID ON THE OTHER mortgage loans in the related loan group will create a shortfall that
CERTIFICATES will carry forward with interest. However, that shortfall will not be
covered by the applicable certificate guaranty insurance policy and will
only be payable from the net monthly excess cash flow and only to the
extent that the level of overcollateralization for each loan group is at
the required level. Any basis risk shortfalls outstanding at the time of
the optional termination of the related loan group will not be paid.
If the pass-through rate on the Class A-I-1A, Class A-I-5 or
Class A-I-7 Certificates is limited to the weighted average net rate of
the Group I mortgage loans, no additional amounts will be due or
distributable on that distribution date or on any future distribution
date.
</TABLE>
S-17
<PAGE>
INTRODUCTION
The depositor will establish a trust with respect to Series 1999-KS3 on the
closing date, pursuant to a pooling and servicing agreement among the depositor,
the master servicer and the trustee, dated as of the cut-off date. On the
closing date, the depositor will deposit into the trust two groups of mortgage
loans that, in the aggregate, will constitute a mortgage pool, and is secured by
one- to four-family residential properties with terms to maturity of not more
than 30 years.
Some capitalized terms used in this prospectus supplement have the meanings
given below under 'Description of the Certificates -- Glossary of Terms' or in
the prospectus under 'Glossary.'
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The mortgage pool will consist of 16,053 mortgage loans with an aggregate
principal balance outstanding as of the cut-off date, after deducting payments
of principal due in the month of the cut-off date, of $1,450,013,700. The
mortgage loans are secured by first and junior liens on fee simple interests in
one- to four-family residential real properties. In each case, the property
securing the mortgage loan is referred to as the mortgaged property. 8.1% of the
mortgage loans have a due date other than the first day of each month. The
mortgage pool will consist of two groups of mortgage loans designated as the
Group I Loans and Group II Loans. Loan Group II will consist of two sub-groups
of mortgage loans designated as Sub-Group II-A and Sub-Group II-B, and each a
Sub-Group. The Group I Loans will consist of fixed-rate mortgage loans with
original terms to maturity of not more than 30 years or, in the case of
approximately 29.3% of the Group I Loans including balloon mortgage loans, not
more than 15 years. The Group II Loans will consist of adjustable-rate mortgage
loans with original terms to maturity of not more than 30 years or, in the case
of approximately 0.1% of the Group II Loans, not more than 15 years.
Approximately 1.8% of the Group I Loans are secured by second liens on the
properties.
Two of the Group I Loans are secured by properties located in Mexico. See
'The Trusts -- The Mortgage Loans' in the prospectus.
With respect to mortgage loans that have been modified, references in this
prospectus supplement to the date of origination shall be deemed to be the date
of the most recent modification. As of the cut-off date 0.2% of the Group I
Loans and 0.1% of the Group II Loans have been modified. Unless otherwise
indicated, all percentages of the mortgage loans described in this prospectus
supplement are approximate percentages by aggregate principal balance as of the
cut-off date, after deducting payments of principal due in the month of the
cut-off date.
The depositor and Residential Funding will make certain limited
representations and warranties regarding the mortgage loans as of the date of
issuance of the certificates. The depositor and Residential Funding will be
required to repurchase or substitute for any mortgage loan as to which a breach
of its representations and warranties with respect to that mortgage loan occurs
if the breach materially and adversely affects the interests of the
certificateholders in the mortgage loan and that mortgage loan is not otherwise
repurchased by the related mortgage collateral seller. The depositor, as
assignee of Residential Funding, will also assign to the trustee for the benefit
of the certificateholders certain of its rights, title and interest in any
agreement relating to the transfer and assignment of the mortgage loans to the
depositor by Residential Funding, including certain representations and
warranties made by the mortgage collateral sellers. Insofar as any such
agreement relates to the representations and warranties made by the related
mortgage collateral seller in respect of a mortgage loan and any remedies
provided thereunder for any breach of those representations and warranties, that
right, title and interest may be enforced by the master servicer on behalf of
the trustee and the certificateholders. However, neither the depositor nor
Residential Funding will be required to repurchase or substitute for any
mortgage loan in the event of a breach of its representations and warranties
with respect to that mortgage loan if the substance of the breach also
constitutes fraud in the origination of the affected mortgage loan.
Approximately 9.1% of the mortgage loans require monthly payments of
principal generally based on 30 year amortization schedules and have scheduled
maturity dates of approximately 15 years from the due date of the first monthly
payment, leaving a substantial portion of the original principal amount due and
payable on the respective scheduled maturity date. These mortgage loans are
called balloon mortgage loans and the payments
S-18
<PAGE>
due at maturity are called balloon amounts. The existence of a balloon amount
generally will require the related mortgagor to refinance the balloon mortgage
loan or to sell the mortgaged property on or prior to the scheduled maturity
date. The ability of a mortgagor to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage rates
at the time of sale or refinancing, the mortgagor's equity in the related
mortgaged property, the financial condition of the mortgagor, tax laws and
prevailing general economic conditions. None of the depositor, the master
servicer or the trustee is obligated to refinance any balloon mortgage loan.
Subject to the terms thereof, each certificate guaranty insurance policy will
provide coverage on any losses incurred upon liquidation of a balloon mortgage
loan arising out of or in connection with the failure of a mortgagor to pay the
balloon amount.
GROUP I LOANS. The Group I Loans consist of 8,916 fixed-rate mortgage loans
with an aggregate principal balance as of the cut-off date, after deducting
payments of principal due in the month of the cut-off date, of approximately
$700,002,497. The Group I Loans had individual principal balances at origination
of at least $2,500 but not more than $650,000, with an average principal balance
at origination of approximately $78,672. 70.7% of the Group I Loans have terms
to maturity from the date of origination or modification of greater than 180
months but not more than 30 years, with a weighted average term to stated
maturity of approximately 352 months as of the cut-off date. 29.3% of the
Group I Loans have terms to maturity from the date of origination of not more
than 15 years, with a weighted average term to stated maturity of approximately
176 months as of the cut-off date. 18.8% of the Group I Loans are balloon
mortgage loans. Approximately 7.9% of the Group I Loans were purchased from
HomeComings Financial Network, Inc., an affiliated seller. No unaffiliated
seller sold more than 6.5% of the Group I Loans to Residential Funding.
Approximately 97.4% of the Group I Loans are being or will be subserviced by
HomeComings Financial Network, Inc.
GROUP II LOANS. The Group II Loans consist of 7,137 adjustable-rate
mortgage loans with an aggregate principal balance as of the cut-off date, after
deducting payments of principal due in the month of the cut-off date, of
approximately $750,011,203. The Group II Loans had individual principal balances
at origination of at least $8,450 but not more than $633,250, with an average
principal balance at origination of approximately $105,212. 99.9% of the
Group II Loans have terms to maturity from the date of origination or
modification of greater than 180 months but not more than 30 years, with a
weighted average term to stated maturity of approximately 358 months as of the
cut-off date. 0.1% of the Group II Loans have terms to maturity from the date of
origination of not more than 15 years, with a weighted average term to stated
maturity of approximately 178 months as of the cut-off date. Approximately 13.6%
of the Group II Loans were purchased from unaffiliated seller Sebring Capital
Corporation. 1.7% of the Group II Loans were purchased from HomeComings
Financial Network, Inc., an affiliated seller. Except as described in the second
preceding sentence, no unaffiliated seller sold more than 9.5% of the Group II
Loans to Residential Funding. Approximately 97.2% of the Group II Loans are
being or will be subserviced by HomeComings Financial Network, Inc.
Approximately 2.8% of the Group II Loans provide that, at the option of the
related Mortgagor, the adjustable interest rate on the mortgage loan may be
converted to a fixed interest rate. Upon conversion, the mortgage rate will be
converted to a fixed interest rate determined in accordance with the formula set
forth in the related mortgage note which formula is intended to result in a
mortgage rate which is not less than the then current market interest rate,
subject to applicable usury laws. After conversion, the monthly payments of
principal and interest will be adjusted to provide for full amortization over
the remaining term to scheduled maturity.
Residential Funding will be obligated to repurchase any convertible
mortgage loan following the conversion thereof at a price equal to the unpaid
principal balance thereof plus accrued interest thereon to the first day of the
month in which that purchase price is to be distributed to the Class A-II
Certificates. If Residential Funding fails to repurchase a converted mortgage
loan, it will not constitute an event of default under the pooling and servicing
agreement and that converted mortgage loan will remain in Group II as a
fixed-rate loan.
MORTGAGE POOL CHARACTERISTICS
As of the cut-off date, 0.8% of the mortgage loans are 30 to 59 days
delinquent in payment of principal and interest. As of the cut-off date, no
mortgage loan is 60 days or more delinquent in payment of principal and
interest. For a discussion of the methodology used to categorize mortgage loans
as delinquent, see 'Pooling and Servicing Agreement -- The Master Servicer' in
this prospectus supplement.
S-19
<PAGE>
A substantial portion of the mortgage loans provide for payment of a
prepayment charge. As to some of those mortgage loans, the prepayment charge
provisions provide for payment of a prepayment charge for partial prepayments
and full prepayments made within up to five years following the origination of
such mortgage loan, in an amount equal to the lesser of (x) six months' advance
interest on the amount of the prepayment that, when added to all other amounts
prepaid during the twelve-month period immediately preceding the date of the
prepayment, exceeds twenty percent of the original principal amount of the
mortgage loan or (y) the maximum amount permitted by state law. As to the
remainder of those mortgage loans, the prepayment charge provisions provide for
payment of a prepayment charge for full prepayments made within two years of the
origination of the mortgage loan, in an amount not to exceed one percent of the
original principal amount of the mortgage loan. Prepayment charges received on
the mortgage loans will not be available for distribution on the certificates.
See 'Certain Legal Aspects of the Mortgage Loans and Contracts -- Default
Interest and Limitations on Prepayments' in the prospectus.
1.8% of the Group I Loans are junior loans. None of the Group II Loans are
junior loans.
No mortgage loan provides for deferred interest or negative amortization.
One of the Group I Loans will be a buydown loan.
Approximately 2.3% of the Group I Loans will be high cost loans.
Approximately 0.6% of the Group II Loans will be high cost loans.
Set forth below is a description of some additional characteristics of the
Group I Loans and Group II Loans, as applicable, including tables showing the
'credit scores' for most of the mortgagors. Credit scores are obtained by many
mortgage lenders in connection with mortgage loan applications to help assess a
borrower's credit-worthiness. Credit scores are obtained from credit reports
provided by various credit reporting organizations, each of which may employ
differing computer models and methodologies. The credit score is designed to
assess a borrower's credit history at a single point in time, using objective
information currently on file for the borrower at a particular credit reporting
organization. Information utilized to create a credit score may include, among
other things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience. Credit scores range from approximately 350 to approximately 840,
with higher scores indicating an individual with a more favorable credit history
compared to an individual with a lower score. However, a credit score purports
only to be a measurement of the relative degree of risk a borrower represents to
a lender; that is, a borrower with a higher score is statistically expected to
be less likely to default in payment than a borrower with a lower score. In
addition, it should be noted that credit scores were developed to indicate a
level of default probability over a two-year period, which does not correspond
to the life of a mortgage loan. Furthermore, credit scores were not developed
specifically for use in connection with mortgage loans, but for consumer loans
in general, and assess only the borrower's past credit history. Therefore, a
credit score does not take into consideration the differences between mortgage
loans and consumer loans generally, or the specific characteristics of the
related mortgage loan including, for example, the LTV ratio, the collateral for
the mortgage loan, or the debt to income ratio. There can be no assurance that
the credit scores of the mortgagors will be an accurate predictor of the
likelihood of repayment of the related mortgage loans.
GROUP I LOANS
None of the Group I Loans will have been originated prior to October 28,
1996 or will have a maturity date later than September 1, 2029. No Group I Loan
will have a remaining term to maturity as of the cut-off date of less than 45
months. The weighted average stated term to maturity of the Group I Loans as of
the cut-off date will be approximately 301 months.
As of the cut-off date, 0.9% of the Group I Loans are 30 to 59 days
delinquent in payment of principal and interest and none of the Group I Loans
are 60 or more days delinquent in payment of principal and interest.
Set forth below is a description of some additional characteristics of the
Group I Loans as of the cut-off date except as otherwise indicated. All
percentages of the Group I Loans are approximate percentages by aggregate
principal balance of the Group I Loans as of the cut-off date except as
otherwise indicated, after deducting payments of principal due in the month of
the cut-off date. Unless otherwise specified, all principal balances of the
Group I Loans are as of the cut-off date, after such deduction, and are rounded
to the nearest dollar.
S-20
<PAGE>
CREDIT SCORE DISTRIBUTION OF THE GROUP I LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
CREDIT SCORE RANGE MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ------------------ -------------- ----------------- -------------
<S> <C> <C> <C>
499 or Less....................................... 215 $ 13,113,011 1.87%
500 - 519......................................... 377 25,786,915 3.68
520 - 539......................................... 658 43,057,225 6.15
540 - 559......................................... 913 62,258,072 8.89
560 - 579......................................... 1,070 74,889,204 10.70
580 - 599......................................... 1,179 89,503,328 12.79
600 - 619......................................... 1,429 123,095,833 17.59
620 - 639......................................... 1,102 97,094,971 13.87
640 - 659......................................... 840 78,957,564 11.28
660 - 679......................................... 471 44,210,866 6.32
680 - 699......................................... 245 20,682,996 2.95
700 - 719......................................... 139 10,480,427 1.50
720 - 739......................................... 81 5,354,911 0.76
740 - 759......................................... 39 2,721,575 0.39
760 or Greater.................................... 35 2,418,143 0.35
----- ------------ ------
Subtotal with Credit Score........................ 8,793 693,625,040 99.09
Not Available (1)................................. 123 6,377,457 0.91
----- ------------ ------
Total Pool................................... 8,916 $700,002,497 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
- ------------
(1) Mortgage Loans indicated as having a Credit Score that is 'not available'
include certain Mortgage Loans where the Credit Score was not provided by
the related Seller and Mortgage Loans where no credit history can be
obtained for the related Mortgagor.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES OF THE GROUP I LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
ORIGINAL MORTGAGE LOAN BALANCE MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ------------------------------ -------------- ----------------- -------------
<S> <C> <C> <C>
$ 0 - 100,000................................ 6,798 $350,450,031 50.06%
100,001 - 200,000................................ 1,676 226,977,512 32.43
200,001 - 300,000................................ 327 79,100,478 11.30
300,001 - 400,000................................ 89 30,490,452 4.36
400,001 - 500,000................................ 15 6,646,206 0.95
500,001 - 600,000................................ 6 3,154,608 0.45
600,001 - 700,000................................ 5 3,183,208 0.45
----- ------------ ------
Total........................................ 8,916 $700,002,497 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the Group I
Loans will be approximately $78,511.
S-21
<PAGE>
NET MORTGAGE RATES OF THE GROUP I LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NET MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ---------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
5.500 - 5.999................................... 1 $ 67,436 0.01%
6.000 - 6.499................................... 3 364,673 0.05
6.500 - 6.999................................... 14 1,364,487 0.19
7.000 - 7.499................................... 103 11,384,265 1.63
7.500 - 7.999................................... 199 21,462,496 3.07
8.000 - 8.499................................... 726 81,902,426 11.70
8.500 - 8.999................................... 1,023 105,671,911 15.10
9.000 - 9.499................................... 1,645 148,833,234 21.26
9.500 - 9.999................................... 1,354 106,237,542 15.18
10.000 - 10.499................................... 1,304 95,513,452 13.64
10.500 - 10.999................................... 858 57,823,669 8.26
11.000 - 11.499................................... 605 32,524,359 4.65
11.500 - 11.999................................... 284 15,977,058 2.28
12.000 - 12.499................................... 249 8,522,132 1.22
12.500 - 12.999................................... 76 3,565,143 0.51
13.000 - 13.499................................... 60 2,322,308 0.33
13.500 - 13.999................................... 21 865,042 0.12
14.000 - 14.499................................... 376 4,986,635 0.71
14.500 - 14.999................................... 5 287,084 0.04
15.000 - 15.499................................... 1 2,348 0.01
15.500 - 15.999................................... 4 188,699 0.03
16.000 - 16.499................................... 2 46,731 0.01
16.500 - 16.999................................... 2 40,881 0.01
17.000 - 17.499................................... 1 48,486 0.01
----- ------------ ------
Total........................................ 8,916 $700,002,497 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-Off Date, the weighted average Net Mortgage Rate of the Group
I Loans will be approximately 9.5549% per annum.
S-22
<PAGE>
MORTGAGE RATES OF THE GROUP I LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ------------------ -------------- ----------------- -------------
<S> <C> <C> <C>
6.000 - 6.499................................... 1 $ 67,436 0.01%
6.500 - 6.999................................... 2 172,627 0.02
7.000 - 7.499................................... 7 568,259 0.08
7.500 - 7.999................................... 63 7,844,805 1.12
8.000 - 8.499................................... 146 15,717,023 2.25
8.500 - 8.999................................... 688 78,979,391 11.28
9.000 - 9.499................................... 786 85,673,054 12.24
9.500 - 9.999................................... 1,597 148,356,076 21.19
10.000 - 10.499................................... 1,118 89,374,717 12.77
10.500 - 10.999................................... 1,533 116,985,248 16.71
11.000 - 11.499................................... 915 61,861,695 8.84
11.500 - 11.999................................... 834 49,208,231 7.03
12.000 - 12.499................................... 286 15,918,531 2.27
12.500 - 12.999................................... 346 14,944,548 2.13
13.000 - 13.499................................... 90 4,385,808 0.63
13.500 - 13.999................................... 76 2,845,894 0.41
14.000 - 14.499................................... 27 1,134,973 0.16
14.500 - 14.999................................... 380 5,115,752 0.73
15.000 - 15.499................................... 9 413,331 0.06
15.500 - 15.999................................... 3 110,300 0.02
16.000 - 16.499................................... 3 151,568 0.02
16.500 - 16.999................................... 2 61,122 0.01
17.000 - 17.499................................... 3 63,621 0.01
18.000 - 18.499................................... 1 48,486 0.01
----- ------------ ------
Total........................................ 8,916 $700,002,497 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Rate of the Group I
Loans will be approximately 10.2109% per annum.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP I LOANS*
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
ORIGINAL LOAN-TO-VALUE RATIO (%) MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- -------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
0.01 - 50.00.................................... 559 $ 26,897,818 3.84%
50.01 - 55.00.................................... 168 10,879,694 1.55
55.01 - 60.00.................................... 308 19,050,039 2.72
60.01 - 65.00.................................... 467 30,418,145 4.35
65.01 - 70.00.................................... 667 49,781,181 7.11
70.01 - 75.00.................................... 1,157 93,888,686 13.41
75.01 - 80.00.................................... 2,344 205,959,954 29.42
80.01 - 85.00.................................... 1,291 112,667,096 16.10
85.01 - 90.00.................................... 1,334 125,259,832 17.89
90.01 - 95.00.................................... 416 22,259,950 3.18
95.01 - 100.00.................................... 205 2,940,101 0.42
----- ------------ ------
Total........................................ 8,916 $700,002,497 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
- ------------
* With respect to the junior Group I Loans, this table was calculated using the
combined Loan-to-Value Ratio for such Group I Loans.
The weighted average Loan-to-Value Ratio at origination of the Group I
Loans will be approximately 78.14%.
S-23
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES OF THE GROUP I LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
STATE MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ----- -------------- ----------------- -------------
<S> <C> <C> <C>
Georgia........................................... 687 $ 64,521,365 9.22%
Florida........................................... 690 57,778,902 8.25
California........................................ 361 50,740,415 7.25
Michigan.......................................... 706 46,628,932 6.66
Texas............................................. 779 46,408,240 6.63
New York.......................................... 350 37,253,552 5.32
North Carolina.................................... 369 30,011,047 4.29
Ohio.............................................. 438 27,339,136 3.91
Illinois.......................................... 329 25,335,844 3.62
Tennessee......................................... 383 21,516,237 3.07
Other(1).......................................... 3,824 292,468,827 41.78
----- ------------ ------
Total........................................ 8,916 $700,002,497 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
- ------------
(1) Other includes states and the District of Columbia with under 3%
concentrations individually.
No more than 0.2% of the Group I Loans will be secured by Mortgaged
Properties located in any one zip code area in California and no more than 0.3%
of the Group I Loans will be secured by Mortgaged Properties located in any one
zip code area outside California.
MORTGAGE LOAN PURPOSE OF THE GROUP I LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ------------ -------------- ----------------- -------------
<S> <C> <C> <C>
Purchase.......................................... 3,050 $254,632,554 36.38%
Rate/Term Refinance............................... 934 90,592,135 12.94
Equity Refinance.................................. 4,932 354,777,808 50.68
----- ------------ ------
Total........................................ 8,916 $700,002,497 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of rate and term
refinance Group I Loans will be 77.98%. The weighted average Loan-to-Value Ratio
at origination of equity refinance Group I Loans will be 73.98%.
MORTGAGE LOAN DOCUMENTATION TYPES OF THE GROUP I LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ------------------ -------------- ----------------- -------------
<S> <C> <C> <C>
Full Documentation................................ 7,794 $567,931,955 81.13%
Reduced Documentation............................. 1,122 132,070,542 18.87
----- ------------ ------
Total........................................ 8,916 $700,002,497 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Group I
Loans which were underwritten under a reduced loan documentation program will be
72.14%. No more than 9.9% of such reduced loan documentation Group I Loans will
be secured by Mortgaged Properties located in California.
OCCUPANCY TYPES OF THE GROUP I LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
OCCUPANCY MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- --------- -------------- ----------------- -------------
<S> <C> <C> <C>
Primary Residence................................. 8,083 $650,010,825 92.86%
Second/Vacation................................... 72 6,622,321 0.95
Non Owner-occupied................................ 761 43,369,351 6.20
----- ------------ ------
Total........................................ 8,916 $700,002,497 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
S-24
<PAGE>
MORTGAGED PROPERTY TYPES OF THE GROUP I LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Single-family detached............................ 7,370 $564,965,264 80.71%
Planned Unit Developments (detached).............. 508 56,915,988 8.13
Two- to four-family units......................... 352 30,851,353 4.41
Condo Low-Rise (less than 5 stories).............. 244 17,279,135 2.47
Condo Mid-Rise (5 to 8 stories)................... 11 638,407 0.09
Condo High-Rise (9 stories or more)............... 13 2,303,479 0.33
Manufactured Home................................. 231 12,810,220 1.83
Townhouse......................................... 102 6,555,998 0.94
Townhouse (2 to 4 family units)................... 9 1,072,194 0.15
Planned Unit Developments (attached).............. 74 6,323,918 0.90
Leasehold......................................... 2 286,542 0.04
----- ------------ ------
Total........................................ 8,916 $700,002,497 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
RISK CATEGORIES OF THE GROUP I LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
RISK GRADE MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ---------- -------------- ----------------- -------------
<S> <C> <C> <C>
Category 1A-1..................................... 1,052 $137,187,508 19.60%
Category 1A....................................... 2,339 182,824,951 26.12
Category 1........................................ 2,270 173,082,403 24.73
Category 2........................................ 2,196 147,671,023 21.10
Category 3........................................ 784 45,340,152 6.48
Category 4........................................ 275 13,896,460 1.99
----- ------------ ------
Total........................................ 8,916 $700,002,497 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
GROUP II LOANS
MORTGAGE RATE ADJUSTMENT. The mortgage rate on 72 Group II Loans,
representing approximately 1.2% of the Group II Loans, will adjust annually to a
rate equal to the sum of One-Year U.S. Treasury and a fixed percentage, which is
called a note margin, set forth in the related mortgage note, subject to the
limitations described in this prospectus supplement. The first mortgage rate
adjustment will not occur for (x) two years after origination for 1 Group II
Loan representing approximately 0.1% of the Group II Loans or (y) three years
after origination for 6 Group II Loans representing approximately 0.1% of the
Group II Loans.
The mortgage rate on 7,063 Group II Loans, representing approximately 98.8%
of the Group II Loans, will adjust semi-annually, annually with respect to 1
loan representing approximately 0.1% of the Group II Loans or bi-annually with
respect to 1 loan representing approximately 0.1% of the Group II Loans, in each
case on the adjustment date specified in the related mortgage note to a rate
equal to the sum, rounded as specified in the related mortgage notes, of
Six-Month LIBOR and the note margin set forth in the related mortgage note,
subject to the limitations described in the prospectus supplement. The first
mortgage rate adjustment on these mortgage loans will occur:
six months after origination for 53 Group II Loans representing
approximately 0.9% of the Group II Loans
one year after origination for 2 Group II Loans representing approximately
0.1% of the Group II Loans
two years after origination for 4,355 Group II Loans representing
approximately 62.8% of the Group II Loans
three years after origination for 2,655 Group II Loans representing
approximately 35.2% of the Group II Loans
S-25
<PAGE>
The amount of the monthly payment on each Group II Loan will be adjusted
semi-annually or annually, as applicable, on the due date 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 to fully amortize the
outstanding principal balance of each Group II Loan over its remaining term to
stated maturity. As of the cut-off date, 0.1% of the Group II Loans will have
reached their first adjustment date. The Group II Loans will have various
adjustment dates, note margins and limitations on the mortgage rate adjustments,
as described below.
The mortgage rate on each Group II Loan may not increase or decrease on any
adjustment date by more than a specified percentage per annum which is called
the periodic rate cap. The periodic rate caps vary based on the index used to
determine the mortgage rate, the length of time before the initial adjustment
date occurs and in the case of some mortgage loans, whether the adjustment date
in question is the initial or a subsequent adjustment date. The following table
lists the maximum periodic rate caps. In some cases, the actual periodic rate
caps may be lower than the maximum periodic rate caps shown in the table.
<TABLE>
<CAPTION>
TIME UNTIL INITIAL MAXIMUM INITIAL MAXIMUM SUBSEQUENT
INDEX ADJUSTMENT ADJUSTMENT ADJUSTMENT
----- ---------- ---------- ----------
<S> <C> <C> <C>
One-Year U.S. Treasury.............. 1 year 2.0% 2.0%
One-Year U.S. Treasury.............. 3 years 3.0% 2.0%
Six-Month LIBOR..................... 6 mos. 3.0% 1.0%
Six-Month LIBOR..................... 1 year 3.0% 2.0%
Six-Month LIBOR..................... 2 years 6.0% 7.0%
Six-Month LIBOR..................... 3 years 7.0% 3.0%
</TABLE>
The mortgage rate on a Group II Loan may not exceed the maximum mortgage
rate or be less than the minimum mortgage rate specified for that Group II Loan
in the related mortgage note. The minimum mortgage rate for each Group II Loan
will be equal to the note margin, except in the case of 85.1% of the Group II
Loans, which have a minimum mortgage rate greater than the note margin. The
minimum mortgage rates on the Group II Loans will range from 2.75% to 14.54%,
with a weighted average minimum mortgage rate as of the cut-off date of 9.4978%.
The maximum mortgage rates on the Group II Loans will range from 13.49% to
21.1%, with a weighted average maximum mortgage rate as of the cut-off date of
16.7420%. No Group II Loan provides for payment caps on any adjustment date that
would result in deferred interest or negative amortization.
The One-Year U.S. Treasury Index will be a per annum rate equal to the
weekly average yield on U.S. Treasury securities adjusted to a constant maturity
of one year as reported by the Federal Reserve Board in Statistical Release
No. H.15(519) as most recently available as of the date forty-five days prior to
the adjustment date, or 25 days with respect to 10 mortgage loans. Those average
yields reflect the yields for the week prior to that week. The Six-Month LIBOR
Index will be a per annum rate equal to the average of interbank offered rates
for six-month U.S. dollar-denominated deposits in the London market based on
quotations of major banks 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,
as of the date forty-five days, prior to the adjustment date,
as of the date fifteen days prior to the adjustment date, or
as of the 20th day of the month preceding the month in which the
adjustment date occurs.
Each date as of which Six-Month LIBOR is determined is referred to as a
reference date.
For 280 Group II Loans, representing approximately 3.9% of the Group II
Loans, the index will be Six-Month LIBOR, as published by Fannie Mae and as most
recently available as of the date forty-five days prior to the adjustment date.
One-Year U.S. Treasury and Six-Month LIBOR are referred to in this prospectus
supplement as an index. In the event that the related index specified in a
mortgage note is no longer available, an index reasonably acceptable to the
trustee that is based on comparable information will be selected by the master
servicer.
One-Year U.S. Treasury. One-Year U.S. Treasury is currently calculated
based on information reported in Statistical Release No. H15 (519). Listed below
are the weekly average yields on actively traded U.S. Treasury securities
adjusted to a constant maturity of one year as reported in that document on the
date that would have
S-26
<PAGE>
been applicable to mortgage loans whose index was the rate most recently
available as of the date forty-five days prior to the adjustment date and having
the following adjustment dates for the indicated years. The average yields may
fluctuate significantly from week to week as well as over longer periods and may
not increase or decrease in a constant pattern from period to period. The
following does not purport to be representative of future average yields. No
assurance can be given as to the average yields on U.S. Treasury securities on
any adjustment date or during the life of any Group II Loan.
ONE-YEAR U.S. TREASURY
<TABLE>
<CAPTION>
ADJUSTMENT DATE 1994 1995 1996 1997 1998 1999
- --------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
January 1...................................... 3.55% 6.42% 5.45% 5.44% 5.44% 4.52%
February 1..................................... 3.60 7.10 5.35 5.46 5.53 4.49
March 1........................................ 3.63 7.24 5.17 5.61 5.25 4.55
April 1........................................ 3.85 6.79 4.85 5.53 5.28 4.67
May 1.......................................... 4.28 6.54 5.15 5.72 5.37 4.77
June 1......................................... 4.71 6.28 5.62 5.99 5.39 4.67
July 1......................................... 5.49 6.00 5.67 5.90 5.46 4.79
August 1....................................... 5.16 5.69 5.86 5.72 5.42 5.12
September 1.................................... 5.49 5.47 5.90 5.54 5.36 5.01
October 1...................................... 5.60 5.71 5.60 5.55 5.23 5.23
November 1..................................... 5.62 5.63 5.88 5.59 4.76 5.28
December 1..................................... 6.04 5.60 5.57 5.45 4.18
</TABLE>
Six-Month LIBOR. Listed below are levels of Six-Month LIBOR as published by
The Wall Street Journal that are or would have been applicable to mortgage loans
with a reference date of the first business day of the preceding month, and
having the following adjustment dates for the indicated years. The levels may
fluctuate significantly from month to month as well as over longer periods and
may not increase or decrease in a constant pattern from period to period. There
can be no assurance that levels of Six-Month LIBOR published by Fannie Mae, or
published in The Wall Street Journal on a different reference date would have
been at the same levels as those set forth below. The following does not purport
to be representative of future levels of Six-Month LIBOR as published by Fannie
Mae or The Wall Street Journal. No assurance can be given as to the level of
Six-Month LIBOR on any adjustment date or during the life of any mortgage loan
based on Six-Month LIBOR.
SIX-MONTH LIBOR
<TABLE>
<CAPTION>
ADJUSTMENT DATE 1994 1995 1996 1997 1998 1999
- --------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
January 1................................ 3.500% 6.562% 5.718% 5.562% 5.914% 5.148%
February 1............................... 3.500 7.000 5.531 5.625 5.843 5.066
March 1.................................. 3.375 6.687 5.281 5.687 5.625 4.971
April 1.................................. 4.000 6.437 5.312 5.718 5.695 5.127
May 1.................................... 4.250 6.500 5.531 5.968 5.750 5.060
June 1................................... 4.688 6.375 5.562 6.000 5.812 5.043
July 1................................... 5.000 6.000 5.656 6.000 5.750 5.245
August 1................................. 5.250 6.000 5.812 5.937 5.781 5.650
September 1.............................. 5.313 5.875 5.906 5.812 5.750 5.705
October 1................................ 5.313 5.906 5.843 5.843 5.593 5.919
November 1............................... 5.750 5.968 5.750 5.843 5.246
December 1............................... 5.937 5.875 5.562 5.812 4.978
</TABLE>
The initial mortgage rate in effect on a Group II Loan generally will be
lower, and may be significantly lower, than the mortgage rate that would have
been in effect based on the related index and note margin. Therefore, unless the
related index declines after origination of a Group II Loan, the related
mortgage rate will generally increase on the first adjustment date following
origination of such Group II Loan subject to the periodic rate cap. The
repayment of the Group II Loans will be dependent on the ability of the
mortgagors to make larger monthly payments following adjustments of the mortgage
rate. Group II Loans that have the same initial mortgage rate may not always
bear interest at the same mortgage rate because such mortgage loans may
S-27
<PAGE>
have different adjustment dates, and the mortgage rates therefore may reflect
different related index values, note margins, maximum mortgage rates and minimum
mortgage rates.
The net mortgage rate with respect to each Group II 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 Group II Loan will be
adjusted on each adjustment date to equal the mortgage rate thereon minus the
sum of (x) the rate per annum at which the related master servicing and
subservicing fees accrue thereon, which is collectively referred to as the
servicing fee rate and (y) the rate at which the premium for the related
certificate guaranty insurance policy accrues, which is called the premium rate,
subject to any periodic rate cap, but may not exceed the maximum mortgage rate
minus the sum of the servicing fee rate and the premium rate or be less than the
minimum mortgage rate minus the sum of the servicing fee rate and the premium
rate for the applicable Group II Loan. The net mortgage rate with respect to
each Group I Loan will equal the mortgage rate thereon minus the sum of the
servicing fee rate with respect to that Group I Loan and the premium rate. See
'Description of the Mortgage Pool -- Mortgage Pool Characteristics' in this
prospectus supplement.
GROUP II LOAN CHARACTERISTICS. The Group II Loans will have the following
characteristics as of the cut-off date:
<TABLE>
<CAPTION>
LIBOR INDEX TREASURY INDEX AGGREGATE FOR ALL
MORTGAGE LOANS MORTGAGE LOANS GROUP II LOANS
-------------- -------------- --------------
<S> <C> <C> <C>
Number of mortgage loans............... 7,065 72 7,137
Weighted average of net mortgage
rates................................ 9.3754% 9.2579% 9.3740%
Range of net mortgage rates............ 6.7850% to 13.8350% 7.0450% to 11.6700% 6.7850% to 13.8350%
Mortgage rates:
Weighted average.................. 10.0804% 9.9629% 10.0790%
Range............................. 7.4900% to 14.5400% 7.7500% to 12.3750% 7.4900% to 14.5400%
Note margins:
Weighted average.................. 6.5966% 6.6566% 6.5972%
Range............................. 2.7500% to 10.3250% 2.8750% to 9.6250% 2.7500% to 10.3250%
Minimum mortgage rates:
Weighted average.................. 9.5057% 8.8194% 9.4978%
Range............................. 2.7500% to 14.5400% 2.8750% to 12.3750% 2.7500% to 14.5400%
Minimum net mortgage rates:
Weighted average.................. 8.8007% 8.1144% 8.7928%
Range............................. 2.0450% to 13.8350% 2.1700% to 11.6700% 2.0450% to 13.8350%
Maximum mortgage rates:
Weighted average.................. 16.7489% 16.1555% 16.7420%
Range............................. 13.4900% to 21.1000% 14.0000% to 19.3750% 13.4900% to 21.1000%
Maximum net mortgage rates:
Weighted average.................. 16.0439% 15.4505% 16.0370%
Range............................. 12.7850% to 20.3950% 13.2950% to 18.6700% 12.7850% to 20.3950%
Weighted average months to next
adjustment date after September 1,
1999................................. 26 11 26
</TABLE>
None of the Group II Loans will have been originated prior to August 19,
1997, or will have a maturity date later than September 1, 2029. No Group II
Loan will have a remaining term to stated maturity as of the cut-off date of
less than 175 months. The weighted average term to stated maturity of the
Group II Loans as of the cut-off date will be approximately 358 months. The
weighted average original term to maturity of the Group II Loans as of the
cut-off date will be approximately 360 months.
As of the cut-off date, 0.7% of the Group II Loans are 30 to 59 days
delinquent in payment of principal and interest, and none of the Group II Loans
are 60 or more days delinquent in payment of principal and interest.
The Group II Loans are generally assumable pursuant to the terms of the
related mortgage note. See 'Maturity and Prepayment Considerations' in the
prospectus.
Set forth below is a description of some additional characteristics of the
Group II Loans as of the cut-off date, except as otherwise indicated. All
percentages of the Group II Loans are approximate percentages by aggregate
principal balance of the Group II Loans as of the cut-off date, except as
otherwise indicated, after
S-28
<PAGE>
deducting payments of principal due in the month of the cut-off date. Unless
otherwise specified, all principal balances of the Group II Loans are as of the
cut-off date, after such deduction and are rounded to the nearest dollar.
CREDIT SCORE DISTRIBUTION OF THE GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
CREDIT SCORE RANGE MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ------------------ -------------- ----------------- --------------
<S> <C> <C> <C>
499 or Less...................................... 219 $ 20,340,514 2.71%
500 - 519........................................ 418 38,595,892 5.15
520 - 539........................................ 672 61,964,281 8.26
540 - 559........................................ 952 94,138,484 12.55
560 - 579........................................ 1,120 117,759,645 15.70
580 - 599........................................ 1,081 116,767,197 15.57
600 - 619........................................ 950 106,398,415 14.19
620 - 639........................................ 666 78,822,691 10.51
640 - 659........................................ 445 52,090,210 6.95
660 - 679........................................ 234 24,440,157 3.26
680 - 699........................................ 149 17,408,777 2.32
700 - 719........................................ 62 6,641,058 0.89
720 - 739........................................ 46 4,404,692 0.59
740 - 759........................................ 20 2,332,722 0.31
760 or Greater................................... 25 2,985,850 0.40
----- ------------ ------
Subtotal with Credit Score....................... 7,059 745,090,585 99.34
Not Available(1)................................. 78 4,920,618 0.66
----- ------------ ------
Total Pool.................................. 7,137 $750,011,203 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
- ------------
(1) Mortgage Loans indicated as having a Credit Score that is 'not available'
include certain Mortgage Loans where the Credit Score was not provided by
the related Seller and Mortgage Loans where no credit history can be
obtained for the related Mortgagor.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES OF THE GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
ORIGINAL MORTGAGE LOAN BALANCE MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ------------------------------ -------------- ----------------- --------------
<S> <C> <C> <C>
$ 0 - 100,000............................... 4,178 $269,221,411 35.90%
100,001 - 200,000............................... 2,352 320,804,798 42.77
200,001 - 300,000............................... 491 117,737,797 15.70
300,001 - 400,000............................... 103 35,648,610 4.75
400,001 - 500,000............................... 8 3,588,456 0.48
500,001 - 600,000............................... 3 1,757,662 0.23
600,001 - 700,000............................... 2 1,252,469 0.17
----- ------------ ------
Total....................................... 7,137 $750,011,203 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the
Group II Loans will be approximately $105,088.
S-29
<PAGE>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES OF THE SUB-GROUP II-A LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF SUCH
ORIGINAL MORTGAGE LOAN BALANCE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ------------------------------ -------------- ----------------- --------------
<S> <C> <C> <C>
$ 0 - 50,000............................... 1,099 $ 42,948,181 10.74%
50,001 - 100,000............................... 1,288 95,582,921 23.90
100,001 - 150,000............................... 890 109,653,042 27.41
150,001 - 200,000............................... 567 98,119,985 24.53
200,001 - 240,000............................... 246 53,703,669 13.43
----- ------------ ------
Total....................................... 4,090 $400,007,798 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the
Sub-Group II-A Loans will be approximately $97,801.
NET MORTGAGE RATES OF THE GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NET MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ---------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
6.500 - 6.999.................................. 6 $ 848,223 0.11%
7.000 - 7.499.................................. 109 15,065,972 2.01
7.500 - 7.999.................................. 257 33,369,076 4.45
8.000 - 8.499.................................. 636 83,245,834 11.10
8.500 - 8.999.................................. 1,032 119,991,501 16.00
9.000 - 9.499.................................. 1,561 172,284,797 22.97
9.500 - 9.999.................................. 1,369 138,423,329 18.46
10.000 - 10.499.................................. 1,071 99,161,725 13.22
10.500 - 10.999.................................. 553 48,192,898 6.43
11.000 - 11.499.................................. 347 26,848,852 3.58
11.500 - 11.999.................................. 127 8,539,163 1.14
12.000 - 12.499.................................. 58 3,476,139 0.46
12.500 - 12.999.................................. 6 294,413 0.04
13.000 - 13.499.................................. 3 83,795 0.01
13.500 - 13.999.................................. 2 185,485 0.02
----- ------------ ------
Total....................................... 7,137 $750,011,203 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-Off Date, the weighted average Net Mortgage Rate of the
Group II Loans will be approximately 9.3740% per annum.
S-30
<PAGE>
MORTGAGE RATES OF THE GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ------------------ -------------- ----------------- --------------
<S> <C> <C> <C>
7.000 - 7.499................................. 1 $ 95,829 0.01%
7.500 - 7.999................................. 92 13,085,567 1.74
8.000 - 8.499................................. 112 14,591,636 1.95
8.500 - 8.999................................. 594 78,299,538 10.44
9.000 - 9.499................................. 666 80,370,947 10.72
9.500 - 9.999................................. 1,605 185,631,598 24.75
10.000 - 10.499................................. 1,227 124,601,289 16.61
10.500 - 10.999................................. 1,420 139,277,596 18.57
11.000 - 11.499................................. 669 55,968,329 7.46
11.500 - 11.999................................. 433 36,466,408 4.86
12.000 - 12.499................................. 201 14,146,843 1.89
12.500 - 12.999................................. 96 6,284,836 0.84
13.000 - 13.499................................. 14 867,840 0.12
13.500 - 13.999................................. 4 103,724 0.01
14.000 - 14.499................................. 2 200,249 0.03
14.500 - 14.999................................. 1 18,974 0.01
----- ------------ ------
Total...................................... 7,137 $750,011,203 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Rate of the Group II
Loans will be approximately 10.0790% per annum.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
ORIGINAL LOAN-TO-VALUE RATIO (%) MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- -------------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
0.01 - 50.00.................................... 178 $ 11,380,211 1.52%
50.01 - 55.00.................................... 75 5,648,850 0.75
55.01 - 60.00.................................... 141 12,752,127 1.70
60.01 - 65.00.................................... 234 19,413,046 2.59
65.01 - 70.00.................................... 443 39,837,756 5.31
70.01 - 75.00.................................... 954 92,570,834 12.34
75.01 - 80.00.................................... 2,106 222,726,511 29.70
80.01 - 85.00.................................... 1,613 169,258,926 22.57
85.01 - 90.00.................................... 1,342 169,660,347 22.62
90.01 - 95.00.................................... 51 6,762,593 0.90
----- ------------ ------
Total....................................... 7,137 $750,011,203 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Group II
Loans will be approximately 80.55%.
S-31
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES OF THE GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
STATE MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ----- -------------- ----------------- --------------
<S> <C> <C> <C>
California....................................... 626 $105,292,419 14.04%
Texas............................................ 876 89,947,951 11.99
Illinois......................................... 473 47,004,926 6.27
Michigan......................................... 487 41,796,118 5.57
Georgia.......................................... 276 32,527,528 4.34
Ohio............................................. 417 30,671,288 4.09
Colorado......................................... 235 30,291,398 4.04
Florida.......................................... 317 30,233,067 4.03
Washington....................................... 224 29,707,322 3.96
Arizona.......................................... 224 23,525,096 3.14
Other (1)........................................ 2,982 289,014,091 38.53
----- ------------ ------
Total....................................... 7,137 $750,011,203 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
- ------------
(1) Other includes states and the District of Columbia with under 3%
concentrations individually.
No more than 0.3% of the Group II Loans will be secured by Mortgaged
Properties located in any one zip code area in California and no more than 0.3%
of the Group II Loans will be secured by Mortgaged Properties located in any one
zip code area outside California.
MORTGAGE LOAN PURPOSE OF THE GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ------------ -------------- ----------------- --------------
<S> <C> <C> <C>
Purchase......................................... 3,676 $398,192,035 53.09%
Rate/Term Refinance.............................. 661 72,741,282 9.70
Equity Refinance................................. 2,800 279,077,886 37.21
----- ------------ ------
Total....................................... 7,137 $750,011,203 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of rate and term
refinance Group II Loans will be 80.42%. The weighted average Loan-to-Value
Ratio at origination of equity refinance Group II Loans will be 77.98%.
MORTGAGE LOAN DOCUMENTATION TYPES OF THE GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ------------------ -------------- ----------------- --------------
<S> <C> <C> <C>
Full Documentation............................... 6,473 $668,989,798 89.20%
Reduced Documentation............................ 664 81,021,405 10.80
----- ------------ ------
Total....................................... 7,137 $750,011,203 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Group II
Loans which were underwritten under a reduced loan documentation program will be
72.18%. No more than 14.0% of such reduced loan documentation Group II Loans
will be secured by Mortgaged Properties located in California.
S-32
<PAGE>
OCCUPANCY TYPES OF THE GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
OCCUPANCY MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- --------- -------------- ----------------- --------------
<S> <C> <C> <C>
Primary Residence................................ 6,692 $715,899,076 95.45%
Second/Vacation.................................. 33 3,461,964 0.46
Non Owner-occupied............................... 412 30,650,163 4.09
----- ------------ ------
Total....................................... 7,137 $750,011,203 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
MORTGAGED PROPERTY TYPES OF THE GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ------------- -------------- ----------------- --------------
<S> <C> <C> <C>
Single-family detached........................... 5,757 $594,307,148 79.24%
Planned Unit Developments (detached)............. 579 81,335,509 10.84
Two- to four-family units........................ 306 30,131,643 4.02
Condo Low-Rise (less than 5 stories)............. 238 20,365,208 2.72
Condo Mid-Rise (5 to 8 stories).................. 8 781,682 0.10
Condo High-Rise (9 stories or more).............. 5 1,010,848 0.13
Manufactured Home................................ 112 7,993,213 1.07
Townhouse........................................ 57 6,021,639 0.80
Townhouse (2 to 4 family units).................. 6 541,334 0.07
Planned Unit Developments (attached)............. 69 7,522,980 1.00
----- ------------ ------
Total....................................... 7,137 $750,011,203 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
RISK CATEGORIES OF THE GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
RISK GRADE MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ---------- -------------- ----------------- --------------
<S> <C> <C> <C>
Category 1A...................................... 1,866 $224,396,665 29.92%
Category 1....................................... 2,159 247,187,079 32.96
Category 2....................................... 2,277 211,552,100 28.21
Category 3....................................... 617 50,056,143 6.67
Category 4....................................... 218 16,819,217 2.24
----- ------------ ------
Total....................................... 7,137 $750,011,203 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
MORTGAGE RATES OF THE GROUP II LOANS
(BASED ON ONE-YEAR U.S. TREASURY)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF SUCH
MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ------------------ -------------- ----------------- --------------
<S> <C> <C> <C>
7.500 - 7.999.................................. 1 $ 46,900 0.54%
8.500 - 8.999.................................. 6 554,942 6.40
9.000 - 9.499.................................. 9 728,813 8.41
9.500 - 9.999.................................. 23 3,693,164 42.62
10.000 - 10.499.................................. 13 1,694,314 19.55
10.500 - 10.999.................................. 12 1,209,894 13.96
11.000 - 11.499.................................. 5 460,226 5.31
11.500 - 11.999.................................. 1 61,712 0.71
12.000 - 12.499.................................. 2 215,465 2.49
-- ---------- ------
Total....................................... 72 $8,665,430 100.00%
-- ---------- ------
-- ---------- ------
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Rate of the Group II
Loans (based on One-Year U.S. Treasury) will be approximately 9.9629% per annum.
S-33
<PAGE>
NOTE MARGINS OF THE GROUP II LOANS
(BASED ON ONE-YEAR U.S. TREASURY)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF SUCH
NOTE MARGINS (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C>
2.500 - 2.999................................... 1 $ 61,712 .71%
3.500 - 3.999................................... 4 406,920 4.70
5.000 - 5.499................................... 6 742,660 8.57
5.500 - 5.999................................... 4 467,594 5.40
6.000 - 6.499................................... 11 1,549,027 17.88
6.500 - 6.999................................... 13 1,384,884 15.98
7.000 - 7.499................................... 14 2,356,328 27.19
7.500 - 7.999................................... 11 929,301 10.72
8.000 - 8.499................................... 6 551,538 6.36
9.000 - 9.499................................... 1 118,766 1.37
9.500 - 9.999................................... 1 96,699 1.12
-- ---------- ------
Total...................................... 72 $8,665,430 100.00%
-- ---------- ------
-- ---------- ------
</TABLE>
As of the Cut-Off Date, the weighted average Note Margin of the Group II
Loans (based on One-Year U.S. Treasury) will be approximately 6.6566% per annum.
MAXIMUM MORTGAGE RATES OF THE GROUP II LOANS
(BASED ON ONE-YEAR U.S. TREASURY)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF SUCH
MAXIMUM MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- -------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
14.000 - 14.999................................. 5 $ 492,664 5.69%
15.000 - 15.999................................. 26 3,819,160 44.07
16.000 - 16.999................................. 27 3,117,432 35.98
17.000 - 17.999................................. 11 933,740 10.78
18.000 - 18.999................................. 1 86,969 1.00
19.000 - 19.999................................. 2 215,465 2.49
-- ---------- ------
Total...................................... 72 $8,665,430 100.00%
-- ---------- ------
-- ---------- ------
</TABLE>
As of the Cut-Off Date, the weighted average Maximum Mortgage Rate of the
Group II Loans (based on One-Year U.S. Treasury) will be approximately 16.1555%
per annum.
MINIMUM MORTGAGE RATES OF THE GROUP II LOANS
(BASED ON ONE-YEAR U.S. TREASURY)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF SUCH
MINIMUM MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- -------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
2.000 - 2.999................................. 1 $ 61,712 0.71%
3.000 - 3.999................................. 4 406,920 4.70
5.000 - 5.999................................. 2 347,219 4.01
6.000 - 6.999................................. 2 216,461 2.50
7.000 - 7.999................................. 12 1,497,875 17.29
8.000 - 8.999................................. 7 664,898 7.67
9.000 - 9.999................................. 23 3,126,036 36.07
10.000 - 10.999................................. 17 1,976,763 22.81
11.000 - 11.999................................. 2 152,082 1.76
12.000 - 12.999................................. 2 215,465 2.49
-- ---------- ------
Total...................................... 72 $8,665,430 100.00%
-- ---------- ------
-- ---------- ------
</TABLE>
As of the Cut-Off Date, the weighted average Minimum Mortgage Rate of the
Group II Loans (based on One-Year U.S. Treasury) will be approximately 8.8194%
per annum.
S-34
<PAGE>
NEXT INTEREST RATE ADJUSTMENT DATES OF THE GROUP II LOANS
(BASED ON ONE-YEAR U.S. TREASURY)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF SUCH
NEXT INTEREST ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ----------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
February 2000................................... 1 $ 36,613 0.42%
March 2000...................................... 3 418,456 4.83
April 2000...................................... 4 491,896 5.68
May 2000........................................ 9 1,049,226 12.11
June 2000....................................... 23 2,884,507 33.29
July 2000....................................... 13 1,776,174 20.50
August 2000..................................... 10 926,946 10.70
September 2000.................................. 2 215,767 2.49
March 2001...................................... 1 97,517 1.13
March 2002...................................... 1 49,858 0.58
April 2002...................................... 1 142,186 1.64
May 2002........................................ 1 102,645 1.18
July 2002....................................... 2 313,709 3.62
August 2002..................................... 1 159,931 1.85
-- ---------- ------
Total...................................... 72 $8,665,430 100.00%
-- ---------- ------
-- ---------- ------
</TABLE>
As of the Cut-Off Date, the weighted average Months to Next Interest Rate
Adjustment Date will be approximately 11.
MORTGAGE RATES OF THE GROUP II LOANS
(BASED ON SIX-MONTH LIBOR)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF SUCH
MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ------------------ -------------- ----------------- --------------
<S> <C> <C> <C>
7.000 - 7.499................................. 1 $ 95,829 0.01%
7.500 - 7.999................................. 91 13,038,667 1.76
8.000 - 8.499................................. 112 14,591,636 1.97
8.500 - 8.999................................. 588 77,744,597 10.49
9.000 - 9.499................................. 657 79,642,134 10.74
9.500 - 9.999................................. 1,582 181,938,434 24.54
10.000 - 10.499................................. 1,214 122,906,975 16.58
10.500 - 10.999................................. 1,408 138,067,702 18.62
11.000 - 11.499................................. 664 55,508,102 7.49
11.500 - 11.999................................. 432 36,404,695 4.91
12.000 - 12.499................................. 199 13,931,378 1.88
12.500 - 12.999................................. 96 6,284,836 0.85
13.000 - 13.499................................. 14 867,840 0.12
13.500 - 13.999................................. 4 103,724 0.01
14.000 - 14.499................................. 2 200,249 0.03
14.500 - 14.999................................. 1 18,974 0.01
----- ------------ ------
Total...................................... 7,065 $741,345,772 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Rate of the Group II
Loans (based on Six-Month LIBOR) will be approximately 10.0804% per annum.
S-35
<PAGE>
NOTE MARGINS OF THE GROUP II LOANS
(BASED ON SIX-MONTH LIBOR)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF SUCH
NOTE MARGINS (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C>
2.500 - 2.999................................. 1 $ 156,423 0.02%
3.500 - 3.999................................. 2 239,436 0.03
4.000 - 4.499................................. 7 1,130,319 0.15
4.500 - 4.999................................. 54 6,466,853 0.87
5.000 - 5.499................................. 304 36,589,470 4.94
5.500 - 5.999................................. 1,023 125,068,450 16.87
6.000 - 6.499................................. 1,450 162,303,849 21.89
6.500 - 6.999................................. 1,823 188,935,150 25.49
7.000 - 7.499................................. 1,169 116,373,964 15.70
7.500 - 7.999................................. 655 60,201,008 8.12
8.000 - 8.499................................. 326 26,629,079 3.59
8.500 - 8.999................................. 138 10,189,063 1.37
9.000 - 9.499................................. 99 6,325,623 0.85
9.500 - 9.999................................. 10 624,159 0.08
10.000 - 10.499................................. 4 112,928 0.02
----- ------------ ------
Total...................................... 7,065 $741,345,772 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-Off Date, the weighted average Note Margin of the Group II
Loans (based on Six-Month LIBOR) will be approximately 6.5966% per annum.
MAXIMUM MORTGAGE RATES OF THE GROUP II LOANS
(BASED ON SIX-MONTH LIBOR)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF SUCH
MAXIMUM MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- -------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
13.000 - 13.999................................. 16 $ 2,269,959 0.31%
14.000 - 14.999................................. 263 37,061,932 5.00
15.000 - 15.999................................. 1,300 161,966,634 21.85
16.000 - 16.999................................. 2,353 257,767,203 34.77
17.000 - 17.999................................. 2,007 193,187,534 26.06
18.000 - 18.999................................. 863 71,455,569 9.64
19.000 - 19.999................................. 252 17,128,772 2.31
20.000 - 20.999................................. 10 474,432 0.06
21.000 - 21.999................................. 1 33,738 0.01
----- ------------ ------
Total...................................... 7,065 $741,345,772 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-Off Date, the weighted average Maximum Mortgage Rate of the
Group II Loans (based on Six-Month LIBOR) will be approximately 16.7489% per
annum.
S-36
<PAGE>
MINIMUM MORTGAGE RATES OF THE GROUP II LOANS
(BASED ON SIX-MONTH LIBOR)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF SUCH
MINIMUM MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- -------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
2.000 - 2.999................................. 1 $ 156,423 0.02%
3.000 - 3.999................................. 1 193,102 0.03
4.000 - 4.999................................. 9 1,476,479 0.20
5.000 - 5.999................................. 185 24,044,927 3.24
6.000 - 6.999................................. 438 54,180,483 7.31
7.000 - 7.999................................. 410 46,574,615 6.28
8.000 - 8.999................................. 766 92,936,823 12.54
9.000 - 9.999................................. 1,862 211,989,635 28.60
10.000 - 10.999................................. 2,167 212,268,283 28.63
11.000 - 11.999................................. 945 78,470,848 10.58
12.000 - 12.999................................. 265 18,277,936 2.47
13.000 - 13.999................................. 14 723,507 0.10
14.000 - 14.999................................. 2 52,712 0.01
----- ------------ ------
Total...................................... 7,065 $741,345,772 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-Off Date, the weighted average Minimum Mortgage Rate of the
Group II Loans (based on Six-Month LIBOR) will be approximately 9.5057% per
annum.
S-37
<PAGE>
NEXT INTEREST RATE ADJUSTMENT DATES OF THE GROUP II LOANS
(BASED ON SIX-MONTH LIBOR)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF SUCH
NEXT INTEREST ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ----------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
October 1999.................................... 4 $ 503,793 0.07%
November 1999................................... 13 1,648,829 0.22
December 1999................................... 15 2,016,014 0.27
January 2000.................................... 9 983,380 0.13
February 2000................................... 10 1,253,226 0.17
March 2000...................................... 1 102,599 0.01
June 2000....................................... 1 33,706 0.01
July 2000....................................... 1 87,272 0.01
August 2000..................................... 2 134,942 0.02
October 2000.................................... 1 52,773 0.01
November 2000................................... 6 514,956 0.07
December 2000................................... 12 1,675,290 0.23
January 2001.................................... 6 1,676,010 0.23
February 2001................................... 6 516,713 0.07
March 2001...................................... 47 5,298,983 0.71
April 2001...................................... 111 13,948,406 1.88
May 2001........................................ 439 48,784,383 6.58
June 2001....................................... 1,165 126,924,864 17.12
July 2001....................................... 1,307 136,544,819 18.42
August 2001..................................... 1,025 110,571,372 14.91
September 2001.................................. 231 24,676,616 3.33
November 2001................................... 1 397,498 0.05
December 2001................................... 5 550,006 0.07
January 2002.................................... 9 1,344,822 0.18
February 2002................................... 9 903,031 0.12
March 2002...................................... 14 1,306,096 0.18
April 2002...................................... 46 5,611,831 0.76
May 2002........................................ 337 39,420,293 5.32
June 2002....................................... 572 60,138,428 8.11
July 2002....................................... 729 70,884,201 9.56
August 2002..................................... 708 63,724,735 8.60
September 2002.................................. 223 19,115,885 2.58
----- ------------ ------
Total...................................... 7,065 $741,345,772 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-Off Date, the weighted average Months to Next Interest Rate
Adjustment Date will be approximately 26.
STANDARD HAZARD INSURANCE AND PRIMARY MORTGAGE INSURANCE
Each mortgage loan is required to be covered by a standard hazard insurance
policy. In addition, to the best of the depositor's knowledge, 420 Group I Loans
and 59 Group II Loans with LTV ratios at origination in excess of 80%,
representing 6.8% and 1.0% of these mortgage loans, respectively, will be
insured by a primary insurance policy covering the amount of the mortgage loan
in excess of 75% (or, with respect to twenty of the Group I Loans representing
approximately 0.2% of the Group I Loans, some other percentage) of the value of
the related mortgaged property used in determining the LTV ratio. An additional
30.8% and 45.1% of the Group I Loans and Group II Loans, respectively, are
mortgage loans with a LTV ratio or CLTV ratio in the case of the junior loans,
at origination in excess of 80% that are not insured by a primary insurance
policy. Substantially all of the primary insurance policies were issued by
General Electric Mortgage Insurance Corporation, Republic Mortgage Insurance
Company, United Guaranty Residential Insurance Company, Mortgage Guaranty
Insurance Corporation, Commonwealth Mortgage Assurance Company and PMI Mortgage
S-38
<PAGE>
Insurance Company. Each issuer of a primary insurance policy has a claims paying
ability currently acceptable to the rating agencies that have been requested to
rate the certificates; however, there is no assurance as to the actual ability
of any primary insurer to pay claims. See 'Insurance Policies on Mortgage Loans
or Contracts -- Standard Hazard Insurance on Mortgaged Properties' and
' -- Primary Mortgage Insurance Policies' in the prospectus.
UNDERWRITING STANDARDS
Prior to assignment to the depositor, Residential Funding reviewed the
underwriting standards for the mortgage loans and purchased all the mortgage
loans from mortgage collateral sellers who participated in or whose loans were
in substantial conformity with the standards set forth in Residential Funding's
AlterNet Program or which are otherwise in conformity with the standards set
forth in the description of risk categories set forth in this prospectus
supplement.
All of the mortgage loans had features that generally distinguish those
loans from the more restrictive underwriting requirements used as standards for
Fannie Mae and Freddie Mac, and moreover, from the more restrictive underwriting
standards set forth in Residential Funding's seller guide for mortgage loan
collateral that does not present significant special risk features. This guide
generally provides the basis for underwriting mortgage loans that serve as the
assets for securities issued by Residential Funding's affiliate, Residential
Funding Mortgage Securities I, Inc. Residential Funding established risk
categories by which it could aggregate acceptable loans into groupings
considered to have progressively greater risk characteristics. A more detailed
description of those risk categories applicable to the mortgage loans is set
forth below.
Residential Funding's underwriting of the mortgage loans generally
consisted of analyzing the following as standards applicable to the mortgage
loans:
the creditworthiness of a mortgagor,
the income sufficiency of a mortgagor's projected family income relative
to the mortgage payment and to other fixed obligations, including in
certain instances rental income from investment property, and
the adequacy of the mortgaged property expressed in terms of LTV ratio, to
serve as the collateral for a mortgage loan.
Generally, each mortgagor would have been required to complete an
application designed to provide to the original lender pertinent credit
information concerning the mortgagor. As part of the description of the
mortgagor's financial condition, each mortgagor furnished information with
respect to the mortgagor's assets, liabilities, income, credit history,
employment history and personal information, and furnished an authorization to
apply for a credit report which summarized the borrower's credit history with
local merchants and lenders and any record of bankruptcy. The information may
have been supplied solely in the loan application. The mortgagor may also have
been required to authorize verifications of deposits at financial institutions
where the mortgagor had demand or savings accounts. In the case of investment
properties, income derived from the mortgaged property may have been considered
for underwriting purposes. With respect to mortgaged property consisting of
vacation or second homes, generally no income derived from the property was
considered for underwriting purposes.
Based on the data provided in the application, certain verifications, if
required by the originator of the mortgage loan, and the appraisal or other
valuation of the mortgaged property, a determination was made by the original
lender that the mortgagor's monthly income would be sufficient to enable the
mortgagor to meet its monthly obligations on the mortgage loan and other
expenses related to the property, including property taxes, utility costs,
standard hazard insurance and other fixed obligations other than housing
expenses. The originator's guidelines for mortgage loans generally specify that
scheduled payments on a mortgage loan during the first year of its term plus
taxes and insurance and all scheduled payments on obligations that extend beyond
ten months, including those mentioned above and other fixed obligations, equal
no more than specified percentages of the prospective mortgagor's gross income.
The originator may also have considered the amount of liquid assets available to
the mortgagor after origination.
Some of the mortgage loans have been originated under 'limited
documentation' or 'no stated income' programs that require less documentation
and verification than do traditional 'full documentation' programs. Typically,
under a 'limited documentation' program, minimal investigation into a
mortgagor's credit history and
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income profile would have been undertaken by the originator and the underwriting
for those mortgage loans will place a greater emphasis on the value of the
mortgaged property. Under a 'no stated income' program, some borrowers with
acceptable payment histories will not be required to provide any information
regarding income and no other investigation regarding the borrower's income will
be undertaken. As used in this section, LTV ratio means that ratio, expressed as
a percentage of (a) the principal amount of the mortgage loan at origination,
over (b) the lesser of the sales price or the appraised value of the related
mortgaged property at origination, or in the case of a refinanced or modified
mortgage loan, either the appraised value determined at origination or, if
applicable, at the time of the refinancing or modification. With respect to any
junior loan, the CLTV ratio will be the ratio, expressed as a percentage, of the
sum of (x) the cut-off date principal balance of the junior loan and (y) the
principal balance of any related mortgage loans that constitute liens senior to
the lien of the junior loan on the related mortgaged property, at the time of
the origination of that junior loan or, in some instances, at the time of an
appraisal subsequent to origination, to the lesser of (A) the appraised value of
the related mortgaged property determined in an appraisal used in the
origination of the junior loan or, in some instances, 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.
The adequacy of a mortgaged property as security for repayment of the
related mortgage loan generally has been determined by an appraisal in
accordance with pre-established appraisal procedure guidelines for appraisals
established by or acceptable to the originator. Appraisers were either staff
appraisers employed by the originator or independent appraisers selected in
accordance with pre-established guidelines established by the originator. The
appraisal procedure guidelines generally will have required the appraiser or an
agent on its behalf to personally inspect the property and to verify whether the
property was in good condition and that construction, if new, had been
substantially completed. The appraisal would have considered a market data
analysis of recent sales of comparable properties and, when deemed applicable,
an analysis based on income generated from the property or replacement cost
analysis based on the current cost of constructing or purchasing a similar
property. In certain instances, the LTV ratio or CLTV ratio may have been based
on the appraised value as indicated on a review appraisal conducted by the
mortgage collateral seller or originator.
In most cases, the mortgage loans were either originated and underwritten
in accordance with Residential Funding's AlterNet Program, as discussed below,
or otherwise acquired from a mortgage collateral seller based on standards
consistent with the following discussion on risk category classification.
Exceptions to these standards are made, however, on a case by case basis if it
is determined, based on compensating factors, that an underwriting exception is
warranted. Compensating factors may include, but are not limited to, a low LTV
ratio, stable employment, a relatively long period of time in the same
residence, and a mortgagor's cash reserves and savings.
The risk categories determined by Residential Funding as applicable to all
of the mortgage loans are expressed herein as Risk Categories 1A-1, 1A, 1, 2, 3
and 4.
Risk Category 1A-1: Under Risk Category 1A-1, the prospective mortgagor may
have minor repayment delinquencies related to installment or revolving debt. No
30-day, 60-day or 90-day late payments are acceptable within the last 12 months
on an existing mortgage loan. Minor derogatory items are allowed as to
non-mortgage credit provided, open collections and charge-offs in excess of $500
must be paid down to zero at closing unless they are 2 years or older and not
reflected in the title report or are medical related. As to each mortgagor in
this Risk Category, no bankruptcies were discharged during the three-year period
prior to the date the mortgage loan was made and there was evidence that the
mortgagor had re-established its credit to an acceptable level. The mortgaged
property must be in average to good condition. A maximum LTV ratio of 95% is
permitted for a mortgage loan on a single family owner-occupied property or 85%
for a mortgage loan originated under a stated documentation program. A maximum
LTV ratio of 90% is permitted for a mortgage loan on a non-owner occupied
property or 70% for mortgage loans originated under a stated documentation
program. The mortgagor's debt service-to-income ratio is 45% or less which, in
the case of adjustable-rate mortgage loans, will be based on the initial rate on
the mortgage loan plus 2% per annum unless the initial rate would not be subject
to change for an extended period.
Risk Category 1A: Under Risk Category 1A, the prospective mortgagor may
have minor repayment delinquencies related to installment or revolving debt. A
maximum of one 30-day late payment, and no 60-day or 90-day late payments,
within the last 12 months is acceptable on an existing mortgage loan. Minor
derogatory items are allowed as to non-mortgage credit provided, open
collections and charge-offs must be paid down to
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zero at closing unless they are 2 years or older and not reflected in the title
report or are medical related. As to each mortgagor in this Risk Category, no
bankruptcies were discharged during the three-year period prior to the date the
mortgage loan was made and there was evidence that the mortgagor had
re-established its credit to an acceptable level. The mortgaged property must be
in average to good condition. A maximum LTV ratio of 90% is permitted for a
mortgage loan on a single family owner-occupied property or 85% for a mortgage
loan originated under a limited documentation program. A maximum LTV ratio of
75% is permitted for a mortgage loan on a non-owner occupied property or 70% for
mortgage loans originated under the limited documentation program. The
mortgagor's debt service-to-income ratio is 45% or less which, in the case of
adjustable-rate mortgage loans, will be based on the initial rate on the
mortgage loan plus 2% per annum unless the initial rate would not be subject to
change for an extended period.
Risk Category 1: Under Risk Category 1, the prospective mortgagor is
required to have generally repaid all previous or existing installment or
revolving debt according to its terms. A maximum of two 30-day late payments,
and no 60-day or 90-day late payments, within the last 12 months is acceptable
on an existing mortgage loan. As to non-mortgage credit, some prior defaults may
have occurred provided, open collections and charge-offs in excess of $1,000
must be paid down to zero at closing unless they are 2 years or older and not
reflected in the title report or are medical related. No bankruptcies were
discharged during the two-year period prior to the date the mortgage loan was
made and there was evidence that the Mortgagor had re-established its credit to
an acceptable level. The mortgaged property must be in average to good
condition. A maximum LTV ratio of 90% is permitted for a mortgage loan on an
owner-occupied property or 80% for mortgage loans originated under a limited
documentation program. A maximum LTV ratio of 75% is permitted for a mortgage
loan on a non-owner-occupied property or 70% for mortgage loans originated under
a limited documentation program. The debt service-to-income ratio is 50% or less
which, in the case of adjustable-rate mortgage loans, will be based on an
initial rate on the mortgage loan plus 2% per annum unless the initial rate
would not be subject to change for an extended period.
Risk Category 2: Under Risk Category 2, the prospective mortgagor may not
have paid all previous or existing installment or revolving debt according to
its terms, and may have some charge-offs. A maximum of four 30-day late
payments, and one 60-day but no 90-day late payments, within the last 12 months
is acceptable on an existing mortgage loan. As to non-mortgage credit, some
prior defaults may have occurred provided, open collections and charge-offs must
be paid down to an amount not in excess of $2,500 at closing unless they are 2
years or older and not reflected in the title report or are medical related. No
bankruptcies were discharged during the twelve-month period prior to the date
the mortgage loan was made and there was evidence that the Mortgagor had
re-established its credit to an acceptable level. The applicant must have also
established some good credit since any bankruptcy proceedings. The mortgaged
property must be in average to good condition. A maximum LTV ratio of 85% is
permitted for a mortgage loan on an owner-occupied property or 80% for mortgage
loans originated under a limited documentation program. A maximum LTV ratio of
75% is permitted for a mortgage loan on a non-owner-occupied property or 70% for
mortgage loans originated under a limited documentation program. The debt
service-to-income ratio is 50% or less which, in the case of adjustable-rate
mortgage loans, will be based on the initial rate on the mortgage loan plus 2%
per annum unless the initial rate would not be subject to change for an extended
period.
Risk Category 3: Under Risk Category 3, the prospective mortgagor may have
experienced significant credit problems in the past. As to mortgage credit, the
mortgagor may have had a history of being generally 30 to 60 days delinquent,
and a maximum of one 90-day late payment within the last 12 months is acceptable
on an existing mortgage loan. As to non-mortgage credit, significant prior
defaults may have occurred provided, open collections and charge-offs must be
paid down to an amount not in excess of $5,000 at closing unless they are 2
years or older and not reflected in the title report or are medical related. No
bankruptcies were discharged during the 12-month period prior to the date the
mortgage loan was made. The mortgaged property must be in average to good
condition. A maximum LTV ratio of 75% is permitted for mortgage loans on an
owner-occupied property or 70% for mortgage loans originated under a limited
documentation program. A maximum LTV ratio of 65% is permitted for mortgage
loans originated under a full or limited documentation program on a non-
owner-occupied property. The debt service-to-income ratio is 55% or less which,
in the case of adjustable-rate mortgage loans, will be based on the initial rate
on the mortgage loan plus 2% per annum unless the initial rate would not be
subject to change for an extended period.
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Risk Category 4: Under Risk Category 4, the prospective mortgagor may have
experienced substantial credit problems in the past. As to mortgage credit, the
mortgagor may have had a history of being generally 30 to 60 days delinquent,
and a maximum of two 90-day late payments within the last 12 months is
acceptable on an existing mortgage loan. The prospective mortgagor's credit
history is poor and a notice of default may have been filed. As to non-mortgage
credit, significant prior defaults may have occurred and any open collections
and charge-offs may not have been paid off prior to closing. A bankruptcy filing
by the mortgagor is permitted if it is discharged at closing. The mortgaged
property must be in average to good condition. A maximum LTV ratio of 70% is
permitted for mortgage loans on an owner-occupied property or 65% for mortgage
loans originated under a limited documentation program. A maximum LTV ratio of
60% is permitted for mortgage loans originated under a full or limited
documentation program on a non-owner-occupied property. The debt service-
to-income ratio is 55% or less which, in the case of adjustable-rate mortgage
loans, will be based on the initial rate on the mortgage loan plus 2% per annum
unless the initial rate would not be subject to change for an extended period.
As described above, the indicated underwriting standards applicable to the
mortgage loans include the foregoing categories and characteristics as
guidelines only. On a case-by-case basis, the underwriting process may determine
that the prospective mortgagor warrants a risk category upgrade based on
compensating factors. For example, the underwriting standards applicable for
Risk Categories 1A-1, 1A, 1 and 2 may include debt service-to-income ratios up
to 5% higher for mortgage loans which have LTV ratios of 70% or less. An
additional 5% variance for mortgage loans which have LTV ratios of 65% or less
may also have been permitted. Similar variance adjustments of up to 5% may have
been allowed for Risk Category 3 for mortgage loans that have LTV ratios less
than 65%.
In applying the standards described above to junior loans, the CLTV ratio
is used in lieu of the LTV ratio for all junior loans that have CLTV ratios of
up to 90%. Any junior loan with a CLTV ratio in excess of 90% would have been
underwritten as an exception to the general AlterNet underwriting standards
based on compensating factors as described above.
The foregoing risk grade classifications are based on factors that are
exclusive of the additional protection against loss that primary mortgage
insurance customarily provides on loans which have LTV ratios in excess of 80%.
Based on the indicated underwriting standards applicable for mortgage loans
with risk features originated thereunder, and in particular mortgage loans in
Risk Categories 3 and 4 as described above, those mortgage loans are likely to
experience greater rates of delinquency, foreclosure and loss, and may
experience substantially greater rates of delinquency, foreclosure and loss than
mortgage loans underwritten under more stringent underwriting standards.
THE ALTERNET PROGRAM
Residential Funding has established the AlterNet program primarily for the
purchase of mortgage loans that are made to borrowers that may have imperfect
credit histories, higher debt to income ratios or mortgage loans that present
certain other risks to investors. The mortgage collateral sellers that
participate in this program have been selected by Residential Funding on the
basis of criteria set forth in Residential Funding's AlterNet Seller Guide. For
those mortgage loans that Residential Funding purchased from sellers in this
program, each mortgage loan determined by Residential Funding to be acceptable
for purchase would have been originated in accordance with or would have been
determined to be generally consistent with the provisions of the AlterNet Seller
Guide. With limited exceptions, each seller in this program is a HUD-approved
mortgagee, or otherwise originates loans on behalf of a HUD-approved mortgagee,
or a financial institution supervised by a federal or state authority and has
demonstrated experience, which may be through a predecessor entity, in
originating mortgage loans. If a seller in this program becomes the subject of a
receivership, conservatorship or other insolvency or bankruptcy proceeding or if
the net worth, financial performance or delinquency and foreclosure rates of a
seller in this program are adversely impacted, that institution may continue to
be treated as a seller in this program.
RESIDENTIAL FUNDING
Residential Funding will be responsible for master servicing the mortgage
loans. Residential Funding's responsibilities will include the receipt of funds
from sub-servicers, the reconciliation of servicing activity with
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respect to the mortgage loans, investor reporting, remittances to the trustee to
accommodate distributions to certificateholders, follow up with sub-servicers
with respect to mortgage loans that are delinquent or for which servicing
decisions may need to be made, management and liquidation of mortgaged
properties acquired by foreclosure or deed in lieu of foreclosure, notices and
other responsibilities as detailed in the pooling and servicing agreement.
Residential Funding and its affiliates are active purchasers of
non-conforming mortgage loans and have sold a substantial amount of mortgage
loans that do not present some of the special risk factors presented by the
mortgage loans as described in this prospectus supplement. Residential Funding
serves as the master servicer for transactions backed by most of these mortgage
loans. As a result of the program criteria and underwriting standards of the
mortgage loans, however, the mortgage loans may experience rates of delinquency,
foreclosure and loss that are higher than those experienced by other pools of
mortgage loans for which Residential Funding acts as master servicer.
SERVICING
Primary servicing will be provided by HomeComings Financial Network, Inc.,
a wholly owned subsidiary of Residential Funding, with respect to approximately
97.3% of the mortgage loans. HomeComings Financial Network, Inc.'s servicing
operations are located at 9275 Sky Park Court, Third Floor, San Diego,
California 92123 and at 2711 North Haskell Avenue, Suite 900, Dallas,
Texas 75204.
HomeComings Financial Network, Inc.'s San Diego location is a participant
in Residential Funding's Asset Resolution Division which has been approved as a
special servicer by Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. and Fitch IBCA, Inc. This division specializes in
the servicing of sub-prime mortgage loans, the acquisition and management of
sub-performing and non-performing mortgages and the real property securing those
loans. Residential Funding's Asset Resolution Division has acquired mortgage
loan portfolios from the Resolution Trust Corporation and private investors.
ADDITIONAL INFORMATION
The description in this prospectus supplement of the mortgage pool and the
mortgaged properties is based upon the mortgage pool as constituted at the close
of business on the cut-off date, after deducting payments of principal due in
the month of the cut-off date. Prior to the issuance of the Class A
Certificates, mortgage loans may be removed from the mortgage pool as a result
of incomplete documentation or otherwise, if the depositor deems removal
necessary or appropriate. A limited number of other mortgage loans may be
included in the mortgage pool prior to the issuance of the Class A Certificates.
The depositor believes that the information set forth in this prospectus
supplement will be substantially representative of the characteristics of the
mortgage pool as it will be constituted at the time the Class A Certificates are
issued, although the range of mortgage rates and maturities and some other
characteristics of the mortgage loans in the mortgage pool may vary.
A current report on Form 8-K, together with the pooling and servicing
agreement, will be filed with the Securities and Exchange Commission within
fifteen days after the initial issuance of the Class A Certificates. If mortgage
loans are removed from or added to the mortgage pool as described in the
preceding paragraph, the removal or addition will be noted in the current report
on Form 8-K.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1999-KS3 Mortgage Asset-Backed Pass-Through Certificates will
consist of the following fifteen classes:
Class A-I-1A Certificates, Class A-I-1B Certificates, Class A-I-2
Certificates, Class A-I-3 Certificates, Class A-I-4 Certificates,
Class A-I-5 Certificates, Class A-I-6 Certificates and Class A-I-7
Certificates;
Class A-II-1 Certificates and Class A-II-2 Certificates;
Class SB-I Certificates and Class SB-II Certificates; and
Class R-I Certificates, Class R-II Certificates and Class R-III
Certificates.
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The Class A-I Certificates and Class A-II Certificates are referred to in this
prospectus supplement collectively as the Class A Certificates. Only the
Class A Certificates are offered by this prospectus supplement. See the Glossary
of Terms in this prospectus supplement for the meanings of capitalized terms and
acronyms not otherwise defined in this prospectus supplement.
The certificates in the aggregate will evidence the entire beneficial
ownership interest in the trust. The trust will consist of:
the mortgage loans;
the assets as from time to time are identified as deposited in respect of
the mortgage loans in the custodial account and in the certificate account
and belonging to the trust;
property acquired by foreclosure of the mortgage loans or deed in lieu of
foreclosure;
any applicable primary insurance policies and standard hazard insurance
policies;
the certificate guaranty insurance policies; and
all proceeds of the foregoing.
The Class A Certificates will be issued, maintained and transferred on the
book-entry records of DTC and its participants. The Class A Certificates will be
issued in minimum denominations of $25,000 and integral multiples of $1 in
excess thereof.
The Class A Certificates will be represented by one or more certificates
registered in the name of the nominee of DTC. The depositor has been informed by
DTC that DTC's nominee will be Cede & Co. No beneficial owner will be entitled
to receive a definitive certificate, except as set forth in the prospectus under
'Description of the Certificates -- Form of Certificates.' Investors in the
Class A Certificates may elect to hold their Class A Certificates through DTC in
the United States or Cedel or Euroclear in Europe. 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 depositaries,
which in turn will hold those positions in customers' securities accounts in the
depositaries' names on the books of DTC. Unless and until definitive
certificates are issued for the Class A Certificates under the limited
circumstances described in this prospectus supplement,
all references to actions by certificateholders with respect to the
Class A Certificates shall refer to actions taken by DTC upon instructions
from its participants, and
all references in this prospectus supplement to distributions, notices,
reports and statements to certificateholders with respect to the Class A
Certificates shall refer to distributions, notices, reports and statements
to DTC or Cede & Co., as the registered holder of the Class A
Certificates, for distribution to beneficial owners by DTC in accordance
with DTC procedures.
DTC has advised the depositor that management of DTC is aware that some
computer applications, systems, and the like for processing data that are
dependent upon calendar dates, including dates before, on, and after January 1,
2000, may encounter 'Year 2000 problems.' DTC has informed its participants and
other members of the financial community that it has developed and is
implementing a program so that its systems, as the same relate to the timely
payment of distributions, including principal and interest payments, to
securityholders, book-entry deliveries, and settlement of trades within DTC,
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally, DTC's plan
includes a testing phase, which is expected to be completed within appropriate
time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including, but not limited to, issuers and their agents, as
well as DTC's direct and indirect participants and third party vendors from whom
DTC licenses software and hardware, and third party vendors on whom DTC relies
for information or the provision of services, including telecommunication and
electrical utility service providers, among others. DTC has informed the
industry that it is contacting, and will continue to contact, third party
vendors from whom DTC acquires services to:
impress upon them the importance of such services being year 2000
compliant; and
determine the extent of their efforts for year 2000 remediation and, as
appropriate, testing of their services.
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In addition, DTC is in the process of developing such contingency plans as
it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided for informational purposes only and is not intended to serve as a
representation, warranty, or contract modification of any kind.
BOOK-ENTRY REGISTRATION OF THE CLASS A CERTIFICATES
General. Beneficial owners that are not participants or indirect
participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, the Class A Certificates may do so only through participants
and indirect participants. In addition, beneficial owners will receive all
distributions of principal of and interest on the Class A Certificates from the
paying agent through DTC and participants. Accordingly, beneficial owners may
experience delays in their receipt of payments. Unless and until definitive
certificates are issued for the Class A Certificates, it is anticipated that the
only registered certificateholder of the Class A Certificates will be Cede, as
nominee of DTC. Beneficial owners will not be recognized by the trustee or the
master servicer as certificateholders, as such term is used in the pooling and
servicing agreement, and beneficial owners will be permitted to receive
information furnished to certificateholders and to exercise the rights of
certificateholders only indirectly through DTC, its participants and indirect
participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers of Class A
Certificates among participants and to receive and transmit distributions of
principal of, and interest on, the Class A Certificates. Participants and
indirect participants with which beneficial owners have accounts with respect to
the Class A Certificates similarly are required to make book-entry transfers and
receive and transmit distributions on behalf of their respective beneficial
owners. Accordingly, although beneficial owners will not possess physical
certificates evidencing their interests in the Class A Certificates, DTC's rules
provide a mechanism by which beneficial owners, through their participants and
indirect participants, will receive distributions and will be able to transfer
their interests in the Class A Certificates. Transfers between participants will
occur in accordance with DTC's rules. Transfers between Cedel participants and
Euroclear participants will occur in accordance with their respective rules and
operating procedures.
None of the depositor, the master servicer or the trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the Class A Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Definitive certificates. Definitive certificates will be issued to
beneficial owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the prospectus under
'Description of the Certificates -- Form of Certificates.'
Upon the occurrence of an event described in the prospectus in the third
paragraph under 'Description of the Certificates -- Form of Certificates,' the
trustee is required to notify, through DTC, participants who have ownership of
Class A Certificates as indicated on the records of DTC of the availability of
definitive certificates for their Class A Certificates. Upon surrender by DTC of
the definitive certificates representing the Class A Certificates and upon
receipt of instructions from DTC for re-registration, the trustee will reissue
the Class A Certificates as definitive certificates issued in the respective
principal amounts owned by individual beneficial owners, and thereafter the
trustee and the master servicer will recognize the holders of the definitive
certificates as certificateholders under the pooling and servicing agreement.
For additional information regarding DTC, Cedel and Euroclear and the
Class A Certificates, see 'Description of the Certificates -- Form of
Certificates' in the prospectus.
GLOSSARY OF TERMS
The following terms are given the meanings shown below to help describe the
cash flows on the certificates:
ACCRUED CERTIFICATE INTEREST -- For any distribution date and class of
Class A Certificates, an amount equal to interest accrued during the related
Interest Accrual Period on the Certificate Principal Balance of the certificates
of that class immediately prior to that distribution date at the related
pass-through rate less interest
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shortfalls from the related loan group, if any, allocated thereto for that
distribution date, to the extent not covered with respect to the Class A
Certificates by the subordination provided by the related class of Class SB
Certificates, including:
(1) the interest portions of Realized Losses on the related loan
group, including Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses, and Extraordinary Losses not allocated through
subordination;
(2) the interest portion of any advances for the related loan group
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
(3) any other interest shortfalls for the related loan group not
covered by subordination, including interest shortfalls relating to the
Soldiers' and Sailors' Civil Relief Act of 1940, or similar legislation or
regulations, all allocated as described below.
Any reductions will be allocated among the holders of all related classes
of certificates in proportion to the respective amounts of Accrued Certificate
Interest that would have been payable on that distribution date absent these
reductions. Accrued Certificate Interest on each class of Class A Certificates
will be distributed on a pro rata basis. Accrued Certificate Interest on the
Fixed Rate Certificates is calculated on the basis of a 360-day year consisting
of twelve 30-day months. Accrued Certificate Interest on the Adjustable Rate
Certificates will be calculated on the basis of the actual number of days in the
Interest Accrual Period and a 360-day year.
ADJUSTABLE RATE CERTIFICATES -- The Class A-I-1A, Class A-I-6,
Class A-II-1 and Class A-II-2 Certificates.
AVAILABLE DISTRIBUTION AMOUNT -- For any distribution date and each loan
group, an amount equal to the sum of the following amounts, net of amounts
reimbursable therefrom to the master servicer and any subservicer:
the aggregate amount of scheduled payments on the related mortgage loans
due during the related due period and received on or prior to the related
determination date, after deduction of the related master servicing fees
and any subservicing fees, which are collectively referred to as the
servicing fees, and the premium payable on the related certificate
guaranty insurance policy;
certain unscheduled payments, including mortgagor prepayments on the
related mortgage loans, Insurance Proceeds, Liquidation Proceeds and
proceeds from repurchases of and substitutions for the related mortgage
loans occurring during the preceding calendar month; and
all advances on the related mortgage loans made for that distribution
date.
In addition to the foregoing amounts, with respect to unscheduled
collections, not including mortgagor prepayments, the master servicer may elect
to treat those amounts as included in the Available Distribution Amount for a
loan group for the distribution date in the month of receipt, but is not
obligated to do so. As described in this prospectus supplement under
' -- Principal Distributions on the Class A Certificates,' any amount with
respect to which that election is so made shall be treated as having been
received on the last day of the preceding calendar month for the purposes of
calculating the amount of principal and interest distributions to any class of
certificates. With respect to any distribution date,
the due period is the calendar month in which that distribution date
occurs,
the determination date is the 20th day of the month in which that
distribution date occurs or, if that day is not a business day, the
immediately succeeding business day, and
the due date is the date on which a monthly payment for a mortgage loan is
due.
On any distribution date, the premium rate is equal to one-twelfth of the
product of the percentage specified in the Insurance and Indemnity Agreement,
dated as of September 29, 1999, among the certificate insurer, the depositor,
the trustee and the master servicer, and the aggregate Certificate Principal
Balance of the related Class A Certificates immediately prior to that
distribution date.
CERTIFICATE PRINCIPAL BALANCE -- For any Class A Certificate as of any date
of determination, an amount equal to the initial Certificate Principal Balance
of that certificate, reduced by the aggregate of (a) all amounts allocable to
principal previously distributed with respect to that certificate, including
amounts paid pursuant to the related certificate guaranty insurance policy, and
(b) any reductions in the Certificate Principal Balance of that certificate
deemed to have occurred in connection with allocations of Realized Losses in the
manner
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described in this prospectus supplement, other than any amounts that have been
paid pursuant to the related certificate guaranty insurance policy. The initial
Certificate Principal Balance of each class of Class SB Certificates is equal to
the excess, if any, of (a) the initial aggregate Stated Principal Balance of the
mortgage loans in the related loan group over (b) the initial aggregate
Certificate Principal Balance of the Class A-I Certificates or Class A-II
Certificates, as applicable.
CLASS A-II BASIS RISK SHORTFALL -- The excess of (x) Accrued Certificate
Interest on a class of Class A-II Certificates, calculated at a rate equal to
One-Month LIBOR plus the applicable spread over (y) Accrued Certificate Interest
on that class calculated at the then-applicable pass-through rate.
CLASS A-I-6 BASIS RISK SHORTFALL -- The excess of (x) Accrued Certificate
Interest on the Class A-I-6 Certificates, calculated at a rate equal to
One-Month LIBOR plus the applicable spread (not to exceed a maximum of 14%) over
(y) Accrued Certificate Interest on that class calculated at the then-applicable
pass-through rate.
CLASS A-I-7 LOCKOUT DISTRIBUTION AMOUNT -- For any distribution date, the
product of (x) the Class A-I-7 Lockout Percentage for that distribution date and
(y) the Class A-I-7 Pro Rata Distribution Amount for that distribution date. In
no event shall the Class A-I-7 Lockout Distribution Amount for a distribution
date exceed the Principal Distribution Amount for Loan Group I for that
distribution date.
CLASS A-I-7 LOCKOUT PERCENTAGE -- For each distribution date, the
applicable percentage set forth below:
<TABLE>
<CAPTION>
LOCKOUT
DISTRIBUTION DATES PERCENTAGE
------------------ ----------
<S> <C>
October 1999 through and including September 2002........... 0%
October 2002 through and including September 2004........... 45%
October 2004 through and including September 2005........... 80%
October 2005 through and including September 2006........... 100%
October 2006 and thereafter................................. 300%
</TABLE>
CLASS A-I-7 PRO RATA DISTRIBUTION AMOUNT -- For any distribution date, an
amount equal to the product of (x) a fraction, the numerator of which is the
Certificate Principal Balance of the Class A-I-7 Certificates immediately prior
to that distribution date and the denominator of which is the aggregate
Certificate Principal Balance of the Class A-I Certificates immediately prior to
that distribution date and (y) the Principal Distribution Amount with respect to
Loan Group I for that distribution date.
CUMULATIVE INSURANCE PAYMENTS -- For either loan group, the aggregate of
any payments made with respect to the related Class A Certificates by the
certificate insurer under the applicable certificate guaranty insurance policy.
ELIGIBLE MASTER SERVICING COMPENSATION -- For either loan group and any
distribution date, an amount equal to the lesser of (a) one-twelfth of 0.125% of
the Stated Principal Balance of the mortgage loans in that loan group
immediately preceding that distribution date and (b) the sum of the master
servicing fee payable to the master servicer in respect of its master servicing
activities and reinvestment income received by the master servicer on amounts
payable on that distribution date.
EXCESS BANKRUPTCY LOSSES -- For either loan group, Bankruptcy Losses on the
mortgage loans in that loan group in excess of the related Bankruptcy Amount.
EXCESS CASH FLOW -- For either loan group on any distribution date, the
excess of the related Available Distribution Amount over the sum of (a) the
Interest Distribution Amount for the related classes of Class A Certificates and
(b) the related Principal Remittance Amount.
EXCESS FRAUD LOSSES -- For either loan group, Fraud Losses on the mortgage
loans in that loan group in excess of the applicable Fraud Loss Amount.
EXCESS LOSSES -- Excess Bankruptcy Losses, Excess Fraud Losses, Excess
Special Hazard Losses, and any other losses not covered by subordination,
collectively.
EXCESS SPECIAL HAZARD LOSSES -- For either loan group, Special Hazard
Losses on the mortgage loans in that loan group in excess of the applicable
Special Hazard Amount.
S-47
<PAGE>
EXCESS SUBORDINATED AMOUNT -- For either loan group on any distribution
date, the excess, if any, of (a) the related Subordinated Amount on that
distribution date over (b) the related Targeted Subordinated Amount.
EXTRAORDINARY LOSSES -- Realized losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks.
FINAL DISPOSITION -- A Final Disposition is deemed to have occurred upon a
determination by the master servicer that it has received all Insurance
Proceeds, Liquidation Proceeds and other payments or cash recoveries which the
master servicer reasonably and in good faith expects to be finally recoverable
with respect to a defaulted mortgage loan.
FIXED RATE CERTIFICATES -- All classes of Class A Certificates except for
the Adjustable Rate Certificates.
INTEREST ACCRUAL PERIOD -- For the Fixed Rate Certificates, the calendar
month preceding the month in which the distribution date occurs. For the
Adjustable Rate Certificates, (a) for the distribution date in October 1999, the
period commencing on the closing date and ending on the day preceding the
distribution date in October 1999, and (b) with respect to any distribution date
after the distribution date in October 1999, the period commencing on the
distribution date in the month immediately preceding the month in which the
distribution date occurs and ending on the day preceding the distribution date.
INTEREST DISTRIBUTION AMOUNT -- For either loan group on any distribution
date, the aggregate amount of Accrued Certificate Interest to be distributed to
the holders of the related classes of Class A Certificates for that distribution
date minus any related Net Prepayment Interest Shortfalls.
NET PREPAYMENT INTEREST SHORTFALL -- For either loan group on any
distribution date, the aggregate amount of Prepayment Interest Shortfalls for
that loan group that is not covered by:
Eligible Master Servicing Compensation for that loan group;
Eligible Master Servicing Compensation for the other loan group remaining
after covering Prepayment Interest Shortfalls for that other loan group;
Excess Cash Flow for that loan group available therefor as described under
' -- Overcollateralization Provisions' below; and
Excess Cash Flow for the other loan group available therefor as described
under ' -- Overcollateralization Provisions' below.
PRINCIPAL DISTRIBUTION AMOUNT -- For either loan group on any distribution
date, the lesser of
(a) the balance of the related Available Distribution Amount remaining
after the related Interest Distribution Amount has been distributed; and
(b) the sum of:
(1) the related Principal Remittance Amount;
(2) the principal portion of any Realized Losses incurred or deemed
to have been incurred on any mortgage loans in the related loan group in
the calendar month preceding that distribution date to the extent
covered by Excess Cash Flow for that distribution date; and
(3) the amount of any related Subordination Increase Amount for
that distribution date;
minus
(4) the amount of any related Subordination Reduction Amount for
that distribution date.
In no event will the Principal Distribution Amount with respect to a Loan
Group and any distribution date be (x) less than zero or (y) greater than the
then outstanding Certificate Principal Balance of the related Class A
Certificates.
PRINCIPAL REMITTANCE AMOUNT -- For either loan group on any distribution
date, the sum of the following amounts relating to the mortgage loans in that
loan group:
(1) the principal portion of all scheduled monthly payments on the
mortgage loans received or advanced with respect to the related due period;
S-48
<PAGE>
(2) the principal portion of all proceeds of the repurchase of
mortgage loans or, in the case of a substitution, amounts representing a
principal adjustment as required by the pooling and servicing agreement
during the preceding calendar month; and
(3) the principal portion of all other unscheduled collections
received on the mortgage loans during the preceding calendar month or
deemed to be received during the preceding calendar month including,
without limitation, full and partial principal prepayments made by the
respective mortgagors, to the extent not distributed in the preceding
month.
STATED PRINCIPAL BALANCE -- For any mortgage loan as of any date of
determination, the principal balance thereof as of the cut-off date, after
application of all scheduled principal payments due in the month of the cut-off
date, whether or not received, reduced by all amounts allocable to principal
that have been distributed to certificateholders with respect to that mortgage
loan on or before the date of determination, 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.
SUBORDINATED AMOUNT -- For either loan group on any distribution date, the
excess, if any, of (a) the aggregate Stated Principal Balances of the mortgage
loans in that loan group after giving effect to distributions of principal to be
made on that distribution date over (b) the Certificate Principal Balance of
those Class A Certificates as of that distribution date, after taking into
account the payment to the Class A Certificates of the amounts described in
clauses (b)(1) and (2) of the definition of the related Principal Distribution
Amount on that distribution date.
SUBORDINATION INCREASE AMOUNT -- For either loan group on any distribution
date, any amount of Excess Cash Flow for that loan group actually applied as an
accelerated payment of principal on the related Class A Certificates.
SUBORDINATION REDUCTION AMOUNT -- For either loan group on any distribution
date, the lesser of (a) the Excess Subordinated Amount for that loan group and
(b) the amount of the related Principal Remittance Amount.
TAC CERTIFICATES -- The Class A-I-2, Class A-I-3, Class A-I-4 and
Class A-I-5 Certificates.
TARGETED PRINCIPAL BALANCE -- For any class of TAC Certificates and any
distribution date, the amount, if any, set forth for that class opposite the
applicable distribution date in the table entitled 'Targeted Principal Balances'
in this prospectus supplement.
TARGETED SUBORDINATED AMOUNT -- For either loan group on any distribution
date, the required level of the Subordinated Amount for that loan group, as set
forth in the pooling and servicing agreement.
TARGETED PRINCIPAL BALANCES TABLES
The following table sets forth for each distribution date the Targeted
Principal Balances for each class of the TAC Certificates.
THERE IS NO ASSURANCE THAT SUFFICIENT FUNDS WILL BE AVAILABLE ON ANY
DISTRIBUTION DATE TO REDUCE THE CERTIFICATE PRINCIPAL BALANCES OF THE TAC
CERTIFICATES TO THEIR CORRESPONDING TARGETED PRINCIPAL BALANCES FOR THAT
DISTRIBUTION DATE. IN ADDITION, THERE IS NO ASSURANCE THAT DISTRIBUTIONS ON THE
TAC CERTIFICATES WILL NOT BE MADE IN EXCESS OF THOSE AMOUNTS FOR ANY
DISTRIBUTION DATE. NEITHER EXCESS CASHFLOW NOR PAYMENTS FROM THE CERTIFICATE
GUARANTY INSURANCE POLICIES WILL BE AVAILABLE TO GUARANTEE THAT THE PRINCIPAL
DISTRIBUTIONS ON THE TAC CERTIFICATES WILL EQUAL THE RESPECTIVE TARGETED
PRINCIPAL BALANCES FOR ANY DISTRIBUTION DATE.
S-49
<PAGE>
TARGETED PRINCIPAL BALANCE TABLES
<TABLE>
<CAPTION>
DISTRIBUTION DATE CLASS A-I-2 CLASS A-I-3 CLASS A-I-4 CLASS A-I-5
- ----------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Initial Balance............... $110,000,000.00 $110,000,000.00 $30,000,000.00 $85,000,000.00
October 25, 1999.............. 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
November 25, 1999............. 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
December 25, 1999............. 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
January 25, 2000.............. 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
February 25, 2000............. 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
March 25, 2000................ 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
April 25, 2000................ 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
May 25, 2000.................. 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
June 25, 2000................. 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
July 25, 2000................. 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
August 25, 2000............... 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
September 25, 2000............ 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
October 25, 2000.............. 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
November 25, 2000............. 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
December 25, 2000............. 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
January 25, 2001.............. 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
February 25, 2001............. 110,000,000.00 110,000,000.00 30,000,000.00 85,000,000.00
March 25, 2001................ 108,213,284.78 110,000,000.00 30,000,000.00 85,000,000.00
April 25, 2001................ 96,414,616.61 110,000,000.00 30,000,000.00 85,000,000.00
May 25, 2001.................. 84,901,194.14 110,000,000.00 30,000,000.00 85,000,000.00
June 25, 2001................. 73,666,172.25 110,000,000.00 30,000,000.00 85,000,000.00
July 25, 2001................. 62,702,869.30 110,000,000.00 30,000,000.00 85,000,000.00
August 25, 2001............... 52,004,763.26 110,000,000.00 30,000,000.00 85,000,000.00
September 25, 2001............ 41,565,487.92 110,000,000.00 30,000,000.00 85,000,000.00
October 25, 2001.............. 31,378,829.15 110,000,000.00 30,000,000.00 85,000,000.00
November 25, 2001............. 21,438,721.30 110,000,000.00 30,000,000.00 85,000,000.00
December 25, 2001............. 11,739,243.64 110,000,000.00 30,000,000.00 85,000,000.00
January 25, 2002.............. 2,274,616.94 110,000,000.00 30,000,000.00 85,000,000.00
February 25, 2002............. 0.00 103,039,200.06 30,000,000.00 85,000,000.00
March 25, 2002................ 0.00 94,027,486.72 30,000,000.00 85,000,000.00
April 25, 2002................ 0.00 85,264,786.06 30,000,000.00 85,000,000.00
May 25, 2002.................. 0.00 77,027,696.25 30,000,000.00 85,000,000.00
June 25, 2002................. 0.00 68,990,249.77 30,000,000.00 85,000,000.00
July 25, 2002................. 0.00 61,147,648.19 30,000,000.00 85,000,000.00
August 25, 2002............... 0.00 53,495,207.78 30,000,000.00 85,000,000.00
September 25, 2002............ 0.00 46,028,356.83 30,000,000.00 85,000,000.00
October 25, 2002.............. 0.00 39,517,897.52 30,000,000.00 85,000,000.00
November 25, 2002............. 0.00 33,175,897.59 30,000,000.00 85,000,000.00
December 25, 2002............. 0.00 26,998,194.36 30,000,000.00 85,000,000.00
January 25, 2003.............. 0.00 20,980,725.90 30,000,000.00 85,000,000.00
February 25, 2003............. 0.00 15,119,528.61 30,000,000.00 85,000,000.00
March 25, 2003................ 0.00 9,410,734.89 30,000,000.00 85,000,000.00
April 25, 2003................ 0.00 3,850,570.77 30,000,000.00 85,000,000.00
May 25, 2003.................. 0.00 0.00 28,435,353.75 85,000,000.00
June 25, 2003................. 0.00 0.00 23,161,490.56 85,000,000.00
July 25, 2003................. 0.00 0.00 18,025,475.02 85,000,000.00
August 25, 2003............... 0.00 0.00 13,023,885.96 85,000,000.00
September 25, 2003............ 0.00 0.00 8,153,385.20 85,000,000.00
October 25, 2003.............. 0.00 0.00 3,410,715.53 85,000,000.00
November 25, 2003............. 0.00 0.00 0.00 83,792,698.77
December 25, 2003............. 0.00 0.00 0.00 79,296,233.90
</TABLE>
S-50
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION DATE CLASS A-I-2 CLASS A-I-3 CLASS A-I-4 CLASS A-I-5
- ----------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
January 25, 2004.............. $ 0.00 $ 0.00 $ 0.00 $74,918,295.19
February 25, 2004............. 0.00 0.00 0.00 70,655,930.39
March 25, 2004................ 0.00 0.00 0.00 66,506,258.98
April 25, 2004................ 0.00 0.00 0.00 62,466,470.42
May 25, 2004.................. 0.00 0.00 0.00 58,533,822.51
June 25, 2004................. 0.00 0.00 0.00 54,705,639.72
July 25, 2004................. 0.00 0.00 0.00 50,979,311.60
August 25, 2004............... 0.00 0.00 0.00 47,352,291.21
September 25, 2004............ 0.00 0.00 0.00 43,822,093.61
October 25, 2004.............. 0.00 0.00 0.00 40,851,779.80
November 25, 2004............. 0.00 0.00 0.00 37,959,245.70
December 25, 2004............. 0.00 0.00 0.00 35,142,512.04
January 25, 2005.............. 0.00 0.00 0.00 32,399,648.93
February 25, 2005............. 0.00 0.00 0.00 29,728,774.65
March 25, 2005................ 0.00 0.00 0.00 27,128,054.47
April 25, 2005................ 0.00 0.00 0.00 24,595,699.48
May 25, 2005.................. 0.00 0.00 0.00 22,129,965.48
June 25, 2005................. 0.00 0.00 0.00 19,729,151.88
July 25, 2005................. 0.00 0.00 0.00 17,391,600.60
August 25, 2005............... 0.00 0.00 0.00 15,115,695.03
September 25, 2005............ 0.00 0.00 0.00 12,899,859.04
October 25, 2005.............. 0.00 0.00 0.00 10,952,676.22
November 25, 2005............. 0.00 0.00 0.00 9,053,178.48
December 25, 2005............. 0.00 0.00 0.00 7,200,212.35
January 25, 2006.............. 0.00 0.00 0.00 5,392,652.07
February 25, 2006............. 0.00 0.00 0.00 3,629,398.89
March 25, 2006................ 0.00 0.00 0.00 1,909,380.44
April 25, 2006................ 0.00 0.00 0.00 231,550.13
May 25, 2006 and thereafter... 0.00 0.00 0.00 0.00
</TABLE>
The Targeted Principal Balances for each distribution date set forth in the
table above were calculated based on assumptions, including the assumption that
prepayments on the Group I Loans occur at a constant level of approximately 25%
HEP. See 'Certain Yield and Prepayment Considerations -- Weighted Average Life'
in this prospectus supplement. The performance of the Group I Loans may differ
from the assumptions used in determining the Targeted Principal Balances. The
Targeted Principal Balances set forth in the table above are final and binding
regardless of any error or alleged error in making those calculations.
There can be no assurance that funds available for distributions of
principal in reduction of the Certificate Principal Balance of the TAC
Certificates will be sufficient to cover, or will not be in excess of, the
amount necessary to reduce the TAC Certificates to their respective Targeted
Principal Balances. Distributions in reduction of the Certificate Principal
Balance of any class of TAC Certificates may commence significantly earlier,
except for any class for which the above table reflects a distribution on the
first distribution date, or later than the first distribution date for that
class shown in the table above. Distributions of principal in reduction of the
Certificate Principal Balance of any class of TAC Certificates may end
significantly earlier or later than the last distribution date for that class
shown in the above table. See 'Certain Yield and Prepayment Considerations' in
this prospectus supplement for a further discussion of the assumptions used to
produce the above table and the effect of prepayments on the mortgage loans on
the rate of payments of principal and on the weighted average lives of the TAC
Certificates.
MULTIPLE LOAN GROUP STRUCTURE
The mortgage loans in the Trust consist of the Group I Loans and Group II
Loans, as described above under 'Description of the Mortgage Pool.'
Distributions of interest and principal on the Class A-I Certificates and
Class A-II Certificates will be based primarily on interest and principal
received or advanced on the Group I
S-51
<PAGE>
Loans and Group II Loans, respectively. However, the Excess Cash Flow for a loan
group will be available to pay amounts related to Realized Losses, Cumulative
Insurance Payments, Prepayment Interest Shortfalls and Class A-II Basis Risk
Shortfalls relating to the other loan group, in the manner and to the extent
described in this prospectus supplement. Distributions of principal on the
Class A-II-1 Certificates and the Class A-II-2 Certificates will derive
primarily from payments of principal received with respect to the Group II Loans
in Sub-Group II-A and Sub-Group II-B, respectively. See ' -- Interest
Distributions', ' -- Principal Distributions on the Class A Certificates' and
' -- Overcollateralization Provisions' in this prospectus supplement.
INTEREST DISTRIBUTIONS
On each distribution date, holders of the Class A-I Certificates and
Class A-II Certificates will be entitled to receive the Interest Distribution
Amount for the related loan group. If an Interest Distribution Amount is reduced
due to Net Prepayment Interest Shortfalls, those shortfalls will be allocated
among the related classes of Class A Certificates based on their respective
amounts of Accrued Certificate Interest. In addition, any Class A-II Basis Risk
Shortfalls will be allocated among the Class A-II Certificates based on their
respective amounts of Accrued Certificate Interest. Any of these shortfalls so
allocated will bear interest at the pass-through rate for the applicable class,
as adjusted from time to time in the case of the Adjustable Rate Certificates,
and will be payable on future distribution dates to the extent of Excess
Cashflow available for that purpose. Any Class A-I-6 Basis Risk Shortfall will
bear interest at a rate equal to the pass-through rate for that class, and will
be payable on future distribution dates to the extent of Excess Cashflow
available for that purpose.
The ratings assigned to the Class A Certificates do not address the
likelihood of the receipt of any amounts in respect of any Net Prepayment
Interest Shortfalls, Class A-I-6 Basis Risk Shortfalls or Class A-II Basis Risk
Shortfalls. The certificate guaranty insurance policies will not cover any of
those shortfalls and those shortfalls may remain unpaid on the final
distribution date. See ' -- Overcollateralization Provisions' and
' -- Description of the Policies' herein.
The pass-through rates on the Class A-I Certificates, other than the
Class A-I-1A and Class A-I-6 Certificates, are fixed and are set forth on
page S-5 of this prospectus supplement. However, the pass-through rates on the
Class A-I-5 and the Class A-I-7 Certificates are subject to a cap equal to the
weighted average of the net mortgage rates on the Group I Loans as of the due
date immediately preceding the related due period. This rate cap is referred to
as the Group I maximum rate.
The pass-through rates on the Class A-I-1A and Class A-I-6 Certificates
with respect to each distribution date will be a per annum rate equal to the
lesser of (x) One-Month LIBOR plus the applicable spread and (y) the Group I
maximum rate. The applicable spread for the Class A-I-1A and Class A-I-6
Certificates is 0.22% and 0.63%, respectively. The applicable spread for the
Class A-I-6 Certificates will double if the master servicer or the depositor
does not exercise its option to terminate Group I on the first distribution date
that the option may be exercised.
The pass-through rate on each class of Class A-II Certificates with respect
to each distribution date will be a per annum rate equal to the lesser of
(i) One-Month LIBOR plus the applicable spread and (ii) the weighted average of
the net mortgage rates on the Group II Loans as of the due date immediately
preceding the related due period. This rate is referred to as the Group II
maximum rate. The applicable spread for each class of Class A-II Certificates is
as follows: (a) Class A-II-1 Certificates, 0.39% per annum, and
(b) Class A-II-2 Certificates, 0.34% per annum. The applicable spread for each
class of Class A-II Certificates will double if the master servicer or the
depositor does not exercise its option to terminate Group II on the first
distribution date that the option may be exercised.
At its option, on any distribution date when the aggregate Stated Principal
Balance of the Group I Loans or Group II Loans, as applicable, is less than 10%
of the initial aggregate Stated Principal Balance of the related loan group, the
master servicer or the depositor may purchase from the trust all remaining
Group I Loans or Group II Loans, as applicable, and other assets related
thereto, and thereby effect early retirement of the Class A-I Certificates or
the Class A-II Certificates, as applicable. See 'Pooling and Servicing
Agreement -- Termination; Retirement of Certificates' in the prospectus.
S-52
<PAGE>
The pass-through rates on the Class A-I-1A Certificates, the Class A-I-6
Certificates and each class of Class A-II Certificates for the current and
immediately preceding calendar month may be obtained by telephoning the trustee
at (800) 524-9274.
With respect to any distribution date, any Prepayment Interest Shortfalls
on a loan group during the preceding calendar month will be offset:
first, by the master servicer, but only to the extent the Prepayment
Interest Shortfalls do not exceed Eligible Master Servicing Compensation
derived from that loan group;
second, by the master servicer, but only to the extent the Prepayment
Interest Shortfalls do not exceed Eligible Master Servicing Compensation
derived from the other loan group, and only to the extent remaining after
covering any Prepayment Interest Shortfalls with respect to the other loan
group; and
third, by Excess Cash Flow available therefor on that distribution
date.
The Prepayment Interest Shortfall for any distribution date and each loan
group is equal to the aggregate shortfall, if any, in collections of interest
resulting from mortgagor prepayments on the mortgage loans in the related loan
group during the preceding calendar month. These shortfalls will result because
interest on prepayments in full is distributed only to the date of prepayment,
and because no interest is distributed on prepayments in part, as those
prepayments in part are applied to reduce the outstanding principal balance of
the related mortgage loans as of the due date immediately preceding the date of
prepayment. No assurance can be given that the amounts available to cover
Prepayment Interest Shortfalls will be sufficient therefor. See
' -- Overcollateralization Provisions' and 'The Pooling and Servicing
Agreement -- Servicing and Other Compensation and Payment of Expenses' in this
prospectus supplement.
DETERMINATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day prior to the commencement of each Interest
Accrual Period for the Adjustable Rate Certificate, One-Month LIBOR shall be
established by the trustee and, as to any Interest Accrual Period, will equal
the rate for one month United States dollar deposits that appears on the
Telerate Screen Page 3750 as of 11:00 a.m., London time, on that day. Telerate
Screen Page 3750 means the display designated as page 3750 on the Bridge
Telerate Service, or any other page as may replace page 3750 on that service for
the purpose of displaying London interbank offered rates of major banks. If the
rate does not appear on that page, or any other page as may replace that page on
that service, or if that service is no longer offered, any other service for
displaying One-Month LIBOR or comparable rates as may be selected by the trustee
after consultation with the master servicer and the certificate insurer, the
rate will be the reference bank rate.
The reference bank rate will be determined on the basis of the rates at
which deposits in U.S. Dollars are offered by the reference banks, which shall
be three major banks that are engaged in transactions in the London interbank
market, selected by the trustee after consultation with the master servicer and
the certificate insurer, as of 11:00 a.m., London time, on the applicable date
to prime banks in the London interbank market for a period of one month in
amounts approximately equal to the Certificate Principal Balances of the
Adjustable Rate Certificates then outstanding. The trustee will request the
principal London office of each of the reference banks to provide a quotation of
its rate. If at least two quotations are provided, the rate will be the
arithmetic mean of the quotations. If on the applicable date fewer than two
quotations are provided as requested, the rate will be the arithmetic mean of
the rates quoted by one or more major banks in New York City, selected by the
trustee after consultation with the master servicer and the certificate insurer,
as of 11:00 a.m., New York City time, on the applicable date for loans in U.S.
Dollars to leading European banks for a period of one month in amounts
approximately equal to the Certificate Principal Balances of the Adjustable Rate
Certificates then outstanding. If no quotations can be obtained, the rate will
be One-Month LIBOR for the prior distribution date. LIBOR Business Day means any
day other than a Saturday, a Sunday or a day on which banking institutions in
the city of London, England are required or authorized by law to be closed.
The establishment of One-Month LIBOR by the trustee and the trustee's
subsequent calculation of the pass-through rates applicable to the Class A-I-1A
Certificates, Class A-I-6 Certificates and Class A-II Certificates for the
relevant Interest Accrual Period, in the absence of manifest error, will be
final and binding.
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PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES
Holders of each of the Class A-I Certificates and Class A-II Certificates
will be entitled to receive on each distribution date, to the extent of the
portion of the related Available Distribution Amount remaining after the related
Interest Distribution Amount is distributed, a distribution allocable to
principal, determined separately for the Class A-I Certificates and Class A-II
Certificates, equal to the applicable Principal Distribution Amount.
Distributions of the Principal Distribution Amount for Loan Group I to the
Class A-I Certificates on each distribution date will be made as follows:
1. first, to the Class A-I-7 Certificates, in an amount equal to the
Class A-I-7 Lockout Distribution Amount for that distribution date, until
the Certificate Principal Balance of the Class A-I-7 Certificates has been
reduced to zero;
2. second, concurrently to the Class A-I-1A and Class A-I-1B
Certificates, on a pro rata basis until the Certificate Principal Balances
thereof have been reduced to zero;
3. third, to the Class A-I-2 Certificates in an amount up to the
amount necessary to reduce the Certificate Principal Balance thereof to its
Targeted Principal Balance for that distribution date;
4. fourth, to the Class A-I-3 Certificates in an amount up to the
amount necessary to reduce the Certificate Principal Balance thereof to its
Targeted Principal Balance for that distribution date;
5. fifth, to the Class A-I-4 Certificates in an amount up to the
amount necessary to reduce the Certificate Principal Balance thereof to its
Targeted Principal Balance for that distribution date;
6. sixth, to the Class A-I-5 Certificates in an amount up to the
amount necessary to reduce the Certificate Principal Balance thereof to its
Targeted Principal Balance for that distribution date;
7. seventh, to the Class A-I-6 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero;
8. eighth, sequentially to the Class A-I-2, Class A-I-3, Class A-I-4
and Class A-I-5 Certificates, in that order, without regard to their
respective Targeted Principal Balances and until the respective Certificate
Principal Balances thereof have been reduced to zero; and
9. ninth, to the Class A-I-7 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero.
The Principal Distribution Amount with respect to Loan Group II will be
distributed on each distribution date concurrently to the Class A-II-1
Certificates and Class A-II-2 Certificates on a pro rata basis in accordance
with the percentage of the amounts described in clauses (b)(1) and (2) of the
definition of Principal Distributions Amount derived from the related Sub-Group
of Loan Group II, in each case until the Certificate Principal Balance of either
class has been reduced to zero and thereafter shall be distributed to the
remaining class of Class A-II Certificates until the Certificate Principal
Balance thereof has been reduced to zero.
The Sub-Group of Group II Loans corresponding to the Class A-II-1
Certificates shall consist of the Group II Loans described in the table entitled
Sub-Group II-A Loans set forth in this prospectus supplement under 'Description
of the Mortgage Pool -- Group II Loans.' The Sub-Group of Group II Loans
corresponding to the Class A-II-2 Certificates shall consist of the Group II
Loans that do not correspond to the Class A-II-1 Certificates. Sub-Group II-A
consists of first-lien mortgage loans with original principal balances of not
more than $240,000.
On each distribution date, the certificate insurer shall be entitled to
receive, from the Excess Cash Flow for each loan group, before the application
of any Subordination Increase Amount, the Cumulative Insurance Payments not
previously reimbursed, together with interest thereon.
OVERCOLLATERALIZATION PROVISIONS
The pooling and servicing agreement requires that, on each distribution
date, the Excess Cash Flow for each loan group be applied on that distribution
date as an accelerated payment of principal on the related classes of Class A
Certificates but only to the extent that (x) the Excess Cash Flow is available
for that purpose and (y) the Targeted Subordinated Amount for that loan group
exceeds the Subordinated Amount for that loan group. Any Excess Cash Flow
actually applied as an accelerated payment of principal is a Subordination
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Increase Amount and has the effect of accelerating the amortization of the
classes of Class A Certificates receiving that payment relative to the
amortization of the mortgage loans in the related loan group. The Excess Cash
Flow for a loan group for any distribution date will derive primarily from the
amount by which the interest accrued or advanced on the mortgage loans in that
loan group exceeds the sum of:
interest at the related pass-through rates on the Certificate Principal
Balances of the related classes of Class A Certificates,
the premium payable on the related certificate guaranty insurance policy,
and
accrued servicing fees in respect of that loan group.
On each distribution date, the Excess Cash Flow for each Loan Group will be
applied in the following order of priority:
first, to pay to the holders of the related Class A Certificates the
principal portion of Realized Losses, other than a portion of Excess Losses
and Extraordinary Losses, incurred on the mortgage loans in that loan group
for the preceding calendar month
second, to pay to the holders of the other Class A Certificates the
principal portion of any Realized Losses, other than a portion of Excess
Losses and Extraordinary Losses, on the mortgage loans in the other loan
group for the preceding calendar month to the extent not covered by the
Excess Cash Flow for that other loan group;
third, to pay to the certificate insurer any Cumulative Insurance
Payments relating to that loan group;
fourth, to pay to the certificate insurer any Cumulative Insurance
Payments relating to the other loan group, to the extent not covered by the
Excess Cash Flow for that other loan group;
fifth, (a) in the case of Loan Group I, on the first distribution
date, first to fund the initial deposit to the Class A-I-6 Basis Risk
Reserve Fund and then to pay any Subordination Increase Amount with respect
to Loan Group I and (b) in the case of Loan Group II, on the first
distribution date, first to fund the initial deposit to the Class A-II
Basis Risk Reserve Fund and then to pay any Subordination Increase Amount
with respect to Loan Group II;
sixth, to pay the holders of the related Class A Certificates the
amount of any Prepayment Interest Shortfalls allocated thereto, to the
extent not covered by Eligible Master Servicing Compensation on that
distribution date;
seventh, to pay to the holders of the other Class A Certificates the
amount of any Prepayment Interest Shortfalls allocated thereto, to the
extent not covered by Eligible Master Servicing Compensation and Excess
Cash Flow for the other loan group on that distribution date;
eighth, to pay the holders of the related Class A Certificates any
Prepayment Interest Shortfalls remaining unpaid from prior distribution
dates together with interest thereon;
ninth, to pay the other Class A Certificates any Prepayment Interest
Shortfalls remaining unpaid from prior distribution dates together with
interest thereon, to the extent not covered by the Excess Cash Flow for the
other loan group;
tenth, (a) in the case of Loan Group II, to pay to the Class A-II
Basis Risk Reserve Fund for distribution to the holders of the Class A-II
Certificates the amount of any Class A-II Basis Risk Shortfalls remaining
unpaid with respect to previous distribution dates, together with interest
thereon and (b) in the case of Loan Group I, to pay (x) to the Class A-I-6
Basis Risk Reserve Fund for distribution to holders of the Class A-I-6
Certificates, the amount of any Class A-I-6 Basis Risk Shortfalls remaining
unpaid with respect to previous distribution dates, together with interest
thereon and (y) to the Class A-II Basis Risk Reserve Fund for distribution
to holders of the Class A-II Certificates the amount of any Class A-II
Basis Risk Shortfalls remaining unpaid with respect to prior distribution
dates, together with interest thereon, to the extent not covered by Excess
Cash Flow for Loan Group II; and
eleventh, to pay to the holders of the related class of Class SB
Certificates and Class R Certificates any balance remaining, in accordance
with the terms of the pooling and servicing agreement.
Subordination Reduction Amount. If the Targeted Subordinated Amount for a
loan group is permitted to decrease or 'step down' on a distribution date in the
future, a portion of the principal that would otherwise be
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distributed to the holders of the related class or classes of Class A
Certificates on that distribution date shall not be distributed to the holders
of the Class A Certificates on that distribution date. This has the effect of
decelerating principal distributions to the applicable Class A Certificates
relative to the amortization of the mortgage loans in the related loan group,
and of reducing the applicable Subordinated Amount. If, on any distribution
date, the Excess Subordinated Amount for a loan group is, or, after taking into
account all other distributions to be made on that distribution date would be,
greater than zero, that is, the Subordinated Amount is or would be greater than
the related Targeted Subordinated Amount, then any amounts relating to principal
which would otherwise be distributed to the holders of the related class or
classes of Class A Certificates on that distribution date shall instead be
distributed to the holders of the related class of Class SB Certificates in an
amount equal to the lesser of (x) the related Excess Subordinated Amount and
(y) the related Principal Remittance Amount.
BASIS RISK RESERVE FUNDS
The pooling and servicing agreement establishes the Class A-I-6 Basis Risk
Reserve Fund and the Class A-II Basis Risk Reserve Fund, which are held in trust
by the trustee on behalf of the holders of the Class A-I-6 and Class A-II
Certificates, respectively. Each Basis Risk Reserve Fund will not be an asset of
any real estate mortgage investment conduit comprising the trust. Holders of the
Class A-I-6 and Class A-II Certificates will be entitled to receive payments
from the Class A-I-6 Basis Risk Reserve Fund and the Class A-II Basis Risk
Reserve Fund, respectively, in an amount equal to any Class A-I-6 Basis Risk
Shortfall or Class A-II Basis Risk Shortfall, as applicable as described under
' -- Overcollateralization Provisions' above. The amount required to be
deposited in a Basis Risk Reserve Fund on any distribution date will equal any
Class A-I-6 Basis Risk Shortfall or Class A-II Basis Risk Shortfall, as
applicable for that distribution date, or, if no related Basis Risk Shortfall is
payable on that distribution date, an amount such that when added to other
amounts already on deposit in the applicable Basis Risk Reserve Fund, the
aggregate amount on deposit therein is equal to $10,000. Any investment earnings
on amounts on deposit in each Basis Risk Reserve Fund will be paid to and for
the benefit of the holders of the related class of Class SB Certificates and
will not be available to pay any Class A-I-6 Basis Risk Shortfall or Class A-II
Basis Risk Shortfall. The initial deposit to each Basis Risk Reserve Fund is
$10,000.
DESCRIPTION OF THE POLICIES
On the closing date, the Insurer will issue the policies in favor of the
trustee on behalf of the certificateholders. The policies will unconditionally
and irrevocably guarantee specified payments on the certificates. On each
payment date, a draw will be made on the policies equal to the sum of:
any shortfall in amounts available in the Certificate Account to pay
interest accrued during the related Interest Accrual Period on the
Certificate Principal Balance of the related Class A Certificates at the
applicable pass-through rate, net of any interest shortfalls relating to
the Soldiers' and Sailors' Civil Relief Act of 1940 and net of any
Prepayment Interest Shortfalls and Class A-I-6 Basis Risk Shortfalls and
Class A-II Basis Risk Shortfalls, as applicable, allocated to the related
Class A Certificates,
the principal portion of any Realized Loss allocated to the related
Class A Certificates, and
the Certificate Principal Balance of the related Class A Certificates to
the extent unpaid on the final distribution date or earlier termination of
the trust pursuant to the terms of the Agreement. For purposes of
determining the Deficiency Amount, the final distribution date will be the
distribution date in October 2030.
ALLOCATION OF LOSSES; SUBORDINATION
Subject to the terms of each certificate guaranty insurance policy, those
policies will cover all Realized Losses allocated to the Class A Certificates.
Notwithstanding the foregoing, if payments are not made as required under the
related certificate guaranty insurance policy, Realized Losses will be allocable
to the related Class A Certificates based on the following priorities.
The subordination provided to the Class A Certificates by the related class
of Class SB Certificates will cover Realized Losses on the mortgage loans that
are Defaulted Mortgage Losses, Fraud Losses, Bankruptcy
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Losses and Special Hazard Losses, subject to the limitations set forth below and
in the pooling and servicing agreement. Any Realized Losses that are not Excess
Losses or Extraordinary Losses for a loan group will be allocated in the
following order of priority:
first, to the Excess Cash Flow for that loan group for the related
distribution date;
second, to the Excess Cash Flow for the other loan group, to the
extent remaining after covering Realized Losses on the mortgage loans in
that other loan group for the related distribution date;
third, to the Class SB Certificates up to an amount equal to the
excess, if any, of (x) the then aggregate Stated Principal Balance of the
mortgage loans over (y) the then aggregate Certificate Principal Balance of
the Class A Certificates; provided that the allocation of Realized Losses
to Excess Cash Flow and the Class SB Certificates as described in clauses
first and second above, and this clause third is subject to the limitations
set forth in the pooling and servicing agreement; and
fourth, among the Class A Certificates related to the loan group that
incurred the Realized Loss, allocated among the applicable classes of
Class A Certificates on a pro rata basis in accordance with their
respective outstanding Certificate Principal Balances prior to giving
effect to distributions to be made on that distribution date. The interest
portion of any Realized Loss will be allocated on any distribution date
among the related Class A Certificates on a pro rata basis in accordance
with the amount of Accrued Certificate Interest payable from the related
loan group for that distribution date.
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 a Realized Loss, in each case until the Certificate Principal
Balance of the applicable class has been reduced to zero, and
the Accrued Certificate Interest thereon, in the case of the interest
portion of a Realized Loss, by the amount so allocated as of the
distribution date occurring in the month following the calendar month in
which the applicable Realized Loss was incurred.
In addition, any allocation of a Realized Loss may be made by operation of the
payment priority to the Class A Certificates set forth under ' -- Principal
Distributions on the Class A Certificates.'
As used in this prospectus supplement, debt service reduction means a
reduction in the amount of the monthly payment due to bankruptcy proceedings,
but does not include any permanent forgiveness of principal. 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 Extraordinary
Losses, and Special Hazard Losses will not exceed the lesser of the cost of
repair or replacement of the related mortgaged properties.
As described in the prospectus, under some circumstances the master
servicer may make a servicing modification to permit the modification of a
defaulted mortgage loan to reduce the applicable mortgage rate or to reduce the
outstanding principal amount thereof. Any principal reduction shall constitute a
Realized Loss at the time of the reduction, and the amount by which each monthly
payment is reduced by any mortgage rate reduction shall constitute a Realized
Loss in the month in which each reduced monthly payment is due. Servicing
modification reductions shall be allocated when incurred in the same manner as
other Realized Losses. Any Advances made on any mortgage loan will be reduced to
reflect any related servicing modifications previously made. For all other
purposes under the pooling and servicing agreement, the mortgage rate, maximum
net mortgage rate and net mortgage rate as to any mortgage loan will not be
reduced by any servicing modification.
Any Excess Losses or Extraordinary Losses with respect to each loan group
will be allocated to the related Class A Certificates on a pro rata basis and in
an aggregate amount equal to the percentage of the loss equal to the then
aggregate Certificate Principal Balance of the related Class A Certificates
divided by the then aggregate Stated Principal Balance of the mortgage loans in
the related loan group, in each case subject to the limitations set forth in the
pooling and servicing agreement, and the remainder of the Realized Losses will
be allocated to the related Class SB Certificates.
An allocation of a Realized Loss on a 'pro rata basis' among two or more
classes of certificates means an allocation to each class of certificates on the
basis of its then outstanding Certificate Principal Balance prior to giving
effect to distributions to be made on the applicable distribution date, in the
case of an allocation of the
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principal portion of a Realized Loss, or based on the Accrued Certificate
Interest thereon, in the case of an allocation of the interest portion of a
Realized Loss.
With respect to any defaulted mortgage loan that is finally liquidated,
through foreclosure sale, disposition of the related mortgaged property if
acquired on behalf of the certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining, if any, plus interest thereon through the
date of liquidation, after application of all amounts recovered, net of amounts
reimbursable to the master servicer or the sub-servicer for Advances and
expenses, including attorneys' fees, towards interest and principal owing on the
mortgage loan.
In order to maximize the likelihood of distribution in full of amounts of
interest and principal to be distributed to holders of the Class A Certificates
on each applicable distribution date, holders of Class A Certificates have a
right to distributions of the related Available Distribution Amount that is
prior to the rights of the holders of the related class of Class SB and Class R
Certificates. In addition, the overcollateralization, together with the limited
availability of the Excess Cash Flow from one loan group to cover the principal
portion of current Realized Losses on the mortgage loans in the other loan group
will also increase the likelihood of distribution of full amounts of interest
and principal to the Class A Certificates on each distribution date.
The Special Hazard Amount initially will be $7,000,025 for Loan Group I and
$7,500,112 for Loan Group II. As of any date of determination following the
cut-off date and with respect to either loan group, the Special Hazard Amount
shall equal the respective initial Special Hazard Amount, in each case less the
sum of (A) any amounts allocated through subordination in respect of Special
Hazard Losses with respect to that loan group and (B) the related adjustment
amount. The adjustment amount for each loan group will be equal to an amount
calculated pursuant to the terms of the pooling and servicing agreement.
The Fraud Loss Amount initially will be $21,000,075 for Loan Group I and
$22,500,336 for Loan Group II. As of any date of determination after the cut-off
date and with respect to either loan group, the related Fraud Amount shall equal
(X) prior to the first anniversary of the cut-off date an amount equal
to 3.00% of the aggregate principal balance of all of the mortgage loans in
the related loan group as of the cut-off date minus the aggregate amounts
allocated through subordination with respect to Fraud Losses with respect
to such loan group up to such date of determination;
(Y) from the first to the second anniversary of the cut-off date, an
amount equal to
(1) the lesser of (a) the Fraud Amount for that loan group as of
the most recent anniversary of the cut-off date and (b) 2.00% of the
aggregate principal balance of all of the mortgage loans in the related
loan group as of the most recent anniversary of the cut-off date minus
(2) the aggregate amount allocated through subordination with
respect to Fraud Losses with respect to that loan group since the most
recent anniversary of the cut-off date up to such date of determination;
and
(Z) from the second to the fifth anniversary of the cut-off date, an
amount equal to
(1) the lesser of (a) the Fraud Amount for that loan group as of
the most recent anniversary of the cut-off date and (b) 1.00% of the
aggregate principal balance of all of the mortgage loans in the related
loan group as of the most recent anniversary of the cut-off date minus
(2) the aggregate amount allocated through subordination with
respect to Fraud Losses with respect to that loan group since the most
recent anniversary of the cut-off date up to the date of determination.
On and after the fifth anniversary of the cut-off date each Fraud Amount shall
be zero and Fraud Losses shall not be allocated through subordination.
The initial Bankruptcy Amount will be $274,524 for Loan Group I and
$341,045 for Loan Group II. As of any date of determination and with respect to
either loan group, the related Bankruptcy Amount shall equal the respective
initial Bankruptcy Amount, in each case less the sum of any amounts allocated
through subordination for Bankruptcy Losses with respect to the related loan
group up to such date of determination.
Notwithstanding the foregoing, the provisions relating to subordination
will not be applicable in connection with a Bankruptcy Loss so long as
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the master servicer has notified the trustee in writing that the master
servicer is diligently pursuing any remedies that may exist in connection
with the representations and warranties made regarding the related
mortgage loan and
either (A) the related mortgage loan is not in default with regard to
payments due thereunder or (B) delinquent payments of principal and
interest under the related mortgage loan and any premiums on any
applicable primary hazard insurance policy and any related escrow payments
in respect of that mortgage loan are being advanced on a current basis by
the master servicer or a sub-servicer.
Each Special Hazard Amount, Fraud Amount and Bankruptcy Amount is subject
to further reduction as described in the prospectus under 'Subordination.'
ADVANCES
Prior to each distribution date, the master servicer is required to make
Advances, out of its own funds, advances made by a sub-servicer, or funds held
in the Custodial Account for future distribution or withdrawal, with respect to
any payments of principal and interest, net of the related Servicing Fees, that
were due on the mortgage loans in any loan group during the related due period
and not received as of the business day next preceding the related determination
date.
These Advances are required to be made only to the extent they are deemed
by the master servicer to be recoverable from related late collections,
Insurance Proceeds, or Liquidation Proceeds. The purpose of making Advances is
to maintain a regular cash flow to the Certificateholders, rather than to
guarantee or insure against losses. The master servicer will not be required to
make any Advances with respect to reductions in the amount of the monthly
payments on the mortgage loans due to debt service reductions or the application
of the Soldiers' and Sailors' Civil Relief Act of 1940 or similar legislation or
regulations. Any failure by the master servicer to make an Advance as required
under the pooling and servicing agreement will constitute an event of default
thereunder, in which case the trustee, as successor master servicer, will be
obligated to make the Advance, in accordance with the terms of the pooling and
servicing agreement.
All Advances will be reimbursable to the master servicer on a first
priority basis from either late collections, Insurance Proceeds or Liquidation
Proceeds from the mortgage loan as to which the unreimbursed Advance was made.
In addition, any Advances previously made which are deemed by the master
servicer to be nonrecoverable from related late collections, Insurance Proceeds
and Liquidation Proceeds may be reimbursed to the master servicer out of any
funds in the custodial account prior to distributions on the Class A
Certificates.
YEAR 2000 CONSIDERATIONS
OVERVIEW OF THE YEAR 2000 ISSUE
The Y2K issue is the term generally used to describe the potential failure
of information technology components on or after January 1, 2000 because
existing computer programs, applications and microprocessors frequently use only
two digits to identify a year. Since the Year 2000 is also a leap year, there
could be additional business disruptions as a result of the inability of many
computer systems to recognize February 29, 2000.
The failure to correct or replace computer programs, applications and
microprocessors with Y2K-ready alternatives may adversely impact the operations
of Residential Funding on or after January 1, 2000. The responsibilities of
Residential Funding as the master servicer include collecting payments from the
subservicers in respect of the mortgage loans, calculating the Available
Distribution Amount for each distribution date, remitting that amount to the
trustee prior to each distribution date, calculating the amount of principal and
interest payments to be made to the certificateholders on each distribution
date, and preparing the monthly statement to be sent to certificateholders on
each distribution date.
OVERVIEW OF RESIDENTIAL FUNDING'S Y2K PROJECT
In January 1997, Residential Funding commenced activities to determine the
impact of Y2K on its critical computer systems. In April 1998, Residential
Funding established a formal Y2K project team to address Y2K issues. The Y2K
project team remains in place and continues to work on solving problems related
to the Year
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2000. In addition, the Y2K project team coordinates its efforts with the Y2K
programs established by General Motors Acceptance Corporation and General Motors
Corporation.
Members of the Y2K project team, together with relevant personnel from
Residential Funding's business units have developed and implemented a six-phase
management strategy discussed below, which is being applied to information
technology and non-information technology components throughout the
organization. Residential Funding's components primarily consist of the
following:
hardware, including mainframe computers, desktop computers and network
devices;
facilities equipment, including elevators, telephone systems, heating
systems and security systems;
software applications, including vendor purchased applications, in-house
developed applications and end-user developed applications;
business partner communication links, which primarily provide data
transmissions to and from business partners; and
business partners data systems, which primarily process data for
Residential Funding.
The six phases by which the Y2K project team will seek to achieve Y2K
readiness throughout Residential Funding are as follows:
<TABLE>
<CAPTION>
PHASE OBJECTIVE
----- ---------
<S> <C>
Phase I -- Awareness To promote Y2K awareness throughout Residential
Funding. Emphasis has been placed on ensuring
that components recently purchased, or to be
purchased, by business units are Y2K-ready prior
to the implementation of those components.
Phase II -- Inventory To create an inventory of all components and
assess the Y2K risks associated with those
components.
Phase III -- Assessment To determine which components are not Y2K-ready
and decide whether such components should be
replaced, retired or repaired.
Phase IV -- Renovation To execute component replacement, retirement or
repair to ensure Y2K readiness.
Phase V -- Validation To test components that have been repaired to
ensure Y2K readiness and validate 'mission
critical' components that were assessed as
Y2K-ready in Phase III.
Phase VI -- Implementation To deploy repaired and validated components.
</TABLE>
In order to execute the six-phase plan, a combination of internal resources
and external contractors have been, and will be, employed by the Y2K project
team.
Y2K PROJECT STATUS
The Y2K project team has completed the six phases for internal 'mission
critical' components. Additionally, the Y2K project team has completed
renovation and validation of any non-mission critical components that the Y2K
project team and related business units determine to be necessary. If
Residential Funding introduces or replaces, prior to January 1, 2000, any
'mission critical' components, the Y2K project team will ensure that the
components conform to the requirements of the above six-phase plan.
The potential impact on Residential Funding of problems related to Y2K,
however, will not depend solely on the corrective measures undertaken by the Y2K
project team. The manner in which Y2K issues are addressed by business partners,
governmental agencies and other entities that provide data to, or receive data
from, Residential Funding, or whose financial condition or operational
capability is important to Residential Funding and its ability to act as master
servicer, will have a significant impact upon Residential Funding. These
entities include, among others, subservicers, the trustee, the custodian and
certain depository institutions, as well as their respective suppliers and
vendors. Accordingly, Residential Funding is communicating with certain of these
parties to assess their Y2K readiness and evaluate any potential impact on
Residential Funding.
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Due to the various dates by which Residential Funding's business partners
anticipate being Y2K-ready, it is expected that the Y2K project team will
continue to spend significant time assessing Y2K business partner issues
throughout 1999. Any business partner, including any subservicer, the trustee
and the Custodian, that
has not provided Residential Funding appropriate documentation supporting
its Y2K efforts,
has not responded in a timely manner to Residential Funding's inquires
regarding their Y2K efforts or
did not expect to be Y2K ready until after June 30, 1999,
has been, and will be, placed in an 'at risk' category. Residential Funding will
carefully monitor the efforts and progress of its 'at risk' business partners,
and if additional steps are necessary Residential Funding will reassess the risk
and act accordingly.
During 1998, Residential Funding also commenced a formal business
continuity plan that is designed to address potential Y2K problems and other
possible disruptions. Residential Funding's business continuity plan has the
following four phases:
<TABLE>
<CAPTION>
PHASE OBJECTIVE
----- ---------
<S> <C>
Phase I -- Business Impact Assessment To assess the impact upon Residential
Funding business units if 'mission
critical' components were suddenly
not available or significantly
impaired as a result of a natural
disaster or other type of disruption,
including as a result of Y2K.
Phase II -- Strategic Development To develop broad, strategic plans
regarding the manner in which
Residential Funding will operate in
the aftermath of a natural disaster
or other type of disruption,
including as a result of Y2K.
Phase III -- Business Continuity Planning To develop detailed procedures on how
Residential Funding and individual
business units will continue to
operate in the aftermath of a natural
disaster or other type of disruption,
including as a result of Y2K.
Phase IV -- Validation To test the plans developed in Phases
II and III above.
</TABLE>
As of March 31, 1999, Residential Funding had substantially completed
Phases I, II and III of its business continuity plan. As of June 30, 1999,
Residential Funding had substantially completed Phase IV of the plan.
RISKS RELATED TO Y2K
Although Residential Funding's remediation efforts are directed at
eliminating its Y2K exposure, there can be no assurance that these efforts will
fully mitigate the effect of all Y2K problems. If Residential Funding fails to
identify or correct any material Y2K problem, there could be significant
disruptions in its normal business operations. Such disruptions could have a
material adverse effect on Residential Funding's ability to
collect and monitor any subservicer's collection of payments on the
mortgage loans,
distribute such collections to the trustee, and
provide reports to certificateholders as set forth in this prospectus
supplement.
Furthermore, if any subservicer, the trustee or any other business partner or
any of their respective vendors or third party service providers are not
Y2K-ready, the ability to (a) service the mortgage loans in the case of any
subservicer or any of their respective vendors or third party service providers
and (b) make distributions to certificateholders in the case of the trustee or
any of its vendors or third party service providers, may be materially and
adversely affected.
This section entitled 'Year 2000 Considerations' contains 'forward-looking
statements' within the meaning of Section 27A of the Securities Act. Generally,
all statements in this section that are not statements of historical fact are
forward-looking statements. Forward-looking statements made in this Y2K
discussion are
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subject to certain risks and uncertainties. Important factors that could cause
results to differ materially from such forward-looking statements include, among
other things, the ability of Residential Funding to successfully identify
components that may pose Y2K problems, the nature and amount of programming
required to fix the affected components, the costs of labor and consultants
related to such efforts, the continued availability of resources, both personnel
and technology, and the ability of business partners that interface with
Residential Funding to successfully address their Y2K issues.
THE INSURER
The following information has been supplied by Ambac Assurance Corporation
(the 'Insurer') for inclusion in this prospectus supplement. No representation
is made by the depositor, the underwriters or any of their affiliates as to the
accuracy or completeness of such information.
The Insurer is a Wisconsin-domiciled stock insurance corporation regulated
by the Office of the Commissioner of Insurance of the State of Wisconsin and
licensed to do business in 50 states, the District of Columbia, the Commonwealth
of Puerto Rico and the Territory of Guam. The Insurer primarily insures newly
issued municipal and structured finance obligations. The Insurer is a wholly
owned subsidiary of Ambac Financial Group, Inc. (formerly AMBAC, Inc.), a 100%
publicly-held company. Moody's, Standard & Poor's and Fitch IBCA Inc. have each
assigned a triple-A financial strength rating to the Insurer.
The consolidated financial statements of the Insurer and subsidiaries as of
December 31, 1998 and 1997 and for each of the years in the three year period
ended December 31, 1998, prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of Ambac
Financial Group, Inc. (which was filed with the Commission on March 30, 1999;
Commission File No. 1-10777) and the unaudited consolidated financial statements
of the Insurer and subsidiaries as of June 30, 1999 and for the periods ending
June 30, 1999 and June 30, 1998, included in the Quarterly Report on Form 10-Q
of Ambac Financial Group, Inc. for the period ended June 30, 1999 (which was
filed with the Commission on August 13, 1999) are hereby incorporated by
reference into this prospectus supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated herein by reference
shall be modified or superseded for the purposes of this prospectus supplement
to the extent that a statement contained herein by reference herein also
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this prospectus supplement.
All financial statements of the Insurer and subsidiaries included in
documents filed by Ambac Financial Group, Inc. with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this prospectus supplement and prior to the
termination of the offering of the Class A Certificates shall be deemed to be
incorporated by reference into this prospectus supplement and to be a part
hereof from the respective dates of filing such documents.
The following table sets forth the capitalization of the Insurer as of
December 31, 1996, December 31, 1997, December 31, 1998 and June 30, 1999,
respectively, in conformity with generally accepted accounting principles.
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AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1996 1997 1998 1999
---- ---- ---- ----
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Unearned premiums......................................... $ 995 $1,184 $1,303 $1,349
Other liabilities......................................... 259 562 548 413
------ ------ ------ ------
1,254 1,746 1,851 1,762
------ ------ ------ ------
Stockholder's equity:(1)
Common stock......................................... 82 82 82 82
Additional paid-in capital........................... 515 521 541 644
Accumulated other comprehensive income............... 66 118 138 39
Retained earnings.................................... 992 1,180 1,405 1,530
------ ------ ------ ------
Total stockholder's equity................................ 1,655 1,901 2,166 2,295
------ ------ ------ ------
Total liabilities and stockholder's equity................ $2,909 $3,647 $4,017 $4,057
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- ------------
(1) Components of stockholder's equity have been restated for all periods
presented to reflect 'Accumulated other comprehensive income' in accordance
with the Statement of Financial Accounting Standards No. 130 'Reporting
Comprehensive Income' adopted by the Insurer effective January 1, 1998. As
this new standard only requires additional information in the financial
statements, it does not affect the Insurer's financial position or results
of operations.
------------------------
Copies of the financial statements of the Insurer incorporated herein by
reference and copies of the Insurer's annual statement for the year ended
December 31, 1998 prepared in accordance with statutory accounting standards are
available, without charge, from the Insurer. The address of the Insurer's
administrative offices and its telephone number are One State Street Plaza, 19th
Floor, New York, NY 10004 and (212) 668-0340.
The Insurer makes no representation regarding the Class A Certificates or
the advisability of investing in the Class A Certificates and makes no
representation regarding, nor has it participated in the preparation of, this
prospectus supplement other than the information supplied by the Insurer and
presented under the headings 'Description of the Certificates -- Description of
the Policies' and 'The Insurer' in this prospectus supplement.
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CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yields to maturity and the aggregate amount of distributions on the
Class A Certificates will be affected by the rate and timing of principal
payments on the mortgage loans, the amount and timing of mortgagor defaults
resulting in Realized Losses and by adjustments to the mortgage rates. The
yields to maturity may be adversely affected by a higher or lower than
anticipated rate of principal payments on the mortgage loans in the trust. The
rate of principal payments on the mortgage loans will in turn be affected by the
amortization schedules of the mortgage loans, the rate and timing of principal
prepayments thereon by the mortgagors, liquidations of defaulted mortgage loans
and purchases of mortgage loans due to breaches of representations and
warranties or purchases of converted mortgage loans. The timing of changes in
the rate of prepayments, liquidations and repurchases of the mortgage loans may,
and the timing of Realized Losses will, significantly affect the yield to an
investor, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. In addition, the rate of
prepayments of the mortgage loans and the yield to investors on the certificates
may be affected by refinancing programs, which may include general or targeted
solicitations, as described under 'Maturity and Prepayment Considerations' in
the prospectus. Since the rate and timing of principal payments on the mortgage
loans will depend on future events and on a variety of factors, no assurance can
be given as to the rate or the timing of principal payments on the Class A
Certificates.
The Class A-I Certificates and Class A-II Certificates will receive
distributions with respect to principal and interest primarily from collections
on the Group I Loans and Group II Loans, respectively. In addition, the Excess
Cash Flow from one loan group will be available to make payments to holders of
the classes of Class A Certificates related to the other loan group in respect
of Realized Losses, Prepayment Interest Shortfalls and Class A-II Basis Risk
Shortfalls to the extent described under 'Description of the Certificates --
Overcollateralization Provisions' in this prospectus supplement. Except as
described in the preceding sentence, the Class A-I Certificates and Class A-II
Certificates will receive distributions with respect to principal and interest
solely from collections on the mortgage loans in the related loan group.
The rate and timing of principal payments on and the weighted average lives
of the Class A-II-1 Certificates and the Class A-II-2 Certificates will be
affected primarily by the rate and timing of principal payments, including
prepayments, defaults, liquidations and purchases, on the mortgage loans in the
related Sub-Group.
Investors in the Class A-I-1A, Class A-I-5, Class A-I-7 and Class A-I-6
Certificates should be aware that prepayment of the Group I Loans with higher
net mortgage rates may result in a lower Group I maximum rate. Investors in the
Class A-II Certificates should be aware that the prepayment of the Group II
Loans with higher net mortgage rates or the inclusion of converted mortgage
loans due to the failure of Residential Funding to purchase those loans may
result in a lower Group II maximum rate.
The interest rate on each of the Group I Loans is fixed, whereas the
pass-through rate on the Class A-I-1A and Class A-I-6 Certificates adjusts
monthly based upon One-Month LIBOR as described under 'Description of the
Certificates -- Determination of One-Month LIBOR' in this prospectus supplement,
subject to the Group I maximum rate. Consequently, because One-Month LIBOR plus
the applicable spread may be greater than the Group I maximum rate, shortfalls
could result. Similarly, although the pass-through rates on the Class A-I-5 and
Class A-I-7 Certificates are fixed, those pass-through rates are subject to a
cap equal to the Group I maximum rate. If the pass-through rate on the
Class A-I-1A, Class A-I-5 or Class A-I-7 Certificates is so limited, no payments
will be due or distributable in respect of the resulting shortfall. Any
resulting Class A-I-6 Basis Risk Shortfall is payable only to the extent of the
Excess Cash Flow from Loan Group I available therefor and may remain unpaid on
the final distribution date.
The interest rates on the Group II Loans adjust annually or semi-annually
based upon the related index, whereas the pass-through rates on each class of
the Class A-II Certificates adjusts monthly based upon One-Month LIBOR as
described under 'Description of the Certificates -- Determination of One-Month
LIBOR' in this prospectus supplement, subject to the Group II maximum rate.
Consequently, the interest that becomes due on the Group II Loans during the
related due period may not equal the amount of interest that would accrue at
One-Month LIBOR plus the applicable spread during the related Interest Accrual
Period. In particular, because the pass-through rates on each class of
Class A-II Certificates will adjust monthly, while the interest rates of the
Group II Loans will adjust semi-annually or annually and in some cases, only
after the expiration of the related
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fixed-rate period, subject to any applicable periodic cap, maximum mortgage rate
or minimum mortgage rate, in a rising interest rate environment, the sum of
One-Month LIBOR plus the applicable spread may be greater than the weighted
average of the net mortgage rates on the Group II Loans as of the first day of
the calendar month in which the Interest Accrual Period begins, possibly
resulting in Class A-II Basis Risk Shortfalls to holders of the Class A-II
Certificates. Any Class A-II Basis Risk Shortfalls are payable only to the
extent of the Excess Cash Flow available therefor and may remain unpaid on the
final distribution date. In addition, each of the indices and One-Month LIBOR
may respond to different economic and market factors, and there is not
necessarily a correlation between any of the indices and One-Month LIBOR. Thus,
it is possible, for example, that One-Month LIBOR may rise during periods in
which the indices are stable or are falling or that, even if One-Month LIBOR and
the indices rise during the same period, One-Month LIBOR may rise more rapidly
than the indices, potentially resulting in the Group II maximum rate being lower
than One-Month LIBOR plus the applicable spread during the related Interest
Accrual Period, resulting in shortfalls that are not due to be paid until
subsequent distribution dates.
The amount of Excess Cash Flow in either loan group may be adversely
affected by the prepayment of mortgage loans in that loan group with higher
mortgage rates. Any such reduction will reduce the amount of Excess Cash Flow
that is available to cover Realized Losses, increase overcollateralization on
the related classes of Class A Certificates and cover Prepayment Interest
Shortfalls, Class A-I-6 Basis Risk Shortfalls and Class A-II Basis Risk
Shortfalls, in each case to the extent and in the manner described in this
prospectus supplement. See 'Description of the Mortgage Pool -- General -- Group
I Loans' and ' -- Group II Loans,' 'Description of the
Certificates -- Overcollateralization Provisions' and ' -- Allocation of
Realized Losses' in this prospectus supplement.
The mortgage loans generally may be prepaid in full or in part at any time,
although a substantial portion of the mortgage loans provide for payment of a
prepayment charge, which may have a substantial effect on the rate of
prepayment. See 'Description of the Mortgage Pool -- Mortgage Pool
Characteristics.' Some state laws restrict the imposition of prepayment charges
even when the mortgage loans expressly provide for the collection of those
charges. As a result, it is possible that prepayment charges may not be
collected even on mortgage loans that provide for the payment of these charges.
Investors in the Class A-I Certificates should be aware that 1.8% of the
Group I Loans will be junior loans, which are secured by junior liens on the
related mortgaged properties. Generally, junior mortgage loans are not viewed by
mortgagors as permanent financing. Accordingly, junior loans may experience a
higher rate of prepayment than first lien mortgage loans.
The Group II Loans generally are assumable if, in the sole judgment of the
master servicer or sub-servicer, the prospective purchaser of a mortgaged
property is creditworthy and the security for the mortgage loan is not impaired
by the assumption. If the master servicer or sub-servicer does not approve an
assumption, the related mortgaged property will be due-on-sale. The master
servicer shall enforce any due-on-sale clause contained in any mortgage note or
mortgage, to the extent permitted under applicable law and governmental
regulations; provided, however, if the master servicer determines that it is
reasonably likely that the mortgagor will bring, or if any mortgagor does bring,
legal action to declare invalid or otherwise avoid enforcement of a due-on-sale
clause contained in any mortgage note or mortgage, the master servicer shall not
be required to enforce the due-on-sale clause or to contest that action. The
extent to which the mortgage loans are assumed by purchasers of the mortgaged
properties rather than prepaid by the related mortgagors in connection with the
sales of the mortgaged properties will affect the weighted average life of the
related Class A Certificates and may result in a prepayment experience on the
mortgage loans that differs from that on other conventional mortgage loans. See
'Maturity and Prepayment Considerations' in the prospectus.
Prepayments, liquidations and purchases of the mortgage loans will result
in distributions to holders of the Class A Certificates of principal amounts
which would otherwise be distributed over the remaining terms of the mortgage
loans. Factors affecting prepayment, including defaults and liquidations, of
mortgage loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties, changes in the
value of the mortgaged properties, mortgage market interest rates, solicitations
and servicing decisions. In addition, if prevailing mortgage rates were to 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 were to rise significantly above the mortgage rates
on the mortgage loans, the rate of prepayments on the mortgage loans would be
expected to decrease.
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The convertible mortgage loans provide that the mortgagors may, during a
specified period of time, convert the adjustable interest rate of the mortgage
loans to a fixed interest rate. The depositor is not aware of any publicly
available statistics that set forth principal prepayment or conversion
experience or conversion forecasts of adjustable-rate mortgage loans over an
extended period of time, and its experience with adjustable-rate mortgages is
insufficient to draw any conclusions regarding the expected prepayment or
conversion rates on the convertible mortgage loans. As is the case with
conventional, fixed-rate mortgage loans originated in a high interest rate
environment which may be subject to a greater rate of principal prepayments when
interest rates decrease, adjustable-rate mortgage loans may be subject to a
greater rate of principal prepayments, or purchases by the related sub-servicer
or the master servicer, due to their refinancing or conversion to fixed interest
rate loans in a low interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable-rate mortgage loans could be
subject to higher prepayment and conversion rates than if prevailing interest
rates remain constant because the availability of fixed-rate or other
adjustable-rate mortgage loans at competitive interest rates may encourage
mortgagors to refinance their adjustable-rate mortgages to 'lock in' a lower
fixed interest rate or to take advantage of the availability of other
adjustable-rate mortgage loans, or, in the case of convertible adjustable-rate
mortgage loans, to exercise their option to convert the adjustable interest
rates to fixed interest rates. The conversion feature may also be exercised in a
rising interest rate environment as mortgagors attempt to limit their risk of
higher rates. Such a rising interest rate environment may also result in an
increase in the rate of defaults on the mortgage loans. As a result of the
mortgagor's exercise of the conversion option, the Class A-II Certificates may
experience greater prepayments if the converted mortgage loans are repurchased
by Residential Funding.
The rate of prepayments and defaults on the Group II Loans will differ from
the rate of prepayments and defaults on the Group I Loans and may increase
during periods near their initial adjustment dates, to the extent that the
formula for determining the new mortgage rate after the adjustment date results
in an above market interest rate.
The rate of defaults on the mortgage loans will also affect the rate and
timing of principal payments on the mortgage loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. This is especially true for the Group II Loans as increases in the
monthly payments to an amount in excess of the monthly payment required at the
time of origination may result in a default rate higher than that on level
payment mortgage loans, particularly since the mortgagor under each Group II
Loan was qualified on the basis of the mortgage rate in effect at origination.
The repayment of Group II Loans will be dependent on the ability of the
mortgagor to make larger monthly payments as the mortgage rate increases.
The junior loans are subordinate to the rights of the mortgagee under the
related senior mortgage or mortgages and, therefore, the holder of a junior loan
may be subject to a loss of its mortgage if the holder of a senior mortgage is
successful in foreclosure of its mortgage since no junior liens or encumbrances
survive such a foreclosure. Investors should be aware that any liquidation,
insurance or condemnation proceeds received in respect of junior loans will be
available to satisfy the outstanding balance of those junior loans only to the
extent that the claims of the related senior mortgages have been satisfied in
full, including any related foreclosure costs. See 'Risk Factors' in this
prospectus supplement and in the prospectus and 'Certain Legal Aspects of the
Mortgage Loans and Contracts -- The Mortgage Loans -- Foreclosure on Mortgage
Loans' in the prospectus.
The rate of default on mortgage loans that are refinance, limited
documentation or no stated income mortgage loans, and on mortgage loans with
high LTV ratios, may be higher than for other types of mortgage loans. As a
result of the underwriting standards applicable to the mortgage loans, the
mortgage loans are likely to experience rates of delinquency, foreclosure,
bankruptcy and loss that are higher, and that may be substantially higher, than
those experienced by mortgage loans underwritten in accordance with the
standards applied by Fannie Mae and Freddie Mac first or junior mortgage loan
purchase programs, or by Residential Funding for the purpose of acquiring
mortgage loans to collateralize securities issued by Residential Funding
Mortgage Securities I, Inc. See 'Description of the Mortgage
Pool -- Underwriting Standards.' In addition, because of these underwriting
criteria and their likely effect on the delinquency, foreclosure, bankruptcy and
loss experience of the mortgage loans, the mortgage loans will generally be
serviced in a manner intended to result in a faster exercise of remedies, which
may include foreclosure, in the event mortgage loan delinquencies and defaults
occur, than would be the case if the mortgage loans were serviced in accordance
with those other programs. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the mortgage loans will be affected by the general
economic condition of the region of the country in which the related mortgaged
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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 master servicer has a limited right, but not an
obligation, to repurchase some defaulted mortgage loans at a price equal to the
unpaid principal balance thereof plus accrued and unpaid interest, resulting in
a payment of principal on the Class A Certificates earlier than might have been
the case if foreclosure proceedings had been commenced. See 'Maturity and
Prepayment Considerations' in the prospectus.
The yield to investors on the Class A Certificates may also be adversely
affected by the uncertainty of the availability or sufficiency of Eligible
Master Servicing Compensation and Excess Cash Flow, to cover any Prepayment
Interest Shortfalls, Class A-I-6 Basis Risk Shortfalls and Class A-II Basis Risk
Shortfalls, and those shortfalls may remain unpaid on the final distribution
date.
In addition, the yield to maturity of each class of Class A Certificates
will depend on, among other things, the price paid by the holders of the
applicable class of Class A Certificates and the related pass-through rate. The
extent to which the yield to maturity of a Class A Certificate is sensitive to
prepayments will depend, in part, upon the degree to which it is purchased at a
discount or premium. In general, if a class of Class A Certificates is purchased
at a premium and principal distributions thereon occur at a rate faster than
assumed at the time of purchase, the investor's actual yield to maturity will be
lower than that anticipated at the time of purchase. Conversely, if a class of
Class A 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 anticipated at the
time of purchase.
Because the mortgage rates on the Group I Loans and the pass-through rates
on the Fixed Rate Certificates are fixed, those 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 Fixed Rate Certificates
were to rise, the market value of those certificates may decline. Investors in
the Class A-II Certificates should also be aware that although the mortgage
rates on the Group II Loans will adjust periodically, the increases and
decreases will be limited by the periodic rate caps, maximum mortgage rates and
minimum mortgage rates thereon. In addition, the mortgage rates on the Group II
Loans will be based on the related index, which may not rise and fall
consistently with prevailing mortgage rates, plus the related note margin, which
may be different from the prevailing margins on other mortgage loans. As a
result, the mortgage rates on the Group II Loans at any time may not equal the
prevailing rates for other adjustable-rate mortgage loans and the rate of
prepayment may be lower or higher than would otherwise be anticipated.
Investors in the Class A-II Certificates should be aware that the yield on
those certificates will depend on, among other things, the rate and timing of
principal payments, including prepayments, defaults, liquidations and purchases
of mortgage loans due to a breach of representation and warranty, on the
Sub-Group of Group II Loans to which the applicable class of Class A-II
Certificates relate and the allocation thereof to reduce the Certificate
Principal Balance of that class. See 'Description of the Class A
Certificates -- Principal Distributions on the Class A Certificates' in this
prospectus supplement.
TAC CERTIFICATES
The TAC Certificates have been structured so that principal distributions
generally will be made thereon in the amounts determined by using the Targeted
Principal Balances table in this prospectus supplement, assuming that
prepayments on the Group I Loans occur each month at a constant level of
approximately 25% HEP and based on other assumptions.
There can be no assurance that funds available for distribution of
principal on the TAC Certificates will be sufficient to cover, or will not be in
excess of, the amount necessary to reduce the Certificate Principal Balance of a
class of TAC Certificates to its Targeted Principal Balance for any distribution
date. To the extent that prepayments on the Group I Loans occur at a level below
a constant level of approximately 25% HEP, the funds available for principal
distributions on the TAC Certificates on each distribution date may be
insufficient to reduce the Certificate Principal Balance of the TAC Certificates
to their Targeted Principal Balances for that distribution date, and the
weighted average lives of the TAC Certificates may be extended. Conversely, to
the extent that prepayments on the Group I Loans occur at a level above a
constant level of approximately 25% HEP, the Certificate Principal Balance of
the TAC Certificates may be reduced below their Targeted Principal Balances and
the weighted average lives of the TAC Certificates may be reduced.
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It is very unlikely that the mortgage loans will prepay at any particular
constant rate. Furthermore, the Targeted Principal Balances set forth in the
table under 'Description of the Certificates -- Targeted Principal Balances'
were calculated based on assumptions which may differ from the actual
characteristics and expected performance of the Group I Loans. As a result of
the variances between the actual characteristics of the Group I Loans and those
assumptions, the actual prepayment rates that will result in the Certificate
Principal Balance of the TAC Certificates equaling the amounts set forth in the
table may differ from the rates used to calculate those amounts. For example,
the actual Group I Loans have diverse remaining terms to maturity such that if a
HEP rate, the application of which is dependent on the difference between the
original term to maturity and the remaining term to maturity of a mortgage loan,
were applied individually thereto, the resulting aggregate cash flow and
amortization will be different from those resulting from the assumed weighted
average remaining term to maturity. In addition, the prepayment rates that will
result in the Certificate Principal Balance of the TAC Certificates equalling
those amounts may vary over time as a result of the actual prepayment experience
of the Group I Loans. Because the Targeted Principal Balances were calculated
using assumptions regarding the Group I Loans, the actual prepayments of
individual mortgage loans could be such that the amount available for
distributions on the TAC Certificates may not result in their respective
Certificate Principal Balances equalling their respective Targeted Principal
Balances even if prepayments were made at a constant level of approximately 25%
HEP. In addition, the averaging of high and low principal prepayment rates, even
if the average prepayment level is a constant level of approximately 25% HEP,
will not ensure that the Certificate Principal Balances of the TAC Certificates
will equal their Targeted Principal Balances on any distribution date because
the balance of the Principal Distribution Amount remaining after distribution to
the TAC Certificates will be distributed on each distribution date and therefore
will not be available for distributions on the TAC Certificates on subsequent
distribution dates.
Investors in the TAC Certificates should be aware that the stabilization
provided by the Class A-I-6 Certificates is sensitive to the rate of mortgagor
prepayments, and that the Class A-I-6 Certificates may be reduced to zero
significantly earlier than anticipated. The initial Certificate Principal
Balance of the Class A-I-6 Certificates is equal to approximately 19.40% of the
aggregate initial Certificate Principal Balance of the TAC Certificates.
CLASS A-I-6 CERTIFICATES
Since the Class A-I-6 Certificates will receive as monthly principal
distributions any excess of the Principal Distribution Amount for Loan Group I
remaining after distributions to the Class A-I-1A, Class A-I-1B and Class A-I-7
Certificates over the principal distributed to the TAC Certificates, the
Class A-I-6 Certificates will be particularly sensitive to the rate of
prepayments on the Group I Loans. If the principal distributed to the TAC
Certificates on any distribution date equals or exceeds the Principal
Distribution Amount for Loan Group I remaining after distributions to the
Class A-I-1A, Class A-I-1B and Class A-I-7 Certificates, the Class A-I-6
Certificates will receive no principal distributions on that distribution date.
Due to the companion nature thereof, the Class A-I-6 Certificates will
likely experience price and yield volatility. Investors should consider whether
such volatility is suitable to their investment needs.
CLASS A-I-7 CERTIFICATES
Investors in the Class A-I-7 Certificates should be aware that because the
Class A-I-7 Certificates will not receive any payments of principal prior to the
distribution date occurring in October 2002 and will receive a
disproportionately small portion of principal payments prior to the distribution
date occurring in October 2005 with respect to the mortgage loans in Loan Group
I, unless the Certificate Principal Balances of the Class A-I Certificates,
other than the Class A-I-7 Certificates, have been reduced to zero, the weighted
average life of the Class A-I-7 Certificates will be longer than would otherwise
be the case, and the effect on the market value of the Class A-I-7 Certificates
of changes in market interest rates or market yields for similar securities may
be greater than for other classes of Class A-I Certificates entitled to
principal distributions. On or after the distribution date in October 2006, if
the Certificate Principal Balance of the Class A-I-7 Certificates has not been
reduced to zero, a disproportionately large portion of principal payments,
including mortgagor prepayments, on the Group I Loans will be allocated to the
Class A-I-7 Certificates.
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SCHEDULED FINAL DISTRIBUTION DATE
The scheduled final distribution date with respect to the Class A-I-1A,
Class A-I-1B, Class A-I-2, Class A-I-3, Class A-I-4 and Class A-I-5 Certificates
are set forth on page S-4, and were calculated, assuming, among other things,
that no prepayments are received on the mortgage loans in the related loan group
and that scheduled monthly payments of principal and interest on each of those
mortgage loans are timely received and that Excess Cash Flow is not used to make
accelerated payments of principal. The scheduled final distribution date with
respect to the Class A-I-6, Class A-I-7, Class A-II-1 and Class A-II-2
Certificates are set forth on page S-4, and were set to equal the thirteenth
distribution date immediately following the latest scheduled maturity date for
any mortgage loan in the related loan group. The actual final distribution date
for each class of Class A Certificates could occur significantly earlier than
its scheduled final distribution date because
prepayments are likely to occur which will be applied to the payment of
principal on that Class A Certificates and
the master servicer or the depositor may purchase from the trust all
remaining mortgage loans and other assets in the related loan group,
and could be later depending on the default and recovery experience on the
mortgage loans. No event of default, change in the priorities for distribution
among the various classes or other provisions under the pooling and servicing
agreement will arise or become applicable solely by reason of the failure to
retire the entire Certificate Principal Balance of any class of certificates on
or before its scheduled final distribution date.
WEIGHTED AVERAGE LIFE
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security to the date of distribution to the
investor of each dollar distributed in reduction of principal of that security,
assuming no losses. The weighted average life of the Class A Certificates will
be influenced by, among other things, the rate at which principal of the
mortgage loans in the applicable loan group is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
The prepayment model used in this prospectus supplement for the Group I
Loans is the Home Equity Prepayment assumption -- the Group I Prepayment
Assumption or HEP -- which assumes a rate of prepayment each month relative to
the then outstanding principal balance of a pool of mortgage loans. 25% HEP
assumes a constant prepayment rate or CPR, of one-tenth of 25% per annum of the
then outstanding principal balance of those mortgage loans in the first month of
the life of the mortgage loans and an additional one-tenth of 25% per annum in
each month thereafter until the tenth month. Beginning in the tenth month and in
each month thereafter during the life of the mortgage loans, a 25% HEP assumes a
CPR of 25% per annum each month. The Class A-I Certificates were structured on
the basis of, among other things, a prepayment assumption of 25% HEP. HEP 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 Group I Loans. No representation is made that the Group I Loans
will prepay at that or any other rate.
The prepayment model used in this prospectus supplement for the Group II
Loans -- the Group II Prepayment Assumption or CPR -- assumes that the
outstanding principal balance of a pool of mortgage loans prepays at a constant
annual rate of 28% CPR. In generating monthly cash flows, this rate is converted
to an equivalent constant monthly rate. To assume a 28% CPR or any other CPR
percentage is to assume that the stated percentage of the outstanding principal
balance of the pool is prepaid over the course of a year. CPR 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
Group II Loans. No representation is made that the Group II Loans will prepay at
that or any other rate.
The table set forth below has been prepared on the basis of the structuring
assumptions as described below regarding the weighted average characteristics of
the mortgage loans that are expected to be included in the trust as described
under 'Description of the Mortgage Pool' in this prospectus supplement and the
performance thereof. The table assumes, among other things, that:
as of the date of issuance of the Class A Certificates, the mortgage loans
have the following characteristics:
S-69
<PAGE>
LOAN GROUP I
<TABLE>
<CAPTION>
NON-BALLOON NON-BALLOON NON-BALLOON
NON-BALLOON GROUP I LOANS GROUP I LOANS GROUP I LOANS
GROUP I LOANS WITH ORIGINAL WITH ORIGINAL WITH ORIGINAL
WITH ORIGINAL TERMS TO TERMS TO TERMS TO
TERMS TO MATURITY GREATER MATURITY GREATER MATURITY GREATER
MATURITY LESS THAN 120 MONTHS THAN 180 MONTHS THAN 240 MONTHS
THAN AND LESS THAN AND LESS THAN AND LESS THAN
OR EQUAL OR EQUAL OR EQUAL OR EQUAL
TO 120 MONTHS TO 180 MONTHS TO 240 MONTHS TO 300 MONTHS
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Aggregate current principal balance........ $4,106,979.22 $68,822,726.85 $18,778,523.33 $4,331,816.28
Initial mortgage rate...................... 10.3630% 10.5040% 10.2660% 10.271%
Initial Weighted Average Servicing Fee
Rate..................................... 0.577% 0.555% 0.572% 0.562%
Original term to maturity (months)......... 117 180 240 300
Remaining term to stated maturity
(months)................................. 115 178 238 298
<CAPTION>
NON-BALLOON
GROUP I LOANS
WITH ORIGINAL
TERMS TO
MATURITY GREATER
THAN 300 MONTHS
AND LESS THAN BALLOON
OR EQUAL GROUP I
TO 360 MONTHS LOANS(1)
------------- --------
<S> <C> <C>
Aggregate current principal balance........ $472,091,457.20 $131,879,993.86
Initial mortgage rate...................... 10.0610% 10.5810%
Initial Weighted Average Servicing Fee
Rate..................................... 0.512% 0.579%
Original term to maturity (months)......... 360 180
Remaining term to stated maturity
(months)................................. 358 178
</TABLE>
- ------------
(1) All Balloon Loans in Loan Group I are assumed to have a remaining
amortization term of 360 months and an original amortization term of
358 months.
LOAN GROUP II
SUB-GROUP II-A
<TABLE>
<CAPTION>
ONE YEAR TWO YEAR THREE YEAR ONE YEAR THREE YEAR
SIX MONTH FIXED FIXED FIXED FIXED PERIOD FIXED PERIOD
LIBOR PERIOD LIBOR PERIOD LIBOR PERIOD LIBOR TREASURY INDEX TREASURY INDEX
GROUP II LOANS GROUP II LOANS GROUP II LOANS GROUP II LOANS GROUP II LOANS GROUP II LOANS
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Aggregate current principal
balance................... $3,041,179 $ 87,272 $226,310,233 $118,772,730 $1,533,226 $ 258,764
Initial mortgage rate....... 9.7490% 9.9900% 10.0841% 10.0712% 9.8037% 9.8750%
Original term to maturity
(months).................. 360 360 360 360 360 360
Remaining term to stated
maturity (months)......... 356 358 358 358 357 358
Initial Weighted average
Servicing Fee Rate........ 0.58% 0.58% 0.58% 0.58% 0.58% 0.58%
Gross Margin................ 6.3039% 6.3500% 6.5538% 6.6381% 6.4433% 7.3750%
Periodic Rate Cap........... 1.0000% 2.0000% 1.1584% 1.1765% 2.0000% 2.0000%
Initial Interest Adjustment
Date...................... 1/01/2000 7/01/2000 7/01/2001 7/01/2002 5/01/2000 7/01/2002
Adjustment Frequency
(months).................. 6 6 6 6 12 12
Assumed Index effective for
each adjustment date...... 5.94% 5.94% 5.94% 5.94% 5.24% 5.24%
</TABLE>
LOAN GROUP II
SUB-GROUP II-B
<TABLE>
<CAPTION>
ONE YEAR TWO YEAR THREE YEAR ONE YEAR THREE YEAR
SIX MONTH FIXED FIXED FIXED FIXED PERIOD FIXED PERIOD
LIBOR PERIOD LIBOR PERIOD LIBOR PERIOD LIBOR TREASURY INDEX TREASURY INDEX
GROUP II LOANS GROUP II LOANS GROUP II LOANS GROUP II LOANS GROUP II LOANS GROUP II LOANS
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Aggregate principal
balance................... $3,745,724 $ 33,706 $244,490,516 $144,864,411 $6,266,358 $ 607,082
Initial mortgage rate....... 10.0061% 10.1250% 10.1043% 10.0508% 9.9997% 10.0223%
Original term to maturity
(months).................. 357 360 360 360 360 360
Remaining term to stated
maturity (months)......... 353 357 358 358 357 356
Initial Weighted Average
Servicing Fee Rate........ 0.58% 0.58% 0.58% 0.58% 0.58% 0.58%
Gross Margin................ 6.5697% 6.6250% 6.5734% 6.6755% 6.8920% 4.4600%
Periodic Rate Cap........... 1.0000% 1.0000% 1.1370% 1.1798% 1.9809% 1.7500%
Initial Interest adjustment
date...................... 12/01/1999 6/01/2000 7/01/2001 7/01/2002 6/01/2000 3/01/2002
Adjustment Frequency
(months).................. 6 6 6 6 12 12
Assumed Index effective for
each adjustment date...... 5.94% 5.94% 5.94% 5.94% 5.24% 5.24%
</TABLE>
the value of One-Month LIBOR will be 5.38% per annum for the Adjustable
Rate Certificates;
the scheduled monthly payment for each mortgage loan has been based on its
outstanding balance, interest rate and remaining term to maturity, such
that the mortgage loan will amortize in amounts sufficient for repayment
thereof over its remaining term to maturity;
S-70
<PAGE>
none of the unaffiliated sellers, the master servicer or the depositor
will repurchase any mortgage loan, as described under 'The Trust
Funds -- Representations with Respect to Mortgage Collateral' and
'Description of the Certificates -- Assignment of Mortgage Loans' in the
prospectus, and neither the master servicer nor the depositor exercises
any option to purchase the mortgage loans and thereby cause a termination
of the trust, except as otherwise noted in the table set forth below;
all delinquencies of payments due on or prior to the cut-off date are
brought current, and thereafter there are no delinquencies or Realized
Losses on the mortgage loans, and principal payments on the mortgage loans
will be timely received together with prepayments, if any, at the
respective constant percentages of the Prepayment Assumption, set forth in
the table;
there is no Prepayment Interest Shortfall or any other interest shortfall
in any month;
payments on the certificates will be received on the 25th day of each
month, commencing in October 1999;
payments on the mortgage loans earn no reinvestment return;
there are no additional ongoing trust expenses payable out of the trust;
no convertible mortgage loan becomes a converted mortgage loan; and
the certificates will be purchased on September 29, 1999.
The actual characteristics and performance of the mortgage loans will
differ from the assumptions used in constructing the table set forth below,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the mortgage loans will prepay at a
constant percentage of the applicable prepayment assumption until maturity or
that all of the mortgage loans will prepay at the same rate of prepayment.
Moreover, the diverse remaining terms to stated maturity and mortgage rates of
the mortgage loans could produce slower or faster principal distributions than
indicated in the table at the various constant percentages of the applicable
prepayment assumption specified, even if the weighted average remaining term to
stated maturity and weighted average mortgage rate of the mortgage loans are as
assumed. Any difference between these assumptions and the actual characteristics
and performance of the mortgage loans, or actual prepayment experience, will
affect the percentages of initial Certificate Principal Balances outstanding
over time and the weighted average lives of the classes of Class A Certificates.
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average life of each class of Class A Certificates, and
sets forth the percentages of the initial Certificate Principal Balance of each
class of Class A Certificates that would be outstanding after each of the
distribution dates shown at various percentages of the applicable prepayment
assumption. The weighted average lives of the Class A Certificates are based on
the assumption that the mortgage loans in the related loan group will prepay at
a constant percentage of the applicable prepayment assumption until that loan
group and the related Class A Certificates first become subject to optional
termination by the master servicer or the depositor.
S-71
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING OF THE CLASS A
CERTIFICATES AT THE
FOLLOWING PERCENTAGES OF HEP***
<TABLE>
<CAPTION>
CLASSES A-I-1A AND A-I-1B CLASS A-I-2
--------------------------------- ----------------------------------
HEP 0% 15% 20% 25% 30% 35% 0% 15% 20% 25% 30% 35%
- --- -- --- --- --- --- --- -- --- --- --- --- ---
DISTRIBUTION
DATE
- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 2000... 91 56 45 33 21 9 100 100 100 100 100 100
September 25, 2001... 88 14 0 0 0 0 100 100 83 38 38 14
September 25, 2002... 85 0 0 0 0 0 100 55 0 0 0 0
September 25, 2003... 82 0 0 0 0 0 100 0 0 0 0 0
September 25, 2004... 78 0 0 0 0 0 100 0 0 0 0 0
September 25, 2005... 74 0 0 0 0 0 100 0 0 0 0 0
September 25, 2006... 70 0 0 0 0 0 100 0 0 0 0 0
September 25, 2007... 66 0 0 0 0 0 100 0 0 0 0 0
September 25, 2008... 62 0 0 0 0 0 100 0 0 0 0 0
September 25, 2009... 58 0 0 0 0 0 100 0 0 0 0 0
September 25, 2010... 53 0 0 0 0 0 100 0 0 0 0 0
September 25, 2011... 47 0 0 0 0 0 100 0 0 0 0 0
September 25, 2012... 41 0 0 0 0 0 100 0 0 0 0 0
September 25, 2013... 33 0 0 0 0 0 100 0 0 0 0 0
September 25, 2014... 0 0 0 0 0 0 74 0 0 0 0 0
September 25, 2015... 0 0 0 0 0 0 63 0 0 0 0 0
September 25, 2016... 0 0 0 0 0 0 50 0 0 0 0 0
September 25, 2017... 0 0 0 0 0 0 36 0 0 0 0 0
September 25, 2018... 0 0 0 0 0 0 21 0 0 0 0 0
September 25, 2019... 0 0 0 0 0 0 5 0 0 0 0 0
September 25, 2020... 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2021... 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2022... 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2023... 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2024... 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2025... 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2026... 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2027... 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2028... 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2029... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
in Years**......... 9.9 1.2 1.0 0.8 0.7 0.6 17.1 3.1 2.4 1.9 1.9 1.8
<CAPTION>
CLASS A-I-3 CLASS A-I-4
---------------------------------- ----------------------------------
HEP 0% 15% 20% 25% 30% 35% 0% 15% 20% 25% 30% 35%
- --- -- --- --- --- --- --- -- --- --- --- --- ---
DISTRIBUTION
DATE
- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 2000... 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 2001... 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 2002... 100 100 94 42 42 14 100 100 100 100 100 100
September 25, 2003... 100 97 33 0 0 0 100 100 100 27 37 0
September 25, 2004... 100 49 0 0 0 0 100 100 46 0 0 0
September 25, 2005... 100 13 0 0 0 0 100 100 0 0 0 0
September 25, 2006... 100 0 0 0 0 0 100 41 0 0 0 0
September 25, 2007... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2008... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2009... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2010... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2011... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2012... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2013... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2014... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2015... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2016... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2017... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2018... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2019... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2020... 89 0 0 0 0 0 100 0 0 0 0 0
September 25, 2021... 70 0 0 0 0 0 100 0 0 0 0 0
September 25, 2022... 50 0 0 0 0 0 100 0 0 0 0 0
September 25, 2023... 27 0 0 0 0 0 100 0 0 0 0 0
September 25, 2024... 2 0 0 0 0 0 100 0 0 0 0 0
September 25, 2025... 0 0 0 0 0 0 5 0 0 0 0 0
September 25, 2026... 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2027... 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2028... 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2029... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
in Years**......... 22.9 5.1 3.8 3.0 3.0 2.6 25.6 7.0 5.0 3.9 4.0 3.5
</TABLE>
------------
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a Certificate is determined by (i) multiplying
the net reduction, if any, of the Certificate Principal Balance by the
number of years from the date of issuance of the Certificate to the related
Distribution Date, (ii) adding the results, and (iii) dividing the sum by
the aggregate of the net reductions of the Certificate Principal Balance
Described in (i) above.
*** Optional termination occurs on the Loan Group I Optional Termination Date.
THIS TABLE HAS BEEN PREPARED BASED ON THE STRUCTURING 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.
S-72
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING OF THE CLASS A
CERTIFICATES AT THE
FOLLOWING PERCENTAGES OF HEP***
<TABLE>
<CAPTION>
CLASS A-I-5 CLASS A-I-6
----------------------------------- -----------------------------------
HEP 0% 15% 20% 25% 30% 35% 0% 15% 20% 25% 30% 35%
- --- -- --- --- --- --- --- -- --- --- --- --- ---
DISTRIBUTION
DATE
- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 2000... 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 2001... 100 100 100 100 100 100 100 100 100 100 28 0
September 25, 2002... 100 100 100 100 100 100 100 100 100 100 22 0
September 25, 2003... 100 100 100 100 100 84 100 100 100 100 22 0
September 25, 2004... 100 100 100 52 62 42 100 100 100 100 22 0
September 25, 2005... 100 100 73 15 34 0 100 100 100 100 22 0
September 25, 2006... 100 100 41 0 0 0 100 100 100 88 0 0
September 25, 2007... 100 96 29 0 0 0 100 100 100 0 0 0
September 25, 2008... 100 75 13 0 0 0 100 100 100 0 0 0
September 25, 2009... 100 53 0 0 0 0 100 100 0 0 0 0
September 25, 2010... 100 33 0 0 0 0 100 100 0 0 0 0
September 25, 2011... 100 15 0 0 0 0 100 100 0 0 0 0
September 25, 2012... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2013... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2014... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2015... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2016... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2017... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2018... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2019... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2020... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2021... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2022... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2023... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2024... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2025... 100 0 0 0 0 0 100 0 0 0 0 0
September 25, 2026... 62 0 0 0 0 0 100 0 0 0 0 0
September 25, 2027... 17 0 0 0 0 0 100 0 0 0 0 0
September 25, 2028... 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2029... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
in Years**......... 27.3 10.3 7.1 5.2 5.5 4.8 28.3 13.0 9.9 7.8 2.6 1.3
<CAPTION>
CLASS A-I-7
----------------------------------
HEP 0% 15% 20% 25% 30% 35%
- --- -- --- --- --- --- ---
DISTRIBUTION
DATE
- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage... 100 100 100 100 100 100
September 25, 2000... 100 100 100 100 100 100
September 25, 2001... 100 100 100 100 100 100
September 25, 2002... 100 100 100 100 100 100
September 25, 2003... 99 92 90 87 85 82
September 25, 2004... 99 85 81 76 72 67
September 25, 2005... 98 74 67 60 53 0
September 25, 2006... 96 62 53 44 0 0
September 25, 2007... 90 36 25 0 0 0
September 25, 2008... 85 20 12 0 0 0
September 25, 2009... 79 11 0 0 0 0
September 25, 2010... 72 6 0 0 0 0
September 25, 2011... 66 4 0 0 0 0
September 25, 2012... 59 0 0 0 0 0
September 25, 2013... 52 0 0 0 0 0
September 25, 2014... 15 0 0 0 0 0
September 25, 2015... 14 0 0 0 0 0
September 25, 2016... 12 0 0 0 0 0
September 25, 2017... 10 0 0 0 0 0
September 25, 2018... 9 0 0 0 0 0
September 25, 2019... 7 0 0 0 0 0
September 25, 2020... 6 0 0 0 0 0
September 25, 2021... 5 0 0 0 0 0
September 25, 2022... 4 0 0 0 0 0
September 25, 2023... 3 0 0 0 0 0
September 25, 2024... 2 0 0 0 0 0
September 25, 2025... 1 0 0 0 0 0
September 25, 2026... * 0 0 0 0 0
September 25, 2027... * 0 0 0 0 0
September 25, 2028... 0 0 0 0 0 0
September 25, 2029... 0 0 0 0 0 0
Weighted Average Life
in Years**......... 13.4 7.4 6.8 6.2 5.6 5.0
</TABLE>
- ------------
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a Certificate is determined by (i) multiplying
the net reduction, if any, of the Certificate Principal Balance by the
number of years from the date of issuance of the Certificate to the related
Distribution Date, (ii) adding the results, and (iii) dividing the sum by
the aggregate of the net reductions of the Certificate Principal Balance
Described in (i) above.
*** Optional termination occurs on the Loan Group I Optional Termination Date.
THIS TABLE HAS BEEN PREPARED BASED ON THE STRUCTURING 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.
S-73
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING OF THE CLASS A
CERTIFICATES AT THE
FOLLOWING PERCENTAGES OF CPR***
<TABLE>
<CAPTION>
CLASS A-II-1
----------------------------------
CPR 0% 14% 20% 28% 35% 40%
- --- -- --- --- --- --- ---
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage...... 100 100 100 100 100 100
September 25, 2000...... 96 82 76 68 62 57
September 25, 2001...... 95 69 59 47 38 32
September 25, 2002...... 94 59 46 34 25 20
September 25, 2003...... 94 50 37 24 16 12
September 25, 2004...... 93 42 29 17 10 0
September 25, 2005...... 93 36 23 12 0 0
September 25, 2006...... 92 31 19 0 0 0
September 25, 2007...... 91 26 15 0 0 0
September 25, 2008...... 90 22 12 0 0 0
September 25, 2009...... 89 19 9 0 0 0
September 25, 2010...... 88 16 0 0 0 0
September 25, 2011...... 87 14 0 0 0 0
September 25, 2012...... 85 12 0 0 0 0
September 25, 2013...... 84 10 0 0 0 0
September 25, 2014...... 82 0 0 0 0 0
September 25, 2015...... 80 0 0 0 0 0
September 25, 2016...... 77 0 0 0 0 0
September 25, 2017...... 75 0 0 0 0 0
September 25, 2018...... 71 0 0 0 0 0
September 25, 2019...... 68 0 0 0 0 0
September 25, 2020...... 64 0 0 0 0 0
September 25, 2021...... 59 0 0 0 0 0
September 25, 2022...... 54 0 0 0 0 0
September 25, 2023...... 49 0 0 0 0 0
September 25, 2024...... 42 0 0 0 0 0
September 25, 2025...... 36 0 0 0 0 0
September 25, 2026...... 28 0 0 0 0 0
September 25, 2027...... 19 0 0 0 0 0
September 25, 2028...... 9 0 0 0 0 0
September 25, 2029...... 0 0 0 0 0 0
Weighted Average Life in
Years**............... 21.3 5.4 3.7 2.6 2.0 1.7
<CAPTION>
CLASS A-II-2
------------------------------------
CPR 0% 14% 20% 28% 35% 40%
- --- -- --- --- --- --- ---
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage...... 100 100 100 100 100 100
September 25, 2000...... 96 82 76 68 62 57
September 25, 2001...... 95 69 59 47 38 32
September 25, 2002...... 94 59 46 34 25 20
September 25, 2003...... 94 50 37 24 16 12
September 25, 2004...... 93 42 29 17 10 0
September 25, 2005...... 93 36 23 12 0 0
September 25, 2006...... 92 31 19 0 0 0
September 25, 2007...... 91 26 15 0 0 0
September 25, 2008...... 90 22 12 0 0 0
September 25, 2009...... 89 19 9 0 0 0
September 25, 2010...... 88 16 0 0 0 0
September 25, 2011...... 87 14 0 0 0 0
September 25, 2012...... 85 12 0 0 0 0
September 25, 2013...... 84 10 0 0 0 0
September 25, 2014...... 82 0 0 0 0 0
September 25, 2015...... 80 0 0 0 0 0
September 25, 2016...... 77 0 0 0 0 0
September 25, 2017...... 75 0 0 0 0 0
September 25, 2018...... 71 0 0 0 0 0
September 25, 2019...... 68 0 0 0 0 0
September 25, 2020...... 64 0 0 0 0 0
September 25, 2021...... 60 0 0 0 0 0
September 25, 2022...... 54 0 0 0 0 0
September 25, 2023...... 49 0 0 0 0 0
September 25, 2024...... 42 0 0 0 0 0
September 25, 2025...... 36 0 0 0 0 0
September 25, 2026...... 28 0 0 0 0 0
September 25, 2027...... 19 0 0 0 0 0
September 25, 2028...... 9 0 0 0 0 0
September 25, 2029...... 0 0 0 0 0 0
Weighted Average Life in
Years**............... 21.3 5.4 3.7 2.6 2.0 1.7
</TABLE>
- ------------
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a Certificate is determined by (i) multiplying
the net reduction, if any, of the Certificate Principal Balance by the
number of years from the date of issuance of the Certificate to the related
Distribution Date, (ii) adding the results, and (iii) dividing the sum by
the aggregate of the net reductions of the Certificate Principal Balance
Described in (i) above.
*** Optional termination occurs on the Loan Group II Optional Termination Date.
THIS TABLE HAS BEEN PREPARED BASED ON THE STRUCTURING 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.
S-74
<PAGE>
POOLING AND SERVICING AGREEMENT
GENERAL
The certificates will be issued pursuant to the pooling and servicing
agreement dated as of September 1, 1999, among the depositor, the master
servicer, and Bank One, National Association, as trustee. Reference is made to
the prospectus for important information in addition to that set forth in this
prospectus supplement regarding the terms and conditions of the pooling and
servicing agreement and the Class A Certificates. The trustee, or any of its
affiliates, in its individual or any other capacity, may become the owner or
pledgee of certificates with the same rights as it would have if it were not
trustee. The trustee will appoint Norwest Bank Minnesota, National Association
to serve as custodian in connection with the certificates. The Class A
Certificates will be transferable and exchangeable at the corporate trust office
of the trustee, which will serve as certificate registrar and paying agent. The
depositor will provide a prospective or actual certificateholder, without
charge, on written request, a copy, without exhibits, of the pooling and
servicing agreement. Requests should be addressed to the President, Residential
Asset Securities Corporation, 8400 Normandale Lake Boulevard, Suite 600,
Minneapolis, Minnesota 55437. In addition to the circumstances described in the
prospectus, the depositor may terminate the trustee for cause under some
circumstances. See 'The Pooling and Servicing Agreement -- The Trustee' in the
prospectus.
THE MASTER SERVICER
Residential Funding, an indirect wholly-owned subsidiary of GMAC Mortgage
and an affiliate of the depositor, will act as master servicer for the
certificates under the pooling and servicing agreement. For a general
description of Residential Funding and its activities, see 'Residential Funding
Corporation' in the prospectus and 'The Mortgage Pool -- Residential Funding' in
this prospectus supplement.
The following table sets forth information concerning the delinquency
experience, including pending foreclosures, on one- to four-family residential
mortgage loans that generally complied with Residential Funding's AlterNet
Mortgage Program at the time of purchase by Residential Funding and were being
master serviced by Residential Funding on December 31, 1997, December 31, 1998
and June 30, 1999. Because the AlterNet Program is relatively new, the loss
experience with respect to these mortgage loans is limited and is not sufficient
to provide meaningful disclosure with respect to losses.
As used in this prospectus supplement, a mortgage loan is categorized as
'30 to 59 days' or '30 or more days' delinquent when a payment due on any due
date remains unpaid as of the close of business on the next following monthly
due date. However, since the determination as to whether a mortgage loan falls
into this category is made as of the close of business on the last business day
of each month, a loan with a payment due on August 1 that remained unpaid as of
the close of business on August 31 would still be considered current as of
August 31. If that payment remained unpaid as of the close of business on August
31, the mortgage loan would be considered to be 30 to 59 days delinquent.
Delinquency information presented in this prospectus supplement as of the
cut-off date is determined and prepared as of the close of business on the last
business day immediately prior to the cut-off date.
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ALTERNET MORTGAGE PROGRAM DELINQUENCY EXPERIENCE(1)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1998 AT JUNE 30, 1999
---------------------- ---------------------- ----------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF AMOUNT OF AMOUNT
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
----- -------- ----- -------- ----- --------
(DOLLAR AMOUNTS IN (DOLLAR AMOUNTS IN (DOLLAR AMOUNTS IN
THOUSANDS) THOUSANDS) THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Loan Portfolio.......... 20,758 $2,201,668 57,562 $5,370,940 77,294 $7,108,217
Period of Delinquency
31 to 59 days............ 397 41,416 1,442 135,153 1,626 146,134
60 to 89 days............ 106 9,836 621 60,031 695 61,455
90 days or more(2)....... 70 6,325 990 83,139 1,310 103,715
Foreclosures Pending.......... 720 83,363 1,062 110,238 1,746 166,869
------ ---------- ------ ---------- ------ ----------
Total Delinquent Loans........ 1,293 $ 140,940 4,115 $ 388,561 5,377 $ 478,173
------ ---------- ------ ---------- ------ ----------
------ ---------- ------ ---------- ------ ----------
Percent of Loan Portfolio..... 6.23% 6.40% 7.149% 7.235% 6.957% 6.727%
</TABLE>
The following table sets forth information concerning foreclosed mortgage
loans and loan loss experience of Residential Funding as of December 31, 1997,
December 31, 1998 and June 30, 1999, with respect to the mortgage loans referred
to above. For purposes of the following table, Average Portfolio Balance for the
period indicated is based on end of month balances divided by the number of
months in the period indicated, the Foreclosed Loans Ratio is equal to the
aggregate principal balance of Foreclosed Loans divided by the Total Loan
Portfolio at the end of the indicated period, and the Gross Loss Ratios and Net
Loss Ratios are computed by dividing the Gross Loss or Net Loss respectively
during the period indicated by the Average Portfolio Balance during that period.
ALTERNET MORTGAGE PROGRAM FORECLOSURE EXPERIENCE(1)
<TABLE>
<CAPTION>
AT OR FOR
AT OR FOR AT OR FOR THE SIX MONTH
THE YEAR ENDED THE YEAR ENDED PERIOD ENDING
DECEMBER 31, 1997 DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total Loan Portfolio....................... $2,201,668 $5,370,940 $7,108,217
Average Portfolio Balance.................. $1,893,046 $3,358,709 $6,183,952
Foreclosed Loans(2)........................ $ 17,532 $ 28,417 $ 50,147
Liquidated Foreclosed Loans(3)............. $ 23,567 $ 42,653 $ 31,972
Foreclosed Loans Ratio..................... 0.796% 0.529% 0.705%
Gross Loss(4).............................. $ 5,371 $ 10,388 $ 9,524
Gross Loss Ratio........................... 0.284% 0.309% 0.154%
Covered Loss(5)............................ $ 3,648 $ 8,717 $ 7,915
Net Loss(6)................................ $ 1,723 $ 1,670 $ 1,609
Net Loss Ratio............................. 0.091% 0.050% 0.026%
Excess Recovery(7)......................... $ 121 $ 137 $ 16
</TABLE>
- ------------
(1) The tables relate only to the mortgage loans referred to above.
(2) For purposes of these tables, Foreclosed Loans includes the principal
balance of mortgage loans secured by mortgaged properties the title to which
has been acquired by Residential Funding, by investors or by an insurer
following foreclosure or delivery of a deed in lieu of foreclosure and which
had not been liquidated by the end of the period indicated.
(3) Liquidated Foreclosed Loans is the sum of the principal balances of the
foreclosed loans liquidated during the period indicated.
(4) Gross Loss is the sum of gross losses less net gains (Excess Recoveries) on
all Mortgage Loans liquidated during the period indicated. Gross Loss for
any Mortgage Loan is equal to the difference between (a) the principal
balance plus accrued interest plus all liquidation expenses related to such
Mortgage Loan and
(footnotes continued on next page)
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(footnotes continued from previous page)
(b) all amounts received in connection with the liquidation of the related
Mortgaged Property, excluding amounts received from mortgage pool or special
hazard insurance or other forms of credit enhancement, as described in
footnote (4) below. Net gains from the liquidation of mortgage loans are
identified in footnote (6) below.
(5) Covered Loss, for the period indicated, is equal to the aggregate of all
proceeds received in connection with liquidated Mortgage Loans from mortgage
pool insurance, special hazard insurance (but not including primary mortgage
insurance, hazard insurance or other insurance available for specific
mortgaged properties) or other insurance as well as all proceeds received
from or losses borne by other credit enhancement, including subordinate
certificates.
(6) Net Loss is determined by subtracting Covered Loss from Gross Loss. As is
the case in footnote (3) above, Net Loss indicated here may reflect Excess
Recovery (see footnote (6) below). Net Loss includes losses on mortgage loan
pools which do not have the benefit of credit enhancement.
(7) Excess Recovery is calculated only with respect to defaulted Mortgage Loans
as to which the liquidation of the related Mortgaged Property resulted in
recoveries in excess of the principal balance plus accrued interest thereon
plus all liquidation expenses related to such Mortgage Loan. Excess
recoveries are not applied to reinstate any credit enhancement, and
generally are not allocated to holders of Certificates.
------------------------
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.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The servicing fee for each mortgage loan is payable out of the interest
payments on that mortgage loan. The servicing fee rate in respect of each
mortgage loan will be 0.58% per annum of the outstanding principal balance of
that mortgage loan; provided, however, that the servicing fee rate for each
mortgage loan in Risk Category 1A-1 will be 0.33% per annum for Group I Loans.
As of the cut-off date, the weighted average servicing fee rate is 0.4510% per
annum for Group I and 0.50% per annum for Group II. The servicing fee consists
of (a) servicing compensation payable to the master servicer for its master
servicing activities, and (b) subservicing and other related compensation
payable to the sub-servicer, including compensation paid to the master servicer
as the direct servicer of a mortgage loan for which there is no sub-servicer.
The primary compensation to be paid to the master servicer for its master
servicing activities will be 0.08% per annum of the outstanding principal
balance of each mortgage loan. The sub-servicer is entitled to servicing
compensation in a minimum amount equal to 0.50% per annum, or 0.25% per annum
for mortgage loans in Risk Category 1A-1 for Group I, of the outstanding
principal balance of each mortgage loan serviced by it. The master servicer is
obligated to pay specified ongoing expenses associated with the trust and
incurred by the master servicer in connection with its responsibilities under
the pooling and servicing agreement. See 'Description of the
Certificates -- Spread' and ' -- Withdrawals from the Custodial Account' in the
prospectus for information regarding other possible compensation to the master
servicer and the sub-servicer and for information regarding expenses payable by
the master servicer.
VOTING RIGHTS
Some actions specified in the prospectus that may be taken by holders of
certificates evidencing a specified percentage of all undivided interests in the
trust may be taken by holders of certificates entitled in the aggregate to that
percentage of the voting rights. 97% of all voting rights will be allocated
among all holders of the Class A Certificates in proportion to their then
outstanding Certificate Principal Balances, 1% and 1%, respectively, of all
voting rights will be allocated among the holders of the Class SB-I Certificates
and Class SB-II Certificates, and 1% of all voting rights will be allocated
among holders of the Residual Certificates, in each case in proportion to the
percentage interests evidenced by their respective certificates. So long as
there does not exist a failure by the certificate insurer to make a required
payment under either of the certificate guaranty insurance policies, the
certificate insurer shall have the right to exercise all rights of the holders
of the Class A Certificates under the pooling and servicing agreement without
any consent of those holders, and those holders may exercise
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<PAGE>
such rights only with the prior written consent of the certificate insurer
except as provided in the pooling and servicing agreement.
TERMINATION
The circumstances under which the obligations created by the pooling and
servicing agreement will terminate in respect of the Class A Certificates are
described in 'The Pooling and Servicing Agreement -- Termination; Retirement of
Certificates' in the prospectus. The master servicer or the depositor will have
the option on any distribution date on or after which the aggregate Stated
Principal Balance of the Group I Loans or Group II Loans, as applicable, is less
than 10% of the initial aggregate Stated Principal Balance of the related loan
group,
to purchase all remaining Group I Loans or Group II Loans, as applicable,
and other assets in the trust related thereto except for the certificate
guaranty insurance policies, thereby effecting early retirement of the
Class A-I Certificates or Class A-II Certificates, as applicable, or
to purchase in whole, but not in part, the Class A-I Certificates or
Class A-II Certificates;
provided, however, in each case, that no such early termination of the trust
will be permitted if it would result in a draw under either of the certificate
guaranty insurance policies unless the certificate insurer consents to the
termination. Any purchase of Group I Loans or Group II Loans and other assets of
the trust related thereto shall be made at a price equal to the sum of
100% of the unpaid principal balance of each Group I Loan or Group II
Loan, as applicable, or, if less than the unpaid principal balance, the
fair market value of the related underlying mortgaged properties with
respect to Group I Loans or Group II Loans, as applicable, as to which
title to such underlying mortgaged properties has been acquired, in either
case net of any unreimbursed Advance attributable to principal, as of the
date of repurchase,
accrued interest thereon at the net mortgage rate plus the premium rate
to, but not including, the first day of the month in which the repurchase
price is distributed,
any amounts due to the certificate insurer pursuant to the insurance
agreement, and
any unpaid Prepayment Interest Shortfalls together with interest thereon.
Distributions on the applicable class or classes of Class A Certificates in
respect of any optional termination will be paid, first, to each related class
of Class A Certificates on a pro rata basis and second, except as set forth in
the pooling and servicing agreement, to the related Class SB and Class R
Certificates. The proceeds of that distribution may not be sufficient to
distribute the full amount to the Class A Certificates if the purchase price is
based in part on the fair market value of any underlying mortgaged property in
the related loan group and the fair market value is less than 100% of the unpaid
principal balance of the related mortgage loan; provided, however, with respect
to the Class A Certificates, if that amount is an Insured Amount, that amount
will be paid under the related certificate guaranty insurance policy.
Any purchase of the Class A-I Certificates or Class A-II Certificates as
discussed above, will be made at a price equal to 100% of the Certificate
Principal Balance thereof plus the sum of interest accrued thereon at the
applicable pass-through rate, including any unpaid Prepayment Interest
Shortfalls and any previously accrued and unpaid interest. Upon the purchase of
the Class A-I Certificates or Class A-II Certificates, as applicable, or at any
time thereafter, at the option of the master servicer or the depositor, the
Group I Loans or the Group II Loans, as applicable, may be sold, thereby
effecting a retirement of the Class A-I Certificates or Class A-II Certificates
and the termination of the related loan group from the trust, or the Class A-I
Certificates or Class A-II Certificates so purchased may be held or resold by
the master servicer or the depositor. Upon presentation and surrender of the
Class A-I Certificates or Class A-II Certificates, as applicable, in connection
with a purchase thereof, the holders of the Class A-I Certificates or
Class A-II Certificates, as applicable, will receive an amount equal to the
Certificate Principal Balance of the applicable class plus interest accrued
thereon at the related pass-through rate plus any previously accrued and unpaid
interest.
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<PAGE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Stroock & Stroock & Lavan LLP, counsel to the Depositor, has filed with the
depositor's registration statement an opinion to the effect that, assuming
compliance with all provisions of the pooling and servicing agreement, for
federal income tax purposes, each REMIC comprising the trust will qualify as a
REMIC under the Internal Revenue Code.
The assets of one REMIC will consist of the Group I Loans, any mortgaged
properties relating to an REO mortgage loan in Group I, the assets as from time
to time are deposited in the custodial account or the certificate account with
respect to the Group I Loans and mortgaged properties relating to REO mortgage
loans, any hazard or other insurance policies with respect to the Group I Loans
and any proceeds of such policies, but will not include any proceeds of the
related certificate guaranty insurance policy. The assets of another REMIC will
consist of the Group II Loans, any mortgaged properties relating to an REO
mortgage loan in Loan Group II, the assets as from time to time are deposited in
the custodial account or the certificate account with respect to the Group II
Loans and related mortgaged properties relating to REO mortgage loans in Group
II, any hazard or other insurance policies with respect to the Group II Loans
and any proceeds of such policies, but will not include any proceeds of the
related certificate guaranty insurance policy.
For federal income tax purposes,
(a) the Class R-I Certificates will be the sole class of 'residual
interests' in the first REMIC;
(b) the Class R-II Certificates will be the sole class of 'residual
interests' in the second REMIC;
(c) the separate non-certificated regular interests in each of those
REMICs will be the 'regular interests' in those REMICs, and will constitute
the assets of a third REMIC; and
(d) each class of Class A Certificates, exclusive of any rights to
receive Class A-I-6 Basis Risk Shortfalls and Class A-II Basis Risk
Shortfalls from the Class A-I-6 Basis Risk Reserve Fund and the Class A-II
Basis Risk Reserve Fund, respectively, and Class SB Certificates will
represent ownership of 'regular interests' in the third REMIC and will be
treated as representing ownership of debt instruments of the third REMIC
and the Class R-III Certificates will constitute the sole class of
'residual interests' in that REMIC.
See 'Material Federal Income Tax Consequences -- REMICs' in the prospectus.
For federal income tax reporting purposes, the Class A-I Certificates will
not, and the Class A-II Certificates may, be treated as having been issued with
original issue discount. The prepayment assumption that will be used in
determining the rate of accrual of original issue discount, market discount and
premium, if any, for federal income tax purposes will be based on the assumption
that, subsequent to the date of any determination the mortgage loans will prepay
at a rate equal to 25% HEP with respect to the Group I Loans and 28% CPR with
respect to the Group II Loans. No representation is made that the mortgage loans
will prepay at that rate or at any other rate. See 'Material Federal Income Tax
Consequences -- REMICs -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount' in the Prospectus.
The Internal Revenue Service has issued regulations under sections 1271 to
1275 of the Internal Revenue Code generally addressing the treatment of debt
instruments issued with original issue discount. Section 1272(a)(6) of the
Internal Revenue Code and the original issue discount regulations do not
adequately address certain issues relevant to, or applicable to, prepayable
securities bearing a variable rate of interest such as the Class A-I-1A,
Class A-I-6 or Class A-II Certificates. In the absence of other authority, the
master servicer intends to be guided by certain principles of the original issue
discount regulations applicable to variable rate debt instruments in determining
whether those certificates should be treated as issued with original issue
discount and in adapting the provisions of Section 1272(a)(6) of the Internal
Revenue Code to those certificates for the purpose of preparing reports
furnished to certificateholders and the Internal Revenue Service. Because of the
uncertainties concerning the application of Section 1272(a)(6) of the Internal
Revenue Code to those certificates and because the rules relating to debt
instruments having a variable rate of interest are limited in their application
in ways that could preclude their application to such certificates even in the
absence of Section 1272(a)(6) of the Internal Revenue Code, the Internal Revenue
Service could assert that the Class A-I-1A, Class A-I-6 or Class A-II
Certificates should be governed by some other method not yet set forth in
regulations or should be treated as having been issued with original issue
discount.
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<PAGE>
The master servicer believes that, if the Class A-I-1A, Class A-I-6 or
Class A-II Certificates were determined to have been issued with original issue
discount, a reasonable application of the principles of the original issue
regulations to the Class A-I-1A, Class A-I-6 or Class A-II Certificates
generally would be to report all income with respect to those certificates as
original issue discount for each period, computing such original issue discount
(x) by assuming that the value of the applicable index will remain constant for
purposes of determining the original yield to maturity of each such class of
certificates and projecting future distributions on such certificates, thereby
treating those certificates as fixed-rate instruments to which the original
issue discount computation rules described in the prospectus can be applied, and
(y) by accounting for any positive or negative variation in the actual value of
the applicable index in any period from its assumed value as a current
adjustment to original issue discount with respect to that period. See 'Material
Federal Income Tax Consequences -- REMICs -- Taxation of Owners of REMIC Regular
certificates -- Original Issue Discount' in the prospectus.
In certain circumstances the original issue discount regulations permit the
holder of a debt instrument to recognize original issue discount under a method
that differs from that used by the issuer. Accordingly, the holder of a Class A
Certificate may be able to select a method for recognizing original issue
discount that differs from that used by the master servicer in preparing reports
to the certificateholders and the Internal Revenue Service.
This paragraph applies to the Class A Certificates exclusive of any rights
to receive payments in respect of Class A-I-6 Basis Risk Shortfalls or
Class A-II Basis Risk Shortfalls. The Class A Certificates will be treated as
assets described in Section 7701(a)(19)(C) of the Internal Revenue Code and
'real estate assets' under Section 856(c)(4)(A) of the Internal Revenue Code
generally in the same proportion that the assets of the trust would be so
treated. In addition, interest on the Class A Certificates will be treated as
'interest on obligations secured by mortgages on real property' under Section
856(c)(3)(B) of the Internal Revenue Code generally to the extent that the Class
A Certificates are treated as 'real estate assets' under Section 856(c)(4)(A) of
the Internal Revenue Code. Moreover, the Class A Certificates will be 'qualified
mortgages' within the meaning of Section 860G(a)(3) of the Internal Revenue Code
if transferred to another REMIC on its startup day in exchange for a regular or
residual interest therein. However, prospective investors in the Class A
Certificates that will be generally treated as assets described in Section
860G(a)(3) of the Internal Revenue Code should note that, notwithstanding such
treatment, any repurchase of such a certificate pursuant to the right of the
master servicer or the depositor to repurchase the Class A Certificates may
adversely affect any REMIC that holds a Class A Certificate if such repurchase
is made under circumstances giving rise to a prohibited transaction tax. See
'The Pooling and Servicing Agreement -- Termination' in this Prospectus
Supplement and 'Material Federal Income Tax
Consequences -- REMICs -- Characterization of Investments in REMIC certificates'
in the Prospectus.
The beneficial owners of the Class A-I-6 and Class A-II Certificates and
the related rights to receive payments in respect of Class A-I-6 Basis Risk
Shortfalls and Class A-II Basis Risk Shortfalls, respectively, from the related
reserve fund will be treated for tax purposes as owning two separate assets:
(1) the Class A-I-6 or Class A-II Certificates, as applicable, without the
rights to receive payments in respect of Class A-I-6 Basis Risk Shortfalls and
Class A-II Basis Risk Shortfalls, respectively, which constitute regular
interests in a REMIC, and (2) the related rights to receive payments in respect
of Class A-I-6 Basis Risk Shortfalls and Class A-II Basis Risk Shortfalls,
respectively. Accordingly, a purchaser of a Class A-I-6 or Class A-II
Certificate must allocate its purchase price between the two assets comprising
the certificate. This allocation would be based on the relative fair market
values of the two assets on the date of purchase of the certificates. For
purposes of calculating original issue discount, the trust intends to take the
position that the entire purchase price of a Class A-I-6 and Class A-II
Certificate is allocable to the portion of that certificate that constitutes a
regular interest in a REMIC, and that none of the purchase price is allocable to
the rights to receive payments in respect of Class A-I-6 Basis Risk Shortfalls
or Class A-II Basis Risk Shortfalls, as applicable. No representation is or will
be made as to the relative fair market values.
The rights to receive payments from the Class A-I-6 Basis Risk Reserve Fund
and the Class A-II Basis Risk Reserve Fund in respect of Class A-I-6 Basis Risk
Shortfalls and Class A-II Basis Risk Shortfalls will not constitute
a 'real estate asset' within the meaning of section 856(c)(4)(A) of the
Internal Revenue Code for a real estate investment trust;
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<PAGE>
a 'qualified mortgage' or a 'permitted investment' within the meaning of
section 860G(a)(3) and section 860G(a)(5), respectively, of the Internal
Revenue Code if held by a REMIC; or
an asset described in section 7701(a)(19)(C)(xi) of the Internal Revenue
Code if held by a domestic building and loan association. Further, any
amounts paid in respect of Class A-II Basis Risk Shortfalls will not
constitute income described in section 856(c)(3)(B) of the Internal
Revenue Code for a real estate investment trust.
For further information regarding federal income tax consequences of
investing in the Class A Certificates, see 'Material Federal Income Tax
Consequences -- REMICs' in the Prospectus.
METHOD OF DISTRIBUTION
In accordance with the terms and conditions of an underwriting agreement,
dated September 23, 1999, Prudential Securities Incorporated, Morgan Stanley &
Co. Incorporated and Salomon Smith Barney Inc. have agreed to purchase, and the
depositor has agreed to sell each class of Class A-I Certificates.
It is expected that delivery of the Class A-I Certificates will be made
only in book-entry form through the Same Day Funds Settlement System of DTC.
In accordance with the terms and conditions of another underwriting
agreement, dated September 23, 1999, Residential Funding Securities Corporation
has agreed to offer the Class A-II Certificates on a best efforts basis and the
depositor has agreed to sell to Residential Funding Securities Corporation the
Class A-II Certificates when and if sold by Residential Funding Securities
Corporation. It is expected that delivery of the Class A-II Certificates will be
made only in book-entry form through the Same Day Funds Settlement System of
DTC. The termination date of the offering of the Class A-II Certificates is the
earlier to occur of September 29, 2000 or the date on which all of the
Class A-II Certificates have been sold. Proceeds of the Class A-II Certificates
will not be placed in escrow, trust or similar arrangement. Residential Funding
Securities Corporation is an affiliate of the depositor.
The underwriting agreements provide that the obligations of the
underwriters to pay for and accept delivery of their respective certificates are
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
depositor'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 Class A-I Certificates by the applicable
underwriters may be effected from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined at the time of
sale. Proceeds to the depositor from the sale of the Class A-I underwritten
certificates, before deducting expenses payable by the depositor, will be
approximately 99.75% of the aggregate Certificate Principal Balance of the
Class A-I Certificates plus accrued interest thereon from the cut-off date or,
in the case of the Class A-I-1A and Class A-I-6 Certificates, from the closing
date. The proceeds to the depositor from the sale of any Class A-II Certificates
will be equal to the purchase price paid by the purchaser thereof, net of any
expenses payable by the depositor and any compensation payable to Residential
Funding Securities Corporation and any dealer. The underwriters may effect such
transactions by selling their respective 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 Class A Certificates, the related underwriter
may be deemed to have received compensation from the depositor in the form of
underwriting compensation. The related underwriter and any dealers that
participate with that underwriter in the distribution of its Class A
Certificates may be deemed to be underwriters and any profit on the resale of
the Class A Certificates positioned by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933.
Each underwriting agreement provides that the depositor will indemnify the
related underwriters, and that under limited circumstances the related
underwriters will indemnify the depositor, against certain civil liabilities
under the Securities Act of 1933, or contribute to payments required to be made
in respect thereof.
There is currently no secondary market for the Class A Certificates. The
underwriters of the Class A-I Certificates intend to make a secondary market in
the Class A-I Certificates, but are not obligated to do so. None of the
depositor, Residential Funding Securities Corporation or the other underwriters
intend to create a
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secondary market in the Class A-II Certificates. There can be no assurance that
a secondary market for the Class A Certificates will develop or, if it does
develop, that it will continue.
The primary source of information available to investors concerning the
Class A Certificates will be the monthly statements discussed in the prospectus
under 'Description of the certificates -- Reports to Certificateholders,' which
will include information as to the outstanding principal balance of the Class A
Certificates. There can be no assurance that any additional information
regarding the Class A Certificates will be available through any other source.
In addition, the depositor is not aware of any source through which price
information about the Class A Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Class A
Certificates may adversely affect the liquidity of the Class A Certificates,
even if a secondary market for the Class A Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the certificates will be passed upon for
the depositor and Residential Funding Securities Corporation by Stroock &
Stroock & Lavan LLP, New York, New York and for the other underwriters by Brown
& Wood LLP, New York, New York.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation and
subsidiaries, as of December 31, 1998 and 1997 and for each of the years in the
three-year period ended December 31, 1998 are incorporated by reference herein
and in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, incorporated by reference in this
prospectus supplement, and upon the authority of said firm as experts in
accounting and auditing.
RATINGS
It is a condition of the issuance of the Class A Certificates that they be
rated 'AAA' by Standard & Poor's Ratings Service and 'Aaa' by Moodys Investors
Service, Inc.
Standard & Poor's Ratings Service's ratings on mortgage pass-through
certificates address the likelihood of the receipt by Certificateholders of
payments required under the Pooling and Servicing Agreement. Standard & Poor's
Ratings Service's ratings take into consideration the credit quality of the
mortgage pool, structural and legal aspects associated with the certificates,
and the extent to which the payment stream in the mortgage pool is adequate to
make payments required under the certificates. Standard & Poor's Ratings
Service's rating on the Class A Certificates is based on financial strength of
the Insurer. Standard & Poor's rating on the Class A Certificates does not,
however, constitute a statement regarding frequency of prepayments on the
mortgages. See 'Certain Yield and Prepayment Considerations' in this prospectus
supplement. In addition, the ratings do not address the likelihood of the
receipt of any amounts in respect of Prepayment Interest Shortfalls.
The rating assigned by Moody's Investors Service, Inc. to the Class A
Certificates is based on the financial strength of the Insurer. Ratings by
Moody's Investors Service, Inc. address the structural, legal and issuer-related
aspects associated with the certificates, including the nature and quality of
the underlying mortgage loans. Such ratings do not represent any assessment of
the likelihood of principal prepayments by mortgagors or of the degree by which
such prepayments might differ from those originally anticipated. In addition,
the ratings do not address the likelihood of the receipt of any amounts in
respect of Prepayment Interest Shortfalls.
The ratings on the Class A-I-6 Certificates and the Class A-II Certificates
also do not address the likelihood of the receipt of any amounts in respect of
Class A-I-6 Basis Risk Shortfalls and Class A-II Basis Risk Shortfalls,
respectively.
The depositor has not requested a rating on the Class A Certificates by any
rating agency other than Standard & Poor's Ratings Service and Moody's Investors
Service, Inc. However, there can be no assurance as to whether any other rating
agency will rate the Class A Certificates, or, if it does, what rating would be
assigned by any such other rating agency. A rating on the Class A Certificates
by another rating agency, if assigned at all, may be lower than the ratings
assigned to the Class A Certificates by Standard & Poor's Ratings Service and
Moody's Investors Service, Inc.
S-82
<PAGE>
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Class A Certificates are subsequently lowered for any reason, no person or
entity is obligated to provide any additional support or credit enhancement with
respect to the Class A Certificates.
LEGAL INVESTMENT
The Class A Certificates will not constitute 'mortgage related securities'
for purposes of SMMEA.
One or more classes of the Class A Certificates may be viewed as 'complex
securities' under TB13a, which applies to thrift institutions regulated by the
OTS.
The depositor makes no representations as to the proper characterization of
the Class A Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase any class of the Class A
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of the Class A Certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent an investment in any class of the Class A
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
See 'Legal Investment Matters' in the prospectus.
ERISA CONSIDERATIONS
A fiduciary of any ERISA plan, any insurance company, whether through its
general or separate accounts, or any other person investing ERISA plan assets of
any ERISA plan, as defined under 'ERISA Considerations -- Plan Asset
Regulations' in the prospectus, should carefully review with its legal advisors
whether the purchase or holding of Class A Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Internal Revenue Code. The purchase or holding of the Class A
Certificates by or on behalf of, or with ERISA plan assets of an ERISA plan may
qualify for exemptive relief under the exemption as described under 'ERISA
Considerations -- Prohibited Transaction Exemptions' in the prospectus. However,
the exemption contains a number of conditions which must be met for the
exemption to apply, including the requirement that any ERISA plan must be an
'accredited investor' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
Insurance companies contemplating the investment of general account assets
in the Class A Certificates should consult with their legal advisors with
respect to the applicability of Section 401(c) of ERISA, as described under
'ERISA Considerations -- Insurance Company General Accounts' in the prospectus.
The Department of Labor issued proposed regulations under Section 401(c) on
December 22, 1997, but the required final regulations have not been issued as of
the date hereof.
Any fiduciary or other investor of ERISA plan assets that proposes to
acquire or hold the Class A Certificates on behalf of or with ERISA plan assets
of any Plan should consult with its counsel with respect to (a) whether the
specific and general conditions and the other requirements in the exemption
would be satisfied, or whether any other prohibited transaction exemption would
apply, and (b) the potential applicability of the fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA and
Section 4975 of the Internal Revenue Code to the proposed investment. See 'ERISA
Considerations' in the prospectus.
The sale of any of the Class A Certificates to an ERISA plan is in no
respect a representation by the depositor or the underwriter that such an
investment meets all relevant legal requirements relating to the investments by
ERISA plans generally or any particular ERISA plan, or that such an investment
is appropriate for ERISA plans generally or any particular ERISA plan.
S-83
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Residential
Asset Securities Corporation Mortgage Asset-Backed Pass-Through Certificates,
Series 1999-KS3 (the 'Global Securities') will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities through
DTC, Cedelbank or Euroclear. The Global Securities will be tradeable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedelbank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedure applicable to
U.S. corporate debt obligations and prior Mortgage Pass-Through Certificates
issues.
Secondary cross-market trading between participants of Cedelbank or
Euroclear and Participants holding Certificates will be effected on a
delivery-against-payment basis through the Relevant Depositaries of Cedelbank
and Euroclear (in such capacity) and as Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede, as nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. As a result, Cedelbank and Euroclear will hold
positions on behalf of their participants through their Relevant Depositaries,
which in turn will hold such positions in accounts as Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practice. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedelbank or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Because the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between Participants. Second market trading between Participants
will be settled using the procedures applicable to prior mortgage pass-through
certificates issues in same-day funds.
Trading between Cedelbank and/or Euroclear Participants. Secondary market
trading between Cedelbank Participants or Euroclear Participant will be settled
using the Procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC Seller and Cedelbank or Euroclear Participants. When
Global Securities are to be transferred from the account of a Participant to the
account of a Cedelbank Participant or a Euroclear Participant, the purchaser
will send instructions to Cedelbank or Euroclear through a Cedelbank Participant
or Euroclear Participant at least one business day prior to settlement.
Cedelbank or Euroclear will instruct the respective Depositary, as the case may
be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment date to and
I-1
<PAGE>
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary to the Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedelbank Participant's or
Euroclear Participant's account. The securities credit will appear the next day
(European time) and the cash debt will be back-valued to, and the interest on
the Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Cedelbank or
Euroclear cash debt will be valued instead as of the actual settlement date.
The Cedelbank Participants and the Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the Global Securities are credited to their accounts one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of credit
to them, Cedelbank Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedelbank Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they clear the overdraft when the Global Securities are credited
to their accounts. However, interest on the Global Securities would accrue from
the value date. Therefore, in many cases the investment income on the Global
Securities earned during that one-day period may substantially reduce or offset
the amount of such overdraft charges, although this result will depend on each
Cedelbank. Participants or Euroclear Participant's particular cost of funds.
Because the settlement is taking place during New York business hours,
Participant can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedelbank Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the Participants a cross-market transaction will
settle no differently than a trade between two Participants.
Trading between Cedelbank or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedelbank Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a Participant. The seller will send
instructions to Cedelbank or Euroclear through a Cedelbank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases, Cedelbank or Euroclear will instruct the Relevant Depositary, as
appropriate, to deliver the Global Securities to the Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Cedelbank Participant or Euroclear Participant the following day, and receipt of
the cash proceeds in the Cedelbank Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Cedelbank Participant or
Euroclear Participant have a line of credit with its respective clearing system
and elect to be in debt in anticipation of receipt of the sale proceeds in its
account, the back valuation will extinguish any overdraft incurred over that
one-day period. If settlement is not completed on the intended value date (i.e.,
the trade fails), receipt of the cash proceeds in the Cedelbank Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
Global Securities from Participants for delivery to Cedelbank Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedelbank or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedelbank or Euroclear
accounts) in accordance with the clearing system's customary procedures;
I-2
<PAGE>
(b) borrowing the Global Securities in the U.S. from a Participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedelbank or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the Participant is at least
one day prior to the value date for the sale to the Cedelbank Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedelbank or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are Non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status). If the information shown on Form W-8 changes, a new Form W-8 must
be filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a
tax treaty with the United States can obtain an exemption or reduced tax
rate depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate
Owners or their agents.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person though whom
it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8 and Form 1001 are effective for
three calendar years, and Form 4224 is effective for one calendar year.
The term 'U.S. Person' means: A Person who is (a) a citizen or resident of
the United States, (b) a corporation or partnership, including an entity treated
as a corporation or partnership for U.S. federal income tax purposes, created in
the United States or organized under the laws of the United States or any state
thereof or the District of Columbia (except, in the case of a partnership, as
otherwise provided by Treasury regulations), (c) an estate the income of which
is includable in gross income for United States federal income tax purposes
regardless of its source, or (d) a trust whose administration is subject to the
primary supervision of a United States court and which has one or more of United
States persons who have the authority to control all substantial decisions of
the trust.
This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to non-U.S. Persons that hold Global
Securities, including the application of Treasury regulations relating to tax
documentation requirements that are generally effective with respect to payments
made after December 31, 2000. Investors are advised to consult their own tax
advisors for specific tax advice concern their holding and disposing of the
Global Securities.
I-3
<PAGE>
PROSPECTUS
MORTGAGE ASSET-BACKED AND MANUFACTURED HOUSING CONTRACT
PASS-THROUGH
CERTIFICATES
RESIDENTIAL ASSET SECURITIES CORPORATION
Depositor
The depositor may periodically form separate trusts to issue certificates in
series, secured by assets of that trust.
OFFERED CERTIFICATES The certificates in a series will represent
interests in a trust and will be paid only from the
assets of that trust. Each series may include multiple
classes of certificates with differing payment terms and
priorities. Credit enhancement will be provided for all
offered certificates.
MORTGAGE COLLATERAL Each trust will consist primarily of:
mortgage loans or manufactured housing conditional sales contracts or
installment loan agreements secured by first or junior liens on one- to
four-family residential properties;
mortgage securities and whole or partial participations in mortgage loans.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE CERTIFICATES OR
DETERMINED THAT
THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A
CRIMINAL OFFENSE.
September 23 , 1999
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
AND
THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the certificates in two separate
documents that provide progressively more detail:
this prospectus, which provides general information, some of which may not
apply to your series of certificates; and
the accompanying prospectus supplement, which describes the specific terms
of your series of certificates.
IF THE DESCRIPTION OF YOUR CERTIFICATES IN THE ACCOMPANYING
PROSPECTUS
SUPPLEMENT DIFFERS FROM THE RELATED DESCRIPTION IN THIS PROSPECTUS, YOU SHOULD
RELY ON THE INFORMATION IN THAT PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. See 'Additional Information', 'Reports to Certificateholders' and
'Incorporation of Certain Information by Reference' in this Prospectus. You can
request information incorporated by reference from Residential Asset Securities
Corporation by calling us at (612) 832-7000 or writing to us at 8400 Normandale
Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437. We have not authorized
anyone to provide you with different information. We are not offering the
certificates in any state where the offer is not permitted.
Some capitalized terms used in this prospectus are defined in the Glossary
beginning on page 101.
- ------------------------
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction........................... 4
The Trusts............................. 4
General........................... 4
The Mortgage Loans................ 6
Loan-to-Value Ratio............... 8
Underwriting Policies............. 10
The Contracts..................... 13
The Agency Securities............. 14
Mortgage Collateral Sellers....... 15
Qualifications of Sellers......... 15
Representations with Respect to
Mortgage Collateral............. 16
Repurchases of Mortgage
Collateral...................... 17
Limited Right of Substitution..... 18
Description of the Certificates........ 20
General........................... 20
Form of Certificates.............. 20
Assignment of Mortgage Loans...... 22
Assignment of the Contracts....... 23
Review of Mortgage Loan or
Contract Documents.............. 24
Assignment of Mortgage
Securities...................... 24
Spread............................ 24
Payments on Mortgage Collateral... 25
Withdrawals from the Custodial
Account......................... 27
Distributions..................... 28
Example of Distributions.......... 29
Advances.......................... 30
Prepayment Interest Shortfalls.... 31
Funding Account................... 31
Reports to Certificateholders..... 32
<PAGE>
Servicing and Administration of
Mortgage Collateral............. 33
Realization Upon Defaulted
Mortgage Loans or Contracts..... 35
Subordination.......................... 37
General........................... 37
Overcollateralization............. 38
Description of Credit Enhancement...... 38
General........................... 38
Letters of Credit................. 39
Mortgage Pool Insurance
Policies........................ 40
Special Hazard Insurance
Policies........................ 41
Bankruptcy Bonds.................. 42
Reserve Funds..................... 42
Certificate Insurance Policies;
Surety Bonds.................... 43
Maintenance of Credit
Enhancement..................... 43
Reduction or Substitution of
Credit Enhancement.............. 44
Other Financial Obligations Related to
the Certificates..................... 44
Swaps and Yield Supplement
Agreements...................... 44
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Purchase Obligations.............. 45
Insurance Policies on Mortgage Loans or
Contracts............................ 46
Primary Insurance Policies........ 46
Standard Hazard Insurance on
Mortgaged Properties............ 47
Standard Hazard Insurance on
Manufactured Homes.............. 48
FHA Mortgage Insurance............ 49
VA Mortgage Guaranty.............. 49
The Depositor.......................... 50
Residential Funding Corporation........ 50
<PAGE>
The Pooling and Servicing Agreement.... 50
Events of Default................. 52
Rights Upon Event of Default...... 53
Amendment......................... 53
Termination; Retirement of
Certificates.................... 54
The Trustee....................... 55
Yield Considerations................... 55
Maturity and Prepayment
Considerations....................... 59
Certain Legal Aspects of Mortgage Loans
and Contracts........................ 62
The Mortgage Loans................ 62
The Contracts..................... 72
Environmental Legislation......... 74
Soldiers' and Sailors' Civil
Relief Act of 1940.............. 75
Default Interest and Limitations
on Prepayments.................. 76
Forfeitures in Drug and RICO
Proceedings..................... 76
Negative Amortization Loans....... 76
Material Federal Income Tax
Consequences......................... 76
General........................... 76
REMICs............................ 77
State and Other Tax Consequences....... 92
ERISA Considerations................... 92
ERISA Plan Asset Regulations...... 93
Prohibited Transaction
Exemption....................... 93
Insurance Company General
Accounts........................ 96
Representations from Investing
Plans........................... 96
Tax-Exempt Investors.............. 97
Consultation with Counsel......... 97
Legal Investment Matters............... 97
Use of Proceeds........................ 98
Methods of Distribution................ 98
Legal Matters.......................... 99
Financial Information.................. 99
Additional Information................. 99
Reports to Certificateholders.......... 100
Incorporation of Certain Information by
<PAGE>
Reference............................ 100
Glossary............................... 101
</TABLE>
3
<PAGE>
INTRODUCTION
The pass-through certificates offered may be sold from time to time in
series. Each series of certificates will represent in the aggregate the entire
beneficial ownership interest, excluding any interest retained by the depositor
or any other entity specified in the related prospectus supplement, in a trust
consisting primarily of a segregated pool of mortgage loans or manufactured
housing conditional sales contracts and installment loan agreements, acquired by
the depositor from one or more affiliated or unaffiliated institutions. Each
series of certificates will be issued under a pooling and servicing agreement
among the depositor, the trustee and master servicer or servicer as specified in
the related prospectus supplement, or a trust agreement between the depositor
and trustee as specified in the related prospectus supplement.
THE TRUSTS
GENERAL
The mortgage loans, contracts and other assets described in this prospectus
under 'The Trusts -- The Mortgage Loans' and ' -- The Contracts' and in the
related prospectus supplement will be held in a trust for the benefit of the
holders of the related series of certificates as described in this section and
in the related prospectus supplement. These assets will be evidenced by
promissory notes, or mortgage notes, that are secured by mortgages, deeds of
trust, manufactured housing conditional sales contracts and installment loan
agreements, or other similar security instruments creating a first or junior
lien on one- to four-family residential properties, or interests in the mortgage
loans, which may include mortgage pass-through certificates, known as mortgage
securities, evidencing interests in mortgage loans or contracts. Unless the
context indicates otherwise, as used in this prospectus, contracts will consist
of manufactured housing conditional sales contracts and installment loan
agreements, and mortgage collateral will include mortgage loans and contracts.
As specified in the related prospectus supplement, the mortgaged properties
will consist primarily of owner-occupied attached or detached one-family
dwelling units, two- to four-family dwelling units, condominiums, townhouses,
row houses, individual units in planned-unit developments, modular
pre-cut/panelized housing, Cooperatives and manufactured homes, and the fee,
leasehold or other interests in the underlying real property. The mortgaged
properties may be located in any of the fifty states, the District of Columbia
or the Commonwealth of Puerto Rico and may include vacation, second and
non-owner-occupied homes. In addition, if specified in the related prospectus
supplement, a mortgage pool may contain Mexico Mortgage Loans, which are secured
by interests in trusts that own residential properties located in Mexico. The
Mexico Mortgage Loans will not exceed ten percent (10%) by aggregate principal
balance of the mortgage loans in any mortgage pool as of the cut-off date
specified in the related prospectus supplement.
The prospectus supplement with respect to a series will describe the
specific manner in which certificates of that series issued under a particular
pooling and servicing agreement or trust agreement will evidence specified
beneficial ownership interests in a separate trust created under that pooling
and servicing agreement or trust agreement. A trust will consist of, to the
extent provided in the related pooling and servicing agreement or trust
agreement:
mortgage loans or contracts and the related mortgage documents or
interests in them, including any mortgage securities, underlying a
particular series of certificates as from time to time are subject to the
pooling and servicing agreement or trust agreement, exclusive of, if
specified in the related prospectus supplement, any interest retained by
the depositor or any of its affiliates with respect to each Mortgage Loan;
assets including all payments and collections derived from the mortgage
loans, contracts or mortgage securities due after the related cut-off
date, as from time to time are identified as deposited in the Custodial
Account and in the related Certificate Account;
property acquired by foreclosure of the mortgage loans or contracts or
deed in lieu of foreclosure;
hazard insurance policies and primary insurance policies, if any, and
portions of the related proceeds; and
any combination, as and to the extent specified in the related prospectus
supplement, of a letter of credit, purchase obligation, mortgage pool
insurance policy, special hazard insurance policy, bankruptcy bond,
certificate insurance policy, surety bond or other type of credit
enhancement as described under 'Description of Credit Enhancement.'
4
<PAGE>
The related prospectus supplement will describe the material terms and
conditions of certificates of interest or participations in mortgage loans to
the extent they are included in the related trust.
Each mortgage loan or contract will be selected by the depositor for
inclusion in a mortgage pool from among those purchased by the depositor, either
directly or through its affiliates, including Residential Funding Corporation,
from sellers who are affiliates of the depositor including HomeComings Financial
Network, Inc. and GMAC Mortgage Corporation, or from savings banks, savings and
loan associations, commercial banks, credit unions, insurance companies or
similar institutions that are supervised and/or examined by a federal or state
authority, lenders approved by the United States Department of Housing and Urban
Development, known as HUD, mortgage bankers, investment banking firms, the
Federal Deposit Insurance Corporation, known as the FDIC, and other mortgage
loan originators or sellers not affiliated with the depositor, all as described
in the related prospectus supplement. The mortgage collateral sellers may
include state or local government housing finance agencies. If a mortgage pool
is composed of mortgage loans or contracts acquired by the depositor directly
from sellers other than Residential Funding Corporation, the related prospectus
supplement will specify the extent of mortgage loans or contracts so acquired.
The characteristics of the mortgage loans or contracts are as described in the
related prospectus supplement. No more than five percent (5%) of the mortgage
loans or contracts by aggregate principal balance as of the cut-off date will
have characteristics that deviate from those characteristics described in the
related prospectus supplement. Other mortgage loans or contracts available for
purchase by the depositor may have characteristics which would make them
eligible for inclusion in a mortgage pool but were not selected for inclusion in
a mortgage pool at that time.
The mortgage loans or contracts may also be delivered to the depositor in a
Designated Seller Transaction. Those certificates may be sold in whole or in
part to any seller identified in the related prospectus supplement in exchange
for the related mortgage loans, or may be offered under any of the other methods
described in this prospectus under 'Methods of Distributions.' The related
prospectus supplement for a Designated Seller Transaction will include
information, provided by the related seller, about the seller, the mortgage
loans and the underwriting standards applicable to the mortgage loans. None of
the depositor, Residential Funding Corporation, GMAC Mortgage Group, Inc. or any
of their affiliates will make any representation or warranty with respect to the
mortgage loans sold in a Designated Seller Transaction, or any representation as
to the accuracy or completeness of the information provided by the seller.
If specified in the related prospectus supplement, the trust underlying a
series of certificates may include mortgage securities, including Agency
Securities. The mortgage securities may have been issued previously by the
depositor or an affiliate thereof, a financial institution or other entity
engaged in the business of mortgage lending or a limited purpose corporation
organized for the purpose of, among other things, acquiring and depositing
mortgage loans into trusts, and selling beneficial interests in such trusts. As
specified in the related prospectus supplement, the mortgage securities will
primarily be similar to certificates offered hereunder. The Agency Securities
may have been guaranteed and/or issued by the Governmental National Mortgage
Association, known as Ginnie Mae, or issued by the Federal Home Loan Mortgage
Corporation, known as Freddie Mac, or the Federal National Mortgage Association,
known as Fannie Mae. As to any series of certificates, the related prospectus
supplement will include a description of the mortgage securities and any related
credit enhancement, and the mortgage loans underlying those mortgage securities
will be described together with any other mortgage loans included in the
mortgage pool relating to that series. As to any series of certificates, as used
in this prospectus a mortgage pool includes the related mortgage loans
underlying any mortgage securities.
Any mortgage securities underlying any certificate will (i) either (a) have
been previously registered under the Securities Act, or (b) will be eligible for
sale under Rule 144(k) under the Securities Act of 1933, as amended, and (ii)
will be acquired in secondary market transactions from persons other than the
issuer or its affiliates. Alternatively, if the mortgage securities were
acquired from their issuer or its affiliates, or were issued by the depositor or
any of its affiliates, then the mortgage securities will be registered under the
Securities Act of 1933, as amended, at the same time as the certificates.
For any series of certificates backed by mortgage securities, the entity
that administers the mortgage securities may be referred to as the manager, if
so specified in the related prospectus supplement. References in this prospectus
to Advances to be made and other actions to be taken by the master servicer in
connection with the mortgage loans may include Advances made and other actions
taken under the terms of the mortgage
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securities. Each certificate will evidence an interest in only the related
mortgage pool and corresponding trust, and not in any other mortgage pool or
trust.
The related prospectus supplement will provide material information
concerning the types and characteristics of the mortgage loans and contracts
included in the related trust as of the cut-off date. A Current Report on Form
8-K will be available upon request to holders of the related series of
certificates and will be filed, together with the related pooling and servicing
agreement, with the Securities and Exchange Commission within fifteen days after
the initial issuance of the certificates. If mortgage loans or contracts are
added to or deleted from the trust after the date of the related prospectus
supplement, that addition or deletion will be noted in the Form 8-K. Additions
or deletions of this type, if any, will be made prior to the closing date.
THE MORTGAGE LOANS
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 depositor under the AlterNet Mortgage Program. The depositor 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, known as FHA, a division of HUD, mortgage loans
partially guaranteed by the Veterans Administration, known as VA, and mortgage
loans that are not insured or guaranteed by the FHA or VA. As described in the
related prospectus supplement, the mortgage loans may be:
GPM Loans;
Buy-Down Mortgage Loans;
adjustable rate mortgage loans, or ARM loans;
fixed rate mortgage loans;
simple interest mortgage loans;
High Cost Loans;
Cooperative Loans;
Convertible Mortgage Loans;
mortgage loans that have been modified;
mortgage loans that provide for payment every other week during the term
of the mortgage loan;
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; and
Balloon Loans.
The mortgage loans may be secured by mortgages or deeds of trust, deeds to
secure debt or other similar security instruments creating a first or junior
lien on or other interests in the related mortgaged properties. Cooperative
Loans are evidenced by promissory notes secured by a first or junior lien on the
shares issued by Cooperatives and on the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific units within a
Cooperative. As used in this prospectus, unless the context indicates otherwise,
mortgage loans includes Cooperative Loans; mortgaged properties includes shares
in the related Cooperative and the related proprietary leases or occupancy
agreements securing Cooperative Notes; mortgage notes includes Cooperative
Notes; and mortgages includes security agreements with respect to Cooperative
Notes.
Each Mexico Mortgage Loan will be secured by the beneficial ownership
interest in a separate trust, the sole asset of which is a residential property
located in Mexico. 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. Record
ownership and title to the Mexican property will be held in the name of a
Mexican financial institution acting as Mexican trustee for a Mexican trust
under the terms of a trust
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agreement. The 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 grants to the lender the
right to direct the Mexican trustee to transfer the mortgagor's beneficial
interest in the Mexican trust or to terminate the Mexican trust and sell the
Mexican property. The mortgagor's beneficial interest in the Mexican trust
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 loan
agreement, the mortgagor grants to the lender a security interest in the
mortgagor's beneficial interest in the Mexican trust. If the mortgagor is
domiciled in the United States, the mortgagor's beneficial interest in the
Mexican trust should be considered under applicable state law to be an interest
in personal property, not real property, and, accordingly, the lender will file
financing statements in the appropriate state to perfect the lender's security
interest. Because the lender's security interest in the mortgagor's beneficial
interest in the Mexican trust is not, for purposes of foreclosing on such
collateral, an interest in real property, the depositor either will rely on its
remedies that are available in the United States under the applicable Uniform
Commercial Code, or UCC, and under the trust agreement and foreclose on the
collateral securing a Mexico Mortgage Loan under the UCC, or direct the Mexican
trustee to conduct an auction to sell the mortgagor's beneficial interest or the
Mexican property pursuant to the trust agreement. If a mortgagor is not a
resident of the United States, the lender's security interest in the mortgagor's
beneficial interest in the Mexican trust may be unperfected under the UCC. If
the lender conducts its principal lending activities in the United States, the
loan agreement will provide that rights and obligations of such a mortgagor and
the lender under the loan agreement will be governed under applicable United
States state law. 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
created under a pooling and servicing agreement, 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 in the Mexican
trust, the lender's security interest in the mortgagor's beneficial interest in
the Mexican trust, 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.
The modifications made on mortgage loans 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 typically shall be deemed to be references to the date
of modification.
The mortgaged properties may consist of detached individual dwellings,
Cooperative dwellings, individual condominiums, townhouses, duplexes, row
houses, modular pre-cut/panelized housing, individual units or two-to four-unit
dwellings in planned unit developments, two- to four-family dwellings and other
attached dwelling units. Each mortgaged property, other than a Cooperative
dwelling or Mexican property, will be located on land owned in fee simple by the
mortgagor or, if specified in the related prospectus supplement, land leased by
the mortgagor. The ownership of the 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 an apartment building owned by a Cooperative. The proprietary lease
or occupancy agreement securing a Cooperative Loan is subordinate, in most
cases, to any blanket mortgage on the related cooperative apartment building or
on the underlying land. Additionally, in the case of a Cooperative Loan, the
proprietary lease or occupancy agreement may be terminated and the cooperative
shares may be cancelled by the Cooperative if the tenant-stockholder fails to
pay maintenance or other obligations or charges owed by the tenant-stockholder.
See 'Certain Legal Aspects of Mortgage Loans and Contracts.'
The mortgaged properties may be owner occupied or non-owner occupied and
may include vacation homes, second homes and investment properties. The
percentage of mortgage loans that are owner-occupied will be disclosed in the
related prospectus supplement. The basis for any statement that a given
percentage of the mortgage loans are secured by mortgage properties that are
owner-occupied will be one or more of the following:
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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,
a representation by the originator of the mortgage loan, which may be
based solely on the above clause, or
the fact that the mailing address for the mortgagor is the same as the
address of the mortgaged property; and
any representation and warranty in the related pooling and servicing
agreement regarding owner-occupancy may be based solely on that
information.
Mortgage loans secured by investment properties, including two- to four-unit
dwellings, may also be secured by an assignment of leases and rents and
operating or other cash flow guarantees relating to the mortgage loans.
LOAN-TO-VALUE RATIO
In the case of mortgage loans made to finance the purchase of the mortgaged
property, the Loan-to-Value Ratio, or LTV ratio, is the ratio, expressed as a
percentage, of the principal amount of the mortgage loan at origination to the
lesser of (1) the appraised value determined in an appraisal obtained at
origination of the mortgage loan and (2) the sales price for the related
mortgaged property.
In the case of some mortgage loans made to refinance non-purchase mortgage
loans or modified or converted mortgage loans, the LTV ratio at origination is
defined in most cases as the ratio, expressed as a percentage, of the principal
amount of the mortgage loan to either the appraised value determined in an
appraisal obtained at the time of refinancing, modification or conversion or, if
no appraisal has 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 sale price of the related
mortgaged property. In the case of some mortgage loans seasoned for over twelve
months, the LTV ratio may be determined at the time of purchase from the related
seller based on the ratio of the current loan amount to the current value of the
mortgaged property. Appraised values may be determined by either:
a statistical analysis
a broker's price opinion, or
an automated appraisal, drive by appraisal or other certification of
value.
Some of the mortgage loans which are subject to negative amortization will
have LTV ratios that will increase after origination as a result of their
negative amortization. In the case of some seasoned mortgage loans, the values
used in calculating LTV ratios may no longer be accurate valuations of the
mortgaged properties. Some 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 LTV ratio, or CLTV
ratio, usually will be the ratio, expressed as a percentage, of the sum of the
cut-off date principal balance of the junior mortgage loan and the principal
balance of any related mortgage loans that constitute liens senior or
subordinate to the lien of the junior mortgage loan on the related mortgaged
property, at the time of the origination of the junior mortgage loan, or, in
some cases, at the time of an appraisal subsequent to origination, to the lesser
of (1) the appraised value of the related mortgaged property determined in the
appraisal used in the origination of the junior mortgage loan, or the value
determined in an appraisal obtained subsequent to origination, and (2) in some
cases, the sales price of the mortgaged property. With respect to each junior
mortgage loan, the junior mortgage ratio in most cases will be the ratio,
expressed as a percentage, of the cut-off date principal balance of the junior
mortgage loan to the sum of the cut-off date principal balance of the junior
mortgage loan and the principal balance of any mortgage loans senior or
subordinate to the junior mortgage loan at the time of the origination of the
junior mortgage loan.
Some of 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
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incurred by the mortgagor, are used to refinance an existing mortgage loan or
loans, which may include a junior lien, primarily in order to change the
interest rate or other terms of the existing mortgage loan.
The mortgage loans may be loans that have been consolidated and/or have had
various terms changed, loans that have been converted from adjustable rate
mortgage loans to fixed rate mortgage loans, or construction loans which have
been converted to permanent mortgage loans. In addition, a mortgaged property
may be subject to secondary financing at the time of origination of the mortgage
loan or at any time thereafter.
As described in the related prospectus supplement, ARM loans will provide
for a fixed initial mortgage rate until the first date on which the mortgage
rate is to be adjusted. After this date, the mortgage rate may adjust
periodically, subject to any applicable limitations, based on changes in the
relevant index, to a rate equal to the index plus 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 the ARM loan.
ARM loans have features that provide different investment considerations
than fixed-rate mortgage loans. Adjustable mortgage rates can cause payment
increases that may exceed some mortgagors' capacity to cover such payments. An
ARM loan may provide that its mortgage rate may not be adjusted to a rate above
the applicable maximum mortgage rate or below the applicable minimum mortgage
rate, if any, for the ARM loan. In addition, some of the ARM loans may provide
for limitations on the maximum amount by which their mortgage rates may adjust
for any single adjustment period. 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. 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 the mortgage loan. If the scheduled payment is not sufficient to pay
the accrued monthly interest on a negative amortization ARM loan, the amount of
accrued monthly interest that exceeds the scheduled payment on the mortgage
loans is added to the principal balance of the ARM loan and is to be repaid from
future scheduled payments.
Negatively amortizing 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 allow for negative
amortization and the percentage of any junior mortgage loans that are
subordinate to any related senior mortgage loan that allows for negative
amortization.
Upon any conversion of a Convertible Mortgage Loan, either the depositor
will be obligated to repurchase or Residential Funding Corporation, the
applicable subservicer or a third party will be obligated to purchase the
converted mortgage loan. Alternatively, if specified in the related prospectus
supplement, the depositor, Residential Funding Corporation or another party may
agree to act as remarketing agent with respect to the converted mortgage loans
and, in such capacity, to use its best efforts to arrange for the sale of
converted mortgage loans under specified conditions. Upon the failure of any
party so obligated to purchase any converted mortgage loan, the inability of any
remarketing agent to arrange for the sale of the converted mortgage loan and the
unwillingness of the remarketing agent to exercise any election to purchase the
converted mortgage loan for its own account, the related mortgage pool will
thereafter include both fixed rate and adjustable rate mortgage loans.
In the case of Buy-Down Mortgage Loans, the monthly payments made by the
mortgagor during the Buy-Down Period will be less than the scheduled monthly
payments on the mortgage loan, the resulting difference to be made up from:
Buy-Down Funds contributed by the seller of the mortgaged property or
another source and placed in the Buy-Down Account;
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if the Buy-Down Funds are contributed on a present value basis, investment
earnings on the Buy-Down Funds; or
additional buydown funds to be contributed over time by the mortgagor's
employer or another source.
Some 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. 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.
The depositor will cause the mortgage loans constituting each mortgage
pool, or mortgage securities evidencing interests therein, to be assigned to the
trustee named in the related prospectus supplement, for the benefit of the
holders of all of the certificates of a series. The assignment of the mortgage
loans to the trustee will be without recourse. See 'Description of the
Certificates -- Assignment of Mortgage Loans.'
UNDERWRITING POLICIES
The depositor 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. 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 depositor through the AlterNet Mortgage Program
from affiliated or unaffiliated sellers. The depositor expects that 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 most aspects of the underwriting criteria, to the
extent known by the depositor, that were applied by the originators of such
mortgage loans. In most cases, the depositor will have less detailed information
concerning the origination of seasoned mortgage loans than it will have
concerning newly-originated mortgage loans.
General Standards
In most cases, under a traditional 'full documentation' program, 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, the mortgagor
will have furnished information, which may be supplied solely in the
application, with respect to its assets, liabilities, income, credit history and
employment history, and furnished an authorization to apply for a credit report
that 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 will have been considered for
underwriting purposes.
As described in the related prospectus supplement, some mortgage loans may
have been originated under 'limited documentation' or 'no documentation'
programs that require less documentation and verification than do traditional
'full documentation' programs. Under a limited documentation or no documentation
program, minimal investigation into the mortgagor's credit history and income
profile is undertaken by the originator and the underwriting may be based
primarily or entirely on an appraisal of the mortgaged property and the LTV
ratio at origination.
The adequacy of a mortgaged property as security for repayment of the
related mortgage loan will typically have been determined by an appraisal.
Appraisers may be either staff appraisers employed by the originator or
independent appraisers selected in accordance with pre-established guidelines
established by or acceptable to 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 will have considered a market data analysis of recent sales of
comparable properties and, when deemed applicable, an analysis based on income
generated from the property or replacement cost analysis based on the current
cost of constructing or purchasing
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a similar property. In certain instances, the LTV ratio or combined LTV ratio
may have been based on the appraised value as indicated on a review appraisal
conducted by the mortgage collateral seller or originator.
The underwriting standards applied by an originator typically 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 as
described below, currently supports and is anticipated to support in the future
the outstanding loan balance. In fact, some 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 periodically in certain regions, or increases in the principal
balances of some mortgage loans, such as GPM Loans and negative amortization ARM
loans, could cause the principal balance of some or all of these mortgage loans
to exceed the value of the mortgaged properties.
Based on the data provided in the application and certain verifications, if
required, 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.
Examples of other expenses include property taxes, utility costs, standard
hazard and primary mortgage insurance, maintenance fees and other levies
assessed by a Cooperative, if applicable, 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 will, in most cases, 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 Corporation, if any, will vary
depending on several factors. Residential Funding Corporation, on behalf of the
depositor, typically 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, or mortgage loans that have been outstanding
for more than 12 months, Residential Funding Corporation 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 Corporation may conduct additional procedures to assess the current
value of the mortgaged properties. Those procedures may consist of drive-by
appraisals or real estate broker's price opinions. The depositor may also
consider a specific area's housing value trends. These alternative valuation
methods are not usually as reliable as the type of mortgagor financial
information or appraisals that are typically obtained at origination. In its
underwriting analysis, Residential Funding Corporation may also consider the
applicable Credit Score of the related mortgagor used in connection with the
origination of the mortgage loan, as determined based on a credit scoring model
acceptable to the depositor.
The depositor anticipates that mortgage loans, other than the Mexico
Mortgage Loans and some Puerto Rico mortgage loans, included in mortgage pools
for certain series of certificates will have been originated based on
underwriting standards that are less restrictive 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
initiated bankruptcy proceedings within a few years of the time of origination
of the related mortgage loan. In addition, some mortgage loans with LTV ratios
over 80% will not be required to have the benefit of primary mortgage insurance.
Likewise, mortgage loans included in a trust 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 depositor may place greater weight on payment history or market and
other economic trends and less weight on underwriting factors usually applied to
newly originated mortgage loans.
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With respect to the depositor's underwriting standards, as well as any
other underwriting standards that may be applicable to any mortgage loans, such
underwriting standards typically include a set of specific criteria by which the
underwriting evaluation is made. However, the application of the underwriting
standards does not imply that each specific criterion was satisfied
individually. Rather, a mortgage loan will be considered to be originated in
accordance with a given set of underwriting standards if, based on an overall
qualitative evaluation, the loan is in substantial compliance with the
underwriting standards. For example, a mortgage loan may be considered to comply
with a set of underwriting standards, even if one or more specific criteria
included in the underwriting standards were not satisfied, if other factors
compensated for the criteria that were not satisfied or if the mortgage loan is
considered to be in substantial compliance with the underwriting standards. In
the case of a Designated Seller Transaction, the applicable underwriting
standards will be those of the seller or of the originator of the mortgage
loans, and will be described in the related prospectus supplement.
Credit Scores are obtained by some mortgage lenders in connection with
mortgage loan applications to help assess a borrower's credit-worthiness. In
addition, Credit Scores may be obtained by Residential Funding Corporation after
the origination of a mortgage loan if the seller does not provide to Residential
Funding Corporation a Credit Score. Credit Scores are obtained from credit
reports provided by various credit reporting organizations, each of which may
employ differing computer models and methodologies.
The Credit Score is designed to assess a borrower's credit history at a
single point in time, using objective information currently on file for the
borrower at a particular credit reporting organization. Credit Scores range from
approximately 350 to approximately 840, with higher scores indicating an
individual with a more favorable credit history compared to an individual with a
lower score. However, a Credit Score purports only to be a measurement of the
relative degree of risk a borrower represents to a lender, i.e., a borrower with
a higher score is statistically expected to be less likely to default in payment
than a borrower with a lower score. In addition, it should be noted that Credit
Scores were developed to indicate a level of default probability over a two-year
period, which does not correspond to the life of a mortgage loan. Furthermore,
Credit Scores were not developed specifically for use in connection with
mortgage loans, but for consumer loans in general, and assess only the
borrower's past credit history. Therefore, in most cases, a Credit Score does
not take into consideration the differences between mortgage loans and consumer
loans, or the specific characteristics of the related mortgage loan, including
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the LTV ratio, the collateral for the mortgage loan, or the debt to income
ratio. There can be no assurance that the Credit Scores of the mortgagors will
be an accurate predictor of the likelihood of repayment of the related mortgage
loans or that any mortgagor's Credit Score would not be lower if obtained as of
the date of the related prospectus supplement.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet the borrower's monthly obligations
on the proposed mortgage loan and other expenses related to the home, including
property taxes and hazard insurance, and other financial obligations and monthly
living expenses. The depositor will underwrite ARM loans, Buy-Down Mortgage
Loans, graduated payment mortgage loans and any other mortgage loans on the
basis of the borrower's ability to make monthly payments as determined by
reference to the mortgage rates in effect at origination or the reduced initial
monthly payments, as the case may be, and on the basis of an assumption that the
borrowers will likely be able to pay the higher monthly payments that may result
from later increases in the mortgage rates or from later increases in the
monthly payments, as the case may be, at the time of the increase even though
the borrowers may not be able to make the higher payments at the time of
origination. The mortgage rate in effect from the origination date of an ARM
loan or other types of loans to the first adjustment date are likely to be
lower, and may be significantly lower, than the sum of the then applicable index
and Note Margin. Similarly, the amount of the monthly payment on Buy-Down
Mortgage Loans and graduated payment mortgage loans will increase periodically.
If the borrowers' incomes do not increase in an amount commensurate with the
increases in monthly payments, the likelihood of default will increase. In
addition, in the case of either ARM loans or graduated payment mortgage loans
that are subject to negative amortization, due to the addition of deferred
interest the principal balances of those mortgage loans are more likely to equal
or exceed the value of the underlying mortgaged properties, thereby increasing
the likelihood of defaults and losses. With respect to Balloon Loans, payment of
the Balloon Amount will depend on the borrower's ability to obtain refinancing
or to sell the mortgaged property prior to the maturity of the Balloon Loan, and
there can be no assurance that refinancing will be available to the borrower or
that a sale will be possible.
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The AlterNet Mortgage Program
The underwriting standards with respect to AlterNet loans will in most
cases conform to those published in Residential Funding Corporation's AlterNet
Seller Guide, as modified from time to time. The AlterNet Seller Guide will set
forth general underwriting standards relating to AlterNet 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 depositor's mortgage
pass-through certificates and may also be waived by Residential Funding
Corporation 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 typically will be reviewed by Residential
Funding Corporation or by a designated third party for compliance with
applicable underwriting criteria. Some 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 Corporation. Residential Funding Corporation
may accept a certification from an 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. The
certifications will likely have been issued before the purchase of the AlterNet
loan by Residential Funding Corporation or the depositor. A portion of the
mortgage loans will be purchased in negotiated transactions, which may be
governed by master commitment agreements relating to ongoing purchases of
mortgage loans by Residential Funding Corporation, from sellers who will
represent that the mortgage loans have been originated in accordance with
underwriting standards agreed to by Residential Funding Corporation. Residential
Funding Corporation, on behalf of the depositor, will review only a limited
portion of the mortgage loans in any delivery from the related seller for
conformity with the applicable underwriting standards.
THE CONTRACTS
General
The trust for a series may include a contract pool evidencing interests in
contracts originated by one or more manufactured housing dealers, or such other
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entity or entities described in the related prospectus supplement. The contracts
may be conventional contracts or contracts insured by the FHA or partially
guaranteed by the VA. Each contract will be secured by a manufactured home. The
contracts will be fully amortizing or, if specified in the related prospectus
supplement, Balloon Loans.
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
Internal Revenue Code of 1986, or Internal Revenue 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, 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.
Some 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. 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, that were in effect at the time of origination of the related
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 usually 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 that includes market data based
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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 LTV 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, referred to herein as 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 insured by the FHA, under the
Housing Act or under Title V of the Housing Act of 1949, or partially guaranteed
by the VA under the Servicemen's Readjustment Act of 1944, as amended, or under
Chapter 37 of Title 38, United States Code.
Section 306(g) of the Housing Act provides that 'the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guarantee under this subsection.' In order to meet
its obligations under any such guarantee, Ginnie Mae may, under Section 306(d)
of the Housing Act, borrow from the United States Treasury an amount that is at
any time sufficient to enable Ginnie Mae to perform its obligations under its
guarantee. See 'Additional Information' for the availability of further
information regarding Ginnie Mae and Ginnie Mae securities.
Ginnie Mae Securities
In most cases, 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 for
a series of certificates will be set forth in the related prospectus supplement.
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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, or
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
In most cases, 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,
substantially all of which are secured by one- to four-family residential
properties or, if specified in the related prospectus supplement, are secured by
multi-family residential properties. The characteristics of any Freddie Mac
Securities included in the trust for a series of certificates will be set forth
in the related prospectus supplement.
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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 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
In most cases, 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
fixed, variable or adjustable rate conventional mortgage loans or 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 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 will be purchased by the
depositor directly or indirectly, through Residential Funding Corporation or
other affiliates, from mortgage collateral sellers that may be banks, savings
and loan associations, mortgage bankers, investment banking firms, insurance
companies, the FDIC, and other mortgage loan originators or sellers not
affiliated with the depositor. The mortgage collateral sellers may include
HomeComings Financial Network, Inc. and GMAC Mortgage Corporation and its
affiliates, each of which is an affiliate of the depositor. Such purchases may
occur by one or more of the following methods:
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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;
one or more direct or indirect purchases through the AlterNet Mortgage
Program; or
one or more purchases from affiliated sellers.
Mortgage loans may be purchased pursuant to agreements relating to ongoing
purchases of mortgage loans by Residential Funding Corporation. The prospectus
supplement for a series of certificates will disclose the method or methods used
to acquire the mortgage collateral for the series. The depositor 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.
QUALIFICATIONS OF SELLERS
Each AlterNet Program Seller is selected by Residential Funding Corporation
on the basis of criteria set forth in the AlterNet Seller Guide. An AlterNet
Program Seller may be an affiliate of the depositor and the depositor presently
anticipates that GMAC Mortgage Corporation, HomeComings Financial Network, Inc.
and Residential Money Centers, Inc., each an affiliate of the depositor, will be
AlterNet Program Sellers. Each AlterNet Program Seller typically 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 depositor,
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, the institution may continue to be treated as an AlterNet Program
Seller. Any 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.
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REPRESENTATIONS WITH RESPECT TO MORTGAGE COLLATERAL
Mortgage collateral sellers will typically 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 or no representations and warranties. The
depositor 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 the agreement relates to the representations
and warranties made by a mortgage collateral seller in respect of an item of
mortgage collateral and any remedies provided for any breach of such
representations and warranties.
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 the related mortgage collateral seller sold the mortgage collateral to
the depositor or Residential Funding Corporation or one of their affiliates. The
date as of which the representations and warranties were made typically will be
a date prior to the date of issuance of the related series of certificates or,
in the case of a Designated Seller Transaction, will be the date of closing of
the related sale by the applicable seller. A substantial period of time may
elapse between the date as of which the representations and warranties were made
and the date of issuance of the related series of certificates. The mortgage
collateral seller's repurchase obligation or, if specified in the related
prospectus supplement, limited substitution option, will not arise if, after the
sale of the related mortgage collateral, an event occurs that would have given
rise to such an obligation had the event occurred prior to that period.
Except in the case of a Designated Seller Transaction, with respect to any
mortgage loan, including AlterNet loans, or contracts constituting a part of the
trust, in most cases Residential Funding Corporation will represent and warrant
that:
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;
except in the case of Cooperative Loans, a policy of title insurance in
the form and amount required by the AlterNet Seller Guide or an equivalent
protection was effective or an attorney's certificate was received at
<PAGE>
origination, and each policy remained in full force and effect on the date
of sale of the related mortgage loan or contract to the depositor;
to the best of Residential Funding Corporation's knowledge, if required by
applicable underwriting standards, the mortgage loan or contract is the
subject of a primary insurance policy;
Residential Funding Corporation 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 Soldiers'
and Sailors' Civil Relief Act of 1940, as amended, or Relief Act, and
except with respect to any buydown agreement for a Buy-Down Mortgage Loan;
each mortgaged property is free of material damage and is in good repair;
each mortgage loan complied in all material respects with all applicable
local, state and federal laws at the time of origination; and
there is no delinquent tax, to the best of Residential Funding
Corporation's knowledge, or assessment lien against the related mortgaged
property.
In the event of a breach of a representation or warranty made by
Residential Funding Corporation that materially adversely affects the interests
of the certificateholders in the mortgage loan or contract, Residential Funding
Corporation will be obligated to repurchase any mortgage loan or contract or
substitute for the mortgage loan or contract as described below. In addition,
except in the case of a Designated Seller Transaction, unless otherwise
specified in the related prospectus supplement, Residential Funding Corporation
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 on or, in the case of a contract or a Cooperative Loan, a
perfected security interest in, the related mortgaged property, subject only to
the following:
liens of real property taxes and assessments not yet due and payable;
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;
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liens of any senior mortgages, in the case of junior mortgage loans; and
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, except in the case of a Designated Seller Transaction, unless
otherwise specified in the related prospectus supplement, with respect to any
mortgage loan or contract as to which the depositor delivers to the trustee or
the custodian an affidavit certifying that the original mortgage note or
contract has been lost or destroyed, if the 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 Corporation will be
obligated to repurchase or substitute for such mortgage loan or contract in the
manner described below under ' -- Repurchases of Mortgage Collateral' and ' --
Limited Right of Substitution.'
In most instances, Residential Funding Corporation will not be required to
repurchase or substitute for any mortgage loan or contract if the circumstances
giving rise to the 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 Corporation 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.
REPURCHASES OF MORTGAGE COLLATERAL
If a mortgage collateral seller or Residential Funding Corporation, as the
case may be, cannot cure a breach of any representation or warranty made by it
in respect of an item of mortgage collateral within 90 days after notice from
the master servicer, the servicer, the Certificate Administrator or the trustee,
and the breach materially and adversely affects the interests of the
certificateholders in the item of mortgage collateral, the mortgage collateral
seller or Residential Funding Corporation, as the case may be, will be obligated
to purchase the item of mortgage collateral at a price set forth in the related
<PAGE>
pooling and servicing agreement or trust agreement. Likewise, as described under
'Description of the Certificates -- Review of Mortgage Loan or Contract
Documents,' if the servicer or the mortgage collateral seller, as applicable,
cannot cure certain documentary defects with respect to a mortgage loan or
contract, the servicer or the mortgage collateral seller, as applicable, will be
required to repurchase the item of mortgage collateral. Unless otherwise
specified in the related prospectus supplement, the purchase price for any 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 use its best reasonable efforts 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.
The master servicer or servicer will be entitled to reimbursement for any
costs and expenses incurred in pursuing any purchase or substitution obligation,
including but not limited to any costs or expenses associated with litigation.
In instances where a seller is unable, or disputes its obligation, to purchase
affected mortgage loans, the master servicer or servicer, employing the
standards described in the preceding paragraph, may negotiate and enter into one
or more settlement agreements with that seller that could provide for, among
other things, the purchase of only a portion of the affected mortgage loans or
coverage of some loss amounts. Any such settlement could lead to losses on the
mortgage loans which would be borne by the related credit enhancement, and to
the extent not available, on the related certificates.
Furthermore, the master servicer or servicer may pursue foreclosure or
similar remedies concurrently with pursuing any remedy for a breach of a
representation and warranty. However, the master servicer or servicer is not
required to continue to pursue both remedies if it determines that one remedy is
more likely to result in a greater recovery. In accordance with the above
described practices, the master servicer or servicer will not be
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required to enforce any purchase obligation of a seller arising from any
misrepresentation by the seller, if the master servicer or servicer determines
in the reasonable exercise of its business judgment that the matters related to
the misrepresentation did not directly cause or are not likely to directly cause
a loss on the related mortgage loan. If the seller fails to repurchase and no
breach of either the depositor's or Residential Funding Corporation's
representations has occurred, the seller's purchase obligation will not become
an obligation of the depositor or Residential Funding Corporation. In the case
of a Designated Seller Transaction where the seller fails to repurchase a
mortgage loan and neither the depositor, Residential Funding Corporation nor any
other entity has assumed the representations and warranties, the repurchase
obligation of the seller will not become an obligation of the depositor or
Residential Funding Corporation. The foregoing obligations will constitute the
sole remedies available to certificateholders or the trustee for a breach of any
representation by a seller or by Residential Funding Corporation in its capacity
as a seller of mortgage loans to the depositor, or for any other event giving
rise to the obligations.
Neither the depositor nor the master servicer or servicer will be obligated
to purchase a mortgage loan if a seller defaults on its obligation to do so, and
no assurance can be given that the sellers will carry out those obligations with
respect to mortgage loans. This type of default by a seller is not a default by
the depositor or by the master servicer or servicer. However, to the extent that
a breach of the representations and warranties of a seller also constitutes a
breach of a representation made by Residential Funding, or by the depositor or
the master servicer or servicer, as described in this prospectus under
'Description of the Certificates -- Assignment of Mortgage Loans,' Residential
Funding Corporation, the depositor or the master servicer or servicer may have a
purchase or substitution obligation. Any mortgage loan not so purchased or
substituted for shall remain in the related trust and any losses related thereto
shall be allocated to the related credit enhancement, and to the extent not
available, to the related certificates.
Notwithstanding the foregoing, with respect to any seller that requests
Residential Funding Corporation's consent to the transfer of subservicing rights
relating to any mortgage loans to a successor servicer, Residential Funding
Corporation may release that seller from liability under its representations and
warranties described above, upon the assumption of the successor servicer of the
seller's liability for the representations and warranties as of the date they
were made. In that event, Residential Funding Corporation's rights under the
instrument by which the successor servicer assumes the seller's liability will
<PAGE>
be assigned to the trustee, and the successor servicer shall be deemed to be the
'seller' for purposes of the foregoing provisions.
The depositor and Residential Funding Corporation generally monitor which
mortgage collateral sellers are under the control of the FDIC, or are insolvent,
otherwise in receivership or conservatorship or financially distressed. Those
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 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 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 the related mortgage collateral seller or Residential Funding
Corporation, as applicable, may substitute a new mortgage loan or contract for
the repurchased mortgage loan or contract that was removed from the trust,
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 for which no REMIC election is to be made. With respect to a
trust for which a REMIC election is to be made, except as otherwise provided in
the related prospectus supplement, the substitution must be effected within two
years of the date of the issuance of the certificates, and may not be made if
the substitution would cause the trust to fail to qualify as a REMIC or result
in a prohibited transaction tax under the Internal Revenue Code.
In most cases, any qualified substitute mortgage loan or qualified
substitute contract will, on the date of substitution:
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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;
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;
have an LTV ratio at the time of substitution no higher than that of the
repurchased mortgage loan or repurchased contract;
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;
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
comply with all of the representations and warranties set forth in the
related pooling and servicing agreement as of the date of substitution.
If 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 the 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, including a seller in a Designated Seller Transaction, will have no
option to substitute for a mortgage loan or contract that it is obligated to
repurchase in connection with a breach of a representation and warranty.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The certificates will be issued in series. Each series of certificates or,
in some instances, two or more series of certificates, will be issued under a
pooling and servicing agreement or, in the case of certificates backed by
mortgage securities, a trust agreement, similar to one of the forms filed as an
exhibit to the registration statement under the Securities Act of 1933, as
amended, with respect to the certificates of which this prospectus is a part.
Each pooling and servicing agreement or trust agreement will be filed with the
Securities and Exchange Commission as an exhibit to a Form 8-K. The following
summaries (together with additional summaries under 'The Pooling and Servicing
Agreement' below) describe all material terms and provisions relating to the
certificates common to each pooling and servicing agreement or trust agreement.
All references to a 'pooling and servicing agreement' and any discussion of the
provisions of any pooling and servicing agreement will also apply to trust
agreements. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
pooling and servicing agreement for each trust and the related prospectus
supplement.
Each series of certificates may consist of any one or a combination of the
following:
a single class of certificates;
two or more classes of senior certificates, of which one or more classes
of certificates may be senior in right of payment to any other class or
classes of certificates subordinated thereto, and as to which some classes
of senior certificates may be senior to other classes of senior
certificates, as described in the respective prospectus supplement;
one or more classes of mezzanine certificates which are subordinate
certificates but which are senior to other classes of subordinate
certificates in respect of such distributions or losses;
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,
<PAGE>
nominal or no principal distributions;
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 some accrued interest will not be
distributed but rather will be added to their principal balance on the
distribution date, which is the 25th day, or, if the 25th day is not a
business day, the next business day, of each month, commencing in the
month following the month in which the related cut-off date occurs, or on
such other dates as may be specified in the related prospectus supplement;
or
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, purchase obligation, reserve fund, certificate insurance
policy, surety bond or other credit enhancement as described under 'Description
of Credit Enhancement,' or by the subordination of one or more classes of
certificates as described under 'Subordination' or by any combination of the
foregoing.
FORM OF CERTIFICATES
As specified in the related prospectus supplement, the certificates of each
series will be issued either as physical certificates or in book-entry form. If
issued as physical certificates, the certificates will be in fully registered
form only in the denominations specified in the related prospectus supplement,
and will be transferable and exchangeable at the corporate trust office of the
certificate registrar appointed under the related pooling and servicing
agreement to register the certificates. No service charge will be made for any
registration of exchange or transfer of certificates, but the trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge. The term certificateholder or holder refers to the entity whose name
appears on
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the records of the certificate registrar or, if applicable, a transfer agent, as
the registered holder of the certificate, except as otherwise indicated in the
related prospectus supplement.
If issued in book-entry form, the classes of a series of certificates will
be initially issued through the book-entry facilities of The Depository Trust
Company, or DTC, or CEDEL Bank, SA or the Euroclear System (in Europe) if they
are participants of those systems, or indirectly through organizations which are
participants in those systems, or through any other depository or facility as
may be specified in the related prospectus supplement. As to any class of
book-entry certificates so issued, the record holder of those certificates will
be DTC's nominee. CEDEL Bank, SA and Euroclear System will hold omnibus
positions on behalf of their participants through customers' securities accounts
in CEDEL Bank, SA's and Euroclear System's names on the books of their
respective depositaries, which in turn will hold those positions in customers'
securities accounts in the depositaries' names on the books of DTC. DTC is a
limited-purpose trust company organized under the laws of the State of New York,
which holds securities for its DTC participants, which include securities
brokers and dealers, banks, trust companies and clearing corporations. DTC
together with the CEDEL Bank, SA and Euroclear System participating
organizations facilitates the clearance and settlement of securities
transactions between participants through electronic book-entry changes in the
accounts of participants. Other institutions that are not participants but
indirect participants which clear through or maintain a custodial relationship
with participants have indirect access to DTC's clearance system.
Unless otherwise specified in the related prospectus supplement, no
beneficial owner in an interest in any book-entry certificate will be entitled
to receive a certificate representing that interest in registered, certificated
form, unless either (i) DTC ceases to act as depository for that certificate and
a successor depository is not obtained, or (ii) the depositor elects in its sole
discretion to discontinue the registration of the certificates through DTC.
Prior to any such event, beneficial owners will not be recognized by the
trustee, the master servicer, the 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 their certificates only indirectly through DTC, participants and indirect
participants. Any beneficial owner that desires to purchase, sell or otherwise
transfer any interest in book-entry certificates may do so only through DTC,
either directly if the beneficial owner is a participant or indirectly through
participants and, if applicable, indirect participants. Pursuant to the
<PAGE>
procedures of DTC, transfers of the beneficial ownership of any book-entry
certificates will be required to be made in minimum denominations specified in
the related prospectus supplement. The ability of a beneficial owner to pledge
book-entry certificates to persons or entities that are not participants in the
DTC system, or to otherwise act with respect to the certificates, may be limited
because of the lack of physical certificates evidencing the certificates and
because DTC may act only on behalf of participants.
Because of time zone differences, the securities account of a CEDEL Bank,
SA or Euroclear System participant as a result of a transaction with a DTC
participant, other than a depositary holding on behalf of CEDEL Bank, SA or
Euroclear System, will be credited during a subsequent securities settlement
processing day, which must be a business day for CEDEL Bank, SA or Euroclear
System, as the case may be, immediately following the DTC settlement date.
Credits or any transactions in those securities settled during this processing
will be reported to the relevant Euroclear System participant or CEDEL Bank, SA
participants on that business day. Cash received in CEDEL Bank, SA or Euroclear
System as a result of sales of securities by or through a CEDEL Bank, SA
participant or Euroclear System participant to a DTC participant, other than the
depositary for CEDEL Bank, SA or Euroclear System, will be received with value
on the DTC settlement date, but will be available in the relevant CEDEL Bank, SA
or Euroclear System cash account only as of the business day following
settlement in DTC.
Transfers between participants will occur in accordance with DTC rules.
Transfers between CEDEL Bank, SA participants and Euroclear System participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL Bank, SA
participants or Euroclear System participants, on the other, will be effected in
DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the relevant depositaries; however, the cross
market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in that system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to its
depositary to
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take action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same day funds settlement applicable to DTC. CEDEL Bank, SA
participants and Euroclear System participants may not deliver instructions
directly to the depositaries.
CEDEL Bank, SA, as a professional depository, holds securities for its
participating organizations and facilitates the clearance and settlement of
securities transactions between CEDEL Bank, SA participants through electronic
book-entry changes in accounts of CEDEL Bank, SA participants, thereby
eliminating the need for physical movement of certificates. As a professional
depository, CEDEL Bank, SA is subject to regulation by the Luxembourg Monetary
Institute.
Euroclear System was created to hold securities for participants of
Euroclear System and to clear and settle transactions between Euroclear System
participants through simultaneous electronic book-entry delivery against
payment, thereby eliminating the need for physical movement of certificates and
any risk from lack of simultaneous transfers of securities and cash. Euroclear
System operator is the Brussels, Belgium office of Morgan Guaranty Trust Company
of New York, under contract with the clearance cooperative, Euroclear System
Clearance Systems S.C., a Belgian co-operative corporation. All operations are
conducted by the Euroclear System operator, and all Euroclear System securities
clearance accounts and Euroclear System cash accounts are accounts with the
Euroclear System operator, not the clearance cooperative.
The clearance cooperative establishes policy for Euroclear System on behalf
of Euroclear System participants. The Euroclear System operator is the Belgian
branch of a New York banking corporation which is a member bank of the Federal
Reserve System. As a result, it is regulated and examined by the Board of
Governors of the Federal Reserve System and the New York State Banking
Department, as well as the Belgian Banking Commission. Securities clearance
accounts and cash accounts with the Euroclear System operator are governed by
the terms and conditions Governing Use of Euroclear System and the related
operating procedures of the Euroclear System and applicable Belgian law. The
terms and conditions govern transfers of securities and cash within Euroclear
System, withdrawals of securities and cash from Euroclear System, and receipts
of payments with respect to securities in Euroclear System. All securities in
Euroclear System are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts.
<PAGE>
Distributions on the book-entry certificates will be forwarded by the
trustee to DTC, and DTC will be responsible for forwarding those payments to
participants, each of which will be responsible for disbursing the payments to
the beneficial owners it represents or, if applicable, to indirect participants.
Accordingly, beneficial owners may experience delays in the receipt of payments
in respect of their certificates. Under DTC's procedures, DTC will take actions
permitted to be taken by holders of any class of book-entry certificates under
the pooling and servicing agreement only at the direction of one or more
participants to whose account the book-entry certificates are credited and whose
aggregate holdings represent no less than any minimum amount of percentage
interests or voting rights required therefor. DTC may take conflicting actions
with respect to any action of certificateholders of any Class to the extent that
participants authorize those actions. None of the master servicer, the servicer,
the depositor, 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 those beneficial ownership interests.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of a series of certificates, the depositor will
cause the mortgage loans or mortgage securities and any other assets being
included in the related trust to be assigned to the trustee or its nominee,
which may be the custodian, together with, if specified in the related
prospectus supplement, all principal and interest received on or with respect to
the mortgage loans or mortgage securities after the cut-off date, other than
principal and interest due on or before the cut-off date and any Spread. The
trustee will, concurrently with that assignment, deliver a series of
certificates to the depositor in exchange for the mortgage loans or mortgage
securities. Each mortgage loan or mortgage security will be identified in a
schedule appearing as an exhibit to the related pooling and servicing agreement.
Each schedule of mortgage loans 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
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the mortgage note and the LTV ratio or CLTV ratio and junior mortgage ratio, as
applicable, at origination or modification, without regard to any secondary
financing.
If so specified in the related prospectus supplement, and in accordance
with the rules of membership of Merscorp, Inc. and/or Mortgage Electronic
Registration Systems, Inc. or, MERS, assignments of the mortgages for the
mortgage loans in the related trust will be registered electronically through
Mortgage Electronic Registration Systems, Inc., or MERS'r' System. With respect
to mortgage loans registered through the MERS'r' System, MERS shall serve as
mortgagee of record solely as a nominee in an administrative capacity on behalf
of the trustee and shall not have any interest in any of those mortgage loans.
In addition, the depositor will, as to each mortgage loan other than
mortgage loans underlying any mortgage securities, deliver to the trustee, or to
the custodian, a set of legal documents relating to each mortgage loan that are
in possession of the depositor, including:
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;
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 Mexico Mortgage Loan, the respective
security agreements and any applicable financing statements;
an assignment in recordable form of the mortgage, or evidence that the
mortgage is held for the trustee through the MERS'r' System or, with
respect to a Cooperative Loan, an assignment of the respective security
agreements, any applicable 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 in the
Mexican trust; and
if applicable, any riders or modifications to the mortgage note and
mortgage, together with any other documents at such times as described in
the related pooling and servicing agreement.
The assignments may be blanket assignments covering mortgages secured by
<PAGE>
mortgaged properties located in the same county, if permitted by law. If so
provided in the related prospectus supplement, the depositor may not be required
to deliver one or more of the related documents if any of the documents are
missing from the files of the party from whom the mortgage loan was purchased.
If, with respect to any mortgage loan, the depositor cannot deliver the
mortgage or any assignment with evidence of recording thereon concurrently with
the execution and delivery of the related pooling and servicing agreement
because of a delay caused by the public recording office, the depositor will
deliver or cause to be delivered to the trustee or the custodian a true and
correct photocopy of the mortgage or assignment. The depositor will deliver or
cause to be delivered to the trustee or the custodian such Mortgage or
assignment with evidence of recording indicated thereon after receipt thereof
from the public recording office or from the related servicer or subservicer.
With respect to any Puerto Rico mortgage loans, the mortgages with respect
to those mortgage loans either a Direct Puerto Rico Mortgage or an Endorsable
Puerto Rico Mortgage. Endorsable Puerto Rico Mortgages do not require an
assignment to transfer the related lien. Rather, transfer of those mortgages
follows an effective endorsement of the related mortgage note and, therefore,
delivery of the assignment referred to in the third clause listed in the third
preceding paragraph would be inapplicable. Direct Puerto Rico Mortgages,
however, require an assignment to be recorded with respect to any transfer of
the related lien and the assignment would be delivered to the trustee, or the
custodian.
Assignments of the mortgage loans to the trustee will be recorded in the
appropriate public recording office, except for mortgages held under the MERS'r'
System or in states where, in the opinion of counsel acceptable to the trustee,
the recording is not required to protect the trustee's interests in the mortgage
loan against the claim of any subsequent transferee or any successor to or
creditor of the depositor or the originator of the mortgage loan, or except as
otherwise specified in the related prospectus supplement.
ASSIGNMENT OF THE CONTRACTS
The depositor 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
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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. The
schedule will include, among other things, information as to the principal
amount and the adjusted principal balance of each contract as of the close of
business on the cut-off date, as well as information respecting the mortgage
rate, the current scheduled monthly level payment of principal and interest and
the maturity date of the contract.
In addition, the depositor, the servicer or the master servicer, as to each
contract, will deliver to the trustee, or to 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
depositor, the master servicer or the servicer will cause a financing statement
to be executed by the depositor 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 depositor to the trust 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 documents in trust for the benefit
of the certificateholders and, within 45 days after receipt thereof, will review
such documents. If any such document is found to be defective in any material
respect, the trustee or the custodian shall promptly notify the master servicer
or the servicer, if any, and the depositor, and the master servicer or the
servicer shall notify the mortgage collateral seller or subservicer. If the
mortgage collateral seller or the subservicer, as the case may be, cannot cure
the defect within 60 days, or within the period specified in the related
prospectus supplement, after notice of the defect is given to the mortgage
collateral seller or the subservicer, as applicable, the mortgage collateral
seller or the subservicer will be obligated no later than 90 days after such
notice, or within the period specified in the related prospectus supplement, to
either repurchase the related mortgage loan or contract or any related property
from the trustee or substitute a new mortgage loan or contract in accordance
with the standards described in this prospectus under 'The Trust -- Repurchases
of Mortgage Collateral.' Unless otherwise specified in the related prospectus
supplement, the obligation of the mortgage collateral seller or subservicer to
<PAGE>
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. Any mortgage loan not so purchased or substituted
shall remain in the related trust.
ASSIGNMENT OF MORTGAGE SECURITIES
The depositor will transfer, convey and assign to the trustee or its
nominee, which may be the custodian, all right, title and interest of the
depositor in the mortgage securities and other property to be included in the
trust for a series. The assignment will include all principal and interest due
on or with respect to the mortgage securities after the cut-off date specified
in the related prospectus supplement, except for any Spread. The depositor will
cause the mortgage 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 mortgage security. Each mortgage security will be
identified in a schedule appearing as an exhibit to the related pooling and
servicing agreement, which will specify as to each mortgage security information
regarding the original principal amount and outstanding principal balance of
each mortgage security as of the cut-off date, as well as the annual
pass-through rate or interest rate for each mortgage security conveyed to the
trustee.
SPREAD
The depositor, the servicer, the mortgage collateral seller, the master
servicer or any of their affiliates, or any other entity specified in the
related prospectus supplement may retain or be paid a portion of interest due
with respect to the related mortgage collateral. The payment of any Spread will
be disclosed in the related prospectus supplement. This payment may be in
addition to any other payment, including a servicing fee, that the specified
entity is otherwise entitled to receive with respect to the mortgage collateral.
Any payment of this sort in respect of an item of mortgage collateral will
represent a specified portion of the interest payable thereon
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and will not be part of the related trust. Any partial recovery of interest in
respect of an item of mortgage collateral will be allocated between the owners
of any Spread and the certificateholders entitled to payments of interest as
provided in the applicable pooling and servicing agreement.
PAYMENTS ON MORTGAGE COLLATERAL
Collection of Payments on Mortgage Loans and Contracts
The servicer or the master servicer, as applicable, will deposit or will
cause to be deposited into the Custodial Account payments and collections
received by it subsequent to the cut-off date, other than payments due on or
before the cut-off date, as specifically described in the related pooling and
servicing agreement, which in most cases, except as otherwise provided, will
include the following:
all payments on account of principal of the mortgage loans or contracts
comprising a trust;
all payments on account of interest on the mortgage loans or contracts
comprising that trust, net of the portion of each payment thereof retained
by the servicer or subservicer, if any, as Spread, its servicing or other
compensation;
Liquidation Proceeds;
all amounts, net of unreimbursed liquidation expenses and insured expenses
incurred, and unreimbursed Servicing Advances made, by the related
subservicer, received and retained, including Insurance Proceeds or
proceeds from any alternative arrangements established in lieu of any such
insurance and described in the applicable prospectus supplement, other
than proceeds to be applied to the restoration of the related property or
released to the mortgagor in accordance with the master servicer's or
servicer's normal servicing procedures;
any Buy-Down Funds and, if applicable, investment earnings thereon,
required to be paid to certificateholders;
all proceeds of any mortgage loan or contract in the trust purchased or,
in the case of a substitution, amounts representing a principal
adjustment, by the master servicer, the depositor, Residential Funding
<PAGE>
Corporation, any subservicer or mortgage collateral seller or any other
person under the terms of the pooling and servicing agreement;
any amount required to be deposited by the master servicer in connection
with losses realized on investments of funds held in the Custodial
Account; and
any amounts required to be transferred from the Certificate Account to the
Custodial Account.
See 'The Trusts -- Representations with Respect to Mortgage Collateral' and
' -- Repurchases of Mortgage Collateral.'
In addition to the Custodial Account, the master servicer or servicer will
establish and maintain the Certificate Account. Both the Custodial Account and
the Certificate Account must be either:
maintained with a depository institution whose debt obligations at the
time of any deposit therein are rated by any rating agency that rated any
certificates of the related series not less than a specified level
comparable to the rating category of the certificates;
an account or accounts the deposits in which are fully insured to the
limits established by the FDIC, provided that any deposits not so insured
shall be otherwise maintained so that, as evidenced by an opinion of
counsel, the certificateholders have a claim with respect to the funds in
such accounts or a perfected first priority security interest in any
collateral securing those funds that is superior to the claims of any
other depositors or creditors of the depository institution with which the
accounts are maintained;
in the case of the Custodial Account, a trust account or accounts
maintained in either the corporate trust department or the corporate asset
services department of a financial institution which has debt obligations
that meet specified rating criteria;
in the case of the Certificate Account, a trust account or accounts
maintained with the trustee; or
any other Eligible Account.
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The collateral that is eligible to secure amounts in an Eligible Account is
limited to some Permitted Investments. A Certificate Account may be maintained
as an interest-bearing or a non-interest-bearing account, or funds therein may
be invested in Permitted Investments as described in this prospectus under
'Description of the Certificates -- Payments on Mortgage Collateral.' The
Custodial Account may contain funds relating to more than one series of
certificates as well as payments received on other mortgage loans and assets
serviced or master serviced by the master servicer that have been deposited into
the Custodial Account.
Unless otherwise described in the related prospectus supplement, not later
than the business day preceding each distribution date, the master servicer 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 that distribution
date. The master servicer, the servicer or the trustee will also deposit or
cause to be deposited into the Certificate Account:
the amount of any Advances made by the master servicer or the servicer as
described in this prospectus under ' -- Advances';
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;
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;
any distributions received on any mortgage securities included in the
trust; and
any other amounts as described 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 typically be
deposited into the Custodial Account, but will not be deposited in the
Certificate Account for the related series of certificates and will be
<PAGE>
distributed as provided in the related pooling and servicing agreement.
Funds on deposit in the Custodial Account may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next distribution date and funds on deposit in the related Certificate Account
may be invested in Permitted Investments maturing, in general, no later than the
distribution date. Except as otherwise specified in the related prospectus
supplement, all income and gain realized from any investment will be for the
account of the 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 the loss.
With respect to each Buy-Down Mortgage Loan, the subservicer will deposit
the related Buy-Down Funds provided to it in a Buy-Down Account which will
comply with the requirements described in this prospectus with respect to a
Subservicing Account. Unless otherwise specified in the related prospectus
supplement, the terms of all Buy-Down Mortgage Loans provide for the
contribution of Buy-Down Funds in an amount equal to or exceeding either (i) the
total payments to be made from those funds under the related buydown plan or
(ii) if the Buy-Down Funds are to be deposited on a discounted basis, that
amount of Buy-Down Funds which, together with investment earnings thereon at a
rate as set forth in the AlterNet Seller Guide from time to time will support
the scheduled level of payments due under the Buy-Down Mortgage Loan.
Neither the master servicer nor the depositor will be obligated to add to
any discounted Buy-Down Funds any of its own funds should investment earnings
prove insufficient to maintain the scheduled level of payments. To the extent
that any insufficiency is not recoverable from the mortgagor or, in an
appropriate case, from the subservicer, distributions to certificateholders may
be affected. With respect to each Buy-Down Mortgage Loan, the subservicer will
withdraw from the Buy-Down Account and remit to the master servicer on or before
the date specified in the subservicing agreement described in this prospectus
under 'Description of the Certificates -- Payments on Mortgage Collateral' the
amount, if any, of the Buy-Down Funds, and, if applicable, investment earnings
thereon, for each Buy-Down Mortgage Loan that, when added to the amount due from
the mortgagor on the Buy-Down Mortgage Loan, equals the full monthly payment
which would be due on the Buy-
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Down Mortgage Loan if it were not subject to the buydown plan. The Buy-Down
Funds will in no event be a part of the related trust.
If the mortgagor on a Buy-Down Mortgage Loan prepays the mortgage loan in
its entirety during the Buy-Down Period, the subservicer will withdraw from the
Buy-Down Account and remit to the mortgagor or any other designated party in
accordance with the related buydown plan any Buy-Down Funds remaining in the
Buy-Down Account. If a prepayment by a mortgagor during the Buy-Down Period
together with Buy-Down Funds will result in full prepayment of a Buy-Down
Mortgage Loan, the subservicer will, in most cases, be required to withdraw from
the Buy-Down Account and remit to the master servicer the Buy-Down Funds and
investment earnings thereon, if any, which together with such prepayment will
result in a prepayment in full; provided that Buy-Down Funds may not be
available to cover a prepayment under some mortgage loan programs. Any Buy-Down
Funds so remitted to the master servicer in connection with a prepayment
described in the preceding sentence will be deemed to reduce the amount that
would be required to be paid by the mortgagor to repay fully the related
mortgage loan if the mortgage loan were not subject to the buydown plan.
Any investment earnings remaining in the Buy-Down Account after prepayment
or after termination of the Buy-Down Period will be remitted to the related
mortgagor or any other designated party under the Buy-Down Agreement. If the
mortgagor defaults during the Buy-Down Period with respect to a Buy-Down
Mortgage Loan and the property securing that Buy-Down Mortgage Loan is sold in
liquidation either by the master servicer, the primary insurer, the pool insurer
under the mortgage pool insurance policy or any other insurer, the subservicer
will be required to withdraw from the Buy-Down Account the Buy-Down Funds and
all investment earnings thereon, if any, and remit the same to the master
servicer or, if instructed by the master servicer, pay the same to the primary
insurer or the pool insurer, as the case may be, if the mortgaged property is
transferred to that insurer and the insurer pays all of the loss incurred in
respect of such default.
Collection of Payments on Mortgage Securities
The trustee or the Certificate Administrator, as specified in the related
prospectus supplement, will deposit in the Certificate Account all payments on
the mortgage securities as they are received after the cut-off date. If the
trustee has not received a distribution with respect to any mortgage 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
<PAGE>
mortgage security to make such payment as promptly as possible and legally
permitted. The trustee may take any legal action against the related issuer or
guarantor as is 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 any legal action
will be reimbursable to the trustee out of the proceeds of the 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. If the trustee has reason to believe that the proceeds of
the legal action may be insufficient to cover its projected legal fees and
expenses, the trustee will notify the related certificateholders that it is not
obligated to pursue any available remedies unless adequate indemnity for its
legal fees and expenses is provided by the 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 various purposes, as
specifically described in the related pooling and servicing agreement, which in
most cases will include the following:
to make deposits to the Certificate Account in the amounts and in the
manner provided in the pooling and servicing agreement and described in
this prospectus under ' -- Payments on Mortgage Collateral';
to reimburse itself or any subservicer for Advances, or for Servicing
Advances, 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 those Advances or
Servicing Advances were made;
to pay to itself or any subservicer unpaid servicing fees and subservicing
fees, out of payments or collections of interest on each mortgage loan or
contract;
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to pay to itself as additional servicing compensation any investment
income on funds deposited in the Custodial Account, any amounts remitted
by subservicers as interest on partial prepayments on the mortgage loans
or contracts, and, if so provided in the pooling and servicing agreement,
any profits realized upon disposition of a mortgaged property acquired by
deed in lieu of foreclosure or repossession or otherwise allowed under the
pooling and servicing agreement;
to pay to itself, a subservicer, Residential Funding Corporation, the
depositor or the mortgage collateral seller all amounts received with
respect to each mortgage loan or contract purchased, repurchased or
removed under the terms of the pooling and servicing agreement and not
required to be distributed as of the date on which the related purchase
price is determined;
to pay the depositor or its assignee, or any other party named in the
related prospectus supplement, all amounts allocable to the Spread, if
any, out of collections or payments which represent interest on each
mortgage loan or contract, including any mortgage loan or contract as to
which title to the underlying mortgaged property was acquired;
to reimburse itself or any subservicer for any Nonrecoverable Advance,
limited by the terms of the pooling and servicing agreement as described
in the related prospectus supplement;
to reimburse itself or the depositor for other expenses incurred for which
it or the depositor is entitled to reimbursement, including reimbursement
in connection with enforcing any repurchase, substitution or
indemnification obligation of any seller, or against which it or the
depositor is indemnified under the pooling and servicing agreement;
to withdraw any amount deposited in the Custodial Account that was not
required to be deposited therein; and
to clear the Custodial Account of amounts relating to the corresponding
mortgage loans or contracts in connection with the termination of the
trust under the pooling and servicing agreement, as described in 'The
Pooling and Servicing Agreement -- Termination; Retirement of
Certificates.'
DISTRIBUTIONS
<PAGE>
Beginning on the distribution date in the month next succeeding the month
in which the cut-off date occurs, or any other date as may be set forth in the
related prospectus supplement, for a series of certificates, distribution of
principal and interest, or, where applicable, of principal only or interest
only, on each class of certificates entitled to such payments will be made
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
distributions will be made to the persons who are registered as the holders of
the certificates at the close of business on the last business day of the
preceding month or on such other day as is specified in the related prospectus
supplement.
Distributions will be made in immediately available funds, by wire transfer
or otherwise, to the account of a certificateholder at a bank or other entity
having appropriate facilities, if the 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 that form of payment, or by check mailed to the address of the person
entitled to such payment as it appears on the certificate register. Except as
otherwise provided in the related pooling and servicing agreement, the final
distribution in retirement of the certificates will be made only upon
presentation and surrender of the certificates at the office or agency of the
trustee specified in the notice to the certificateholders. Distributions will be
made to each certificateholder in accordance with that holder's percentage
interest in a particular class.
Principal and Interest on the Certificates
The method of determining, and the amount of, distributions of principal
and interest, or, where applicable, of principal only or interest only, on a
particular series of certificates will be described in the related prospectus
supplement. Distributions of interest on each class of certificates will be made
prior to distributions of principal thereon. Each class of certificates, other
than classes of strip certificates, may have a different specified interest
rate, or pass-through rate, which may be a fixed, variable or adjustable
pass-through rate, or any combination of two or more pass-through rates. The
related prospectus supplement will specify the pass-through rate or rates for
each class, or the initial pass-through rate or rates and the method for
determining the pass-through rate or rates.
28
<PAGE>
<PAGE>
Unless otherwise specified in the related prospectus supplement, interest on the
certificates will accrue during each calendar month and will be payable on the
distribution date in the following calendar month. If so specified in the
related prospectus supplement, interest on any class of certificates for any
distribution date may be limited to the extent of available funds for that
distribution date. Unless otherwise specified in the related prospectus
supplement, interest on the certificates will be calculated on the basis of a
360-day year consisting of twelve 30-day months.
On each distribution date for a series of certificates, the trustee or the
master servicer 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 last day of the preceding month of a class of
certificates, or on such other day as is specified in the related prospectus
supplement, an amount equal to the percentage interest represented by the
certificate held by that holder multiplied by that class's Distribution Amount.
In the case of a series of certificates which includes two or more classes
of certificates, the timing, sequential order, priority of payment or amount of
distributions of principal, and any schedule or formula or other provisions
applicable to that determination, including distributions among multiple classes
of senior certificates or subordinate certificates, shall be described in the
related prospectus supplement. Distributions of principal on any class of
certificates will be made on a pro rata basis among all of the certificates of
that class unless otherwise set forth in the related prospectus supplement.
Except as otherwise provided in the related pooling and servicing
agreement, on or prior to the 20th day, or, if the 20th day is not a business
day, the next business day, of the month of distribution, the master servicer or
the Certificate Administrator, as applicable, will determine the amounts of
principal and interest which will be passed through to certificateholders on the
immediately succeeding distribution date. Prior to the close of business on the
business day next succeeding each determination date, the master servicer or the
Certificate Administrator, as applicable, will furnish a statement to the
trustee with information 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
<PAGE>
The following chart provides an example of the flow of funds as it would
relate to a hypothetical series of certificates backed by mortgage loans or
contracts that are issued, and with a cut-off date occurring, in June 1999:
<TABLE>
<CAPTION>
DATE NOTE DESCRIPTION
- ---- ---- -----------
<S> <C> <C>
June 1............................... (A) Cut-off date.
June 2-30............................ (B) Servicers or subservicers, as applicable,
receive any Principal Prepayments and
applicable interest thereon.
June 30.............................. (C) Record date.
June 2-July 1........................ (D) The due dates for payments on a mortgage loan
or contract.
July 16.............................. (E) Servicers or subservicers remit to the master
servicer or servicer, as applicable, scheduled
payments of principal and interest due during
the related Due Period and received or
advanced by them.
July 20.............................. (F) Determination date.
July 26.............................. (G) Distribution date.
</TABLE>
Succeeding months follow the pattern of (B) through (G), except that for
succeeding months, (B) will also include the first day of that month. A series
of certificates may have different prepayment periods, Due Periods, cut-off
dates, record dates, remittance dates, determination dates and/or distribution
dates than those set forth above.
- ------------
(A) The initial principal balance of the mortgage pool or contract pool will be
the aggregate principal balance of the mortgage loans or contracts at the
close of business on June 1 after deducting principal payments due on or
before that date. Those principal payments due on or before June 1 and the
accompanying interest
(footnotes continued on next page)
29
<PAGE>
<PAGE>
(footnotes continued from previous page)
payments, and any Principal Prepayments received as of the close of
business on June 1 are not part of the mortgage pool or contract pool and
will not be passed through to certificateholders.
(B) Any 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 from such prepaid amounts for the month in which the
partial Principal Prepayments were received.
(C) Distributions on July 26 -- because July 25, 1999 is not a business day --
will be made to certificateholders of record at the close of business on
June 30.
(D) Scheduled principal and interest payments are due from mortgagors.
(E) Payments due from mortgagors during the related Due Period will be
deposited by the subservicers in Subservicing Accounts or 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 those
payments. Funds required to be remitted from the Subservicing Accounts or
collection accounts to the master servicer or servicer, as applicable, will
be remitted on July 16 -- because July 18, 1999 is not a business day --
together with any required Advances by the servicer or subservicers, except
that Principal Prepayments in full and Principal Prepayments in part
received by subservicers during the month of June will have been remitted
to the master servicer or the servicer, as applicable, within five business
days of receipt.
(F) On July 20, the master servicer or servicer will determine the amounts of
principal and interest which will be passed through on July 26 to the
holders of each class of certificates. The master servicer or servicer will
be obligated to distribute those payments due during the related Due Period
which have been received from subservicers or servicers prior to and
<PAGE>
including July 16, as well as all Principal Prepayments received on
mortgage loans in June, with interest adjusted to the pass-through rates
applicable to the respective classes of certificates and reduced on account
of Principal Prepayments as described in clause (B) above. Distributions to
the holders of senior certificates, if any, on July 26 may include amounts
otherwise distributable to the holders of the related subordinate
certificates, amounts withdrawn from any reserve fund and amounts Advanced
by the master servicer or the servicer under the circumstances described in
'Subordination' and ' -- Advances.'
(G) On July 26, the amounts determined on July 20 will be distributed to
certificateholders.
If provided in the related prospectus supplement, the distribution date
with respect to any series of certificates as to which the trust includes
mortgage securities may be a specified date or dates other than the 25th day of
each month in order to allow for the receipt of distributions on the mortgage
securities.
ADVANCES
As to each series of certificates, the master servicer or the servicer will
make Advances on or before each distribution date, but only to the extent that
the Advances would, in the judgment of the master servicer or the servicer, be
recoverable out of late payments by the mortgagors, Liquidation Proceeds,
Insurance Proceeds or otherwise.
The amount of any Advance will be determined based on the amount payable
under the mortgage loan as adjusted from time to time and as may be modified as
described in this prospectus under ' -- Servicing and Administration of Mortgage
Collateral,' and no Advance will be required in connection with any reduction in
amounts payable under the Relief Act or as a result of certain actions taken by
a bankruptcy court. As specified in the related prospectus supplement with
respect to any series of certificates as to which the trust includes mortgage
securities, any advancing obligations will be pursuant to the terms of the
mortgage securities and may differ from the provisions relating to Advances
described in this prospectus.
30
<PAGE>
<PAGE>
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to related certificateholders. Advances do not represent an
obligation of the master servicer or 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, those funds will be
required to be replaced on or before any future distribution date to the extent
that funds in the Certificate Account on that distribution date would be less
than payments required to be made to certificateholders. Any Advances will be
reimbursable to the master servicer or servicer out of recoveries on the related
mortgage loans or contracts for which those amounts were advanced, including
late payments made by the related mortgagor, any related Liquidation Proceeds
and Insurance Proceeds, proceeds of any applicable form of credit enhancement,
or proceeds of any mortgage collateral purchased by the depositor, Residential
Funding Corporation, a subservicer or a mortgage collateral seller.
Advances will also be reimbursable from cash otherwise distributable to
certificateholders to the extent that the master servicer or servicer shall
determine that any Advances previously made are not ultimately recoverable as
described in the third preceding paragraph. With respect to any
senior/subordinate series, so long as the related subordinate certificates
remain outstanding and limited with respect to Special Hazard Losses, Fraud
Losses, Bankruptcy Losses and Extraordinary Losses, the Advances may also be
reimbursable out of amounts otherwise distributable to holders of the
subordinate certificates, if any. The master servicer or the servicer may also
be obligated to make Servicing Advances, to the extent recoverable out of
Liquidation Proceeds or otherwise, in respect of some taxes and insurance
premiums not paid by mortgagors on a timely basis. Funds so advanced 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. If the short-term or
long-term obligations of the provider of the support are downgraded by a rating
agency rating the related certificates or if any collateral supporting such
obligation is not performing or is removed under the terms of any agreement
described in the related prospectus supplement, the certificates may also be
downgraded.
PREPAYMENT INTEREST SHORTFALLS
<PAGE>
When a mortgagor prepays a mortgage loan or contract in full between
scheduled due dates for the mortgage loan or contract, the mortgagor pays
interest on the amount prepaid only to but not including the date on which the
Principal Prepayment is made. Similarly, Liquidation Proceeds from a mortgaged
property will not include interest for any period after the date on which the
liquidation took place.
If so specified in the related prospectus supplement, to the extent funds
are available from the servicing fee, the master servicer or servicer may make
an additional payment to certificateholders out of the servicing fee otherwise
payable to it with respect to any mortgage loan that prepaid during the related
prepayment period equal to the Compensating Interest for that mortgage loan or
contract from the date of the prepayment to the related due date. Compensating
Interest will be limited to the aggregate amount specified in the related
prospectus supplement and may not be sufficient to cover the Prepayment Interest
Shortfall. If so disclosed in the related prospectus supplement, Prepayment
Interest Shortfalls may be applied to reduce interest otherwise payable with
respect to one or more classes of certificates of a series. See 'Yield
Considerations' in this prospectus.
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. Any 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. 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 in the Funding
Account will be required to be invested in Permitted Investments and the amount
held in the Funding Account shall at no time exceed 25% of the aggregate
outstanding principal balance of the
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<PAGE>
<PAGE>
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 transfers must be
made within 90 days, and that amounts set aside to fund the 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
described in the 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 setting forth the information described in the related pooling and
servicing agreement. Except as otherwise provided in the related pooling and
servicing agreement, the information will include the following (as applicable):
the amount, if any, of the distribution allocable to principal;
the amount, if any, of the distribution allocable to interest and the
amount, if any, of any shortfall in the amount of interest and principal;
the aggregate unpaid principal balance of the mortgage collateral after
giving effect to the distribution of principal on that distribution date;
the outstanding principal balance or notional amount of each class of
certificates after giving effect to the distribution of principal on that
distribution date;
based on the most recent reports furnished by subservicers, the number and
aggregate principal balances of any items of mortgage collateral in the
related trust that are delinquent (a) one month, (b) two months and (c)
three months, and that are in foreclosure;
the book value of any property acquired by the trust through foreclosure
or grant of a deed in lieu of foreclosure;
the balance of the reserve fund, if any, at the close of business on that
distribution date;
the percentage of the outstanding principal balances of the senior
<PAGE>
certificates, if applicable, after giving effect to the distributions on
that distribution date;
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;
if applicable, the Special Hazard Amount, Fraud Loss Amount and Bankruptcy
Amount as of the close of business on the applicable distribution date and
a description of any change in the calculation of those amounts;
in the case of certificates benefiting from alternative credit enhancement
arrangements described in a prospectus supplement, the amount of coverage
under the alternative arrangements as of the close of business on the
applicable determination date;
the servicing fee payable to the master servicer and the subservicer; and
with respect to any series of certificates as to which the trust includes
mortgage securities, any additional information as required under the
related pooling and servicing agreement.
In addition to the information described above, reports to
certificateholders will contain any other information as is described in the
applicable pooling and servicing agreement, which may include, without
limitation, information as to Advances, reimbursements to subservicers, the
servicer and the master servicer and losses borne by the related trust.
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 that calendar year. The report will
include information as to the aggregate of amounts reported pursuant to the
first two items in the list above for that calendar year or, if the person was a
holder of record of a class of certificates during a portion of that calendar
year, for the applicable portion of that year.
32
<PAGE>
<PAGE>
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
servicer 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. With respect to any series of certificates for which the trust
includes mortgage 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, the servicer or the
master servicer may enter into subservicing agreements with one or more
subservicers 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 relating to the subservicing agreement.
A subservicer may be an affiliate of the depositor. Under any subservicing
agreement, each subservicer 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 subservicer as if the servicer or
the master servicer alone were servicing such mortgage loans or contracts.
Collection and Other Servicing Procedures
The servicer or the master servicer, directly or through subservicers, as
the case may be, will make reasonable efforts to collect all payments called for
under the mortgage loans or contracts and will, consistent with the related
pooling and servicing agreement and any applicable insurance policy or other
credit enhancement, follow the collection procedures as it follows with respect
to mortgage loans or contracts serviced by it that are comparable to the
mortgage loans or contracts. The servicer or the master servicer may, in its
<PAGE>
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 the mortgage loan or contract
or any coverage provided by any alternative credit enhancement will not be
adversely affected thereby. The master servicer may also waive or modify any
term of a mortgage loan so long as the master servicer has determined that the
waiver or modification is not materially adverse to any certificateholders,
taking into account any estimated loss that may result absent that action. With
respect to any series of certificates as to which the trust includes mortgage
securities, the master servicer's servicing and administration obligations will
be pursuant to the terms of those mortgage securities.
In instances in which a mortgage loan is in default or if default is
reasonably foreseeable, and if determined by the master servicer to be in the
best interests of the related certificateholders, the master servicer or
servicer may permit modifications of the mortgage loan rather than proceeding
with foreclosure. In making this determination, the estimated Realized Loss that
might result if the mortgage loan were liquidated would be taken into account.
These modifications may have the effect of reducing the mortgage rate or
extending the final maturity date of the mortgage loan. Any modified mortgage
loan may remain in the related trust, and the reduction in collections resulting
from the modification may result in reduced distributions of interest, or other
amounts, on, or may extend the final maturity of, one or more classes of the
related certificates.
In connection with any significant partial prepayment of a mortgage loan,
the master servicer, to the extent not inconsistent with the terms of the
mortgage note and local law and practice, may permit the mortgage loan to be
re-amortized so that the monthly payment is recalculated as an amount that will
fully amortize its remaining principal amount by the original maturity date
based on the original mortgage rate, provided that the re-amortization shall not
be permitted if it would constitute a modification of the mortgage loan for
federal income tax purposes.
33
<PAGE>
<PAGE>
The master servicer, any servicer or one or more subservicers with respect
to a given trust may establish and maintain an 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 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 the escrow account, if required, to repair
or otherwise protect the mortgage properties and to clear and terminate such
account. The master servicer or any servicer or subservicer, as the case may be,
will be responsible for the administration of each such escrow account and will
be obligated to make advances to the escrow accounts when a deficiency exists
therein. The master servicer, servicer or subservicer will be entitled to
reimbursement for any advances from the Custodial Account.
Other duties and responsibilities of each servicer, the master servicer and
the Certificate Administrator are described above under ' -- Payments on
Mortgage Collateral.'
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.
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 typically will require the approval of the master servicer or
servicer, as applicable.
In addition, the master servicer or servicer may enter into various
agreements with holders of one or more classes of subordinate certificates or of
a class of securities representing interests in one or more classes of
subordinate certificates. Under the terms of those agreements, the holder may,
with respect to some delinquent mortgage loans:
instruct the master servicer or servicer to commence or delay foreclosure
<PAGE>
proceedings, provided that the holder deposits a specified amount of cash
with the master servicer or servicer which will be available for
distribution to certificateholders if Liquidation Proceeds are less than
they otherwise may have been had the master servicer or servicer acted
under its normal servicing procedures;
instruct the master servicer or servicer to purchase the mortgage loans
from the trust prior to the commencement of foreclosure proceedings at the
purchase price and to resell the mortgage loans to the holder, in which
case any subsequent loss with respect to the mortgage loans will not be
allocated to the certificateholders;
become, or designate a third party to become, a subservicer with respect
to the mortgage loans so long as (i) the master servicer or servicer has
the right to transfer the subservicing rights and obligations of the
mortgage loans to another subservicer at any time or (ii) the holder or
its servicing designee is required to service the mortgage loans according
to the master servicer's or servicer's servicing guidelines; or
the related prospectus supplement may provide for the other types of
special servicing arrangements.
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, is about to be conveyed by the mortgagor, the master servicer or the
servicer, as applicable, directly or through a subservicer, 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.'
34
<PAGE>
<PAGE>
If the master servicer, servicer or subservicer is prevented from enforcing
a due-on-sale clause under applicable law or if the master servicer, servicer or
subservicer 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 subservicer 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 subservicer shall have determined in good
faith that such release will not adversely affect the collectability of the
mortgage loan or contract. An ARM loan may be assumed if it is by its terms
assumable and if, in the reasonable judgment of the master servicer, servicer or
subservicer, the proposed transferee of the related mortgaged property
establishes its ability to repay the loan and the security for the 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. Any fee collected by the master servicer, servicer or
subservicer 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
subservicer as additional servicing compensation. In connection with any
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 subservicer 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.
REALIZATION UPON DEFAULTED MORTGAGE LOANS OR CONTRACTS
With respect to a mortgage loan in default, the master servicer or the
related subservicer will decide whether to foreclose upon the mortgaged 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, if the senior mortgage holder
<PAGE>
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 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 in the Mexican trust 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 collateral
securing the Mexico Mortgage Loans uneconomical, thus significantly increasing
the amount of the loss on the Mexico Mortgage Loan.
Any acquisition of title and cancellation of any REO Mortgage Loan or REO
Contract will be considered for most purposes to be an outstanding mortgage loan
or contract held in the trust until it is converted into a Liquidated Mortgage
Loan or 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 acquisition of title, before any adjustment by
reason of any bankruptcy or any similar proceeding or any moratorium or similar
waiver or grace period, will be deemed to have continued in effect and, in the
case of an ARM loan, the amortization schedule will be deemed to have adjusted
in accordance with any interest rate changes occurring on any adjustment date,
so long as the REO Mortgage Loan or REO Contract is considered to remain in the
trust. If a REMIC election has been made, any mortgaged property so acquired by
the trust must be disposed of in accordance with applicable federal income tax
regulations and consistent with the status of the trust as a REMIC. To the
extent provided in the related pooling and servicing agreement, any income, net
of expenses and other than gains described in the second succeeding paragraph,
received by the subservicer, servicer or the master servicer on the mortgaged
property prior to its disposition will be deposited in the Custodial Account
upon receipt and will be available at that time for making payments to
certificateholders.
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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 Contracts'
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 remedies if it determines that one 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, the mortgage
loan or contract will be removed from the related trust. 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 the mortgage loan or contract thereafter incurred will be
reimbursable to the master servicer, servicer or any subservicer from any
amounts otherwise distributable to the related certificateholders, or may be
offset by any subsequent recovery related to the mortgage loan 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 the
defaulted mortgage loan or contract.
With respect to some series of certificates, the applicable form of credit
enhancement may provide, to the extent of coverage, that a defaulted mortgage
loan or contract or REO Mortgage Loan or REO Contract will be removed from the
trust prior to its final liquidation. In addition, the master servicer or
servicer may have the option to purchase from the trust any defaulted mortgage
loan or contract after a specified period of delinquency. 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 that mortgage loan or contract, in connection with a
related breach of a representation or warranty or otherwise, such subsequent
recovery shall be distributed to the then-current certificateholders of any
outstanding class to which the Realized Loss was allocated, with the amounts to
be distributed allocated among such classes in the same proportions as such
Realized Loss was allocated, provided that no such distribution shall result in
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distributions on the certificates of any class in excess of the total amount of
the Realized Loss that was allocated to that 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 in accordance with specified conditions if, following
the final liquidation of a mortgage loan or contract and a draw under the
related 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, then, upon its final liquidation, if a loss is realized which is
not covered by any applicable form of credit enhancement or other insurance, the
certificateholders will bear the loss. However, if a gain results from the final
liquidation of an REO Mortgage Loan or REO Contract which is not required by law
to be remitted to the related mortgagor, the master servicer or servicer will be
entitled to retain that 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 mortgage securities in the manner set forth in the
related prospectus supplement.
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SUBORDINATION
GENERAL
A senior/subordinate series of certificates will consist of one or more
classes of senior certificates and one or more classes of subordinate
certificates, as specified in the related prospectus supplement. Subordination
of the subordinate certificates of any senior/subordinate series will be
effected by the following method, unless an alternative method is specified in
the related prospectus supplement. In addition, some classes of senior or
subordinate certificates may be senior to other classes of senior or subordinate
certificates, as specified in the related prospectus supplement.
With respect to any senior/subordinate series, the total amount available
for distribution on each distribution date, as well as the method for allocating
that amount among the various classes of certificates included in the series,
will be described in the related prospectus supplement. In most cases, with
respect to any series, the amount available for distribution will be allocated
first to interest on the senior certificates of that series, and then to
principal of the senior certificates up to the amounts described in the related
prospectus supplement, prior to allocation of any amounts to the subordinate
certificates.
If so provided in the pooling and servicing agreement, the master servicer
or servicer may be permitted, under certain circumstances, to purchase any
mortgage loan or contract that is three or more months delinquent in payments of
principal and interest, at the repurchase price. Any Realized Loss subsequently
incurred in connection with any such mortgage loan may be, under certain
circumstances, 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, unless that purchase was made upon the request of the
holder of the most junior class of certificates of the related series. See
'Description of the Certificates -- Servicing and Administration of Mortgage
Collateral -- Special Servicing' above.
In the event of any Realized Losses not in excess of the limitations
described below (other than Extraordinary Losses), the rights of the subordinate
certificateholders to receive distributions will be subordinate to the rights of
the senior certificateholders and the owner of the Spread and, as to certain
classes of subordinated certificates, may be subordinate to the rights of other
subordinate certificateholders.
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Except as noted below, Realized Losses will be allocated to the subordinate
certificates of the related series until their outstanding principal balances
have been reduced to zero. Additional Realized Losses, if any, will be allocated
to the senior certificates. If the series includes more than one class of senior
certificates, the additional Realized Losses will be allocated either on a pro
rata basis among all of the senior certificates in proportion to their
respective outstanding principal balances or as otherwise provided in the
related prospectus supplement.
Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding classes of certificates of the related series,
either on a pro rata basis in proportion to their outstanding principal
balances, or as otherwise provided in the related prospectus supplement. The
respective amounts of other specified types of losses, including Fraud Losses
and Bankruptcy Losses, that may be borne solely by the subordinate certificates
may be similarly limited to the Fraud Loss Amount and Bankruptcy Amount, and the
subordinate certificates may provide no coverage with respect to Extraordinary
Losses or other specified types of losses, as described in the related
prospectus supplement, in which case those losses would be allocated on a pro
rata basis among all outstanding classes of certificates or as otherwise
specified in the related prospectus supplement. Each of the Special Hazard
Amount, Fraud Loss Amount and Bankruptcy Amount may be subject to periodic
reductions and may be subject to further reduction or termination, without the
consent of the certificateholders, upon the written confirmation from each
applicable rating agency that the then-current rating of the related series of
certificates will not be adversely affected.
In most cases, any allocation of a Realized Loss, including a Special
Hazard Loss, Fraud Loss or Bankruptcy Loss, to a certificate in a
senior/subordinate series will be made by reducing its outstanding principal
balance as of the distribution date following the calendar month in which the
Realized Loss was incurred.
The rights of holders of the various classes of certificates of any series
to receive distributions of principal and interest is determined by the
aggregate outstanding principal balance of each class or, if applicable, the
related notional amount. The outstanding principal balance of any certificate
will be reduced by all amounts previously distributed on that certificate
representing principal, and by any Realized Losses allocated thereto. If
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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
described in the related prospectus supplement, holders of senior certificates
may be entitled to receive a disproportionately larger amount of prepayments
received during specified periods, which will have the effect, absent offsetting
losses, of accelerating the amortization of the senior certificates and
increasing the respective percentage ownership interest evidenced by the
subordinate certificates in the related trust, with a corresponding decrease in
the percentage of the outstanding principal balances of the senior certificates,
thereby preserving the availability of the subordination provided by the
subordinate certificates. In addition, some Realized Losses will be allocated
first to subordinate certificates by reduction of their outstanding principal
balance, which will have the effect of increasing the respective ownership
interest evidenced by the senior certificates in the related trust.
If so provided in the related prospectus supplement, some 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.
In lieu of the foregoing provisions, subordination may be effected in the
following manner, or in any other manner as may be described in the related
prospectus supplement. The rights of the holders of subordinate certificates to
receive the Subordinate Amount will be limited to the extent described in the
related prospectus supplement. As specified in the related prospectus
supplement, the Subordinate Amount may be reduced based upon the amount of
losses borne by the holders of the subordinate certificates as a result of the
subordination, a specified schedule or other method of reduction as the
prospectus supplement may specify.
With respect to any senior/subordinate series, the terms and provisions of
the subordination may vary from those described in this prospectus. Any
variation and any additional credit enhancement will be described in the related
prospectus supplement.
OVERCOLLATERALIZATION
If so specified in the related prospectus supplement, interest collections
on the mortgage collateral may exceed interest payments on the certificates for
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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 collateral, 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:
Defaulted Mortgage Losses;
Special Hazard Losses;
Bankruptcy Losses; and
Fraud Losses.
Most forms of credit support will not provide protection against all risks
of loss and will not guarantee repayment of the entire outstanding principal
balance of the certificates and interest thereon. If losses occur that exceed
the amount covered by credit support or are of a type that is not covered by the
credit support, certificateholders will bear their allocable share of
deficiencies. In particular, Defaulted Mortgage Losses, Special Hazard Losses,
Bankruptcy Losses and Fraud Losses in excess of the amount of coverage provided
therefor and Extraordinary Losses will not be covered. To the extent that the
credit enhancement for any series of certificates is exhausted, the
certificateholders will bear all further risks of loss not otherwise insured
against.
As described in this prospectus and in the related prospectus supplement,
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coverage with respect to Defaulted Mortgage Losses may be provided by a
mortgage pool insurance policy,
coverage with respect to Special Hazard Losses may be provided by a
special hazard insurance policy,
coverage with respect to Bankruptcy Losses may be provided by a bankruptcy
bond and
coverage with respect to Fraud Losses may be provided by a mortgage pool
insurance policy or mortgage repurchase bond.
In addition, if so specified in the applicable prospectus supplement, in
lieu of or in addition to any or all of the foregoing arrangements, credit
enhancement may be in the form of a reserve fund to cover those losses, in the
form of subordination of one or more classes of certificates as described under
'Subordination,' or in the form of a certificate insurance policy, a letter of
credit, a mortgage pool insurance policy, surety bonds or other types of
insurance policies, other secured or unsecured corporate guarantees or in any
other form as may be described in the related prospectus supplement, or in the
form of a combination of two or more of the foregoing. Coverage may also be
provided by representations made by Residential Funding Corporation or the
depositor. If so specified in the related prospectus supplement, limited credit
enhancement may be provided to cover Defaulted Mortgage Losses with respect to
mortgage loans with LTV ratios at origination of over 80% which are not insured
by a primary insurance policy, to the extent that those losses would be covered
under a primary insurance policy if obtained, or may be provided in lieu of
title insurance coverage, in the form of a corporate guaranty or in other forms
described in this section. As described in the pooling and servicing agreement,
credit support may apply to all of the mortgage loans or to some mortgage loans
contained in a mortgage pool.
In addition, the credit support may be provided by an assignment of the
right to receive cash amounts, a deposit of cash into a reserve fund or other
pledged assets, or by banks, insurance companies, guarantees or any combination
of credit support identified in the related prospectus supplement.
Each prospectus supplement will include a description of:
the amount payable under the credit enhancement arrangement, if any,
provided with respect to a series;
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any conditions to payment thereunder not otherwise described in this
prospectus;
the conditions under which the amount payable under the credit support may
be reduced and under which the credit support may be terminated or
replaced; and
the material provisions of any agreement relating to the credit support.
Additionally, each prospectus supplement will contain information with
respect to the issuer of any third-party credit enhancement, if applicable. The
pooling and servicing agreement or other documents may be modified in connection
with the provisions of any credit enhancement arrangement to provide for
reimbursement rights, control rights or other provisions that may be required by
the credit enhancer. To the extent provided in the applicable pooling and
servicing agreement, the credit enhancement arrangements may be periodically
modified, reduced and substituted for based on the performance of or on the
aggregate outstanding principal balance of the mortgage loans covered thereby.
See 'Description of Credit Enhancement -- Reduction or Substitution of Credit
Enhancement.' If specified in the applicable prospectus supplement, credit
support for a series of certificates may cover one or more other series of
certificates.
The descriptions of any insurance policies, bonds or other instruments
described in this prospectus or any prospectus supplement and the coverage
thereunder do not purport to be complete and are qualified in their entirety by
reference to the actual forms of the policies, copies of which typically will be
exhibits to the Form 8-K to be filed with the Securities and Exchange Commission
in connection with the issuance of the related series of certificates.
LETTERS OF CREDIT
If any component of credit enhancement as to any series of certificates is
to be provided by a letter of credit, a bank will deliver to the trustee an
irrevocable letter of credit. The letter of credit may provide direct coverage
with respect to the mortgage 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 payments after notification from
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the trustee, to be deposited in the related Certificate Account with respect to
the coverage provided thereby. The letter of credit may also provide for the
payment of Advances.
MORTGAGE POOL INSURANCE POLICIES
Any insurance policy covering losses on a mortgage collateral pool obtained
by the depositor for a trust will be issued by the pool insurer. Each mortgage
pool insurance policy, in accordance with the limitations described in this
prospectus and in the prospectus supplement, if any, will cover Defaulted
Mortgage Losses in an amount specified in the prospectus supplement. As
described under ' -- Maintenance of Credit Enhancement,' the master servicer,
servicer or Certificate Administrator will use its best reasonable efforts to
maintain the mortgage pool insurance policy and to present claims thereunder to
the pool insurer on behalf of itself, the trustee and the certificateholders.
The mortgage pool insurance policies, however, are not blanket policies against
loss, since claims thereunder may only be made respecting particular defaulted
mortgage loans and only upon satisfaction of specified conditions precedent
described in the succeeding paragraph. Unless specified in the related
prospectus supplement, the mortgage pool insurance policies may not cover losses
due to a failure to pay or denial of a claim under a primary insurance policy,
irrespective of the reason therefor.
Each mortgage pool insurance policy will provide that no claims may be
validly presented thereunder unless, among other things:
any required primary insurance policy is in effect for the defaulted
mortgage loan and a claim thereunder has been submitted and settled;
hazard insurance on the property securing the mortgage loan has been kept
in force and real estate taxes and other protection and preservation
expenses have been paid by the master servicer, servicer or subservicer;
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
the insured has acquired good and merchantable title to the mortgaged
property free and clear of liens except permitted encumbrances.
Upon satisfaction of these conditions, the pool insurer will have the
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option either (a) to purchase the property securing the defaulted mortgage loan
at a price equal to its outstanding principal balance plus accrued and unpaid
interest at the applicable mortgage rate to the date of purchase and some
expenses incurred by the master servicer, servicer or subservicer on behalf of
the trustee and certificateholders, or (b) to pay the amount by which the sum of
the outstanding principal balance of the defaulted mortgage loan plus accrued
and unpaid interest at the mortgage rate to the date of payment of the claim and
the aforementioned expenses exceeds the proceeds received from an approved sale
of the mortgaged property, in either case net of some amounts paid or assumed to
have been paid under any related primary insurance policy.
Certificateholders will experience a shortfall in the amount of interest
payable on the related certificates in connection with the payment of claims
under a mortgage pool insurance policy because the pool insurer is only required
to remit unpaid interest through the date a claim is paid rather than through
the end of the month in which the claim is paid. In addition, the
certificateholders will also experience losses with respect to the related
certificates in connection with payments made under a mortgage pool insurance
policy to the extent that the master servicer, servicer or subservicer expends
funds to cover unpaid real estate taxes or to repair the related mortgaged
property in order to make a claim under a mortgage pool insurance policy, as
those amounts will not be covered by payments under the policy and will be
reimbursable to the master servicer, servicer or subservicer from funds
otherwise payable to the certificateholders. If any mortgaged property securing
a defaulted mortgage loan is damaged and proceeds, if any (see ' -- Special
Hazard Insurance Policies' below for risks which are not covered by those
policies), from the related hazard insurance policy or applicable special hazard
insurance policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the mortgage pool insurance policy, the
master servicer, servicer or subservicer is not required to expend its own funds
to restore the damaged property unless it determines that (a) restoration will
increase the proceeds to certificateholders on liquidation of the mortgage loan
after reimbursement of the master servicer, servicer or subservicer for its
expenses and (b) the expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds.
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A mortgage pool insurance policy and some primary insurance policies will
likely not insure against loss sustained by reason of a default arising from,
among other things, fraud or negligence in the origination or servicing of a
mortgage loan, including misrepresentation by the mortgagor, the mortgage
collateral seller or other persons involved in the origination thereof, failure
to construct a mortgaged property in accordance with plans and specifications or
bankruptcy, unless, if specified in the related prospectus supplement, an
endorsement to the mortgage pool insurance policy provides for insurance against
that type of loss. Depending upon the nature of the event, a breach of
representation made by a mortgage collateral seller may also have occurred. That
breach, if it materially and adversely affects the interests of
certificateholders and cannot be cured, would give rise to a repurchase
obligation on the part of the mortgage collateral seller, as described under
'The Trusts -- Mortgage Collateral Sellers -- Representations with respect to
Mortgage Collateral.' However, such an event would not give rise to a breach of
a representation and warranty or a repurchase obligation on the part of the
depositor or Residential Funding Corporation.
The original amount of coverage under each mortgage pool insurance policy
will be reduced over the life of the related series of certificates by the
aggregate amount of claims paid less the aggregate of the net amounts realized
by the pool insurer upon disposition of all foreclosed properties. The amount of
claims paid includes some expenses incurred by the master servicer, servicer or
subservicer as well as accrued interest on delinquent mortgage loans to the date
of payment of the claim. See 'Certain Legal Aspects of Mortgage Loans and
Contracts.' 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 determines that an Advance relating to a delinquent mortgage loan would
be recoverable to it from the proceeds of the liquidation of the mortgage loan
or otherwise, the master servicer or servicer would not be obligated to make an
Advance respecting any delinquency since the Advance would not be ultimately
recoverable to it from either the mortgage pool insurance policy or from any
other related source. See 'Description of the Certificates -- Advances.'
Since each mortgage pool insurance policy will require that the property
subject to a defaulted mortgage loan be restored to its original condition prior
to claiming against the pool insurer, the policy will not provide coverage
against hazard losses. As described under 'Insurance Policies on Mortgage Loans
or Contracts -- Standard Hazard Insurance on Mortgaged Properties,' the hazard
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policies covering the mortgage loans typically exclude from coverage physical
damage resulting from a number of causes and, even when the damage is covered,
may afford recoveries which are significantly less than full replacement cost of
those losses. Additionally, no coverage for Special Hazard Losses, Fraud Losses
or Bankruptcy Losses will cover all risks, and the amount of any such coverage
will be limited. See ' -- Special Hazard Insurance Policies' below. As a result,
certain hazard risks will not be insured against and may be borne by
certificateholders.
Contract pools may be covered by pool insurance policies that are similar
to the mortgage pool insurance policies described above.
SPECIAL HAZARD INSURANCE POLICIES
Any insurance policy covering Special Hazard Losses obtained for a trust
will be issued by the insurer named in the related prospectus supplement. Each
special hazard insurance policy subject to limitations described in this
paragraph and in the related prospectus supplement, if any, will protect the
related certificateholders from Special Hazard Losses. Aggregate claims under a
special hazard insurance policy will be limited to the amount set forth in the
related pooling and servicing agreement and will be subject to reduction as
described in the related pooling and servicing agreement. A special hazard
insurance policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the property securing the mortgage loan or
contract has been kept in force and other protection and preservation expenses
have been paid by the master servicer or servicer.
In accordance with the foregoing limitations, a special hazard insurance
policy will provide that, where there has been damage to property securing a
foreclosed mortgage loan, title to which has been acquired by the insured, and
to the extent the damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the mortgagor or the master servicer,
servicer or the subservicer, the insurer will pay the lesser of (i) the cost of
repair or replacement of the related property or (ii) upon transfer of the
property to the insurer, the unpaid principal balance of the mortgage loan or
contract at the time of acquisition of the related
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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 the subservicer with respect to the related
property.
If the property is transferred to a third party in a sale approved by the
special hazard insurer, the amount that the special hazard insurer will pay will
be the amount under (ii) above reduced by the net proceeds of the sale of the
property. If the unpaid principal balance plus accrued interest and some
expenses is paid by the special hazard insurer, the amount of further coverage
under the related special hazard insurance policy will be reduced by that amount
less any net proceeds from the sale of the property. Any amount paid as the cost
of repair of the property will further reduce coverage by that amount.
Restoration of the property with the proceeds described under (i) above will
satisfy the condition under each mortgage pool insurance policy or contract pool
insurance policy that the property be restored before a claim under the policy
may be validly presented with respect to the defaulted mortgage loan or contract
secured by the related property. The payment described under (ii) above will
render presentation of a claim relating to a 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 some
expenses will not affect the total Insurance Proceeds paid to
certificateholders, but will affect the relative amounts of coverage remaining
under the related special hazard insurance policy and mortgage pool insurance
policy or contract pool insurance policy.
To the extent described 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 depositor or
Residential Funding Corporation.
BANKRUPTCY BONDS
In the event of a personal bankruptcy of a mortgagor, a bankruptcy court
may establish the value of the mortgaged property of the mortgagor at a
Deficient Valuation. The amount of the secured debt could then be reduced to
that value, and, thus, the holder of the mortgage loan or contract would become
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an unsecured creditor to the extent the outstanding principal balance of the
mortgage loan or contract, together with any senior mortgage loan in the case of
a junior mortgage loan, or contract exceeds the value assigned to the mortgaged
property by the bankruptcy court.
In addition, other modifications of the terms of a mortgage loan or
contract can result from a bankruptcy proceeding, including a Debt Service
Reduction. See 'Certain Legal Aspects of Mortgage Loans and Contracts -- The
Mortgage Loans -- Anti-Deficiency Legislation and Other Limitations on Lenders.'
Any bankruptcy policy to provide coverage for Bankruptcy Losses resulting from
proceedings under the federal Bankruptcy Code obtained for a trust will be
issued by an insurer named in the related prospectus supplement. The level of
coverage under each bankruptcy policy will be set forth in the related
prospectus supplement.
RESERVE FUNDS
If so specified in the related prospectus supplement, the depositor will
deposit or cause to be deposited in a reserve fund, any combination of cash or
Permitted Investments in specified amounts, or any other instrument satisfactory
to the rating agency or agencies, which will be applied and maintained in the
manner and under the conditions specified in the related prospectus supplement.
In the alternative or in addition to that deposit, to the extent described in
the related prospectus supplement, a reserve fund may be funded through
application of all or a portion of amounts otherwise payable on any related
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 the funding is dependent are lower than anticipated.
With respect to any series of certificates as to which credit enhancement
includes a letter of credit, if so specified in the related prospectus
supplement, under specified circumstances the remaining amount of the letter of
credit may be drawn by the trustee and deposited in a reserve fund. Amounts in a
reserve fund may be
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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. If so
specified in the related prospectus supplement, amounts in a reserve fund may be
available only to cover specific types of losses, or losses on specific mortgage
loans. Unless otherwise specified in the related prospectus supplement, any
reserve fund will not be deemed to be part of the related trust. A reserve fund
may provide coverage to more than one series of certificates, if set forth in
the related prospectus supplement.
The trustee will have a perfected security interest for the benefit of the
certificateholders in the assets in the reserve fund, unless the assets are
owned by the related trust. However, to the extent that the depositor, any
affiliate of the depositor or any other entity has an interest in any reserve
fund, in the event of the bankruptcy, receivership or insolvency of that entity,
there could be delays in withdrawals from the reserve fund and the corresponding
payments to the certificateholders. These delays could adversely affect the
yield to investors on the related certificates.
Amounts deposited in any reserve fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of a
servicer, the master servicer, the Certificate Administrator or any other person
named in the related prospectus supplement.
CERTIFICATE INSURANCE POLICIES; SURETY BONDS
The depositor may obtain one or more certificate insurance policies or
guaranties or one or more surety bonds, or one or more guarantees issued by
insurers or other parties acceptable to the rating agency or agencies rating the
certificates offered insuring the holders of one or more classes of certificates
the payment of amounts due in accordance with the terms of that class or those
classes of certificates. Any certificate insurance policy, surety bond or
guaranty will have the characteristics described in, and will be in accordance
with any limitations and exceptions described in, the related prospectus
supplement.
MAINTENANCE OF CREDIT ENHANCEMENT
If credit enhancement has been obtained for a series of certificates, the
master servicer, the servicer or the Certificate Administrator will be obligated
to exercise its best reasonable efforts to keep or cause to be kept the credit
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enhancement in full force and effect throughout the term of the applicable
pooling and servicing agreement, unless coverage thereunder has been exhausted
through payment of claims or otherwise, or substitution therefor is made as
described below under ' -- Reduction or Substitution of Credit Enhancement.' The
master servicer, 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.
The master servicer, the servicer or the Certificate Administrator will
agree to pay the premiums for each mortgage pool insurance policy, special
hazard insurance policy, bankruptcy policy, certificate insurance policy or
surety bond, as applicable, on a timely basis, unless the premiums are paid
directly by the trust. As to mortgage pool insurance policies generally, if the
related insurer ceases to be a Qualified Insurer, 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
the policy or bond. If the cost of the replacement policy is greater than the
cost of the existing policy or bond, the coverage of the replacement policy or
bond will, unless otherwise agreed to by the depositor, be reduced to a level so
that its premium rate does not exceed the premium rate on the original insurance
policy. If a pool insurer ceases to be a Qualified Insurer because it ceases to
be approved as an insurer by Freddie Mac or Fannie Mae or any successor entity,
the master servicer, the servicer or the Certificate Administrator 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, at the same
cost limit. Any losses in market value of the certificates associated with any
reduction or withdrawal in rating by an applicable rating agency shall be borne
by the certificateholders.
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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 is not required to expend its own
funds to restore the damaged property unless it determines (i) that restoration
will increase the proceeds to one or more classes of certificateholders on
liquidation of the mortgage loan after reimbursement of the master servicer for
its expenses and (ii) that the expenses will be recoverable by it through
Liquidation Proceeds or Insurance Proceeds. If recovery under any letter of
credit, mortgage pool insurance policy, contract pool insurance policy, other
credit enhancement or any related primary insurance policy is not available
because the master servicer has been unable to make the above determinations,
has made the determinations incorrectly or recovery is not available for any
other reason, the master servicer is nevertheless obligated to follow whatever
normal practices and procedures, in accordance with the preceding sentence, that
it deems necessary or advisable to realize upon the defaulted mortgage loan and
if this determination has been incorrectly made, is entitled to reimbursement of
its expenses in connection with the restoration.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
The amount of credit support provided with respect to any series of
certificates and relating to various types of losses incurred may be reduced
under specified circumstances. In most cases, the amount available as credit
support will be subject to periodic reduction on a non-discretionary basis in
accordance with a schedule or formula set forth in the related pooling and
servicing agreement. Additionally, in most cases, the credit support may be
replaced, reduced or terminated, and the formula used in calculating the amount
of coverage with respect to Bankruptcy Losses, Special Hazard Losses or Fraud
Losses may be changed, without the consent of the certificateholders, upon the
written assurance from each applicable rating agency that the then-current
rating of the related series of certificates will not be adversely affected
thereby.
Furthermore, if the credit rating of any obligor under any applicable
credit enhancement is downgraded, the credit rating of each class of the related
certificates may be downgraded to a corresponding level, and, unless otherwise
specified in the related prospectus supplement, neither the master servicer, the
servicer, the Certificate Administrator nor the depositor will be obligated to
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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 any credit
support with other credit enhancement instruments issued by obligors whose
credit ratings are equivalent to the downgraded level and in lower amounts which
would satisfy the downgraded level, provided that the then-current rating of
each class of the related series of certificates is maintained. Where the credit
support is in the form of a reserve fund, a permitted reduction in the amount of
credit enhancement will result in a release of all or a portion of the assets in
the reserve fund to the depositor, the master servicer or any other person that
is entitled to the credit support. Any assets so released and any amount by
which the credit enhancement is reduced will not be available for distributions
in future periods.
OTHER FINANCIAL OBLIGATIONS RELATED TO THE CERTIFICATES
SWAPS AND YIELD SUPPLEMENT AGREEMENTS
The trustee on behalf of the trust may enter into interest rate swaps and
related caps, floors and collars to minimize the risk to certificateholders of
adverse changes in interest rates, and other yield supplement agreements or
similar yield maintenance arrangements that do not involve swap agreements or
other notional principal contracts.
An interest rate swap is an agreement between two parties to exchange a
stream of interest payments on an agreed hypothetical or 'notional' principal
amount. No principal amount is exchanged between the counterparties to an
interest rate swap. In the typical swap, one party agrees to pay a fixed rate on
a notional principal amount, while the counterparty pays a floating rate based
on one or more reference interest rates including the London Interbank Offered
Rate or, LIBOR, a specified bank's prime rate or U.S. Treasury Bill rates.
Interest rate swaps also permit counterparties to exchange a floating rate
obligation based upon one reference interest rate (such as LIBOR) for a floating
rate obligation based upon another referenced interest rate (such as U.S.
Treasury Bill rates).
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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.
There can be no assurance that the trust will be able to enter into or
offset swaps or enter into yield supplement agreements at any specific time or
at prices or on other terms that are advantageous. In addition, although the
terms of the swaps and yield supplement agreements may provide for termination
under some circumstances, there can be no assurance that the trust will be able
to terminate a swap or yield supplement agreement when it would be economically
advantageous to the trust to do so.
PURCHASE OBLIGATIONS
Some types of mortgage collateral and classes of certificates of any
series, as specified in the related prospectus supplement, may be subject to a
purchase obligation. The terms and conditions of each purchase obligation,
including the purchase price, timing and payment procedure, will be described in
the related prospectus supplement. A purchase obligation with respect to
mortgage collateral may apply to the mortgage collateral or to the related
certificates. Each purchase obligation may be a secured or unsecured obligation
of its provider, which may include a bank or other financial institution or an
insurance company. Each purchase obligation will be evidenced by an instrument
delivered to the trustee for the benefit of the applicable certificateholders of
the related series. Unless otherwise specified in the related prospectus
supplement, each purchase obligation with respect to mortgage 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 the obligations relate.
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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, at times, 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
contained in this prospectus or any prospectus supplement and the coverage
thereunder do not purport to be complete and are qualified in their entirety by
reference to the forms of policies.
PRIMARY INSURANCE POLICIES
Unless otherwise specified in the related prospectus supplement, and except
as described below, (i) each mortgage loan having a LTV ratio at origination of
over 80% will be covered by a primary mortgage guaranty insurance policy
insuring against default on the mortgage loan up to an amount set forth in the
related prospectus supplement, unless and until the principal balance of the
mortgage loan is reduced to a level that would produce a LTV ratio equal to or
less than 80%, and (ii) the depositor or the related mortgage collateral seller
will represent and warrant that, to the best of its knowledge, the mortgage
loans are so covered. Alternatively, coverage of the type that would be provided
by a primary insurance policy if obtained may be provided by another form of
credit enhancement as described herein under 'Description of Credit
Enhancement.' However, the foregoing standard may vary significantly depending
on the characteristics of the mortgage loans and the applicable underwriting
standards. A mortgage loan will not be considered to be an exception to the
foregoing standard if no primary insurance policy was obtained at origination
but the mortgage loan has amortized to an 80% or less LTV ratio level as of the
applicable cut-off date. In most cases, the depositor will have the ability to
cancel any primary insurance policy if the LTV ratio of the mortgage loan is
reduced to 80% or less (or a lesser specified percentage) based on an appraisal
of the mortgaged property after the related closing date or as a result of
principal payments that reduce the principal balance of the mortgage loan after
the closing date. Junior mortgage loans usually will not be required by the
depositor to be covered by a primary mortgage guaranty insurance policy insuring
against default on the mortgage loan.
Pursuant to recently enacted federal legislation, mortgagors with respect
to many residential mortgage loans originated after July 1999 will have a right
to cancel any private mortgage insurance policy insuring loans when the
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outstanding principal amount of the mortgage loan has been reduced or is
scheduled to have been reduced to 80% or less of the value of the mortgaged
property at the time the mortgage loan was originated. The mortgagor's right to
cancel the policy is subject to certain conditions, including the condition that
no monthly payment has been thirty days or more past due during the twelve
months prior to the cancellation date, and no monthly payment has been sixty
days or more past due during the twelve months prior to that period. In
addition, any requirement for private mortgage insurance will automatically
terminate when the scheduled principal balance of the mortgage loan, based on
the original amortization schedule for the mortgage loan, is reduced to 78% or
less of the value of the mortgaged property at the time of origination, provided
the mortgage loan is current.
In most cases, Mexico Mortgage Loans will have LTV ratios of less than 80%
and will not be insured 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.
Mortgage loans which are subject to negative amortization will only be
covered by a primary insurance policy if that coverage was required upon their
origination, notwithstanding that subsequent negative amortization may cause
that mortgage loan's LTV ratio, based on the then-current balance, to
subsequently exceed the limits which would have required coverage upon their
origination.
Primary insurance policies may be required to be obtained and paid for by
the mortgagor, or may be paid for by the servicer.
While the terms and conditions of the primary insurance policies issued by
one primary mortgage guaranty insurer will usually differ from those in primary
insurance policies issued by other primary insurers, each primary insurance
policy generally will pay either:
the insured percentage of the loss on the related mortgaged property;
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the entire amount of the loss, after receipt by the primary insurer of
good and merchantable title to, and possession of, the mortgaged property;
or
at the option of the primary insurer under certain primary insurance
policies, the sum of the delinquent monthly payments plus any Advances
made by the insured, both to the date of the claim payment and,
thereafter, monthly payments in the amount that would have become due
under the mortgage loan if it had not been discharged plus any Advances
made by the insured until the earlier of (a) the date the mortgage loan
would have been discharged in full if the default had not occurred or (b)
an approved sale.
The amount of the loss as calculated under a primary insurance policy
covering a mortgage loan will in most cases consist of the unpaid principal
amount of such mortgage loan and accrued and unpaid interest thereon and
reimbursement of some expenses, less:
rents or other payments received by the insured (other than the proceeds
of hazard insurance) that are derived from the related mortgaged property;
hazard insurance proceeds received by the insured in excess of the amount
required to restore the mortgaged property and which have not been applied
to the payment of the mortgage loan;
amounts expended but not approved by the primary insurer;
claim payments previously made on the mortgage loan; and
unpaid premiums and other amounts.
As conditions precedent to the filing or payment of a claim under a primary
insurance policy, in the event of default by the mortgagor, the insured will
typically be required, among other things, to:
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;
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
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effective date of the primary insurance policy (ordinary wear and tear
excepted); and
tender to the primary insurer good and merchantable title to, and
possession of, the mortgaged property.
For any certificates offered under this prospectus, the master servicer
will maintain or cause each subservicer to maintain, as the case may be, in full
force and effect and to the extent coverage is available a primary insurance
policy with regard to each mortgage loan for which coverage is required under
the standard described above unless an exception to such standard applies or
alternate credit enhancement is provided as described in the related prospectus
supplement; provided that the primary insurance policy was in place as of the
cut-off date and the depositor had knowledge of such primary insurance policy.
STANDARD HAZARD INSURANCE ON MORTGAGED PROPERTIES
The terms of the mortgage loans (other than Cooperative Loans) require each
mortgagor to maintain a hazard insurance policy covering the related mortgaged
property and providing for coverage at least equal to that of the standard form
of fire insurance policy with extended coverage customary in the state in which
the property is located. Most coverage will be in an amount equal to the lesser
of the principal balance of the mortgage loan and, in the case of junior
mortgage loans, the principal balance of any senior mortgage loans, or 100% of
the insurable value of the improvements securing the mortgage loan. The pooling
and servicing agreement will provide that the master servicer or servicer shall
cause the hazard policies to be maintained or shall obtain a blanket policy
insuring against losses on the mortgage loans. The master servicer may satisfy
its obligation to cause hazard policies to be maintained by maintaining a
blanket policy insuring against losses on those 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 subservicers.
If junior mortgage loans are included within any trust, investors should also
consider the application of hazard insurance proceeds discussed herein under
'Certain Legal Aspects of Mortgage Loans and Contracts -- The Mortgage Loans
- --Junior Mortgages, Rights of Senior Mortgagees.'
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The standard form of fire and extended coverage policy covers physical
damage to or destruction of the improvements on the property by fire, lightning,
explosion, smoke, windstorm, hail, riot, strike and civil commotion, in
accordance with the conditions and exclusions specified in each policy. The
policies relating to the mortgage loans will be underwritten by different
insurers under different state laws in accordance with different applicable
state forms and therefore will not contain identical terms and conditions, the
basic terms of which are dictated by respective state laws. These policies
typically do not cover any physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement, including earthquakes, landslides and mudflows, nuclear reactions, wet
or dry rot, vermin, rodents, insects or domestic animals, theft and, in some
cases, vandalism. The foregoing list is merely indicative of some kinds of
uninsured risks and is not intended to be all-inclusive. Where the improvements
securing a mortgage loan are located in a federally designated flood area at the
time of origination of that mortgage loan, the pooling and servicing agreement
typically 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 to the lesser of the amount required to compensate for any loss
or damage on a replacement cost basis or the maximum insurance available under
the federal flood insurance program.
The hazard insurance policies covering the mortgaged properties typically
contain a co-insurance clause that in effect requires the related mortgagor at
all times to carry insurance of a specified percentage, typically 80% to 90%, of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the related mortgagor's coverage
falls below this specified percentage, this clause usually provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(i) the replacement cost of the improvements damaged or destroyed less physical
depreciation or (ii) the proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of the
improvements.
Since the amount of hazard insurance that mortgagors are required to
maintain on the improvements securing the mortgage loans may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss. See 'Subordination' above for a description of when subordination is
provided, the protection, limited to the Special Hazard Amount as described in
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the related prospectus supplement, afforded by subordination, and 'Description
of Credit Enhancement -- Special Hazard Insurance Policies' for a description of
the limited protection afforded by any special hazard insurance policy against
losses occasioned by hazards which are otherwise uninsured against.
Hazard insurance on the Mexican properties will usually be provided by
insurers located in Mexico. The depositor may not be able to obtain as much
information about the financial condition of the companies issuing hazard
insurance policies in Mexico as it is able to obtain with respect to companies
based in the United States. The ability of the 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 that 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 the policies in the state in which the manufactured home is
located, and in an amount that is not less than the maximum insurable value of
the manufactured home or the principal balance due from the mortgagor on the
related contract, whichever is less. 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 maintain
at its expense hazard insurance with respect to the manufactured home or
indemnify the trustee against any damage to the 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 upon foreclosure, or other acquisition of possession, and
conveyance of the mortgaged premises to HUD or 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
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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 depositor for VA loans in excess of certain amounts. The amount
of any additional coverage will be set forth in the related prospectus
supplement. Any VA guaranty relating to contracts underlying a series of
certificates will be described in the related prospectus supplement.
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THE DEPOSITOR
The depositor is an indirect wholly-owned subsidiary of GMAC Mortgage
Group, Inc., which is a wholly-owned subsidiary of General Motors Acceptance
Corporation. The depositor was incorporated in the State of Delaware in November
1994. The depositor was organized for the purpose of acquiring mortgage loans
and contracts and issuing securities backed by such mortgage loans and
contracts. The depositor anticipates that it will in many cases have acquired
mortgage loans indirectly through Residential Funding Corporation, which is also
an indirect wholly-owned subsidiary of GMAC Mortgage Group, Inc. The depositor
does not have, nor is it expected in the future to have, any significant assets.
The certificates do not represent an interest in or an obligation of the
depositor. The depositor's only obligations with respect to a series of
certificates will be pursuant to limited representations and warranties made by
the depositor or as otherwise provided in the related prospectus supplement.
The depositor maintains its principal office at 8400 Normandale Lake
Boulevard, Suite 600, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000.
RESIDENTIAL FUNDING CORPORATION
Unless otherwise specified in the related prospectus supplement,
Residential Funding Corporation, an affiliate of the depositor, will act as the
master servicer or Certificate Administrator for each series of certificates.
Residential Funding Corporation buys conventional mortgage loans under
several loan purchase programs from mortgage loan originators or sellers
nationwide, including affiliates, that meet its seller/servicer eligibility
requirements and services mortgage loans for its own account and for others.
Residential Funding Corporation's principal executive offices are located at
8400 Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437. Its
telephone number is (612) 832-7000. Residential Funding Corporation conducts
operations from its headquarters in Minneapolis and from offices located
primarily in California, Texas and Maryland.
Residential Funding Corporation's delinquency, foreclosure and loan loss
experience as of the end of the most recent calendar quarter for which that
information is available on the portfolio of loans for which it acts as master
servicer and that were originated under its AlterNet Mortgage Program or similar
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loan programs will be summarized in each prospectus supplement relating to a
mortgage pool for which Residential Funding Corporation will act as master
servicer. There can be no assurance that this experience will be representative
of the results that may be experienced with respect to any particular series of
certificates.
THE POOLING AND SERVICING AGREEMENT
As described in this prospectus under 'Introduction' and 'Description of
the Certificates -- General,' each series of certificates will be issued under a
pooling and servicing agreement as described in that section. The following
summaries describe additional provisions common to each pooling and servicing
agreement.
Servicing 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 at the percentage per annum described in the related prospectus
supplement of the outstanding principal balance of each mortgage loan or
contract. Any subservicer will also be entitled to the servicing fee as
described in the related prospectus supplement. 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 fees may be fixed or variable. In
addition, the master servicer, any servicer or the relevant subservicers, if
any, will be entitled to servicing compensation in the form of assumption fees,
late payment 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, to the
extent not applied as Compensating Interest. Any Spread retained by a mortgage
collateral seller, the master servicer, or any servicer or subservicer will not
constitute part of the servicing fee. Notwithstanding the foregoing, with
respect to a series of certificates as to which the trust includes mortgage
securities, the compensation payable to the master servicer or Certificate
Administrator for servicing and
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administering such mortgage 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 mortgage securities and
may be retained from distributions of interest thereon, if so specified in the
related prospectus supplement. In addition, some reasonable duties of the master
servicer may be performed by an affiliate of the master servicer who will be
entitled to compensation for performance of those duties.
The master servicer will pay or cause to be paid some of the ongoing
expenses associated with each trust and incurred by it in connection with its
responsibilities under the pooling and servicing agreement, including, without
limitation, payment of any fee or other amount payable for any alternative
credit enhancement arrangements, payment of the fees and disbursements of the
trustee, any custodian appointed by the trustee, the certificate registrar and
any paying agent, and payment of expenses incurred in enforcing the obligations
of subservicers and sellers. The master servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of subservicers
and sellers under limited circumstances. In addition, as indicated in the
preceding section, the master servicer will be entitled to reimbursements for
some of the expenses incurred by it in connection with Liquidated Mortgage Loans
and in connection with the restoration of mortgaged properties, such right of
reimbursement being prior to the rights of certificateholders to receive any
related Liquidation Proceeds, including Insurance Proceeds.
Evidence as to Compliance
Each pooling and servicing agreement will provide that the master servicer
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:
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 the related pooling and servicing
agreement, has been made under the supervision of that officer;
to the best of the officer's knowledge, based on the review, the master
servicer or the Certificate Administrator has complied in all material
respects with the minimum servicing standards set forth in the Uniform
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Single Attestation Program for Mortgage Bankers and has fulfilled all its
obligations under the related 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, the statement shall include a description of such
noncompliance or specify each default known to the officer and the nature
and status thereof; and
to the best of the officer's knowledge, each subservicer has complied in
all material respects with the minimum servicing standards set forth in
the Uniform Single Attestation Program for Mortgage Bankers and has
fulfilled all of its material obligations under its subservicing agreement
in all material respects throughout such year, or, if there has been
material noncompliance with the servicing standards or a material default
in the fulfillment of such obligations, the statement shall include a
description of the noncompliance or specify each default, as the case may
be, known to the officer and the nature and status thereof.
In addition, each pooling and servicing agreement will provide that the
master servicer 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 the firm, the accounting standards
require it to report. In rendering such statement, the firm may rely, as to
matters relating to the direct servicing of mortgage loans by subservicers, on
comparable statements prepared in connection with examinations conducted in
similar manners.
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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 except upon a determination that
its duties thereunder are no longer permissible under applicable law. No
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 the related pooling and
servicing agreement.
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 of the master servicer or the depositor,
will be under any liability to the trust or the certificateholders for any
action taken or for refraining from 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 that 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 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 related certificateholders. The legal
expenses and costs of the action and any liability resulting therefrom will be
expenses, costs and liabilities of the trust and the servicer, the master
servicer or the Certificate Administrator will be entitled to be reimbursed out
of funds otherwise distributable to certificateholders.
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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EVENTS OF DEFAULT
Events of default under the pooling and servicing agreement for a series of
certificates will include:
any failure by the servicer, if the servicer is a party to the pooling and
servicing agreement, or master servicer to make a required deposit to the
Certificate Account or, if the master servicer is the paying agent, to
distribute to the holders of any class of certificates of that series any
required payment which continues unremedied for five days after the giving
of written notice of the failure to the master servicer by the trustee or
the depositor, or to the master servicer, the depositor and the trustee by
the holders of certificates of such class evidencing not less than 25% of
the aggregate percentage interests constituting that class;
any failure by the master servicer or 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 that series of certificates which continues unremedied for 30
days, or 15 days in the case of a failure to pay the premium for any
insurance policy which is required to be maintained under the pooling and
servicing agreement, after the giving of written notice of the failure to
the master servicer or Certificate Administrator, as applicable, by the
trustee or the depositor, or to the master servicer, the Certificate
Administrator, the depositor and the trustee by the holders of any class
of certificates of that series evidencing not less than 25%, or 33% in the
case of a trust including mortgage securities, of the aggregate percentage
interests constituting that class; and
some events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the master servicer or the
Certificate Administrator and certain actions by the master servicer or
the Certificate Administrator indicating its insolvency or inability to
pay its obligations.
A default under the terms of any mortgage securities included in any trust
will not constitute an event of default under the related pooling and servicing
agreement.
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RIGHTS UPON EVENT OF DEFAULT
So long as an event of default remains unremedied, either the depositor or
the trustee may, and, at the direction of the holders of certificates evidencing
not less than 51% of the aggregate voting rights in the related trust, except as
otherwise provided for in the related pooling and servicing agreement with
respect to the credit enhancer, the trustee shall, by written notification to
the master servicer or the Certificate Administrator, as applicable, and to the
depositor 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 the trust and in and to the
mortgage collateral and the proceeds thereof, whereupon the trustee or, upon
notice to the depositor and with the depositor's consent, its designee will
succeed to all responsibilities, duties and liabilities of the master servicer
or the Certificate Administrator under the pooling and servicing agreement,
other than the obligation to purchase mortgage loans under some circumstances,
and will be entitled to similar compensation arrangements. If the trustee would
be obligated to succeed the master servicer but is unwilling so to act, it may
appoint or if it is unable so to act, it shall appoint or petition a court of
competent jurisdiction for the appointment of, a Fannie Mae- or Freddie
Mac-approved mortgage servicing institution with a net worth of at least
$10,000,000 to act as successor to the master servicer under the pooling and
servicing agreement, unless otherwise set forth in the pooling and servicing
agreement. Pending appointment, the trustee is obligated to act in that
capacity. The trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial master servicer or the Certificate Administrator under the
pooling and servicing agreement.
No certificateholder will have any right under a pooling and servicing
agreement to institute any proceeding with respect to the pooling and servicing
agreement, except as otherwise provided for in the related pooling and servicing
agreement with respect to the credit enhancer, unless the holder previously has
given to the trustee written notice of default and the continuance thereof and
unless the holders of certificates of any class evidencing not less than 25% of
the aggregate percentage interests constituting that class have made written
request upon the trustee to institute the proceeding in its own name as trustee
thereunder and have offered to the trustee reasonable indemnity and the trustee
for 60 days after receipt of the request and indemnity has neglected or refused
to institute any proceeding. However, the trustee will be under no obligation to
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exercise any of the trusts or powers vested in it by the pooling and servicing
agreement or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the holders of
certificates covered by the pooling and servicing agreement, unless the
certificateholders have offered to the trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
AMENDMENT
Each pooling and servicing agreement may be amended by the depositor, the
master servicer, the Certificate Administrator or any servicer, as applicable,
and the trustee, without the consent of the related certificateholders:
to cure any ambiguity;
to correct or supplement any provision therein which may be inconsistent
with any other provision therein or to correct any error;
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) the change may
not adversely affect in any material respect the interests of any
certificateholder, as evidenced by an opinion of counsel, and (c) the
change may not adversely affect the then-current rating of any rated
classes of certificates, as evidenced by a letter from each applicable
rating agency;
if an election to treat the related trust as a 'real estate mortgage
investment conduit' or, REMIC has been made, to modify, eliminate or add
to any of its provisions (a) to the extent necessary to maintain the
qualification of the trust as a REMIC or to avoid or minimize the risk of
imposition of any tax on the related trust, provided that the trustee has
received an opinion of counsel to the effect that (1) the action is
necessary or desirable to maintain qualification or to avoid or minimize
that risk, and (2) the action
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will not adversely affect in any material respect the interests of any
related certificateholder, or (b) to modify the provisions regarding the
transferability of the REMIC residual certificates, provided that the
depositor has determined that the change would not adversely affect the
applicable ratings of any classes of the certificates, as evidenced by a
letter from each applicable rating agency, 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;
to make any other provisions with respect to matters or questions arising
under the pooling and servicing agreement which are not materially
inconsistent with its provisions, so long as the action will not adversely
affect in any material respect the interests of any certificateholder; or
to amend any provision that is not material to holders of any class of
related certificates.
The pooling and servicing agreement may also be amended by the depositor,
the master servicer, Certificate Administrator or servicer, as applicable, and
the trustee, except as otherwise provided for in the related pooling and
servicing agreement with respect to the credit enhancer, with the consent of the
holders of certificates of each class affected thereby evidencing, in each case,
not less than 66% of the aggregate percentage interests constituting that class
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the pooling and servicing agreement or of
modifying in any manner the rights of the related certificateholders, except
that no such amendment may (i) reduce in any manner the amount of, or delay the
timing of, payments received on mortgage collateral which are required to be
distributed on a certificate of any class without the consent of the holder of
the certificate or (ii) reduce the percentage of certificates of any class the
holders of which are required to consent to any such amendment unless the
holders of all certificates of that class have consented to the change in the
percentage.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related trust, the trustee will not be entitled to consent to any
amendment to a pooling and servicing agreement without having first received an
opinion of counsel to the effect that the amendment or the exercise of any power
granted to the master servicer, the Certificate Administrator, servicer, the
depositor or the trustee in accordance with the amendment will not result in the
imposition of a tax on the related trust or cause the trust to fail to qualify
<PAGE>
as a REMIC.
TERMINATION; RETIREMENT OF CERTIFICATES
The primary obligations created by the pooling and servicing agreement for
each series of certificates will terminate upon the payment to the related
certificateholders of all amounts held in the Certificate Account or by the
master servicer or any servicer and required to be paid to the
certificateholders following the earlier of
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
the purchase by the master servicer, the Certificate Administrator, the
servicer or the depositor or, if specified in the related prospectus
supplement, by the holder of the REMIC residual certificates (see
'Material Federal Income Tax Consequences' below) from the trust for such
series of all remaining mortgage collateral and all property acquired in
respect of the mortgage collateral.
Any option to purchase described in the second item above will be limited
to cases in which the aggregate Stated Principal Balance of the remaining
mortgage loans is less than or equal to ten percent (10%) of the initial
aggregate Stated Principal Balance of the mortgage loans. In addition to the
foregoing, the master servicer, the Certificate Administrator or the depositor
may have the option to purchase, in whole but not in part, the certificates
specified in the related prospectus supplement in the manner described in the
related prospectus supplement. Upon the purchase of such certificates or at any
time thereafter, at the option of the master servicer, the Certificate
Administrator or the depositor, the mortgage collateral may be sold, thereby
effecting a retirement of the certificates and the termination of the trust, or
the certificates so purchased may be held or resold by the master servicer, the
Certificate Administrator or the depositor. Written notice of termination of the
pooling and servicing agreement will be given to each certificateholder, and the
final distribution will be made only upon surrender and cancellation of the
certificates at an office or agency appointed by the trustee which will be
specified in the notice of termination. If the certificateholders are permitted
to terminate the trust under the applicable pooling and servicing agreement, a
penalty may be imposed upon the certificateholders based upon
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the fee that would be foregone by the master servicer, the Certificate
Administrator or the servicer, as applicable, because of the related
termination.
Any purchase described in the preceding paragraph of mortgage collateral
and property acquired relating to the mortgage collateral evidenced by a series
of certificates shall be made at the option of the master servicer, Certificate
Administrator, servicer, depositor or, if applicable, the holder of the REMIC
residual certificates at the price specified in the related prospectus
supplement. The exercise of that right will effect early retirement of the
certificates of that series, but the right of any entity to purchase the
mortgage collateral and related property will be in accordance with the
criteria, and will be at the price, set forth in the related prospectus
supplement. Early termination in this manner may adversely affect the yield to
holders of some classes of the certificates. If a REMIC election has been made,
the termination of the related trust will be effected in a manner consistent
with applicable federal income tax regulations and its status as a REMIC.
In addition to the optional repurchase of the property in the related
trust, if so specified in the related prospectus supplement, a holder of the
Call Class will have the right, solely at its discretion, to terminate the
related trust and thereby effect early retirement of the certificates of the
series, on any distribution date after the 12th distribution date following the
date of initial issuance of the related series of certificates and until the
date when the optional termination rights of the master servicer and the
depositor become exercisable. The Call Class will not be offered pursuant to the
prospectus supplement. Any such call will be of the entire trust at one time;
multiple calls with respect to any series of certificates will not be permitted.
In the case of a call, the holders of the certificates will be paid a price
equal to the Call Price. To exercise the call, the Call certificateholder must
remit to the related trustee for distribution to the certificateholders, funds
equal to the Call Price. If those funds are not deposited with the related
trustee, the certificates of that series will remain outstanding. In addition,
in the case of a trust for which a REMIC election or elections have been made,
this termination will be effected in a manner consistent with applicable Federal
income tax regulations and its status as a REMIC. In connection with a call by
the holder of a Call Certificate, the final payment to the certificateholders
will be made upon surrender of the related certificates to the trustee. Once the
certificates have been surrendered and paid in full, there will not be any
further liability to certificateholders.
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THE TRUSTEE
The trustee under each pooling and servicing agreement will be named in the
related prospectus supplement. The commercial bank or trust company serving as
trustee may have normal banking relationships with the depositor and/or its
affiliates, including Residential Funding Corporation.
The trustee may resign at any time, in which event the depositor will be
obligated to appoint a successor trustee. The depositor may also remove the
trustee if the trustee ceases to be eligible to continue as trustee under the
pooling and servicing agreement or if the trustee becomes insolvent. Upon
becoming aware of those circumstances, the depositor will be obligated to
appoint a successor trustee. The trustee may also be removed at any time by the
holders of certificates evidencing not less than 51% of the aggregate voting
rights in the related trust. Any resignation or removal of the trustee and
appointment of a successor trustee will not become effective until acceptance of
the appointment by the successor trustee.
YIELD CONSIDERATIONS
The yield to maturity of a certificate will depend on the price paid by the
holder for the certificate, the pass-through rate on any certificate entitled to
payments of interest, which pass-through rate may vary if so specified in the
related prospectus supplement, and the rate and timing of principal payments,
including prepayments, defaults, liquidations and repurchases, on the mortgage
collateral and the allocation thereof to reduce the principal balance of the
certificate or its notional amount, if applicable.
In general, defaults on mortgage loans and 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 LTV ratios or
combined LTV ratios, as applicable, may be higher than for other types of
mortgage loans or manufactured housing contracts. Likewise, the rate of default
on mortgage loans or manufactured housing contracts that have been originated
pursuant to lower than traditional underwriting standards may be higher than
those originated pursuant to traditional standards. A trust may include mortgage
loans or contracts that are one month or more
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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 LTV ratios or combined LTV 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. The yield on
any class of certificates and the timing of principal payments on that class may
also be affected by modifications or actions that may be approved by the master
servicer as described in this prospectus under 'Description of the Certificates
- -- Servicing and Administration of Mortgage Collateral,' in connection with a
mortgage loan or contract that is in default, or if a default is reasonably
foreseeable.
The risk of loss on mortgage loans made on Puerto Rico mortgage loans may
be greater than on mortgage loans that are made to mortgagors who are United
States residents and citizens or that are secured by properties located in the
United States. See 'Certain Legal Aspects of Mortgage Loans and Contracts' in
this prospectus.
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 the 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 may
also be greater than mortgage loans that are made to U.S. borrowers located in
the United States. See 'Certain Legal Aspects of Mortgage Loans and Contracts'
in this prospectus.
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
<PAGE>
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, the 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' in this prospectus.
The amount of interest payments with respect to each item of mortgage
collateral distributed monthly to holders of a class of certificates entitled to
payments of interest will be calculated, or accrued in the case of deferred
interest or accrual certificates, on the basis of that class's specified
percentage of each payment of interest, or accrual in the case of accrual
certificates, and will be expressed as a fixed, adjustable or variable
pass-through rate payable on the outstanding principal balance or notional
amount of the certificate, or any combination of pass-through rates, calculated
as described in this prospectus and in the related prospectus supplement under
'Description of the Certificates -- Distributions.' Holders of strip
certificates or a class of certificates having a pass-through rate that varies
based on the weighted average interest rate of the underlying mortgage
collateral will be affected by disproportionate prepayments and repurchases of
mortgage collateral having higher net interest rates or higher rates applicable
to the strip certificates, as applicable.
The effective yield to maturity to each holder of certificates entitled to
payments of interest will be below that otherwise produced by the applicable
pass-through rate and purchase price of the certificate because, while interest
will accrue on each mortgage loan or contract from the first day of each month,
the distribution of interest will be made on the 25th day or, if the 25th day is
not a business day, the next succeeding business day, of the month following the
month of accrual or, in the case of a trust including mortgage securities, 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 pass-through
rates, each as specified in the related prospectus supplement. A variable
pass-through rate may be calculated based on the weighted average of the Net
Mortgage Rates, net of
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servicing fees and any Spread, of the related mortgage collateral for the month
preceding the distribution date. An adjustable pass-through rate may be
calculated by reference to an index or otherwise.
The aggregate payments of interest on a class of certificates, and the
yield to maturity thereon, will be affected by the rate of payment of principal
on the certificates, or the rate of reduction in the notional amount of
certificates entitled to payments of interest only, and, in the case 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 for the mortgage
collateral by the depositor, the master servicer and others, or conversions of
ARM loans to a fixed interest rate. See 'The Trusts -- Representations with
Respect to Mortgage Collateral' in this prospectus.
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 anticipated at the time of purchase, the purchaser's actual yield to
maturity will be lower than assumed. The effect of Principal Prepayments,
liquidations and purchases on yield will be particularly significant in the case
of a class of certificates entitled to payments of interest only or
disproportionate payments of interest. 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. In some circumstances, rapid prepayments may result in the failure of the
holders to recoup their original investment. In addition, the yield to maturity
on other types of classes of certificates, including accrual certificates,
certificates with a pass-through rate that fluctuates inversely with or at a
multiple of an index or other classes in a series including more than one class
of certificates, may be relatively more sensitive to the rate of prepayment on
<PAGE>
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 of mortgage
collateral, the greater will be the effect on an investor's yield to maturity.
As a result, the effect on an investor's yield of principal payments and
repurchases occurring at a rate higher or lower than the rate anticipated by the
investor during the period immediately following the issuance of a series of
certificates would not be fully offset by a subsequent like reduction or
increase in the rate of principal payments.
When a full prepayment is made on a mortgage loan, the mortgagor is charged
interest on the principal amount of the mortgage loan so prepaid for the number
of days in the month actually elapsed up to the date of the prepayment, at a
daily rate determined by dividing the mortgage rate by 365. Prepayments in full
generally will reduce the amount of interest distributed in the following month
to holders of certificates entitled to distributions of interest if the
resulting Prepayment Interest Shortfall is not covered by Compensating Interest.
See 'Description of the Certificates -- Prepayment Interest Shortfalls.' A
partial prepayment of principal is applied so as to reduce the outstanding
principal balance of the related mortgage loan or contract as of the first day
of the month in which the partial prepayment is received. As a result, the
effect of a partial prepayment on a mortgage loan or contract will be to reduce
the amount of interest distributed to holders of certificates in the month
following the receipt of the partial prepayment by an amount equal to one
month's interest at the applicable pass-through rate or Net Mortgage Rate, as
the case may be, on the prepaid amount if such shortfall is not covered by
Compensating Interest. 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 some ARM loans, the mortgage rate at origination may be
below the rate that would result if the index and margin relating thereto were
applied at origination. Under the applicable underwriting standards, the
mortgagor under each mortgage loan or contract usually will be qualified on the
basis of the mortgage rate in
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effect at origination. The repayment of any such mortgage loan or contract may
thus be dependent on the ability of the mortgagor to make larger monthly
payments following the adjustment of the mortgage rate. In addition, the
periodic increase in the amount paid by the mortgagor of a Buy-Down Mortgage
Loan during or at the end of the applicable Buy-Down Period may create a greater
financial burden for the mortgagor, who might not have otherwise qualified for a
mortgage under 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.
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 any
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 the
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 the 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.
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The mortgage rates on ARM loans that are subject to negative amortization
typically adjust monthly and their amortization schedules adjust less
frequently. Because initial mortgage rates are typically lower than the sum of
the indices applicable at origination and the related Note Margins, during a
period of rising interest rates as well as immediately after origination, the
amount of interest accruing on the principal balance of those mortgage loans may
exceed the amount of the scheduled monthly payment. As a result, a portion of
the accrued interest on negatively amortizing mortgage loans may become deferred
interest which will be added to their principal balance and will bear interest
at the applicable mortgage rate.
The addition of any deferred interest to the principal balance of any
related class of certificates will lengthen the weighted average life of that
class of certificates and may adversely affect yield to holders of those
certificates. In addition, with respect to ARM loans that are subject to
negative amortization, during a period of declining interest rates, it might be
expected that each scheduled monthly payment on such a mortgage loan would
exceed the amount of scheduled principal and accrued interest on its principal
balance, and since the excess will be applied to reduce the principal balance of
the related class or classes of certificates, the weighted average life of those
certificates will be reduced and may adversely affect yield to holders thereof.
If so specified in the related prospectus supplement, a trust may contain
GPM Loans or Buy-Down Mortgage Loans that 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.
With respect to Balloon Loans, payment of the Balloon Amount, which, based
on the amortization schedule of those mortgage loans, is expected to be a
substantial amount, will typically depend on the mortgagor's ability to obtain
refinancing of the mortgage loans or to sell the mortgaged property prior to the
maturity of the Balloon Loan. The ability to obtain refinancing will depend on a
number of factors prevailing at the time refinancing or sale is required,
including, without limitation, real estate values, the mortgagor's financial
situation, prevailing mortgage loan interest rates, the mortgagor's equity in
the related mortgaged property, tax laws and prevailing
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general economic conditions. Neither the depositor, the master servicer nor any
of their affiliates will be obligated to refinance or repurchase any mortgage
loan or to sell the mortgaged property.
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 a letter of credit,
insurance policy or bond, any Realized Losses on the mortgage collateral not
covered by the credit enhancement will be applied to a series of certificates in
the manner described in the related prospectus supplement and may reduce an
investor's anticipated yield to maturity.
The related prospectus supplement may set forth other factors concerning
the mortgage collateral securing a series of certificates or the structure of
such series that will affect the yield on the certificates.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under 'The Trusts,' the original terms to maturity of
the mortgage collateral in a given trust will vary depending upon the type of
mortgage collateral included in the trust. 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. 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.
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,' and the trust is unable to acquire any
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.
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 prepayment
standard or model and may contain tables setting forth the projected yields to
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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 that series that would be outstanding on specified
payment dates for the series based on the assumptions stated in the related
prospectus supplement, including assumptions that prepayments on the mortgage
collateral are made at rates corresponding to various percentages of the
prepayment standard or model. There is no assurance that prepayment of the
mortgage loans underlying a series of certificates will conform to any level of
the prepayment standard or model specified in the related prospectus supplement.
The following is a list of factors that may affect prepayment experience:
homeowner mobility;
economic conditions;
changes in mortgagors' housing needs;
job transfers;
unemployment;
mortgagors' 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; and
the obtaining of secondary financing by the mortgagor.
All statistics known to the depositor that have been compiled with respect
to prepayment experience on mortgage loans indicate that while some mortgage
loans may remain outstanding until their stated maturities, a
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substantial number will be paid prior to their respective stated maturities. The
rate of prepayment with respect to conventional fixed-rate mortgage loans has
fluctuated significantly in recent years. 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 those mortgage loans or contracts. The
depositor is not aware of any historical prepayment experience with respect to
mortgage loans secured by properties located in Mexico or Puerto Rico or with
respect to manufactured housing contracts and, accordingly, prepayments on such
loans or contracts 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 that loan if alternative financing on more favorable terms are
available.
Typically, 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.
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 the
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 Trusts -- The Contracts.'
Unless otherwise specified in the related prospectus supplement, all
mortgage loans, other than ARM loans, will contain due-on-sale provisions
permitting the mortgagee to accelerate the maturity of the mortgage loan upon
sale or some transfers by the mortgagor of the underlying mortgaged property.
Unless the related prospectus supplement indicates otherwise, the master
servicer will enforce any due-on-sale clause to the extent it has knowledge of
the conveyance or proposed conveyance of the underlying mortgaged property and
it is entitled to do so under applicable law, provided, however, that the master
servicer will not take any action in relation to the enforcement of any
due-on-sale provision which would adversely affect or jeopardize coverage under
any applicable insurance policy.
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An ARM loan is assumable, in some circumstances, if the proposed transferee
of the related mortgaged property establishes its ability to repay the mortgage
loan and, in the reasonable judgment of the master servicer or the related
subservicer, the security for the ARM loan would not be impaired by the
assumption. The extent to which ARM loans are assumed by purchasers of the
mortgaged properties rather than prepaid by the related mortgagors in connection
with the sales of the mortgaged properties will affect the weighted average life
of the related series of certificates. See 'Description of the Certificates --
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 provisions of each pooling and servicing
agreement and legal developments that may affect the prepayment rate of mortgage
loans or contracts.
In addition, some mortgage securities included in a mortgage pool may be
backed by underlying mortgage loans having differing interest rates.
Accordingly, the rate at which principal payments are received on the related
certificates will, to some extent, depend on the interest rates on the
underlying mortgage loans.
Some types of mortgage collateral included in a trust may have
characteristics that make it more likely to default than collateral provided for
mortgage pass-through certificates from other mortgage purchase programs. The
depositor anticipates including in mortgage collateral pools '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 were originated in accordance with
lower underwriting standards and which may have been made to mortgagors with
imperfect credit histories and prior bankruptcies. Likewise, a trust may include
mortgage loans or contracts that are one month or more delinquent at the time of
offering of the related series of certificates or are secured by junior liens on
the related mortgaged property. 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 mortgage loans may be prepaid by the mortgagors at any time without
payment of any prepayment fee or penalty, although a portion of the mortgage
loans provide for payment of a prepayment charge, which may
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have a substantial effect on the rate of prepayment. Some states' laws restrict
the imposition of prepayment charges even when the mortgage loans expressly
provide for the collection of those charges. As a result, it is possible that
prepayment charges may not be collected even on mortgage loans that provide for
the payment of these charges.
A servicer may allow the refinancing of a mortgage loan in any trust by
accepting prepayments thereon and permitting a new loan to the same borrower
secured by a mortgage on the same property, which may be originated by the
servicer or the master servicer or any of their respective affiliates or by an
unrelated entity. In the event of a refinancing, the new loan would not be
included in the related trust and, therefore, the refinancing would have the
same effect as a prepayment in full of the related mortgage loan. A servicer or
the master servicer may, from time to time, implement programs designed to
encourage refinancing. These programs may include, without limitation,
modifications of existing loans, general or targeted solicitations, the offering
of pre-approved applications, reduced origination fees or closing costs, or
other financial incentives. Targeted solicitations may be based on a variety of
factors, including the credit of the borrower or the location of the mortgaged
property. In addition, servicers or the master servicer may encourage assumption
of mortgage loans, including defaulted mortgage loans, under which creditworthy
borrowers assume the outstanding indebtedness of the mortgage loans, which may
be removed from the related mortgage pool. As a result of these programs, with
respect to the mortgage pool underlying any trust (i) the rate of Principal
Prepayments of the mortgage loans in the mortgage pool may be higher than would
otherwise be the case, and (ii) in some cases, the average credit or collateral
quality of the mortgage loans remaining in the mortgage pool may decline.
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
subservicer, 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, the adjustments generally will:
not increase or decrease the mortgage rates by more than a fixed
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percentage amount on each adjustment date;
not increase the mortgage rates over a fixed percentage amount during the
life of any ARM loan; and
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 at any time may
not equal the prevailing rates for similar, newly originated adjustable rate
mortgage loans. In some rate environments, the prevailing rates on fixed-rate
mortgage loans may be sufficiently low in relation to the then-current mortgage
rates on ARM loans that the rate of prepayment may increase as a result of
refinancings. There can be no certainty as to the rate of prepayments on the
mortgage collateral during any period or over the life of any series of
certificates.
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.' In addition, even where values
of mortgaged properties generally remain constant, manufactured homes typically
depreciate in value.
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 for a series of certificates are not
covered
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by the methods of credit enhancement described in this prospectus under
'Description of Credit Enhancement' or in the related prospectus supplement, the
losses will be borne by holders of the certificates of the related series. Even
where credit enhancement covers all Realized Losses resulting from delinquency
and foreclosure or repossession, the effect of foreclosures and repossessions
may be to increase prepayment experience on the mortgage collateral, thus
reducing average weighted life and affecting yield to maturity. See 'Yield
Considerations.'
Under some circumstances, the master servicer, a servicer, the depositor
or, if specified in the related prospectus supplement, the holders of the REMIC
residual certificates may have the option to purchase the mortgage loans in a
trust. See 'The Pooling and Servicing Agreement -- Termination; Retirement of
Certificates.' Any 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 some legal aspects of
mortgage loans and manufactured housing contracts that are general in nature.
Because these legal aspects are governed in part by state law, which laws may
differ substantially from state to state, the summaries do not purport to be
complete, to reflect the laws of any particular state or to encompass the laws
of all states in which the mortgaged properties may be situated. The summaries
are qualified in their entirety by reference to the applicable federal and state
laws governing the mortgage loans.
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 related real property. In other states, the
mortgage, deed of trust or deed to secure debt conveys legal title to the
property to the mortgagee subject to a condition subsequent, for example, the
payment of the indebtedness secured thereby. These instruments are not prior to
the lien for real estate taxes and assessments and other charges imposed under
governmental police powers. Priority with respect to these instruments depends
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on their terms and in some cases on the terms of separate subordination or
inter-creditor agreements, and generally on the order of recordation of the
mortgage deed of trust or deed to secure debt in the appropriate recording
office.
There are two parties to a mortgage, the mortgagor, who is the borrower and
homeowner, and the mortgagee, who is the lender. Under the mortgage instrument,
the mortgagor delivers to the mortgagee a note or bond and the mortgage. In some
states, three parties may be involved in a mortgage financing when title to the
property is held by a land trustee under a land trust agreement of which the
borrower is the beneficiary; at origination of a mortgage loan, the land
trustee, as fee owner of the property, executes the mortgage and the borrower
executes 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
grantor, who is the borrower/homeowner; the beneficiary, who is the lender; and
a third-party grantee called the trustee. Pursuant to a deed of trust, the
borrower grants the mortgaged property to the trustee, irrevocably until
satisfaction of the debt. A deed to secure debt typically has two parties, under
which the borrower, or grantor, conveys title to the real property to the
grantee, or lender, typically with a power of sale, until the time when the debt
is repaid. The trustee's authority under a deed of trust and the mortgagee's or
grantee's authority under a mortgage or a deed to secure debt, as applicable,
are governed by the law of the state in which the real property is located, the
express provisions of the deed of trust, mortgage or deed to secure debt and, in
some deed of trust transactions, the directions of the beneficiary.
Cooperative Loans
If specified in the prospectus supplement relating to a series of
certificates, the mortgage loans may include Cooperative Loans. Each Cooperative
Note evidencing a Cooperative Loan will be secured by a security interest in
shares issued by the Cooperative that owns the related apartment building, which
is a corporation entitled to
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be treated as a housing cooperative under federal tax law, and in the related
proprietary lease or occupancy agreement granting exclusive rights to occupy a
specific dwelling unit in the Cooperative's building. The security agreement
will create a lien upon, or grant a security interest in, the Cooperative shares
and proprietary leases or occupancy agreements, the priority of which will
depend on, among other things, the terms of the particular security agreement as
well as the order of recordation of the agreement, or the filing of the
financing statements related thereto, in the appropriate recording office or the
taking of possession of the Cooperative shares, depending on the law of the
state in which the Cooperative is located. This type of lien or security
interest is not, in general, prior to liens in favor of the cooperative
corporation for unpaid assessments or common charges.
In most cases, each Cooperative owns in fee or has a leasehold interest in
all the real property and owns in fee or leases the building and all separate
dwelling units therein. The Cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is an underlying
mortgage or mortgages on the Cooperative's building or underlying land, as is
typically the case, or an underlying lease of the land, as is the case in some
instances, the Cooperative, as mortgagor or lessee, as the case may be, is also
responsible for fulfilling the mortgage or rental obligations.
An underlying mortgage loan is ordinarily obtained by the Cooperative in
connection with either the construction or purchase of the Cooperative's
building or the obtaining of capital by the Cooperative. The interest of the
occupant under proprietary leases or occupancy agreements as to which that
Cooperative is the landlord is usually subordinate to the interest of the holder
of an underlying mortgage and to the interest of the holder of a land lease. If
the Cooperative is unable to meet the payment obligations (i) arising under an
underlying mortgage, the mortgagee holding an underlying mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements or (ii) arising under its land lease, the holder of the
landlord's interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. In addition, an underlying mortgage
on a Cooperative may provide financing in the form of a mortgage that does not
fully amortize, with a significant portion of principal being due in one final
payment at maturity. The inability of the Cooperative to refinance a mortgage
and its consequent inability to make the final payment could lead to foreclosure
by the mortgagee. Similarly, a land lease has an expiration date and the
inability of the Cooperative to extend its term or, in the alternative, to
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purchase the land, could lead to termination of the Cooperative's interest in
the property and termination of all proprietary leases and occupancy agreements.
In either event, a foreclosure by the holder of an underlying mortgage or the
termination of the underlying lease could eliminate or significantly diminish
the value of any collateral held by the lender who financed the purchase by an
individual tenant-stockholder of shares of the Cooperative, or in the case of
the mortgage loans, the collateral securing the Cooperative Loans.
Each Cooperative is owned by shareholders, referred to as
tenant-stockholders, who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. In most instances, a
tenant-stockholder of a Cooperative must make a monthly maintenance payment to
the Cooperative under the proprietary lease, which rental payment represents the
tenant-stockholder's pro rata share of the Cooperative's payments for its
underlying mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a Cooperative and accompanying
occupancy rights may be financed through a Cooperative Loan evidenced by a
Cooperative Note and secured by an assignment of and a security interest in the
occupancy agreement or proprietary lease and a security interest in the related
shares of the related Cooperative. The lender usually takes possession of the
stock 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 or local
offices to perfect the lender's interest in its collateral. In accordance with
the limitations discussed below, upon default of the tenant-stockholder, the
lender may sue for judgment on the Cooperative Note, dispose of the collateral
at a public or private sale or otherwise proceed against the collateral or
tenant-stockholder as an individual as provided in the security agreement
covering the assignment of the proprietary lease or occupancy agreement and the
pledge of Cooperative shares. See ' -- Foreclosure on Shares of Cooperatives'
below.
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Tax Aspects of Cooperative Ownership
In general, a 'tenant-stockholder' (as defined in Section 216(b)(2) of the
Internal Revenue Code, of a corporation that qualifies as a 'cooperative housing
corporation' within the meaning of Section 216(b)(1) of the Internal Revenue
Code is allowed a deduction for amounts paid or accrued within his or her
taxable year to the corporation representing his or her proportionate share of
certain interest expenses and real estate taxes allowable as a deduction under
Section 216(a) of the Internal Revenue Code to the corporation under Sections
163 and 164 of the Internal Revenue Code. In order for a corporation to qualify
under Section 216(b)(1) of the Internal Revenue Code for its taxable year in
which those items are allowable as a deduction to the corporation, the section
requires, among other things, that at least 80% of the gross income of the
corporation be derived from its tenant-stockholders. By virtue of this
requirement, the status of a corporation for purposes of Section 216(b)(1) of
the Internal Revenue Code must be determined on a year-to-year basis.
Consequently, there can be no assurance that Cooperatives relating to the
Cooperative Loans will qualify under this section for any particular year. If a
Cooperative fails to qualify for one or more years, the value of the collateral
securing any related Cooperative Loans could be significantly impaired because
no deduction would be allowable to tenant-stockholders under Section 216(a) of
the Internal Revenue Code with respect to those years. In view of the
significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies under Section 216(b)(1) of the Internal Revenue Code, the
likelihood that this type of failure would be permitted to continue over a
period of years appears remote.
Mexico Mortgage Loans
If specified in the related prospectus supplement, the mortgage loans may
include Mexico Mortgage Loans. See 'The Trusts -- The Mortgage Loans' for a
description of the security for the Mexico Mortgage Loans.
Foreclosure on Mortgage Loans
Although a deed of trust or a deed to secure debt may also be foreclosed by
judicial action, foreclosure of a deed of trust or a deed to secure debt is
typically accomplished by a non-judicial sale under a specific provision in the
deed of trust or deed to secure debt which authorizes the trustee or grantee, as
applicable, to sell the property upon default by the borrower under the terms of
the note or deed of trust or deed to secure debt. In addition to any notice
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requirements contained in a deed of trust or deed to secure debt, in some
states, the trustee or grantee, as applicable, must record a notice of default
and send a copy to the borrower and to any person who has recorded a request for
a copy of notice of default and notice of sale. In addition, in some states, the
trustee or grantee, as applicable, must provide notice to any other individual
having an interest of record in the real property, including any junior
lienholders. If the deed of trust or deed to secure debt is not reinstated
within a specified period, a notice of sale must be posted in a public place
and, in most states, published for a specific period of time in one or more
newspapers. In addition, some states' laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest of
record in the real property.
Foreclosure of a mortgage usually is accomplished by judicial action. In
most cases, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may result from difficulties in locating and serving
necessary parties, including borrowers, such as 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 has the right to reinstate the loan at any
time following default until shortly before the trustee's sale. In general, in
those states, the borrower, or any other person having a junior encumbrance on
the real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation.
In the case of foreclosure under a mortgage, a deed of trust or deed to
secure debt, the sale by the referee or other designated officer or by the
trustee or grantee, as applicable, is a public sale. However, because of the
difficulty a potential buyer at the sale may have in determining the exact
status of title and because the physical condition of the property may have
deteriorated during the foreclosure proceedings, it is uncommon for a third
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party to purchase the property at a foreclosure sale. Rather, it is common for
the lender to purchase the property from the trustee or grantee, as applicable,
or referee for a credit bid less than or equal to the unpaid principal amount of
the loan, accrued and unpaid interest and the expense of foreclosure, in which
case the mortgagor's debt will be extinguished unless the lender purchases the
property for a lesser amount and preserves its right against a borrower to seek
a deficiency judgment and the remedy is available under state law and the
related loan documents. In the same states, there is a statutory minimum
purchase price which the lender may offer for the property and generally, state
law controls the amount of foreclosure costs and expenses, including attorneys'
fees, which may be recovered by a lender. Thereafter, subject to the right of
the borrower in some states to remain in possession during the redemption
period, the lender will assume the burdens of ownership, including obtaining
hazard insurance, paying taxes and making repairs at its own expense that are
necessary to render the property suitable for sale. In most cases, the lender
will obtain the services of a real estate broker and pay the broker's commission
in connection with the sale of the property. Depending upon market conditions,
the ultimate proceeds of the sale of the property may not equal the lender's
investment in the property and, in some states, the lender may be entitled to a
deficiency judgment. In some cases, a deficiency judgment may be pursued in lieu
of foreclosure. Any loss may be reduced by the receipt of any mortgage insurance
proceeds or other forms of credit enhancement for a series of certificates. See
'Description of Credit Enhancement.'
Foreclosure on Junior Mortgage Loans
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 if the mortgagor is in
default thereunder, in either event adding the amounts expended to the balance
due on the junior loan. In addition, if 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,
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 that is being foreclosed. Any remaining
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proceeds are typically 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 usually 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 'Description of the
Certificates -- Realization Upon Defaulted Mortgage Loans or Contracts' in this
prospectus.
Foreclosure on Mexico Mortgage Loans
Foreclosure on the mortgagor's beneficial interest in the Mexican trust
typically is expected to be accomplished by public sale in accordance with the
provisions of Article 9 of the UCC and the security agreement relating to that
beneficial interest or by public auction held by the Mexican trustee pursuant to
the Mexico trust agreement. 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. In most cases, 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 in the Mexican
trust 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 in the Mexican trust 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 usually
responsible for the deficiency. However, some states limit
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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 mortgagor's beneficial
interest in the Mexican trust 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 mortgagor'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 in the Mexican trust. However, because the
lender's security interest in the mortgagor's beneficial interest in the Mexican
trust 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 lender's security interest in the mortgagor's beneficial
interest in the Mexican trust is not, for purposes of foreclosing on such
collateral, an interest in real property. The depositor either will rely on its
remedies that are available in the United States under the applicable UCC and
under the Mexico trust agreement and foreclose on the collateral securing a
Mexico Mortgage Loan under the UCC, or follow the procedures described below.
In the case of some Mexico Mortgage Loans, the Mexico trust agreement may
permit the Mexican trustee, upon notice from the lender of a default by the
borrower, to notify the mortgagor that the mortgagor's beneficial interest in
the Mexican trust or the Mexican property will be sold at an auction in
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accordance with the Mexico trust agreement. Pursuant to the terms of the Mexico
trust agreement, the mortgagor may avoid foreclosure by paying in full prior to
sale the outstanding principal balance of, together with all accrued and unpaid
interest and other amounts owed on, the Mexico Mortgage Loan. At the auction,
the Mexican trustee may sell the mortgagor's beneficial interest in the Mexican
trust to a third party, sell the Mexican property to another trust established
to hold title to such property, or sell the Mexican property directly to a
Mexican citizen.
The depositor 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 process of marketing the mortgagor's beneficial
interest in the Mexican trust to persons interested in purchasing a Mexican
property may be difficult.
Foreclosure on Mortgaged Properties Located in the Commonwealth of Puerto Rico
Under the laws of the Commonwealth of Puerto Rico the foreclosure of a real
estate mortgage usually follows an ordinary 'civil action' filed in the Superior
Court for the district where the 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 of Puerto Rico must be
made at least once a week for two weeks. There may be as many as three public
sales of the mortgaged property. If the defendant contests the foreclosure, the
case may be tried and judgment rendered based on the merits of the case.
There are no redemption rights after the public sale of a foreclosed
property under the laws of the Commonwealth of Puerto Rico. Commonwealth of
Puerto Rico law provides for a summary proceeding for the foreclosure of a
mortgage, but it is very seldom used because of concerns regarding the validity
of those actions.
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The process may be expedited if the mortgagee can obtain the consent of the
defendant to the execution of a deed in lieu of foreclosure.
Under Commonwealth of Puerto Rico law, in the case of the public sale upon
foreclosure of a mortgaged property that (a) is subject to a mortgage loan that
was obtained for a purpose other than the financing or refinancing of the
acquisition, construction or improvement of the property and (b) is occupied by
the mortgagor as his principal residence, the mortgagor of the property has a
right to be paid the first $1,500 from the proceeds obtained on the public sale
of the property. The mortgagor can claim this sum of money from the mortgagee at
any time prior to the public sale or up to one year after the sale. This payment
would reduce the amount of sales proceeds available to satisfy the mortgage loan
and may increase the amount of the loss.
Foreclosure on Shares of Cooperatives
The Cooperative shares owned by the tenant-stockholder, together with the
rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, in accordance
with restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged, may
be cancelled by the Cooperative for failure by the tenant-stockholder to pay
rent or other obligations or charges owed by the tenant-stockholder, including
mechanics' liens against the Cooperative's building incurred by the
tenant-stockholder.
In most cases, rent and other obligations and charges arising under a
proprietary lease or occupancy agreement which are owed to the Cooperative are
made liens upon the shares to which the proprietary lease or occupancy agreement
relates. In addition, the proprietary lease or occupancy agreement generally
permits the Cooperative to terminate the lease or agreement if the borrower
defaults in the performance of covenants thereunder. Typically, the lender and
the Cooperative enter into a recognition agreement which, together with any
lender protection provisions contained in the proprietary lease or occupancy
agreement, establishes the rights and obligations of both parties in the event
of a default by the tenant-stockholder on its obligations under the proprietary
lease or occupancy agreement. A default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
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The recognition agreement generally provides that, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate the lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under the proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the amount realized upon a sale of
the collateral below the outstanding principal balance of the Cooperative Loan
and accrued and unpaid interest thereon.
Recognition agreements also typically provide that if the lender succeeds
to the tenant-shareholder's shares and proprietary lease or occupancy agreement
as the result of realizing upon its collateral for a Cooperative Loan, the
lender must obtain the approval or consent of the board of directors of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares and assigning the proprietary lease. This approval or consent
is usually based on the prospective purchaser's income and net worth, among
other factors, and may significantly reduce the number of potential purchasers,
which could limit the ability of the lender to sell and realize upon the value
of the collateral. In most cases, the lender is not limited in any rights it may
have to dispossess the tenant-stockholder.
Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
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A foreclosure on the Cooperative shares is accomplished by public sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code, or
UCC, and the security agreement relating to those shares. Article 9 of the UCC
requires that a sale be conducted in a 'commercially reasonable' manner. Whether
a sale has been conducted in a 'commercially reasonable' manner will depend on
the facts in each case. In determining commercial reasonableness, a court will
look to the notice given the debtor and the method, manner, time, place and
terms of the sale and the sale price. In most instances, 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 the Cooperative shares, any foreclosure sale
would be subject to the rights and interests of any creditor holding senior
interests in the shares. 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 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, or a deed to secure
debt or foreclosure of a mortgage, the borrower and foreclosed junior lienors or
other parties are given a statutory period, typically ranging from six months to
two years, in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
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redemption may be authorized if the former borrower pays only a portion of the
sums due. In some states, the right to redeem is an equitable right. The equity
of redemption, which is a non-statutory right, should be distinguished from
statutory rights of redemption. The effect of a statutory right of redemption is
to diminish the ability of the lender to sell the foreclosed property. The
rights of redemption would defeat the title of any purchaser subsequent to
foreclosure or sale under a deed of trust or a deed to secure debt.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired.
Anti-Deficiency Legislation and Other Limitations on Lenders
Some states have imposed statutory prohibitions which limit the remedies of
a beneficiary under a deed of trust, a mortgagee under a mortgage or a grantee
under a deed to secure debt. In some states, including California, statutes
limit the right of the beneficiary, mortgagee or grantee to obtain a deficiency
judgment against the borrower following foreclosure. A deficiency judgment is a
personal judgment against the former borrower equal in most cases to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. In the case of a mortgage loan
secured by a property owned by a trust where the Mortgage Note is executed on
behalf of the trust, a deficiency judgment against the trust following
foreclosure or sale under a deed of trust or deed to secure debt, even if
obtainable under applicable law, may be of little value to the beneficiary,
grantee or mortgagee if there are no trust assets against which the deficiency
judgment may be executed. Some state statutes require the beneficiary, grantee
or mortgagee to exhaust the security afforded under a deed of trust, deed to
secure debt or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower.
In other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting the security; however,
in some of these states, the lender, following judgment on the personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect of the
election requirement, in those states permitting
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this election, is that lenders will usually proceed against the security first
rather than bringing a personal action against the borrower. Finally, in some
states, statutory provisions limit any deficiency judgment against the borrower
following a foreclosure to the excess of the outstanding debt over the fair
value of the property at the time of the public sale. The purpose of these
statutes is generally to prevent a beneficiary, grantee or mortgagee from
obtaining a large deficiency judgment against the borrower as a result of low or
no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Article 9 to prohibit or limit a deficiency award in some
circumstances, including circumstances where the disposition of the collateral,
which, in the case of a Cooperative Loan, would be the shares of the Cooperative
and the related proprietary lease or occupancy agreement, was not conducted in a
commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon its collateral and/or
enforce a deficiency judgment. For example, under the federal bankruptcy law,
all actions against the debtor, the debtor's property and any co-debtor are
automatically stayed upon the filing of a bankruptcy petition. Moreover, a court
having federal bankruptcy jurisdiction may permit a debtor through its Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default relating to a
mortgage loan on the debtor's residence by paying arrearages within a reasonable
time period and reinstating the original mortgage loan payment schedule, even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court. 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
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outstanding balance of the loan. In most cases, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified under a plan confirmed under Chapter 13, as
opposed to Chapter 11, except with respect to mortgage payment arrearages, which
may be cured within a reasonable time period. Courts with federal bankruptcy
jurisdiction similarly may be able to modify the terms of a Cooperative Loan.
Certain tax liens arising under the Internal Revenue Code may, in some
circumstances, have priority over the lien of a mortgage, deed to secure debt or
deed of trust. This may have the effect of delaying or interfering with the
enforcement of rights with respect to a defaulted mortgage loan.
In addition, substantive requirements are imposed upon mortgage lenders in
connection with the origination and the servicing of mortgage loans by numerous
federal and some state consumer protection laws. These laws include the federal
Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal Credit
Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and related
statutes. These federal laws impose specific statutory liabilities upon lenders
who originate mortgage loans and who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the mortgage loans.
Some of the mortgage loans may be High Cost Loans. Purchasers or assignees
of any High Cost Loan, including any trust, could be liable for all claims and
subject to all defenses arising under any applicable law that the borrower could
assert against the originator of the High Cost Loan. Remedies available to the
borrower include monetary penalties, as well as recission rights if the
appropriate disclosures were not given as required.
Enforceability of Certain Provisions
Unless the prospectus supplement indicates otherwise, the mortgage loans
contain due-on-sale clauses. These clauses permit the lender to accelerate the
maturity of the loan if the borrower sells, transfers or conveys the property.
The enforceability of these clauses has been the subject of legislation or
litigation in many states, and in some cases the enforceability of these clauses
has been limited or denied. However, the Garn-St Germain Depository Institutions
Act of 1982, or Garn-St Germain Act, preempts state constitutional, statutory
and case law that prohibit the enforcement of due-on-sale clauses and permits
lenders to enforce these clauses in
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accordance with their terms, subject to limited exceptions. The Garn-St Germain
Act does 'encourage' lenders to permit assumption of loans at the original rate
of interest or at some other rate less than the average of the original rate and
the market rate.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of a prepayment penalty upon the acceleration of a loan under a
due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the mortgage loans and the number of mortgage loans which may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are designed to relieve the borrower from the legal effect
of its defaults under the loan documents. Examples of judicial remedies that
have been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, including the borrower failing to adequately maintain the property.
Finally, some courts have been faced with the issue of whether or not federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that borrowers under deeds of trust, deeds to secure debt or
mortgages receive notices in addition to the statutorily prescribed minimum. For
the most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale by a trustee under a deed of trust, or under a deed
to secure a debt or a mortgagee having a power of sale, does not involve
sufficient state action to afford constitutional protections to the borrower.
Applicability of Usury Laws
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Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, or Title V, provides that state usury limitations shall not apply
to some types of residential first mortgage loans, including Cooperative Loans,
originated by some lenders after March 31, 1980. A similar federal statute was
in effect with respect to mortgage loans made during the first three months of
1980. The Office of Thrift Supervision, or OTS is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to impose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision which expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, 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 in many states and Mexico
Mortgage Loans. 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 described in the related prospectus supplement, each
seller of a mortgage collateral, 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. These
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law.
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These difficulties were alleviated substantially as a result of the enactment of
Title VIII of the Garn-St Germain Act, or Title VIII. Title VIII provides that,
notwithstanding any state law to the contrary;
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,
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
all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings
banks and mutual savings banks and mortgage banking companies, may
originate alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor
to the OTS, with respect to origination of alternative mortgage
instruments by federal savings and loan associations.
Title VIII also provides that any state may reject applicability of the
provisions of Title VIII by adopting, prior to October 15, 1985, a law or
constitutional provision expressly rejecting the applicability of these
provisions. Some states have taken this action.
Junior Mortgages; Rights of Senior Mortgagees
The mortgage loans included in the trust may be junior to other mortgages,
deeds to secure debt or deeds of trust held by other lenders. Absent an
intercreditor agreement, the rights of the trust, 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. The sale of the mortgaged property 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 the default and
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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, or an intercreditor agreement, 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 notice may prevent the junior mortgagee
from exercising any right to reinstate the loan which applicable law may
provide.
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 the proceeds and
awards to any indebtedness secured by the mortgage, deed to secure debt or deed
of trust, in the order the mortgagee determines. Thus, if improvements on the
property are damaged or destroyed by fire or other casualty, or if 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, deed to secure debt 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 or deed of trust. Upon a failure of the mortgagor
to perform any of these obligations, the mortgagee is given the right under
certain mortgages, deeds to secure debt 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
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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 the escrows and will rely upon the holder
of the senior mortgage to collect and disburse the 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 the 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 the 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. If the master servicer, the servicer or the
lender fails to effect the 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
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where the manufactured home is located. These filings must be made in the real
estate records office of the county where the manufactured home is located.
Unless otherwise provided in the related prospectus supplement, substantially
all of the contracts will contain provisions prohibiting the mortgagor from
permanently attaching the manufactured home to its site. So long as the
mortgagor does not violate this agreement and a court does not hold that the
manufactured home is real property, a security interest in the manufactured home
will be governed by the certificate of title laws or the UCC, and the notation
of the security interest on the certificate of title or the filing of a UCC
financing statement will be effective to maintain the priority of the seller's
security interest in the manufactured home. If, however, a manufactured home is
permanently attached to its site or if a court determines that a manufactured
home is real property, other parties could obtain an interest in the
manufactured home which is prior to the security interest originally retained by
the mortgage collateral seller and transferred to the depositor. 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 the 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 depositor will assign its security interests in the manufactured homes
to the trustee on behalf of the certificateholders. See 'Description of the
Certificates -- Assignment of the Contracts' in this prospectus. 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 depositor nor the trustee will amend the certificates of title to identify
the trustee as the new secured party. Accordingly, the depositor or any 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, the assignment of the security interest
may not be held effective against subsequent purchasers of a
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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 the manufactured home initially is registered and if steps are
not taken to re-perfect the trustee's security interest in the 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 typically will represent that it has no
knowledge of any liens with respect to any manufactured home securing payment on
any contract. However, the liens could arise at any time during the term of a
contract. No notice will be given to the trustee or certificateholders if a lien
arises and the 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 depositor, 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 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 depositor to the trustee. Therefore, if a
subsequent purchaser were able to take physical possession of the contracts
without notice of the assignment, the trustee's interest in the contracts could
be defeated. To the extent that manufactured homes are treated as real property
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under applicable state law, contracts will be treated in a manner similar to
that described above with regard to mortgage loans. See ' -- The Mortgage Loans'
above.
Enforcement of Security Interests in Manufactured Homes
The servicer or the master servicer on behalf of the trustee, to the extent
required by the related pooling and servicing agreement, may take action to
enforce the trustee's security interest with respect to contracts in default by
repossession and sale of the manufactured homes securing the 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 the 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 the transferor to transfer the contract free
of notice of claims by the debtor thereunder. The effect of this rule is to
subject the assignee of the 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
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defense against a claim brought against the 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 depositor, the master servicer or
the servicer and permit the acceleration of the maturity of the contracts by the
depositor, the master servicer or the servicer upon any sale or transfer that is
not consented to. Unless otherwise specified in the related prospectus
supplement, the depositor, 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 depositor
desires to accelerate the maturity of the related contract, the depositor'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 depositor or
the master servicer may be prohibited from enforcing a 'due-on-sale' clause in
respect of certain manufactured homes.
Applicability of Usury Laws
Title V provides that, subject to certain conditions, state usury
limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. For a discussion of Title V, see ' -- The
Mortgage Loans -- Applicability of Usury Laws' above. Unless otherwise specified
in the related pooling and servicing agreement, each mortgage collateral seller,
or another specified party, will represent that all of the contracts comply with
applicable usury laws.
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ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, or CERCLA, and under state law in some
states, a secured party which takes a deed-in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a mortgaged property may
become liable in some circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996,
or Conservation Act amended, among other things, the provisions of CERCLA with
respect to lender liability and the secured creditor exemption. The Conservation
Act offers substantial protection to lenders by defining the activities in which
a lender can engage and still have the benefit of the secured creditor
exemption. 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 operational functions of the mortgaged property.
The Conservation Act also provides that a lender will continue to have the
benefit of the secured
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creditor exemption even if it forecloses on a mortgaged property, purchases it
at a foreclosure sale or accepts a deed-in-lieu of foreclosure provided that the
lender seeks to sell the mortgaged property at the earliest practicable
commercially reasonable time on commercially reasonable terms.
Other federal and state laws in some circumstances may impose liability on
a secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property on which
contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. These cleanup costs may be substantial. It is possible that
the cleanup costs could become a liability of a trust and reduce the amounts
otherwise distributable to the holders of the related series of certificates.
Moreover, some federal statutes and some states by statute impose an
Environmental Lien. All subsequent liens on that property are usually
subordinated to an Environmental Lien and, in some states, even prior recorded
liens are subordinated to Environmental Liens. In the latter states, the
security interest of the trustee in a related parcel of real property that is
subject to an Environmental Lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged property
prior to the origination of the mortgage loan or prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Neither the depositor nor any master
servicer will be required by any agreement to undertake any of these evaluations
prior to foreclosure or accepting a deed-in-lieu of foreclosure. The depositor
does not make any representations or warranties or assume any liability with
respect to the absence or effect of contaminants on any mortgaged property or
any casualty resulting from the presence or effect of contaminants. However, the
master servicer will not be obligated to foreclose on any mortgaged property or
accept a deed-in-lieu of foreclosure if it knows or reasonably believes that
there are material contaminated conditions on the property. A failure so to
foreclose may reduce the amounts otherwise available to certificateholders of
the related series.
Except as otherwise specified in the applicable prospectus supplement, at
the time the mortgage loans 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
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Under the terms of the Relief Act a borrower who enters military service
after the origination of the 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 the
borrower's active duty status, unless a court orders otherwise upon application
of the lender. The Relief Act applies to borrowers who are members of the Air
Force, Army, Marines, Navy, National Guard, Reserves or Coast Guard, and
officers of the U.S. Public Health Service assigned to duty with the military.
Because the Relief Act applies to borrowers who enter military service,
including reservists who are called to active duty, after origination of the
related mortgage loan 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, application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the servicer or the master servicer, as applicable, to collect full
amounts of interest on the 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 some
circumstances, during an additional three month period thereafter. Thus, if the
Relief Act or similar legislation or regulations applies to any mortgage loan or
contract which goes into default, there may be delays in payment and losses on
the related certificates in connection therewith. Any other interest shortfalls,
deferrals or forgiveness of payments on the mortgage loans or contracts
resulting from similar legislation or regulations may result in delays in
payments or losses to certificateholders of the related series.
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DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In some states, there are or may be specific limitations
upon the late charges which a lender may collect from a borrower for delinquent
payments. Some states also limit the amounts that a lender may collect from a
borrower as an additional charge if the loan is prepaid. In addition, the
enforceability of provisions that provide for prepayment fees or penalties upon
an involuntary prepayment is unclear under the laws of many states. Most
conventional single-family mortgage loans may be prepaid in full or in part
without penalty. The regulations of the Federal Home Loan Bank Board, as
succeeded by the OTS, prohibit the imposition of a prepayment penalty or
equivalent fee for or in connection with the acceleration of a loan by exercise
of a due-on-sale clause. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly with respect to mortgage loans having higher mortgage
rates, may increase the likelihood of refinancing or other early retirements of
the mortgage loans.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations, or RICO, statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984, the
government may seize the property even before conviction. The government must
publish notice of the forfeiture proceeding and may give notice to all parties
'known to have an alleged interest in the property,' including the holders of
mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, 'reasonably without cause to believe' that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
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NEGATIVE AMORTIZATION LOANS
A recent case held that state restrictions on the compounding of interest
are not preempted by the provisions of the Depository Institutions Deregulation
and Monetary Control Act of 1980, or DIDMC, and as a result, a mortgage loan
that provided for negative amortization violated New Hampshire's requirement
that first mortgage loans provide for computation of interest on a simple
interest basis. The court did not address the applicability of the Alternative
Mortgage Transaction Parity Act of 1982, which authorizes a lender to make
residential mortgage loans that provide for negative amortization. As a result,
the enforceability of compound interest on mortgage loans that provide for
negative amortization is unclear. The case, which was decided by the First
Circuit Court of Appeals, is binding authority only on Federal District Courts
in Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a discussion of the material federal income tax
consequences of the purchase, ownership and disposition of the certificates.
This discussion is directed solely to certificateholders that hold the
certificates as capital assets within the meaning of Section 1221 of the
Internal Revenue Code and does not purport to discuss all federal income tax
consequences that may be applicable to particular categories of investors, some
of which, including banks, insurance companies and foreign investors) may be
subject to special rules. In addition, the authorities on which this discussion,
and the opinion referred to below, are based are subject to change or differing
interpretations, which could apply retroactively. Taxpayers and preparers of tax
returns, including those filed by any REMIC or other issuer, should be aware
that under applicable Treasury regulations a provider of advice on specific
issues of law is not considered an income tax return preparer unless the advice
(i) is given with respect to events that have occurred at the time the advice is
rendered and is not given with respect to the
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consequences of contemplated actions, and (ii) is directly relevant to the
determination of an entry on a tax return. Accordingly, taxpayers should consult
their tax advisors and tax return preparers regarding the preparation of any
item on a tax return, even where the anticipated tax treatment has been
discussed in this prospectus or in a prospectus supplement. In addition to the
federal income tax consequences described in this prospectus, potential
investors should consider the state and local tax consequences, if any, of the
purchase, ownership and disposition of the certificates. See 'State and Other
Tax Consequences.' Certificateholders are advised to consult their tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the certificates offered hereunder.
The following discussion addresses REMIC certificates representing
interests in a trust, or a portion thereof, which the master servicer or
Certificate Administrator, as applicable, will covenant to elect to have treated
as a REMIC under Sections 860A through 860G or REMIC Provisions of the Internal
Revenue Code. The prospectus supplement for each series of certificates will
indicate whether a REMIC election or elections will be made for the related
trust and, if that election is to be made, will identify all 'regular interests'
and 'residual interests' in the REMIC. If a REMIC election will not be made for
a trust, the federal income consequences of the purchase, ownership and
disposition of the related certificates will be described in the related
prospectus supplement. For purposes of this tax discussion, references to a
'certificateholder' or a 'holder' are to the beneficial owner of a certificate.
If a REMIC election is not made upon the issuance of a particular series
because, for example, a grantor trust structure is being used, an opinion of
counsel relating to the tax consequences of that structure will be filed prior
to the initial sale of the related certificates. Furthermore, the tax discussion
relating to that structure will be provided in the prospectus supplement for
that series.
The following discussion is based in part upon the OID regulations and in
part upon the REMIC regulations. The OID regulations, which are effective with
respect to debt instruments issued on or after April 4, 1994, do not adequately
address some issues relevant to, and in some instances provide that they are not
applicable to, securities similar to the certificates.
REMICS
Classification of REMICs
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Upon the issuance of each series of REMIC certificates, Thacher Proffitt &
Wood, Orrick, Herrington & Sutcliffe LLP or Stroock & Stroock & Lavan LLP,
counsel to the depositor, will deliver their opinion to the effect that,
assuming compliance with all provisions of the related pooling and servicing
agreement or trust agreement, the related trust, or each applicable portion of
the trust, will qualify as a REMIC and the REMIC certificates offered with
respect thereto will be considered to evidence ownership of 'regular interests,'
or REMIC regular certificates or 'residual interests,' or REMIC residual
certificates in that REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Internal Revenue Code for that status
during any taxable year, the Internal Revenue Code provides that the entity will
not be treated as a REMIC for that year and thereafter. In that event, the
entity may be taxable as a separate corporation under Treasury regulations, and
the related REMIC certificates may not be accorded the status or given the tax
treatment described in this prospectus under 'Material Federal Income Tax
Consequences.' Although the Internal Revenue Code authorizes the Treasury
Department to issue regulations providing relief in the event of an inadvertent
termination of REMIC status, no regulations have been issued. Any relief,
moreover, may be accompanied by sanctions, including the imposition of a
corporate tax on all or a portion of the trust's income for the period in which
the requirements for that status are not satisfied. The pooling and servicing
agreement or trust agreement with respect to each REMIC will include provisions
designed to maintain the trust's status as a REMIC under the REMIC Provisions.
It is not anticipated that the status of any trust as a REMIC will be
terminated.
Characterization of Investments in REMIC Certificates
In general, the REMIC certificates will be 'real estate assets' within the
meaning of Section 856(c)(4)(A) of the Internal Revenue Code and assets
described in Section 7701(a)(19)(C) of the Internal Revenue Code in the same
proportion that the assets of the REMIC underlying the certificates would be so
treated. Moreover, if
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95% or more of the assets of the REMIC qualify for any of the foregoing
treatments at all times during a calendar year, the REMIC certificates will
qualify for the corresponding status in their entirety for that calendar year.
Interest, including original issue discount, on the REMIC regular certificates
and income allocated to the class of REMIC residual certificates will be
interest described in Section 856(c)(3)(B) of the Internal Revenue Code to the
extent that those certificates are treated as 'real estate assets' within the
meaning of Section 856(c)(4)(A) of the Internal Revenue Code. In addition, the
REMIC regular certificates will be 'qualified mortgages' within the meaning of
Section 860G(a)(3)(C) of the Internal Revenue Code if transferred to another
REMIC on its startup day in exchange for regular or residual interests in that
REMIC. The determination as to the percentage of the REMIC's assets that
constitute assets described in the foregoing sections of the Internal Revenue
Code will be made with respect to each calendar quarter based on the average
adjusted basis of each category of the assets held by the REMIC during that
calendar quarter. The master servicer 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 those 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)(4)(A) of the Internal Revenue
Code.
Tiered REMIC Structures
For some series of REMIC certificates, two or more separate elections may
be made to treat designated portions of the related trust as REMICs for federal
income tax purposes. Upon the issuance of this type of series of REMIC
certificates, Thacher Proffitt & Wood, Orrick, Herrington & Sutcliffe LLP or
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Stroock & Stroock & Lavan LLP, counsel to the depositor, will deliver their
opinion to the effect that, assuming compliance with all provisions of the
related pooling and servicing agreement or trust agreement, the Tiered REMICs
will each qualify as a REMIC and the REMIC certificates issued by the Tiered
REMICs, respectively, will be considered to evidence ownership of REMIC regular
certificates or REMIC residual certificates in the related REMIC within the
meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC certificates will be
'real estate assets' within the meaning of Section 856(c)(4)(A) of the Internal
Revenue Code, and 'loans secured by an interest in real property' under Section
7701(a)(19)(C) of the Internal Revenue Code, and whether the income on the
certificates is interest described in Section 856(c)(3)(B) of the Internal
Revenue Code, the tiered REMICs will be treated as one REMIC.
Taxation of Owners of REMIC Regular Certificates
General
Except as otherwise stated in this discussion, REMIC regular certificates
will be treated for federal income tax purposes as debt instruments issued by
the REMIC and not as ownership interests in the REMIC or its assets. Moreover,
holders of REMIC regular certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to REMIC
regular certificates under an accrual method.
Original Issue Discount
Some REMIC regular certificates may be issued with 'original issue
discount' within the meaning of Section 1273(a) of the Internal Revenue Code.
Any holders of REMIC regular certificates issued with original issue discount
typically will be required to include original issue discount in income as it
accrues, in accordance with the method described below, in advance of the
receipt of the cash attributable to that income. In addition,
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Section 1272(a)(6) of the Internal Revenue Code provides special rules
applicable to REMIC regular certificates and certain other debt instruments
issued with original issue discount. Regulations have not been issued under that
section.
The Internal Revenue Code requires that a prepayment assumption be used
with respect to mortgage 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 the discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The conference committee report accompanying the Tax Reform Act of 1986
indicates that the regulations will provide that the prepayment assumption used
with respect to a REMIC regular certificate must be the same as that used in
pricing the initial offering of the REMIC regular certificate. The prepayment
assumption used by the master servicer 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 depositor, 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,
or the closing date, the issue price for that class will be treated as the fair
market value of the class on the closing date. Under the OID regulations, the
stated redemption price of a REMIC regular certificate is equal to the total of
all payments to be made on that certificate other than 'qualified stated
interest.' Qualified stated interest includes interest that is unconditionally
payable at least annually at a single fixed rate, or in the case of a variable
rate debt instrument, at a 'qualified floating rate,' an 'objective rate,' a
combination of a single fixed rate and one or more 'qualified floating rates' or
one 'qualified inverse floating rate,' or a combination of 'qualified floating
rates' that generally does not operate in a manner that accelerates or defers
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interest payments on a REMIC regular certificate.
In the case of REMIC regular certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion of the original issue discount will vary according to
the characteristics of the REMIC regular certificates. If the original issue
discount rules apply to the certificates, the related prospectus supplement will
describe the manner in which the rules will be applied by the master servicer or
the Certificate Administrator, as applicable, with respect to those certificates
in preparing information returns to the certificateholders and the Internal
Revenue Service, or IRS.
Some classes of the REMIC regular certificates may provide for the first
interest payment with respect to their certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the 'accrual period' (as
defined below) for original issue discount is each monthly period that 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 the accrued interest. In these cases, information returns to the
certificateholders and the IRS will be based on the position that the portion of
the purchase price paid for the interest accrued with respect to periods prior
to the closing date is treated as part of the overall cost of the REMIC regular
certificate, and not as a separate asset the cost of which is recovered entirely
out of interest received on the next distribution date, and that portion of the
interest paid on the first distribution date in excess of interest accrued for a
number of days corresponding to the number of days from the closing date to the
first distribution date should be included in the stated redemption price of the
REMIC regular certificate. However, the OID regulations state that all or some
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portion of the accrued interest may be treated as a separate asset the cost of
which is recovered entirely out of interest paid on the first distribution date.
It is unclear how an election to do so would be made under the OID regulations
and whether that election could be made unilaterally by a certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC regular certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
regular certificate multiplied by its weighted average 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 the REMIC regular certificate, by multiplying (i) the number
of complete years, rounding down for partial years, from the issue date until
the payment is expected to be made, presumably taking into account the
prepayment assumption, by (ii) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of the REMIC regular certificate. Under the OID regulations, original
issue discount of only a de minimis amount, other than de minimis original issue
discount attributable to a so-called 'teaser' interest rate or an initial
interest holiday, will be included in income as each payment of stated principal
is made, based on the product of the total amount of the de minimis original
issue discount and a fraction, the numerator of which is the amount of the
principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC regular certificate. The OID regulations also
would permit a certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See ' -- Market
Discount' for a description of that election under the OID regulations.
If original issue discount on a REMIC regular certificate is in excess of a
de minimis amount, the holder of the certificate must include in ordinary gross
income the sum of the 'daily portions' of original issue discount for each day
during its taxable year on which it held the REMIC regular certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC regular certificate, the daily portions of
original issue discount will be determined as follows.
As to each 'accrual period,' that is, unless otherwise stated in the
related prospectus supplement, each period that 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 accrual
period, begins on the closing date, a calculation will be made of the portion of
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the original issue discount that accrued during that accrual period. The portion
of original issue discount that accrues in any accrual period will equal the
excess, if any, of (i) the sum of (A) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the REMIC
regular certificate, if any, in future periods and (B) the distributions made on
the REMIC regular certificate during the accrual period of amounts included in
the stated redemption price, over (ii) the adjusted issue price of the REMIC
regular certificate at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated (1) assuming that distributions on the REMIC regular certificate will
be received in future periods based on the mortgage 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
the certificate, increased by the aggregate amount of original issue discount
that accrued with respect to that certificate in prior accrual periods, and
reduced by the amount of any distributions made on that REMIC regular
certificate in prior accrual periods of amounts included in its stated
redemption price. The original issue discount accruing during any accrual
period, computed as described above, will be allocated ratably to each day
during the accrual period to determine the daily portion of original issue
discount for that day.
The OID regulations suggest that original issue discount with respect to
securities that represent multiple uncertificated REMIC regular interests, in
which ownership interests will be issued simultaneously to the same buyer and
which may be required under the related pooling and servicing agreement to be
transferred together, should be computed on an aggregate method. In the absence
of further guidance from the IRS, original issue discount with respect to
securities that represent the ownership of multiple uncertificated REMIC regular
interests will be reported to the IRS and the certificateholders on an aggregate
method based on a single overall constant yield and the prepayment assumption
stated in the related prospectus supplement, treating all
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uncertificated regular interests as a single debt instrument as set forth in the
OID regulations, so long as the pooling and servicing agreement requires that
the uncertificated regular interests be transferred together.
A subsequent purchaser of a REMIC regular certificate that purchases the
certificate at a cost, excluding any portion of that cost attributable to
accrued qualified stated interest, less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to that certificate. However, each daily
portion will be reduced, if the cost is in excess of its 'adjusted issue price,'
in proportion to the ratio that excess bears to the aggregate original issue
discount remaining to be accrued on the REMIC regular certificate. The adjusted
issue price of a REMIC regular certificate on any given day equals (i) the
adjusted issue price or, in the case of the first accrual period, the issue
price, of the certificate at the beginning of the accrual period which includes
that day, plus (ii) the daily portions of original issue discount for all days
during the accrual period prior to that day minus (iii) any principal payments
made during the accrual period prior to that day with respect to the
certificate.
Market Discount
A certificateholder that purchases a REMIC regular certificate at a market
discount, that is, in the case of a REMIC regular certificate issued without
original issue discount, at a purchase price less than its remaining stated
principal amount, or in the case of a REMIC regular certificate issued with
original issue discount, at a purchase price less than its adjusted issue price
will recognize income upon receipt of each distribution representing stated
redemption price. In particular, under Section 1276 of the Internal Revenue Code
such a certificateholder generally will be required to allocate the portion of
each distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent.
A certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, the election will apply to all market
discount bonds acquired by the certificateholder on or after the first day of
the first taxable year to which the election applies. In addition, the OID
regulations permit a certificateholder to elect to accrue all interest,
discount, including de minimis market or original issue discount, and premium in
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income as interest, based on a constant yield method. If the election were made
with respect to a REMIC regular certificate with market discount, the
certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that the certificateholder acquires during the taxable year of
the election or thereafter. Similarly, a certificateholder that made this
election for a certificate that is acquired at a premium would be deemed to have
made an election to amortize bond premium with respect to all debt instruments
having amortizable bond premium that the certificateholder owns or acquires. See
' -- Premium.' Each of these elections to accrue interest, discount and premium
with respect to a certificate on a constant yield method or as interest may not
be revoked without the consent of the IRS.
However, market discount with respect to a REMIC regular certificate will
be considered to be de minimis for purposes of Section 1276 of the Internal
Revenue Code if the market discount is less than 0.25% of the remaining stated
redemption price of the REMIC regular certificate multiplied by the number of
complete years to maturity remaining after the date of its purchase. In
interpreting a similar rule with respect to original issue discount on
obligations payable in installments, the OID regulations refer to the weighted
average maturity of obligations, and it is likely that the same rule will be
applied with respect to market discount, presumably taking into account the
prepayment assumption. If market discount is treated as de minimis under this
rule, it appears that the actual discount would be treated in a manner similar
to original issue discount of a de minimis amount. See ' -- Original Issue
Discount.' This treatment may result in discount being included in income at a
slower rate than discount would be required to be included in income using the
method described above.
Section 1276(b)(3) of the Internal Revenue Code specifically authorizes the
Treasury Department to issue regulations providing for the method for accruing
market discount on debt instruments, the principal of which is payable in more
than one installment. Until regulations are issued by the Treasury Department,
certain rules described in the Committee Report apply. The Committee Report
indicates that in each accrual period market discount on REMIC regular
certificates should accrue, at the certificateholder's option:
on the basis of a constant yield method,
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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
in the case of a REMIC regular certificate issued with original issue
discount, in an amount that bears the same ratio to the total remaining
market discount as the original issue discount accrued in the accrual
period bears to the total original issue discount remaining on the REMIC
regular certificate at the beginning of the accrual period.
Moreover, the prepayment assumption used in calculating the accrual of original
issue discount is to be used in calculating the accrual of market discount.
Because the regulations referred to in this paragraph have not been issued, it
is not possible to predict what effect those regulations might have on the tax
treatment of a REMIC regular certificate purchased at a discount in the
secondary market.
To the extent that REMIC regular certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which the discount would accrue if it were
original issue discount. Moreover, in any event a holder of a REMIC regular
certificate generally will be required to treat a portion of any gain on the
sale or exchange of that Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
In addition, under Section 1277 of the Internal Revenue Code, a holder of a
REMIC regular certificate may be required to defer a portion of its interest
deductions for the taxable year attributable to any indebtedness incurred or
continued to purchase or carry a REMIC regular certificate purchased with market
discount. For these purposes, the de minimis rule referred to above applies. Any
deferred interest expense would not exceed the market discount that accrues
during that taxable year and is, in general, allowed as a deduction not later
than the year in which the market discount is includible in income. If the
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by that holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
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Premium
A REMIC regular certificate purchased at a cost, excluding any portion of
that cost attributable to accrued qualified stated interest, greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of a REMIC regular certificate may elect under Section 171
of the Internal Revenue Code to amortize that premium under the constant yield
method over the life of the certificate. If made, this election will apply to
all debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related REMIC regular certificate, rather than as a
separate interest deduction. The OID regulations also permit certificateholders
to elect to include all interest, discount and premium in income based on a
constant yield method, further treating the certificateholder as having made the
election to amortize premium generally. See ' -- Market Discount.' The
conference committee report states that the same rules that apply to accrual of
market discount, which rules will require use of a prepayment assumption in
accruing market discount with respect to REMIC regular certificates without
regard to whether those certificates have original issue discount, will also
apply in amortizing bond premium under Section 171 of the Internal Revenue Code.
Realized Losses
Under Section 166 of the Internal Revenue Code, both corporate holders of
the REMIC regular certificates and noncorporate holders of the REMIC regular
certificates that acquire those certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their certificates become wholly or partially
worthless as the result of one or more Realized Losses on the mortgage
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 Internal Revenue Code until
the holder's certificate becomes wholly worthless -- until its outstanding
principal balance has been reduced to zero -- and that the loss will be
characterized as a short-term capital loss.
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Each holder of a REMIC regular certificate will be required to accrue
interest and original issue discount with respect to that certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the mortgage collateral or the underlying certificates until it
can be established that any reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC regular certificate could exceed the amount of economic income actually
realized by the holder in that period. Although the holder of a REMIC regular
certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that, as the result of a Realized
Loss, ultimately will not be realized, the law is unclear with respect to the
timing and character of the loss or reduction in income.
Taxation of Owners of REMIC Residual Certificates
General
As residual interests, the REMIC residual certificates will be subject to
tax rules that differ significantly from those that would apply if the REMIC
residual certificates were treated for federal income tax purposes as direct
ownership interests in the mortgage 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, in accordance with the
limitations noted in this discussion, the net loss of the REMIC for each day
during a calendar quarter that the holder owned the REMIC residual certificate.
For this purpose, the taxable income or net loss of the REMIC will be allocated
to each day in the calendar quarter ratably using a '30 days per month/90 days
per quarter/360 days per year' convention unless otherwise disclosed in the
related prospectus supplement. The daily amounts will then be allocated among
the REMIC residual certificateholders in proportion to their respective
ownership interests on that day. Any amount included in the gross income or
allowed as a loss of any REMIC residual certificateholder by virtue of this
allocation will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described in this prospectus in ' --
Taxable Income of the REMIC' and will be taxable to the REMIC residual
certificateholders without regard to the timing or amount of cash distributions
by the REMIC. Ordinary income derived from REMIC residual certificates will be
'portfolio income' for purposes of the taxation of taxpayers in accordance with
limitations under Section 469 of the Internal Revenue Code on the deductibility
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of 'passive losses.'
A holder of a REMIC residual certificate that purchased the certificate
from a prior holder of that certificate also will be required to report on its
federal income tax return amounts representing its daily portion of the taxable
income or net loss of the REMIC for each day that it holds the REMIC residual
certificate. These daily portions generally will equal the amounts of taxable
income or net loss determined as described above. The committee report indicates
that modifications of the general rules may be made, by regulations, legislation
or otherwise, to reduce, or increase, the income or loss of a REMIC residual
certificateholder that purchased the REMIC residual certificate from a prior
holder of such certificate at a price greater than, or less than, the adjusted
basis (as defined below) that REMIC residual certificate would have had in the
hands of an original holder of that Certificate. The REMIC regulations, however,
do not provide for any such modifications.
Any payments received by a REMIC residual certificateholder in connection
with the acquisition of that REMIC residual certificate will be taken into
account in determining the income of the holder for federal income tax purposes.
Although it appears likely that any payment would be includible in income
immediately upon its receipt, the IRS might assert that the payment should be
included in income over time according to an amortization schedule or according
to some other method. Because of the uncertainty concerning the treatment of
these payments, holders of REMIC residual certificates should consult their tax
advisors concerning the treatment of these payments for income tax purposes.
The amount of income REMIC residual certificateholders will be required to
report, or the tax liability associated with that income, may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC residual certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC residual certificates or unrelated deductions against which
income may be offset, subject to the rules relating to 'excess inclusions' and
'noneconomic' residual interests discussed below. The fact that the tax
liability associated with the income allocated to REMIC residual
certificateholders may exceed the cash distributions received by the REMIC
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residual certificateholders for the corresponding period may significantly
adversely affect the REMIC residual certificateholders after-tax rate of return.
Taxable Income of the REMIC
The taxable income of the REMIC will equal the income from the mortgage
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.
The 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 those 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 -- under the constant yield method taking into account the
prepayment assumption. However, a REMIC that acquires collateral at a market
discount must include the discount in income currently, as it accrues, on a
constant interest basis. See ' -- Taxation of Owners of REMIC Regular
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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 discount will be includible in the income of the REMIC as
it accrues, in advance of receipt of the cash attributable to that income, under
a method similar to the method described above for accruing original issue
discount on the REMIC regular certificates. It is anticipated that each REMIC
will elect under Section 171 of the Internal Revenue Code to amortize any
premium on the mortgage collateral. Premium on any item of mortgage collateral
to which the election applies may be amortized under a constant yield method,
presumably taking into account a prepayment assumption.
A REMIC will be allowed deductions for interest, including original issue
discount, on the REMIC regular certificates, including any other class of REMIC
certificates constituting 'regular interests' in the REMIC not offered hereby,
equal to the deductions that would be allowed if the REMIC regular certificates,
including any other class of REMIC certificates constituting 'regular interests'
in the REMIC not offered hereby, were indebtedness of the REMIC. Original issue
discount will be considered to accrue for this purpose as described above under
' -- Taxation of Owners of REMIC Regular Certificates -- Original Issue
Discount,' except that the de minimis rule and the adjustments for subsequent
holders of REMIC regular certificates, including any other class of certificates
constituting 'regular interests' in the REMIC not offered hereby, described
therein will not apply.
If a class of REMIC regular certificates is issued at an Issue Premium, the
net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC regular certificates of that class will be
reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under
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a constant yield method in a manner analogous to the method of accruing original
issue discount described above under ' -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount.'
As a general rule, the taxable income of the REMIC will be determined in
the same manner as if the REMIC were an individual having the calendar year as
its taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See ' -- Prohibited Transactions and Other Possible REMIC
Taxes' below. Further, the limitation on miscellaneous itemized deductions
imposed on individuals by Section 67 of the Internal Revenue Code, which allows
those deductions only to the extent they exceed in the aggregate two percent of
the taxpayer's adjusted gross income, will not be applied at the REMIC level so
that the REMIC will be allowed deductions for servicing, administrative and
other non-interest expenses in determining its taxable income. All of these
expenses will be allocated as a separate item to the holders of REMIC residual
certificates, subject to the limitation of Section 67 of the Internal Revenue
Code. See ' -- Possible Pass-Through of Miscellaneous Itemized Deductions.' If
the deductions allowed to the REMIC exceed its gross income for a calendar
quarter, the excess will be the net loss for the REMIC for that calendar
quarter.
Basis Rules, Net Losses and Distributions
The adjusted basis of a REMIC residual certificate will be equal to the
amount paid for that REMIC residual certificate, increased by amounts included
in the income of the related certificateholder and decreased, but not below
zero, by distributions made, and by net losses allocated, to the related
certificateholder.
A REMIC residual certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent the net loss exceeds the REMIC
residual certificateholder's adjusted basis in its REMIC residual certificate as
of the close of that calendar quarter, determined without regard to the net
loss. Any loss that is not currently deductible by reason of this limitation may
be carried forward indefinitely to future calendar quarters and, in accordance
with the same limitation, may be used only to offset income from the REMIC
residual certificate. The ability of REMIC residual certificateholders to deduct
net losses in accordance with additional limitations under the Internal Revenue
Code, as to which the certificateholders should consult their tax advisors.
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Any distribution on a REMIC residual certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC residual certificate. To the extent a distribution
on a REMIC residual certificate exceeds the adjusted basis, it will be treated
as gain from the sale of the REMIC residual certificate. holders of REMIC
residual certificates may be entitled to distributions early in the term of the
related REMIC under circumstances in which their bases in the REMIC residual
certificates will not be sufficiently large that distributions will be treated
as nontaxable returns of capital. Their bases in the REMIC residual certificates
will initially equal the amount paid for such REMIC residual certificates and
will be increased by their allocable shares of taxable income of the trust.
However, their basis increases may not occur until the end of the calendar
quarter, or perhaps the end of the calendar year, with respect to which the
REMIC taxable income is allocated to the REMIC residual certificateholders. To
the extent the REMIC residual certificateholders initial bases are less than the
distributions to the REMIC residual certificateholders, and increases in the
initial bases either occur after distributions or, together with their initial
bases, are less than the amount of the distributions, gain will be recognized to
the REMIC residual certificateholders on those distributions and will be treated
as gain from the sale of their REMIC residual certificates.
The effect of these rules is that a certificateholder may not amortize its
basis in a REMIC residual certificate, but may only recover its basis through
distributions, through the deduction of its share of any net losses of the REMIC
or upon the sale of its REMIC residual certificate. See ' -- Sales of REMIC
Certificates.' For a discussion of possible modifications of these rules that
may require adjustments to income of a holder of a REMIC residual certificate
other than an original holder in order to reflect any difference between the
cost of the REMIC residual certificate to its holder and the adjusted basis the
REMIC residual certificate would have had in the hands of the original holder,
see ' -- General.'
Excess Inclusions
Any 'excess inclusions' with respect to a REMIC residual certificate will
be subject to federal income tax in all events.
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In general, the 'excess inclusions' with respect to a REMIC residual
certificate for any calendar quarter will be the excess, if any, of (i) the sum
of the daily portions of REMIC taxable income allocable to the REMIC residual
certificate over (ii) the sum of the 'daily accruals' (as defined below) for
each day during that quarter that the REMIC residual certificate was held by the
REMIC residual certificateholder. The daily accruals of a REMIC residual
certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the 'adjusted issue price' of the
REMIC residual certificate at the beginning of the calendar quarter and 120% of
the 'long-term Federal rate' in effect on the closing date. For this purpose,
the adjusted issue price of a REMIC residual certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC residual
certificate, increased by the sum of the daily accruals for all prior quarters
and decreased, but not below zero, by any distributions made with respect to the
REMIC residual certificate before the beginning of that quarter. The issue price
of a REMIC residual certificate is the initial offering price to the public,
excluding bond houses, brokers and underwriters, at which a substantial amount
of the REMIC residual certificates were sold. If less than a substantial amount
of a particular class of REMIC residual certificates is sold for cash on or
prior to the closing date, the issue price of that class will be treated as the
fair market value of that class on the closing date. The 'long-term Federal
rate' is an average of current yields on Treasury securities with a remaining
term of greater than nine years, computed and published monthly by the IRS.
For REMIC residual certificateholders, an excess inclusion:
will not be permitted to be offset by deductions, losses or loss
carryovers from other activities,
will be treated as 'unrelated business taxable income' to an otherwise
tax-exempt organization and
will not be eligible for any rate reduction or exemption under any
applicable tax treaty with respect to the 30% United States withholding
tax imposed on distributions to REMIC residual certificateholders that are
foreign investors.
See, however, ' -- Foreign Investors in REMIC certificates.'
Furthermore, for purposes of the alternative minimum tax, (i) excess
inclusions will not be permitted to be offset by the alternative tax net
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operating loss deduction and (ii) alternative minimum taxable income may not be
less than the taxpayer's excess inclusions; provided, however, that for purposes
of (ii), alternative minimum taxable income is determined without regard to the
special rule that taxable income cannot be less than excess inclusions. The
latter rule has the effect of preventing nonrefundable tax credits from reducing
the taxpayer's income tax to an amount lower than the alternative minimum tax on
excess inclusions.
In the case of any REMIC residual certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to the REMIC
residual certificates, reduced, but not below zero, by the real estate
investment trust taxable income, within the meaning of Section 857(b)(2) of the
Internal Revenue Code, excluding any net capital gain, will be allocated among
the shareholders of the trust in proportion to the dividends received by the
shareholders from the trust, and any amount so allocated will be treated as an
excess inclusion with respect to a REMIC residual certificate as if held
directly by the shareholder. Treasury regulations yet to be issued could apply a
similar rule to regulated investment companies, common trust funds and some
cooperatives; the REMIC regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates
Under the REMIC regulations, transfers of 'noneconomic' REMIC residual
certificates will be disregarded for all federal income tax purposes if 'a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax.' If the transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on the 'noneconomic' REMIC residual certificate. The REMIC regulations
provide that a REMIC residual certificate is noneconomic unless, based on the
prepayment assumption and on any required or permitted clean up calls, or
required qualified liquidation provided for in the REMIC's organizational
documents, (1) the present value of the expected future distributions
(discounted using the 'applicable Federal rate' for obligations whose term ends
on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC residual certificate, which rate is computed
and published monthly by the IRS) on the REMIC residual certificate equals at
least the present value of the expected tax on the anticipated excess
inclusions, and (2) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC residual certificate at or after
the time the taxes
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accrue on the anticipated excess inclusions in an amount sufficient to satisfy
the accrued taxes. Accordingly, all transfers of REMIC residual certificates
that may constitute noneconomic residual interests will be subject to
restrictions under the terms of the related pooling and servicing agreement or
trust agreement that are intended to reduce the possibility of any transfer
being disregarded. The restrictions will require each party to a transfer to
provide an affidavit that no purpose of the transfer is to impede the assessment
or collection of tax, including representations as to the financial condition of
the prospective transferee, as to which the transferor also is required to make
a reasonable investigation to determine the transferee's historic payment of its
debts and ability to continue to pay its debts as they come due in the future.
Prior to purchasing a REMIC residual certificate, prospective purchasers should
consider the possibility that a purported transfer of the REMIC residual
certificate by such a purchaser to another purchaser at some future date may be
disregarded in accordance with the above-described rules which would result in
the retention of tax liability by that purchaser.
The related prospectus supplement will disclose whether offered REMIC
residual certificates may be considered 'noneconomic' residual interests under
the REMIC regulations. Any disclosure that a REMIC residual certificate will not
be considered 'noneconomic' will be based upon some assumptions, and the
depositor will make no representation that a REMIC residual certificate will not
be considered 'noneconomic' for purposes of the above-described rules. See ' --
Foreign Investors in REMIC Certificates' for additional restrictions applicable
to transfers of certain REMIC residual certificates to foreign persons.
Mark-to-Market Rules
The mark-to-market requirement applies to all securities owned by a dealer,
except to the extent that the dealer has specifically identified a security as
held for investment. The Mark-to-Market Regulations provide that for purposes of
this mark-to-market requirement, a REMIC residual certificate acquired on or
after January 4, 1995 is not treated as a security and thus may not be marked to
market. Prospective purchasers of a REMIC residual certificate should consult
their tax advisors regarding the possible application of the mark-to-market
requirement to REMIC residual certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions
Fees and expenses of a REMIC generally will be allocated to the holders of
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the related REMIC residual certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of those fees and expenses should be allocated
to the holders of the related REMIC regular certificates. Unless otherwise
stated in the related prospectus supplement, fees and expenses will be allocated
to holders of the related REMIC residual certificates in their entirety and not
to the holders of the related REMIC regular certificates.
With respect to REMIC residual certificates or REMIC regular certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a Pass-Through Entity beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to the individual's, estate's or trust's
share of fees and expenses will be added to the gross income of that holder and
(ii) the individual's, estate's or trust's share of fees and expenses will be
treated as a miscellaneous itemized deduction allowable in accordance with the
limitation of Section 67 of the Internal Revenue Code, which permits those
deductions only to the extent they exceed in the aggregate two percent of a
taxpayer's adjusted gross income. In addition, Section 68 of the Internal
Revenue Code provides that the amount of itemized deductions otherwise allowable
for an individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (i) 3% of the excess of the individual's adjusted gross
income over that amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for the taxable year. The amount of additional taxable
income reportable by REMIC certificateholders that are in accordance with the
limitations of either Section 67 or Section 68 of the Internal Revenue Code may
be substantial. Furthermore, in determining the alternative minimum taxable
income of such a holder of a REMIC Certificate that is an individual, estate or
trust, or a Pass-Through Entity beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in the holder's gross income. Accordingly, the REMIC
certificates may not be appropriate investments for individuals, estates, or
trusts, or pass-through entities beneficially owned by one or more individuals,
estates
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or trusts. Any prospective investors should consult with their tax advisors
prior to making an investment in these certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations
If a REMIC residual certificate is transferred to a Disqualified
Organization, a tax would be imposed in an amount, determined under the REMIC
regulations, equal to: the product of
(1) the present value, discounted using the 'applicable Federal rate' for
obligations whose term ends on the close of the last quarter in which
excess inclusions are expected to accrue with respect to the
certificate, which rate is computed and published monthly by the IRS,
of the total anticipated excess inclusions with respect to the REMIC
residual certificate for periods after the transfer; and
(2) the highest marginal federal income tax rate applicable to
corporations.
The anticipated excess inclusions must be determined as of the date that
the REMIC residual certificate is transferred and must be based on events that
have occurred up to the time of transfer, the prepayment assumption and any
required or permitted clean up calls or required liquidation provided for in the
REMIC's organizational documents. This tax generally would be imposed on the
transferor of the REMIC residual certificate, except that where the transfer is
through an agent for a Disqualified Organization, the tax would instead be
imposed on that agent. However, a transferor of a REMIC residual certificate
would in no event be liable for the tax with respect to a transfer if the
transferee furnishes to the transferor an affidavit that the transferee is not a
Disqualified Organization and, as of the time of the transfer, the transferor
does not have actual knowledge that the affidavit is false. Moreover, an entity
will not qualify as a REMIC unless there are reasonable arrangements designed to
ensure that:
residual interests in the entity are not held by Disqualified
Organizations; and
information necessary for the application of the tax described herein will
be made available.
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Restrictions on the transfer of REMIC residual certificates and other
provisions that are intended to meet this requirement will be included in the
pooling and servicing agreement, including provisions:
(1) requiring any transferee of a REMIC residual certificate to provide an
affidavit representing that it is not a Disqualified Organization and
is not acquiring the REMIC residual certificate on behalf of a
Disqualified Organization, undertaking to maintain that status and
agreeing to obtain a similar affidavit from any person to whom it shall
transfer the REMIC residual certificate;
(2) providing that any transfer of a REMIC residual certificate to a
Disqualified Organization shall be null and void; and
(3) granting to the master servicer the right, without notice to the holder
or any prior holder, to sell to a purchaser of its choice any REMIC
residual certificate that shall become owned by a Disqualified
Organization despite (1) and (2) above.
In addition, if a Pass-Through Entity includes in income excess inclusions
with respect to a REMIC residual certificate, and a Disqualified Organization is
the record holder of an interest in that entity, then a tax will be imposed on
the entity equal to the product of (i) the amount of excess inclusions on the
REMIC residual certificate that are allocable to the interest in the
Pass-Through Entity held by the Disqualified Organization and (ii) the highest
marginal federal income tax rate imposed on corporations. A Pass-Through Entity
will not be subject to this tax for any period, however, if each record holder
of an interest in the Pass-Through Entity furnishes to that Pass-Through Entity
(i) the holder's social security number and a statement under penalties of
perjury that the social security number is that of the record holder or (ii) a
statement under penalties of perjury that the record holder is not a
Disqualified Organization. For taxable years beginning after December 31, 1997,
notwithstanding the preceding two sentences, in the case of a REMIC residual
certificate held by an 'electing large partnership,' all interests in such
partnership shall be treated as held by Disqualified Organizations, without
regard to whether the record holders of the partnership furnish statements
described in the preceding sentence, and the amount that is subject to tax under
the second preceding sentence is excluded from the gross income of the
partnership allocated to the partners, in lieu of allocating to the partners a
deduction for the tax paid by the partners.
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Sales of REMIC Certificates
If a REMIC Certificate is sold, the selling certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Certificate. The adjusted basis of
a REMIC regular certificate generally will equal the cost of that REMIC regular
certificate to that certificateholder, increased by income reported by the
certificateholder with respect to that REMIC regular certificate, including
original issue discount and market discount income, and reduced, but not below
zero, by distributions on the REMIC regular certificate received by the
certificateholder and by any amortized premium. The adjusted basis of a REMIC
residual certificate will be determined as described under ' -- Taxation of
Owners of REMIC Residual Certificates -- Basis Rules, Net Losses and
Distributions.' Except as described below, any gain or loss generally will be
capital gain or loss.
Gain from the sale of a REMIC regular certificate that might otherwise be
capital gain will be treated as ordinary income to the extent the gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to the REMIC regular certificate had income
accrued thereon at a rate equal to 110% of the 'applicable federal rate', which
is typically a rate based on an average of current yields on Treasury securities
having a maturity comparable to that of the certificate, which rate is computed
and published monthly by the IRS, determined as of the date of purchase of the
REMIC regular certificate, over (ii) the amount of ordinary income actually
includible in the seller's income prior to the sale. In addition, gain
recognized on the sale of a REMIC regular certificate by a seller who purchased
the REMIC regular certificate at a market discount will be taxable as ordinary
income to the extent of any accrued and previously unrecognized market discount
that accrued during the period the certificate was held. See ' -- Taxation of
Owners of REMIC Regular Certificates -- Discount.'
REMIC certificates will be 'evidences of indebtedness' within the meaning
of Section 582(c)(1) of the Internal Revenue Code, so that gain or loss
recognized from the sale of a REMIC certificate by a bank or thrift institution
to which that section applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC regular certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that the certificate is held as part of a 'conversion transaction' within the
meaning of Section 1258 of the Internal Revenue Code. A conversion transaction
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generally is one in which the taxpayer has taken two or more positions in
certificates or similar property that reduce or eliminate market risk, if
substantially all of the taxpayer's return is attributable to the time value of
the taxpayer's net investment in the transaction. The amount of gain so realized
in a conversion transaction that is recharacterized as ordinary income generally
will not exceed the amount of interest that would have accrued on the taxpayer's
net investment at 120% of the appropriate 'applicable Federal rate', which rate
is computed and published monthly by the IRS, at the time the taxpayer enters
into the conversion transaction, subject to appropriate reduction for prior
inclusion of interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include any net capital
gain in total net investment income for the taxable year, for purposes of the
limitation on the deduction of interest on indebtedness incurred to purchase or
carry property held for investment to a taxpayer's net investment income.
If the seller of a REMIC residual certificate reacquires the certificate,
any other residual interest in a REMIC or any similar interest in a 'taxable
mortgage pool' (as defined in Section 7701(i) of the Internal Revenue Code)
within six months of the date of the sale, the sale will be subject to the 'wash
sale' rules of Section 1091 of the Internal Revenue Code. In that event, any
loss realized by the REMIC residual certificateholders on the sale will not be
deductible, but instead will be added to the REMIC residual certificateholders
adjusted basis in the newly-acquired asset.
Prohibited Transactions and Other Possible REMIC Taxes
The Internal Revenue Code imposes a prohibited transactions tax, which is a
tax on REMICs equal to 100% of the net income derived from prohibited
transactions. In general, subject to specified exceptions a prohibited
transaction means the disposition of an item of mortgage collateral, the receipt
of income from a source other than an item of mortgage collateral or other
Permitted Investments, the receipt of compensation for services, or gain from
the disposition of an asset purchased with the payments on the mortgage
collateral for temporary investment pending distribution on the REMIC
certificates. It is not anticipated that any REMIC will
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engage in any prohibited transactions in which it would recognize a material
amount of net income. In addition, some contributions to a REMIC made after the
day on which the REMIC issues all of its interests could result in the
imposition of a contributions tax, which is a tax on the REMIC equal to 100% of
the value of the contributed property. Each pooling and servicing agreement or
trust agreement will include provisions designed to prevent the acceptance of
any contributions that would be subject to the tax.
REMICs also are subject to federal income tax at the highest corporate rate
on 'net income from foreclosure property,' determined by reference to the rules
applicable to real estate investment trusts. 'Net income from foreclosure
property' generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related prospectus supplement, it is not
anticipated that any REMIC will recognize 'net income from foreclosure property'
subject to federal income tax.
Unless otherwise disclosed in the related prospectus supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related prospectus supplement, and to the
extent permitted by then applicable laws, any prohibited transactions tax,
contributions tax, tax on 'net income from foreclosure property' or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related master servicer, 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 the 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 relating to compliance with applicable laws and regulations. Any
tax not borne by the master servicer or the trustee will be payable out of the
related trust resulting in a reduction in amounts payable to holders of the
related REMIC certificates.
Termination
A REMIC will terminate immediately after the distribution date following
receipt by the REMIC of the final payment from the mortgage collateral or upon a
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sale of the REMIC's assets following the adoption by the REMIC of a plan of
complete liquidation. The last distribution on a REMIC regular certificate will
be treated as a payment in retirement of a debt instrument. In the case of a
REMIC residual certificate, if the last distribution on the REMIC residual
certificate is less than the certificateholder's adjusted basis in the
certificate, the certificateholder should be treated as realizing a loss equal
to the amount of the difference, and the loss may be treated as a capital loss.
Reporting and Other Administrative Matters
Solely for purposes of the administrative provisions of the Internal
Revenue Code, the REMIC will be treated as a partnership and REMIC residual
certificateholders will be treated as 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 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, will have the authority to act on behalf of the
REMIC and the REMIC residual certificateholders in connection with the
administrative and judicial review of items of income, deduction, gain or loss
of the REMIC, as well as the REMIC's classification. REMIC residual
certificateholders will be required to report the REMIC items consistently with
their treatment on the related REMIC's tax return and may in some circumstances
be bound by a settlement agreement between the master servicer, or the
Certificate Administrator, as applicable, as tax matters person, and the IRS
concerning any REMIC item.
Adjustments made to the REMIC tax return may require a REMIC residual
certificateholders to make corresponding adjustments on its return, and an audit
of the REMIC's tax return, or the adjustments resulting from an audit, could
result in an audit of the certificateholder's return. No REMIC will be
registered as a tax shelter under Section 6111 of the Internal Revenue Code
because it is not anticipated that any REMIC will have a net loss for any of the
first five taxable years of its existence. Any person that holds a REMIC
residual
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certificate as a nominee for another person may be required to furnish to the
related REMIC, in a manner to be provided in Treasury regulations, the name and
address of that person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC regular certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports are
required to be sent to individual holders of REMIC regular Interests and the
IRS; holders of REMIC regular certificates that are corporations, trusts,
securities dealers and other non-individuals will be provided interest and
original issue discount income information and the information in the following
paragraph upon request in accordance with the requirements of the applicable
regulations. The information must be provided by the later of 30 days after the
end of the quarter for which the information was requested, or two weeks after
the receipt of the request. The REMIC must also comply with rules requiring a
REMIC regular certificate issued with original issue discount to disclose on its
face information including the amount of original issue discount and the issue
date, and requiring such information to be reported to the IRS. Reporting with
respect to the REMIC residual certificates, including income, excess inclusions,
investment expenses and relevant information regarding qualification of the
REMIC's assets will be made as required under the Treasury regulations,
typically on a quarterly basis.
As applicable, the REMIC regular certificate information reports will
include a statement of the adjusted issue price of the REMIC regular certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method requires information relating to the holder's purchase
price that the master servicer, or the Certificate Administrator, as applicable,
will not have, the regulations only require that information pertaining to the
appropriate proportionate method of accruing market discount be provided. See '
- -- Taxation of Owners of REMIC Regular Certificates -- Market Discount.'
The responsibility for complying with the foregoing reporting rules will be
borne by the 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. Any request
should be directed to the master servicer or Certificate Administrator, as
applicable, at Residential Funding Corporation, 8400 Normandale Lake Boulevard,
Suite 600, Minneapolis, Minnesota 55437.
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Backup Withholding with Respect to REMIC Certificates
Payments of interest and principal, as well as payments of proceeds from
the sale of REMIC certificates, may be subject to the 'backup withholding tax'
under Section 3406 of the Internal Revenue Code at a rate of 31% if recipients
of payments fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from the tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against the recipient's federal income
tax. Furthermore, penalties may be imposed by the IRS on a recipient of payments
that is required to supply information but that does not do so in the proper
manner.
Foreign Investors in REMIC Certificates
A REMIC regular certificateholder that is not a United States person and is
not subject to federal income tax as a result of any direct or indirect
connection to the United States in addition to its ownership of a REMIC regular
certificate will not be subject to United States federal income or withholding
tax on a distribution on a REMIC regular certificate, provided that the holder
complies to the extent necessary with certain identification requirements,
including delivery of a statement, signed by the certificateholder under
penalties of perjury, certifying that the certificateholder is not a United
States person and providing the name and address of the certificateholder. For
these purposes, United States person means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in, or
under the laws of, the United States, any state thereof or the District of
Columbia, except, in the case of a partnership, to the extent provided in
regulations, or an estate whose income is subject to United States federal
income tax regardless of its source, or a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust. To the extent prescribed in regulations by
the Secretary of the Treasury, which regulations have not yet been issued, a
trust
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which was in existence on August 20, 1996 (other than a trust treated as owned
by the grantor under subpart E of part I of subchapter J of chapter 1 of the
Internal Revenue Code), and which was treated as a United States person on
August 19, 1996, may elect to continue to be treated as a United States person
notwithstanding the previous sentence. It is possible that the IRS may assert
that the foregoing tax exemption should not apply with respect to a REMIC
regular certificate held by a REMIC residual certificateholder that owns
directly or indirectly a 10% or greater interest in the REMIC residual
certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions of accrued original issue discount, to the
holder may be subject to a tax rate of 30%, subject to reduction under any
applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on the United
States shareholder's allocable portion of the interest income received by the
controlled foreign corporation.
Further, it appears that a REMIC regular certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related prospectus supplement, transfers of
REMIC residual certificates to investors that are not United States persons will
be prohibited under the related pooling and servicing agreement or trust
agreement.
New Withholding Regulations
The Treasury Department has issued New Regulations. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
2000, subject to certain transition rules. Prospective investors are urged to
consult their tax advisors regarding the New Regulations.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in 'Material
Federal Income Tax Consequences,' potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
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certificates offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their tax advisors with respect
to the various tax consequences of investments in the certificates offered
hereby.
ERISA CONSIDERATIONS
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, or ERISA, impose fiduciary and prohibited transaction restrictions on
employee pension and welfare benefit plans and certain other retirement plans
and arrangements, including individual retirement accounts and annuities and
Keogh plans, subject to ERISA, or Plans, and on bank collective investment funds
and insurance company general and separate accounts in which those Plans are
invested. Section 4975 of the Internal Revenue Code imposes essentially the same
prohibited transaction restrictions on Tax-Favored Plans.
Some employee benefit plans, including governmental plans (as defined in
Section 3(32) of ERISA) and, if no election has been under Section 410(d) of the
Internal Revenue Code, church plans (as defined in Section 3(33) of ERISA), are
not subject to the ERISA requirements discussed in this prospectus. Accordingly,
assets of these plans may be invested in certificates without regard to the
ERISA considerations described below, subject to the provisions of applicable
federal and state law. Any plan that is a tax-qualified plan and exempt from
taxation under Sections 401(a) and 501(a) of the Internal Revenue Code, however,
is subject to the prohibited transaction rules in Section 503 of the Internal
Revenue Code.
In addition to ERISA rules imposing general fiduciary requirements,
including those of investment prudence and diversification and the requirement
that a Plan's investment be made in accordance with the documents governing the
Plan, Section 406 of ERISA and Section 4975 of the Internal Revenue Code
prohibit a broad range of transactions involving 'plan assets' of Plans and
Tax-Favored Plans, or ERISA plans, and Parties in Interest, unless a statutory
or administrative exemption is available. Certain Parties in Interest that
participate
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in a prohibited transaction may be subject to a penalty (or an excise tax)
imposed under Section 502(i) of ERISA or Section 4975 of the Internal Revenue
Code, unless a statutory or administrative exemption is available with respect
to any transaction of this sort.
ERISA PLAN ASSET REGULATIONS
An investment of ERISA plan assets in certificates may cause the underlying
mortgage loans, mortgage securities or any other assets included in a trust to
be deemed 'plan assets' of the Plan. The U.S. Department of Labor, or DOL, has
promulgated regulations at 29 C.F.R. Section 2510.3-101 or, DOL Regulations,
concerning whether or not an ERISA plan's assets would be deemed to include an
interest in the underlying assets of an entity, including a trust, for purposes
of applying the general fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and Section 4975 of the Internal
Revenue Code, when ERISA plan assets are used to acquire an 'equity interest,'
such as a certificate, in that entity.
Because of the factual nature of some of the rules in the DOL Regulations,
ERISA plan assets either may be deemed to include an interest in the assets of
an entity, including a trust, or may be deemed merely to include an ERISA plan's
interest in the instrument evidencing such equity interest, such as a
certificate. Therefore, neither ERISA 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 'ERISA plan assets' or
'assets of an ERISA plan' has the meaning specified in the DOL Regulations and
includes an undivided interest in the underlying assets of some entities in
which a ERISA plan invests.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Internal Revenue Code may apply to a trust and cause the depositor,
the master servicer, the Certificate Administrator, any servicer, any
subservicer, the trustee, the obligor under any credit enhancement mechanism or
certain affiliates of those entities to be considered or become Parties in
Interest with respect to an investing ERISA plan or of an ERISA plan holding an
interest in such an entity. If so, the acquisition or holding of certificates by
or on behalf of the investing ERISA plan could also give rise to a prohibited
transaction under ERISA and/or Section 4975 of the Internal Revenue Code, unless
some statutory or administrative exemption is available. Certificates acquired
by an ERISA plan would be assets of that plan. Under the DOL Regulations, a
trust, including the mortgage loans, Agency Securities or any other assets held
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in the trust, may also be deemed to be assets of each ERISA plan that acquires
certificates. Special caution should be exercised before ERISA plan assets are
used to acquire a certificate in those circumstances, especially if, with
respect to the ERISA plan assets, the depositor, the master servicer, the
Certificate Administrator, any servicer, any subservicer, the trustee, the
obligor under any credit enhancement mechanism or an affiliate thereof either
(i) has investment discretion with respect to the investment of the ERISA plan
assets; or (ii) has authority or responsibility to give, or regularly gives,
investment advice with respect to ERISA plan assets for a fee under an agreement
or understanding that any advice will serve as a primary basis for investment
decisions with respect to the ERISA plan assets.
Any person who has discretionary authority or control respecting the
management or disposition of ERISA plan assets, and any person who provides
investment advice with respect to the ERISA plan assets for a fee (in the manner
described above), is a fiduciary of the investing ERISA plan. If the mortgage
loans, contracts, Agency Securities or any other assets held in a trust were to
constitute ERISA plan assets, then any party exercising management or
discretionary control with respect to those ERISA plan assets may be deemed to
be a 'fiduciary,' and thus subject to the fiduciary requirements of ERISA and
the prohibited transaction provisions of ERISA and Section 4975 of the Internal
Revenue Code, with respect to any investing ERISA plan. In addition, if the
mortgage loans, contracts, Agency Securities or any other assets held in a trust
were to constitute ERISA plan assets, then the acquisition or holding of
certificates by, on behalf of a ERISA plan assets or with ERISA plan assets, as
well as the operation of such trust, may constitute or result in a prohibited
transaction under ERISA and the Internal Revenue Code.
PROHIBITED TRANSACTION EXEMPTION
The DOL has issued an individual exemption, prohibited transaction
exemption, or PTE, 94-29, 59 Fed. Reg. 14674 (March 29, 1994), as amended by PTE
97-34, 62 Fed. Reg. 39021 (July 21, 1997), to Residential Funding Corporation
and certain of its affiliates, which generally exempts from the application of
the prohibited transaction provisions of Section 406 of ERISA, and the excise
taxes imposed on the prohibited transactions
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pursuant to Section 4975(a) and (b) of the Internal Revenue Code, certain
transactions, among others, relating to the servicing and operation of pools of
certain secured obligations, including mortgage loans, contracts or Agency
Securities, which are held in a trust and the purchase, sale and holding of
pass-through certificates issued by that trust as to which (i) the depositor or
any of its affiliates is the sponsor if any entity which has received from the
DOL an individual prohibited transaction exemption which is similar to the
exemption is the sole underwriter, a manager or co-manager of the underwriting
syndicate or a seller or placement agent, or (ii) the depositor or an affiliate
is the underwriter or placement agent, provided that the conditions of the
exemption are satisfied. For purposes of this section, the term underwriter
includes (a) the depositor and certain of its affiliates, (b) any person
directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with the depositor and certain of its
affiliates, (c) any member of the underwriting syndicate or selling group of
which a person described in (a) or (b) is a manager or co-manager with respect
to a class of certificates, or (d) any entity which has received an exemption
from the DOL relating to certificates which is substantially 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 an ERISA plan or with ERISA plan assets must be on terms that are at least as
favorable to the ERISA plan as they would be in an arm's-length transaction with
an unrelated party. Second, the exemption only applies to certificates
evidencing rights and interests that are not subordinated to the rights and
interests evidenced by the other certificates of the same trust. Third, the
certificates at the time of acquisition by an ERISA plan or with ERISA plan
assets must be rated in one of the three highest generic rating categories by
Standard & Poor's, a division of McGraw Hill Companies, Inc., Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc., or the
exemption rating agencies. Fourth, the trustee cannot be an affiliate of any
other member of the restricted group which consists of any underwriter, the
depositor, the master servicer, the Certificate Administrator, any servicer, any
subservicer, the trustee and any mortgagor with respect to assets of a trust
constituting more than 5% of the aggregate unamortized principal balance of the
assets in the related trust as of the date of initial issuance of the
certificates. Fifth, the sum of all payments made to and retained by the
underwriters must represent not more than reasonable compensation for
underwriting the certificates; the sum of all payments made to and retained by
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the depositor pursuant to the assignment of the assets to the related trust must
represent not more than the fair market value of those obligations; and the sum
of all payments made to and retained by the master servicer, the Certificate
Administrator, any servicer and any subservicer must represent not more than
reasonable compensation for that person's services under the related pooling and
servicing agreement or trust agreement and reimbursement of that person's
reasonable expenses in connection therewith. Sixth, the exemption states that
the investing ERISA plan or ERISA plan assets investor must be an accredited
investor as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended. In addition,
except as otherwise specified in the related prospectus supplement, the
exemptive relief afforded by the exemption may not apply to any certificates
where the related trust contains a swap or Mexico Mortgage Loans.
The exemption also requires that each trust meet the following
requirements:
the trust must consist solely of assets of the type that have been
included in other investment pools;
certificates evidencing interests in those other investment pools must
have been rated in one of the three highest categories of one of the
exemption rating agencies for at least one year prior to the acquisition
of certificates by or on behalf of an ERISA plan or with ERISA plan assets
in reliance upon the exemption; and
certificates in the other investment pools must have been purchased by
investors other than ERISA plans for at least one year prior to any
acquisition of certificates by or on behalf of an ERISA plan or with ERISA
plan assets in reliance upon the exemption.
A fiduciary of or other investor of ERISA plan assets contemplating
purchasing a certificate must make its own determination that the general
conditions described above will be satisfied with respect to that certificate.
If the general conditions of the exemption are satisfied, the exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA, and the excise taxes imposed by Sections 4975(a) and (b) of the
Internal Revenue Code by reason of Sections 4975(c)(1)(A) through (D) of the
Internal Revenue Code, in connection with the direct or indirect sale, exchange,
transfer, holding or the direct or indirect
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acquisition or disposition in the secondary market of certificates by or with
ERISA plan assets. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E) and 406(a)(2) of ERISA for the acquisition or holding of a
certificate by or with ERISA plan assets of an excluded plan by any person who
has discretionary authority or renders investment advice with respect to ERISA
plan assets of the excluded plan. For purposes of the certificates, an excluded
plan is a ERISA plan sponsored by any member of the restricted group.
If specific conditions of the exemption are also satisfied, the exemption
may provide an exemption from the restrictions imposed by Sections 406(b)(1) and
(b)(2) of ERISA, and the excise taxes imposed by Sections 4975(a) and (b) of the
Internal Revenue Code by reason of Section 4975(c)(1)(E) of the Internal Revenue
Code, in connection with the following:
(1) the direct or indirect sale, exchange or transfer of certificates in
the initial issuance of certificates between the depositor or an
underwriter and an ERISA plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of the relevant ERISA plan assets in the certificates is:
(a) a mortgagor with respect to 5% or less of the fair market value of
the assets of a trust; or
(b) an affiliate of such a person.
(2) the direct or indirect acquisition or disposition in the secondary
market of certificates by an ERISA plan or with ERISA plan assets; and
(3) the holding of certificates by an ERISA plan or with ERISA plan assets.
Additionally, if specific conditions of the exemption are satisfied, the
exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, and the excise taxes imposed by Sections
4975(a) and (b) of the Internal Revenue Code by reason of Section 4975(c) of the
Internal Revenue Code, for transactions in connection with the servicing,
management and operation of the mortgage pools or contract pools. The depositor
expects that the specific conditions of the exemption required for this purpose
will be satisfied with respect to the certificates so that the exemption would
provide an exemption from the restrictions imposed by Sections 406(a) and (b) of
ERISA, and the excise taxes imposed by Sections 4975(a) and (b) of the Internal
Revenue Code by reason of Section 4975(c) of the Internal Revenue Code,
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for transactions in connection with the servicing, management and operation of
the mortgage pools and contract pools, provided that the general conditions of
the exemption are satisfied.
The exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the excise taxes imposed by Sections
4975(a) and (b) of the Internal Revenue Code by reason of Sections 4975(c)(1)(A)
through (D) of the Internal Revenue Code, if those restrictions are deemed to
otherwise apply merely because a person is deemed to be a Party in Interest with
respect to an investing ERISA plan, or an ERISA plan holding interests in the
investing entity holding ERISA plan assets, by virtue of providing services to
the ERISA plan or the ERISA plan assets, or by virtue of having specified
relationships to such a person, solely as a result of the ERISA plan's ownership
of certificates.
Before purchasing a certificate, a fiduciary or other investor of ERISA
plan assets should itself confirm that (a) the certificates constitute
'certificates' for purposes of the exemption and (b) the specific and general
conditions described in the exemption and the other requirements in the
exemption would be satisfied. In addition to making its own determination as to
the availability of the exemptive relief provided in the exemption, the
fiduciary or other ERISA plan assets investor should consider its general
fiduciary obligations under ERISA in determining whether to purchase any
certificates with ERISA plan assets.
Any fiduciary or other ERISA plan assets investor that proposes to purchase
certificates on behalf of an ERISA plan or with ERISA plan assets should consult
with its counsel with respect to the potential applicability of ERISA and the
Internal Revenue Code to that investment and the availability of the exemption
or any other DOL prohibited transaction exemption in connection therewith. In
particular, in connection with a contemplated purchase of certificates
representing a beneficial ownership interest in a pool of single-family
residential first or second mortgage loans or Agency Securities, the fiduciary
or other ERISA plan assets investor should consider the availability of the
exemption or prohibited transaction class exemption 83-1, or PTCE 83-1, for some
transactions involving mortgage pool investment trusts. However, PTCE 83-1 does
not provide exemptive relief with respect to certificates evidencing interests
in trusts which include mortgage loans secured by third or more junior liens,
contracts or Cooperative Loans or some types of mortgage securities, or which
contain a swap. In
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addition, the fiduciary or other ERISA plan assets investor should consider the
availability of other class exemptions granted by the DOL, which provide relief
from certain of the prohibited transaction provisions of ERISA and the related
excise tax provisions of Section 4975 of the Internal Revenue Code, including
Sections I and III of PTCE 95-60, regarding transactions by insurance company
general accounts. The related prospectus supplement may contain additional
information regarding the application of the exemption, PTCE 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 ERISA plan's or other ERISA plan assets investor's investment
in the certificates or, even if an exemption were deemed to apply, that any
exemption would apply to all prohibited transactions that may occur in
connection with this form of investment.
INSURANCE COMPANY GENERAL ACCOUNTS
In addition to any exemptive relief that may be available under PTCE 95-60
for the purchase and holding of the certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides exemptive relief from the provisions of Part 4
of Title I of ERISA and Section 4975 of the Internal Revenue Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by Section 4975 of the Internal Revenue Code, for transactions
involving an insurance company general account.
The 401(c) Regulations are to provide guidance for the purpose of
determining, in cases where insurance policies or annuity contracts supported by
an insurer's general account are issued to or for the benefit of a ERISA plan on
or before December 31, 1998, which general account assets constitute ERISA plan
assets. Section 401(c) of ERISA generally provides that, until the date which is
18 months after the 401(c) Regulations become final, no person shall be subject
to liability under Part 4 of Title I of ERISA or Section 4975 of the Internal
Revenue Code on the basis of a claim that the assets of an insurance company
general account constitute ERISA plan assets, unless (i) as otherwise provided
by the Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. Any assets of an insurance company general account that
support insurance policies or annuity contracts issued to a ERISA plan after
December 31, 1998 or issued to ERISA plans on or before December 31, 1998 for
which the insurance company does not comply with the 401(c) Regulations may be
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treated as ERISA plan assets. In addition, because Section 401(c) does not
relate to insurance company separate accounts, separate account assets are still
treated as ERISA plan assets of any ERISA plan invested in a separate account.
Insurance companies contemplating the investment of general account assets in
the certificates should consult with their legal counsel with respect to the
applicability of Sections I and III of PTCE 95-60 and Section 401(c) of ERISA,
including the general account's ability to continue to hold the certificates
after the date which is 18 months after the date the 401(c) Regulations become
final.
REPRESENTATIONS FROM INVESTING PLANS
The exemptive relief afforded by the exemption will not apply to the
purchase, sale or holding of any class of subordinate certificates or REMIC
residual certificates. To the extent certificates are subordinate certificates
or the related trust contains a swap or Mexico Mortgage Loan, except as
otherwise specified in the related prospectus supplement, transfers of those
certificates to an ERISA plan, to a trustee or other person acting on behalf of
any ERISA plan, or to any other person using ERISA plan assets to effect the
acquisition, will not be registered by the trustee unless the transferee
provides the depositor, the trustee and the master servicer with an opinion of
counsel satisfactory to the depositor, the trustee and the master servicer,
which opinion will not be at the expense of the depositor, the trustee or the
master servicer, that the purchase of the certificates by or on behalf of the
ERISA plan or with ERISA plan assets is permissible under applicable law, will
not constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Internal Revenue Code and will not subject the depositor,
the trustee or the master servicer to any obligation in addition to those
undertaken in the pooling and servicing agreement.
In lieu of an opinion of counsel, except as otherwise specified in the
related prospectus supplement, the transferee may provide a certification of
facts substantially to the effect that the purchase of the certificates by or on
behalf of the ERISA plan or with ERISA plan assets is permissible under
applicable law, will not constitute or result in a non-exempt prohibited
transaction under ERISA or Section 4975 of the Internal Revenue Code,
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will not subject the depositor, the trustee or the master servicer to any
obligation in addition to those undertaken in the pooling and servicing
agreement, and the following conditions are met: (a) the source of funds used to
purchase the certificates is an 'insurance company general account' (as that
term is defined in PTCE 95-60), and (b) the conditions in Sections I and III of
PTCE 95-60 have been satisfied as of the date of the acquisition of the
certificates.
TAX-EXEMPT INVESTORS
A Tax-Exempt Investor nonetheless will be subject to federal income
taxation to the extent that its income is 'unrelated business taxable income,'
or UBTI, within the meaning of Section 512 of the Internal Revenue Code. All
'excess inclusions' of a REMIC allocated to a REMIC residual certificate held by
a Tax-Exempt Investor will be considered UBTI and thus will be subject to
federal income tax. See 'Material Federal Income Tax Consequences -- Taxation of
Owners of REMIC Residual Certificates -- Excess Inclusions.'
CONSULTATION WITH COUNSEL
There can be no assurance that the exemption or any other DOL exemption
will apply with respect to any particular ERISA plan that acquires the
certificates or, even if all of the conditions specified therein were satisfied,
that the exemption would apply to all transactions involving a trust.
Prospective ERISA plan investors should consult with their legal counsel
concerning the impact of ERISA and the Internal Revenue Code and the potential
consequences to their specific circumstances prior to making an investment in
the certificates.
Any fiduciary or other investor of ERISA plan assets that proposes to
acquire or hold certificates on behalf of an ERISA plan or with ERISA plan
assets should consult with its counsel with respect to the potential
applicability of the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and Section 4975 of the Internal
Revenue Code to the proposed investment and the exemption and the availability
of exemptive relief under PTCE 83-1, Sections I and III of PTCE 95-60 or any
other DOL class exemption.
LEGAL INVESTMENT MATTERS
Each class of certificates offered hereby and by the related prospectus
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supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one rating agency. If so specified in the related
prospectus supplement, classes that are, and continue to be, rated in one of the
two highest rating categories by at least one nationally recognized statistical
rating organization will constitute 'mortgage related securities' for purposes
of the Secondary Mortgage Market Enhancement Act of 1984, as amended, or SMMEA,
and, as such, will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
under or existing under the laws of the United States or of any State whose
authorized investments are subject to state regulation to the same extent that,
under applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for those entities. Under SMMEA, if a State enacted
legislation on or prior to October 3, 1991 specifically limiting the legal
investment authority of any of these entities with respect to 'mortgage related
securities,' these securities will constitute legal investments for entities
subject to the legislation only to the extent provided therein. Certain States
enacted legislation which overrides the preemption provisions of SMMEA. SMMEA
provides, however, that in no event will the enactment of any such legislation
affect the validity of any contractual commitment to purchase, hold or invest in
'mortgage related securities,' or require the sale or other disposition of the
securities, so long as the contractual commitment was made or the securities
acquired prior to the enactment of the legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with 'mortgage
related securities' without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in these securities, and
national banks may purchase these securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. SS24 (Seventh), subject in each case to any regulations that
the applicable federal regulatory authority may prescribe.
The 1998 Policy Statement was adopted by the Federal Reserve Board, the
Office of the Comptroller of the Currency, the FDIC, the National Credit Union
Administration, or NCUA and the OTS with an effective date of May 26, 1998. The
1998 Policy Statement rescinded a 1992 policy statement that had required, prior
to
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purchase, a depository institution to determine whether a mortgage derivative
product that it was considering acquiring was high-risk, and, if so, required
that the proposed acquisition would reduce the institution's overall interest
rate risk. The 1998 Policy Statement eliminates constraints on investing in
certain 'high-risk' mortgage derivative products and substitutes broader
guidelines for evaluating and monitoring investment risk.
The OTS has issued Thrift Bulletin 13a, entitled 'Management of Interest
Rate Risk, Investment Securities, and Derivatives Activities,' or TB 13a, which
is effective as of December 1, 1998 and applies to thrift institutions regulated
by the OTS. One of the primary purposes of TB 13a is to require thrift
institutions, prior to taking any investment position to conduct (i) a
pre-purchase portfolio sensitivity analysis for any 'significant transaction'
involving securities or financial derivatives, and (ii) a pre-purchase price
sensitivity analysis of any 'complex security' or financial derivative. For the
purposes of TB 13a, 'complex security' includes, among other things, any
collateralized mortgage obligation or REMIC security, other than any 'plain
vanilla' mortgage pass-through security (that is, securities that are part of a
single class of securities in the related pool that are non-callable and do not
have any special features). One or more classes of certificates offered hereby
and by the related prospectus supplement may be viewed as 'complex securities.'
The OTS recommends that while a thrift institution should conduct its own
in-house pre-acquisition analysis, it may rely on an analysis conducted by an
independent third-party as long as management understands the analysis and its
key assumptions. Further, TB 13a recommends that the use of 'complex securities
with high price sensitivity' be limited to transactions and strategies that
lower a thrift institution's portfolio interest rate risk. TB 13a warns that
investment in complex securities by thrift institutions that do not have
adequate risk measurement, monitoring and control systems may be viewed by OTS
examiners as an unsafe and unsound practice.
Prospective investors in the certificates, including in particular the
classes of certificates that do not constitute 'mortgage related securities' for
purposes of SMMEA, should consider the matters discussed in the following
paragraph.
There may be other restrictions on the ability of some investors either to
purchase some classes of certificates or to purchase any class of certificates
representing more than a specified percentage of the investors' assets. The
depositor will make no representations as to the proper characterization of any
class of certificates for legal investment or other purposes, or as to the
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ability of particular investors to purchase any class of certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of any class of certificates. Accordingly, all investors
whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their own legal advisors in determining whether and to what
extent the certificates of any class constitute legal investments or are subject
to investment, capital or other restrictions, and, if applicable, whether SMMEA
has been overridden in any jurisdiction relevant to the investor.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
certificates will be applied by the depositor to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the mortgage
collateral underlying the certificates or will be used by the depositor for
general corporate purposes. The depositor expects that it will make additional
sales of securities similar to the certificates from time to time, but the
timing and amount of any additional offerings will be dependent upon a number of
factors, including the volume of mortgage loans, contracts or mortgage
securities purchased by the depositor, prevailing interest rates, availability
of funds and general market conditions.
METHODS OF DISTRIBUTION
The certificates offered hereby and by the related prospectus supplements
will be offered in series through one or more of the methods described below.
The prospectus supplement prepared for each series will describe the method of
offering being utilized for that series and will state the net proceeds to the
depositor from that sale.
The depositor intends that certificates will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of certificates may be made through a combination of two or more of the
following methods:
by negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters
by placements by the depositor with institutional investors through
dealers; and
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by direct placements by the depositor with institutional investors.
In addition, if specified in the related prospectus supplement, a series of
certificates may be offered in whole or in part in exchange for the mortgage
collateral, and other assets, if applicable, that would comprise the trust
securing the certificates.
If underwriters are used in a sale of any certificates, other than in
connection with an underwriting on a best efforts basis, the certificates will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. These underwriters may be
broker-dealers affiliated with the depositor whose identities and relationships
to the depositor will be as described in the related prospectus supplement. The
managing underwriter or underwriters with respect to the offer and sale of a
particular series of certificates will be set forth on the cover of the
prospectus supplement relating to that series and the members of the
underwriting syndicate, if any, will be named in the related prospectus
supplement.
In connection with the sale of the certificates, underwriters may receive
compensation from the depositor or from purchasers of the certificates in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the certificates may be deemed to be
underwriters in connection with the certificates, and any discounts or
commissions received by them from the depositor and any profit on the resale of
certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of certificates will provide that the obligations of the underwriters
will be subject to certain conditions precedent, that the underwriters will be
obligated to purchase all of the certificates if any are purchased (other than
in connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the depositor will indemnify the several underwriters and the
underwriters will indemnify the depositor against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments required to be made in respect thereof.
The prospectus supplement with respect to any series offered by placements
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through dealers will contain information regarding the nature of the offering
and any agreements to be entered into between the depositor and purchasers of
certificates of that series.
The depositor anticipates that the certificates offered hereby will be sold
primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of certificates, including dealers, may, depending on the
facts and circumstances of the purchases, be deemed to be 'underwriters' within
the meaning of the Securities Act of 1933, as amended, in connection with
reoffers and sales by them of certificates. Holders of certificates should
consult with their legal advisors in this regard prior to any reoffer or sale.
LEGAL MATTERS
Certain legal matters, including certain federal income tax matters, will
be passed upon for the depositor by Thacher Proffitt & Wood, New York, New York,
Orrick, Herrington & Sutcliffe LLP, New York, New York or by Stroock & Stroock &
Lavan LLP, as specified in the prospectus supplement.
FINANCIAL INFORMATION
The depositor has determined that its financial statements are not material
to the offering made hereby. The certificates do not represent an interest in or
an obligation of the depositor. The depositor's only obligations with respect to
a series of certificates will be to repurchase certain items of mortgage
collateral upon any breach of limited representations and warranties made by the
depositor, or as otherwise provided in the applicable prospectus supplement.
ADDITIONAL INFORMATION
The depositor has filed the registration statement with the Securities and
Exchange Commission. The depositor is also subject to some of the information
requirements of the Securities Exchange Act of 1934, as amended, or Exchange
Act, and, accordingly, will file reports thereunder with the Securities and
Exchange Commission. The registration statement and the exhibits thereto, and
reports and other information filed by the depositor pursuant to the Exchange
Act can be inspected and copied at the public reference facilities maintained by
the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at certain
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of its Regional Offices located as follows: Chicago Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048 and electronically through the Securities and Exchange Commission's
Electronic Data Gathering, Analysis and Retrieval System at the Securities and
Exchange Commission's Web Site (http://www.sec.gov).
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 depositor 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 or on behalf of the master servicer, the
Certificate Administrator or the trustee to each holder of record of the
certificates of the related series. See 'Description of the Certificates --
Reports to Certificateholders.' Reports forwarded to holders will contain
financial information that has not been examined or reported upon by an
independent certified public accountant. The depositor will file with the
Securities and Exchange Commission those periodic reports relating to the trust
for a series of certificates as are required under the Exchange Act.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
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The SEC allows the depositor to 'incorporate by reference' the information
filed with the SEC by the depositor, under Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act, that relates to the trust fund for the certificates. This
means that the depositor can disclose important information to any investor by
referring the investor to these documents. The information incorporated by
reference is an important part of this prospectus, and information filed by the
depositor with the SEC that relates to the trust fund for the certificates will
automatically update and supersede this information. Documents that may be
incorporated by reference with respect to a particular series of certificates
include an insurer's financials, a certificate policy, mortgage pool policy,
computational materials, collateral term sheets, the related pooling and
servicing agreement and amendments thereto, other documents on Form 8-K and
Section 13(a), 13(c), 14 or 15(d) of Exchange Act as may be required in
connection with the related trust fund.
The depositor will provide or cause to be provided without charge to each
person to whom this prospectus and related prospectus supplement is delivered in
connection with the offering of one or more classes of the related series of
certificates, upon written or oral request of that person, a copy of any or all
reports incorporated herein by reference, in each case to the extent the reports
relate to one or more of the classes of the related series of certificates,
other than the exhibits to those documents, unless the exhibits are specifically
incorporated by reference in the documents. Requests should be directed in
writing to Residential Asset Securities Corporation, 8400 Normandale Lake
Boulevard, Suite 600, Minneapolis, Minnesota 55437, or by telephone at (612)
832-7000.
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GLOSSARY
1998 POLICY STATEMENT -- The revised supervisory statement listing the
guidelines for investments in 'high risk mortgage securities', and adopted by
the Federal Reserve Board, the Office of the Comptroller of the Currency, the
FDIC, the National Credit Union Administration, or NCUA and the OTS with an
effective date of May 26, 1998.
401(C) REGULATIONS -- The regulations the DOL is required to issue under
Section 401(c) of ERISA, which were published in proposed form on December 22,
1997.
ADVANCE -- As to any mortgage loan and any distribution date, an amount
equal to the scheduled payments of principal (other than any Balloon Amount in
the case of a Balloon Loan) and interest at the applicable pass-through rate
which were delinquent as of the close of business on the business day preceding
the determination date on the mortgage loans.
AGENCY SECURITIES -- Any securities issued by Freddie Mac, Fannie Mae or
Ginnie Mae. 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.
ALTERNET MORTGAGE PROGRAM -- Residential Funding Corporation's mortgage
loan origination program for sub-prime mortgage loans.
ALTERNET PROGRAM SELLER -- A mortgage collateral seller that participates
in the AlterNet Mortgage Program.
BALLOON AMOUNT -- The full outstanding principal balance on a Balloon Loan
due and payable on the maturity date.
BALLOON LOANS -- Mortgage loans or contracts with level monthly payments of
principal and interest based on a 30 year amortization schedule, or such other
amortization schedule as specified in the related prospectus supplement, and
having original or modified terms to maturity shorter than the term of the
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related amortization schedule.
BANKRUPTCY AMOUNT -- The amount of Bankruptcy Losses that may be borne
solely by the subordinate certificates of the related series.
BANKRUPTCY LOSSES -- A Realized Loss attributable to certain actions which
may be taken by a bankruptcy court in connection with a mortgage loan or
contract, including a reduction by a bankruptcy court of the principal balance
of or the mortgage rate on a mortgage loan or an extension of its maturity.
BUY-DOWN ACCOUNT -- As to a Buydown Mortgage Loan, the custodial account
where Buydown Funds are deposited.
BUY-DOWN FUNDS -- As to a Buydown Mortgage Loan, the amount contributed by
the seller of the Mortgaged Property or another source and placed in the Buydown
Account.
BUY-DOWN MORTGAGE LOAN -- A mortgage loan subject to a temporary buydown
plan.
BUY-DOWN PERIOD -- The early years of the term of or Buy-Down Mortgage Loan
when payments will be less than the scheduled monthly payments on the Mortgage
Loan, the resulting difference to be made up from the Buy-Down Funds.
CALL CERTIFICATE -- Any certificate evidencing an interest in a Call Class.
CALL CLASS -- A class of certificates under which the holder will have the
right, at its sole discretion, to terminate the related trust, resulting in
early retirement of the certificates of the series.
CALL PRICE -- In the case of a call with respect to a Call Class, a price
equal to 100% of the principal balance of the related certificates as of the day
of that purchase plus accrued interest at the applicable pass-through rate.
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CERTIFICATE ACCOUNT -- An account established and maintained by the master
servicer in the name of the trustee for the benefit of the holders of each
series of certificates, for the disbursement of payments on the mortgage loans
evidenced by each series of certificates.
CERTIFICATE ADMINISTRATOR -- In addition to or in lieu of the master
servicer for a series of certificates, the related prospectus supplement may
identify a Certificate Administrator for the trust, which will have
administrative responsibilities with respect to such trust. The Certificate
Administrator may be an affiliate of the depositor or the master servicer.
COMPENSATING INTEREST -- With respect to any mortgage loan or contract that
prepaid in full and, if so specified in the related prospectus supplement, in
part, during the related prepayment period an additional payment made by the
master servicer, to the extent funds are available from the servicing fee, equal
to the amount of interest at the mortgage rate, less the servicing fee and
Spread, if any, for that mortgage loan or contract from the date of the
prepayment to the next date on which a monthly payment on the related mortgage
loan would have been due.
CONVERTIBLE MORTGAGE LOAN -- ARM loans which allow the mortgagors to
convert the adjustable rates on those mortgage loans to a fixed rate at one or
more specified periods during the life of the mortgage loans, in most cases not
later than ten years subsequent to the date of origination.
COOPERATIVE -- With respect to a Cooperative Loan, the corporation that
owns the related apartment building.
COOPERATIVE LOANS -- Cooperative apartment loans evidenced by Cooperative
Notes secured by security interests in shares issued by Cooperatives and in the
related proprietary leases or occupancy agreements granting exclusive rights to
occupy specific dwelling units in the related buildings.
COOPERATIVE NOTES -- A promissory note with respect to a Cooperative Loan.
CREDIT SCORES -- A measurement of the relative degree of risk a borrower
represents to a lender obtained from credit reports utilizing, among other
things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience.
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CUSTODIAL ACCOUNT -- The custodial account or accounts created and
maintained pursuant to the pooling and servicing agreement in the name of a
depository institution, as custodian for the holders of the certificates, for
the holders of certain other interests in mortgage loans serviced or sold by the
master servicer and for the master servicer, into which the amounts shall be
deposited directly. Any such account or accounts shall be an Eligible Account.
DEBT SERVICE REDUCTION -- Modifications of the terms of a mortgage loan
resulting from a bankruptcy proceeding, including a reduction in the amount of
the monthly payment on the related mortgage loan, but not any permanent
forgiveness of principal.
DEFAULTED MORTGAGE LOSSES -- A Realized Loss attributable to the
mortgagor's failure to make any payment of principal or interest as required
under the mortgage note 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.
DEFICIENT VALUATION -- In connection with the personal bankruptcy of a
mortgagor, the difference between the outstanding principal balance of the first
and junior lien mortgage loans or contracts and a lower value established by the
bankruptcy court.
DESIGNATED SELLER TRANSACTION -- A transaction in which the mortgage loans
are provided by an unaffiliated seller described in the prospectus supplement.
DIRECT PUERTO RICO MORTGAGE -- With respect to any Puerto Rico Mortgage
Loan, a Mortgage to secure a specific obligation for the benefit of a specified
person.
DISQUALIFIED ORGANIZATION -- For these purposes means:
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)
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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,
any organization described in Section 1381(a)(2)(C) of the Code
an 'electing large partnership' (as described in Section 775 of the Code)
or
any other person so designated by the trustee based upon an opinion of
counsel that the holding of an ownership interest in a REMIC certificate
by that person may cause the related trust or any person having an
ownership interest in the REMIC certificate, other than such person, to
incur a liability for any federal tax imposed under the Code that would
not otherwise be imposed but for the transfer of an ownership interest in
a REMIC certificate to that person.
DISTRIBUTION AMOUNT -- As to a class of certificates for any distribution
date will be the portion, if any, of the amount to be distributed to that class
for that distribution date of principal, plus, if the class is entitled to
payments of interest on that distribution date, interest accrued during the
related interest accrual period at the applicable pass-through rate on the
principal balance or notional amount of that class specified in the applicable
prospectus supplement, less certain interest shortfalls, which will include:
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;
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
Prepayment Interest Shortfalls not covered by Compensating Interest, in
each case in an amount that is allocated to that class on the basis set
forth in the prospectus supplement.
DUE PERIOD -- As to any distribution date, the period starting on the
second day of the month prior to such distribution date, and ending on the first
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day of the month of such distribution date, or such other period as specified in
the related prospectus supplement.
ELIGIBLE ACCOUNT -- An account acceptable to the applicable rating agency.
ENDORSABLE PUERTO RICO MORTGAGE -- As to any Puerto Rico Mortgage Loan, a
mortgage to secure an instrument transferable by endorsement.
ENVIRONMENTAL LIEN -- A lien imposed by federal or state statute, for any
cleanup costs incurred by a state on the property that is the subject of the
cleanup costs.
EXTRAORDINARY LOSSES -- Realized Losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks.
FUNDING ACCOUNT -- An account established for the purpose of funding the
transfer of additional mortgage loans into the related trust.
FRAUD LOSS AMOUNT -- The amount of Fraud Losses that may be borne solely by
the subordinate certificates of the related series.
FRAUD LOSSES -- A Realized Loss incurred on defaulted mortgage loans or
contracts as to which there was fraud in the origination of the mortgage loans.
GPM LOAN -- A mortgage loan pursuant to which the monthly payments by the
mortgagor during the early years of the 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.
GROSS MARGIN -- With respect to an ARM loan, the fixed percentage set forth
in the related mortgage note, which when added to the related index, provides
the mortgage rate for the ARM loan.
HIGH COST LOANS -- Mortgage loans that are subject to the special rules,
disclosure requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Homeownership and Equity Protection Act of 1994,
which were originated on or after October 1, 1995, are not mortgage loans made
to finance the purchase of the mortgaged property and have interest rates or
origination costs in excess of prescribed levels.
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INSURANCE PROCEEDS -- Proceeds of any special hazard insurance policy,
bankruptcy bond, mortgage pool insurance policy, primary insurance policy and
any title, hazard or other insurance policy or guaranty covering any mortgage
loan in the mortgage pool together with any payments under any letter of credit.
ISSUE PREMIUM -- As to a class of REMIC Regular Certificates, the issue
price in excess of the stated redemption price of that class.
LIQUIDATED CONTRACT -- A defaulted contract for which the related mortgaged
property has been sold by the related trust and all recoverable Liquidation
Proceeds and Insurance Proceeds have been received.
LIQUIDATED MORTGAGE LOAN -- A defaulted mortgage loan for which the related
mortgaged property has been sold by the related trust and all recoverable
Liquidation Proceeds and Insurance Proceeds have been received.
LIQUIDATION PROCEEDS -- Amounts collected by the subservicer in connection
with the liquidation of a mortgage loan, by foreclosure or otherwise.
MARK-TO-MARKET REGULATIONS -- The final regulations of the IRS, released on
December 24, 1996, relating to the requirement that a securities dealer mark to
market securities held for sale to customers.
MEXICO MORTGAGE LOAN -- A mortgage loan secured by a beneficial interest in
a trust, the principal asset of which is residential real property located in
Mexico.
NET MORTGAGE RATE -- As to a mortgage loan, the mortgage rate net of
servicing fees, other administrative fees and any Excess Spread or Excluded
Spread.
NONRECOVERABLE ADVANCE -- Any Advance previously made which the Master
Servicer has determined to not be ultimately recoverable from Liquidation
Proceeds, Insurance Proceeds or otherwise.
NOTE MARGIN -- Amounts advanced by the master servicer or related
subservicer to cover taxes, insurance premiums or similar expenses as to any
mortgaged property. With respect to an ARM loan, the fixed percentage set forth
in the related mortgage note, which when added to the related index, provides
the mortgage rate for the ARM loan.
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PARTIES IN INTEREST -- With respect to an ERISA plan, persons who are
either 'parties in interest' within the meaning of ERISA or 'disqualified
persons' within the meaning of the Code, because they have specified
relationships to the ERISA plan.
PASS-THROUGH ENTITY -- Any regulated investment company, real estate
investment trust, trust, partnership or other entities described in Section
860E(e)(6) of the Code. In addition, a person holding an interest in a
pass-through entity as a nominee for another person will, with respect to that
interest, be treated as a pass-through entity.
PERMITTED INVESTMENTS -- United States government securities and other
investment grade obligations specified in the related pooling and servicing
agreement.
PREPAYMENT INTEREST SHORTFALL -- With respect to a mortgage loan that is
subject to a mortgagor prepayment or liquidation, the amount that equals the
difference between a full month's interest due with respect to that mortgage
loan and the amount of interest paid or recovered with respect thereto.
PRINCIPAL PREPAYMENTS -- Any principal payments received with respect to a
mortgage loan, in advance of the scheduled due date and not accompanied by a
payment of interest for any period following the date of payment.
QUALIFIED INSURER -- As to a mortgage pool insurance policy, special hazard
insurance policy, bankruptcy policy, certificate insurance policy or surety
bond, an insurer qualified under applicable law to transact the insurance
business or coverage as applicable.
REALIZED LOSS -- As to any defaulted mortgage loan that is finally
liquidated, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining after application of all amounts recovered,
net of amounts reimbursable to the master servicer for related Advances and
expenses, towards interest and principal owing on the mortgage loan. With
respect to a mortgage loan the principal balance of which has been reduced in
connection with bankruptcy proceedings, the amount of the reduction will be
treated as a Realized Loss.
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REO CONTRACT -- A contract where title to the related mortgaged property
has been obtained by the trustee or its nominee on behalf of certificateholders
of the related series.
REO MORTGAGE LOAN -- A mortgage loan where title to the related mortgaged
property has been obtained by the trustee or its nominee on behalf of
certificateholders of the related series.
SERVICING ADVANCES -- Amounts advanced on any mortgage loan to cover taxes,
insurance premiums or similar expenses.
SPECIAL HAZARD AMOUNT -- The amount of Special Hazard Losses that may be
allocated to the subordinate certificates of the related series.
SPECIAL HAZARD LOSSES -- A Realized Loss incurred, to the extent that the
loss was attributable to (i) direct physical damage to a mortgaged property
other than any loss of a type covered by a hazard insurance policy or a flood
insurance policy, if applicable, and (ii) any shortfall in insurance proceeds
for partial damage due to the application of the co-insurance clauses contained
in hazard insurance policies. The amount of the Special Hazard Loss is limited
to he lesser of the cost of repair or replacement of the mortgaged property; any
loss above that amount would be a Defaulted Mortgage Loss or other applicable
type of loss. Special Hazard Losses does not include losses occasioned by war,
civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
chemical contamination or waste by the mortgagor.
SPECIAL SERVICER -- A special servicer named pursuant to the pooling and
servicing agreement for a series of certificates, which will be responsible for
the servicing of delinquent loans.
SPREAD -- A portion of interest due with respect to the mortgage loans or
mortgage securities transferred as part of the assets of the related trust.
STATED PRINCIPAL BALANCE -- As to any mortgage loan as of any date of
determination, its principal balance as of the cut-off date, after application
of all scheduled principal payments due on or before the cut-off date, whether
received or not, reduced by all amounts allocable to principal that are
distributed to certificateholders on or before the date of determination, and as
further reduced to the extent that any Realized Loss has been allocated to any
certificates on or before that date.
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SUBORDINATE AMOUNT -- A specified portion of subordinated distributions
with respect to the mortgage loans, allocated to the holders of the subordinate
certificates as set forth in the related prospectus supplement.
SUBSERVICING ACCOUNT -- An account established and maintained by a
subservicer which meets the requirements described in the AlterNet Seller Guide
and is otherwise acceptable to the master servicer.
TAX-EXEMPT INVESTOR -- Tax-qualified retirement plans described in Section
401(a) of the Code and on individual retirement accounts described in Section
408 of the Code.
TAX-FAVORED PLANS -- An ERISA plan which is exempt from federal income
taxation under Section 501(a) of the Code or is an individual retirement plan or
annuity described in Section 408 of the Code.
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STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as................... 'r'
The section symbol shall be expressed as................................ 'SS'
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RESIDENTIAL ASSET SECURITIES CORPORATION
$1,450,000,000
MORTGAGE ASSET-BACKED PASS-THROUGH CERTIFICATES
SERIES 1999-KS3
PROSPECTUS SUPPLEMENT
PRUDENTIAL SECURITIES
RESIDENTIAL FUNDING SECURITIES CORPORATION
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CERTIFICATES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED.
WE REPRESENT THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS ONLY AS OF THE DATES ON THEIR RESPECTIVE COVERS.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
offered certificates, whether or not participating in this offering, may be
required to deliver a prospectus supplement and prospectus until December 22,
1999.
