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:
o 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;
o mortgage loans secured by first or junior liens on mixed-use properties; or
o 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.
December __, 2000
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Important notice about information presented in this
prospectus and the accompanying prospectus supplement
We provide information to you about the certificates in two separate documents
that provide progressively more detail:
o this prospectus, which provides general information, some of which may not
apply to your series of certificates; and
o the accompanying prospectus supplement, which describes the specific terms
of your series of certificates.
If the description of your certificates in the accompanying prospectus
supplement differs from the related description in this prospectus, you should
rely on the information in that prospectus supplement.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. See "Additional Information", "Reports to Certificateholders" and
"Incorporation of Certain Information by Reference" in this Prospectus. You can
request information incorporated by reference from Residential Asset Securities
Corporation by calling us at (952) 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 130.
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TABLE OF CONTENTS
Page
INTRODUCTION.............................1
THE TRUSTS...............................1
General...............................1
The Mortgage Loans....................4
The Mortgaged Properties.............10
Loan-to-Value Ratio..................11
Underwriting Policies................12
The Contracts........................16
The Agency Securities................17
Mortgage Collateral Sellers..........19
Qualifications of Sellers............19
Representations with Respect to
Mortgage Collateral .............20
Repurchases of Mortgage Collateral...21
Limited Right of Substitution........23
DESCRIPTION OF THE CERTIFICATES.........24
General..............................24
Form of Certificates.................25
Assignment of Mortgage Loans.........28
Assignment of the Contracts..........29
Review of Mortgage Loan or Contract
Documents .......................30
Assignment of Mortgage Securities....30
Spread...............................30
Payments on Mortgage Collateral......31
Withdrawals from the Custodial Account34
Distributions........................35
Example of Distributions.............37
Advances.............................38
Prepayment Interest Shortfalls.......39
Funding Account......................40
Reports to Certificateholders........40
Servicing and Administration of
Mortgage Collateral .............42
Realization Upon Defaulted Mortgage
Loans or Contracts ..............45
SUBORDINATION...........................47
General..............................47
Overcollateralization................48
DESCRIPTION OF CREDIT ENHANCEMENT.......49
General..............................49
Letters of Credit....................50
Mortgage Pool Insurance Policies.....51
Special Hazard Insurance Policies....53
Bankruptcy Bonds.....................54
Reserve Funds........................54
Certificate Insurance Policies;
Surety Bonds ....................55
Maintenance of Credit Enhancement....55
Reduction or Substitution of Credit
Enhancement .....................56
OTHER FINANCIAL OBLIGATIONS RELATED TO
THE CERTIFICATES ................57
Swaps and Yield Supplement Agreements57
Purchase Obligations.................57
INSURANCE POLICIES ON MORTGAGE LOANS OR
CONTRACTS .......................58
Primary Insurance Policies...........58
Standard Hazard Insurance on
Mortgaged Properties ............60
Standard Hazard Insurance on
Manufactured Homes ..............61
FHA Mortgage Insurance...............62
VA Mortgage Guaranty.................63
THE DEPOSITOR...........................63
RESIDENTIAL FUNDING CORPORATION.........63
THE POOLING AND SERVICING AGREEMENT.....64
Events of Default....................66
Rights Upon Event of Default.........67
Amendment............................68
Termination; Retirement of
Certificates ....................69
The Trustee..........................70
YIELD CONSIDERATIONS....................70
MATURITY AND PREPAYMENT CONSIDERATIONS..75
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
AND CONTRACTS ...................79
The Mortgage Loans...................79
The Contracts........................91
Environmental Legislation............94
Soldiers' and Sailors' Civil Relief
Act of 1940 .....................96
Default Interest and Limitations on
Prepayments .....................96
Forfeitures in Drug and RICO
Proceedings .....................97
Negative Amortization Loans..........97
MATERIAL FEDERAL INCOME TAX CONSEQUENCES97
General..............................97
REMICs...............................98
STATE AND OTHER TAX CONSEQUENCES.......117
ERISA CONSIDERATIONS...................118
ERISA Plan Asset Regulations........118
Prohibited Transaction Exemptions...119
Insurance Company General Accounts..123
Representations From Investing Plans123
Tax-Exempt Investors; REMIC Residual
Certificates ...................124
Consultation With Counsel...........124
LEGAL INVESTMENT MATTERS...............125
USE OF PROCEEDS........................126
METHODS OF DISTRIBUTION................126
LEGAL MATTERS..........................128
FINANCIAL INFORMATION..................128
ADDITIONAL INFORMATION.................128
REPORTS TO CERTIFICATEHOLDERS..........129
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE ...................129
GLOSSARY...............................130
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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 accompanying 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 accompanying prospectus supplement, or
a trust agreement between the depositor and trustee as specified in the
accompanying 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 accompanying 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 accompanying prospectus supplement. These assets will be
evidenced by promissory notes, or mortgage notes, that are secured by the
following:
o mortgages;
o deeds of trust;
o manufactured housing conditional sales contracts and installment loan
agreements; or
o other similar security instruments creating a first or junior lien on one-
to four-family residential properties and Mixed-Use 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
includes:
o manufactured housing conditional sales contracts; and
o installment loan agreements.
Unless the context indicates otherwise, mortgage collateral includes:
o mortgage loans; and
o contracts.
As specified in the accompanying prospectus supplement, the mortgaged
properties will primarily include any combination of the following:
o attached or detached one-family dwelling units;
o two- to four-family dwelling units;
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o condominiums;
o townhouses;
o row houses;
o individual units in planned-unit developments;
o modular pre-cut/panelized housing;
o Cooperatives and manufactured homes;
o Mixed-Use Properties; and
o 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 accompanying
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 accompanying 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:
o 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
accompanying prospectus supplement, any interest retained by the depositor
or any of its affiliates with respect to each mortgage loan;
o 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;
o property acquired by foreclosure of the mortgage loans or contracts or deed
in lieu of foreclosure;
o hazard insurance policies and primary insurance policies, if any, and
portions of the related proceeds; and
o any combination, as and to the extent specified in the accompanying
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."
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The accompanying 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 from
any of the following sources:
o either directly or through its affiliates, including Residential Funding
Corporation;
o sellers who are affiliates of the depositor including HomeComings Financial
Network, Inc., Residential Money Centers, Inc. and GMAC Mortgage
Corporation; or
o 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 accompanying 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 accompanying 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 accompanying 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 accompanying 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 accompanying 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
accompanying 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 accompanying 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 accompanying 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
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Association, known as Fannie Mae. As to any series of certificates, the
accompanying 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:
o either:
o will have been previously registered under the Securities Act, or
o will be eligible for sale under Rule 144(k) under the Securities Act
of 1933, as amended; and
o 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
stated in the accompanying prospectus supplement. References in this prospectus
to Advances to be made and other actions to be taken by the master servicer in
connection with the mortgage loans may include Advances made and other actions
taken under the terms of the mortgage securities. 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 accompanying 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 on 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 accompanying 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 stated in the accompanying 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
accompanying prospectus supplement, the mortgage loans may be of one or more of
the following types, and may include one or more of the following
characteristics:
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o GPM Loans;
o Buy-Down Mortgage Loans;
o adjustable rate mortgage loans, or ARM loans;
o fixed rate mortgage loans;
o simple interest mortgage loans;
o High Cost Loans;
o Cooperative Loans;
o Convertible Mortgage Loans;
o delinquent loans;
o Mexico Mortgage Loans;
o mortgage loans that have been modified;
o mortgage loans that provide for payment every other week during the term of
the mortgage loan;
o mortgage loans that provide for the reduction of the interest rate based on
the payment performance of the mortgage loans;
o mortgage loans that experience negative amortization; and
o 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. 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. If a mortgage loan is a modified mortgage loan,
references to origination typically shall refer to the date of modification. 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.
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 accompanying 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."
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Cooperative Loans
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.
Mexico Mortgage Loans
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 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 relating to the Mexico Mortgage Loan.
As security for repayment of the Mexico Mortgage Loan, under 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 under 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."
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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 accompanying prospectus
supplement.
Modified Mortgage Loans
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.
Balloon Loans
As specified in the prospectus supplement, a pool may include Balloon
Loans. Balloon Loans generally require a monthly payment of a pre-determined
amount that will not fully amortize the loan until the maturity date, at which
time the Balloon Amount will be due and payable. For 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 loan or to sell the
mortgaged property prior to the maturity of the Balloon Loan. The ability to
obtain refinancing will depend on a number of factors prevailing at the time
refinancing or sale is required, including, without limitation, real estate
values, the mortgagor's financial situation, the level of available mortgage
loan interest rates, the mortgagor's equity in the related mortgaged property,
tax laws, prevailing general economic conditions and the terms of any related
first lien mortgage loan. 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.
Prepayment Charges on the Mortgage Loans
In some cases, mortgage loans may be prepaid by the mortgagors at any
time without payment of any prepayment fee or penalty. The prospectus supplement
will disclose whether a material portion of the mortgage loans provide for
payment of a prepayment charge if the mortgagor prepays within a specified time
period. This charge may affect the rate of prepayment. The master servicer will
be entitled to all prepayment charges and late payment charges received on the
mortgage loans and those amounts will not be available for payment on the
certificates unless the prospectus supplement discloses that those charges will
be available for payment. However, some states' laws restrict the imposition of
prepayment charges even when the mortgage loans expressly provide for the
collection of those charges. Although the Alternative Mortgage Transaction
Parity Act of 1982, or the Parity Act, permits the collection of prepayment
charges in connection with some types of eligible mortgage loans, preempting any
contrary state law prohibitions, some states do not recognize the preemptive
authority of the Parity Act. 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.
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"Equity Refinance" Mortgage Loans
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 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.
ARM Loans
As described in the accompanying 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.
Negatively Amortizing ARM Loans
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 accompanying 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.
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Convertible Mortgage Loans
On 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 accompanying
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. If any party
obligated to purchase any converted mortgage loan fails to do so, or if any
remarketing agent fails either to arrange for the sale of the converted mortgage
loan or 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.
Buy-Down 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:
o Buy-Down Funds contributed by the seller of the mortgaged property or
another source and placed in the Buy-Down Account;
o if the Buy-Down Funds are contributed on a present value basis, investment
earnings on the Buy-Down Funds; or
o additional buydown funds to be contributed over time by the mortgagor's
employer or another source.
Simple Interest Mortgage Loans
If specified in the accompanying prospectus supplement, a portion of the
mortgage loans underlying a series of certificates may be simple interest
mortgage loans. A simple interest mortgage loan provides the amortization of the
amount financed under the mortgage loan over a series of equal monthly payments,
except, in the case of a Balloon Loan, the final payment. Each monthly payment
consists of an installment of interest which is calculated on the basis of the
outstanding principal balance of the mortgage loan multiplied by the stated
mortgage loan rate and further multiplied by a fraction, with the numerator
equal to the number of days in the period elapsed since the preceding payment of
interest was made and the denominator equal to the number of days in the annual
period for which interest accrues on the mortgage loan. As payments are received
under a simple interest mortgage loan, the amount received is applied first to
interest accrued to the date of payment and then the remaining amount is applied
to pay any unpaid fees and then to reduce the unpaid principal balance.
Accordingly, if a mortgagor pays a fixed monthly installment on a simple
interest mortgage loan before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. On the other hand, if a mortgagor pays a fixed monthly
installment after its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be greater
than it would have been had the payment been made as scheduled, and the
remaining portion, if any, of the payment applied to reduce the unpaid principal
balance will be correspondingly less. If each scheduled payment under a simple
interest mortgage loan is made on or prior to its scheduled due date, the
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principal balance of the mortgage loan will amortize more quickly than
scheduled. However, if the mortgagor consistently makes scheduled payments after
the scheduled due date, the mortgage loan will amortize more slowly than
scheduled. If a simple interest mortgage loan is prepaid, the mortgagor is
required to pay interest only to the date of prepayment. The variable
allocations among principal and interest of a simple interest mortgage loan may
affect the distributions of principal and interest on the certificates, as
described in the accompanying prospectus supplement.
Delinquent Loans
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 accompanying 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 Mortgaged Properties
The mortgaged properties may consist of detached individual dwellings,
Cooperative dwellings, individual or adjacent 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, Mixed-Use Properties 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
accompanying 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 on 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."
Mortgage loans secured by Mixed-Use Property, or mixed-use mortgage
loans, will consist of mortgage loans secured by first or junior mortgages,
deeds of trust or similar security instruments on fee simple or leasehold
interests in Mixed-Use Property. The mixed-use mortgage loans may also be
secured by one or more assignments of leases and rents, management agreements or
operating agreements relating to the mortgaged property and in some cases by
certain letters of credit, personal guarantees or both. Under an assignment of
leases and rents, the related mortgagor assigns its right, title and interest as
landlord under each related lease and the income derived from the lease to the
related lender, while retaining a right to collect the rents for so long as
there is no default. If the mortgagor defaults, the right of the mortgagor
terminates and the related lender is entitled to collect the rents from tenants
to be applied to the payment obligations of the mortgagor. State law may limit
or restrict the enforcement of the assignment of leases and rents by a lender
until the lender takes possession of the related mortgaged property and a
receiver is appointed.
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Mixed-use real estate lending is generally viewed as exposing the lender
to a greater risk of loss than one- to four-family residential lending.
Mixed-use real estate lending typically involves larger loans to single
mortgagors or groups of related mortgagors than residential one- to four-family
mortgage loans. Furthermore, the repayment of loans secured by income-producing
properties is typically dependent on the successful operation of the related
real estate project. If the cash flow from the project is reduced, for example,
if leases are not obtained or renewed, the borrower's ability to repay the loan
may be impaired. Mixed-use real estate can be affected significantly by supply
and demand in the market for the type of property securing the loan and,
therefore, may be subject to adverse economic conditions. Market values may vary
as a result of economic events or governmental regulations outside the control
of the borrower or lender, such as rent control laws, which impact the future
cash flow of the property. Mortgage loans secured by Mixed-Use Properties 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 accompanying
prospectus supplement.
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
accompanying 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:
o 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;
o a representation by the originator of the mortgage loan, which may be based
solely on the above clause; or
o the fact that the mailing address for the mortgagor is the same as the
address of the mortgaged property.
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.
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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:
o a statistical analysis
o a broker's price opinion, or
o 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.
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 accompanying 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
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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 accompanying 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 in most cases 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 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.
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
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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 regardless of 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.
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
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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 accompanying 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
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 accompanying 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
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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.
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 listed 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 describe 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 to Residential Funding Corporation
that AlterNet loans were originated under 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. In some
of those cases, the price paid by Residential Funding Corporation to the seller
may be adjusted to reflect losses or gains on the mortgage loans sold by that
seller to Residential Funding Corporation. The sellers who sell to Residential
Funding Corporation pursuant to master commitment agreements will represent to
Residential Funding Corporation 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 entity or entities described in the accompanying 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
accompanying prospectus supplement, Balloon Loans.
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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 accompanying prospectus supplement will describe 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 accompanying 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 in most cases 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 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 in most cases
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 accompanying 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 in this prospectus 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.
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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 described in the accompanying prospectus
supplement.
Federal Home Loan Mortgage Corporation
Freddie Mac is a corporate instrumentality of the United States created
under 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 described 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 that generally meets 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 accompanying 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 described in the accompanying prospectus supplement.
Federal National Mortgage Association
Fannie Mae is a federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act (12 U.S.C. ss. 1716 et seq.). It is the nation's largest supplier of
residential mortgage funds. Fannie Mae was originally established in 1938 as a
United States government agency to provide supplemental liquidity to the
mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968. Fannie Mae provides funds to
the mortgage market primarily by purchasing home mortgage loans from local
lenders, thereby replenishing their funds for additional lending. See
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"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 described in the accompanying 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., Residential Money Centers, 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:
o 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;
o one or more direct or indirect purchases through the AlterNet Mortgage
Program; or
o one or more purchases from affiliated sellers.
Mortgage loans may be purchased under 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 accompanying prospectus supplement.
Qualifications of Sellers
Each AlterNet Program Seller is selected by Residential Funding
Corporation on the basis of criteria described 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. 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
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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.
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.
Residential Funding Corporation and the depositor will not assign to the trustee
for the benefit of the certificateholders any of the representations and
warranties made by a mortgage collateral seller regarding mortgage collateral
sold by it or any remedies provided for any breach of those representations and
warranties, except to the extent that the substance of the breach also
constitutes fraud in the origination of the mortgage loan or the breach relates
to the absence of toxic waste or other environmental hazards. Accordingly,
unless the accompanying prospectus supplement discloses that additional
representations and warranties are made by the mortgage collateral seller or
other person for the benefit of the certificateholders, the only representations
and warranties that will be made for the benefit of the certificateholders will
be the limited representations and warranties of Residential Funding Corporation
described below and any representations made by a mortgage collateral seller to
the limited extent described in this paragraph.
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:
o as of the cut-off date, the information described in a listing of the
related mortgage loan or contract was true and correct in all material
respects;
o 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 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;
o 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;
o 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;
o each mortgaged property is free of material damage and is in good repair;
o each mortgage loan complied in all material respects with all applicable
local, state and federal laws at the time of origination; and
o there is no delinquent tax, or assessment lien against the related
mortgaged property.
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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 accompanying 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:
o liens of real property taxes and assessments not yet due and payable;
o 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;
o liens of any senior mortgages, in the case of junior mortgage loans; and
o 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 accompanying 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.".
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 relating to 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 described in the related
pooling and servicing agreement or trust agreement. Likewise, as described under
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"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 accompanying 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 for a breach by a Seller of a representation and warranty that has
been assigned to the trustee for the benefit of the certificateholders,
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 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
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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. 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, if any seller requests that Residential
Funding Corporation 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 if the successor servicer assumes 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 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 regarding the 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 regarding 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 accompanying 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:
o have an outstanding principal balance, after deduction of the principal
portion of the monthly payment due in the month of substitution, not in
excess of the outstanding principal balance of the repurchased mortgage
loan or repurchased contract;
o have a mortgage rate and a Net Mortgage Rate not less than, and not more
than one percentage point greater than, the mortgage rate and Net
Mortgage Rate, respectively, of the repurchased mortgage loan or
repurchased contract as of the date of substitution;
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o have an LTV ratio at the time of substitution no higher than that of the
repurchased mortgage loan or repurchased contract;
o 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;
o 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
o comply with all of the representations and warranties described 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 accompanying 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.
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 accompanying prospectus
supplement.
Each series of certificates may consist of any one or a combination of
the following:
o a single class of certificates;
o one or more classes of senior certificates, of which one or more
classes of certificates may be senior in right of payment to any
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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;
o one or more classes of mezzanine certificates which are subordinate
certificates but which are senior to other classes of subordinate
certificates relating to such distributions or losses;
o one or more classes of strip certificates which will be entitled to (a)
principal distributions, with disproportionate, nominal or no interest
distributions or (b) interest distributions, with disproportionate, nominal
or no principal distributions;
o two or more classes of certificates which differ as to the timing,
sequential order, rate, pass-through rate or amount of distributions of
principal or interest or both, or as to which distributions of principal or
interest or both on any class may be made on 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
for 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 accompanying prospectus supplement; or
o other types of classes of certificates, as described in the accompanying
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 accompanying 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 accompanying
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 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 accompanying 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 Clearstream Banking, societe anonyme, formerly known
as Cedelbank, SA, or Clearstream, 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
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may be specified in the accompanying prospectus supplement. As to any class of
book-entry certificates so issued, the record holder of those certificates will
be DTC's nominee. Clearstream and Euroclear System will hold omnibus positions
on behalf of their participants through customers' securities accounts in
Clearstream'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 Clearstream 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 accompanying 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. Under the procedures of
DTC, transfers of the beneficial ownership of any book-entry certificates will
be required to be made in minimum denominations specified in the accompanying
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 for 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
Clearstream or Euroclear System participant as a result of a transaction with a
DTC participant, other than a depositary holding on behalf of Clearstream or
Euroclear System, will be credited during a subsequent securities settlement
processing day, which must be a business day for Clearstream 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 Clearstream
participants on that business day. Cash received in Clearstream or Euroclear
System as a result of sales of securities by or through a Clearstream
participant or Euroclear System participant to a DTC participant, other than the
depositary for Clearstream or Euroclear System, will be received with value on
the DTC settlement date, but will be available in the relevant Clearstream 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 Clearstream participants and Euroclear System participants
will occur in accordance with their respective rules and operating procedures.
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Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
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
defined with respect to European time. The relevant European international
clearing system will, if the transaction meets its settlement requirements,
deliver instructions to its depositary to take action to effect final settlement
on its behalf by delivering or receiving securities in DTC, and making or
receiving payment in accordance with normal procedures for same day funds
settlement applicable to DTC. Clearstream participants and Euroclear System
participants may not deliver instructions directly to the depositaries.
Clearstream, as a professional depository, holds securities for its
participating organizations and facilitates the clearance and settlement of
securities transactions between Clearstream participants through electronic
book-entry changes in accounts of Clearstream participants, thereby eliminating
the need for physical movement of certificates. As a professional depository,
Clearstream 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.
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
relating to 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
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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 accompanying
prospectus supplement, all principal and interest received on 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 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 stated in the accompanying 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. For 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:
o 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;
o 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;
o an assignment in recordable form of the mortgage, or evidence that the
mortgage is held for the trustee through the MERS(R)System or, for 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, for a mixed-use mortgage loan, the assignment
of leases, rents and profits, if separate from the mortgage, and an
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executed re-assignment of the assignment of leases, rents and profits and,
for a Mexico Mortgage Loan, an assignment of the mortgagor's beneficial
interest in the Mexican trust; and
o if applicable, any riders or modifications to the mortgage note and
mortgage, together with any other documents at such times as
described in the related pooling and servicing agreement.
The assignments may be blanket assignments covering mortgages secured by
mortgaged properties located in the same county, if permitted by law. If so
provided in the accompanying 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, for 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.
Any mortgage for a mortgage loan secured by mortgaged property located
in Puerto Rico will be 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 for 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 accompanying 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 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
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<PAGE>
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 accompanying 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 accompanying
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 accompanying 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
accompanying prospectus supplement, the obligation of the mortgage collateral
seller or subservicer to repurchase or substitute for a mortgage loan or
contract constitutes the sole remedy available to the certificateholders or the
trustee for a material defect in a constituent document. 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 accompanying 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 accompanying 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
accompanying 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 accompanying prospectus supplement. This payment may be
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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 on an item of mortgage collateral will represent a
specified portion of the interest payable thereon and will not be part of the
related trust. Any partial recovery of interest on 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:
o all payments on account of principal of the mortgage loans or contracts
comprising a trust;
o 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;
o Liquidation Proceeds;
o 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;
o any Buy-Down Funds and, if applicable, investment earnings thereon,
required to be paid to certificateholders;
o 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 Corporation, any
subservicer or mortgage collateral seller or any other person under the
terms of the pooling and servicing agreement;
o any amount required to be deposited by the master servicer in connection
with losses realized on investments of funds held in the Custodial Account;
and
o 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".
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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:
o maintained with a depository institution whose debt obligations at the time
of any deposit therein are rated by any rating agency that rated any
certificates of the related series not less than a specified level
comparable to the rating category of the certificates;
o an account or accounts the deposits in which are fully insured to the
limits established by the FDIC, provided that any deposits not so insured
shall be otherwise maintained so that, as evidenced by an opinion of
counsel, the certificateholders have a claim with respect to the funds in
such accounts or a perfected first priority security interest in any
collateral securing those funds that is superior to the claims of any other
depositors or creditors of the depository institution with which the
accounts are maintained;
o in the case of the Custodial Account, a trust account or accounts
maintained in either the corporate trust department or the corporate asset
services department of a financial institution which has debt obligations
that meet specified rating criteria;
o in the case of the Certificate Account, a trust account or accounts
maintained with the trustee; or
o any other Eligible Account.
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 accompanying 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:
o the amount of any Advances made by the master servicer or the servicer as
described in this prospectus under "--Advances;"
o any payments under any letter of credit, and any amounts required to be
transferred to the Certificate Account from a reserve fund, as described
under "Description of Credit Enhancement" below;
o any amounts required to be paid by the master servicer 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;
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o any distributions received on any mortgage securities included in the
trust; and
o 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 relating to 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
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 accompanying 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.
For 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 accompanying 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 described 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. For 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-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
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<PAGE>
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 buydown 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
relating to such default.
Collection of Payments on Mortgage Securities
The trustee or the Certificate Administrator, as specified in the
accompanying 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 for 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
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:
o 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;"
o to reimburse itself or any subservicer for Advances, or for Servicing
Advances, out of late payments, Insurance Proceeds, Liquidation
Proceeds, any proceeds relating to any REO Mortgage Loan or
collections on the mortgage loan or contract with respect to which
those Advances or Servicing Advances were made;
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o to pay to itself or any subservicer unpaid servicing fees and subservicing
fees, out of payments or collections of interest on each mortgage loan or
contract;
o to pay to itself as additional servicing compensation any investment
income on funds deposited in the Custodial Account, any amounts
remitted by subservicers as interest on partial prepayments on the
mortgage loans 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;
o to pay to itself, a subservicer, Residential Funding Corporation, the
depositor or the mortgage collateral seller all amounts received on
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;
o to pay the depositor or its assignee, or any other party named in the
accompanying 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;
o to reimburse itself or any subservicer for any Nonrecoverable Advance,
limited by the terms of the pooling and servicing agreement as described in
the accompanying prospectus supplement;
o to reimburse itself or the depositor for other expenses incurred for which
it or the depositor is entitled to reimbursement, including reimbursement
in connection with enforcing any repurchase, substitution or
indemnification obligation of any seller that is assigned to the trustee
for the benefit of the certificateholder, or against which it or the
depositor is indemnified under the pooling and servicing agreement;
o to withdraw any amount deposited in the Custodial Account that was not
required to be deposited therein; and
o to clear the Custodial Account of amounts relating to the corresponding
mortgage loans 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
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 described in
the accompanying 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 accompanying
prospectus supplement.
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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 accompanying
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 accompanying prospectus supplement will specify the pass-through rate
or rates for each class, or the initial pass-through rate or rates and the
method for determining the pass-through rate or rates. Unless otherwise
specified in the accompanying 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 stated in the accompanying
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 accompanying 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 accompanying
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 accompanying 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 or as otherwise described in the accompanying
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
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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
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 January 2001:
<TABLE>
<CAPTION>
Date Note Description
<S> <C>
January 1 (A) Cut-off date.
January 2-31 (B) Servicers or
subservicers, as applicable,
receive any Principal
Prepayments and applicable
interest thereon.
January 31 (C) record date.
January 2-February 1 (D) The due dates for payments on a
mortgage loan or contract.
February 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.
February 20 (F) Determination date.
February 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 described 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 January 1 after deducting principal payments
due on or before that date. Those principal payments due on or before
January 1 and the accompanying interest payments, and any Principal
Prepayments received as of the close of business on January 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.
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(C) Distributions on February 26 will be made to certificateholders of record
at the close of business on January 31.
(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 February 16, 2000 (because February 18 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 January will have been
remitted to the master servicer or the servicer, as applicable, within five
business days of receipt.
(F) On February 20, the master servicer or servicer will determine the amounts
of principal and interest which will be passed through on February 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
including February 16, as well as all Principal Prepayments received on
mortgage loans in January, 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 February 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 February 26 (because February 25 is not a business day), the amounts
determined on February 20 will be distributed to certificateholders.
If provided in the accompanying prospectus supplement, the distribution
date for 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 accompanying prospectus supplement for
any series of certificates as to which the trust includes mortgage securities,
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any advancing obligations will be under the terms of the mortgage securities and
may differ from the provisions relating to Advances described in this
prospectus.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to related certificateholders. Advances do not represent
an obligation of the master 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. For 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,
for 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 accompanying prospectus supplement, the certificates may also
be downgraded.
Prepayment Interest Shortfalls
When a mortgagor prepays a mortgage loan or contract in full between
scheduled due dates for 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 stated in the accompanying 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 for 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 accompanying prospectus
supplement and may not be sufficient to cover the Prepayment Interest Shortfall.
If so disclosed in the accompanying 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.
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Funding Account
If stated in the accompanying 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 described 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 relating to principal will be deposited in such account to be
released as additional mortgage loans are transferred. Unless otherwise
specified in the accompanying 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 certificates. Unless otherwise specified in
the accompanying 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):
o the amount, if any, of the distribution allocable to principal;
o the amount, if any, of the distribution allocable to interest and the
amount, if any, of any shortfall in the amount of interest and principal;
o the aggregate unpaid principal balance of the mortgage collateral after
giving effect to the distribution of principal on that distribution date;
o the outstanding principal balance or notional amount of each class of
certificates after giving effect to the distribution of principal on that
distribution date;
o based on the most recent reports furnished by subservicers, the number and
aggregate principal balances of 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;
o the book value of any property acquired by the trust through foreclosure or
grant of a deed in lieu of foreclosure;
o the balance of the reserve fund, if any, at the close of business on that
distribution date;
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o the percentage of the outstanding principal balances of the senior
certificates, if applicable, after giving effect to the distributions on
that distribution date;
o the amount of coverage under any letter of credit, mortgage pool
insurance policy or other form of credit enhancement covering default
risk as of the close of business on the applicable determination date
and a description of any credit enhancement substituted therefor;
o if applicable, the Special Hazard Amount, Fraud Loss Amount and
Bankruptcy Amount as of the close of business on the applicable
distribution date and a description of any change in the calculation
of those amounts;
o in the case of certificates 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;
o the servicing fee payable to the master servicer and the subservicer; and
o for 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 under 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.
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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. For 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 described in the accompanying prospectus
supplement.
Under 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
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. For
any series of certificates as to which the trust includes mortgage securities,
the master servicer's servicing and administration obligations will be under 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.
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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.
The master servicer, any servicer or one or more subservicers for 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 under 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 accompanying 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,
for some delinquent mortgage loans:
o instruct the master servicer or servicer to commence or delay
foreclosure 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;
o instruct the master servicer or servicer to purchase the mortgage
loans from the trust prior to the commencement of foreclosure
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proceedings at the purchase price and to resell the mortgage loans to
the holder, in which case any subsequent loss with respect to the
mortgage loans will not be allocated to the certificateholders;
o become, or designate a third party to become, a subservicer with respect to
the mortgage loans so long as (i) the master servicer 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
o the accompanying prospectus supplement may provide for the other types of
special servicing arrangements.
Enforcement of "Due-on-Sale" Clauses
Unless otherwise specified in the accompanying 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."
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, under 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.
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Realization Upon Defaulted Mortgage Loans or Contracts
For 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. For any junior
mortgage loan, following any default, if the senior mortgage holder commences a
foreclosure action it is likely that such mortgage loan will be written off as
bad debt with no foreclosure proceeding unless foreclosure proceeds for such
mortgage 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 relating to 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 on receipt and will be available at that time
for making payments to certificateholders.
For 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 under 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
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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.
For 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
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
accompanying 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 accompanying 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."
The market value of any Mixed-Use Property obtained in foreclosure or by
deed in lieu of foreclosure will be based substantially on the operating income
obtained from renting the commercial and dwelling units. Since a default on a
mortgage loan secured by Mixed-Use Property is likely to have occurred because
operating income, net of expenses, is insufficient to make debt service payments
on the related mortgage loan, it can be anticipated that the market value of
that property will be less than was anticipated when the related mortgage loan
was originated. To the extent that the equity in the property does not absorb
the loss in market value and the loss is not covered by other credit support, a
loss may be experienced by the related trust.
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 described in the
accompanying 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 accompanying 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 accompanying 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 accompanying prospectus
supplement.
For 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 accompanying prospectus supplement. In most cases, for
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 accompanying 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.
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
accompanying 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 accompanying 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
accompanying prospectus supplement, in which case those losses would be
allocated on a pro rata basis among all outstanding classes of certificates or
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as otherwise specified in the accompanying 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 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 accompanying 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 accompanying 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 accompanying 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
accompanying prospectus supplement. The rights of the holders of subordinate
certificates to receive the Subordinate Amount will be limited to the extent
described in the accompanying prospectus supplement. As specified in the
accompanying 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.
For 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 accompanying
prospectus supplement.
Overcollateralization
If stated in the accompanying prospectus supplement, interest
collections on the mortgage collateral may exceed interest payments on the
certificates for the related distribution date. To the extent such excess
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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 accompanying prospectus supplement.
DESCRIPTION OF CREDIT ENHANCEMENT
General
Credit support for each series of certificates may be comprised of one
or more of the following components. Each component will have a dollar limit and
will provide coverage with respect to Realized Losses that are:
o Defaulted Mortgage Losses;
o Special Hazard Losses;
o Bankruptcy Losses; and
o 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 accompanying prospectus
supplement,
o coverage with respect to Defaulted Mortgage Losses may be provided by a
mortgage pool insurance policy,
o coverage with respect to Special Hazard Losses may be provided by a special
hazard insurance policy,
o coverage with respect to Bankruptcy Losses may be provided by a bankruptcy
bond and
o coverage with respect to Fraud Losses may be provided by a mortgage pool
insurance policy or mortgage repurchase bond.
In addition, if stated 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 accompanying 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
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depositor. If stated in the accompanying 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 accompanying prospectus supplement.
Each prospectus supplement will include a description of:
o the amount payable under the credit enhancement arrangement, if any,
provided with respect to a series;
o any conditions to payment thereunder not otherwise described in this
prospectus;
o the conditions under which the amount payable under the credit support may
be reduced and under which the credit support may be terminated or
replaced; and
o the material provisions of any agreement relating to the credit support.
Additionally, each prospectus supplement will contain information with
respect to the issuer of any third-party credit enhancement, 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 accompanying
prospectus supplement. On or before each distribution date, the letter of credit
bank will be required to make payments after notification from the trustee, to
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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 accompanying
prospectus supplement, the mortgage pool insurance policies may not cover losses
due to a failure to pay or denial of a claim under a primary insurance policy,
irrespective of the reason therefor.
Each mortgage pool insurance policy will provide that no claims may be
validly presented thereunder unless, among other things:
o any required primary insurance policy is in effect for the defaulted
mortgage loan and a claim thereunder has been submitted and settled;
o hazard insurance on the property securing the mortgage loan has been
kept in force and real estate taxes and other protection and
preservation expenses have been paid by the master servicer, servicer
or subservicer;
o if there has been physical loss or damage to the mortgaged property,
it has been restored to its condition, reasonable wear and tear
excepted, at the cut-off date; and
o the insured has acquired good and merchantable title to the mortgaged
property free and clear of liens except permitted encumbrances.
Upon satisfaction of these conditions, the pool insurer will have the
option either (a) to purchase the property securing the defaulted mortgage loan
at a price equal to its outstanding principal balance plus accrued and unpaid
interest at the applicable mortgage rate to the date of purchase and 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
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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.
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 accompanying 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, has been assigned to the trustee for the benefit to the
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 --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
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
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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 accompanying prospectus supplement.
Each special hazard insurance policy subject to limitations described in this
paragraph and in the accompanying 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 described
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 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.
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To the extent described in the accompanying prospectus supplement,
coverage relating to 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
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 accompanying prospectus supplement. The level
of coverage under each bankruptcy policy will be described in the accompanying
prospectus supplement.
Reserve Funds
If stated in the accompanying 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 accompanying prospectus
supplement. In the alternative or in addition to that deposit, to the extent
described in the accompanying 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.
For any series of certificates as to which credit enhancement includes a
letter of credit, if stated in the accompanying prospectus supplement, under
specified circumstances the remaining amount of the letter of credit may be
drawn by the trustee and deposited in a reserve fund. Amounts in a reserve fund
may be distributed to certificateholders, or applied to reimburse the master
servicer or servicer for outstanding Advances, or may be used for other
purposes, in the manner and to the extent specified in the accompanying
prospectus supplement. If stated in the accompanying 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
accompanying 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 described in the accompanying 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
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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 accompanying 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 accompanying 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 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
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cost limit. Any losses in market value of the certificates associated with any
reduction or withdrawal in rating by an applicable rating agency shall be borne
by the certificateholders.
If any property securing a defaulted mortgage loan or contract is
damaged and proceeds, if any, from the related hazard insurance policy or any
applicable special hazard insurance policy are insufficient to restore the
damaged property to a condition sufficient to permit recovery under any letter
of credit, mortgage pool insurance policy, contract pool insurance policy or any
related primary insurance policy, the master servicer 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 described 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 accompanying prospectus supplement, neither the master
servicer, the servicer, the Certificate Administrator nor the depositor will be
obligated to obtain replacement credit support in order to restore the rating of
the certificates. The master servicer, the servicer or the Certificate
Administrator, as applicable, will also be permitted to replace 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.
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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).
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 accompanying 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 accompanying 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 accompanying 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 accompanying 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 described
in the accompanying 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 Residential Funding
Corporation 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 in this prospectus 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 on or after July 29, 1999
will have a right to request the cancellation of any private mortgage insurance
policy insuring loans when the 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 request the cancellation of the policy is subject to
certain conditions, including (i) 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, (ii) there has been no decline in the value
of the mortgaged property since the time the mortgage loan was originated and
(iii) the mortgaged property is not encumbered by subordinate liens. 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. The legislation requires that mortgagors be
provided written notice of their cancellation rights at the origination of the
mortgage loans.
If the requirement for private mortgage insurance is not otherwise
canceled or terminated in the circumstances described above, it must be
terminated no later than the first day of the month immediately following the
date that is the midpoint of the loan's amortization period, if, on that date,
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the borrower is current on the payments required by the terms of the loan. The
mortgagee's or servicer's failure to comply with the law could subject such
parties to civil money penalties but would not affect the validity or
enforceability of the mortgage loan. The law does not preempt any state law
regulating private mortgage insurance except to the extent that such law is
inconsistent with the federal law and then only to the extent of the
inconsistency.
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:
o the insured percentage of the loss on the related mortgaged property;
o the entire amount of the loss, after receipt by the primary insurer of good
and merchantable title to, and possession of, the mortgaged property; or
o at the option of the primary insurer under certain primary insurance
policies, the sum of the delinquent monthly payments plus any Advances made
by the insured, both to the date of the claim payment and, thereafter,
monthly payments in the amount that would have become due under the
mortgage loan if it had not been discharged plus any Advances made by the
insured until the earlier of (a) the date the mortgage loan would have been
discharged in full if the default had not occurred or (b) an approved sale.
The amount of the loss as calculated under a primary insurance policy
covering a mortgage loan will in most cases consist of the unpaid principal
amount of such mortgage loan and accrued and unpaid interest thereon and
reimbursement of some expenses, less:
o rents or other payments received by the insured (other than the
proceeds of hazard insurance) that are derived from the related
mortgaged property;
o hazard insurance proceeds received by the insured in excess of the
amount required to restore the mortgaged property and which have not
been applied to the payment of the mortgage loan;
o amounts expended but not approved by the primary insurer;
o claim payments previously made on the mortgage loan; and
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o unpaid premiums and other amounts.
As conditions precedent to the filing or payment of a claim under a
primary insurance policy, in the event of default by the mortgagor, the insured
will typically be required, among other things, to:
o 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;
o in the event of any physical loss or damage to the mortgaged property, have
the mortgaged property restored to at least its condition at the effective
date of the primary insurance policy (ordinary wear and tear excepted); and
o 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 accompanying
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 in
this prospectus under "Certain Legal Aspects of Mortgage Loans and Contracts --
The Mortgage Loans -- Junior Mortgages, Rights of Senior Mortgagees".
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
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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
the accompanying 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.
For mixed-use mortgage loans, some additional insurance policies may be
required, including, but not limited to, loss of rent endorsements, business
interruption insurance, comprehensive public liability insurance and general
liability insurance for bodily injury and property damage, and the related
pooling and servicing agreement may require the master servicer or servicer to
maintain that insurance with respect to any related mortgaged properties secured
by REO Mortgage Loans.
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
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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 for the manufactured home or indemnify
the trustee against any damage to the manufactured home prior to resale or other
disposition.
FHA Mortgage Insurance
The Housing Act authorizes various FHA mortgage insurance programs. Some
of the mortgage loans may be insured under either Section 203(b), Section 234 or
Section 235 of the Housing Act. Under Section 203(b), FHA insures mortgage loans
of up to 30 years' duration for the purchase of one- to four-family dwelling
units. Mortgage loans for the purchase of condominium units are insured by FHA
under Section 234. Loans insured under these programs must bear interest at a
rate not exceeding the maximum rate in effect at the time the loan is made, as
established by HUD, and may not exceed specified percentages of the lesser of
the appraised value of the property and the sales price, less seller-paid
closing costs for the property, up to certain specified maximums. In addition,
FHA imposes initial investment minimums and other requirements on mortgage loans
insured under the Section 203(b) and Section 234 programs.
Under Section 235, assistance payments are paid by HUD to the mortgagee
on behalf of eligible mortgagors for as long as the mortgagors continue to be
eligible for the payments. To be eligible, a mortgagor must be part of a family,
have income within the limits prescribed by HUD at the time of initial
occupancy, occupy the property and meet requirements for recertification at
least annually.
The regulations governing these programs provide that insurance benefits
are payable either 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
described in the accompanying prospectus supplement.
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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 described in the accompanying prospectus
supplement. Any VA guaranty relating to contracts underlying a series of
certificates will be described in the accompanying prospectus supplement.
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 for a series of certificates will be
pursuant to limited representations and warranties made by the depositor or as
otherwise provided in the accompanying prospectus supplement.
The depositor maintains its principal office at 8400 Normandale Lake
Boulevard, Suite 600, Minneapolis, Minnesota 55437. Its telephone number is
(952) 832-7000.
RESIDENTIAL FUNDING CORPORATION
Unless otherwise specified in the accompanying prospectus supplement,
Residential Funding Corporation, an affiliate of the depositor, will act as the
master servicer or Certificate Administrator for each series of certificates.
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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 (952) 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
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 for 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 accompanying 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 accompanying prospectus supplement. Except as otherwise
provided in the accompanying prospectus supplement, the servicer or the master
servicer, if any, will deduct the servicing fee for the mortgage loans or
contracts underlying the certificates of a series in an amount to be specified
in the accompanying 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 administering such mortgage
securities on behalf of the holders of such certificates may be based on a
percentage per annum described in the accompanying prospectus supplement of the
outstanding balance of such mortgage securities and may be retained from
distributions of interest thereon, if stated in the accompanying 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
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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, for each series of
certificates, deliver to the trustee, on or before the date in each year
specified in the related pooling and servicing agreement, an officer's
certificate stating that:
o a review of the activities of the master servicer, 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;
o 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 described in
the Uniform 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
o to the best of the officer's knowledge, each subservicer has complied
in all material respects with the minimum servicing standards
described 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 described 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 under 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 described 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 for 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 for 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.
Events of Default
Events of default under the pooling and servicing agreement for a series
of certificates will include:
o 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;
o 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
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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
o 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.
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 described 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
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
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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:
o to cure any ambiguity;
o to correct or supplement any provision therein which may be inconsistent
with any other provision therein or to correct any error;
o to change the timing and/or nature of deposits in the Custodial Account or
the Certificate Account or to change the name in which the Custodial
Account is maintained, except that (a) 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;
o 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 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;
o to make any other provisions with respect to matters or questions arising
under the pooling and servicing agreement which are not materially
inconsistent with its provisions, so long as the action will not adversely
affect in any material respect the interests of any certificateholder; or
o to amend any provision that is not material to holders of any class of
related certificates.
The pooling and servicing agreement may also be amended by the
depositor, the master servicer, 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
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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
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
o 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
o the purchase by the master servicer, the Certificate Administrator,
the servicer or the depositor or, if specified in the accompanying
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 from 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 accompanying prospectus supplement in the manner
described in the accompanying 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 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 accompanying prospectus
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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, described in the accompanying 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 stated in the accompanying 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 under 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.
The Trustee
The trustee under each pooling and servicing agreement will be named in
the accompanying 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 stated in
the accompanying 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.
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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 CLTV 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 under traditional standards. 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. 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 CLTV
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
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
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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 accompanying 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 accompanying 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 accompanying prospectus supplement.
A variable pass-through rate may be calculated based on the weighted average of
the Net Mortgage Rates, net of 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. On
the other hand, 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
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yield to maturity on other types of classes of certificates, including accrual
certificates, certificates with a pass-through rate that fluctuates inversely
with or at a multiple of an index or other classes in a series including more
than one class of certificates, may be relatively more sensitive to the rate of
prepayment on the related mortgage 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."
For 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 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 stated in the
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accompanying 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 on 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.
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, for 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 stated in the accompanying 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.
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
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collateral not covered by the credit enhancement will be applied to a series of
certificates in the manner described in the accompanying prospectus supplement
and may reduce an investor's anticipated yield to maturity.
The accompanying prospectus supplement may describe 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
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 accompanying
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 accompanying prospectus
supplement.
The following is a list of factors that may affect prepayment
experience:
o homeowner mobility;
o economic conditions;
o changes in mortgagors' housing needs;
o job transfers;
o unemployment;
o mortgagors' equity in the properties securing the mortgages;
o servicing decisions;
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o enforceability of due-on-sale clauses;
o mortgage market interest rates;
o mortgage recording taxes;
o solicitations and the availability of mortgage funds; and
o the obtaining of secondary financing by the mortgagor.
All statistics known to the depositor that have been compiled with
respect to prepayment experience on mortgage loans indicate that while some
mortgage loans may remain outstanding until their stated maturities, a
substantial number will be paid prior to their respective stated maturities. The
rate of prepayment with respect to conventional fixed-rate mortgage loans has
fluctuated significantly in recent years. 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 accompanying 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 accompanying prospectus supplement indicates otherwise, the master
servicer will enforce any due-on-sale clause to the extent it has knowledge of
the conveyance or proposed conveyance of the underlying mortgaged property and
it is entitled to do so under applicable law, provided, however, that the master
servicer will not take any action in relation to the enforcement of any
due-on-sale provision which would adversely affect or jeopardize coverage under
any applicable insurance policy.
An ARM loan is assumable, in some circumstances, if the proposed
transferee of the related mortgaged property establishes its ability to repay
the mortgage loan and, in the reasonable judgment of the master servicer or the
related subservicer, the security for the ARM loan would not be impaired by the
assumption. The extent to which ARM loans are assumed by purchasers of the
mortgaged properties rather than prepaid by the related mortgagors in connection
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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 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.
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While most manufactured housing contracts will contain "due-on-sale"
provisions permitting the holder of the contract to accelerate the maturity of
the contract upon conveyance by the mortgagor, the master servicer, servicer or
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:
o not increase or decrease the mortgage rates by more than a fixed percentage
amount on each adjustment date;
o not increase the mortgage rates over a fixed percentage amount during the
life of any ARM loan; and
o be based on an index, which may not rise and fall consistently with
mortgage interest rates, plus the related 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 for 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 for mortgage loans or
contracts included in a trust for a series of certificates are not covered by
the methods of credit enhancement described in this prospectus under
"Description of Credit Enhancement" or in the accompanying 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."
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Under some circumstances, the master servicer, a servicer, the depositor
or, if specified in the accompanying 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
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. Under 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.
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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 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
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
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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.
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 accompanying 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
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."
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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
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 under 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. Under 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. On the other
hand, if a portion of the indebtedness remains unpaid, the borrower is usually
responsible for the deficiency. However, some states limit the rights of lenders
to obtain deficiency judgments. See "--Anti-Deficiency Legislation and Other
Limitations on Lenders" below. The costs of sale may be substantially higher
than the costs associated with foreclosure sales with respect to property
located in the United States, and may include transfer taxes, notary public
fees, trustee fees, capital gains and other taxes on the proceeds of sale, and
the cost of amending or terminating the Mexico trust agreement and preparing a
new trust agreement. Additional costs associated with realizing on the
collateral may include eviction proceedings, the costs of defending actions
brought by the defaulting borrower and enforcement actions. Any such additional
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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
accordance with the Mexico trust agreement. Under 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
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made at least once a week for two weeks. There may be as many as three public
sales of the mortgaged property. If the defendant contests the foreclosure, the
case may be tried and judgment rendered based on the merits of the case.
There are no redemption rights after the public sale of a foreclosed
property under the laws of the Commonwealth of Puerto Rico. Commonwealth of
Puerto Rico law provides for a summary proceeding for the foreclosure of a
mortgage, but it is very seldom used because of concerns regarding the validity
of those actions. The process may be expedited if the mortgagee can obtain the
consent of the defendant to the execution of a deed in lieu of foreclosure.
Under Commonwealth of Puerto Rico law, in the case of the public sale
upon foreclosure of a mortgaged property that (a) is subject to a mortgage loan
that was obtained for a purpose other than the financing or refinancing of the
acquisition, construction or improvement of the property and (b) is occupied by
the mortgagor as his principal residence, the mortgagor of the property has a
right to be paid the first $1,500 from the proceeds obtained on the public sale
of the property. The mortgagor can claim this sum of money from the mortgagee at
any time prior to the public sale or up to one year 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 described 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.
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
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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.
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. On the other
hand, 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
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lienors or other parties are given a statutory period, typically ranging from
six months to two years, in which to redeem the property from the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. In some states, the right to redeem is an equitable
right. The equity of redemption, which is a non-statutory right, 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 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
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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
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 accordance with their terms, subject to
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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, regardless of 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
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 described
in the accompanying prospectus supplement.
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Unless otherwise described in the accompanying prospectus supplement,
Residential Funding Corporation, the seller of the 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. 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, regardless of any
state law to the contrary;
o 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,
o 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
o 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
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
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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 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.
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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
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 accompanying 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 Residential Funding Corporation or 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 accompanying 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 manufactured home
or subsequent lenders who take a security interest in the manufactured home or
creditors of the assignor.
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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. Under 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 accompanying
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
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
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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 defense against a claim
brought against the mortgagor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination of 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 accompanying 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 "due-on-sale"
clauses in contracts relating to 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, Residential Funding Corporation,
the mortgage collateral seller, or another specified party, will represent that
all of the contracts comply with applicable usury laws.
Environmental Legislation
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, or CERCLA, and under state law in some
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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 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
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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
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.
For 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.
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
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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. 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 Parity
Act, 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 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
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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 accompanying
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
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
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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 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 accompanying 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
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
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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, 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 accompanying 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,
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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
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 accompanying 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 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
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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 remaining 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
accompanying 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
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
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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 accompanying prospectus supplement, treating all uncertificated
regular interests as a single debt instrument as described 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
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
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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:
o on the basis of a constant yield method,
o 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
o 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.
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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.
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.
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.
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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
accompanying 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
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
residual certificateholders for the corresponding period may significantly
adversely affect the REMIC residual certificateholders after-tax rate of return.
Taxable Income of the REMIC
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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
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.
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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 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.
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.
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However, their basis increases may not occur until the end of the calendar
quarter, or perhaps the end of the calendar year, with respect to which the
REMIC taxable income is allocated to the REMIC residual certificateholders. To
the extent the REMIC residual certificateholders initial bases are less than the
distributions to the REMIC residual certificateholders, and increases in the
initial bases either occur after distributions or, together with their initial
bases, are less than the amount of the distributions, gain will be recognized to
the REMIC residual certificateholders on those distributions and will be treated
as gain from the sale of their REMIC residual certificates.
The effect of these rules is that a certificateholder may not amortize
its basis in a REMIC residual certificate, but may only recover its basis
through distributions, through the deduction of its share of any net losses of
the REMIC or upon the sale of its REMIC residual certificate. See "-- Sales of
REMIC Certificates." For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC residual
certificate other than an original holder in order to reflect any difference
between the cost of the REMIC residual certificate to its holder and the
adjusted basis the REMIC residual certificate would have had in the hands of the
original holder, see "--General."
Excess Inclusions
Any "excess inclusions" with respect to a REMIC residual certificate
will be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC residual
certificate for any calendar quarter will be the excess, if any, of (i) the sum
of the daily portions of REMIC taxable income allocable to the REMIC residual
certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during that quarter that the REMIC residual certificate was held by the
REMIC residual certificateholder. The daily accruals of a REMIC residual
certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC residual certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the closing date. For this purpose,
the adjusted issue price of a REMIC residual certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC residual
certificate, increased by the sum of the daily accruals for all prior quarters
and decreased, but not below zero, by any distributions made with respect to the
REMIC residual certificate before the beginning of that quarter. The issue price
of a REMIC residual certificate is the initial offering price to the public,
excluding bond houses, brokers and underwriters, at which a substantial amount
of the REMIC residual certificates were 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:
o will not be permitted to be offset by deductions, losses or loss carryovers
from other activities,
o will be treated as "unrelated business taxable income" to an otherwise
tax-exempt organization and
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o will not be eligible for any rate reduction or exemption under any
applicable tax treaty with respect to the 30% United States
withholding tax imposed on distributions to REMIC residual
certificateholders that are foreign investors.
See, however, "--Foreign Investors in REMIC certificates."
Furthermore, for purposes of the alternative minimum tax, (i) excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and (ii) alternative minimum taxable income may not be
less than the taxpayer's excess inclusions; provided, however, that for purposes
of (ii), alternative minimum taxable income is determined without regard to the
special rule that taxable income cannot be less than excess inclusions. The
latter rule has the effect of preventing nonrefundable tax credits from reducing
the taxpayer's income tax to an amount lower than the alternative minimum tax on
excess inclusions.
In the case of any REMIC residual certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to the REMIC
residual certificates, reduced, but not below zero, by the real estate
investment trust taxable income, within the meaning of Section 857(b)(2) of the
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 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. The IRS has issued proposed changes to the
REMIC regulations that would add to the conditions necessary to assure that a
transfer of a noneconomic residual interest would be respected. The proposed
additional condition would require that the amount received by the transferee be
no less on a present value basis than the present value of the net tax detriment
attributable to holding the residual interest reduced by the present value of
the projected payments to be received on the residual interest. In Revenue
Procedure 2001-12, pending finalization of the new regulations, the IRS has
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include certain transfers to domestic taxable corporations with large amounts of
gross and net assets where agreement is made that all future transfers will be
to taxable domestic corporations in transactions that qualify for one of the
"safe harbor" provisions. Eligibility for this safe harbor requires, among other
things, that the facts and circumstances known to the transferor at the time of
transfer not indicate to a reasonable person that the taxes with respect to the
residual interest will not be paid, with an unreasonably low cost for the
transfer specifically mentioned as negating eligibility. The changes would be
effective for transfers of residual interests occurring after February 4, 2000.
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 accompanying 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 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 accompanying 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
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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 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:
o residual interests in the entity are not held by Disqualified
Organizations; and
o information necessary for the application of the tax described in this
prospectus will be made available.
Restrictions on the transfer of REMIC residual certificates and other
provisions that are intended to meet this requirement will be included in the
pooling and servicing agreement, including provisions:
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(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.
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
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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
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 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.
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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 accompanying 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 accompanying 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 accompanying 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
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
accompanying 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.
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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 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.
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.
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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, provided that, for purposes solely of the restrictions on the
transfer of residual interests, no partnership or other entity treated as a
partnership for United States federal income tax purposes shall be treated as a
United States Person unless all persons that own an interest in such partnership
either directly or through any entity that is not a corporation for United
States federal income tax purposes are required by the applicable operating
agreement to be United States Persons or an estate whose income is subject to
United States federal income tax regardless of its source, or a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. To the extent
prescribed in regulations by the Secretary of the Treasury, which regulations
have not yet been issued, a trust which was in existence on August 20, 1996
(other than a trust treated as owned by the grantor under subpart E of part I of
subchapter J of chapter 1 of the 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 accompanying prospectus supplement,
transfers of REMIC residual certificates to investors that are not United States
persons will be prohibited under the related pooling and servicing agreement or
trust agreement.
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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 certificates offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their tax advisors
with respect to the various tax consequences of investments in the certificates
offered hereby.
ERISA CONSIDERATIONS
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended, or ERISA, impose fiduciary and prohibited transaction
restrictions on employee pension and welfare benefit plans subject to ERISA and
various other retirement plans and arrangements, including bank collective
investment funds and insurance company general and separate accounts in which
those employee benefit plans and arrangements are invested. Section 4975 of the
Internal Revenue Code imposes essentially the same prohibited transaction
restrictions on certain tax-favored plans, including tax-qualified retirement
plans described in Section 401(a) of the Internal Revenue Code and individual
retirement accounts described in Section 408 of the Internal Revenue Code.
Some employee benefit plans, including governmental plans, as defined in
Section 3(32) of ERISA, and, if no election has been made 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(b)
of the Internal Revenue Code.
Section 404 of ERISA imposes 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.
In addition, Section 406 of ERISA and Section 4975 of the Internal Revenue Code
prohibit a broad range of transactions involving assets of employee benefit
plans and arrangements and tax-favored plans, which are collectively referred to
in this prospectus as "ERISA plans," and persons, called "parties in interest"
under ERISA or "disqualified persons" under the Internal Revenue Code, who have
specified relationships to the ERISA plans, unless a statutory, regulatory or
administrative exemption is available. Some parties in interest that participate
in a prohibited transaction may be subject to a penalty (or an excise tax)
imposed under Section 502(i) of ERISA or Section 4975 of the Internal Revenue
Code, unless a statutory, regulatory or administrative exemption is available
with respect to any transaction of this sort.
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ERISA Plan Asset Regulations
An investment of assets of an ERISA plan in certificates may cause the
underlying mortgage loans, mortgage securities or any other assets held in a
trust to be deemed ERISA plan assets of the ERISA plan. The U.S. Department of
Labor, or DOL, has promulgated regulations at 29 C.F.R. Section 2510.3-101
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 an ERISA plan acquires an "equity interest," such as a
certificate, in that entity.
Some of the rules contained in the DOL regulations provide that ERISA
plan assets may be deemed to include an undivided interest in each asset of an
entity, such as a trust, in which it makes an equity investment. Therefore,
ERISA plans should not acquire or hold certificates in reliance upon the
availability of any exception under the DOL regulations. For purposes of this
section, the terms "ERISA plan assets" and "assets of an ERISA plan" have the
meanings specified in the DOL regulations and include an undivided interest in
the underlying assets of entities in which an ERISA plan holds an equity
interest.
Under the DOL regulations, the prohibited transaction provisions of
Section 406 of ERISA and Section 4975 of the Internal Revenue Code may apply to
the assets of 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 affiliates of those entities
to be considered or become parties in interest for an investing ERISA plan or an
ERISA plan holding an interest in an ERISA-subject investment 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 Section
4975 of the Internal Revenue Code, unless some statutory, regulatory or
administrative exemption is available. Certificates acquired by an ERISA plan
would be assets of that ERISA plan. Under the DOL regulations, a trust,
including the mortgage loans, contracts, Agency Securities or any other assets
held 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,
for 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
this 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 with respect to
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 general fiduciary requirements of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Internal Revenue Code, for any investing ERISA plan. In addition, if the
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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, or on behalf of an ERISA plan or with ERISA plan assets, as
well as the operation of the trust, may constitute or result in a prohibited
transaction under ERISA and Section 4975 of the Internal Revenue Code.
Prohibited Transaction Exemptions
The DOL has issued an individual 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), and PTE 2000-58, 65 Fed. Reg. 67765 (November 13,
2000), to Residential Funding Corporation and a number of its affiliates. The
RFC exemption generally exempts, from the application of the prohibited
transaction provisions of Section 406 of ERISA and Section 4975 of the Internal
Revenue Code, various transactions, among others, relating to the servicing and
operation of pools of secured obligations of some types, including mortgage
loans, contracts or Agency Securities, which are held in a trust and the
purchase, sale and holding of pass-through certificates or other "securities"
issued by that trust as to which:
o 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 substantially similar to the RFC exemption is the sole
underwriter, a manager or co-manager of the underwriting syndicate or a
selling or placement agent; or
o 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:
o the depositor and a number of its affiliates;
o 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;
o any member of the underwriting syndicate or selling group of which a person
described in the two clauses just above is a manager or co-manager with
respect to a class of certificates; or
o any entity which has received an exemption from the DOL relating to
certificates which is substantially similar to the RFC exemption.
The RFC 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.
o 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.
o Second, the RFC 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, unless none of the
mortgage loans or other assets has an LTV ratio or CLTV ratio that exceeds
100% at the date of issuance of the certificates.
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o Third, at the time of acquisition by an ERISA plan or with ERISA plan
assets, the certificates must be rated in one of the four highest generic
rating categories by Standard & Poor's, a division of McGraw Hill
Companies, Inc., Moody's Investors Service, Inc. or Fitch, Inc., called the
exemption rating agencies. The certificates must be rated in one of the two
highest generic categories by the exemption rating agencies if the LTV
ratio or CLTV ratio of any one- to four-family residential mortgage loan or
home equity loan held in the trust exceeds 100% but does not exceed 125% at
the date of issuance of the certificates. However, in that case the RFC
exemption will not apply:
o to any of the certificates if any mortgage loan or other asset held in the
trust (other than a one- to four-family residential mortgage loan or home
equity loan) has an LTV ratio or CLTV ratio that exceeds 100% at the date
of issuance of the certificates; or
o to any subordinate certificates.
o Fourth, the trustee cannot be an affiliate of any other member of the
restricted group. The restricted group 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.
o Fifth, the sum of all payments made to and retained by the underwriters
must represent not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the depositor
pursuant to the assignment of the assets to the related trust must
represent not more than the fair market value of those obligations; and the
sum of all payments made to and retained by the master servicer, 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.
o Sixth, the investing ERISA plan or ERISA plan asset 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 accompanying
prospectus supplement, the exemptive relief afforded by the RFC exemption may
not apply to any certificates where the related trust contains a swap, a
pre-funding arrangement or Mexico Mortgage Loans.
The RFC exemption also requires that each trust meet the following
requirements:
o the trust must consist solely of assets of the type that have been included
in other investment pools;
o securities evidencing interests in those other investment pools must have
been rated in one of the four 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 on the RFC exemption; and
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o securities 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 on the RFC 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 RFC exemption are satisfied, the RFC
exemption may provide an exemption, from the application of the prohibited
transaction provisions of Sections 406(a) and 407(a) of ERISA and 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
acquisition or disposition in the secondary market of certificates by an ERISA
plan 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 an excluded ERISA plan or with ERISA plan assets
of an excluded ERISA plan by any person who has discretionary authority or
renders investment advice with respect to ERISA plan assets of the excluded
ERISA plan. For purposes of the certificates, an "excluded ERISA plan" is an
ERISA plan sponsored by any member of the restricted group.
If specific conditions of the RFC exemption are also satisfied, the RFC
exemption may provide an exemption, from the application of the prohibited
transaction provisions of Sections 406(b)(1) and (b)(2) of ERISA and Section
4975(c)(1)(E) of the Internal Revenue Code, in connection with the following:
o 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:
o a mortgagor with respect to 5% or less of the fair market value of the
assets of a trust; or
o an affiliate of that person;
provided that, if the certificates are acquired in connection
with their initial issuance, the quantitative restrictions
described in the RFC exemption are met;
o the direct or indirect acquisition or disposition in the secondary market
of certificates by an ERISA plan or with ERISA plan assets; and
o the holding of certificates by an ERISA plan or with ERISA plan assets.
Additionally, if specific conditions of the RFC exemption are satisfied,
the RFC exemption may provide an exemption, from the application of the
prohibited transaction provisions of Sections 406(a), 406(b) and 407(a) of ERISA
and 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. Unless otherwise described in the accompanying prospectus supplement, the
depositor expects that the specific conditions of the RFC exemption required for
this purpose will be satisfied with respect to the certificates so that the RFC
exemption would provide an exemption, from the application of the prohibited
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transaction provisions of Sections 406(a) and (b) of ERISA and Section 4975(c)
of the Internal Revenue Code, for transactions in connection with the servicing,
management and operation of the mortgage pools and contract pools, provided that
the general conditions of the RFC exemption are satisfied.
The RFC exemption also may provide an exemption, from the application of
the prohibited transaction provisions of Sections 406(a) and 407(a) of ERISA and
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 investing
entity holding ERISA plan assets, by virtue of providing services to the ERISA
plan 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 the certificates constitute "securities"
for purposes of the RFC exemption and that the specific and general conditions
and the other requirements described in the RFC exemption would be satisfied. In
addition to making its own determination as to the availability of the exemptive
relief provided in the RFC exemption, the fiduciary or other ERISA plan asset
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 asset investor that proposes to
purchase certificates on behalf of an ERISA plan or with ERISA plan assets
should consult with its counsel on the potential applicability of ERISA and the
Internal Revenue Code to that investment and the availability of the RFC
exemption or any DOL prohibited transaction class exemption, or PTCE, 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 asset investor should consider the
availability of PTCE 83-1 for various 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, Cooperative Loans or
mixed-use mortgage loans, or some types of private securities, or which contain
a swap, a pre-funding arrangement or Mexico Mortgage Loans. In addition, the
fiduciary or other ERISA plan asset investor should consider the availability of
other class exemptions granted by the DOL, which provide relief from certain of
the prohibited transaction provisions of ERISA and the related excise tax
provisions of Section 4975 of the Internal Revenue Code, including Sections I
and III of PTCE 95-60, regarding transactions by insurance company general
accounts. The accompanying prospectus supplement may contain additional
information regarding the application of the RFC exemption, PTCE 83-1, PTCE
95-60 or other DOL class exemptions for 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 asset investor's investment in the
certificates or, even if an exemption were deemed to apply, that any exemption
would apply to all prohibited transactions that may occur in connection with
this form of investment.
Insurance Company General Accounts
Insurance companies contemplating the investment of general account
assets in the certificates should consult with their legal advisors with respect
to the applicability of Section 401(c) of ERISA. The DOL issued final
regulations under Section 401(c) which were published in the Federal Register on
January 5, 2000, but these final regulations are generally not applicable until
July 5, 2001.
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Representations From Investing Plans
If the criteria specified in the RFC exemption as described above are
not satisfied by one or more classes of certificates, or by a trust or the
mortgage loans and other assets held by the trust, except as otherwise specified
in the accompanying 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:
o is permissible under applicable law;
o will not constitute or result in any non-exempt prohibited transaction
under ERISA or Section 4975 of the Internal Revenue Code; and
o 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.
Except as otherwise specified in the accompanying prospectus supplement,
each beneficial owner of a subordinate certificate offered by this prospectus
and the accompanying prospectus supplement (or any interest therein) shall be
deemed to have represented, by virtue of its acquisition or holding of such
certificate (or interest therein), that either (i) it is not an ERISA plan, a
trustee or other person acting on behalf of an ERISA plan, or any other person
using ERISA plan assets to effect such acquisition or holding, (ii) it has
acquired and is holding such subordinate certificate in reliance on the RFC
exemption and it understands that there are certain conditions to the
availability of the RFC exemption including that the subordinate certificates
must be rated, at the time of acquisition, in one of the four highest generic
rating categories by at least one of the exemption rating agencies or (iii)(1)
such acquirer or holder is an insurance company, (2) the source of funds used to
acquire or hold such certificate (or interest therein) is an "insurance company
general account" (as defined in PTCE 95-60), and (3) the conditions set forth in
Sections I and III of PTCE 95-60 have been satisfied.
If any subordinate certificate (or any interest therein) is acquired or
held in violation of the conditions described in the preceding paragraph, the
next preceding permitted beneficial owner will be treated as the beneficial
owner of the subordinate certificate, retroactive to the date of transfer to the
purported beneficial owner. Any purported beneficial owner whose acquisition or
holding of any subordinate certificate (or interest therein) was effected in
violation of the conditions described in the preceding paragraph shall indemnify
and hold harmless the depositor, the trustee, the master servicer, any
subservicer and the trust from and against any and all liabilities, claims,
costs or expenses incurred by such parties as a result of such acquisition or
holding.
Tax-Exempt Investors; REMIC Residual Certificates
An ERISA plan that is 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." In
addition, the exemptive relief afforded by the RFC exemption does not apply to
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the purchase, sale or holding of any class of REMIC residual certificates.
Consultation With Counsel
There can be no assurance that the RFC 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 specified conditions 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.
Before purchasing a certificate, a fiduciary of an ERISA plan should
itself confirm that all of the specific and general conditions described in the
RFC exemption or one of the other DOL exemptions would be satisfied. Before
purchasing a certificate in reliance on the RFC exemption, an ERISA plan
fiduciary should itself confirm that the certificate constitutes a "security"
for purposes of the RFC exemption. In addition to making its own determination
as to the availability of the exemptive relief provided in the RFC exemption or
any other DOL exemption, an ERISA plan fiduciary should consider its general
fiduciary obligations under ERISA in determining whether to purchase a security
on behalf of an ERISA plan.
LEGAL INVESTMENT MATTERS
Each class of certificates offered hereby and by the accompanying
prospectus supplement will be rated at the date of issuance in one of the four
highest rating categories by at least one rating agency. If stated in the
accompanying 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
described in 12 U.S.C. SS24 (Seventh), subject in each case to any regulations
that the applicable federal regulatory authority may prescribe.
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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 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 accompanying 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 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
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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 accompanying prospectus
supplements will be offered in series through one or more of the methods
described below. The prospectus supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the depositor from that sale.
The depositor intends that certificates will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of certificates may be made through a combination of two or more of the
following methods:
o by negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters
o by placements by the depositor with institutional investors through
dealers; and
o by direct placements by the depositor with institutional investors.
In addition, if specified in the accompanying 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 accompanying prospectus supplement.
The managing underwriter or underwriters with respect to the offer and sale of a
particular series of certificates will be listed 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 accompanying 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
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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 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.
If required by applicable law or regulation, this prospectus and the
applicable prospectus supplement will also be used by Residential Funding
Securities Corporation, an affiliate of the depositor, after the completion of
the offering in connection with offers and sales related to market-making
transactions in the offered certificates in which Residential Funding Securities
Corporation may act as principal. Sales will be made at negotiated prices
determined at the time of sales.
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 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).
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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 described 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
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 accompanying 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 in this prospectus 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 (952) 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.
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 accompanying 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 accompanying
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 accompanying prospectus
supplement, and having original or modified terms to maturity shorter than the
term of the 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.
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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.
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 accompanying 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--For any mortgage loan or contract that prepaid in
full and, if stated in the accompanying 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--For 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 for 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.
Custodial Account--The custodial account or accounts created and
maintained under 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
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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--For 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:
o the United States, any State or political subdivision thereof, any
foreign government, any international organization, or any agency or
instrumentality of the foregoing (but would not include
instrumentalities described in Section 168(h)(2)(D) of the Code or
Freddie Mac)
o any organization (other than a cooperative described in Section 521
of the Code) that is exempt from federal income tax, unless it is
subject to the tax imposed by Section 511 of the Code,
o any organization described in Section 1381(a)(2)(C) of the Code
o an "electing large partnership" (as described in Section 775 of the Code)
or
o any other person so designated by the trustee based upon an opinion
of counsel that the holding of an ownership interest in a REMIC
certificate by that person may cause the related trust or any person
having an ownership interest in the REMIC certificate, other than
such person, to incur a liability for any federal tax imposed under
the Code that would not otherwise be imposed but for the transfer of
an ownership interest in a REMIC certificate to that person.
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:
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o any deferred interest added to the principal balance of the mortgage loans
and/or the outstanding balance of one or more classes of certificates on
the related due date;
o any other interest shortfalls, including, without limitation,
shortfalls resulting from application of the Relief Act or similar
legislation or regulations as in effect from time to time, allocable
to certificateholders which are not covered by advances or the
applicable credit enhancement; and
o Prepayment Interest Shortfalls not covered by Compensating Interest,
in each case in an amount that is allocated to that class on the
basis set forth in the prospectus supplement.
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
day of the month of such distribution date, or such other period as specified in
the accompanying 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.
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.
Funding Account--An account established for the purpose of funding the
transfer of additional mortgage loans into the related trust.
GPM Loan-- A mortgage loan under 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--For 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.
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.
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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.
Mixed-Use Property--Mortgaged property on which a mixed-use -
residential and commercial - structure is located.
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. For 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.
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--For 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.
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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. For 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.
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 under 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 accompanying 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.
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