<PAGE>
Rule 424(b)(5)
Registration No. 33-80419
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 16, 1996)
$116,693,900
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
DEPOSITOR
HOME EQUITY LOAN TRUST 1996-RHS4
GMAC MORTGAGE CORPORATION
MASTER SERVICER
RESIDENTIAL FUNDING CORPORATION
ADMINISTRATOR
HOME EQUITY LOAN-BACKED TERM NOTES, SERIES 1996-RHS4
The Home Equity Loan Trust 1996-RHS4 (the "ISSUER" or the "TRUST") will be
formed pursuant to a Trust Agreement to be dated as of December 1, 1996,
between Residential Funding Mortgage Securities II, Inc. (the "DEPOSITOR") and
Wilmington Trust Company, the Owner Trustee. The Issuer will issue
$116,693,900 aggregate principal amount of Home Equity Loan-Backed Term Notes,
Series 1996-RHS4 (the "TERM NOTES"). The Term Notes will be issued pursuant to
an Indenture to be dated as of December 1, 1996, between the Issuer and The
Chase Manhattan Bank, the Indenture Trustee. Pursuant to the Indenture, the
Issuer will also issue an aggregate amount up to the Maximum Variable Funding
Balance (as defined herein) of Home Equity Loan-Backed Variable Funding Notes,
Series 1996-RHS4 (the "VARIABLE FUNDING NOTES") and $10,147,354 initial
aggregate principal amount of Home Equity Loan-Backed Certificates, Series
1996-RHS4 (the "CERTIFICATES"). The Term Notes and the Variable Funding Notes
will have equal priorities and are collectively referred to herein as the
"NOTES" and the Notes and the Certificates are collectively referred to herein
as the "SECURITIES." Only the Term Notes are offered hereby.
The Term Notes will be secured by the Class A Ownership Interest in a special
purpose limited liability company (the "1996-RHS4 LLC") created pursuant to an
operating agreement (the "OPERATING AGREEMENT") among the Depositor and
affiliated entities. The Class A Ownership Interest represents an ownership
interest in the 1996-RHS4 LLC, and the right to receive certain collections
with respect to certain adjustable rate home equity revolving credit loans
made or to be made in the future (the "REVOLVING CREDIT LOANS") owned by the
1996-RHS4 LLC and secured by first or second deeds of trust or mortgages on
residential properties that are one- to four-family properties. In addition,
the Class A Ownership Interest will have the benefit of an irrevocable and
unconditional financial guaranty insurance policy (the "POLICY") issued by
AMBAC Indemnity Corporation (the "CREDIT ENHANCER") as described under
"Description of the Policy" herein.
[LOGO] AMBAC
Payments of principal and interest on the Term Notes will be made on the 20th
day of each month or, if such day is not a business day, then on the next
business day, commencing on January 21, 1997 (each, a "PAYMENT DATE").
Interest will accrue on the Term Notes at a floating rate (the "NOTE RATE")
during each Interest Period, as described herein. See "Description of the
Securities--Interest on the Notes" herein.
(Continued on following page)
---------------
THE TERM NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, THE 1996-RHS4 LLC, THE MASTER
SERVICER, THE ADMINISTRATOR OR ANY OF THEIR RESPECTIVE AFFILIATES. NONE OF THE
TERM NOTES, THE CLASS A OWNERSHIP INTEREST OR THE UNDERLYING REVOLVING CREDIT
LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY
OR BY THE DEPOSITOR, THE 1996-RHS4 LLC, THE MASTER SERVICER, THE ADMINISTRATOR
OR ANY OF THEIR RESPECTIVE AFFILIATES.
---------------
THESE TERM NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
---------------
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE TERM
NOTES, SEE "RISK FACTORS" COMMENCING ON PAGE S-10 HEREIN AND "RISK FACTORS" IN
THE PROSPECTUS COMMENCING ON PAGE 10.
The Term Notes will be offered by Residential Funding Securities Corporation,
an affiliate of the Depositor (the "UNDERWRITER"), on a best efforts basis,
from time to time to the public, directly or through dealers, in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The termination date of the offering is the earlier to occur of December
20, 1997 or the date on which all of the Term Notes have been sold. Proceeds
of the offering will not be placed in any escrow, trust or similar
arrangement. The proceeds to the Depositor from any sale of the Term Notes
will be equal to the purchase price paid by the purchaser thereof, net of any
expenses payable by the Depositor and any compensation payable to the
Underwriter and any dealer. The Term Notes are offered by the Underwriter
subject to prior sale, when, as and if delivered to and accepted by the
Underwriter and subject to certain other conditions. The Underwriter reserves
the right to withdraw, cancel or modify any such offer and to reject any order
in whole or in part. It is expected that delivery of the Term Notes will be
made on or about December 20, 1996, in book-entry form only through DTC, Cedel
and Euroclear as discussed herein, against payment therefor in immediately
available funds.
RESIDENTIAL FUNDING SECURITIES CORPORATION
The date of this Prospectus Supplement is December 16, 1996.
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(Continued from previous page)
It is a condition of the issuance of the Term Notes that they be rated "Aaa"
by Moody's Investors Service, Inc. ("MOODY'S") and "AAA" by Standard & Poor's
Ratings Services ("STANDARD & POOR'S").
The yield to maturity on the Term Notes will depend on the rate and timing of
principal payments (including payments in excess of required installments,
prepayments in full or terminations, liquidations and repurchases) and the
rate and timing of Draws (as defined herein) on the Revolving Credit Loans.
The Revolving Credit Loans generally may be prepaid at any time without
penalty. The yield to investors on the Term Notes may also be adversely
affected to the extent that P&I Collections (as defined herein) allocable to
the Class A Ownership Interest (as defined herein) are not sufficient to cover
any Interest Shortfalls (as defined herein). See "Certain Yield and Prepayment
Considerations" herein and "Yield and Prepayment Considerations" in the
Prospectus.
----------------
There is currently no secondary market for the Term Notes. The Underwriter
intends to make a secondary market in the Term Notes, but is not obligated to
do so. There can be no assurance that a secondary market for the Term Notes
will develop or, if it does develop, that it will continue. The Term Notes
will not be listed on any securities exchange.
THE TERM NOTES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF SECURITIES BEING OFFERED PURSUANT TO THE DEPOSITOR'S
PROSPECTUS DATED DECEMBER 16, 1996, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A
PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN,
AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE TERM NOTES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
----------------
UNTIL MARCH 16, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE TERM NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the
meanings assigned in the Prospectus.
Issuer...................... The Term Notes will be issued by Home Equity Loan
Trust 1996-RHS4, a Delaware business trust
established pursuant to the Trust Agreement,
dated as of December 1, 1996, between the
Depositor and the Owner Trustee. The assets of
the Issuer will consist of the Class A Ownership
Interest (as defined herein) and certain related
assets.
The Term Notes.............. $116,693,900 Home Equity Loan-Backed Term Notes,
Series 1996-RHS4, are offered hereby. The Term
Notes will be issued pursuant to an Indenture,
dated as of December 1, 1996, between the Issuer
and the Indenture Trustee.
Depositor................... Residential Funding Mortgage Securities II, Inc.
(the "DEPOSITOR" or the "COMPANY"). See "The
Company" in the Prospectus.
Master Servicer............. GMAC Mortgage Corporation (the "MASTER SERVICER"
or "GMAC MORTGAGE"), an affiliate of the
Depositor. See "Description of the Servicing
Agreement--The Master Servicer" herein.
Designated Seller........... GMAC Mortgage Corporation (the "DESIGNATED
SELLER"). See "Description of the Designated
Seller's Agreement" herein.
Owner Trustee............... Wilmington Trust Company.
Indenture Trustee........... The Chase Manhattan Bank.
Administrator............... Residential Funding Corporation. See "Description
of the Servicing Agreement--The Administrator"
herein and "Residential Funding Corporation" in
the Prospectus.
Closing Date................ On or about December 20, 1996.
Payment Date................ The 20th day of each month (or, if such day is
not a business day, the next business day),
beginning on January 21, 1997 (each, a "PAYMENT
DATE").
Denominations and The Term Notes will be issued in minimum
Registration............... denominations of $1,000 and integral multiples of
$1,000 in excess thereof. The Term Notes will
initially be issued in book-entry form. Persons
acquiring beneficial ownership interests in the
Term Notes ("TERM NOTE OWNERS") may elect to hold
their Term Notes through DTC, in the United
States, or Cedel Bank, societe anonyme ("Cedel")
or Euroclear, in Europe. Transfers within DTC,
Cedel or Euroclear, as the case may be, will be
in accordance with the usual rules and operating
procedures of the relevant system. No Term Note
Owner will be entitled to receive a physical
certificate representing such
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person's interest, except in the event that
Definitive Term Notes (as defined herein) are
issued under the limited circumstances described
herein. All references in this Prospectus
Supplement to any Term Notes reflect the rights
of Term Note Owners only as such rights may be
exercised through DTC and its participating
organizations for so long as such Term Notes are
Book-Entry Notes. See "Description of the
Securities--Book-Entry Notes" herein and
"Description of the Notes--Form of Notes" in the
Prospectus.
The Class A Ownership As described herein, the Mortgage Pool will be
Interest................... conveyed to the 1996-RHS4 LLC (the "1996-RHS4
LLC"), a limited liability company organized
under applicable state law. Pursuant to the 1996-
RHS4 LLC's Operating Agreement, the 1996-RHS4 LLC
will consist of two classes of ownership
interests (the "CLASS A OWNERSHIP INTEREST" and
the "CLASS B OWNERSHIP INTEREST"). The Class A
Ownership Interest will represent an ownership
interest in the 1996-RHS4 LLC, and will be
entitled to receive certain payments with respect
to the Mortgage Pool owned by the 1996-RHS4 LLC
as described below under "Allocation of P&I
Collections."
The Mortgage Pool........... The Mortgage Pool will consist of a pool of
Revolving Credit Loans originated by the
Designated Seller pursuant to Credit Line
Agreements and secured by Mortgaged Properties.
No more than 96.6% of the Revolving Credit Loans
(by Cut-off Date Balance) are secured by second
mortgages or deeds of trust and the remainder are
secured by first mortgages or deeds of trust. The
Mortgage Pool will include the unpaid principal
balance of the Revolving Credit Loans as of the
close of the latest billing cycle therefor ending
prior to December 1, 1996 (the "CUT-OFF DATE
BALANCE" and, such date, the "CUT-OFF DATE"), and
any additions thereto as a result of new advances
of money made pursuant to the applicable Credit
Line Agreement after such day (the "ADDITIONAL
BALANCES" or "DRAWS") except as otherwise
provided herein. With respect to any date, the
"POOL BALANCE" will be equal to the aggregate of
the Principal Balances of all Revolving Credit
Loans as of such date. The "PRINCIPAL BALANCE" of
a Revolving Credit Loan (other than a Liquidated
Revolving Credit Loan) on any day is equal to its
Cut-off Date Balance, plus (i) any Additional
Balances in respect of such Revolving Credit Loan
conveyed to the 1996-RHS4 LLC prior to such day,
minus (ii) all collections credited against the
Principal Balance of such Revolving Credit Loan
in accordance with the related Credit Line
Agreement since the Cut-off Date. The Principal
Balance of a Liquidated Revolving Credit Loan
after the final recovery of related Liquidation
Proceeds shall be zero.
The Pool Balance of the Revolving Credit Loans as
of the Cut-off Date will be $126,841,254. The
Combined Loan-to-Value Ratio (as defined herein)
for the Revolving Credit Loans ranged from 5% to
100% and the weighted average Combined Loan-to-
Value Ratio based on the Credit Limits of the
Revolving Credit Loans will be
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74.4% as of the Cut-off Date. The Junior Ratios
for the Revolving Credit Loans ranged from 2% to
100%, and the weighted average Junior Ratio will
be 34.9%, as of the Cut-off Date. The weighted
average Credit Utilization Rate based on the
Credit Limits of the Revolving Credit Loans will
be 66.8% as of the Cut-off Date. The Principal
Balances of the Revolving Credit Loans as of the
Cut-off Date ranged from $0.14 to $401,715 and
averaged $24,984. Credit Limits under the
Revolving Credit Loans as of the Cut-off Date
ranged from $10,000 to $500,000 and averaged
$37,393. Each Revolving Credit Loan was
originated in the period from October 1988 to
April 1996. With respect to 22.4% of the
Revolving Credit Loans (by Cut-off Date Balance),
the related Mortgaged Properties will be located
in Michigan. For a further description of the
Revolving Credit Loans, see "Description of the
Mortgage Pool" herein.
Interest Payments........... Interest on the Notes will be paid monthly on
each Payment Date, commencing in January 1997, at
the Note Rate for the related Interest Period (as
defined below), subject to the limitations set
forth below which may result in Interest
Shortfalls (as described below). The Note Rate
for each Interest Period will be a floating rate
equal to the lesser of (i) LIBOR plus 0.17% per
annum, or, on any Payment Date when the aggregate
Principal Balance of the Revolving Credit Loans
as of the last day during the related Collection
Period is less than 10% of the aggregate Cut-off
Date Balance, LIBOR plus 0.34% and (ii) the
Maximum Net Loan Rate (as described herein under
"Description of the Securities--Interest on the
Notes"). However, on any Payment Date on which
interest accrued on the Notes during the related
Interest Period exceeds an amount equal to one-
twelfth of the product of (a) the ratio of the
Security Balance of the Notes to the Security
Balance of the Securities multiplied by (b) the
aggregate Principal Balance of the Revolving
Credit Loans multiplied by (c) the Net Loan Rate
Cap (as defined herein), the amount of such
difference (any such amount, an "INTEREST
SHORTFALL") will not be included as interest
payments on the Notes for such Payment Date and
such amount will accrue interest at the Note Rate
on the Notes (as adjusted from time to time) and
will be paid on future Payment Dates pro rata
based on the Security Balance thereof only to the
extent funds are available therefor as set forth
herein under "Description of the Securities--
Allocation of P&I Collections." Interest
Shortfalls will not be covered by the Policy and
may remain unpaid on the final Payment Date.
Interest on the Notes in respect of any Payment
Date will accrue from the preceding Payment Date
(or in the case of the first Payment Date, from
the date of initial issuance of the Notes (the
"CLOSING DATE") through the day preceding such
Payment Date (each such period, an "INTEREST
PERIOD")) on the basis of the actual number of
days in the Interest Period and a 360-day year.
Principal Payments.......... On each Payment Date, other than the Payment Date
in February 2011, principal payments will be due
and payable on the Term
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Notes in an aggregate amount equal to the pro
rata percentage of the Term Notes (based on the
outstanding Security Balances (as defined herein)
of the Term Notes, the Variable Funding Notes and
the Certificates) of either (i) Net Principal
Collections (as defined herein) for such Payment
Date, so long as no Amortization Event (as
defined herein) has occurred and such Payment
Date is during the Revolving Period or (ii)
Principal Collections for such Payment Date, if
an Amortization Event has occurred or if such
Payment Date is after the end of the Revolving
Period. In addition, on any Payment Date, to the
extent of funds available therefor, Term
Noteholders will also be entitled to receive
principal payments in an aggregate amount
generally equal to the pro rata percentage of the
Term Notes (based on the outstanding Security
Balances of the Term Notes, the Variable Funding
Notes and the Certificates) of (i) Liquidation
Loss Distribution Amounts (as defined herein), as
and to the extent described herein, and (ii) the
amount, if any, necessary to bring the
Outstanding Reserve Amount up to the Reserve
Amount Target, to the extent that such amount was
paid as a principal distribution on the Class A
Ownership Interest. In no event will principal
payments on the Notes on any Payment Date exceed
the Security Balance thereof on such date. On the
Payment Date in February 2011, principal will be
due and payable on the Notes in an amount equal
to the Security Balance for each such Security
remaining outstanding on such Payment Date.
Allocation of P&I All collections on the Revolving Credit Loans
Collections................ will be allocated by the Master Servicer in
accordance with the terms of the Credit Line
Agreements between amounts collected in respect
of interest and amounts collected in respect of
principal. See "Description of the Servicing
Agreement--Allocation of P&I Collections" herein,
which describes the calculation of the Interest
Collections and the Principal Collections on the
Revolving Credit Loans for the Collection Period
related to each Payment Date. These amounts are
calculated exclusive of the pro rata portion of
collections attributable to Additional Balances
not conveyed to the 1996-RHS4 LLC following an
Amortization Event. With respect to any Payment
Date, the portion of Principal Collections and
Interest Collections that are distributable
pursuant to the Servicing Agreement (together,
the "P&I COLLECTIONS") will equal (a) Interest
Collections for such Payment Date and (b) either
(1) at any time during the Revolving Period, so
long as an Amortization Event has not occurred,
the Net Principal Collections for such Payment
Date, or (2) at any time after the end of the
Revolving Period, or if an Amortization Event has
occurred, Principal Collections for such Payment
Date.
The Security Balances of the Variable Funding
Notes (as described herein) together with the
Variable Funding Certificates will be increased
from time to time during the Revolving Period (so
long as an Amortization Event has not occurred)
in consideration for Additional Balances sold to
the 1996-RHS4 LLC, if Principal
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Collections are insufficient or unavailable to
cover the related Draws, up to the Maximum
Variable Funding Balance.
Upon the occurrence of an Amortization Event or
after the end of the Revolving Period, Principal
Collections for a Collection Period will no
longer be applied to acquire Additional Balances
during such Collection Period. On any Payment
Date after the end of the Revolving Period, so
long as an Amortization Event has not occurred,
the acquisition of all Additional Balances will
be reflected by an increase in the Security
Balance of the Variable Funding Notes together
with the Variable Funding Certificates, up to the
Maximum Variable Funding Balance at such time,
and all Principal Collections will be paid to the
then-outstanding Securities. Upon the occurrence
of an Amortization Event, no new Additional
Balances will be acquired by the 1996-RHS4 LLC.
The Revolving Period is the period commencing on
the Closing Date and ending on December 31, 2001.
See "Description of the Securities--Allocation of
P&I Collections" for a description of
"Amortization Events."
Credit Enhancement.......... The Credit Enhancement provided for the benefit
of the Noteholders consists of (a) the
Liquidation Loss Distribution Amounts, (b) the
Outstanding Reserve Amount, (c) the Policy and
(d) the Certificates, each as described below.
Liquidation Loss Distribution Amounts: Holders of
the Notes will be protected against Liquidation
Loss Amounts (other than Excess Loss Amounts (as
defined herein)) as a result of the preferential
allocation to the Class A Ownership Interest of
the Liquidation Loss Distribution Amount
(representing excess interest collections, if
available), as described herein which will be
used to make corresponding payments on the Notes
and distributions on the Certificates.
Outstanding Reserve Amount: The Outstanding
Reserve Amount will be created by distributions
of the Special Capital Distribution Amount (as
defined herein), if any, on the Class A Ownership
Interest. The Outstanding Reserve Amount, if any,
will represent overcollateralization which will
be available to absorb any Liquidation Loss
Amounts (other than Excess Loss Amounts) that are
not covered by Liquidation Loss Distribution
Amounts. Any Liquidation Loss Amounts not so
covered by a Liquidation Loss Distribution Amount
or the Outstanding Reserve Amount will be covered
by draws on the Policy to the extent provided
herein. The "OUTSTANDING RESERVE AMOUNT"
available on any Payment Date is the amount, if
any, by which the Pool Balance as of the end of
the related Collection Period exceeds the
aggregate of the Security Balances of all
Securities on such Payment Date (after
application of Net Principal Collections or
Principal Collections, as the case may be, for
such date).
As of the Closing Date, the Reserve Amount Target
is equal to 1.75% of the Cut-off Date Balance.
The Reserve Amount Target
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may decrease from time to time pursuant to the
terms of the Indenture based on specified trigger
tests, as further described herein. See
"Description of the Securities--Allocation of P&I
Collections" herein. To the extent the Reserve
Amount Target decreases on any Payment Date, the
amount of the Principal Collection Distribution
Amount will be reduced on such Payment Date and
on each subsequent Payment Date to the extent the
remaining Outstanding Reserve Amount is in excess
of the reduced Reserve Amount Target until the
Outstanding Reserve Amount equals the Reserve
Amount Target.
Policy: On the Closing Date, the Credit Enhancer
will issue a Policy in favor of the Owner Trustee
on behalf of the Issuer. The Policy will
unconditionally and irrevocably guarantee
interest on the Class A Ownership Interest at the
Guaranteed Rate as described herein plus any
Liquidation Loss Amounts allocated to the Class A
Ownership Interest. On each Payment Date, a draw
will be made on the Policy to cover (a) any
shortfall in amounts available to make payments
of interest on the Class A Principal Balance at
the Guaranteed Rate, (b) any Liquidation Loss
Amount (other than any Excess Loss Amount) to the
extent not currently covered by Liquidation Loss
Distribution Amounts or a reduction in the
Outstanding Reserve Amount and (c) any Excess
Loss Amounts. Interest Shortfalls will not be
covered by the Policy. See "Description of the
Policy" herein and "Description of Credit
Enhancement" in the Prospectus.
The Certificates: In the event the Credit
Enhancer fails to make a payment required under
the Policy in accordance with its terms or if an
Event of Default on the Notes under the Indenture
occurs, the amounts to be distributed on the
Certificates in respect of interest and principal
will be subordinated to the payment of interest
and principal on the Notes.
Credit Enhancer............. AMBAC Indemnity Corporation. See "The Credit
Enhancer" herein.
The Variable Funding Home Equity Loan-Backed Variable Funding Notes,
Notes...................... Series 1996-RHS4. The Variable Funding Notes will
be issued pursuant to the Indenture. The Variable
Funding Notes will have the same interest rate
and will be paid in the same manner as the Term
Notes. As of the Closing Date, the Security
Balance of the Variable Funding Notes will be
zero. See "Description of the Securities--
General." The Variable Funding Notes are not
offered hereby.
The Certificates............ $10,147,354 initial principal amount of Home
Equity Loan-Backed Certificates, Series 1996-
RHS4. The Certificates will be issued pursuant to
the Trust Agreement and will represent fractional
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undivided interests in the Issuer. The Trust
Agreement provides that the principal amount of
the Certificates may be increased from time to
time by the issuance of (or increase in the
principal amount of) additional Certificates
referred to as "VARIABLE FUNDING CERTIFICATES."
The Certificates are not offered hereby. Interest
on the Certificates will be paid monthly on each
Payment Date, at a floating rate equal to LIBOR
plus the percentage specified in the Trust
Agreement. Payments on the Certificates will be
subordinate to payments on the Notes, as
described herein.
Final Payment of Principal
on the Notes............... The Notes will be payable in full on the Payment
Date in February 2011, to the extent of the
outstanding related Security Balance on such
date, if any. In addition, the Issuer will pay
the Notes in full upon the exercise by the Master
Servicer of its option to purchase all Revolving
Credit Loans and all property acquired in respect
of such Revolving Credit Loans. See "Description
of the Securities--Maturity and Optional
Redemption" herein and "The Agreements--
Termination; Redemption of Notes" in the
Prospectus.
Certain Federal Income Tax
Consequences............... In the opinion of Thacher Proffitt & Wood,
counsel to the Depositor, for federal income tax
purposes, the Notes will be characterized as
indebtedness and the Issuer, as created pursuant
to the terms and conditions of the Trust
Agreement, will not be characterized as an
association (or publicly traded partnership
within the meaning of section 7704 of the Code)
taxable as a corporation or as a taxable mortgage
pool within the meaning of section 7701(i) of the
Code.
For further information regarding certain federal
income tax consequences of an investment in the
Notes, see "Certain Federal Income Tax
Consequences" herein and "Certain Federal Income
Tax Consequences" and "State and Other Tax
Consequences" in the Prospectus.
Legal Investment............ THE TERM NOTES WILL NOT CONSTITUTE "MORTGAGE
RELATED SECURITIES" FOR PURPOSES OF SMMEA,
BECAUSE THE MORTGAGE POOL INCLUDES REVOLVING
CREDIT LOANS THAT ARE SECURED BY SUBORDINATE
LIENS ON THE RELATED MORTGAGED PROPERTIES.
Institutions whose investment activities are
subject to legal investment laws and regulations
or to review by certain regulatory authorities
may be subject to restrictions on investment in
the Term Notes. See "Legal Investment" herein.
Rating...................... It is a condition to the issuance of the Term
Notes that they be rated "Aaa" by Moody's and
"AAA" by Standard & Poor's. A security rating is
not a recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time by the assigning rating
organization. A security rating does not address
the frequency of prepayments or Draws of
Revolving Credit Loans, the likelihood of the
receipt of any amounts in respect of Interest
Shortfalls, or the corresponding effect on yield
to investors. See "Certain Yield and Prepayment
Considerations" and "Ratings" herein.
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RISK FACTORS
PROSPECTIVE NOTEHOLDERS SHOULD CONSIDER, AMONG OTHER THINGS, THE ITEMS
DISCUSSED UNDER "RISK FACTORS" WHICH BEGINS ON PAGE 10 IN THE PROSPECTUS AND
THE FOLLOWING FACTORS IN CONNECTION WITH THE PURCHASE OF THE TERM NOTES:
RISKS ASSOCIATED WITH THE REVOLVING CREDIT LOANS
No more than 96.6% (by Cut-off Date Balance) of the Revolving Credit Loans
are subordinate to the rights of the mortgagee under the related senior
mortgage or mortgages, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the outstanding balance
of such Revolving Credit Loans secured by subordinate mortgages only to the
extent that the claims of such senior mortgages have been satisfied in full,
including any related foreclosure costs. In circumstances when it is
determined to be uneconomical to foreclose on the Mortgaged Property, the
Master Servicer may write off the entire outstanding balance of such Revolving
Credit Loan as a bad debt. The foregoing considerations will be particularly
applicable to Revolving Credit Loans secured by junior liens that have high
Combined Loan-to-Value Ratios or low Junior Ratios because it is comparatively
more likely that the Master Servicer would determine foreclosure to be
uneconomical in the case of such Revolving Credit Loans. Any losses on
Revolving Credit Loans, to the extent such losses are not covered by the
Liquidation Loss Distribution Amount, a reduction in the Outstanding Reserve
Amount, the Policy or the Certificates will be borne by the Noteholders.
Under the home equity program of the Designated Seller (the "GMAC HOME
EQUITY PROGRAM"), Mortgagors are generally qualified based on an assumed
payment which reflects a rate significantly lower than the maximum rate. The
repayment of any Revolving Credit Loan may thus be dependent on the ability of
the Mortgagor to make larger interest payments following the adjustment of the
Loan Rate during the life of such Revolving Credit Loan.
Defaults on mortgage loans are generally expected to occur with greater
frequency in their early years. The rate of default of second mortgage loans
may be greater than that of mortgage loans secured by first liens on
comparable properties.
As to 97.2% (by Cut-off Date Balance) of the Revolving Credit Loans,
borrowers are not required to make any payments of principal until maturity
(such Revolving Credit Loans, the "BALLOON LOANS"). As a result, a borrower
generally will be required to pay the entire remaining principal amount of the
Balloon Loan at its maturity. The ability of a borrower to make such a payment
may depend on the ability of the borrower to obtain refinancing of the balance
due on the Balloon Loan. An increase in interest rates over the Note Rate
applicable at the time the Balloon Loan was originated may have an adverse
effect on the borrower's ability to obtain refinancing or to pay the required
monthly payment. Collections on the Revolving Credit Loans may also vary due
to seasonal purchasing and payment habits of borrowers.
With respect to certain Balloon Loans, general credit risk may also be
greater to Noteholders than to holders of instruments representing interests
in level payment first mortgage loans since no payment of principal generally
is required until after either a five, ten or fifteen year Draw Period under
the related Credit Line Agreements. Minimum monthly payments will at least
equal and may exceed accrued interest. Even assuming that the Mortgaged
Properties provide adequate security for the Revolving Credit Loans,
substantial delays could be encountered in connection with the liquidation of
Revolving Credit Loans that are delinquent and resulting shortfalls in
payments to Noteholders could occur if the Outstanding Reserve Amount has been
reduced to zero, the Credit Enhancer were unable to perform on its obligations
under the Policy and the balance of the Certificates has been reduced to zero.
Further, liquidation expenses (such as legal fees, real estate taxes, and
maintenance and preservation expenses) will reduce the proceeds payable to
Noteholders and thereby reduce the security for the Revolving Credit Loans. In
the event any of the Mortgaged Properties fail to provide adequate security
for the related Revolving Credit Loans, Noteholders could experience a loss if
the Credit Enhancer was unable to perform its obligations under the Policy.
S-10
<PAGE>
LIMITATIONS AND REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
Credit enhancement will be provided for the Notes in the form of Liquidation
Loss Distribution Amounts (representing excess interest collections, if
available), by the Outstanding Reserve Amount (representing any
overcollateralization that may have been established as described herein), by
the Policy, and by the subordination provided by the Certificates to the
limited extent described herein. None of the Depositor, the Master Servicer,
the Administrator or any of their affiliates will have any obligation to
replace or supplement such credit enhancement, or to take any other action to
maintain any rating of the Notes. To the extent that any losses are incurred
on any of the Revolving Credit Loans that are not covered by Liquidation Loss
Distribution Amounts, a reduction in the Outstanding Reserve Amount, the
Policy or the Certificates, the holders of the Notes will bear all risk of
such losses resulting from default by Mortgagors.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Revolving Credit Loans were originated pursuant to Credit Line
Agreements, of which no more than 96.6% (by Cut-off Date Balance) are secured
by second mortgages or deeds of trust and the remainder of which are first
mortgages or deeds of trust. The Mortgaged Properties securing the Revolving
Credit Loans consist primarily of residential properties that are one- to
four-family properties. As to each Revolving Credit Loan, the Mortgagor
represented at the time of origination that the related Mortgaged Property
would be owner occupied as a primary, second or vacation home.
All percentages of the Revolving Credit Loans described herein are
approximate percentages determined (except as otherwise indicated) by Cut-off
Date Balance.
The Cut-off Date Balance of the Revolving Credit Loans will be $126,841,254.
As of the Cut-off Date, no Revolving Credit Loan will be 30 days or more
delinquent. The average Cut-off Date Balance will be $24,984, the minimum Cut-
off Date Balance will be $0.14, the maximum Cut-off Date Balance will be
$401,715, the lowest Loan Rate and the highest Loan Rate on the Cut-off Date
will be 8.00% and 11.25% per annum, respectively, the weighted average Loan
Rate on the Cut-off Date will be 10.13% per annum and the maximum Combined
Loan-to-Value Ratio as of the Cut-off Date will be 100%. The weighted average
Combined Loan-to-Value Ratio based on the Credit Limits of the Revolving
Credit Loans will be 74.4% as of the Cut-off Date. The weighted average Credit
Utilization Rate based on the Credit Limits of the Revolving Credit Loans will
be 66.8% as of the Cut-off Date. The weighted average Junior Ratio of the
Revolving Credit Loans will be approximately 34.9% as of the Cut-off Date. The
latest scheduled maturity of any Revolving Credit Loan will be August 2010.
With respect to 22.4% of the Revolving Credit Loans, the related Mortgaged
Properties will be located in Michigan.
REVOLVING CREDIT LOAN TERMS
Interest on each Revolving Credit Loan is calculated based on the average
daily balance outstanding during the Billing Cycle, and with respect to each
Revolving Credit Loan, the Billing Cycle is the calendar month preceding the
related Due Date (as defined herein).
Each Revolving Credit Loan has a Loan Rate that is subject to adjustment on
each day (with respect to 99.5% of the Revolving Credit Loans) or on each
month (with respect to 0.5% of the Revolving Credit Loans, all of which were
originated in the State of Washington) (each such day, an "ADJUSTMENT DATE")
to equal the sum of (a) either (i) the prime rate (or high point in a range of
prime rates) published in the "Money Rate" column of The Wall Street Journal
(the "INDEX"), or (ii) with respect to approximately 0.50% of the Revolving
Credit Loans, all of which were originated in the State of Washington, the
rate for 26 week Treasury Bills as published in the "MONEY RATE" column of The
Wall Street Journal and (b) the Gross Margin specified in the related Credit
Line Agreement, provided, however, that the Loan Rate on each Revolving Credit
Loan will in no event be greater than the maximum Loan Rate (the "MAXIMUM LOAN
RATE") set forth in the related Credit Line Agreement (subject to the maximum
rate permitted by applicable law).
S-11
<PAGE>
With respect to approximately 57% of the Revolving Credit Loans, the Gross
Margin is adjustable from time to time based on the then outstanding balance
and CLTV generally as follows:
GROSS MARGINS
<TABLE>
<CAPTION>
CLTV NOT CLTV
OUTSTANDING BALANCE MORE THAN 80% MORE THAN 80%
------------------- ------------- -------------
<S> <C> <C>
$25,000 or less......... 2.00% 3.00%
$25,001 to $50,000...... 1.75% 2.75%
$50,001 or more......... 1.50% 2.50%
</TABLE>
The Gross Margins with respect to the Revolving Credit Loans are reduced
below the applicable levels indicated above by 0.25% or by 0.50% in certain
instances based on specific employee status at the time of origination of the
Revolving Credit Loan (with no adjustment in the event of any change in such
status of the Mortgagor).
Each Revolving Credit Loan had a term to maturity from the date of
origination of not more than 192 months (the "15-YEAR LOANS"), 132 months (the
"10-YEAR LOANS") or 72 months (the "5-YEAR LOANS"). The Mortgagor for each
Revolving Credit Loan may make a Draw at any time during the period stated in
the related Credit Line Agreement (the "DRAW PERIOD"). In addition, with
respect to certain of the Revolving Credit Loans, the related Mortgagor will
not be permitted to make any Draw during the time period stated in the related
Credit Line Agreement (the "REPAYMENT PERIOD"). The Draw Period and the
Repayment Period vary for the Revolving Credit Loans based on such loan's CLTV
at origination, State of origination and original term to maturity. With
respect to 15-Year Loans and 10-Year Loans with CLTVs of 90% or less, the Draw
Period will be at any time during the term of the loan and there will be no
Repayment Period for such Revolving Credit Loans, except with respect to 2.8%
of the Revolving Credit Loans, all of which were originated in the
Commonwealth of Massachusetts, which will have a Draw Period of the first 5
years of the loan and will have a Repayment Period for the last 5 years of the
loan with respect to such 10-Year Loans and a Draw Period for the first 10
years of the loan and a Repayment Period for the last 5 years with respect to
such 15-Year Loans. With respect to 10-Year Loans with CLTVs greater than 90%,
the Draw Period will be the first 5 years of the term of the loan, and the
Repayment Period will be the final 5 years of the loan. With respect to the 5-
Year Loans, the Draw Period will be 5 years and there will be no Repayment
Period.
The maximum amount of each Draw with respect to any Revolving Credit Loan is
equal to the excess, if any, of the Credit Limit over the outstanding
principal balance under such Credit Line Agreement at the time of such Draw.
Each Revolving Credit Loan may be prepaid in full or in part at any time and
without penalty, but with respect to each Revolving Credit Loan, the related
Mortgagor will have the right during the related Draw Period to make a Draw in
the amount of any prepayment theretofore made with respect to such Revolving
Credit Loan. Each Mortgagor generally will have access to make Draws by check,
subject to applicable law. Generally, the Credit Line Agreement or Mortgage
related to each Revolving Credit Loan will, subject to applicable law, contain
a customary "due-on-sale" clause.
As to each Revolving Credit Loan, the Mortgagor's rights to receive Draws
during the Draw Period may be suspended, or the Credit Limit may be reduced,
for cause under a number of circumstances, including, but not limited to: a
materially adverse change in the Mortgagor's financial circumstances; a
decline in the value of the Mortgaged Property significantly below its
appraised value at origination; or a payment default by the Mortgagor.
However, generally such suspension or reduction will not affect the payment
terms for previously drawn balances. The Subservicers and the Master Servicer
will have no obligation to investigate as to whether any such circumstances
have occurred and may have no knowledge thereof; therefore there can be no
assurance that any Mortgagor's ability to receive Draws will be suspended or
reduced in the event that the foregoing circumstances occur. In the event of
default under a Revolving Credit Loan, the Revolving Credit Loan may be
terminated and declared immediately due and payable in full. For this purpose,
a default includes, but is not limited to: the
S-12
<PAGE>
Mortgagor's failure to make any payment as required; any action or inaction by
the Mortgagor that adversely affects the Mortgaged Property or the rights in
the Mortgaged Property; or fraud or material misrepresentation by a Mortgagor
in connection with the Revolving Credit Loan.
Prior to the related Repayment Period or prior to the date of maturity for
loans without Repayment Periods, the Mortgagor for each Revolving Credit Loan
will be obligated to make monthly payments thereon in a minimum amount that
generally will be equal to the Finance Charge (as defined below) for such
Billing Cycle. Except as described below, if such loan has a Repayment Period,
during such period, the Mortgagor will be obligated to make monthly payments
consisting of principal installments which would substantially amortize the
Principal Balance by the maturity date, plus current Finance Charges and
Additional Charges (as defined below). In addition, certain Mortgagors will be
required to pay an annual fee of up to $35.
Notwithstanding the foregoing, with respect to the Balloon Loans,
representing approximately 97.2% of the Revolving Credit Loans, the Mortgagor
will be obligated to make a payment on the related maturity date in an amount
equal to the related Account Balance (as defined below). Such Balloon Loans
will not have a Repayment Period and prior to the related maturity date, the
related Mortgagors will be obligated to make minimum monthly payments
generally similar to those described in the preceding paragraph. See "Risk
Factors--Risks Associated with the Revolving Credit Loans" herein.
With respect to each Revolving Credit Loan, (a) the "FINANCE CHARGE" for any
Billing Cycle will be an amount equal to the aggregate of, as calculated for
each day in the Billing Cycle, the then-applicable Loan Rate divided by 365
multiplied by the daily Principal Balance and (b) the "ACCOUNT BALANCE" on any
day generally will be the aggregate of the unpaid principal of the Revolving
Credit Loan outstanding at the beginning of such day, plus the sum of any
unpaid fees, insurance premiums and other charges, if any (collectively,
"ADDITIONAL CHARGES") and any unpaid Finance Charges that are due on such
Revolving Credit Loan, plus the aggregate of all related Draws funded on such
day, minus the aggregate of all payments and credits that are applied to the
repayment of any such Draws on such day. Payments made by or on behalf of the
Mortgagor for each Revolving Credit Loan will be applied to any unpaid Finance
Charges that are due thereon, prior to application, to any unpaid principal
outstanding.
With respect to each Revolving Credit Loan, the "COMBINED LOAN-TO-VALUE
RATIO" or "CLTV" generally will be the ratio, expressed as a percentage, of
the sum of (i) the Credit Limit and (ii) any outstanding principal balance, at
origination of such Revolving Credit Loan, of all other mortgage loans, if
any, secured by senior or subordinate liens on the related Mortgaged Property,
to the Appraised Value, or, when not available, the Stated Value. The
"APPRAISED VALUE" for any Revolving Credit Loan will be the appraised value of
the related Mortgaged Property determined in the appraisal used in the
origination of such Revolving Credit Loan (which may have been obtained at an
earlier time); provided that if such Revolving Credit Loan was originated
simultaneously with or not more than 12 months after a senior lien on the
related Mortgaged Property, the "APPRAISED VALUE" shall be the lesser of the
appraised value at the origination of the senior lien and the sales price for
such Mortgaged Property. However, with respect to not more than 5% of the
Revolving Credit Loans, the "STATED VALUE" will be based on the stated value
of the property as made by the related Mortgagor in his or her application.
See "Revolving Credit Loan Program--Underwriting Standards" in the Prospectus
and "Description of the Mortgage Pool--Underwriting Standards" herein.
No more than 8% of the Revolving Credit Loans are insured by mortgage
insurance policies covering all or a portion of any losses on each such Loan,
subject to certain limitations.
S-13
<PAGE>
REVOLVING CREDIT LOAN CHARACTERISTICS
Set forth below is a description of certain additional characteristics of
the Revolving Credit Loans as of the Cut-off Date. Unless otherwise specified,
all principal balances of the Revolving Credit Loans are as of the Cut-off
Date Balance and are rounded to the nearest dollar. All percentages are
approximate percentages by aggregate principal balance as of the Cut-off Date
(except as indicated otherwise). THE INFORMATION RELATING TO PROPERTY TYPE,
OCCUPANCY, DOCUMENTATION TYPE AND LIEN PRIORITY OF THE MORTGAGE LOANS IS NOT
AVAILABLE WITH RESPECT TO UP TO 13.2% OF THE MORTGAGE LOANS. THEREFORE, THE
INFORMATION SET FORTH BELOW IN THE PROPERTY TYPE, OCCUPANCY TYPES,
DOCUMENTATION TYPE AND LIEN PRIORITY TABLES BELOW WERE CALCULATED BASED ON THE
MORTGAGE LOANS FOR WHICH SUCH INFORMATION WAS AVAILABLE, AS OF THE CUT-OFF
DATE. NO ASSURANCE CAN BE GIVEN THAT THE PROPERTY TYPE, OCCUPANCY,
DOCUMENTATION TYPE AND LIEN PRIORITY CHARACTERISTICS OF THE MORTGAGE LOANS FOR
WHICH SUCH INFORMATION WAS AVAILABLE ARE REPRESENTATIVE OF THE MORTGAGE LOANS
IN THE AGGREGATE.
PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE LOANS
FOR WHICH
PROPERTY TYPE
NUMBER OF IS KNOWN
REVOLVING CUT-OFF DATE BY CUT-OFF
PROPERTY TYPE CREDIT LOANS BALANCE DATE BALANCE
- ------------- ------------ ------------ --------------
<S> <C> <C> <C>
Two-Four Family......................... 44 $ 1,225,721 1.11%
Condominium............................. 106 2,191,740 1.99
PUD..................................... 120 2,866,862 2.60
Single-Family........................... 4,163 103,989,548 94.30
----- ------------ ------
Total................................. 4,433 110,273,871 100.00%
===== ============ ======
OCCUPANCY TYPES
<CAPTION>
PERCENT OF
MORTGAGE LOANS
FOR WHICH
OCCUPANCY TYPE
NUMBER OF IS KNOWN
OCCUPANCY REVOLVING CUT-OFF DATE BY CUT-OFF
(AS INDICATED BY BORROWER) CREDIT LOANS BALANCE DATE BALANCE
- -------------------------- ------------ ------------ --------------
<S> <C> <C> <C>
Primary Residence....................... 4,397 $108,750,360 98.59%
Second/Vacation......................... 37 1,557,336 1.41
----- ------------ ------
Totals................................ 4,434 $110,307,696 100.00%
===== ============ ======
DOCUMENTATION TYPE
<CAPTION>
PERCENT OF
MORTGAGE LOANS
FOR WHICH
DOCUMENTATION
NUMBER OF TYPE IS KNOWN
REVOLVING CUT-OFF DATE BY CUT-OFF
DOCUMENTATION TYPE CREDIT LOANS BALANCE DATE BALANCE
- ------------------ ------------ ------------ --------------
<S> <C> <C> <C>
Alternate Documentation................. 3,547 $ 84,255,991 76.49%
Full Documentation...................... 542 16,720,661 15.18
No Income or Appraisal.................. 120 2,093,079 1.90
Quick-No Income......................... 93 2,951,668 2.68
Select Documentation.................... 128 4,137,494 3.76
----- ------------ ------
Totals................................ 4,430 $110,158,893 100.00%
===== ============ ======
</TABLE>
S-14
<PAGE>
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF PRINCIPAL BALANCES CREDIT LOANS BALANCE DATE BALANCE
- --------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
$ 0.01 to 10,000.00.................. 814 $ 4,874,733 3.84%
10,000.01 to 20,000.00.................. 1,519 23,099,339 18.21
20,000.01 to 30,000.00.................. 1,492 36,826,501 29.03
30,000.01 to 40,000.00.................. 576 19,952,740 15.73
40,000.01 to 50,000.00.................. 330 14,950,859 11.79
50,000.01 to 60,000.00.................. 115 6,287,748 4.96
60,000.01 to 70,000.00.................. 68 4,404,366 3.47
70,000.01 to 80,000.00.................. 58 4,342,477 3.42
80,000.01 to 90,000.00.................. 31 2,625,916 2.07
90,000.01 to 100,000.00.................. 43 4,141,950 3.27
100,000.01 to 150,000.00.................. 21 2,672,769 2.11
150,000.01 to 200,000.00.................. 3 494,929 0.39
200,000.01 to 250,000.00.................. 2 462,375 0.36
250,000.01 to 300,000.00.................. 1 290,000 0.23
300,000.01 and over....................... 4 1,414,551 1.12
----- ------------ ------
Totals.................................. 5,077 $126,841,254 100.00%
===== ============ ======
</TABLE>
The average Principal Balance as of the Cut-off Date will be $24,984.
GEOGRAPHICAL DISTRIBUTIONS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
STATE CREDIT LOANS BALANCE DATE BALANCE
- ----- ------------ ------------ -------------
<S> <C> <C> <C>
Michigan................................ 1,246 $ 28,360,297 22.36%
California.............................. 767 20,611,874 16.25
New Jersey.............................. 422 11,207,089 8.84
New York................................ 292 8,091,403 6.38
Pennsylvania............................ 303 7,320,088 5.77
Other(1)................................ 2,047 51,250,503 40.40
----- ------------ ------
Totals................................ 5,077 $126,841,254 100.00%
===== ============ ======
</TABLE>
- --------
(1) Other includes states and the District of Columbia under 5% of the Cut-
off Date Balance individually.
S-15
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
RANGE OF COMBINED REVOLVING CUT-OFF BY CUT-OFF
LOAN-TO-VALUE RATIOS(%) CREDIT LOANS DATE BALANCE DATE BALANCE
- ----------------------- ------------ ------------ -------------
<S> <C> <C> <C>
00.01 to 10.00......................... 3 $ 61,087 0.05%
10.01 to 20.00......................... 21 431,813 0.34
20.01 to 30.00......................... 44 1,141,097 0.90
30.01 to 40.00......................... 94 2,944,335 2.32
40.01 to 50.00......................... 143 3,642,615 2.87
50.01 to 60.00......................... 258 7,384,762 5.82
60.01 to 70.00......................... 499 14,777,432 11.65
70.01 to 75.00......................... 545 14,630,226 11.53
75.01 to 80.00......................... 2,161 52,781,005 41.61
80.01 to 85.00......................... 128 2,582,664 2.04
85.01 to 90.00......................... 1,142 25,692,602 20.26
90.01 to 95.00......................... 4 117,553 0.09
95.01 to 100.00......................... 35 654,063 0.52
----- ------------ ------
Totals................................ 5,077 $126,841,254 100.00%
===== ============ ======
</TABLE>
The weighted average Combined Loan-to-Value Ratio based on the Credit Limits
of the Revolving Credit Loans as of the Cut-off Date will be 74.4%.
JUNIOR RATIOS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
RANGE OF REVOLVING CUT- BY CUT-OFF
JUNIOR RATIOS(%) CREDIT LOANS OFF DATE BALANCE DATE BALANCE
- ---------------- ------------ ---------------- -------------
<S> <C> <C> <C>
0.00 to 5.00..................... 9 $ 112,399 0.09%
5.01 to 10.00..................... 183 2,996,228 2.36
10.01 to 15.00..................... 745 14,567,366 11.48
15.01 to 20.00..................... 852 18,987,290 14.97
20.01 to 25.00..................... 694 15,879,132 12.52
25.01 to 30.00..................... 630 16,310,741 12.86
30.01 to 40.00..................... 801 22,311,857 17.59
40.01 to 50.00..................... 419 11,913,780 9.39
50.01 to 60.00..................... 223 7,108,381 5.60
60.01 to 70.00..................... 119 3,956,680 3.12
70.01 to 80.00..................... 103 3,572,288 2.82
80.01 to 90.00..................... 69 2,239,908 1.77
90.01 to 100.00..................... 230 6,885,204 5.43
----- ------------ ------
Totals............................ 5,077 $126,841,254 100.00%
===== ============ ======
</TABLE>
The weighted average Junior Ratio as of the Cut-off Date will be 34.9%.
S-16
<PAGE>
LOAN RATES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF BY CUT-OFF
RANGE OF LOAN RATES(%) CREDIT LOANS DATE BALANCE DATE BALANCE
- ---------------------- ------------ ------------ -------------
<S> <C> <C> <C>
7.501 to 8.000........................ 1 $ 27,001 0.02%
8.001 to 9.000........................ 2 95,822 0.08
9.001 to 9.500........................ 226 9,963,440 7.86
9.501 to 10.000........................ 2,144 66,735,723 52.61
10.001 to 10.500........................ 1,693 28,417,428 22.40
10.501 to 11.000........................ 491 13,079,184 10.31
11.001 to 11.250........................ 520 8,522,656 6.72
----- ------------ ------
Totals................................ 5,077 $126,841,254 100.00%
===== ============ ======
</TABLE>
The weighted average Loan Rate as of the Cut-off Date will be 10.13%.
CURRENT GROSS MARGINS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF GROSS MARGINS(%) CREDIT LOANS BALANCE DATE BALANCE
- ------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Less than 0.501.......................... 2 $ 63,856 0.05%
0.501 to 1.000........................... 77 3,594,955 2.83
1.001 to 1.500........................... 751 35,693,533 28.14
1.501 to 2.000........................... 3,174 64,086,100 50.52
2.001 to 2.500........................... 147 4,928,562 3.89
2.501 to 3.000........................... 896 17,834,569 14.06
3.001 to 4.000........................... 30 639,678 0.50
----- ------------ ------
Totals................................. 5,077 $126,841,254 100.00%
===== ============ ======
</TABLE>
The weighted average Gross Margin as of the Cut-off Date will be 1.90%.
S-17
<PAGE>
CREDIT UTILIZATION RATES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF BY CUT-OFF
RANGE OF CREDIT UTILIZATION RATES (%) CREDIT LOANS DATE BALANCE DATE BALANCE
- ------------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
00.01 to 10.00......................... 190 $ 568,233 0.45%
10.01 to 20.00......................... 272 2,051,875 1.62
20.01 to 30.00......................... 245 3,032,187 2.39
30.01 to 40.00......................... 254 3,908,498 3.08
40.01 to 50.00......................... 261 4,967,457 3.92
50.01 to 60.00......................... 343 7,021,053 5.54
60.01 to 70.00......................... 357 8,707,179 6.86
70.01 to 80.00......................... 389 10,430,166 8.22
80.01 to 90.00......................... 514 15,262,443 12.03
90.01 to 92.50......................... 203 6,064,650 4.78
92.51 to 95.00......................... 295 8,967,467 7.07
95.01 to 97.50......................... 456 13,831,217 10.90
97.51 to 100.00......................... 1,227 39,996,342 31.53
100.01 to 107.00......................... 71 2,032,489 1.60
----- ------------ ------
Totals................................. 5,077 $126,841,254 100.00%
===== ============ ======
</TABLE>
The weighted average Credit Utilization Rate based on the Credit Limits of
the Revolving Credit Loans as of the Cut-off Date will be 66.8%.
CREDIT LIMITS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF BY CUT-OFF
RANGE OF CREDIT LIMITS CREDIT LOANS DATE BALANCE DATE BALANCE
- ---------------------- ------------ ------------ -------------
<S> <C> <C> <C>
$ 0.01 to 10,000.00............... 109 $ 895,512 0.71%
10,000.01 to 20,000.00............... 751 10,040,950 7.92
20,000.01 to 30,000.00............... 1,945 36,775,078 28.99
30,000.01 to 40,000.00............... 851 21,882,986 17.25
40,000.01 to 50,000.00............... 641 19,975,203 15.75
50,000.01 to 60,000.00............... 204 7,413,628 5.84
60,000.01 to 70,000.00............... 126 4,773,132 3.76
70,000.01 to 80,000.00............... 131 5,440,791 4.29
80,000.01 to 90,000.00............... 78 3,783,763 2.98
90,000.01 to 100,000.00............... 171 8,742,540 6.89
100,000.01 to 150,000.00............... 35 2,940,171 2.32
150,000.01 to 200,000.00............... 15 1,000,924 0.79
200,000.01 to 250,000.00............... 6 804,377 0.63
250,000.01 to 300,000.00............... 7 678,978 0.54
300,000.01 and over.................... 7 1,693,219 1.33
----- ------------ ------
Totals................................ 5,077 $126,841,254 100.00%
===== ============ ======
</TABLE>
The aggregate of the Credit Limits as of the Cut-off Date will be $37,393.
S-18
<PAGE>
MAXIMUM LOAN RATES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
RANGE OF REVOLVING CUT-OFF DATE BY CUT-OFF
MAXIMUM LOAN RATES(%) CREDIT LOANS BALANCE DATE BALANCE
- --------------------- ------------ ------------ -------------
<S> <C> <C> <C>
0.001-14.000............................ 5 $ 198,917 0.16%
14.001-15.000........................... 3 64,057 0.05
15.001-16.000........................... 303 7,471,734 5.89
16.001-17.000........................... 64 1,424,765 1.12
17.001-18.000........................... 1,571 38,209,873 30.12
18.001-19.000........................... 3,128 79,359,763 62.57
19.001-21.000........................... 3 112,145 0.09
----- ------------ ------
Totals................................ 5,077 $126,841,254 100.00%
===== ============ ======
</TABLE>
The weighted average Maximum Loan Rate as of the Cut-off Date will be 18.30%.
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
RANGE OF
MONTHS PERCENT OF
REMAINING TO NUMBER OF MORTGAGE POOL
SCHEDULED REVOLVING CUT-OFF BY CUT-OFF
MATURITY CREDIT LOANS DATE BALANCE DATE BALANCE
- ------------ ------------ ------------ -------------
<S> <C> <C> <C>
1-- 96............................... 131 $ 3,456,740 2.73%
97--108............................... 2,893 69,840,569 55.06
109--120............................... 959 22,957,906 18.10
121--132............................... 66 1,710,402 1.35
133--144............................... 132 3,599,280 2.84
145--156............................... 379 10,009,896 7.89
157--168............................... 517 15,266,461 12.04
----- ------------ ------
Totals............................... 5,077 $126,841,254 100.00%
===== ============ ======
</TABLE>
The weighted average months remaining to scheduled maturity as of the Cut-off
Date will be 117 months.
ORIGINATION YEAR
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF BY CUT-OFF
ORIGINATION YEAR CREDIT LOANS DATE BALANCE DATE BALANCE
- ---------------- ------------ ------------ -------------
<S> <C> <C> <C>
1988.................................... 1 $ 6,242 0.00%
1990.................................... 15 250,696 0.20
1991.................................... 18 459,350 0.36
1992.................................... 73 1,790,594 1.41
1993.................................... 141 3,964,537 3.13
1994.................................... 615 16,745,704 13.20
1995.................................... 3,635 89,408,852 70.49
1996.................................... 579 14,215,278 11.21
----- ------------ ------
Totals................................ 5,077 $126,841,254 100.00%
===== ============ ======
</TABLE>
S-19
<PAGE>
LIEN PRIORITY
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE LOANS
FOR WHICH LIEN
PRIORITY IS
NUMBER OF KNOWN
REVOLVING CUT-OFF BY CUT-OFF
LIEN PRIORITY CREDIT LOANS DATE BALANCE DATE BALANCE
- ------------- ------------ ------------ --------------
<S> <C> <C> <C>
First Lien............................. 141 $ 4,316,475 3.92%
Second Lien............................ 4,290 105,807,240 96.08
----- ------------ ------
Totals............................... 4,431 $110,123,715 100.00%
===== ============ ======
</TABLE>
UNDERWRITING STANDARDS
All of the Revolving Credit Loans will be acquired by the Depositor from the
Designated Seller. The following is a brief description of the various
underwriting standards and procedures applicable to the Revolving Credit
Loans.
The Designated Seller's underwriting standards with respect to the Revolving
Credit Loans generally will conform to those published in the GMAC Mortgage
Underwriting Guidelines (the "GMAC UNDERWRITING GUIDE," as modified from time
to time), including the provisions of the GMAC Underwriting Guide applicable
to the GMAC Home Equity Program. The underwriting standards as set forth in
the GMAC Underwriting Guide are continuously revised based on prevailing
conditions in the residential mortgage market and the market for mortgage
securities.
The underwriting standards of the Designated Seller are generally similar to
the underwriting standards of the Home Equity Program as described in the
Prospectus under "Revolving Credit Loan Program--Underwriting" with a few
differences. First, borrowers with a previous foreclosure or bankruptcy
generally do not qualify for a loan unless extenuating credit circumstances
beyond their control are documented. Second, the monthly payment used to
qualify the borrower is based solely on the payment of interest only on the
loan. Finally, credit scores are not used to deny loans. However, credit
scores are used as a "tool" to analyze a borrower's credit.
The underwriting standards set forth in the GMAC Underwriting Guide with
respect to Revolving Credit Loans originated under the GMAC Home Equity
Program provide for varying levels of documentation. For fully documented
loans, a prospective borrower is required to fill out a detailed application
providing pertinent credit information, including tax returns if they are
self-employed or received income from dividends and interest, rental
properties or other income which can be verified via tax returns. For
alternatively documented loans, a borrower may demonstrate income and
employment directly by providing alternative documentation in the form of a
pay stub and a W-2. Both full and alternative documented loans require drive-
by appraisals for property values of $500,000 or less, and full appraisals for
property values of more than $500,000.
Under the GMAC Underwriting Guide, loans may also be originated under the
"Quick" or no income verification program. For such loans, only a credit check
and an appraisal are required. Such loans are limited to an amount of $50,000
or less, and are limited to primary residences. In addition, the borrower may
be qualified under a "No Income/No Appraisal" program. Under such program, a
credit check is required, the borrower may not be self-employed, and the CLTV
is limited to 80.00%. The borrower is qualified based on his or her stated
income in the application, the CLTV is based on the borrower's stated value of
the property and no appraisal is made. The maximum loan amount under such
program is $30,000.
In addition, the GMAC Underwriting Guide provides for loans under its
"Select" program to employees and retirees of GM. Such loans are made to
executives of GM or affiliates of GM, dealer principals and general managers
with a minimum annual base salary of $75,000 or to GM or GM affiliate retirees
with a minimum base retirement annual income of $60,000. Underwriting is
subject to a maximum CLTV of 80% for primary residences and a maximum CLTV of
65% for second homes, and a maximum loan amount of $250,000. The CLTV is based
on the borrower's stated value and no appraisal is made.
S-20
<PAGE>
The Revolving Credit Loans included in the Mortgage Pool generally were
originated subject to a maximum CLTV of 100%. Additionally, loans were
generally generated with a maximum total monthly debt to income ratio of 40%,
although variances are permitted based on compensating factors. There can be
no assurance that the CLTV or the debt to income ratio for any Revolving
Credit Loans will not increase from the levels established at origination.
The underwriting standards set forth in the GMAC Underwriting Guide with
respect to Revolving Credit Loans originated under the GMAC Home Equity
Program may be varied in appropriate cases. There can be no assurance that
every Revolving Credit Loan was originated in conformity with the applicable
underwriting standards in all material respects, or that the quality or
performance of the Revolving Credit Loans will be equivalent under all
circumstances.
SERVICING OF REVOLVING CREDIT LOANS
GENERAL
The Master Servicer will be responsible for servicing the Revolving Credit
Loans directly (or through one or more Subservicers) in accordance with the
Guide (as defined in the Prospectus) and the terms of the Servicing Agreement.
See "Servicing of Revolving Credit Loans" in the Prospectus. The Custodian is
The Bank of Maryland.
Billing statements are mailed monthly by the Master Servicer (or any
Subservicers). The statement details the monthly activity on the related
Revolving Credit Loan and specifies the minimum payment due to the Master
Servicer and the available credit line. Notice of changes in the applicable
Loan Rate are provided by the Master Servicer to the Mortgagor with such
statements. All payments are due by the 20th day of the month (as defined
herein) (a "DUE DATE").
For information regarding foreclosure procedures, see "Servicing of
Revolving Credit Loans--Realization Upon Defaulted Loans" in the Prospectus.
Servicing and charge-off policies and collection practices may change over
time in accordance with the Master Servicer's business judgment, changes in
the Master Servicer's portfolio of real estate secured revolving credit line
loans that it services for its clients and applicable laws and regulations,
and other considerations.
DELINQUENCY AND LOSS EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO
The following tables summarize the delinquency and loss experience for all
home equity lines of credit ("HELOC") loans originated by the Master Servicer.
The data presented in the following tables is for illustrative purposes only,
and there is no assurance that the delinquency and loss experience of the
Revolving Credit Loans will be similar to that set forth below.
The information in the tables below has not been adjusted to eliminate the
effect of the significant growth in the size of the Master Servicer's HELOC
loan portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of such HELOC loans serviced for
each period would be higher than those shown if certain of such home equity
loans were artificially isolated at a point in time and the information showed
the activity only with respect to such HELOC loans.
There can be no assurance that the delinquency experience set forth below
will be representative of the results that may be experienced with respect to
the Revolving Credit Loans serviced by the Master Servicer or any
Subservicers.
S-21
<PAGE>
GMAC MORTGAGE CORPORATION DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
ELEVEN
MONTHS ENDED
YEAR ENDED DECEMBER 31, NOVEMBER 30,
------------------------------------------------------ ------------
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Number of Accounts with
Balances Managed....... 7,052 7,209 8,280 11,577 15,622
Aggregate Amount........ $226,899,196 $251,211,408 $276,617,622 $348,925,061 $450,078,025
Loan Balance of Mortgage
Loans 30-59 Days Past
Due(1) ................ $ 6,527,653 $ 4,429,046 $ 4,896,105 $ 6,155,371 $ 3,759,951
Loan Balance of Mortgage
Loans 60-89 Days Past
Due(1)................. $ 2,919,100 $ 1,574,663 $ 1,118,243 $ 1,147,721 $ 1,045,164
Loan Balance of Mortgage
Loans 90+ Days Past
Due(1)................. $ 3,090,349 $ 779,235 $ 684,166 $ 1,114,707 $ 2,023,975
Loan Balance of Mortgage
Loans 30+ Days Past
Due(1)................. $ 12,537,102 $ 6,782,944 $ 6,698,514 $ 8,417,799 $ 6,829,090
Loan Balance of Mortgage
Loans 30+ Days Past Due
as a Percentage of
Aggregate Amount
Outstanding(1)......... 5.53% 2.70% 2.42% 2.42% 1.52%
Foreclosures and
Bankruptcies........... $ 1,032,124 $ 1,636,714 $ 3,382,048 $ 2,647,576 $ 2,834,139
Real Estate Owned....... $ 0 $ 313,975 $ 183,921 $ 1,545,197 $ 1,586,358
</TABLE>
- --------
(1) Contractually past due excluding loans in the process of foreclosure and
loans where the borrower has filed for bankruptcy.
GMAC MORTGAGE CORPORATION LOSS EXPERIENCE
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED
YEAR ENDED DECEMBER 31, NOVEMBER 30,
-------------------------- -------------
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Aggregate Amount Outstanding........ $276,617,622 $348,925,061 $450,078,025
Net Charge-offs(1).................. $ 518,197 $ 522,013 $ 1,545,158
Net Charge-offs as a Percentage of
Aggregate Amount Outstanding at
Year-End(2)........................ 0.19% 0.15% 0.34%
</TABLE>
- --------
(1) Net Charge-offs refers to writedowns on properties prior to liquidation
and the actual liquidated loss incurred on a mortgaged property when sold
net of recoveries.
(2) Annualized.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fees for each Revolving Credit Loan are payable out of the
interest payments on such Revolving Credit Loan. The weighted average
Servicing Fee as of the Cut-off Date will be approximately 0.50% per annum.
The Servicing Fees consist of (a) servicing compensation payable to the Master
Servicer in respect of its master servicing and servicing activities and (b)
subservicing and other related compensation retained by
S-22
<PAGE>
any Subservicer. The Master Servicer is obligated to pay certain ongoing
expenses associated with its servicing activities and incurred by the Master
Servicer in connection with its responsibilities under the Servicing
Agreement.
THE 1996-RHS4 LLC
As described herein, the Mortgage Pool will be conveyed to the 1996-RHS4
LLC, a limited liability company organized under Delaware law. Pursuant to the
1996-RHS4 LLC's Operating Agreement, the 1996-RHS4 LLC will consist of two
classes of ownership interests (the "CLASS A OWNERSHIP INTEREST" and the
"CLASS B OWNERSHIP INTEREST"). The assets of the 1996-RHS4 LLC will consist of
the Revolving Credit Loans including any Additional Balances (except as
otherwise described herein) and all of the Depositor's rights under the
Designated Seller's Agreement. The limited purpose of the 1996-RHS4 LLC is to
own its assets, collect the proceeds therefrom and distribute such proceeds in
the manner provided in the Operating Agreement, and to exercise any and all
rights as assignee of the Designated Seller's Agreement, including the right
to purchase Additional Balances. The Issuer, as owner of the Class A Ownership
Interest and as managing member, will be responsible for the management of the
1996-RHS4 LLC and all decisions concerning the business affairs of the 1996-
RHS4 LLC and will be entitled to exercise all rights and remedies of the 1996-
RHS4 LLC against the Designated Seller under the Designated Seller's Agreement
and against the Master Servicer under the Servicing Agreement. The Class A
Ownership Interest and the Class B Ownership Interest will each represent an
ownership interest in the 1996-RHS4 LLC, and each will be entitled to receive
certain payments with respect to the Mortgage Pool owned by the 1996-RHS4 LLC
as described below under "Description of the Securities--Allocation of P&I
Collections."
THE ISSUER
GENERAL
The Home Equity Loan Trust 1996-RHS4 is a business trust formed under the
laws of the State of Delaware pursuant to the Trust Agreement dated as of
December 1, 1996, between the Depositor and the Owner Trustee for the purposes
described in this Prospectus Supplement. The Trust Agreement constitutes the
"governing instrument" under the laws of the State of Delaware relating to
business trusts. After its formation, the Issuer will not engage in any
activity other than (i) acquiring and holding the Class A Ownership Interest
and the other assets of the Issuer and proceeds therefrom, (ii) issuing the
Notes and the Certificates, (iii) making payments on the Notes and the
Certificates and (iv) engaging in other activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto
or connected therewith.
The Issuer's principal offices are in Wilmington, Delaware, in care of
Wilmington Trust Company, as Owner Trustee, at the address listed below.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust Agreement. The
Owner Trustee is a Delaware banking corporation and its principal offices are
located in Wilmington, Delaware.
Neither the Owner Trustee nor any director, officer or employee of the Owner
Trustee will be under any liability to the Issuer or the Securityholders for
any action taken or for refraining from the taking of any action in good faith
pursuant to the Trust Agreement or for errors in judgment; provided, however,
that none of the Owner Trustee and any director, officer or employee thereof
will be protected against any liability which would otherwise be imposed by
reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
Trust Agreement. All persons into which the Owner Trustee may be merged or
with which it may be consolidated or any person resulting from such merger or
consolidation shall be the successor of the Owner Trustee under the Trust
Agreement.
S-23
<PAGE>
THE INDENTURE TRUSTEE
The Chase Manhattan Bank, a New York State banking corporation, is the
Indenture Trustee under the Indenture. The principal offices of the Indenture
Trustee are located in New York, New York.
THE CREDIT ENHANCER
The following information has been supplied by AMBAC Indemnity Corporation
(the "CREDIT ENHANCER") for inclusion in this Prospectus Supplement. No
representation is made by the Depositor, the Administrator, the Master
Servicer, the Underwriter or any of their affiliates as to the accuracy or
completeness of such information.
The Credit Enhancer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and Guam. The Credit Enhancer primarily
insures newly issued municipal bonds. The Credit Enhancer is a wholly owned
subsidiary of AMBAC Inc., a 100% publicly held company. Moody's, Standard &
Poor's and Fitch Investors Service, L.P. have each assigned a triple-A claims-
paying ability rating to the Credit Enhancer.
The Credit Enhancer has entered into pro rata reinsurance agreements under
which a percentage of the insurance underwritten pursuant to certain of the
Credit Enhancer's municipal bond insurance programs has been and will be
assumed by a number of foreign and domestic unaffiliated reinsurers.
The following table sets forth the Credit Enhancer's capitalization as of
December 31, 1993, December 31, 1994, December 31, 1995 and September 30,
1996, respectively, on the basis of generally accepted accounting principles.
AMBAC INDEMNITY CORPORATION
CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1996
------------ ------------ ------------ -------------
UNAUDITED
<S> <C> <C> <C> <C>
Unearned premiums......... $ 785 $ 840 $ 906 $ 965
Other liabilities......... 192 136 295 282
Stockholder's equity:
Common Stock............ 82 82 82 82
Additional paid-in
capital................ 444 444 481 515
Unrealized gain (loss)
on bonds; net of tax... 68 (46) 87 51
Retained earnings....... 668 782 907 947
------ ------ ------ ------
Total stockholder's
equity................... $1,262 $1,262 $1,557 $1,595
------ ------ ------ ------
Total liabilities and
stockholder's equity..... $2,239 $2,238 $2,758 $2,842
====== ====== ====== ======
</TABLE>
For additional financial information concerning the Credit Enhancer, see the
audited financial statements of the Credit Enhancer included in Appendix A of
this Prospectus Supplement.
S-24
<PAGE>
Effective December 31, 1993, the Credit Enhancer adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Debt and
Equity Securities" ("STATEMENT 115") with all investments designated as
available-for-sale. As required under Statement 115, prior years' financial
statements have not been restated. The cumulative effect of adopting Statement
115 as of December 31, 1993 was to increase the Credit Enhancer's
stockholder's equity $63.6 million, net of tax. The adoption of Statement 115
had no effect on earnings.
The Credit Enhancer makes no representation regarding the Notes or the
advisability of investing in the Notes and makes no representation regarding,
nor has it participated in the preparation of, the Prospectus Supplement other
than the information supplied by the Credit Enhancer and presented under the
headings "THE CREDIT ENHANCER" and "DESCRIPTION OF THE POLICY" and in the
financial statements hereto.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to the Indenture dated as of December 1,
1996, between the Issuer and The Chase Manhattan Bank, as Indenture Trustee.
The Certificates will be issued pursuant to the Trust Agreement dated as of
December 1, 1996, between the Depositor and Wilmington Trust Company, as Owner
Trustee. The following summaries describe certain provisions of the
Securities, the Indenture and the Trust Agreement. The summaries do not
purport to be complete and are subject to, and qualified in their entirety by
reference to, the provisions of the applicable agreement. Only the Term Notes
are offered hereby.
The Notes will be secured by the Trust Fund pledged by the Issuer to the
Indenture Trustee pursuant to the Indenture which will consist of: (i) the
Class A Ownership Interest; (ii) all amounts on deposit in the Payment
Account; (iii) the Policy; and (iv) proceeds of the foregoing.
The Variable Funding Notes and the Variable Funding Certificates initially
will be issued to GMAC Mortgage. The Security Balance of the Variable Funding
Notes and the Variable Funding Certificates will be increased from time to
time during the Revolving Period (as long as an Amortization Event has not
occurred) in consideration for Additional Balances sold to the 1996-RHS4 LLC
under the Designated Seller's Agreement, if Principal Collections are
insufficient or unavailable to cover the related Draws. On any Payment Date
after the end of the Revolving Period, so long as an Amortization Event has
not occurred, the acquisition of all Additional Balances will be reflected in
the increase in the Security Balance of the Variable Funding Notes together
with the Variable Funding Certificates. All increases in the balances of the
Variable Funding Notes together with the Variable Funding Certificates at any
time will be made on a proportionate basis in the same proportion as the
initial aggregate Security Balance of the Term Notes bears to the initial
aggregate Security Balance of the Certificates. Notwithstanding the foregoing,
the Security Balance of the Variable Funding Notes together with the Variable
Funding Certificates may not exceed an aggregate amount equal to $63,002,834
minus any amounts paid as principal on the Variable Funding Notes and Variable
Funding Certificates or such greater amount as may be permitted under the
Indenture (the "MAXIMUM VARIABLE FUNDING BALANCE"). Initially the Variable
Funding Notes and the Variable Funding Certificates will have no Security
Balance.
BOOK-ENTRY NOTES
The Term Notes will initially be issued as Book-Entry Notes. Term Note
Owners may elect to hold their Term Notes through DTC in the United States, or
Cedel or Euroclear, in Europe if they are Participants of such systems, or
indirectly through organizations which are Participants in such systems. The
Book-Entry Notes will be issued in one or more securities which equal the
aggregate principal balance of the Term Notes and will initially be registered
in the name of Cede & Co., the nominee of DTC. Cedel and Euroclear will hold
omnibus
S-25
<PAGE>
positions on behalf of their Participants through customers' securities
accounts in Cedel's and Euroclear's names on the books of their respective
depositaries (in such capacities, individually the "RELEVANT DEPOSITARY" and
collectively the "EUROPEAN DEPOSITARIES") which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Investors may hold such beneficial interests in the Book-Entry
Notes in minimum denominations representing Security Balances of $1,000 and in
integral multiples of $1,000 in excess thereof. Except as described below, no
Beneficial Owner will be entitled to receive a physical certificate
representing such security (a "DEFINITIVE TERM NOTE"). Unless and until
Definitive Term Notes are issued, it is anticipated that the only "HOLDER" of
the Term Notes will be Cede & Co., as nominee of DTC. Term Note Owners will
not be Holders as that term is used in the Indenture.
The Beneficial Owner's ownership of a Book-Entry Note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "FINANCIAL INTERMEDIARY") that maintains the Beneficial
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Notes will be recorded on the records of DTC (or
of a Participating firm that acts as agent for the Financial Intermediary,
whose interest will in turn be recorded on the records of DTC, if the
Beneficial Owner's Financial Intermediary is not a DTC Participant and on the
records of Cedel or Euroclear, as appropriate).
Term Note Owners will receive all payments of principal of, and interest on,
the Term Notes from the Indenture Trustee through DTC and DTC Participants.
While the Term Notes are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "RULES"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Term Notes and
is required to receive and transmit payments of principal of, and interest on,
the Term Notes. Participants and Indirect Participants with whom Term Note
Owners have accounts with respect to Term Notes are similarly required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Term Note Owners. Accordingly, although Term Note Owners will not
possess physical certificates, the Rules provide a mechanism by which Term
Note Owners will receive payments and will be able to transfer their interest.
Term Note Owners will not receive or be entitled to receive Definitive Term
Notes representing their respective interests in the Term Notes, except under
the limited circumstances described below. Unless and until Definitive Term
Notes are issued, Term Note Owners who are not Participants may transfer
ownership of Term Notes only through Participants and Indirect Participants by
instructing such Participants and Indirect Participants to transfer the Term
Notes, by book-entry transfer, through DTC for the account of the purchasers
of such Term Notes, which account is maintained with their respective
Participants. Under the Rules and in accordance with DTC's normal procedures,
transfers of ownership of Term Notes will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and Indirect Participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Term Note Owners.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes may
experience some delay in their receipt of payments, since such payments will
be forwarded by the Indenture Trustee to Cede & Co. Payments with respect to
Term Notes held through Cedel or Euroclear will be credited to the cash
accounts of Cedel Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such payments will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Because DTC
can only act on behalf of Financial Intermediaries, the ability of a
Beneficial Owner to pledge Book-Entry Notes to persons or entities that do not
participate in the Depositary system, or otherwise take actions in respect of
such Book-Entry Notes, may be limited due to the lack of physical certificates
for such Book-Entry Notes. In addition, issuance of the Book-Entry Notes in
book-entry form may reduce the liquidity of such Term Notes in the secondary
market since certain potential investors may be unwilling to purchase
securities for which they cannot obtain physical certificates.
DTC has advised the Indenture Trustee that, unless and until Definitive Term
Notes are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Notes under the Indenture only at the
S-26
<PAGE>
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Notes are credited, to the extent that such actions are taken on
behalf of Financial Intermediaries whose holdings include such Book-Entry
Notes. Cedel or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by Term Noteholders under the Indenture on
behalf of a Cedel Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Term Notes which conflict with actions taken with respect to other Term Notes.
Definitive Term Notes will be issued to Beneficial Owners of the Book-Entry
Notes, or their nominees, rather than to DTC, if (a) the Indenture Trustee
determines that the DTC is no longer willing, qualified or able to discharge
properly its responsibilities as nominee and depository with respect to the
Book-Entry Notes and the Indenture Trustee is unable to locate a qualified
successor, (b) the Indenture Trustee elects to terminate a book-entry system
through DTC or (c) after the occurrence of an Event of Default, pursuant to
the Indenture, Beneficial Owners having Percentage Interests aggregating at
least a majority of the Security Balances of the Term Notes advise the DTC
through the Financial Intermediaries and the DTC Participants in writing that
the continuation of a book-entry system through DTC (or a successor thereto)
is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all
Beneficial Owners of the occurrence of such event and the availability through
DTC of Definitive Term Notes. Upon surrender by DTC of the global certificate
or certificates representing the Book-Entry Notes and instructions for re-
registration, the Indenture Trustee will issue and authenticate Definitive
Term Notes, and thereafter the Indenture Trustee will recognize the holders of
such Definitive Term Notes as Holders under the Indenture.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Term Notes among Participants of DTC, Cedel
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
For additional information regarding DTC, Cedel, Euroclear and the Term
Notes, see "Description of the Notes--Form of Notes" in the Prospectus.
PAYMENTS
Payments on the Notes will be made by the Indenture Trustee or the Paying
Agent on the 20th day of each month or, if such day is not a Business Day,
then the next succeeding Business Day, commencing in January 1997. Payments on
the Term Notes will be made to the persons in whose names such Term Notes are
registered at the close of business on the day prior to each Payment Date or,
if the Term Notes are no longer Book-Entry Notes, on the Record Date. See
"Description of the Notes--Payments" in the Prospectus. Payments will be made
by check or money order mailed (or upon the request of a Holder owning Term
Notes having denominations aggregating at least $1,000,000, by wire transfer
or otherwise) to the address of the person entitled thereto (which, in the
case of Book-Entry Notes, will be DTC or its nominee) as it appears on the
Security Register in amounts calculated as described herein on the
Determination Date. However, the final payment in respect of the Term Notes
will be made only upon presentation and surrender thereof at the office or the
agency of the Indenture Trustee specified in the notice to Holders of such
final payment. A "BUSINESS DAY" is any day other than (i) a Saturday or Sunday
or (ii) a day on which banking institutions in the State of California,
Minnesota, Pennsylvania, New York, Illinois or Delaware are required or
authorized by law to be closed.
INTEREST ON THE NOTES
Interest payments will be made on the Notes and the Certificates on each
Payment Date at the Note Rate and Certificate Rate, respectively, for the
related Interest Period, subject to the limitations set forth below, which may
result in Interest Shortfalls. The "NOTE RATE" for an Interest Period will
generally be a floating rate equal
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to the lesser of (i) the sum of (a) LIBOR, determined as specified herein, as
of the second LIBOR Business Day prior to the first day of such Interest
Period (or as of two LIBOR Business Days prior to the Closing Date, in the
case of the first Interest Period) plus (b) 0.17% per annum (or, on any
Payment Date when the aggregate Principal Balance of the Revolving Credit
Loans as of the last day during the related Collection Period is less than 10%
of the aggregate Cut-off Date Balance, LIBOR plus 0.34%) and (ii) the Maximum
Net Loan Rate (as described below). However, on any Payment Date on which
interest accrued on the Notes during the related Interest Period exceeds an
amount equal to one-twelfth of the product of (a) the ratio of the Security
Balance of the Notes to the Security Balance of the Securities multiplied by
(b) the aggregate Principal Balance of the Revolving Credit Loans multiplied
by (c) the Net Loan Rate Cap (as defined herein), the amount of such
difference (any such amount, an "INTEREST SHORTFALL") will not be included as
interest payments on the Notes for such Payment Date and such amount will
accrue interest at the Note Rate on the Notes (as adjusted from time to time)
and will be paid on future Payment Dates pro rata based on the Security
Balance thereof only to the extent funds are available therefor as set forth
herein under "--Allocation of P&I Collections." Interest Shortfalls will not
be covered by the Policy and may remain unpaid on the final Payment Date. The
"CERTIFICATE RATE" for an Interest Period will generally equal the sum of (a)
LIBOR, determined as specified in the preceding sentence, plus (b) the
percentage specified in the Trust Agreement, which may exceed 0.40% per annum,
subject to limitations similar to those set forth above which may result in
Interest Shortfalls. The Net Loan Rate Cap will be equal to the weighted
average of the Loan Rates as of the last day of the related Billing Cycle (net
of 0.655% per annum), adjusted to an effective rate reflecting accrued
interest calculated on the basis of the actual number of days in the related
Interest Period and a year assumed to consist of 360 days. The Maximum Net
Loan Rate will be equal to (x) (1) one-twelfth of the aggregate principal
balance of the Revolving Credit Loans multiplied by the weighted average of
the Maximum Loan Rates on the Revolving Credit Loans as of the first day of
the calendar month in which the Interest Period begins, minus (2) the sum of
the Servicing Fees and the amount of the premium payable to the Credit
Enhancer with respect to the Policy for such Payment Date, divided by (y) the
aggregate Principal Balance of the Notes and Certificates as of such Payment
Date, multiplied by (z) 360 divided by the actual number of days in the
related Interest Period. For a description of the Maximum Loan Rates on the
Revolving Credit Loans, see "Description of the Mortgage Pool--Revolving
Credit Loan Characteristics" herein.
Interest on the Securities in respect of any Payment Date will accrue on the
applicable Security Balance from the preceding Payment Date (or in the case of
the first Payment Date, from the Closing Date) through the day preceding such
Payment Date (each such period, an "INTEREST PERIOD") on the basis of the
actual number of days in the Interest Period and a 360-day year. Interest
payments on the Securities will be funded from payments on the Class A
Ownership Interest and, if necessary, from draws on the Policy.
On each Payment Date, LIBOR shall be established by the Indenture Trustee
and as to any Interest Period, LIBOR will equal the rate for United States
dollar deposits for one month which appears on the Telerate Screen Page 3750
as of 11:00 A.M., London time, on the second LIBOR Business Day prior to the
first day of such Interest Period. "TELERATE SCREEN PAGE 3750" means the
display designated as page 3750 on the Telerate Service (or such other page as
may replace page 3750 on that service for the purpose of displaying London
interbank offered rates of major banks). If such rate does not appear on such
page (or such other page as may replace that page on that service, or if such
service is no longer offered, such other service for displaying LIBOR or
comparable rates as may be selected by the Indenture Trustee after
consultation with the Master Servicer), the rate will be the Reference Bank
Rate. The "REFERENCE BANK RATE" will be determined on the basis of the rates
at which deposits in U.S. Dollars are offered by the reference banks (which
shall be three major banks that are engaged in transactions in the London
interbank market, selected by the Indenture Trustee after consultation with
the Master Servicer) as of 11:00 A.M., London time, on the day that is two
LIBOR Business Days prior to the immediately preceding Payment Date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the aggregate Security Balances of all of the
Securities then outstanding. The Indenture Trustee will request the principal
London office of each of the reference banks to provide a quotation of its
rate. If at least two such quotations are provided, the rate will be the
arithmetic mean of the quotations. If on such date fewer than two quotations
are provided as requested, the rate will be the arithmetic mean of the
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rates quoted by one or more major banks in New York City, selected by the
Indenture Trustee after consultation with the Master Servicer, as of 11:00
A.M., New York City time, on such date for loans in U.S. Dollars to leading
European banks for a period of one month in amounts approximately equal to the
aggregate Security Balances of all of the Securities then outstanding. If no
such quotations can be obtained, the rate will be LIBOR for the prior Payment
Date. "LIBOR BUSINESS DAY" means any day other than (i) a Saturday or a Sunday
or (ii) a day on which banking institutions in the city of London, England are
required or authorized by law to be closed.
The establishment of LIBOR as to each Interest Period by the Indenture
Trustee and the Indenture Trustee's calculation of the rate of interest
applicable to the Notes for the related Interest Period shall (in the absence
of manifest error) be final and binding.
PRINCIPAL PAYMENTS ON THE NOTES
On each Payment Date, other than the Payment Date in February 2011,
principal payments will be due and payable on the Notes in an amount equal to
the pro rata percentage (based on the outstanding Security Balances on the
Term Notes, the Variable Funding Notes and the Certificates) of the aggregate
of the Principal Collection Distribution Amount, together with any Special
Capital Distribution Amounts and Liquidation Loss Distribution Amounts (each
as defined below) for such Payment Date, as and to the extent described below.
On the Payment Date in February 2011, principal will be due and payable on the
Notes and distributable on the Certificates in amounts equal to the Security
Balance, if any, for each such Security on such Payment Date. In no event will
principal payments on the Notes or principal distributions on the Certificates
on any Payment Date exceed the Security Balance thereof on such date.
ALLOCATION OF P&I COLLECTIONS
The Master Servicer on behalf of the 1996-RHS4 LLC will establish an account
(the "DISTRIBUTION ACCOUNT") into which the Master Servicer will deposit P&I
Collections for each Payment Date on the Business Day prior thereto. The
Distribution Account will be an Eligible Account and amounts on deposit in the
Distribution Account will be invested in Permitted Investments.
On each Payment Date, P&I Collections will be allocated from the
Distribution Account in the following order of priority:
(i) to the Class A Ownership Interest, the sum of the following:
(a) as payment of preferred return in an amount equal to accrued interest
due and any overdue accrued interest (with interest thereon) at the Class A
Preferred Return (as defined herein) on the Class A Principal Balance (as
defined herein), calculated as provided in the Operating Agreement;
(b) an amount equal to the Principal Collection Distribution Amount,
applied to reduce the Class A Principal Balance;
(c) an amount equal to (A) 100% of the Liquidation Loss Amounts (other
than any Excess Loss Amounts) on such Payment Date, plus (B) any such
Liquidation Loss Amounts (other than any Excess Loss Amounts) remaining
undistributed from any preceding Payment Date (together with interest
thereon from the date initially distributable to the date paid), provided,
that any such Liquidation Loss Amount shall not be required to be paid to
the extent that such Liquidation Loss Amount was reflected in the reduction
of the Outstanding Reserve Amount (the aggregate amount so distributed
under this clause (c) on any Payment Date, a "LIQUIDATION LOSS DISTRIBUTION
AMOUNT");
(d) an additional amount to be applied to reduce the Class A Principal
Balance (the aggregate amount so distributed on any Payment Date, the
"SPECIAL CAPITAL DISTRIBUTION AMOUNT"), to the extent necessary to bring
the Outstanding Reserve Amount up to the Reserve Amount Target; and
(e) an amount equal to any Interest Shortfalls not previously paid
together with interest thereon;
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(ii) to the Class A Ownership Interest and the Class B Ownership Interest,
allocated as provided in the Operating Agreement, an amount equal to the
excess, if any, of the Outstanding Reserve Amount immediately after the
distribution pursuant to clause (i)(e) above over the Reserve Amount
Target; and
(iii) the remaining amount, if any, of the P&I Collections shall be
allocated as follows: 10% to the Class A Ownership Interest and 90% to the
Class B Ownership Interest, except as otherwise provided pursuant to the
Operating Agreement.
The "CLASS A PREFERRED RETURN" equals a rate of LIBOR plus 0.50% per annum
(or, on any Payment Date when the aggregate Principal Balance of the Revolving
Credit Loans as of the last day during the related Collection Period is less
than 10% of the aggregate Cut-off Date Balance, LIBOR plus 0.835% per annum),
but not more than the Net Loan Rate Cap plus 0.125%. The "CLASS A PRINCIPAL
BALANCE," as of any Payment Date, equals (i) the Principal Balance of the
Revolving Credit Loans minus (ii) the Outstanding Reserve Amount.
For any Payment Date, the "PRINCIPAL COLLECTION DISTRIBUTION AMOUNT" will
equal (i) Net Principal Collections for such Payment Date so long as no
Amortization Event has occurred and such Payment Date is during the Revolving
Period or (ii) Principal Collections for such Payment Date if an Amortization
Event has occurred or if such Payment Date is after the end of the Revolving
Period, provided however, on any Payment Date with respect to which the
Outstanding Reserve Amount that would result without regard to this proviso
exceeds the Reserve Amount Target, the Principal Collection Distribution
Amount will be reduced by the amount of such excess until the Outstanding
Reserve Amount equals the Reserve Amount Target.
"LIQUIDATION LOSS AMOUNT" means with respect to any Liquidated Revolving
Credit Loan, the unrecovered Principal Balance thereof and any unpaid accrued
interest thereon at the end of the related Collection Period in which such
Revolving Credit Loan became a Liquidated Revolving Credit Loan, after giving
effect to the Net Liquidation Proceeds allocable to such Principal Balance in
connection therewith.
To the extent the amount payable pursuant to clause (B) of the definition of
Liquidation Loss Distribution Amount is covered by a draw on the Policy, such
amount will be available to reimburse the Credit Enhancer for such draws on
the Policy with interest thereon (other than those attributable to Excess Loss
Amounts).
A "LIQUIDATED REVOLVING CREDIT LOAN" means, as to any Payment Date, any
Revolving Credit Loan in respect of which the Master Servicer has determined,
based on the servicing procedures specified in the Servicing Agreement, as of
the end of the preceding Collection Period that all liquidation proceeds which
it expects to recover with respect to the disposition of the related Mortgaged
Property have been recovered.
As to any Payment Date prior to the Payment Date in June 1999, the Reserve
Amount Target will be 1.75% of the Cut-off Date Balance. As to any Payment
Date on or after the Payment Date in June 1999, the Reserve Amount Target will
be equal to the lesser of (a) the Reserve Amount Target as of the Cut-off Date
and (b) 3.50% of the Pool Balance as of the beginning of the related
Collection Period (but not lower than $634,206 (0.5% of the Cut-off Date
Balance) plus 50% of the outstanding Principal Balance of all Revolving Credit
Loans 90 or more days delinquent as of such Payment Date); provided however
that any scheduled reduction to the Reserve Amount Target described above
shall not be made as of any Payment Date unless (i) the outstanding Principal
Balance of the Revolving Credit Loans delinquent 90 days or more averaged over
the last six months as a percentage of the aggregate outstanding Principal
Balance of all Revolving Credit Loans averaged over the last six months does
not exceed 2% and (ii) the aggregate cumulative Liquidation Loss Amounts on
the Revolving Credit Loans prior to any such Payment Date occurring during the
first year, the second year or the third year (or any year thereafter) after
the Payment Date in June 1999 are less than 2.0%, 3.0% and 4.0% respectively,
of the aggregate Cut-off Date Balance and (iii) there has been no draw on the
Policy on such Payment Date that remains unreimbursed. In addition, the
Reserve Amount Target may be reduced with the prior written consent of the
Credit Enhancer and the Rating Agencies.
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To the extent the Reserve Amount Target decreases on any Payment Date, the
amount of the Principal Collection Distribution Amount will be reduced on such
Payment Date and on each subsequent Payment Date to the extent the remaining
Outstanding Reserve Amount is in excess of the reduced Reserve Amount Target
until the Outstanding Reserve Amount equals the Reserve Amount Target.
The Indenture Trustee will establish the Payment Account into which the
Master Servicer will deposit the portion of the P&I Collections allocable to
the Class A Ownership Interest for each Payment Date on the Business Day prior
thereto. The Payment Account will be an Eligible Account and may be invested
in Permitted Investments.
On each Payment Date, amounts in the Payment Account, will be allocated to
the Securities in the following order of priority:
(i) to pay accrued interest due (other than any Interest Shortfalls) on
the applicable Security Balance of the Term Notes, Variable Funding Notes
and the Certificates;
(ii) to pay principal in an amount equal to the Principal Collection
Distribution Amount for such Payment Date on the Term Notes, the Variable
Funding Notes and the Certificates, pro rata, based on the outstanding
Security Balances thereof;
(iii) to pay principal on the Term Notes, the Variable Funding Notes and
the Certificates, pro rata, based on the outstanding Security Balances, up
to the pro rata percentage of Liquidation Loss Distribution Amounts for
such Payment Date, except to the extent attributable to Liquidation Loss
Amounts for all previous Collection Periods with respect to which payments
were made on the Notes and the Certificates by means of a draw on the
Policy;
(iv) to pay the Credit Enhancer the premium for the Policy and any
previously unpaid premium for the Policy (with interest thereon);
(v) to reimburse the Credit Enhancer for prior draws made on the Policy
(with interest thereon) (other than those attributable to Excess Loss
Amounts);
(vi) to pay principal on the Term Notes, the Variable Funding Notes and
the Certificates, pro rata, based on the outstanding Security Balances on
such Payment Date, up to the Special Capital Distribution Amount for such
Payment Date;
(vii) to pay the Credit Enhancer any other amounts owed pursuant to the
Insurance Agreement;
(viii) to pay the Term Notes, Variable Funding Notes and the
Certificates, any Interest Shortfalls not previously paid together with
interest thereon; and
(ix) any remaining amounts to pay to the Holders of the Certificates
specified as the "DESIGNATED CERTIFICATES" under the Trust Agreement.
The "SECURITY BALANCE" of any Security on any day is, with respect to the
Term Notes and the Certificates (other than the Variable Funding
Certificates), the respective initial balance thereof as of the Closing Date,
and with respect to the Variable Funding Notes and the Variable Funding
Certificates, the aggregate principal amount added to the Variable Funding
Notes and the Variable Funding Certificates prior to such day, in each case
reduced by all payments of principal thereon prior to and as of such day.
Except as provided below, payments pursuant to clause (i) will be allocated
to the Term Notes, Variable Funding Notes and the Certificates pro rata based
on the amount of interest each such Security is entitled to receive pursuant
to such clause. Except as provided below, payments pursuant to clauses (ii),
(iii) and (vi) will constitute payments of principal and will be allocated
among the Term Notes, Variable Funding Notes and Certificates pro rata based
on the outstanding Security Balances.
For any Payment Date as to which a Credit Enhancer Default has occurred and
is continuing or if an Event of Default under the Indenture has occurred and
is continuing, the priorities of distribution described above will
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be adjusted such that amounts to be distributed on the Certificates in respect
of interest and principal will be subordinated to the payment of interest and
principal as required on the Notes. For purposes of the foregoing, required
payments of principal on the Notes on each Payment Date will include the pro
rata portion allocable to the Notes of all Liquidation Loss Amounts for such
Payment Date and for all previous Collection Periods until paid or covered in
full, to the extent not otherwise covered by a Liquidation Loss Distribution
Amount, a reduction of the Outstanding Reserve Amount or a draw on the Policy.
A "CREDIT ENHANCER DEFAULT" shall have occurred if the Credit Enhancer fails
to make a payment required under the Policy in accordance with its terms.
An "AMORTIZATION EVENT" will be deemed to occur upon (i) the occurrence of
certain events relating to a violation of the Designated Seller's obligations
under the Designated Seller's Agreement, (ii) the occurrence of certain events
of bankruptcy, insolvency or receivership relating to the Designated Seller,
the 1996-RHS4 LLC or the Issuer, (iii) the 1996-RHS4 LLC or Issuer becomes
subject to regulation as an investment company within the meaning of the
Investment Company Act of 1940, as amended, (iv) a Servicing Default relating
to the Master Servicer occurs under the Servicing Agreement and the Master
Servicer is the Designated Seller, (v) if the aggregate of all draws under the
Policy exceeds 1% of the Cut-off Date Balance or (vi) the Issuer or the 1996-
RHS4 LLC is determined to be an association taxable as a corporation for
federal income tax purposes.
OUTSTANDING RESERVE AMOUNT
The distribution of the Special Capital Distribution Amount, if any, to the
Class A Ownership Interest (and to the Securities) will create
overcollateralization equal to the Outstanding Reserve Amount. On each Payment
Date, the Outstanding Reserve Amount (as in effect immediately prior to such
Payment Date), if any, shall be deemed to be reduced by an amount equal to any
Liquidation Loss Amounts (other than any Excess Loss Amounts) for such Payment
Date, except to the extent that such Liquidation Loss Amounts were covered on
such Payment Date by a Liquidation Loss Distribution Amount (which amount
would be so distributed, if available, from any excess interest collections
for such Payment Date). Any Liquidation Loss Amounts not so covered will be
covered by draws on the Policy to the extent provided herein. However, any
Excess Loss Amounts are required to be covered by a draw on the Policy in all
cases, without regard to the availability of the Outstanding Reserve Amount,
and the Outstanding Reserve Amount will not be reduced by any Excess Loss
Amount so long as a corresponding draw on the Policy is made as so required.
The "OUTSTANDING RESERVE AMOUNT" available on any Payment Date is the amount,
if any, by which (i) the Pool Balance as of the end of the related Collection
Period exceeds (ii) the aggregate Security Balances of all of the Securities
on such Payment Date (after application of Net Principal Collections or
Principal Collections, as the case may be, for such date).
To the extent that the Outstanding Reserve Amount is insufficient or not
available to absorb Liquidation Loss Amounts that are not covered by the
Liquidation Loss Distribution Amount, if payments are not made under the
Policy as required and the Security Balance of the Certificates is reduced to
zero, a Noteholder may incur a loss.
EXCESS LOSS AMOUNT
On any Payment Date, the "EXCESS LOSS AMOUNT" will be equal to the sum of
(i) any Liquidation Loss Amounts (other than as described in clauses (ii)-(v)
below) for the related Collection Period which, when added to the aggregate of
such Liquidation Loss Amounts for all preceding Collection Periods exceed
$7,293,372, (ii) any Special Hazard Losses in excess of the Special Hazard
Amount, (iii) any Fraud Losses in excess of the Fraud Loss Amount, (iv) any
Bankruptcy Losses in excess of the Bankruptcy Loss Amount, and (v) certain
losses occasioned by war, civil insurrection, certain governmental actions,
nuclear reaction and certain other risks as described in the Indenture. Excess
Loss Amounts will not be covered by any Liquidation Loss Distribution Amount
or by a reduction in the Outstanding Reserve Amount. Any Excess Loss Amounts
however, will be covered by the Policy, and in the event payments are not made
as required under the Policy, such losses will be allocated first to the
Certificates and, after the Security Balance of the Certificates is reduced to
zero to the Notes pro rata based on the outstanding Security Balances thereof.
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The "SPECIAL HAZARD AMOUNT" shall initially be equal to $1,898,441. As of
any date of determination following the Cut-off Date, the Special Hazard
Amount shall equal $1,898,441 less the sum of (A) the aggregate of any
Liquidation Loss Amounts on the Revolving Credit Loans due to Special Hazard
Losses and (B) the Adjustment Amount. The Adjustment Amount will be equal to
an amount calculated pursuant to the terms of the Indenture.
The "FRAUD LOSS AMOUNT" shall initially be equal to $5,695,323. As of any
date of determination after the Cut-off Date, the Fraud Loss Amount shall
equal (X) prior to the first anniversary of the Cut-off Date an amount equal
to 3% of the aggregate of the Credit Limits of the Revolving Credit Loans as
of the Cut-off Date minus the aggregate of any Liquidation Loss Amounts on the
Revolving Credit Loans due to Fraud Losses up to such date of determination;
(Y) from the first to the second anniversary of the Cut-off Date, an amount
equal to (1) the lesser of (a) the Fraud Loss Amount as of the most recent
anniversary of the Cut-off Date and (b) 2% of the aggregate of the Credit
Limits of the Revolving Credit Loans as of the most recent anniversary of the
Cut-off Date minus (2) the aggregate of any Liquidation Loss Amounts on the
Revolving Credit Loans due to Fraud Losses since the most recent anniversary
of the Cut-off Date up to such date of determination; and (Z) from the second
to the fifth anniversary of the Cut-off Date, an amount equal to (1) the
lesser of (a) the Fraud Loss Amount as of the most recent anniversary of the
Cut-off Date and (b) 1% of the aggregate of the Credit Limits of the Revolving
Credit Loans as of the most recent anniversary of the Cut-off Date minus (2)
the aggregate of any Liquidation Loss Amounts on the Revolving Credit Loans
due to Fraud Losses since the most recent anniversary of the Cut-off Date up
to such date of determination. On and after the fifth anniversary of the Cut-
off Date the Fraud Loss Amount shall be zero.
The "BANKRUPTCY AMOUNT" will initially be equal to $100,000. As of any date
of determination, the Bankruptcy Amount shall equal $100,000 less the sum of
any Liquidation Loss Amounts on the Revolving Credit Loans due to such losses
up to such date of determination.
THE PAYING AGENT
The Paying Agent shall initially be the Indenture Trustee, together with any
successor thereto. The Paying Agent shall have the revocable power to withdraw
funds from the Payment Account for the purpose of making payments to the
Noteholders.
MATURITY AND OPTIONAL REDEMPTION
The Notes will be payable in full on the Payment Date in February 2011, to
the extent of the related outstanding Security Balance on such date, if any.
In addition a principal payment may be made in partial or full redemption of
the Notes, after the Pool Balance is reduced to an amount less than or equal
to $12,684,125 (10% of the Cut-off Date Balance), upon the exercise by the
Master Servicer of its option to purchase all or a portion of the Revolving
Credit Loans and related assets. In the event that all of the Revolving Credit
Loans are purchased by the Master Servicer, the purchase price will be equal
to the sum of the outstanding Pool Balance and accrued and unpaid interest
thereon at the weighted average of the Loan Rates through the day preceding
the Payment Date (including Interest Shortfalls and interest thereon) on which
such purchase occurs together with all amounts due and owing to the Credit
Enhancer.
In the event that a portion of the Revolving Credit Loans are purchased by
the Master Servicer the purchase price will be equal to the sum of the
aggregate Principal Balances of the Revolving Credit Loans so purchased and
accrued and unpaid interest thereon at the weighted average of the related
Loan Rates on such Revolving Credit Loans through the day preceding the
Payment Date on which such purchase occurs together with all amounts due and
owing to the Credit Enhancer with respect to the Revolving Credit Loans so
purchased. In lieu of a cash payment, if an Amortization Event had previously
occurred, all or a portion of such purchase price may be in the form of
Additional Balances on other Revolving Credit Loans not previously conveyed to
the 1996-RHS4 LLC. Any such purchase will be subject to satisfaction of
certain conditions specified in the
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Servicing Agreement, including: (i) the Master Servicer shall have delivered
to the Indenture Trustee a "REVOLVING CREDIT LOAN SCHEDULE" containing a list
of all Revolving Credit Loans remaining in the 1996-RHS4 LLC after such
removal; (ii) the Master Servicer shall represent and warrant that no
selection procedures reasonably believed by the Master Servicer to be adverse
to the interests of the Securityholders or the Credit Enhancer were used by
the Master Servicer in selecting such Revolving Credit Loans; and (iii) each
Rating Agency shall have been notified of the proposed retransfer and shall
not have notified the Master Servicer that such retransfer would result in a
reduction or withdrawal of the ratings of the Securities without regard to the
Policy.
DESCRIPTION OF THE POLICY
On the Closing Date, the Credit Enhancer will issue the Policy in favor of
the Owner Trustee on behalf of the Issuer. The Policy will unconditionally and
irrevocably guarantee certain payments on the Class A Ownership Interest. On
each Payment Date, a draw will be made on the Policy equal to the sum of (a)
the amount by which accrued interest on the Class A Principal Balance at the
Guaranteed Rate on such Payment Date exceeds the amount on deposit in the
Payment Account available for interest distributions on such Payment Date, (b)
any Liquidation Loss Amount (other than any Excess Loss Amount) for such
Payment Date, to the extent not currently covered by a Liquidation Loss
Distribution Amount or a reduction in the Outstanding Reserve Amount and (c)
any Excess Loss Amount for such Payment Date. For purposes of the foregoing,
amounts in the Payment Account available for interest distributions on any
Payment Date shall be deemed to include all amounts distributed on the Class A
Ownership Interest for such Payment Date, other than the Principal Collection
Distribution Amount and the Liquidation Loss Distribution Amount (if any)
distributed thereon. Interest Shortfalls will not be covered by the Policy.
Pursuant to the terms of the Indenture, draws under the Policy in respect of
any Liquidation Loss Amount will be paid on the Notes by the Paying Agent, as
principal, pro rata among all of the Securities based on the outstanding
Security Balances thereof. In addition, a draw will be made on the Policy to
cover certain shortfalls in amounts allocable to the Noteholders and the
Certificateholders following the sale, liquidation or other disposition of the
assets of the 1996-RHS4 LLC in connection with either (a) the liquidation of
the Trust Fund as permitted under the Indenture following an Event of Default
thereunder, or (b) a termination of the Issuer as required under the Trust
Agreement in the event of the bankruptcy of the Holder of the Certificates
designated as the "Designated Certificates" in the Trust Agreement. In
addition, the Policy will guarantee the payment of the outstanding Security
Balance of each Security on the Payment Date in February 2011. In the absence
of payments under the Policy, Noteholders will directly bear the credit risks
associated with their investment to the extent such risks are not covered by
the Certificates or otherwise.
The "GUARANTEED RATE" is equal to the weighted average of the Note Rate and
the Certificate Rate, based on the outstanding Security Balances thereof;
provided, however, the Guaranteed Rate shall not exceed the Net Loan Rate Cap
related to such Payment Date.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
PROSPECTIVE NOTEHOLDERS SHOULD CONSIDER, AMONG OTHER THINGS, THE ITEMS
DISCUSSED UNDER "YIELD AND PREPAYMENT CONSIDERATIONS" IN THE PROSPECTUS AND
THE FOLLOWING FACTORS IN CONNECTION WITH THE PURCHASE OF THE TERM NOTES:
The yield to maturity of the Term Notes will depend on the price paid by the
holder for such Note, the Note Rate and the rate and timing of principal
payments (including payments in excess of required installments, prepayments
in full or terminations, liquidations and repurchases) on the Revolving Credit
Loans and the rate and timing of Draws and the allocation thereof.
In general, if a Term Note is purchased at a premium over its face amount
and payments of principal on such Term Note occur at a rate faster than
anticipated at the time of purchase, the purchaser's actual yield to
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<PAGE>
maturity will be lower than that assumed at the time of purchase. Conversely,
if a Term Note is purchased at a discount from its face amount and payments of
principal on such Term Note occur at a rate slower than that assumed at the
time of purchase, the purchaser's actual yield to maturity will be lower than
that originally anticipated.
The rate and timing of defaults on the Revolving Credit Loans will also
affect the rate and timing of principal payments on the Revolving Credit Loans
and thus the yield on the Term Notes. There can be no assurance as to the rate
of losses or delinquencies on any of the Revolving Credit Loans, however, the
rate of such losses and delinquencies are likely to be higher than those of
traditional first lien mortgage loans, particularly in the case of Revolving
Credit Loans with high Combined Loan-to-Value Ratios or low Junior Ratios. In
addition, because borrowers of Balloon Loans are required to make a relatively
large single payment upon maturity, it is possible that the default risk
associated with Balloon Loans is greater than that associated with fully-
amortizing mortgage loans. See "Risk Factors" herein. To the extent that any
losses are incurred on any of the Revolving Credit Loans that are not covered
by the Liquidation Loss Distribution Amount, a reduction in the Outstanding
Reserve Amount, the Policy or the Certificates, holders of the Term Notes will
bear all risk of such losses resulting from default by Mortgagors. See "Risk
Factors--Limitations, Reduction and Substitution of Credit Enhancement" in the
Prospectus. Even where the Policy covers all losses incurred on the Revolving
Credit Loans, the effect of losses may be to increase prepayment rates on the
Revolving Credit Loans, thus reducing the weighted average life and affecting
the yield to maturity.
In addition, the repayment of any Revolving Credit Loan may be dependent on
the ability of the Mortgagor to make larger interest payments following the
adjustment of the Loan Rate and during the life of such Revolving Credit Loan.
There can be no assurance as to the rate of principal payments and Draws on
the Revolving Credit Loans. The rate of principal payments and the rate of
Draws may fluctuate substantially from time to time. Generally, home equity
loans are not viewed by mortgagors as permanent financing. Due to the
unpredictable nature of both principal payments and Draws, the rates of
principal payments net of Draws on the Revolving Credit Loans may be much more
volatile than for typical first lien mortgage loans. See "Yield and Prepayment
Considerations" in the Prospectus and "Risk Factors" herein.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security to the date of distribution to the
investor of each dollar distributed in reduction of principal of such security
(assuming no losses). The weighted average life of the Term Notes will be
influenced by, among other things, the rate of principal payments and Draws on
the Revolving Credit Loans.
The prepayment model used in this Prospectus Supplement, the Constant
Prepayment Rate model ("CPR"), assumes that the outstanding principal balance
of a pool of HELOC loans prepays at a specified constant annual rate of CPR.
In generating monthly cash flows, this rate is converted to an equivalent
constant monthly rate. To assume 30% of CPR or any other CPR percentage is to
assume that the stated percentage of the outstanding principal balance of the
pool is prepaid over the course of a year. No representation is made that the
Revolving Credit Loans will prepay at that or any other rate.
The tables set forth below are based on a CPR, constant draw rate (which for
purposes of the assumptions is the amount of Additional Balances on the
Revolving Credit Loans drawn each month expressed as an annualized percentage
of the Pool Balance outstanding at the beginning of such month) and optional
termination assumptions as indicated in the tables below. For the following
tables, it was assumed that the Revolving Credit Loans have been aggregated
into two pools, one pool with a principal balance of $31,247,501 and a second
pool with a principal balance of $95,593,753. Further, Revolving Credit Loans
with respect to the two pools are assumed to have Loan Rates of 9.8987% per
annum and 10.2045% per annum, respectively, which will adjust to 9.8987% per
annum and 10.2258% per annum in the first month, respectively, Credit
Utilization Rates of 55.8735% and 71.3820%, respectively, terms in which the
loans do not amortize and in which Additional Draws may be made of 151 months
and 104 months, respectively, and as of the Closing Date, remaining terms to
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<PAGE>
maturity of 152 months and 105 months, respectively. In addition, each pool is
assumed to have a Servicing Fee Rate of 0.53% per annum and each pool is
assumed to have a Policy premium rate equal to the percentage specified in the
Policy.
In addition, it was assumed that (i) payments are made in accordance with
the description set forth under "Description of the Securities," (ii) payments
on the Notes will be made on the 20th day of each calendar month regardless of
the day on which the Payment Date actually occurs commencing in January 1997,
(iii) no extension past the scheduled maturity date of a Revolving Credit Loan
is made, (iv) no delinquencies or defaults occur, (v) monthly Draws are
calculated under each of the assumptions as set forth in the tables below
before giving effect to prepayments, (vi) each Revolving Credit Loan is
subject to a maximum Credit Utilization Rate of 110%, (vii) there is no
restriction on the Maximum Variable Funding Balance, (viii) no Amortization
Event occurs, (ix) the scheduled Due Date for each of the Revolving Credit
Loans is the first day of each month, (x) the Closing Date is December 20,
1996, (xi) for each Payment Date, the Note Rate and the Certificate Rate are
equal to 5.77547% per annum and 6.00547% per annum, respectively, and (xii)
the initial Security Balance of the Term Notes is set forth on the cover page
hereof and the initial Security Balance of the Certificates is $10,147,354.
The actual characteristics and performance of the Revolving Credit Loans
will differ from the assumptions used in constructing the tables set forth
below, which are hypothetical in nature and are provided only to give a
general sense of how the principal cash flows might behave under varying
prepayment and Draw scenarios. For example, it is very unlikely that the
Revolving Credit Loans will prepay and experience Draws at a constant rate
until maturity or that all of the Revolving Credit Loans will prepay or
experience Draws at the same rate. Moreover, the diverse remaining terms to
stated maturity of the Revolving Credit Loans could produce slower or faster
principal distributions than indicated in the tables at the various
assumptions specified, even if the weighted average remaining term to stated
maturity of the Revolving Credit Loans is as assumed. Any difference between
such assumptions and the actual characteristics and performance of the
Revolving Credit Loans, or actual prepayment experience, will affect the
percentages of initial Security Balance outstanding over time and the weighted
average life of the Term Notes.
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<PAGE>
PERCENTAGE OF ORIGINAL SECURITY BALANCE OUTSTANDING OF THE TERM NOTES (1)(2)
<TABLE>
<CAPTION>
CPR
---------------------------------
PAYMENT DATE 0% 10% 22% 26% 30% 34% 38%
- ------------ --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial...................................... 100% 100% 100% 100% 100% 100% 100%
December 1997................................ 98 98 93 89 84 79 74
December 1998................................ 98 98 89 80 72 63 56
December 1999................................ 98 98 85 72 61 51 42
December 2000................................ 98 98 80 65 52 41 32
December 2001................................ 98 98 76 59 44 33 24
December 2002................................ 98 88 59 43 31 22 15
December 2003................................ 98 79 46 31 21 14 9
December 2004................................ 98 71 36 23 15 9 6
December 2005................................ 28 18 7 0 0 0 0
December 2006................................ 28 17 5 0 0 0 0
December 2007................................ 28 15 4 0 0 0 0
December 2008................................ 28 13 3 0 0 0 0
December 2009................................ 0 0 0 0 0 0 0
Weighted Average Life (years)................ 9.7 8.6 6.4 5.2 4.3 3.7 3.1
</TABLE>
- --------
(1) Assumes (i) that an optional termination is exercised on the first Payment
Date when the Pool Balance is less than or equal to 10% of the Cut-off Date
Balance and (ii) a constant draw rate of 18%.
(2) All percentages are rounded to the nearest 1%.
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<PAGE>
WEIGHTED AVERAGE LIFE(1) AND FINAL SCHEDULED
PAYMENT DATE(2) SENSITIVITY OF THE TERM NOTES
TO PREPAYMENTS AND DRAWS
<TABLE>
<CAPTION>
CPR(3)
------------------------------------------------------------------------------------------
0% 10% 22% 26% 30% 34% 38%
CONSTANT ------------ ------------ ------------ ------------ ------------ ------------ ------------
DRAWRATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE
-------- --- -------- --- -------- --- -------- --- -------- --- -------- --- -------- --- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0%..................... 9.5 Aug-2009 5.9 Aug-2009 3.6 Aug-2009 3.1 Aug-2009 2.6 Dec-2007 2.3 May-2006 2.0 Sep-2005
10%..................... 9.7 Aug-2009 8.5 Aug-2009 4.8 Aug-2009 4.0 Aug-2009 3.4 Aug-2009 2.9 Aug-2009 2.5 Jul-2007
18%..................... 9.7 Aug-2009 8.6 Aug-2009 6.4 Aug-2009 5.3 Aug-2009 4.4 Aug-2009 3.7 Aug-2009 3.1 Aug-2009
22%..................... 9.7 Aug-2009 8.6 Aug-2009 7.6 Aug-2009 6.2 Aug-2009 5.1 Aug-2009 4.2 Aug-2009 3.5 Aug-2009
26%..................... 9.7 Aug-2009 8.6 Aug-2009 7.6 Aug-2009 7.3 Aug-2009 6.0 Aug-2009 4.9 Aug-2009 4.0 Aug-2009
<CAPTION>
CPR(4)
------------------------------------------------------------------------------------------
0% 10% 22% 26% 30% 34% 38%
CONSTANT ------------ ------------ ------------ ------------ ------------ ------------ ------------
DRAW RATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE
--------- --- -------- --- -------- --- -------- --- -------- --- -------- --- -------- --- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0%..................... 9.5 Aug-2009 5.6 Sep-2005 3.5 Sep-2005 2.9 Aug-2004 2.5 Jun-2003 2.1 Jul-2002 1.9 Oct-2001
10%..................... 9.7 Aug-2009 8.5 Aug-2009 4.7 Sep-2005 4.0 Sep-2005 3.4 Sep-2005 2.8 Jun-2004 2.4 Mar-2003
18%..................... 9.7 Aug-2009 8.6 Aug-2009 6.4 Aug-2009 5.2 Dec-2005 4.3 Sep-2005 3.7 Sep-2005 3.1 May-2005
22%..................... 9.7 Aug-2009 8.6 Aug-2009 7.6 Aug-2009 6.2 Aug-2009 5.0 Sep-2005 4.2 Sep-2005 3.5 Sep-2005
26%..................... 9.7 Aug-2009 8.6 Aug-2009 7.6 Aug-2009 7.3 Aug-2009 6.0 Aug-2009 4.8 Sep-2005 4.0 Sep-2005
</TABLE>
- --------
(1) The weighted average life of the Term Notes is determined by (i)
multiplying the amount of each payment allocated to principal by the
number of years from the date of issuance to the related Payment Date,
(ii) adding the results, and (iii) dividing the sum by the original
Security Balance thereof.
(2) The final scheduled payment date of the Term Notes is the date on which
the Security Balance thereof is reduced to zero.
(3) Assumes no optional termination is exercised.
(4) Assumes that an optional termination is exercised on the first Payment
Date when the Pool Balance is less than or equal to 10% of the Cut-off
Date Balance.
DESCRIPTION OF THE DESIGNATED SELLER'S AGREEMENT
The Revolving Credit Loans to be transferred to the 1996-RHS4 LLC by the
Depositor were or will be purchased by the Depositor from GMAC Mortgage
Corporation (in such capacity, the "DESIGNATED SELLER") pursuant to the
Designated Seller's Agreement. Under the Designated Seller's Agreement, the
Designated Seller has agreed to transfer to the Depositor the Revolving Credit
Loans and related Additional Balances. Pursuant to an assignment by the
Depositor executed on the Closing Date, upon such transfer to the Depositor,
the Revolving Credit Loans will be transferred by the Depositor to the 1996-
RHS4 LLC, as well as the Depositor's rights in, to and under the Designated
Seller's Agreement, which will include the right to purchase Additional
Balances. The following summary describes certain terms of the form of the
Designated Seller's Agreement and is qualified in its entirety by reference to
the form of Designated Seller's Agreement. For a general description of the
Designated Seller, see "Description of the Servicing Agreement--The Master
Servicer" herein.
TRANSFER OF REVOLVING CREDIT LOANS
Pursuant to the Designated Seller's Agreement, the Designated Seller will
transfer and assign to the Depositor all of its right, title and interest in
and to the Revolving Credit Loans, the related Credit Line Agreement,
mortgages and other related documents (collectively, the "RELATED DOCUMENTS")
and all of the Additional Balances thereafter created prior to the occurrence
of an Amortization Event. The purchase price of the Revolving Credit Loans is
a specified percentage of the face amount thereof as of the time of transfer
and is payable by the Depositor, as provided in the Designated Seller's
Agreement. The purchase price of each Additional Balance is the amount of the
related new advance and is payable by the 1996-RHS4 LLC, either in cash or in
the form of an increase in the Security Balance of the Variable Funding Notes
(or, in certain circumstances, the issuance of additional Certificates), as
provided in the Designated Seller's Agreement.
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<PAGE>
The Designated Seller's Agreement will require that, within the time period
specified therein, the Designated Seller, acting on the Depositor's behalf,
deliver to the Indenture Trustee (as the 1996-RHS4 LLC's agent for such
purpose) the Revolving Credit Loans and the Related Documents. In lieu of
delivery of original mortgages, the Designated Seller may deliver true and
correct copies thereof which have been certified as to authenticity by the
appropriate county recording office where such mortgage is recorded.
REPRESENTATIONS AND WARRANTIES
The Designated Seller will also represent and warrant to the Depositor that,
among other things, (a) the information with respect to the Revolving Credit
Loans set forth in the schedule attached to the Designated Seller's Agreement
is true and correct in all material respects and (b) immediately prior to the
sale of the Revolving Credit Loans to the Depositor, the Designated Seller was
the sole owner and holder of the Revolving Credit Loans free and clear of any
and all liens and security interests. The Designated Seller will also
represent and warrant to the Depositor that, among other things, as of the
Closing Date, (a) the Designated Seller's Agreement constitutes a legal, valid
and binding obligation of the Designated Seller and (b) the Designated
Seller's Agreement constitutes a valid transfer and assignment to the
Depositor of all right, title and interest of the Designated Seller in and to
the Revolving Credit Loans and the proceeds thereof. The benefit of the
representations and warranties made to the Depositor by the Designated Seller
in the Designated Seller's Agreement will be assigned by the Depositor to the
1996-RHS4 LLC.
Within 90 days of the Closing Date, the Custodian will review or cause to be
reviewed the Revolving Credit Loans and the Related Documents and if any
Revolving Credit Loan or Related Document is found to be defective in any
material respect, which may materially and adversely affect the value of the
related Revolving Credit Loan, or the interests of the Indenture Trustee (as
pledgee of the Class A Ownership Interest), the Securityholders or the Credit
Enhancer in such Revolving Credit Loan and such defect is not cured within 90
days following notification thereof to the Designated Seller and the 1996-RHS4
LLC by the Custodian, the Designated Seller will be obligated under the
Designated Seller's Agreement to deposit the Repurchase Price into the
Custodial Account. In lieu of any such deposit, the Designated Seller may
substitute an Eligible Substitute Loan. Any such purchase or substitution will
result in the removal of such Revolving Credit Loan required to be removed
from the 1996-RHS4 LLC (each such Revolving Credit Loan, a "DELETED LOAN").
The obligation of the Designated Seller to remove a Deleted Loan from the
1996-RHS4 LLC is the sole remedy regarding any defects in the Revolving Credit
Loans and Related Documents available to the 1996-RHS4 LLC, the
Certificateholders (or the Owner Trustee on behalf of the Certificateholders)
and the Noteholders (or the Indenture Trustee on behalf of the Noteholders)
against the Designated Seller.
With respect to any Revolving Credit Loan, the "REPURCHASE PRICE" is equal
to the Principal Balance of such Revolving Credit Loan at the time of any
removal described above plus accrued and unpaid interest thereon to the date
of removal. In connection with the substitution of an Eligible Substitute
Loan, the Designated Seller will be required to deposit in the Custodial
Account an amount (the "SUBSTITUTION ADJUSTMENT AMOUNT") equal to the excess
of the Principal Balance of the related Deleted Loan over the Principal
Balance of such Eligible Substitute Loan.
An "ELIGIBLE SUBSTITUTE LOAN" is a mortgage loan substituted by the
Designated Seller for a Deleted Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Revolving Credit Loan for a Deleted Loan, an
aggregate Principal Balance) not in excess of the Principal Balance relating
to such Deleted Loan; (ii) have a Loan Rate, Net Loan Rate and Gross Margin no
lower than and not more than 1% in excess of the Loan Rate, Net Loan Rate and
Gross Margin, respectively, of such Deleted Loan; (iii) have a Combined Loan-
to-Value Ratio at the time of substitution no higher than that of the Deleted
Loan at the time of substitution; (iv) have a remaining term to maturity not
more than one year earlier and not later than the remaining term to maturity
of the Deleted Loan; (v) comply with each representation and warranty as to
the Revolving Credit Loans set forth in the Designated Seller's Agreement
(deemed to be made as of the date of substitution); and (vi) satisfy certain
other conditions specified in the Indenture.
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<PAGE>
In addition the Designated Seller will be obligated to deposit the
Repurchase Price or substitute an Eligible Substitute Loan with respect to a
Revolving Credit Loan as to which there is a breach of a representation or
warranty in the Designated Seller's Agreement and such breach is not cured by
the Designated Seller within the time provided in the Designated Seller's
Agreement.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing Agreement,
dated as of December 1, 1996, among the 1996-RHS4 LLC, the Indenture Trustee,
the Administrator and the Master Servicer. The summary does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
provisions of the Servicing Agreement. Whenever particular defined terms of
the Servicing Agreement are referred to, such defined terms are thereby
incorporated herein by reference. See "Servicing of Revolving Credit Loans"
and "The Agreements" in the Prospectus.
THE MASTER SERVICER
GMAC Mortgage Corporation ("GMACMC"), an affiliate of the Depositor, is
Master Servicer for all of the Revolving Credit Loans. GMAC Mortgage
Corporation is an indirect subsidiary of General Motors Acceptance Corporation
and is one of the nation's largest mortgage bankers. GMACMC is engaged in the
mortgage banking business, including the origination, purchase, sale and
servicing of residential loans. GMACMC's executive offices are located at 100
Witmer Road, Horsham, Pennsylvania 19044-0963.
All of the Revolving Credit Loans will initially be serviced by the Master
Servicer, but may be subserviced by one or more subservicers designated by the
Master Servicer pursuant to subservicing agreements between the Master
Servicer and any future subservicers. For a general description of the Master
Servicer and its activities, and certain information concerning the Master
Servicer's delinquency experience on residential revolving credit loans, see
"Servicing of Revolving Credit Loans--Delinquency and Loss Experience of the
Master Servicer's Portfolio" herein.
THE ADMINISTRATOR
Residential Funding, an affiliate of the Company and the Master Servicer,
will act as Administrator for the Securities pursuant to the Servicing
Agreement. The Administrator shall act as tax administrator for the Trust and
the 1996-RHS4 LLC and shall calculate the amounts to be distributed with
respect to the Securityholders in the aggregate. The Administrator is entitled
to an annual fee of 0.03% per annum on the aggregate Security Balance of the
Securities. For a general description of Residential Funding, see "Residential
Funding Corporation" in the Prospectus.
P&I COLLECTIONS
The Master Servicer shall establish and maintain an account (the "CUSTODIAL
ACCOUNT") in which the Master Servicer shall deposit or cause to be deposited
any amounts representing payments on and any collections received in respect
of the Revolving Credit Loans received by it subsequent to the Cut-off Date.
The Custodial Account shall be an Eligible Account. On the 15th day of each
month or if such day is not a Business Day, the next succeeding Business Day
(the "DETERMINATION DATE"), the Master Servicer will notify the Paying Agent
and the Indenture Trustee of the amount of aggregate amounts required to be
withdrawn from the Distribution Account and deposited into the Payment Account
prior to the close of business on the Business Day next succeeding each
Determination Date.
"PERMITTED INVESTMENTS" are specified in the Servicing Agreement and are
limited to investments which meet the criteria of the Rating Agencies from
time to time as being consistent with their then-current ratings of the
Securities.
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<PAGE>
The Master Servicer will make the following withdrawals from the Custodial
Account and deposit such amounts as follows:
(i) to the Distribution Account, an amount equal to the P&I Collections
on the Business Day prior to each Payment Date; and
(ii) to pay to itself or the Designated Seller various reimbursement
amounts and other amounts as provided in the Servicing Agreement.
As to any Payment Date, "P&I COLLECTIONS" will equal the sum of (a) Interest
Collections for such Payment Date and (b) so long as an Amortization Event has
not occurred and if during the Revolving Period, "NET PRINCIPAL COLLECTIONS"
for such Payment Date which are the excess, if any, of Principal Collections
for such Payment Date over the aggregate amount of Additional Balances created
during the related Collection Period and conveyed to the 1996-RHS4 LLC, or if
such event or date has occurred, Principal Collections for such date. Upon the
occurrence of an Amortization Event or after the end of the Revolving Period,
Principal Collections for a Collection Period will no longer be applied to
acquire Additional Balances during such Collection Period.
All collections on the Revolving Credit Loans will generally be allocated in
accordance with the Credit Line Agreements between amounts collected in
respect of interest and amounts collected in respect of principal. As to any
Payment Date, "INTEREST COLLECTIONS" will be equal to the sum of (i) the
amounts collected during the related Collection Period, including Net
Liquidation Proceeds (as defined below), allocated to interest pursuant to the
terms of the Credit Line Agreements (exclusive of the pro rata portion thereof
attributable to Additional Balances not conveyed to the 1996-RHS4 LLC
following an Amortization Event), reduced by the Servicing Fees for such
Collection Period and (ii) the interest portion of the Repurchase Price for
any Deleted Loans and the cash purchase price paid in connection with any
optional purchase of the Revolving Credit Loans by the Master Servicer. As to
any Payment Date, "PRINCIPAL COLLECTIONS" will be equal to the sum of (i) the
amount collected during the related Collection Period, including Net
Liquidation Proceeds allocated to principal pursuant to the terms of the
Credit Line Agreements (exclusive of the pro rata portion thereof attributable
to Additional Balances not conveyed to the 1996-RHS4 LLC following an
Amortization Event) and (ii) the principal portion of the Repurchase Price for
any Deleted Loans, any Substitution Adjustment Amounts and the cash purchase
price paid in connection with any optional purchase of the Revolving Credit
Loans by the Master Servicer.
As to any Payment Date, the "COLLECTION PERIOD" is the calendar month
preceding the month of such Payment Date.
"NET LIQUIDATION PROCEEDS" with respect to a Revolving Credit Loan are the
proceeds (excluding amounts drawn on the Policy) received in connection with
the liquidation of any Revolving Credit Loan, whether through trustee's sale,
foreclosure sale or otherwise, reduced by related expenses, but not including
the portion, if any, of such amount that exceeds the Principal Balance of the
Revolving Credit Loan at the end of the Collection Period immediately
preceding the Collection Period in which such Revolving Credit Loan became a
Liquidated Revolving Credit Loan.
With respect to any date, the "POOL BALANCE" will be equal to the aggregate
of the Principal Balances of all Revolving Credit Loans as of such date owned
by the 1996-RHS4 LLC. The Principal Balance of a Revolving Credit Loan (other
than a Liquidated Revolving Credit Loan) on any day is equal to the Cut-off
Date Balance thereof, plus (i) any Additional Balances in respect of such
Revolving Credit Loan conveyed to the 1996-RHS4 LLC minus (ii) all collections
credited against the Principal Balance of such Revolving Credit Loan in
accordance with the related Credit Line Agreement prior to such day (exclusive
of the pro rata portion thereof attributable to Additional Balances not
conveyed to the 1996-RHS4 LLC following an Amortization Event). The Principal
Balance of a Liquidated Revolving Credit Loan after final recovery of
substantially all of the related Liquidation Proceeds which the Master
Servicer reasonably expects to receive shall be zero.
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<PAGE>
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE
The following summary describes certain terms of the Trust Agreement and the
Indenture. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Trust
Agreement and the Indenture. Whenever particular defined terms of the
Indenture are referred to, such defined terms are thereby incorporated herein
by reference. See "The Agreements" in the Prospectus.
THE TRUST FUND
Simultaneously with the issuance of the Notes, the Issuer will pledge the
Trust Fund to the Indenture Trustee as collateral for the Notes. As pledgee of
the Class A Ownership Interest, the Indenture Trustee will be entitled to
direct the Issuer, as managing member of the 1996-RHS4 LLC, in the exercise of
all rights and remedies of the 1996-RHS4 LLC against the Designated Seller
under the Designated Seller's Agreement and against the Master Servicer under
the Servicing Agreement.
REPORTS TO HOLDERS
The Indenture Trustee will mail to each Holder of Term Notes, at its address
listed on the Security Register maintained with the Indenture Trustee, a
report setting forth certain amounts relating to the Notes for each Payment
Date, among other things:
(i) the amount of principal, if any, payable on such Payment Date to
Securityholders;
(ii) the amount of interest payable on such Payment Date to
Securityholders separately stating the portion thereof in respect of
overdue accrued interest;
(iii) the aggregate Principal Balance of such class of Securities after
giving effect to the payment of principal on such Payment Date;
(iv) P&I Collections for the related Collection Period;
(v) the aggregate Principal Balance of the Revolving Credit Loans as of
the end of the preceding Collection Period;
(vi) the Special Capital Distribution Amount as of the end of the related
Collection Period; and
(vii) the amount paid, if any, under the Policy for such Payment Date.
In the case of information furnished pursuant to clauses (i) and (ii) above,
the amounts shall be expressed as a dollar amount per $1,000 in face amount of
Notes.
CERTAIN COVENANTS
The Indenture will provide that the Issuer may not consolidate with or merge
into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes, by an
indenture supplemental to the Indenture, the Issuer's obligation to make due
and punctual payments upon the Notes and the performance or observance of any
agreement and covenant of the Issuer under the Indenture, (iii) no Event of
Default shall have occurred and be continuing immediately after such merger or
consolidation, (iv) the Issuer has received consent of the Credit Enhancer and
has been advised that the ratings of the Securities (without regard to the
Policy) then in effect would not be reduced or withdrawn by any Rating Agency
as a result of such merger or consolidation, (v) any action that is necessary
to maintain the lien and security interest created by the Indenture is taken
and (vi) the Issuer has received an Opinion of Counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Issuer or to any Noteholder or Certificateholder and (vii) the Issuer has
delivered to the Indenture Trustee an officer's certificate and an Opinion of
Counsel each stating that such consolidation or merger and such supplemental
indenture comply with the Indenture and that all conditions precedent, as
provided in the Indenture, relating to such transaction have been complied
with. The Issuer will not, among other things, (i) except as expressly
permitted by the Indenture, sell, transfer, exchange or otherwise
S-42
<PAGE>
dispose of any of the assets of the Issuer, (ii) claim any credit on or make
any deduction from the principal and interest payable in respect of the Notes
(other than amounts withheld under the Code or applicable state law) or assert
any claim against any present or former holder of Notes because of the payment
of taxes levied or assessed upon the Issuer, (iii) permit the validity or
effectiveness of the Indenture to be impaired or permit any person to be
released from any covenants or obligations with respect to the Notes under the
Indenture except as may be expressly permitted thereby or (iv) permit any
lien, charge, excise, claim, security interest, mortgage or other encumbrance
to be created on or extend to or otherwise arise upon or burden the assets of
the Issuer or any part thereof, or any interest therein or the proceeds
thereof. The Issuer may not engage in any activity other than as specified
under "The Issuer" herein.
MODIFICATION OF INDENTURE
With the consent of the holders of a majority of each of the outstanding
Term Notes and Variable Funding Notes and the Credit Enhancer, the Issuer and
the Indenture Trustee may execute a supplemental indenture to add provisions
to, change in any manner or eliminate any provisions of, the Indenture, or
modify (except as provided below) in any manner the rights of the Noteholders.
Without the consent of the holder of each outstanding Note affected thereby
and the Credit Enhancer, however, no supplemental indenture will: (i) change
the due date of any installment of principal of or interest on any Note or
reduce the principal amount thereof, the interest rate specified thereon or
change any place of payment where or the coin or currency in which any Note or
any interest thereon is payable; (ii) impair the right to institute suit for
the enforcement of certain provisions of the Indenture regarding payment;
(iii) reduce the percentage of the aggregate amount of the outstanding Notes,
the consent of the holders of which is required for any supplemental indenture
or the consent of the holders of which is required for any waiver of
compliance with certain provisions of the Indenture or of certain defaults
thereunder and their consequences as provided for in the Indenture; (iv)
modify or alter the provisions of the Indenture regarding the voting of Notes
held by the Issuer, the Depositor or an affiliate of any of them; (v) decrease
the percentage of the aggregate principal amount of Notes required to amend
the sections of the Indenture which specify the applicable percentage of
aggregate principal amount of the Notes necessary to amend the Indenture or
certain other related agreements; (vi) modify any of the provisions of the
Indenture in such manner as to affect the calculation of the amount of any
payment of interest or principal due on any Note (including the calculation of
any of the individual components of such calculation); or (vii) permit the
creation of any lien ranking prior to or, except as otherwise contemplated by
the Indenture, on a parity with the lien of the Indenture with respect to any
of the collateral for the Notes or, except as otherwise permitted or
contemplated in the Indenture, terminate the lien of the Indenture on any such
collateral or deprive the holder of any Note of the security afforded by the
lien of the Indenture.
The Issuer and the Indenture Trustee may also enter into supplemental
indentures, with the consent of the Credit Enhancer and without obtaining the
consent of the Noteholders, for the purpose of, among other things, curing any
ambiguity or correcting or supplementing any provision in the Indenture that
may be inconsistent with any other provision therein.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE ISSUER
Neither the Indenture Trustee nor any director, officer or employee of the
Indenture Trustee will be under any liability to the Issuer or the related
Noteholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Indenture or for errors in judgment;
provided, however, that none of the Indenture Trustee and any director,
officer or employee thereof will be protected against any liability which
would otherwise be imposed by reason of willful malfeasance, bad faith or
negligence in the performance of duties or by reason of reckless disregard of
obligations and duties under the Indenture. Subject to certain limitations set
forth in the Indenture, the Indenture Trustee and any director, officer,
employee or agent of the Indenture Trustee shall be indemnified by the Issuer
and held harmless against any loss, liability or expense incurred in
connection with investigating, preparing to defend or defending any legal
action, commenced or threatened, relating to the Indenture other than any
loss, liability or expense incurred by reason of willful
S-43
<PAGE>
malfeasance, bad faith or negligence in the performance of its duties under
such Indenture or by reason of reckless disregard of its obligations and
duties under the Indenture. All persons into which the Indenture Trustee may
be merged or with which it may be consolidated or any person resulting from
such merger or consolidation shall be the successor of the Indenture Trustee
under the Indenture.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Notes will not be treated as having
been issued with "original issue discount" (as defined in the Prospectus). See
"Certain Federal Income Tax Consequences" in the Prospectus.
Prospective investors in the Notes should see "Certain Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the Prospectus for a
discussion of the application of certain federal income and state and local
tax laws to the Issuer and purchasers of the Notes.
ERISA CONSIDERATIONS
Any fiduciary or other investor of Plan assets that proposes to acquire or
hold the Term Notes on behalf of or with Plan assets of any Plan should
consult with its counsel with respect to the potential applicability of the
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and the Code to the proposed investment. See "ERISA
Considerations" in the Prospectus.
LEGAL INVESTMENT
The Term Notes will not constitute "mortgage related securities" for
purposes of SMMEA. Accordingly, many institutions with legal authority to
invest in mortgage related securities may not be legally authorized to invest
in the Term Notes. No representation is made herein as to whether the Term
Notes constitute legal investments for any entity under any applicable
statute, law, rule, regulation or order. Prospective purchasers are urged to
consult with their counsel concerning the status of the Term Notes as legal
investments for such purchasers prior to investing in Term Notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated December 16, 1996 (the "UNDERWRITING AGREEMENT"), the Underwriter has
agreed to offer the Term Notes on a best efforts basis and the Depositor has
agreed to sell to the Underwriter such Term Notes when and if sold by the
Underwriter. The termination date of the offering of the Term Notes is the
earlier to occur of December 20, 1997, or the date on which all of such Term
Notes have been sold. Proceeds of the offering of the Term Notes will not be
placed in any escrow, trust or similar arrangement. It is expected that
delivery of the Term Notes will be made only in book-entry form through the
facilities of DTC, Cedel or Euroclear.
The Underwriter is offering the Term Notes on a best efforts basis and will
only be obligated to pay for and accept delivery of any of the Term Notes at
such time as it sells such Term Notes.
In addition, the Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Term Notes is subject to,
among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of
the Depositor's Registration Statement shall be in effect, and that no
proceedings for such purpose shall be pending before or threatened by the
Securities and Exchange Commission.
S-44
<PAGE>
The Depositor has been advised by the Underwriter that it presently intends
to make a market in the Term Notes offered hereby; however, it is not
obligated to do so, any market-making may be discontinued at any time, and
there can be no assurance that an active public market for the Term Notes will
develop.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter and that under limited circumstances the Underwriter will
indemnify the Depositor against certain liabilities, including liabilities
under the Securities Act of 1933, or contribute to payments the Underwriter
may be required to make in respect thereof.
Residential Funding Securities Corporation is an affiliate of the Depositor,
the Administrator and the Designated Seller.
EXPERTS
The consolidated balance sheets of the Credit Enhancer, AMBAC Indemnity
Corporation, at December 31, 1995 and 1994 and the consolidated statements of
operations, stockholder's equity and cash flows of AMBAC Indemnity Corporation
for each of the years in the three year period ended December 31, 1995
appearing in Appendix A of this Prospectus Supplement have been included
herein in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein and upon the
authority of said firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the consolidated financial
statements referred to above of AMBAC Indemnity Corporation refers to the
adoption of the Financial Accounting Standards Board's Statements of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," and
No. 112, "Employers' Accounting for Postemployment Benefits" in 1993.
LEGAL MATTERS
Certain legal matters with respect to the Term Notes will be passed upon for
the Depositor and the Administrator by Thacher Proffitt & Wood, New York, New
York and for the Master Servicer by General Counsel to the Master Servicer.
RATINGS
It is a condition to issuance that the Term Notes be rated "Aaa" by Moody's
and "AAA" by Standard & Poor's. The Depositor has not requested a rating on
the Term Notes by any rating agency other than Moody's and Standard & Poor's.
However, there can be no assurance as to whether any other rating agency will
rate the Term Notes, or, if it does, what rating would be assigned by any such
other rating agency. A rating on the Term Notes by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Term Notes by
Moody's and Standard & Poor's. A securities rating addresses the likelihood of
the receipt by holders of Term Notes of distributions on the Revolving Credit
Loans. The rating takes into consideration the structural and legal aspects
associated with the Term Notes. The ratings on the Term Notes do not, however,
constitute statements regarding the possibility that Holders might realize a
lower than anticipated yield. In addition, such ratings do not address the
likelihood of the receipt of any amounts in respect of Interest Shortfalls. A
securities rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
S-45
<PAGE>
APPENDIX A
FINANCIAL STATEMENTS OF THE CREDIT ENHANCER
AMBAC INDEMNITY CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of AMBAC Inc.)
Consolidated Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors
AMBAC Indemnity Corporation:
We have audited the accompanying consolidated balance sheets of AMBAC
Indemnity Corporation and subsidiaries (a wholly owned subsidiary of AMBAC Inc.)
as of December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of AMBAC Indemnity Corporation's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AMBAC
Indemnity Corporation and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, AMBAC
Indemnity Corporation has adopted the provisions of the Financial Accounting
Standards Board's Statements of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" and No. 112, "Employers' Accounting for
Postemployment Benefits," in 1993.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
New York, New York
January 31, 1996
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars In Thousands Except Share Data)
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Assets
Investments:
Bonds held in available-for-sale account, at fair value
(amortized cost of $2,090,101 in 1995 and $1,865,350
in 1994).............................................. $2,224,528 $1,795,958
Short-term investments, at cost (approximates fair
value)................................................ 163,953 85,202
---------- ----------
Total investments..................................... 2,388,481 1,881,160
Cash....................................................... 6,912 2,117
Securities purchased under agreements to resell............ 4,120 8,011
Receivable for securities.................................. 8,136 21,508
Investment income due and accrued.......................... 38,319 34,902
Investment in affiliate.................................... 25,827 24,976
Deferred acquisition costs................................. 82,620 71,774
Deferred income taxes...................................... -- 1,778
Current income taxes....................................... 2,171 10,544
Prepaid reinsurance........................................ 153,372 139,855
Other assets............................................... 48,472 41,677
---------- ----------
Total assets.......................................... $2,758,430 $2,238,302
========== ==========
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums........................................ $ 906,136 $ 839,775
Losses and loss adjustment expenses...................... 65,996 65,662
Ceded reinsurance balances payable....................... 14,654 908
Deferred income taxes.................................... 85,008 --
Accounts payable and other liabilities................... 43,625 43,519
Payable for securities................................... 86,304 26,696
---------- ----------
Total liabilities..................................... 1,201,723 976,560
---------- ----------
Stockholder's equity:
Preferred stock, par value $1,000.00 per share.
Authorized shares -- 285,000; issued and outstanding
shares -- none........................................ -- --
Common stock, par value $2.50 per share. Authorized
shares -- 40,000,000; issued and outstanding
shares -- 32,800,000 at December 31, 1995 and 1994.... 82,000 82,000
Additional paid-in capital............................... 481,059 444,258
Unrealized gains (losses) on investments, net of tax..... 87,112 (46,087)
Retained earnings........................................ 906,536 781,571
---------- ----------
Total stockholder's equity............................ 1,556,707 1,261,742
---------- ----------
Total liabilities and stockholder's equity............ $2,758,430 $2,238,302
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollars In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Gross premiums written........................... $195,033 $192,598 $321,490
Ceded premiums written........................... (28,606) 2,815 (35,810)
-------- -------- --------
Net premiums written.......................... 166,427 195,413 285,680
Increase in unearned premiums, net............... (52,844) (76,077) (132,862)
-------- -------- --------
Net premiums earned........................... 113,583 119,336 152,818
Net investment income............................ 131,496 119,737 104,609
Net realized gains (losses)...................... 177 (13,386) 30,145
Other income..................................... 6,777 6,887 1,516
-------- -------- --------
Total revenues................................ 252,033 232,574 289,088
-------- -------- --------
Expenses:
Losses and loss adjustment expenses.............. 3,377 2,593 (1,849)
Underwriting and operating expenses.............. 38,722 35,946 34,746
Interest expense................................. 1,590 1,428 163
-------- -------- --------
Total expenses................................ 43,689 39,967 33,060
-------- -------- --------
Income before income taxes.................... 208,344 192,607 256,028
-------- -------- --------
Income tax expense:
Current taxes.................................... 29,085 26,286 66,386
Deferred taxes................................... 14,461 16,277 4,090
-------- -------- --------
Total income taxes............................ 43,546 42,563 70,476
-------- -------- --------
Income before cumulative effect of changes in
accounting principles......................... 164,798 150,044 185,552
Cumulative effect of changes in accounting
principles.................................... -- -- (98)
-------- -------- --------
Net income.................................... $164,798 $150,044 $185,454
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Stockholder's Equity
(Dollars In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Preferred Stock:
Balance at January 1 and December 31........... $ -- $ -- $ --
========== ========== =========
Common Stock:
Balance at January 1 and December 31........... $ 82,000 $ 82,000 $ 82,000
========== ========== =========
Additional Paid-in Capital:
Balance at January 1........................... $ 444,258 $ 444,143 $397,570
Capital contributions.......................... 35,000 -- 40,000
Cumulative effect of changes in accounting
principles.................................. -- -- 4,708
Other paid-in capital.......................... 1,801 115 1,865
--------- --------- --------
Balance at December 31......................... $ 481,059 $ 444,258 $444,143
========== ========== =========
Unrealized Gains (Losses) on Investments, Net of
Tax:
Balance at January 1........................... $ (46,087) $ 68,091 $ 5,285
Unrealized gain from change in accounting
principle................................... -- -- 63,568
Change in unrealized gain (loss)............... 133,199 (114,178) (762)
--------- --------- --------
Balance at December 31......................... $ 87,112 ($ 46,087) $ 68,091
========== ========== =========
Retained Earnings:
Balance at January 1........................... $ 781,571 $ 667,527 $515,073
Net income..................................... 164,798 150,044 185,454
Dividends declared-common stock................ (40,000) (36,000) (33,000)
Other.......................................... 167 -- --
--------- --------- --------
Balance at December 31......................... $ 906,536 $ 781,571 $667,527
========== ========== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 164,798 $ 150,044 $ 185,454
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization............ 1,605 1,106 1,080
Amortization of bond premium and
discount.............................. (831) (1,097) (507)
Current income taxes payable............. 8,373 (6,069) (20,844)
Deferred income taxes payable............ 14,462 16,277 (2,463)
Deferred acquisition costs............... (10,846) (20,757) (7,059)
Unearned premiums........................ 52,844 76,077 132,862
Losses and loss adjustment expenses...... 334 1,625 (718)
Ceded reinsurance balances payable....... 13,746 (2,963) (5,147)
(Gain) loss on sales of investments...... (177) 13,386 (30,145)
Proceeds from sales of bonds in trading
account............................... -- -- 2,091,143
Proceeds from maturities of bonds in
trading account....................... -- -- 34,409
Purchases of bonds for trading account... -- -- (2,181,198)
Accounts payable and other liabilities... 106 20,497 9,591
Other, net............................... (11,273) 7,179 (1,622)
----------- ----------- -----------
Net cash provided by operating
activities......................... 233,141 255,305 204,836
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds at amortized
cost.................................. 1,882,485 1,305,011 18,912
Proceeds from maturities of bonds at
amortized cost........................ 163,031 39,126 60,131
Purchases of bonds at amortized cost..... (2,192,824) (1,559,982) (258,832)
Investment in preferred stock of
affiliate............................. -- -- (3,000)
Change in short-term investments......... (78,751) 9,005 (25,252)
Securities purchased under agreements to
resell................................ 3,891 (8,011) --
Other, net............................... (1,178) (3,786) (2,370)
----------- ----------- -----------
Net cash used in investing
activities......................... (223,346) (218,637) (210,411)
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid........................... (40,000) (36,000) (33,000)
Capital contribution..................... 35,000 -- 40,000
----------- ----------- -----------
Net cash (used in) provided by
financing activities............... (5,000) (36,000) 7,000
----------- ----------- -----------
Net cash flow......................... 4,795 668 1,425
Cash at beginning of year.................. 2,117 1,449 24
----------- ----------- -----------
Cash at December 31........................ $ 6,912 $ 2,117 $ 1,449
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Income taxes.......................... $ 19,500 $ 32,153 $ 86,781
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands)
1 BACKGROUND
AMBAC Indemnity Corporation ("AMBAC Indemnity") is a leading insurer of
municipal and structured finance obligations. Financial guarantee insurance
underwritten by AMBAC Indemnity guarantees payment when due of the principal of
and interest on the obligation insured. In the case of a default on the insured
bond, payments under the insurance policy may not be accelerated by the
policyholder without AMBAC Indemnity's consent. As of December 31, 1995, AMBAC
Indemnity's net insurance in force (principal and interest) was $199,078,000.
AMBAC Indemnity is a wholly owned subsidiary of AMBAC Inc. (NYSE: ABK), a
holding company that provides financial guarantee insurance and financial
services to both public and private clients through its subsidiaries.
As of December 31, 1995, AMBAC Indemnity owned approximately 26.5% of the
outstanding common stock of an affiliate, HCIA Inc. (NASDAQ: HCIA) ("HCIA"), a
leading health care information content company. AMBAC Inc. owns approximately
19.9% of the outstanding common stock of HCIA. Prior to 1995, AMBAC Inc. and
AMBAC Indemnity combined owned approximately 96% of HCIA. During 1995, HCIA
offered approximately 3.5 million shares of its common stock for sale in two
separate public offerings. In addition, in conjunction with the second public
offering by HCIA, AMBAC Inc. sold approximately 1.1 million shares of HCIA
common stock. As a result of these public offerings, as of December 31, 1995,
AMBAC Indemnity and AMBAC Inc. combined owned 46.4% of the common stock of HCIA.
AMBAC Indemnity, as the sole limited partner, owns a limited partnership
interest representing 90% of the total partnership interests of AMBAC Financial
Services, Limited Partnership ("AFS"), a limited partnership which provides
interest rate swaps primarily to states, municipalities and municipal
authorities. The sole general partner of AFS, AMBAC Financial Services Holdings,
Inc., a wholly owned subsidiary of AMBAC Inc., owns a general partnership
interest representing 10% of the total partnership interest in AFS.
AMBAC Indemnity has one wholly owned subsidiary, American Municipal Bond
Holding Company ("AMBH"), which is a holding company for certain real estate
interests.
2 SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared on
the basis of generally accepted accounting principles ("GAAP"). The preparation
of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
significant accounting policies of AMBAC Indemnity and its subsidiaries are as
described below:
CONSOLIDATION:
The consolidated financial statements include the accounts of AMBAC
Indemnity, AFS and AMBH (sometimes collectively referred to as "AMBAC
Indemnity"). All significant intercompany balances have been eliminated.
5
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
INVESTMENTS:
AMBAC Indemnity's investment portfolio is accounted for on a trade-date
basis and consists entirely of investments in debt securities which are
considered available-for-sale and are carried at fair value. Fair value is based
on quotes obtained by AMBAC Indemnity from independent market sources.
Short-term investments are carried at cost, which approximates their fair value.
Unrealized gains and losses, net of deferred income taxes, are included as a
separate component of stockholder's equity and are computed using amortized cost
as the basis. For purposes of computing amortized cost, premiums and discounts
are accounted for using the interest method. For bonds purchased at a price
below par value, discounts are accreted over the remaining term of the
securities. For bonds purchased at a price above par value which have call
features, premiums are amortized to the most likely call dates as determined by
management. For premium bonds which do not have call features, such premiums are
amortized over the remaining term of the securities. Premiums and discounts on
mortgage-backed securities are adjusted for the effects of actual and
anticipated prepayments. Realized gains and losses on the sale of investments
are determined on the basis of specific identification.
Effective December 31, 1993, AMBAC Indemnity adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("Statement 115"). Pursuant to Statement 115, AMBAC Indemnity
has designated all investments as "available-for-sale" and reports them at fair
value. Unrealized gains and losses are excluded from earnings and reported as a
separate component of stockholder's equity, net of tax. The cumulative effect of
adopting Statement 115 as of December 31, 1993 was to increase AMBAC Indemnity's
stockholder's equity by $63,568, net of tax. The adoption of Statement 115 had
no effect on earnings.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL:
Securities purchased under agreements to resell are collateralized
financing transactions, and are recorded at their contracted resale amounts,
plus accrued interest. AMBAC Indemnity takes possession of the collateral
underlying those agreements and monitors its market value on a daily basis and,
when necessary, requires prompt transfer of additional collateral to reflect
current market value.
PREMIUM REVENUE RECOGNITION:
Premiums for municipal new issue and secondary market policies are: (i)
generally computed as a percentage of principal and interest insured; (ii)
typically collected in a single payment at policy inception date; and (iii) are
earned pro rata over the period of risk. Premiums for structured finance
policies can be computed as a percentage of either principal or principal and
interest insured. The timing of the collection of structured finance premiums
varies among individual transactions. For policies where premiums are collected
in a single payment at policy inception date, premiums are earned pro rata over
the period of risk. For policies with premiums that are collected periodically
(i.e., monthly, quarterly or annually), premiums are reflected in income pro
rata over the period covered by the premium payment.
When an AMBAC Indemnity-insured new or secondary market issue has been
refunded or called, the remaining unearned premium is generally earned at that
time, as the risk to AMBAC Indemnity is considered to have been eliminated.
6
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
LOSSES AND LOSS ADJUSTMENT EXPENSES:
The liability for losses and loss adjustment expenses consists of the
Active Credit Reserve ("ACR") and case basis loss reserves. The development of
the ACR is based upon estimates of the ultimate aggregate losses inherent in the
obligations insured and reflects the net result of contributions related to the
portion of earnings required to cover those losses, less reductions of ACR no
longer deemed necessary by management. When losses occur (actual monetary
defaults or defaults which are imminent on insured obligations), case basis loss
reserves are established in an amount that is sufficient to cover the present
value of the anticipated defaulted debt service payments over the expected
period of default and estimated expenses associated with settling the claims,
less estimated recoveries under salvage or subrogation rights. All or part of
case basis loss reserves are allocated from any ACR available for such insured
obligation.
AMBAC Indemnity's management believes that the reserves for losses and loss
adjustment expenses are adequate to cover the ultimate net cost of claims, but
the reserves are necessarily based on estimates and there can be no assurance
that the ultimate liability will not exceed such estimates.
DEFERRED ACQUISITION COSTS:
Certain costs incurred which vary with, and are primarily related to, the
production of business have been deferred. These costs include direct and
indirect expenses related to underwriting, marketing and policy issuance, rating
agency fees and premium taxes, net of reinsurance ceding commissions. The
deferred acquisition costs are being amortized over the periods in which the
related premiums are earned, and such amortization amounted to $10,183, $9,348
and $12,120 for 1995, 1994 and 1993, respectively. Deferred acquisition costs,
net of such amortization, amounted to $10,845, $20,757 and $7,059 for 1995, 1994
and 1993, respectively.
DEPRECIATION AND AMORTIZATION:
Depreciation of furniture and fixtures and electronic data processing
equipment is provided over the estimated useful lives of the respective assets
using the straight-line method. Amortization of leasehold improvements and
intangibles, including certain computer software licenses, is provided over the
estimated useful lives of the respective assets using the straight-line method.
INTEREST RATE CONTRACTS:
Interest Rate Contracts Held for Purposes Other Than Trading:
AMBAC Indemnity uses interest rate contracts for hedging purposes as part
of its overall interest rate risk management. Gains and losses on interest rate
futures and options contracts that qualify as accounting hedges of existing
assets or liabilities are included in the carrying amounts and amortized over
the remaining lives of the assets and liabilities as an adjustment to interest
income. When the hedged asset is sold, the unamortized gain or loss on the
related hedge is recognized in income. Gains and losses on interest rate
contracts that do not qualify as accounting hedges are recognized in current
period income.
AMBAC Indemnity accounts for its interest rate futures contracts in
accordance with the provisions of Statement of Financial Accounting Standards
No. 80, "Accounting For Futures Contracts" ("Statement 80"). Statement 80
permits hedge accounting for interest rate futures contracts when the item to be
hedged exposes the Company to price or interest rate risk, and the futures
contract effectively reduces that exposure and is designated as a hedge.
Interest rate futures contracts held for purposes other than trading are used
primarily to hedge interest sensitive assets, and are designated at inception as
a hedge to specific assets.
7
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Interest rate swaps that are linked with existing liabilities are accounted
for like a hedge of those liabilities, using the accrual method as an adjustment
to interest expense. Interest rate swaps that are linked with existing assets
classified as available-for-sale are accounted for like hedges of those assets,
using the accrual method as an adjustment to interest income, with unrealized
gains and losses included in stockholder's equity, net of tax.
Interest Rate Contracts Held for Trading Purposes:
AMBAC Indemnity, in connection with its market making activities as a
provider of interest rate swaps, primarily to states, municipalities, municipal
authorities and other entities in connection with their financings, uses
interest rate contracts which are classified as held for trading purposes.
Interest rate contracts are recorded on trade date at fair value. Changes in
fair value are recorded as a component of other income. The fair value of
interest rate swaps is determined through the use of valuation models. The
portion of the interest rate swap's initial fair value that reflects credit
considerations, on-going servicing and transaction hedging costs is recognized
over the life of the interest rate swap, as an adjustment to other income.
Interest rate swaps are recorded on a gross basis; assets and liabilities are
netted by customer only when a legal right of set-off exists.
INCOME TAXES:
AMBAC Inc., as common parent, files a consolidated Federal income tax
return with its subsidiaries. Effective January 1, 1993, AMBAC Indemnity adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("Statement 109"). Under Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date.
The cumulative effect of this change in accounting for income taxes
resulted in an increase to net income for 1993 of $1,162 and an increase to
additional paid-in capital of $4,708. The adjustment to additional paid-in
capital reflects Statement 109 adjustments for prior business combinations.
The Internal Revenue Code permits municipal bond insurance companies to
deduct from taxable income, subject to certain limitations, the amounts added to
the statutory mandatory contingency reserve during the year. The deduction taken
is allowed only to the extent that U.S. Treasury noninterest-bearing tax and
loss bonds are purchased at their par value prior to the original due date of
AMBAC Inc.'s consolidated Federal tax return and held in an amount equal to the
tax benefit attributable to such deductions. The amounts deducted must be
included in taxable income when the contingency reserve is released, at which
time AMBAC Indemnity may redeem the tax and loss bonds to satisfy the additional
tax liability. The purchases of tax and loss bonds are recorded as payments of
Federal income taxes and are not reflected in AMBAC Indemnity's current tax
provision.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS:
AMBAC Inc., through its subsidiaries, provides various postretirement and
postemployment benefits, including pension, and health and life benefits
covering substantially all employees who meet certain age and service
requirements. AMBAC Indemnity accounts for these benefits under the accrual
method of accounting. Amounts related to the defined benefit pension plan and
postretirement health benefits are charged based on actuarial determinations.
8
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Effective January 1, 1993, AMBAC Indemnity adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("Statement 106"). Statement 106 requires that the expected
cost of postretirement benefits, other than pensions, be charged to expense
during the period that the employee renders service. AMBAC Indemnity elected to
recognize the transition obligation immediately and recorded a charge of $465,
after reduction of $240 for income tax benefits, as a cumulative effect of a
change in accounting principle as of the date of adoption.
Effective January 1, 1993, AMBAC Indemnity adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" ("Statement 112"), which, similar to Statement 106, requires accrual
of a liability representing the cost of certain benefits earned by employees
over their employment period. Statement 112 applies to vested benefits provided
to former or inactive employees, their beneficiaries and covered dependents,
after employment but before retirement. In adopting Statement 112, AMBAC
Indemnity recorded a charge of $801, after reduction for income tax benefits of
$429, as a cumulative effect of a change in accounting principle as of the date
of adoption.
STOCK COMPENSATION PLANS:
In 1991, AMBAC Inc. adopted the AMBAC Inc. 1991 Stock Incentive Plan. Under
this plan awards are granted to eligible employees of AMBAC Indemnity in the
form of incentive stock options or other stock-based awards. In October 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("Statement 123") which must be adopted no later than 1996. Statement 123
applies to all stock-based employee compensation plans (except employee stock
ownership plans) in which an employer grants shares of its stock or other equity
instruments to employees. Statement 123 permits a company to choose either the
fair value based method of accounting as defined in the statement or the
intrinsic value based method of accounting as prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") for its stock-based
compensation plans. Companies electing the accounting requirements under APB 25
must also make pro forma disclosures of net income and earnings per share as if
the fair value based method of accounting had been applied. AMBAC Indemnity
currently accounts for its plans under APB 25 and intends to continue to do so
after adopting Statement 123 in 1996. The adoption of Statement 123 is expected
to have no effect on AMBAC Indemnity's results of operations.
RECLASSIFICATIONS:
Certain reclassifications have been made to prior years' amounts to conform
to the current year's presentation.
9
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
3 INVESTMENTS
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1995
Municipal obligations........................ $1,558,754 $ 98,090 $ 2,428 $1,654,416
Corporate securities......................... 261,492 30,785 3,263 289,014
U.S. Government obligations.................. 214,224 8,796 621 222,399
Mortgage-backed securities (including
GNMA)...................................... 55,631 3,362 294 58,699
Other........................................ 163,953 -- -- 163,953
---------- ---------- ---------- ----------
$2,254,054 $ 141,033 $ 6,606 $2,388,481
========= ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1994
Municipal obligations........................ $1,505,501 $ 23,009 $ 80,935 $1,447,575
Corporate securities......................... 228,992 2,336 11,501 219,827
U.S. Government obligations.................. 61,906 311 1,797 60,420
Mortgage-backed securities (including
GNMA)...................................... 70,251 1,325 2,140 69,436
Other........................................ 83,902 -- -- 83,902
---------- ---------- ---------- ----------
$1,950,552 $ 26,981 $ 96,373 $1,881,160
========= ======== ======== =========
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1995, by contractual maturity, were as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
---------- ----------
<S> <C> <C>
1995
Due in one year or less..................................... $ 223,069 $ 223,949
Due after one year through five years....................... 168,417 181,772
Due after five years through ten years...................... 302,601 315,385
Due after ten years......................................... 1,504,336 1,608,676
---------- ----------
2,198,423 2,329,782
Mortgage-backed securities.................................. 55,631 58,699
---------- ----------
$2,254,054 $2,388,481
========= =========
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
10
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Net investment income comprised the following:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds.............................................. $127,865 $118,685 $102,020
Short-term investments............................. 6,116 3,512 4,278
-------- -------- --------
Total investment income.......................... 133,981 122,197 106,298
Investment expense................................. (2,485) (2,460) (1,689)
-------- -------- --------
Net investment income............................ $131,496 $119,737 $104,609
======== ======== ========
</TABLE>
Gross realized gains were $27,786, $26,514 and $42,217 for 1995, 1994 and
1993, respectively, and gross realized losses were $27,609, $39,900 and $12,072
for 1995, 1994 and 1993, respectively.
As of December 31, 1995, AMBAC Indemnity did not have any investment
concentrated in any single repayment source (excluding obligations of the U.S.
Government and its agencies) with a fair value greater than 2.0% of its
stockholder's equity.
As of December 31, 1995 and 1994, AMBAC Indemnity held securities subject
to agreements to resell for $4,120 and $8,011, respectively. Such securities
were held as collateral by AMBAC Indemnity. The agreements had terms of less
than 30 days.
As of December 31, 1995 and 1994, investment securities with a fair value
of $4,583 and $3,948, respectively, were pledged to futures brokers for required
margin.
4 REINSURANCE
In the ordinary course of business, AMBAC Indemnity cedes exposures under
various reinsurance contracts primarily designed to minimize losses from large
risks and to protect capital and surplus. The effect of reinsurance on premiums
written and earned was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- ---------------------
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct................... $192,277 $127,322 $188,057 $136,632 $321,179 $181,320
Assumed.................. 2,756 1,349 4,541 1,325 311 311
Ceded.................... (28,606) (15,088) 2,815 (18,621) (35,810) (28,813)
-------- -------- -------- -------- -------- --------
Net premiums............. $166,427 $113,583 $195,413 $119,336 $285,680 $152,818
======== ======== ======== ======== ======== ========
</TABLE>
The reinsurance of risk does not relieve the ceding insurer of its original
liability to its policyholders. In the event that all or any of the reinsurers
are unable to meet their obligations to AMBAC Indemnity under the existing
reinsurance agreements, AMBAC Indemnity would be liable for such defaulted
amounts. To minimize its exposure to significant losses from reinsurer
insolvencies, AMBAC Indemnity evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk. There were no reinsurance
receivables as of December 31, 1995 and 1994. As of December 31, 1995, prepaid
reinsurance of approximately $48,120 was associated with a single reinsurer. As
of December 31, 1995, AMBAC Indemnity held letters of credit and collateral
amounting to approximately $90,643 from its reinsurers to cover liabilities
ceded under the aforementioned reinsurance contracts.
AMBAC Indemnity terminated reinsurance contracts, resulting in return
premiums to AMBAC Indemnity of $18,141, $30,482 and $36,461 of which $15,700,
$25,891 and $31,010 were recorded as an
11
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
increase to the unearned premium reserve in 1995, 1994 and 1993, respectively,
with the remainder recognized as revenue.
5 LOSSES AND LOSS ADJUSTMENT EXPENSES
AMBAC Indemnity's liability for losses and loss adjustment expenses
includes case basis loss reserves and the ACR. Following is a summary of the
activity in the case basis loss and active credit reserve accounts and the
components of the liability for losses and loss adjustment expenses:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Case basis loss reserves:
Balance at January 1......................... $38,892 $35,155 $ 28,321
------- ------- --------
Incurred related to:
Current year............................... 750 8,073 6,630
Prior years................................ 2,650 (3,368) (926)
------- ------- --------
Total incurred.......................... 3,400 4,705 5,704
------- ------- --------
Paid related to:
Current year............................... 150 275 315
Prior years................................ 2,893 693 (1,445)
------- ------- --------
Total paid.............................. 3,043 968 (1,130)
------- ------- --------
Balance at December 31....................... 39,249 38,892 35,155
------- ------- --------
Active credit reserve:
Balance at January 1......................... 26,770 28,882 36,434
Net provision for losses..................... 4,097 4,422 6,709
ACR transfers to case reserves............... (4,120) (6,534) (14,261)
------- ------- --------
Balance at December 31....................... 26,747 26,770 28,882
------- ------- --------
Total................................... $65,996 $65,662 $ 64,037
======= ======= =========
</TABLE>
The terms "current year" and "prior years" in the foregoing table refer to
the year in which case basis loss reserves were established.
12
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
6 COMMITMENTS AND CONTINGENCIES
AMBAC Indemnity is responsible for leases on the rental of office space,
principally in New York City. The lease agreements which expire periodically
through September 2014, contain provisions for scheduled periodic rent increases
and are accounted for as operating leases. An estimate of future net minimum
lease payments in each of the next five years ending December 31, and the
periods thereafter, is as follows:
<TABLE>
<CAPTION>
Year Amount
- --------------- --------
<S> <C>
1996........................................................... $ 3,042
1997........................................................... 3,073
1998........................................................... 3,359
1999........................................................... 3,650
2000........................................................... 3,650
All later years................................................ 53,880
-------
$70,654
=======
</TABLE>
Rent expense for the aforementioned leases amounted to $2,924, $2,719 and
$2,778 for the years ended December 31, 1995, 1994 and 1993, respectively.
7 INSURANCE REGULATORY RESTRICTIONS
AMBAC Indemnity is subject to insurance regulatory requirements of the
States of Wisconsin, New York and the other jurisdictions in which it is
licensed to conduct business.
AMBAC Indemnity's ability to pay dividends is generally restricted by law
and subject to approval by the Office of the Commissioner of Insurance of the
State of Wisconsin (the "Wisconsin Commissioner"). Wisconsin insurance law
restricts the payment of dividends in any 12-month period without regulatory
approval to the lesser of (a) 10% of policyholders' surplus as of the preceding
December 31 and (b) the greater of (i) statutory net income for the calendar
year preceding the date of dividend, minus realized capital gains for that
calendar year and (ii) the aggregate of statutory net income for three calendar
years preceding the date of the dividend, minus realized capital gains for those
calendar years and minus dividends paid or credited within the first two of the
three preceding calendar years. AMBAC Indemnity paid dividends of $40,000,
$36,000 and $33,000 on its common stock in 1995, 1994 and 1993, respectively.
Based upon these restrictions, at December 31, 1995, the maximum amount that
will be available during 1996 for payment of dividends by AMBAC Indemnity
without prior approval is approximately $86,000.
However, as discussed in Note 15, AMBAC Indemnity, upon consummation of the
proposed PRIDES offering will deliver to AMBAC Inc. (in the form of an
extraordinary dividend) its 2,378,672 shares of HCIA common stock, at fair
value. The Wisconsin Commissioner has approved such dividend. The fair value of
such dividend will be determined based on the price per share of HCIA common
stock used to price the PRIDES. As a result, any dividends paid by AMBAC
Indemnity to AMBAC Inc. for the twelve months following the extraordinary
dividend will require pre-approval from the Wisconsin Commissioner. The
Wisconsin Commissioner has stated to AMBAC Indemnity management that it does not
foresee any reason such pre-approval would not be given.
The New York Financial Guarantee Insurance Law establishes single risk
limits applicable to all obligations issued by a single entity and backed by a
single revenue source. Under the limit applicable to
13
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
municipal bonds, the insured average annual debt service for a single risk, net
of reinsurance and collateral, may not exceed 10% of the sum of the insurer's
policyholders' surplus and contingency reserves. In addition, insured principal
of municipal bonds attributable to any single risk, net of reinsurance and
collateral, is limited to 75% of the insurer's policyholders' surplus and
contingency reserves. Additional single risk limits, which generally are more
restrictive than the municipal bond single risk limit, are also specified for
several other categories of insured obligations.
Statutory capital and surplus was $862,976 and $781,772 at December 31,
1995 and 1994, respectively. Qualified statutory capital (statutory surplus plus
contingency reserve) was $1,358,769 and $1,218,204 at December 31, 1995 and
1994, respectively. Statutory net income was $142,541, $116,238 and $166,157 for
1995, 1994 and 1993, respectively. Statutory capital and surplus differs from
stockholder's equity determined under GAAP principally due to statutory
accounting rules that treat loss reserves, premiums earned, policy acquisition
costs and deferred income taxes differently.
8 INCOME TAXES
The total effect of income taxes on income and stockholder's equity for the
years ended December 31, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Total income taxes charged to income.................. $ 43,546 $ 42,563
-------- --------
Income taxes charged (credited) to stockholder's
equity:
Unrealized gain (loss) on bonds..................... 71,722 (61,480)
Unrealized gain on investment in affiliate.......... 602 --
Other............................................... (682) (116)
-------- --------
Total charged (credited) to stockholder's
equity................................... 71,642 (61,596)
-------- --------
Total effect of income taxes.......................... $115,188 $(19,033)
======== ========
</TABLE>
The tax provisions in the accompanying consolidated statements of
operations reflect effective tax rates differing from prevailing Federal
corporate income tax rates. The following is a reconciliation of these
differences:
<TABLE>
<CAPTION>
1995 % 1994 % 1993 %
-------- ----- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax at
statutory rate................ $ 72,920 35.0% $ 67,412 35.0% $ 89,610 35.0%
Increases (reductions) in
expected tax resulting from:
Tax-exempt interest........ (28,274) (13.6) (26,336) (13.7) (21,043) (8.2)
Adjustment to deferred tax
assets and liabilities
for enacted changes in
tax laws and rates...... -- -- -- -- 754 0.3
Other, net................. (1,100) (0.5) 1,487 0.8 1,155 0.4
------- ----- ------- ---- ------- ----
Income tax expense on income from
continuing operations.......... $ 43,546 20.9% $ 42,563 22.1% $ 70,476 27.5%
======= ===== ======= ==== ======= ====
</TABLE>
14
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities and deferred tax assets at December 31,
1995 and 1994 are presented below:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gains on bonds............................ $ 46,906 $ --
Deferred acquisition costs........................... 28,917 25,121
Unearned premiums.................................... 22,079 14,522
Unrealized gain on investment in affiliate........... 602 --
Investments.......................................... 2,911 796
Other................................................ 1,996 1,613
------- -------
Total deferred tax liabilities.............. 103,411 42,052
------- -------
Deferred tax assets:
Unrealized loss on bonds............................. -- 24,816
Loss reserves........................................ 9,631 9,733
Insurance in force................................... 2,870 3,205
Compensation......................................... 2,418 2,812
Other................................................ 3,484 3,264
------- -------
Sub-total deferred tax assets............... 18,403 43,830
Valuation allowance.................................. -- --
------- -------
Total deferred tax assets................... 18,403 43,830
------- -------
Net deferred tax (liabilities) assets....... $(85,008) $ 1,778
======= =======
</TABLE>
AMBAC Indemnity believes that no valuation allowance is necessary in
connection with the deferred tax assets.
9 EMPLOYEE BENEFITS
Pensions:
AMBAC Inc. has a defined benefit pension plan covering substantially all
employees of AMBAC Indemnity and AFS. The benefits are based on years of service
and the employee's compensation during the last five years of employment. AMBAC
Indemnity's funding policy is to contribute annually the maximum amount that can
be deducted for Federal income tax purposes. Contributions are intended to
provide not only for benefits attributed to service-to-date but also for those
expected to be earned in the future.
The actuarial present value of the benefit obligations shown in the table
below sets forth the plan's funded status and amounts recognized by AMBAC Inc.
as of December 31, 1995 and 1994.
15
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Actuarial present value of the benefit obligations:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of
$6,049 and $4,300, respectively................................ $(6,788) $(5,000)
======= =======
Projected benefit obligation for service rendered to date........ (7,800) (5,500)
Plan assets at fair value, primarily listed stocks, commingled
funds and fixed income securities.............................. 7,054 4,898
------- -------
Unfunded projected benefit....................................... (746) (602)
Unrecognized prior service cost.................................. (1,784) (1,950)
Unrecognized net loss............................................ 1,906 1,412
Unrecognized net transition asset................................ (12) (15)
------- -------
Pension liability -- entire plan................................. $ (636) $(1,155)
======= =======
</TABLE>
Net pension costs for 1995, 1994 and 1993 included the following
components:
<TABLE>
<CAPTION>
1995 1994 1993
------- ----- -----
<S> <C> <C> <C>
Service cost............................................. $ 541 $ 558 $ 447
Interest cost on expected benefit obligation............. 456 386 297
Actual return on plan assets............................. (1,333) 30 (390)
Net amortization and deferral............................ 760 (547) (149)
------- ----- -----
Net periodic pension cost................................ $ 424 $ 427 $ 205
======= ===== =====
</TABLE>
The weighted-average discount rate used in the determination of the
actuarial present value for the projected benefit obligation was 7.25% and 8.0%
for 1995 and 1994, respectively. The expected long-term rate of return on assets
was 9.25% for both 1995 and 1994. The rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 5.0% in both 1995 and 1994.
Substantially all employees of AMBAC Indemnity and AFS are covered by a
defined contribution plan (the "Savings Incentive Plan") for which contributions
and costs are determined as 6% of each covered employee's base salary, plus a
matching company contribution of 50% on contributions up to 6% of base salary
made by eligible employees to the plan. The total cost of the Savings Incentive
Plan to AMBAC Indemnity was $1,435, $1,292 and $1,243 in 1995, 1994 and 1993,
respectively.
Annual Incentive Plan:
AMBAC Indemnity has an annual incentive plan which provides for awards to
key officers and employees based upon predetermined criteria. The cost of the
plan to AMBAC Indemnity for the years ended December 31, 1995, 1994 and 1993 was
$7,669, $8,531 and $6,165, respectively.
Postretirement Health Care and Other Benefits:
AMBAC Indemnity provides certain medical and life insurance benefits for
retired employees and eligible dependents. All plans are contributory. None of
the plans is currently funded.
16
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Postretirement benefits expense was $168, $176 and $500 in 1995, 1994 and
1993, respectively. The unfunded accumulated postretirement benefit obligation
was $1,309 and the accrued postretirement liability was $1,368 as of December
31, 1995.
The assumed weighted average health care cost trend rates range from 13.5%
in 1995, decreasing ratably to 5.5% in 2001, and remaining at that level
thereafter. Increasing the assumed health care cost trend rate by one percentage
point in each future year would increase the accumulated postretirement benefit
obligation at December 31, 1995 by $174 and the 1995 benefit expense by $28. The
weighted average discount rate used to measure the accumulated postretirement
benefit obligation and 1995 expense was 7.25%.
10 INSURANCE IN FORCE
The par amount of bonds insured by AMBAC Indemnity, net of reinsurance, was
$110,997,000 and $93,305,000 at December 31, 1995 and 1994, respectively. As of
December 31, 1995, AMBAC Indemnity's insured portfolio was diversified by type
of insured bond as shown in the following table:
<TABLE>
<CAPTION>
Net Par Amount
Outstanding
--------------------
(Dollars in Millions) As of December 31 1995 1994
-------- -------
<S> <C> <C>
Municipal finance:
General obligation........................... $ 30,546 $26,674
Utility revenue.............................. 21,053 19,597
Tax-backed revenue........................... 18,780 16,279
Health care revenue.......................... 12,553 10,922
Transportation revenue....................... 6,293 5,397
Investor Owned Utilities..................... 4,497 3,500
Higher education............................. 3,973 3,447
Student loan................................. 3,769 2,709
Housing revenue.............................. 3,577 2,567
Other........................................ 483 403
-------- -------
Total Municipal finance................... 105,524 91,495
-------- -------
Structured finance:
Domestic..................................... 3,238 902
International................................ 2,235 908
-------- -------
Total Structured finance.................. 5,473 1,810
-------- -------
$110,997 $93,305
========= =======
</TABLE>
As of December 31, 1995, California was the state with the highest
aggregate net par amount inforce, accounting for 14.3% of the total, and the
highest single insured risk represented 0.6% of aggregate net par amount
insured. AMBAC Indemnity's direct insurance in force (principal and interest)
was $235,118,000 and $205,810,000, at December 31, 1995 and 1994, respectively.
Net insurance in force (after giving effect to reinsurance) was $199,078,000 and
$171,678,000 as of December 31, 1995 and 1994, respectively.
17
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
11 FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
Financial instruments with off-balance-sheet risk:
In the normal course of business, AMBAC Indemnity becomes a party to
various financial transactions to reduce its exposure to fluctuations in
interest rates. These financial instruments include an interest rate swap
agreement and exchange traded interest rate futures contracts. The notional
amounts of AMBAC Indemnity's off-balance-sheet financial instruments which are
held for purposes other than trading were as follows:
<TABLE>
<CAPTION>
As of December 31,
--------------------
1995 1994
------- --------
<S> <C> <C>
Interest rate futures contracts................ $44,500 $164,200
Interest rate swap............................. 20,000 20,000
</TABLE>
Notional principal amounts are often used to express the volume of these
transactions and do not reflect the extent to which positions may offset one
another. These amounts do not represent the much smaller amounts potentially
subject to risk.
Interest rate futures contracts are sold to hedge interest rate risk
inherent in fixed rate investment securities. At December 31, 1995, interest
rate futures contracts with an outstanding notional amount of $44,500 were
designated as hedges of fixed rate investment securities.
The interest rate swap held for purposes other than trading is used to
manage interest rate risk by synthetically changing the nature of certain
floating rate investments.
Fair values of financial instruments held for purposes other than trading:
The following fair value amounts were determined by AMBAC Indemnity using
independent market information when available, and appropriate valuation
methodologies when market quotes were not available. In cases where specific
market quotes are unavailable, interpreting market data and estimating market
values necessarily require considerable judgment by management. Accordingly, the
estimates presented are not necessarily indicative of the amount AMBAC Indemnity
could realize in a current market exchange.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Investments: The fair values of bonds are based on quoted market prices or
dealer quotes.
Short-term investments and cash: The fair values of short-term investments
and cash are assumed to equal amortized cost.
Securities purchased under agreements to resell: The fair value of
securities purchased under agreements to resell is assumed to approximate
carrying value.
Investment in affiliate: As of December 31, 1995, the fair value of AMBAC
Indemnity's investment in HCIA is based on the quoted market price of HCIA
common stock. As of December 31, 1994, the fair value of AMBAC Indemnity's
investment in HCIA was assumed to equal carrying value.
Interest rate contracts: Fair values of off-balance-sheet interest rate
contracts (futures and swap) are based on quoted market and dealer prices,
current settlement values, or pricing models.
18
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Liability for net financial guarantees written: The fair value of the
liability for those financial guarantees written related to new issue and
secondary market exposures is based on the estimated cost to reinsure those
exposures at current market rates, which amount consists of the current unearned
premium reserve, less an estimated ceding commission thereon.
Certain other financial guarantee insurance policies have been written on
an installment basis, where the future premiums to be received by AMBAC
Indemnity are determined based on the outstanding exposure at the time the
premiums are due. The fair value of AMBAC Indemnity's liability under its
installment premium policies is measured using the present value of estimated
future installment premiums, less an assumed ceding commission. The estimate of
the amounts and timing of the future installment premiums is based on
contractual premium rates, debt service schedules and expected run-off
scenarios. This measure is used as an estimate of the cost to reinsure AMBAC
Indemnity's liability under these policies. The carrying amount and estimated
fair value of these financial instruments are presented below:
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------
1995 1994
----------------------- -----------------------
Carrying Estimated Carrying Estimated
(Dollars in Millions) Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Investments........................ $2,225 $2,225 $1,796 $1,796
Short-term investments............. 164 164 85 85
Securities purchased under
agreements to resell............. 4 4 8 8
Investment in affiliate............ 26 111 25 25
Cash............................... 7 7 2 2
Unrecognized financial instruments:
Interest rate swap................. -- -- -- (1)
Interest rate futures contracts.... -- -- -- --
Liability for net financial
guarantees
Direct........................... -- 655 -- 609
Net of reinsurance............... -- 543 -- 507
Net installment premiums......... -- 80 -- 51
</TABLE>
12 FINANCIAL INSTRUMENTS HELD FOR TRADING PURPOSES
AMBAC Indemnity, through its affiliate AFS, is a provider of interest rate
swaps to states, municipalities, municipal authorities and other entities,
including its affiliate, AMBAC Capital Management, Inc. ("ACMI"), in connection
with their financings. AMBAC Indemnity manages its interest rate swap business
with the goal of being market neutral to changes in overall interest rates,
while retaining "basis risk", the relationship between changes in floating rate
tax-exempt and floating rate taxable interest rates. If actual or projected
floating rate tax-exempt interest rates rise in relation to floating rate
taxable rates, AMBAC Indemnity will experience an unrealized mark-to-market
loss. Conversely, if actual or projected floating rate tax-exempt interest rates
decline in relation to floating rate taxable interest rates, AMBAC Indemnity
will experience an unrealized mark-to-market gain.
19
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
In the ordinary course of business, AMBAC Indemnity manages a variety of
risks -- principally credit, market, liquidity, operational and legal. These
risks are identified, measured and monitored through a variety of control
mechanisms, which are in place at different levels throughout the organization.
Credit risk relates to the ability of counterparties to perform according
to the terms of their contractual commitments. Various procedures and controls
are in place to monitor the credit risk of interest rate swaps. These include
the initial credit approval process, the establishment of credit limits,
management approvals and a process that ensures the continuous monitoring of
credit exposure.
Market risk relates to the impact of price changes on future earnings. This
risk is a consequence of AMBAC Indemnity's market-making activities in the
municipal interest rate swap market. The principal market risk is basis risk,
the relationship between changes in floating rate tax-exempt and floating rate
taxable interest rates. Since the third quarter of 1995, all municipal interest
rate swaps transacted contain provisions which are designed to protect AMBAC
Indemnity against certain forms of tax reform, thus mitigating its basis risk.
An independent risk management group monitors trading risk limits and, together
with senior management, is involved in the application of risk measurement
methodologies.
The estimation of potential losses arising from adverse changes in market
relationships, known as "value at risk," is a key element in managing market
risk. AMBAC Indemnity has developed a value at risk methodology to estimate
potential losses over a specified holding period and based on certain
probabilistic assessments. AMBAC Indemnity estimates value at risk utilizing
historical short and long term interest rate volatilities and the relationship
between changes in tax-exempt and taxable interest rates calculated on a
consistent daily basis. For the year ended December 31, 1995, AMBAC Indemnity's
value at risk averaged approximately $1,358, calculated at a ninety-nine percent
confidence level. Since no single measure can capture all dimensions of market
risk, AMBAC Indemnity bolsters its value at risk methodology by performing daily
analyses of parallel and nonparallel shifts in yield curves and stress test
scenarios which measure the potential impact of market conditions, however
improbable, which might cause abnormal volatility swings or disruptions of
market relationships.
Liquidity risk relates to the possible inability to satisfy contractual
obligations when due. This risk is present in interest rate swap agreements and
in futures contracts used to hedge those agreements. AMBAC Indemnity manages
liquidity risk by maintaining cash and cash equivalents, closely matching the
dates swap payments are made and received and limiting the amount of risk hedged
by futures contracts.
Operational risk relates to the potential for loss caused by a breakdown in
information, communication and settlement systems. AMBAC Indemnity mitigates
operational risk by maintaining a comprehensive system of internal controls.
This includes the establishment of systems and procedures to monitor
transactions and positions, documentation and confirmation of transactions,
ensuring compliance with regulations and periodic reviews by auditors.
Legal risk relates to the uncertainty of the enforceability, through legal
or judicial processes, of the obligations of AMBAC Indemnity's counterparties,
including contractual provisions intended to reduce credit exposure by providing
for the offsetting or netting of mutual obligations. AMBAC Indemnity seeks to
remove or minimize such uncertainties through continuous consultation with
internal and external legal advisers to analyze and understand the nature of
legal risk, to improve documentation and to strengthen transaction structure.
20
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
The following table summarizes information about AMBAC Indemnity's
financial instruments held for trading purposes as of December 31, 1995 and
1994:
<TABLE>
<CAPTION>
Net Net Average Net Fair Value
Carrying Estimated ----------------------- Notional
Amount Fair Value Assets Liabilities Amount
-------- ---------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1995:
Interest rate
swaps............ $5,207 $5,207 $17,714 $16,667 $2,152,400
Interest rate
futures
contracts........ -- -- -- -- 569,800
1994:
Interest rate
swaps............ $1,681 $1,681 $ 4,441 $ 3,560 $ 771,900
Interest rate
futures
contracts........ -- -- -- -- 443,000
</TABLE>
The aggregate amount of net trading income recognized from interest rate
financial instruments held for trading purposes was $2,602 and $3,051 for 1995
and 1994, respectively. Average net fair values were calculated based on average
daily net fair values. For 1994, average net fair values began from the
commencement of operations in September 1994.
Notional principal amounts are often used to express the volume of these
transactions and do not reflect the extent to which positions may offset one
another. These amounts do not represent the much smaller amounts potentially
subject to risk.
13 LINES OF CREDIT
AMBAC Inc. and AMBAC Indemnity maintain a three-year revolving credit
facility with two major international banks, as co-agents, for $100,000. As of
December 31, 1995, no amounts were outstanding under this credit facility, which
expires in July 1998. This facility amended a one-year revolving credit facility
for $75,000. As of December 31, 1994, no amounts were outstanding under this
credit facility.
AMBAC Indemnity has an agreement with another major international bank, as
agent, for a $300,000 credit facility, expiring in 2002. This facility is a
seven-year stand-by irrevocable limited recourse line of credit, which was
increased from $225,000 to $300,000 and extended for an additional year in
December 1995. The line will provide liquidity to AMBAC Indemnity in the event
claims from municipal obligations exceed specified levels. Repayment of any
amounts drawn under the line will be limited primarily to the amount of any
recoveries of losses related to policy obligations. As of December 31, 1995 and
1994, no amounts were outstanding under this line.
14 RELATED PARTY TRANSACTIONS
During 1995 and 1994, AMBAC Indemnity guaranteed the timely payment of
principal and interest on obligations under municipal investment contracts and
municipal investment repurchase agreements issued by its affiliate, ACMI. As of
December 31, 1995 and 1994, the aggregate amount of municipal investment
contracts and municipal investment repurchase contracts insured was $2,240,959
and $2,042,230, respectively, including accrued interest. These insurance
policies are collateralized by ACMI's investment securities, accrued interest,
securities purchased under agreements to resell and cash and cash equivalents,
which as of December 31, 1995 and 1994 had a fair value of $2,299,687 and
$1,964,830, respectively, in the aggregate.
21
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
During 1995 and 1994, AMBAC Indemnity recorded gross premiums written of $1,707
and $2,692, and net premiums earned of $1,764 and $1,872, respectively, related
to these contracts.
During 1995 and 1994, several interest rate swap transactions were executed
between AFS and ACMI. As of December 31, 1995 and 1994, these contracts had an
outstanding notional amount of approximately $359,000 and $478,000,
respectively. As of December 31, 1995 and 1994, AFS recorded a positive fair
value of $6,539 and a negative fair value of $5,492, respectively, related to
these transactions.
15 SUBSEQUENT EVENTS
On January 19, 1996, AMBAC Inc. filed with the Securities and Exchange
Commission a registration statement related to a proposed offering of 3,781,369
PRIDES(SM) (Provisionally Redeemable Income Debt Exchangeable for Stock). The
PRIDES, which constitute senior debt of AMBAC Inc., will mature in 2001 and will
be mandatorily exchanged at maturity into shares of HCIA common stock (or, at
AMBAC Inc.'s option, cash with an equal value) determined in accordance with an
exchange rate formula. AMBAC Inc. may redeem the PRIDES, in whole or in part,
after three years. AMBAC Inc. has also granted the underwriters an option to
purchase up to 378,136 PRIDES to cover any over-allotments.
AMBAC Indemnity, upon consummation of the PRIDES offering, will deliver to
AMBAC Inc. (in the form of an extraordinary dividend) its 2,378,672 shares of
HCIA common stock, at fair value. The fair value of such dividend will be
determined based on the price per share of HCIA common stock used to price the
PRIDES.
22
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
(a wholly-owned subsidiary of AMBAC Inc.)
Consolidated Unaudited Financial Statements
as of September 30, 1996 and December 31, 1995
and for the periods ended September 30, 1996 and 1995
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
(unaudited)
Assets
- ------
<S> <C> <C>
Investments:
Bonds held in available for sale account, at fair value
(amortized cost of $2,224,021 in 1996 and $2,090,101 in 1995) $2,302,605 $2,224,528
Short-term investments, at cost (approximates fair value) 151,107 163,953
--------------- ----------------
Total investments 2,453,712 2,388,481
Cash 9,138 6,912
Securities purchased under agreements to resell 8,466 4,120
Receivable for securities 23,433 8,136
Investment income due and accrued 39,135 38,319
Investment in affiliate - 25,827
Deferred acquisition costs 90,022 82,620
Current income taxes - 2,171
Prepaid reinsurance 166,588 153,372
Other assets 51,443 48,472
--------------- ----------------
Total assets $2,841,937 $2,758,430
=============== ================
Liabilities and Stockholder's Equity
- ------------------------------------
Liabilities:
Unearned premiums $965,192 $906,136
Losses and loss adjustment expenses 60,170 65,996
Ceded reinsurance balances payable 11,280 14,654
Deferred income taxes 67,253 85,008
Current income taxes 12,963 -
Accounts payable and other liabilities 48,982 43,625
Payable for securities 80,737 86,304
--------------- ----------------
Total liabilities 1,246,577 1,201,723
--------------- ----------------
Stockholder's equity:
Preferred stock, par value $1,000.00 per share; authorized
shares - 285,000; issued and outstanding shares - none - -
Common stock, par value $2.50 per share; authorized shares
- 40,000,000; issued and outstanding shares - 32,800,000
at September 30, 1996 and December 31, 1995 82,000 82,000
Additional paid-in capital 514,809 481,059
Unrealized gains on investments, net of tax 51,079 87,112
Retained earnings 947,472 906,536
--------------- ----------------
Total stockholder's equity 1,595,360 1,556,707
--------------- ----------------
Total liabilities and stockholder's equity $2,841,937 $2,758,430
=============== ================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For The Periods Ended September 30, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------------------
1996 1995 1996 1995
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Gross premiums written $67,875 $43,960 $177,935 $121,425
Ceded premiums written (9,813) (7,369) (29,261) (4,314)
--------- --------- ---------- ---------
Net premiums written 58,062 36,591 148,674 117,111
Increase in unearned premiums (23,900) (9,919) (45,840) (37,482)
--------- --------- ---------- ---------
Net premiums earned 34,162 26,672 102,834 79,629
Net investment income 36,977 33,320 107,466 97,613
Net realized gains (losses) (5,381) (2,455) 64,555 (9,331)
Other income 2,377 1,762 13,182 3,747
--------- --------- ---------- ---------
Total revenues 68,135 59,299 288,037 171,658
--------- --------- ---------- ---------
Expenses:
Losses and loss adjustment expenses 1,301 841 3,811 2,210
Underwriting and operating expenses 9,713 8,900 31,379 28,146
Interest expense 514 505 1,542 1,142
--------- --------- ---------- ---------
Total expenses 11,528 10,246 36,732 31,498
--------- --------- ---------- ---------
Income before income taxes 56,607 49,053 251,305 140,160
--------- --------- ---------- ---------
Income tax expense:
Current taxes 10,521 5,113 62,834 18,656
Deferred taxes 888 5,123 1,648 8,789
--------- --------- ---------- ---------
Total income taxes 11,409 10,236 64,482 27,445
--------- --------- ---------- ---------
Net income 45,198 38,817 186,823 112,715
======== ========= ========== =========
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Periods Ended September 30, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $186,823 $112,715
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,463 1,240
Amortization of bond premium and discount (1,525) (707)
Current income taxes payable 15,134 4,282
Deferred income taxes payable 1,648 8,789
Deferred acquisition costs (7,402) (11,398)
Unearned premiums 45,840 37,482
Losses and loss adjustment expenses (5,826) 218
Ceded reinsurance balances payable (3,374) 2,089
(Gain) loss on sales of investments (64,555) 9,331
Other, net (2,004) (1,978)
------------ -----------
Net cash provided by operating activities 166,222 162,063
------------ -----------
Cash flows from investing activities:
Proceeds from sales of bonds at amortized cost 1,210,927 1,085,062
Proceeds from maturities of bonds at amortized cost 78,368 121,470
Purchases of bonds at amortized cost (1,462,567) (1,323,132)
Change in short-term investments 12,846 (15,125)
Proceeds from sale of affiliate 115,865 -
Securities purchased under agreements to resell (4,346) (531)
Other, net (1,724) (959)
------------ -----------
Net cash used in investing activities (50,631) (133,215)
------------ -----------
Cash flows from financing activities:
Dividends paid (145,865) (30,000)
Capital contribution 32,500 -
------------ -----------
Net cash used in financing activities (113,365) (30,000)
------------ -----------
Net cash flow 2,226 (1,152)
Cash at beginning of year 6,912 2,117
------------ -----------
Cash at September 30 $9,138 $965
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $13,300 $13,700
============ ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
AMBAC INDEMNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
AMBAC Indemnity Corporation ("AMBAC Indemnity") is a leading insurer of
municipal and structured finance obligations. Financial guarantee insurance
underwritten by AMBAC Indemnity guarantees payment when due of the principal of
and interest on the obligation insured. In the case of a default on the insured
obligation, payments under the insurance policy may not be accelerated by the
policyholder without AMBAC Indemnity's consent. As of September 30, 1996, AMBAC
Indemnity's net insurance in force (principal and interest) was $215.4 billion.
AMBAC Indemnity is a wholly-owned subsidiary of AMBAC Inc., which is a holding
company that provides through its affiliates financial guarantee insurance and
financial services to clients in both the public and private sectors.
AMBAC Indemnity has one wholly-owned subsidiary, American Municipal Bond
Holding Company ("AMBH"), which is a holding company for certain real estate
interests.
On May 6, 1996, AMBAC Inc. sold its 4,159,505 shares of common stock of its
affiliate, HCIA Inc. (NASDAQ:HCIA) ("HCIA") in a secondary public offering.
Prior to consummation of the secondary public offering, AMBAC Indemnity
delivered to AMBAC Inc. (in the form of an extraordinary dividend) its 2,378,672
shares of HCIA common stock, at fair value. The fair value of the HCIA shares
was $115.9 million, based on the offering price per share of HCIA common stock
in the secondary public offering. The carrying value of AMBAC Indemnity's HCIA
shares was $26.2 million, and the resulting gain to AMBAC Indemnity from the
disposition of the shares was $89.7 million. As a result of the secondary public
offering, neither AMBAC Indemnity, nor AMBAC Inc. own any shares of HCIA.
AMBAC Indemnity, as the sole limited partner, owns 90% of the total
partnership interests of AMBAC Financial Services, Limited Partnership ("AFS"),
a limited partnership which provides interest rate swaps primarily to states,
municipalities and municipal authorities. The sole general partner of AFS, AMBAC
Financial Services Holdings, Inc., a wholly-owned subsidiary of AMBAC Inc., owns
a general partnership interest representing 10% of the total partnership
interest in AFS.
AMBAC Indemnity's consolidated unaudited interim financial statements have been
prepared on the basis of generally accepted accounting principles ("GAAP") and,
in the opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Company's
financial condition, results of operations and cash flows for the periods
presented. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported revenues
and expenses during the reporting period. Actual results could differ from those
estimates. The results of operations for the nine months ended September 30,
1996 may not be indicative of the results that may be expected for the full year
ending December 31, 1996. These financial statements and notes should be
read in conjunction with
<PAGE>
AMBAC INDEMNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
the financial statements and notes included in the audited consolidated
financial statements of AMBAC Indemnity Corporation and its subsidiaries as of
December 31, 1995 and 1994, and for each of the years in the three-year period
ended December 31, 1995.
(2) INCOME TAXES
The tax provisions in the accompanying financial statements reflect
effective tax rates differing from prevailing federal corporate income tax
rates, primarily as a result of tax-exempt interest income.
<PAGE>
PROSPECTUS
ASSET-BACKED NOTES
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
Depositor
The Asset-Backed Notes (the "NOTES") offered hereby may be sold from time to
time in series, as described in the related Prospectus Supplement. Each series
of Notes will represent indebtedness of the related trust fund (the "TRUST
FUND") secured by certain assets deposited therein (the "TRUST ASSETS")
described below. The Trust Fund for a series of Notes and the related
Certificates (as defined herein, and together with the Notes, the
"SECURITIES") will consist primarily of a segregated pool (a "POOL") of (i)
one- to four-family first or junior lien home equity revolving lines of credit
(the "REVOLVING CREDIT LOANS"); (ii) one- to-four family first or junior lien
closed end home equity loans for property improvement, debt consolidation and
home equity purposes (the "HOME EQUITY LOANS"); (iii) home improvement
installment sales contracts and installment loan agreements (the "HOME
IMPROVEMENT CONTRACTS"), that are either unsecured or secured by first or
junior liens on one- to four-family residential properties or by purchase
money security interests in the home improvements financed thereby (the "HOME
IMPROVEMENTS"); (iv) manufactured housing installment sales contracts and
installment loan agreements (the "MANUFACTURED HOUSING CONTRACTS" and together
with the Home Improvement Contracts, the "CONTRACTS") secured by either
security interests in Manufactured Homes (as defined herein) or by mortgages
on real estate on which the related Manufactured Homes are located; (v)
certain balances of the foregoing and/or (vi) certain interests in the
foregoing (which may include Private Securities, as defined herein). To the
extent specified in the related Prospectus Supplement, the Contracts may be
partially insured by the Federal Housing Administration (the "FHA") pursuant
to Title I (as defined herein) (the "TITLE I CONTRACTS"). Each of the Trust
Assets will be acquired by the Company from one or more affiliated or
unaffiliated institutions. See "The Pools." Only the Notes are offered hereby.
See "Index of Principal Definitions" for the meanings of capitalized terms and
acronyms.
The Trust Assets described herein under "The Pools" and in the related
Prospectus Supplement will be held in the related Trust Fund pursuant to a
trust agreement (the "TRUST AGREEMENT") and pledged pursuant to an indenture
(the "INDENTURE") to secure a series of Notes to the extent and as described
herein and in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, each Pool will consist of one or more types
of Trust Assets described under "The Pools." Information regarding each class
of Notes of a series, and the general characteristics of the Trust Assets
securing such Notes, will be set forth in the related Prospectus Supplement.
Each series of Notes will include one or more classes. Each class of Notes of
any series will represent the right, which right may be senior or subordinate
to the rights of one or more of the other classes of Securities or other
interests in the related Trust Fund, to receive a specified portion of
payments of principal or interest (or both) on the Trust Assets in the related
Trust Fund in the manner described herein and in the related Prospectus
Supplement. See "Description of the Notes--Payments." A series may include one
or more classes of Notes entitled to principal payments, with
disproportionate, nominal or no interest payments, or to interest payments,
with disproportionate, nominal or no principal payments. A series may include
two or more classes of Notes which differ as to the timing, sequential order,
priority of payment, Interest Rate or amount of payments of principal or
interest or both.
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Notes may include any one or any combination of a Financial Guaranty
Insurance Policy, Letter of Credit (each as defined herein), bankruptcy bond,
special hazard insurance policy, Reserve Fund (as defined herein), or other
form of credit support. In addition to or in lieu of the foregoing, credit
enhancement may be provided by means of subordination. See "Description of
Credit Enhancement."
The rate of payment of principal of each class of Notes will depend on the
priority of payment of such class and the rate and timing of principal
payments (including payments in excess of required installments, prepayments,
Draws or terminations, liquidations and repurchases) on the Trust Assets. A
rate of principal payment lower or higher than that anticipated may affect the
yield on each class of Notes in the manner described herein and in the related
Prospectus Supplement. See "Yield and Prepayment Considerations."
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE NOTES,
SEE "RISK FACTORS," WHICH BEGINS ON PAGE 10.
PROCEEDS OF THE TRUST ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS
ON THE NOTES. THE NOTES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
COMPANY, RESIDENTIAL FUNDING, GMAC MORTGAGE GROUP, INC. ("GMAC MORTGAGE") OR
ANY OF THEIR AFFILIATES. NEITHER THE NOTES NOR THE UNDERLYING TRUST ASSETS
WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR
BY THE COMPANY, RESIDENTIAL FUNDING CORPORATION, GMAC MORTGAGE OR ANY OF THEIR
AFFILIATES, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT. NONE OF SUCH ENTITIES WILL HAVE ANY OBLIGATIONS IN RESPECT OF THE
NOTES, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT.
THESE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Offers of the Notes may be made through one or more different methods,
including offerings through underwriters, as described under "Methods of
Distribution" and in the related Prospectus Supplement.
There will be no secondary market for any series of Notes prior to the
offering thereof. There can be no assurance that a secondary market for any of
the Notes will develop or, if it does develop, that it will continue. The
Notes will not be listed on any securities exchange.
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of Notes offered hereby unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is December 16, 1996.
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Notes (the "REGISTRATION STATEMENT"). The Company
is also subject to certain of the information requirements of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and, accordingly, will
file reports thereunder with the Commission. The Registration Statement and
the exhibits thereto, and reports and other information filed by the Company
pursuant to the Exchange Act can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at certain of its Regional Offices located as
follows: Midwest 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 Commission's Electronic Data Gathering, Analysis and Retrieval
System at the Commission's Web Site (http://www.sec.gov).
REPORTS TO NOTEHOLDERS
Monthly reports that contain information concerning the Trust Fund for a
series of Notes will be sent by the Master Servicer or the Indenture Trustee
to each holder of record of the Notes of the related series. See "Description
of the Notes--Reports to Noteholders." Any reports forwarded to holders will
not contain financial information that has been examined and reported upon,
with an opinion expressed, by an independent or certified public accountant.
The Company will file with the Commission such periodic reports with respect
to the Trust Fund for a series of Notes as are required under the Exchange
Act, and the rules and regulations of the Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each series of Notes offered hereby, there are incorporated
herein and in the related Prospectus Supplement by reference all documents and
reports filed or caused to be filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, prior to the termination of the
offering of the related series of Notes, that relate specifically to such
related series of Notes. The Company will provide or cause to be provided
without charge to each person to whom this Prospectus and related Prospectus
Supplement is delivered in connection with the offering of one or more classes
of such series of Notes, upon written or oral request of such person, a copy
of any or all such reports incorporated herein by reference, in each case to
the extent such reports relate to one or more of such classes of such series
of Notes, other than the exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents. Requests should be
directed in writing to Residential Funding Mortgage Securities II, Inc., 8400
Normandale Lake Boulevard, Suite 700, Minneapolis, Minnesota 55437, or by
telephone at (612) 832-7000.
2
<PAGE>
No dealer, salesman, or any other person has been authorized to give any
information, or to make any representations, other than those contained in
this Prospectus or the related Prospectus Supplement and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any dealer, salesman, or any other person.
Neither the delivery of this Prospectus or the related Prospectus Supplement
nor any sale made hereunder or thereunder shall under any circumstances create
an implication that there has been no change in the information herein or
therein since the date hereof. This Prospectus and the related Prospectus
Supplement are not an offer to sell or a solicitation of an offer to buy any
security in any jurisdiction in which it is unlawful to make such offer or
solicitation.
TABLE OF CONTENTS
<TABLE>
<S> <C>
ADDITIONAL INFORMATION..................................................... 2
REPORTS TO NOTEHOLDERS..................................................... 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................... 2
SUMMARY OF PROSPECTUS...................................................... 4
RISK FACTORS............................................................... 10
Special Features of Certain Trust Assets that are Secured by Junior Liens
on Mortgaged Properties.................................................. 10
Limitations on FHA Insurance for Title I Contracts........................ 12
Risks Associated with Certain Trust Assets................................ 13
Limitations, Reduction and Substitution of Credit Enhancement............. 14
Yield and Prepayment Considerations....................................... 15
Limited Liquidity......................................................... 15
Limited Obligations....................................................... 16
THE POOLS.................................................................. 16
General................................................................... 16
Revolving Credit Loans.................................................... 19
The Home Equity Loans and the Contracts................................... 20
TRUST ASSET PROGRAM........................................................ 21
Underwriting Standards Applicable to the Revolving Credit Loans........... 21
Qualifications of Sellers................................................. 24
Representations Relating to Trust Assets.................................. 25
Subservicing.............................................................. 27
DESCRIPTION OF THE NOTES................................................... 27
General................................................................... 27
Form of Notes............................................................. 28
Assignment of the Trust Assets............................................ 30
Review of Trust Assets.................................................... 31
Excess Spread and Excluded Spread......................................... 32
Payments on Trust Assets; Deposits to Payment Account..................... 32
Withdrawals from the Custodial Account.................................... 34
Payments.................................................................. 34
Funding Account........................................................... 35
Reports to Noteholders.................................................... 36
Hazard Insurance; Claims Thereunder....................................... 37
DESCRIPTION OF CREDIT ENHANCEMENT.......................................... 38
Financial Guaranty Insurance Policy....................................... 39
Letter of Credit.......................................................... 39
Subordination............................................................. 39
Overcollateralization..................................................... 40
Reserve Funds............................................................. 40
Maintenance of Credit Enhancement......................................... 41
Reduction or Substitution of Credit Enhancement........................... 42
DESCRIPTION OF FHA INSURANCE UNDER TITLE I................................. 42
THE COMPANY................................................................ 44
RESIDENTIAL FUNDING CORPORATION............................................ 44
SERVICING OF TRUST ASSETS.................................................. 44
Subservicing.............................................................. 45
Collection and Other Servicing Procedures................................. 45
Realization Upon Defaulted Loans.......................................... 47
Servicing Compensation and Payment of Expenses............................ 48
Evidence as to Compliance................................................. 48
Certain Matters Regarding the Master Servicer and the Company............. 49
</TABLE>
<TABLE>
<S> <C>
THE AGREEMENTS............................................................. 50
Events of Default; Rights Upon Event of Default........................... 50
Amendment................................................................. 52
Termination; Redemption of Notes.......................................... 52
The Owner Trustee......................................................... 53
The Indenture Trustee..................................................... 53
YIELD AND PREPAYMENT CONSIDERATIONS........................................ 53
CERTAIN LEGAL ASPECTS OF THE TRUST ASSETS AND RELATED MATTERS.............. 58
General; Trust Assets Secured by Mortgages on Mortgaged Property.......... 58
Cooperative Loans......................................................... 59
Tax Aspects of Cooperative Ownership...................................... 60
Manufactured Housing Contracts............................................ 60
Foreclosure on Revolving Credit Loans, Home Equity Loans and Certain Con-
tracts................................................................... 62
Foreclosure on Shares of Cooperatives..................................... 63
Repossession with Respect to Manufactured Housing Contracts............... 64
Rights of Redemption...................................................... 65
Notice of Sale; Redemption Rights with Respect to Manufactured Homes...... 65
Anti-Deficiency Legislation and Other Limitations on Lenders.............. 65
Environmental Legislation................................................. 67
Consumer Protection Laws with Respect to Manufactured Housing Contracts... 68
Enforceability of Certain Provisions...................................... 68
Transfer of Manufactured Homes............................................ 69
The Home Improvement Contracts............................................ 70
Applicability of Usury Laws............................................... 72
Alternative Mortgage Instruments.......................................... 72
Formaldehyde Litigation with Respect to Manufactured Housing Contracts.... 73
Soldiers' and Sailors' Civil Relief Act of 1940........................... 73
Forfeitures in Drug and RICO Proceedings.................................. 74
Junior Mortgages; Rights of Senior Mortgagees............................. 74
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 75
General................................................................... 75
STATE AND OTHER TAX CONSEQUENCES........................................... 81
ERISA CONSIDERATIONS....................................................... 81
Plan Asset Regulations.................................................... 81
Prohibited Transaction Exemptions......................................... 82
Insurance Company General Accounts........................................ 82
Representation from Plans Investing in Notes with "Substantial Equity
Features"................................................................ 83
Tax Exempt Investors...................................................... 84
Consultation with Counsel................................................. 84
LEGAL INVESTMENT MATTERS................................................... 84
USE OF PROCEEDS............................................................ 85
METHODS OF DISTRIBUTION.................................................... 85
LEGAL MATTERS.............................................................. 86
FINANCIAL INFORMATION...................................................... 86
INDEX OF PRINCIPAL DEFINITIONS............................................. 87
</TABLE>
3
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each series of Notes contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of such series. Capitalized terms used in this summary that are not
otherwise defined shall have the meanings ascribed thereto in this Prospectus.
An index indicating where certain terms used herein are defined appears at the
end of this Prospectus.
Securities Offered.......... Asset-Backed Notes.
Company..................... Residential Funding Mortgage Securities II, Inc.,
the depositor. See "The Company."
Master Servicer............. The entity identified as Master Servicer in the
related Prospectus Supplement, which may be
Residential Funding Corporation, an affiliate of
the Company ("RESIDENTIAL FUNDING"). See
"Residential Funding Corporation" and "Servicing
of the Trust Assets--Certain Matters Regarding
the Master Servicer and the Company."
Administrator............... An entity may be named as the Administrator in
the related Prospectus Supplement if required in
addition to or in lieu of the Master Servicer or
Servicer for a series of Notes (the
"ADMINISTRATOR").
Indenture Trustee........... The Indenture Trustee for each series of Notes
will be specified in the related Prospectus
Supplement (the "INDENTURE TRUSTEE").
Owner Trustee............... The Owner Trustee for each related Trust Fund
will be specified in the related Prospectus
Supplement (the "OWNER TRUSTEE").
The Notes................... Each series of Notes will be secured by a Pool of
Trust Assets as further described herein
(exclusive of any portion of interest payments
(the "EXCESS SPREAD" or "EXCLUDED SPREAD" as
further defined herein) relating to each Trust
Asset retained by the Company or any of its
affiliates), and certain other assets as
described below (collectively, a "TRUST FUND").
The Trust Fund (or the "ISSUER") will be created
pursuant to a Trust Agreement between the Company
and the Owner Trustee. The ownership of the Trust
Fund will be evidenced by certificates (the
"CERTIFICATES") issued under the Trust Agreement,
which are not offered hereby. Each series of
Notes will represent indebtedness of the related
Trust Fund and will be issued pursuant to an
Indenture between the Trust Fund and the
Indenture Trustee.
As specified in the related Prospectus
Supplement, each series of Notes, or class of
Notes in the case of a series consisting of two
or more classes, may have a stated principal
balance, no stated principal balance or a
notional amount and may be entitled to payments
of interest based on a specified interest rate or
rates (each,
4
<PAGE>
an "INTEREST RATE"). Each series or class of
Notes may have a different Interest Rate, which
may be a fixed, variable or adjustable Interest
Rate, or any combination of two or more of such
Interest Rates. The related Prospectus Supplement
will specify the Interest Rate or Rates for each
series or class of Notes, or the initial Interest
Rate or Rates and the method for determining
subsequent changes to the Interest Rate or Rates.
A series may include one or more classes of Notes
(each, a "STRIP NOTE") entitled to (i) principal
payments, with disproportionate, nominal or no
interest payments, or (ii) interest payments,
with disproportionate, nominal or no principal
payments. In addition, a series may include
classes of Notes that differ as to timing,
sequential order, priority of payment, Interest
Rate or amount of payments of principal or
interest or both, or as to which payments of
principal or interest or both on any class may be
made upon the occurrence of specified events, in
accordance with a schedule or formula, or on the
basis of collections from designated portions of
the Pool. In addition, a series may include one
or more classes of Notes ("ACCRUAL NOTES") as to
which certain accrued interest will not be paid
but rather will be added to the principal balance
thereof in the manner described in the related
Prospectus Supplement. One or more classes of
Notes in a series may be entitled to receive
principal payments pursuant to an amortization
schedule under the circumstances described in the
related Prospectus Supplement.
Each series of Notes will be senior in right of
payment to the related Certificates. If so
provided in the related Prospectus Supplement, a
series of Notes may include one or more classes
of Notes which are senior to one or more other
classes of Notes (collectively, together with the
related Certificates, the "SUBORDINATE
SECURITIES") in respect of certain payments of
principal and interest and allocations of losses
on the Trust Assets. See "Description of Credit
Enhancement--Subordination." The Notes will be
issued in fully registered certificated or book-
entry form in the authorized denominations
specified in the related Prospectus Supplement.
See "Description of the Notes."
Neither the Notes nor the underlying Trust Assets
will be guaranteed or insured by any governmental
agency or instrumentality or the Company,
Residential Funding, GMAC Mortgage or any of
their affiliates, except as expressly set forth
herein or in the related Prospectus Supplement.
See "Risk Factors--Limited Obligations."
The Pools................... As specified in the related Prospectus
Supplement, each Trust Fund will consist
primarily of a Pool of Trust Assets which may
include (i) Revolving Credit Loans secured by
first or junior liens on one- to four-family
residential properties located in any one of the
fifty states, the District of Columbia or the
Commonwealth of Puerto Rico (the "MORTGAGED
PROPERTIES"); (ii) Home Equity Loans; (iii) Home
Improvement Contracts; (iv) Manufactured Housing
5
<PAGE>
Contracts; (v) certain balances of the foregoing
and/or (vi) Private Securities. All or a portion
of the Contracts underlying a series of Notes may
be partially insured by the FHA pursuant to Title
I ("TITLE I") of the National Housing Act of
1934, as amended (the "NATIONAL HOUSING ACT").
All of the Trust Assets will have been purchased
by the Company, either directly or through
Residential Funding, from loan originators or
sellers who, as specified in the related
Prospectus Supplement, may or may not be
affiliated with the Company, including GMAC
Mortgage and Homecomings Financial Network, Inc.
(each affiliates of the Company). See "Trust
Asset Program." For a description of the types of
Trust Assets that may be included in the Pools,
see "The Pools."
If specified in the related Prospectus
Supplement, a Trust Fund may include pass-through
certificates or other instruments evidencing
interests in or secured by Revolving Credit
Loans, Home Equity Loans, Home Improvement
Contracts and Manufactured Housing Contracts, or
certain balances of any of the foregoing
("PRIVATE SECURITIES") and certain interests in
the foregoing, as described herein. See "The
Pools--General" herein.
Interest Payments........... Except as otherwise specified herein or in the
related Prospectus Supplement, interest on each
class of Notes of each series, other than Strip
Notes or Accrual Notes (prior to the time when
accrued interest becomes payable thereon), will
be remitted at the applicable Interest Rate on
the outstanding principal balance of such class,
on the day specified as a payment date for such
series or Class in the related Prospectus
Supplement (each, a "PAYMENT DATE"). Payments, if
any, with respect to interest on Strip Notes will
be made on each Payment Date as described herein
and in the related Prospectus Supplement. See
"Description of the Notes--Payments." Strip Notes
that are entitled to payments of principal only
will not receive payments in respect of interest.
Interest that has accrued but is not yet payable
on any Accrual Notes will be added to the
principal balance of such class on the related
Payment Date, and will thereafter bear interest
at the applicable Interest Rate. Payments of
interest with respect to any series of Notes (or
accruals thereof in the case of Accrual Notes),
or with respect to one or more classes included
therein, may be reduced to the extent of interest
shortfalls not covered by the applicable form of
credit support. See "Yield and Prepayment
Considerations" and "Description of the Notes."
Principal Payments.......... Except as otherwise specified in the related
Prospectus Supplement, principal payments on the
Notes of each series, or of the class or classes
of Notes then entitled thereto, will be made on a
pro rata basis among all such Notes or among the
Notes of any such class, in proportion to their
respective outstanding principal balances or the
percentage interests represented by such class,
in the priority and manner specified in the
related Prospectus Supplement. Strip Notes
6
<PAGE>
with no principal balance will not receive
payments of principal. In the event that
principal payments on the Trust Assets are
reduced due to certain delinquencies or losses
not covered by the applicable form of credit
enhancement, the payments of principal on the
Notes may be reduced.
In addition, for any series of Notes, there may
be no principal payments on such Notes in any
given month as a result of the payment terms of
any of the Revolving Credit Loans in the Trust
Fund, certain of which may require only limited
or no payments of principal prior to the related
maturity date, or the payment terms of such
series of Notes, including provisions whereby
principal payments on certain Revolving Credit
Loans may be applied to cover Draws on other
Revolving Credit Loans. If specified in the
related Prospectus Supplement, a series of Notes
may provide for a period during which all or a
portion of the principal collections on the
Revolving Credit Loans are reinvested in
Additional Balances or additional Revolving
Credit Loans or are accumulated in a trust
account pending commencement of an amortization
period. See "The Pools," "Yield and Prepayment
Considerations" and "Description of the Notes."
Funding Account............. If so specified in the related Prospectus
Supplement, a portion of the proceeds of the sale
of one or more classes of Notes of a series or a
portion of collections on the Trust Assets in
respect of principal may be deposited in a
segregated account to be applied to acquire
additional Trust Assets from the Sellers, subject
to the limitations set forth herein under
"Description of the Notes--Funding Account."
Monies on deposit in the Funding Account and not
applied to acquire such additional Trust Assets
within the time set forth in the related Trust
Agreement or other applicable agreement may be
treated as principal and applied in the manner
described in the related Prospectus Supplement.
Yield and Prepayment The Trust Assets supporting a series of Notes
Considerations.............. will have unique characteristics that will affect
the yield to maturity and the rate of payment of
principal on such Notes. See "Risk Factors"
herein and "Yield and Prepayment Considerations"
herein and in the related Prospectus Supplement.
Credit Enhancement.......... If so specified in the related Prospectus
Supplement, the Trust Fund with respect to any
series of Notes may include any one or any
combination of a Letter of Credit, Financial
Guaranty Insurance Policy, special hazard
insurance policy, bankruptcy bond, Reserve Fund,
or other type of credit support to provide full
or partial coverage for certain defaults and
losses relating to the Trust Assets. Credit
support also will be provided in the form of
subordination of the Certificates and may be
provided in the form of subordination of one or
more classes of subordinate Notes in a series
under which certain losses are first allocated to
such Subordinate Securities up to
7
<PAGE>
a specified limit or in the form of
Overcollateralization (as defined herein). Any
form of credit enhancement may have certain
limitations and exclusions from coverage
thereunder, which will be described in the
related Prospectus Supplement. Losses not covered
by any form of credit enhancement will be borne
by the holders of the related Notes (or certain
classes thereof). If so specified in the related
Prospectus Supplement, the Contracts may be
partially insured by the FHA pursuant to Title I.
To the extent not set forth herein, the amount
and types of coverage, the identification of any
entity providing the coverage, the terms of any
subordination and related information will be set
forth in the Prospectus Supplement relating to a
series of Notes. See "Description of Credit
Enhancement."
Optional Redemption......... The Master Servicer, the Company or a person
specified in the related Prospectus Supplement,
may at its option either (i) effect early
redemption of any series of Notes through the
purchase of the Pool in the related Trust Fund or
(ii) purchase, in whole but not in part, the
Notes of any series; in each case under the
circumstances and in the manner set forth herein
under "The Agreements--Termination; Redemption of
Notes" and in the related Prospectus Supplement.
Rating...................... At the date of issuance, as to each series, each
class of Notes offered hereby will be rated at
the request of the Company in one of the four
highest rating categories by one or more
nationally recognized statistical rating agencies
(each, a "RATING AGENCY"). See "Ratings" in the
related Prospectus Supplement.
Legal Investment............ Unless otherwise specified in the related
Prospectus Supplement, the Notes offered hereby
will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended ("SMMEA").
See "Legal Investment Matters."
ERISA Considerations........ A fiduciary of an employee benefit plan and
certain other plans and arrangements, including
individual retirement accounts and annuities,
Keogh plans, and bank collective investment
funds, insurance company general or separate
accounts and certain other entities in which such
plans, accounts, annuities or arrangements are
invested, which is subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 4975 of the
Internal Revenue Code of 1986 (the "CODE"), and
any other person contemplating purchasing a Note
with Plan Assets (as defined herein), should
carefully review with its legal counsel whether
the purchase or holding of Notes could give rise
to a transaction that is prohibited or is not
otherwise permissible either under ERISA or
Section 4975 of the Code. See "ERISA
Considerations" herein and in the related
Prospectus Supplement.
8
<PAGE>
Certain Federal Income Tax
Consequences.............. In the opinion of Tax Counsel (as defined
herein), for federal income tax purposes, the
Notes will be characterized as indebtedness and
the Issuer, as created pursuant to the terms and
conditions of the Trust Agreement, will not be
characterized as an association (or publicly
traded partnership) taxable as a corporation or
as a taxable mortgage pool within the meaning of
section 7701(i) of the Code.
For further information regarding certain federal
income tax consequences of an investment in the
Notes see "Certain Federal Income Tax
Consequences" and "State and Other Tax
Consequences" herein and "Certain Federal Income
Tax Consequences" in the Prospectus Supplement.
9
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Notes:
SPECIAL FEATURES OF CERTAIN TRUST ASSETS THAT ARE SECURED BY JUNIOR LIENS ON
MORTGAGED PROPERTIES
General
Although the Revolving Credit Loans, Home Equity Loans and, if applicable,
Contracts may be secured by liens on Mortgaged Properties, such collateral may
not provide assurance of repayment of such Trust Assets comparable to that
provided under many first lien lending programs, and such Trust Assets
(especially those with high Combined Loan-to-Value Ratios (as defined herein))
may have risk of repayment characteristics more similar to unsecured consumer
loans.
Since the Revolving Credit Loans, Home Equity Loans and, if applicable,
Contracts may be subordinate to the rights of the mortgagee under the related
senior mortgage or mortgages, the proceeds from any foreclosure, liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of such Trust Assets secured by junior mortgages only to
the extent that the claims of such senior mortgages have been satisfied in
full, including any related foreclosure costs. With respect to a Contract
partially insured by the FHA pursuant to Title I, however, an FHA claim may be
payable subject to certain limitations, as described in the related Prospectus
Supplement and herein. With respect to the Trust Assets secured by junior
liens that have low Junior Ratios (as defined herein), foreclosure costs may
be substantial relative to the outstanding balance of such Trust Assets upon
default, and therefore the amount of any liquidation proceeds payable to
Noteholders may be smaller as a percentage of the outstanding balance of such
Trust Assets than would be the case in a typical pool of first lien
residential loans. In addition, the holder of a loan secured by a junior
mortgage may not foreclose on the Mortgaged Property 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 at or prior to the
foreclosure sale or undertake the obligation to make payments on the senior
mortgages in the event the mortgagor is in default thereunder. The Trust Fund
will not have any source of funds to satisfy the senior mortgages or make
payments due to the senior mortgagees, although the Master Servicer or
Subservicer may, at its option, advance such amounts to the extent deemed
recoverable and prudent but will not be obligated to do so. In the event that
such proceeds from a foreclosure or similar sale of the related Mortgaged
Property are insufficient to satisfy all senior liens and such Trust Asset in
the aggregate, the Trust Fund, as the holder of the junior lien, and,
accordingly, Holders of one or more classes of the Notes are likely to (i)
incur losses in jurisdictions in which a deficiency judgment against the
borrower is not available or in the Master Servicer's discretion seeking such
judgment is not advisable, and (ii) incur losses if any deficiency judgment
obtained is not realized upon. See "Certain Legal Aspects of the Trust Assets
and Related Matters."
No assurance can be given that the values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Trust Assets. If the residential real estate market should experience
an overall decline in value (including as a result of the general economic
factors discussed below under "--Mortgagor Credit"), any such decline could
extinguish the value of the interest of a junior mortgagee in the Mortgaged
Property before having any adverse effect on the interest of the related
senior mortgagees.
With respect to Trust Assets secured by junior liens that have high Combined
Loan-to-Value Ratios (as defined herein) or low Junior Ratios, many
circumstances exist, including those described above, under which it would be
uneconomical to foreclose on the Mortgaged Property in the event of a default.
For purposes of the foregoing, the actual Junior Ratio for a Trust Asset at
any time may be lower than indicated in the Prospectus Supplement as a result
of any reductions in the Stated Principal Balance thereof. In such
circumstances, repayment of the Trust Asset would be dependent solely on the
credit of the borrower under the related Revolving Credit Loan, Home Equity
Loan or Contract (the "MORTGAGOR"), and the ability to obtain repayment of
such Trust Asset may be generally similar to that which would be experienced
if such Trust Asset were an
10
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unsecured consumer loan. Moreover, while in most jurisdictions a mortgagee
would be permitted to elect to either foreclose or sue to collect the debt
evidenced by the Mortgage Note, in some jurisdictions that prohibit suits to
collect the debt until the mortgagee has sought to foreclose against the
security, the mortgagee may be forced to foreclose first and obtain a
deficiency judgment. In addition, in some jurisdictions, where the mortgagee
has chosen to sue on the debt in lieu of foreclosure, the mortgagee will be
barred from foreclosing against the security. In addition, no assurance can be
given that a borrower under the related Home Improvement Contract (other than
Title I Contracts) will use the proceeds thereof for Home Improvements and
consequently, no additional value will have been added to the Mortgage
Property. See "Certain Legal Aspects of the Trust Assets and Related Matters--
Anti-Deficiency Legislation and Other Limitations on Lenders."
Mortgagor Credit
As a result of the foregoing considerations, the underwriting standards and
procedures applicable thereto, as well as the repayment prospects thereof, may
be more dependent on the creditworthiness of the Mortgagor and less dependent
on the adequacy of the Mortgaged Property as collateral than would be the case
under many first lien lending programs. As to such Trust Assets, future
changes in the Mortgagor's economic circumstances will have a significant
effect on the likelihood of repayment. Although the Revolving Credit Loans are
generally subject to provisions whereby the Credit Limit may be reduced as a
result of a material adverse change in the Mortgagor's economic circumstances,
the Servicer or Master Servicer generally will not monitor for such changes
and may not become aware of them until after the Mortgagor has defaulted.
Under certain circumstances, a Mortgagor may draw his entire Credit Limit in
response to personal financial needs resulting from an adverse change in
circumstances.
Future changes in a Mortgagor's economic circumstances may result from a
variety of unforeseeable personal factors, including loss of employment,
reduction in income, illness and divorce. Any increase in prevailing market
interest rates may adversely affect a Mortgagor by increasing debt service on
any floating rate Revolving Credit Loans, Home Equity Loans, Contracts or
other similar debt of the Mortgagor. In addition, for any Trust Assets secured
by junior mortgages, changes in the payment terms of any related senior
mortgage loan may adversely affect the Mortgagor's ability to pay principal
and interest on such senior mortgage loan. For example, such changes may
result if the senior mortgage loan is an adjustable rate loan and the interest
rate thereon increases, which may occur with or without an increase in
prevailing market interest rates if the increase is due to the phasing out of
a reduced initial rate. Specific information about such senior mortgage loans,
other than the amount thereof at origination of the corresponding Trust Asset,
generally will not be available and will not be included in the related
Prospectus Supplement.
General economic conditions, both on a national and regional basis, will
also have an impact on the ability of Mortgagors to repay their Revolving
Credit Loans, Home Equity Loans or Contracts. Certain geographic regions of
the United States from time to time will experience weaker regional economic
conditions and housing markets, and, consequently, will experience higher
rates of loss and delinquency than will be experienced on mortgage loans
generally. For example, a region's economic condition and housing market may
be directly, or indirectly, adversely affected by natural disasters or civil
disturbances such as earthquakes, hurricanes, floods, eruptions or riots. The
economic impact of any of these types of events may also be felt in areas
beyond the region immediately affected by the disaster or disturbance. The
Trust Assets underlying a series of Notes may be concentrated in these
regions, and such concentration may present risk considerations in addition to
those generally present for similar mortgage-backed securities without such
concentration. Any change in the deductibility for federal income tax purposes
of interest payments on home equity loans may also have an impact on the
ability of Mortgagors to repay such Trust Assets.
Revolving Credit Loan Characteristics
Certain of the types of Revolving Credit Loans that may be included in the
Pools may involve additional uncertainties not present in traditional types of
mortgage loans, or in home equity or home improvement loans originated under
other programs.
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Except for certain programs under which the Draw Period is less than the
full term thereof, required minimum monthly payments on Revolving Credit Loans
are generally equal to or not significantly larger than the amount of interest
currently accruing thereon, and therefore are not expected to significantly
amortize the outstanding principal amount of such Revolving Credit Loan prior
to maturity, which amount may include substantial Draws recently made. As a
result, a borrower will generally be required to pay a substantial principal
amount at the maturity of a Revolving Credit Loan. The ability of a borrower
to make such a payment may be dependent on the ability to obtain refinancing
of the balance due on such Revolving Credit Loan or to sell the related
Mortgaged Property. Furthermore, Revolving Credit Loans generally have
adjustable rates that are subject to much higher maximum rates than typically
apply to adjustable rate first mortgage loans, and which may be as high as
applicable usury limitations. Mortgagors under such Revolving Credit Loans are
generally qualified based on an assumed payment which reflects either the
initial interest rate or a rate significantly lower than the maximum rate. An
increase in the interest rate over the Mortgage Rate applicable at the time
the Revolving Credit Loan was originated may have an adverse effect on the
Mortgagor's ability to pay the required monthly payment. In addition, an
increase in prevailing market interest rates may reduce the borrower's ability
to obtain refinancing and to pay the balance of a Revolving Credit Loan at its
maturity.
To the extent that any losses are incurred on any of the Revolving Credit
Loans that are not covered by the applicable credit enhancement, holders of
Notes of the series secured by the related Pool (or certain classes thereof)
will bear all risk of such losses resulting from default by Mortgagors.
LIMITATIONS ON FHA INSURANCE FOR TITLE I CONTRACTS
The related Prospectus Supplement will specify the number and percentage of
Contracts, if any, included in the related Trust Fund that are partially
insured by the FHA pursuant to Title I. Since the FHA Insurance Amount (as
defined herein) for the Title I Contracts is limited as described herein and
in the related Prospectus Supplement, and since the adequacy of such FHA
Insurance Amount is dependent upon future events, including reductions for the
payment of FHA claims, no assurance can be given that the FHA Insurance Amount
is or will be adequate to cover 90% of all potential losses on the Title I
Contracts included in the related Trust Fund. If the FHA Insurance Amount for
the Title I Contracts is reduced to zero, such contracts will be uninsured
from and after the date of such reduction. Under Title I, until a claim for
insurance reimbursement is submitted to the FHA, the FHA does not review or
approve for qualification for insurance the individual Title I Contract
insured thereunder (as is typically the case with other federal loan insurance
programs). Consequently, the FHA has not acknowledged that any of the Title I
Contracts are eligible for FHA insurance, nor has the FHA reviewed or approved
the underwriting and qualification by the originating lenders of any
individual Title I Contracts. See "Description of FHA Insurance Under Title
I."
The availability of FHA insurance reimbursement following a default on a
Title I Contract is subject to a number of conditions, including strict
compliance by the originating lender of such loan, the Seller, the FHA Claims
Administrator (as defined herein), the servicer and any subservicer with the
FHA Regulations (as defined herein) in originating and servicing such Title I
Contract, and limits on the aggregate insurance coverage available in the FHA
Reserve (as defined herein). For example, the FHA Regulations provide that,
prior to originating a Title I Contract, a lender must exercise prudence and
diligence in determining whether the borrower and any co-maker or co-signer is
solvent and an acceptable credit risk with a reasonable ability to make
payments on the loan. Although the related Seller will represent and warrant
that the Title I Contracts have been originated and serviced in compliance
with all FHA Regulations, these regulations are susceptible to substantial
interpretation. Failure to comply with any FHA Regulations may result in a
denial of FHA claims, and there can be no assurance that the FHA's enforcement
of the FHA Regulations will not become more strict in the future. See
"Description of FHA Insurance Under Title I."
Because the Trust Fund is not eligible to hold an FHA contract of insurance
under Title I, the FHA will not recognize the Trust Fund or the Noteholders as
the owners of the Title I Contracts, or any portion thereof, entitled to
submit FHA claims. Accordingly, neither the Trust Fund nor the Noteholders
will have a direct right to receive insurance payments from the FHA. Unless
otherwise specified in the related Prospectus Supplement, the Master
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Servicer will either serve as or contract with the person specified in the
Prospectus Supplement to serve as the Administrator for FHA claims (each an
"FHA CLAIMS ADMINISTRATOR") pursuant to an FHA claims administration agreement
(the "FHA CLAIMS ADMINISTRATION AGREEMENT"). The FHA Claims Administrator will
be responsible for administering, processing and submitting FHA claims with
respect to the Title I Contracts. The Noteholders will be dependent on the FHA
Claims Administrator to (i) make claims on the Title I Contracts in accordance
with FHA Regulations and (ii) remit all FHA insurance proceeds received from
the FHA in accordance with the related agreement. The Noteholders' rights
relating to the receipt of payment from and the administration, processing and
submission of FHA claims by any FHA Claims Administrator is limited and
governed by the related agreement and the FHA Claims Administration Agreement
and these functions are obligations of the FHA Claims Administrator, but not
the FHA.
RISKS ASSOCIATED WITH CERTAIN TRUST ASSETS
No Hazard Insurance for Title I Contracts
With respect to any Title I Contract, the FHA Regulations do not require
that a borrower obtain title or fire and casualty insurance as a condition to
obtaining a Home Improvement Contract. However, with respect to both
Manufactured Home Contracts and Home Improvement Contracts that are Title I
Contracts, if the related Mortgaged Property is located in a flood hazard
area, flood insurance in an amount at least equal to the loan amount is
required. In addition, the FHA Regulations do not require that the borrower
obtain insurance against physical damage arising from earth movement
(including earthquakes, landslides and mudflows) as a condition to obtaining a
property improvement loan insured under Title I. Accordingly, if a Mortgaged
Property that secures a Title I Contract suffers any uninsured hazard or
casualty losses, holders of the related series of Notes that are secured in
whole or in part by such Title I Contract may bear the risk of loss resulting
from a default by the borrower to the extent such losses are not recovered by
foreclosure on the defaulted loans or from any FHA Insurance Proceeds (as
defined herein). Such loss may be otherwise covered by amounts available from
the credit enhancement provided for the related series of Notes, as specified
in the related Prospectus Supplement.
Contracts Secured by Manufactured Homes
The Manufactured Housing Contracts will be secured by security interests in
Manufactured Homes that are not considered to be real property because such
homes are not permanently affixed to real estate. Perfection of security
interests in such Manufactured Homes and enforcement of rights to realize upon
the value of such Manufactured Homes as collateral for such Manufactured
Housing Contracts are subject to a number of Federal and state laws, including
the UCC as adopted in each state and each state's certificate of title
statutes. The steps necessary to perfect the security interest in a
Manufactured Home will vary from state to state. Because of the expense and
administrative inconvenience involved, unless otherwise specified in the
related Prospectus Supplement, the certificate of title to Manufactured Homes
will not be amended to change the lienholder specified therein to the
applicable Owner Trustee and will not deliver any certificate of title to such
Owner Trustee or note thereon. Consequently, in some states, in the absence of
such an amendment, the assignment to such Owner Trustee of the security
interest in the Manufactured Home may not be effective or such security
interest may not be perfected and, in the absence of such notation or delivery
to such Owner Trustee, the assignment of the security interest in the
Manufactured Home may not be effective against creditors of the lienholder or
a trustee in bankruptcy of the lienholder. In addition, if the owner of a
Manufactured Home were to relocate such Manufactured Home to another state or
if a Manufactured Home becomes permanently attached to its site, other parties
could obtain an interest in the Manufactured Home which may be prior to the
original security interest. See "Certain Legal Aspects of the Trust Assets and
Related Matters--Manufactured Housing Contracts." If any related Credit
Enhancement is exhausted and such Manufactured Housing Contract is in default,
then recovery of outstanding principal and unpaid interest due on such
Contract generally is dependent on repossession and resale of the Manufactured
Home securing such Manufactured Housing Contract. Manufactured Homes, unlike
Mortgaged Properties, generally depreciate in value and may have a limited
market for resale. Therefore, the amount recoverable upon repossession and
resale may not be sufficient to pay amounts due on the defaulted Contract.
Certain other factors may limit the ability of the Master Servicer to realize
upon a Manufactured Home or may limit the amount realized to less than the
amount due.
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Unsecured Contracts
The obligations of the borrower under any unsecured Contract included as
part of the related Trust Fund will not be secured by an interest in the
related real estate or otherwise (an "UNSECURED CONTRACT"), and the related
Owner Trustee on behalf of the Trust Fund, as the owner of such Unsecured
Contract, will be a general unsecured creditor as to such obligations. As a
consequence, in the event of a default under an Unsecured Contract, the
related Trust Fund will have recourse only against the borrower's assets
generally, along with all the other general unsecured creditors of such
borrower. In a bankruptcy or insolvency proceeding relating to a borrower on
an Unsecured Contract, the obligations of the borrower under such Unsecured
Contract may be discharged in their entirety or in part (for example, the
amount due and owing by such borrower under such Unsecured Contract that
exceeds payments made to the Indenture Trustee as a general unsecured creditor
may be discharged). Investors should be aware that a borrower on an Unsecured
Contract may not demonstrate the same degree of concern over performance of
its obligations under such Unsecured Contract as a borrower whose obligations
were secured by a single family residence owned by such borrower.
Consumer Protection Laws Related to Contracts
Numerous federal and state consumer protection laws impose requirements on
lending under retail installment sales contracts and installment loan
agreements such as the Contracts, and the failure by the lender or seller of
goods to comply with such requirements could cause assignees of such
agreements to be partially liable for amounts due under such agreements and
claims by such assignees may be subject to set-off or rescission as a result
of such lender's or seller's noncompliance. See "Certain Legal Aspects of the
Trust Assets and Related Matters--Consumer Protection Laws with Respect to
Manufactured Housing Contracts" and "--The Home Improvement Contracts--
Consumer Protection Laws." These laws would apply to an Indenture Trustee as
an assignee of Contracts. Each Seller will warrant that each Contract complies
with all requirements of law and, with respect to any Manufactured Housing
Contract secured only by the related Manufactured Home, will make certain
warranties relating to the validity, subsistence, perfection and priority of
the security interest in each Manufactured Home securing such Contract.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
With respect to each series of Notes, credit enhancement may be provided to
cover delinquencies and losses on the underlying Trust Assets, subject to any
applicable limitations. Credit enhancement will be provided in one or more of
the forms referred to herein, including, but not limited to: subordination of
Subordinate Securities of the same series; Overcollateralization; a Financial
Guaranty Insurance Policy; a Letter of Credit; a Reserve Fund or any
combination thereof. If so specified in the related Prospectus Supplement, the
Contracts may be partially insured by the FHA pursuant to Title I. See
"Description of Credit Enhancement" herein.
As to any series of Notes, the amount of coverage under the applicable
credit enhancement may be limited in amount, and if limited may be subject to
periodic reduction in accordance with a schedule or formula. Furthermore, such
credit enhancement may provide only very limited coverage as to certain types
of losses or risks, and may provide no coverage as to certain other types of
losses or risks. For any type of credit enhancement which is generated in
whole or in part by cash flows on the underlying Trust Assets (as may be the
case for a Reserve Fund or Overcollateralization, for example), the amount of
coverage provided thereby may be adversely affected under a variety of
scenarios by factors such as the prepayment and draw experience of the Trust
Assets, changes in the Mortgage Rates or Gross Margins applicable to the Trust
Assets pursuant to the terms thereof, and changes in the relationship between
the Mortgage Rates on the Trust Assets and the Interest Rates on the Notes
(which changes may result, in part, from changes in the relationship between
different indexes respectively used to determine the Mortgage Rates and the
Interest Rates). In the event losses exceed the amount of coverage provided by
any credit enhancement or losses of a type not covered by any credit
enhancement occur, such losses will be borne by the holders of the related
Notes (or certain classes thereof).
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The rating of any series of Notes by any Rating Agency may be lowered
following the initial issuance thereof as a result of the downgrading or
nonperformance of the obligations of any applicable credit support provider,
or as a result of losses on the related Trust Assets in excess of the levels
contemplated by such Rating Agency at the time of its initial rating analysis.
None of the Company, the Master Servicer, GMAC Mortgage or any of their
affiliates will have any obligation to replace or supplement any credit
enhancement, or to take any other action to maintain any rating of any series
of Notes. See "Description of Credit Enhancement--Reduction or Substitution of
Credit Enhancement."
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Notes of each series will depend on the rate
and timing of principal payments (including payments in excess of required
installments, prepayments or terminations, liquidations and repurchases) on
the Trust Assets, the rate and timing of Draws, and the price paid by
Noteholders. Such yield may be adversely affected by a higher or lower than
anticipated rate of principal payments or Draws on the related Revolving
Credit Loans. The Trust Assets generally may be prepaid in full or in part
without penalty. The Company has no significant experience with respect to the
rate of principal prepayments on home improvement contracts or manufactured
housing contracts, but generally expects that prepayments on home improvement
contracts will be higher than certain other Trust Assets due to the
possibility of increased property value resulting from the home improvement
and greater refinance options. The Company generally expects that prepayments
on manufactured housing contracts will be lower than on other Trust Assets
because manufactured housing contracts may have less refinance options.
Principal payments or Draws are influenced by a number of factors, including
prevailing market interest rates, national and regional economic conditions
and changes in Mortgagors' personal and economic circumstances. See "Yield and
Prepayment Considerations" herein. In addition, the yield to maturity of the
Notes of any series, or the rate and timing of principal payments or Draws on
the related Revolving Credit Loans, may be affected by a wide variety of
specific terms and conditions applicable to the respective programs under
which the Revolving Credit Loans were originated. For example, the Revolving
Credit Loans may provide for future Draws to be made only in specified minimum
amounts, or alternatively may permit Draws to be made by check or through a
credit card in any amount. A pool of Revolving Credit Loans subject to the
latter provisions may be likely to remain outstanding longer with a higher
aggregate principal balance than a pool of Revolving Credit Loans with the
former provisions, because of the relative ease of making new Draws.
Furthermore, certain Trust Assets may provide for interest rate changes on a
daily or monthly basis, or may have Gross Margins that may vary under certain
circumstances over the term of the loan. In extremely high market interest
rate scenarios, Notes secured by Trust Assets with adjustable rates subject to
substantially higher maximum rates than typically apply to adjustable rate
first mortgage loans may experience rates of default and liquidation
substantially higher than those that have been experienced on other adjustable
rate mortgage loan pools. The yield to maturity of the Notes of each series
will also be affected by the rate and timing of defaults on the related Trust
Assets. See "--Special Features of Certain Trust Assets Secured by Junior
Liens on Mortgaged Properties" above.
The yield to maturity on any Strip Notes will be extremely sensitive to the
rate and timing of principal payments or Draws on the related Revolving Credit
Loans. In addition, the yield to maturity on certain other types of classes of
Notes, including Accrual Notes, Notes with a Interest Rate which fluctuates
inversely with an index or certain other classes in a series including more
than one class of Notes, may be relatively more sensitive to the rate and
timing of principal payments or Draws on the related Revolving Credit Loans
than other classes of Notes.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Notes of any
series will develop or, if it does develop, that it will provide Noteholders
with liquidity of investment or that it will continue for the life of the
Notes of any series. Although the Prospectus Supplement for any series of
Notes may indicate that an underwriter specified therein intends to establish
a secondary market in such Notes, no underwriter will be obligated to do so.
The Notes will not be listed on any securities exchange.
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LIMITED OBLIGATIONS
The Notes will evidence an obligation of the related Trust Fund to remit
certain payments to the registered holder thereof. The Notes will not
represent an interest in or obligation of the Company, Residential Funding,
GMAC Mortgage or any of their affiliates. The only obligations of the
foregoing entities with respect to the Notes, the Revolving Credit Loans, the
Home Equity Loans, the Contracts or any Private Securities will be the
obligations (if any) of Residential Funding pursuant to certain limited
representations and warranties made with respect to such Trust Assets, the
obligation of Residential Funding (or such other entity specified in the
related Prospectus Supplement) to advance funds to Mortgagors in respect of
Draws and the servicing obligations of Residential Funding as Master Servicer
under the related Servicing Agreement. If any affiliate of the Company has
originated any Trust Assets, such affiliate will only have an obligation with
respect to such Trust Assets to the same extent as a Seller, as described
herein. Neither the Notes nor the underlying Trust Assets will be guaranteed
or insured by any governmental agency or instrumentality, or by the Company,
Residential Funding, GMAC Mortgage or any of their affiliates, except as
expressly set forth herein or in the related Prospectus Supplement. Proceeds
of the assets included in the related Trust Fund (including the Trust Assets
and any form of credit enhancement) will be the sole source of payments on the
Notes, and there will be no recourse to the Company, Residential Funding, GMAC
Mortgage or any other entity in the event that such proceeds are insufficient
or otherwise unavailable to make all payments provided for under the Notes.
THE POOLS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each Pool
will consist primarily of (i) Revolving Credit Loans; (ii) Home Equity Loans;
(iii) Home Improvement Contracts; (iv) Manufactured Housing Contracts; (v)
certain balances of any of the foregoing and/or (vi) certain interests in the
foregoing (which may include Private Securities) excluding any interest
retained by the Company or any other entity specified in the Prospectus
Supplement. The Revolving Credit Loans, Home Equity Loans and, if applicable,
Contracts will be evidenced by promissory notes (the "MORTGAGE NOTES") secured
by mortgages or deeds of trust or other similar security instruments creating
first or junior liens on one- to four-family residential properties. All or a
portion of the Contracts underlying a series of Notes may be partially insured
by the FHA pursuant to Title I. The Mortgaged Properties will consist
primarily of owner-occupied attached or detached one-family dwelling units,
two- to four-family dwelling units, condominiums, townhouses, row houses,
individual units in planned-unit developments, Manufactured Homes which may be
permanently affixed to the real property on which they are located and certain
other dwelling units, and the fee, leasehold or other interests in the
underlying real property. The Mortgaged Properties may include vacation,
second and non-owner-occupied homes. If specified in the related Prospectus
Supplement relating to a series of Notes, a Pool may contain cooperative
apartment loans ("COOPERATIVE LOANS") evidenced by promissory notes
("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. As used herein, unless the context indicates otherwise, "Revolving
Credit Loans," "Home Equity Loans" and, if applicable, "Contracts" include
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 a security agreement with respect to a Cooperative Note.
Each Trust Asset will be selected by the Company for inclusion in a Pool
from among those purchased by the Company, either directly or through its
affiliates, including Residential Funding, Homecomings Financial Network, Inc.
and GMAC Mortgage ("AFFILIATED SELLERS"), or from banks, savings and loan
associations, mortgage bankers, investment banking firms, the FDIC and other
mortgage loan originators or sellers not affiliated with the Company
("UNAFFILIATED SELLERS"); (Unaffiliated Sellers and Affiliated Sellers are
collectively referred to herein as "SELLERS"), all as described below under
"Trust Asset Program." If a Pool is composed of Trust Assets acquired by the
Company directly from Sellers other than Residential Funding, the related
Prospectus Supplement will specify the extent of Trust Assets so acquired. The
characteristics of the Trust Assets
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are as described in the related Prospectus Supplement. Other mortgage loans
available for purchase by the Company may have characteristics which would
make them eligible for inclusion in a Pool but were not selected for inclusion
in such Pool.
Under certain circumstances, the Trust Assets will be delivered either
directly or indirectly to the Company by one or more Sellers identified in the
related Prospectus Supplement, concurrently with the issuance of the related
series of Notes (a "DESIGNATED SELLER TRANSACTION"). Such Notes may be sold in
whole or in part to any such Seller in exchange for the related Trust Assets,
or may be offered under any of the other methods described herein under
"Methods of Distribution." The related Prospectus Supplement for a Pool
composed of Trust Assets acquired by the Company pursuant to a Designated
Seller Transaction will generally include information, provided by the related
Seller (the "DESIGNATED SELLER"), about the Designated Seller, the Trust
Assets and the underwriting standards applicable to the Trust Assets. None of
the Company, Residential Funding, GMAC Mortgage or any of their affiliates
will make any representation or warranty with respect to such Trust Assets, or
any representation as to the accuracy or completeness of such information
provided by the Seller.
If specified in the related Prospectus Supplement, the Trust Fund securing a
series of Notes may include Private Securities. The Private Securities may
have been issued previously by the Company or an affiliate thereof, a
financial institution or other entity engaged generally 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 such
trusts, and selling beneficial interests in such trusts. As to any such series
of Notes, the related Prospectus Supplement will include a description of such
Private Securities and any related credit enhancement, and the assets
underlying such Private Securities will be described together with any other
Trust Assets included in the Pool relating to such series.
In addition, with respect to any series of Notes secured by Private
Securities, such Private Securities may consist of an ownership interest (an
"OWNERSHIP INTEREST") in a structuring entity formed by the Company for the
limited purpose of holding the Trust Assets relating to such series of Notes
(a "SPECIAL PURPOSE ENTITY"). A Special Purpose Entity may be organized in the
form of a trust, limited partnership or limited liability company, and will be
structured in a manner that will insulate the holders of Notes from
liabilities of the Special Purpose Entity. The provisions governing such
Special Purpose Entity generally will restrict the Special Purpose Entity from
engaging in or conducting any business other than the holding of Trust Assets
and any related assets and the issuance of Ownership Interests in such Trust
Assets and certain activities incidental thereto. Any such Ownership Interest
will evidence an ownership interest in the related Trust Assets as well as the
right to receive specified cash flows derived from such Trust Assets, as
described in the related Prospectus Supplement. The obligations of the
Depositor in respect of any such Ownership Interest will generally be limited
to certain representations and warranties with respect to the Trust Assets, as
described herein. Credit support of any of the types described herein under
"Description of Credit Enhancement" may be provided for the benefit of any
such Ownership Interest, if so specified in the related Prospectus Supplement.
As to any such series of Notes, the term "Pool" includes the Trust Assets
underlying such Private Securities.
The Prospectus Supplement for each series of Notes will contain information
as to the type of Trust Assets which will be included in the related Pool.
Each Prospectus Supplement applicable to a series of Notes will include
certain information, generally as of the Cut-off Date and to the extent then
available to the Company, on an approximate basis, as to (i) the aggregate
principal balance of the Trust Assets, (ii) the type of property securing the
Trust Assets and related lien priority, if any, (iii) the original or modified
terms to maturity of the Trust Assets, (iv) the earliest origination or
modification date and latest maturity date of the Trust Assets, (v) the Loan-
to-Value Ratios or Combined Loan-to-Value Ratios of the Trust Assets, as
applicable, (vi) the Mortgage Rate or range of Mortgage Rates borne by the
Trust Assets, (vii) the applicable Index, the range of Gross Margins, the
weighted average Gross Margin, the frequency of adjustments and maximum loan
rate, (viii) the geographical distribution of the Mortgaged Properties, (ix)
the aggregate Credit Limits of the related Credit Line Agreements, (x) the
number and percentage of Contracts that are partially insured by the FHA
pursuant to Title I and (xi) if applicable, the weighted average Junior Ratio
and Credit Utilization Rate. A Current Report on Form 8-K will be available
upon request to holders of the related series of Notes and will be filed,
together with the
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related Trust Agreement, with the Commission within fifteen days after the
initial issuance of such Notes. The composition and characteristics of a Pool
that contains Revolving Credit Loans may change from time to time as a result
of any Draws made after the related Cut-off Date under the related Credit Line
Agreements that are included in such Pool. In the event that Trust Assets are
added to or deleted from the Trust Fund after the date of the related
Prospectus Supplement other than as a result of any such Draws with respect to
the Revolving Credit Loans, such addition or deletion will be noted in the
Current Report on Form 8-K.
With respect to each Revolving Credit Loan, the "COMBINED LOAN-TO-VALUE
RATIO" or "CLTV" generally will be the ratio, expressed as a percentage, of
the sum of (i) the greater of the Cut-off Date Principal Balance or the Credit
Limit, if applicable, and (ii) the principal balance of any related senior
mortgage loan at origination of such Revolving Credit Loan together with any
mortgage loan subordinate thereto, to the lesser of (x) the appraised value of
the related Mortgaged Property determined in the appraisal used in the
origination of such Revolving Credit Loan and (y) if applicable under the
corresponding program, the sales price of each Mortgaged Property. With
respect to each Revolving Credit Loan, the "JUNIOR RATIO" generally will be
the ratio, expressed as a percentage, of the greater of the Cut-off Date
Principal Balance or the Credit Limit, if applicable, of such Revolving Credit
Loan to the sum of (i) the greater of the Cut-off Date Principal Balance or
the Credit Limit, if applicable, of such Revolving Credit Loan and (ii) the
principal balance of any related senior mortgage loan at origination of such
Revolving Credit Loan. With respect to each Home Equity Loan or Contract, the
CLTV and Junior Ratio will be computed in the manner described in the related
Prospectus Supplement. The "CREDIT UTILIZATION RATE" is determined by dividing
the Cut-off Date Principal Balance of a Revolving Credit Loan by the Credit
Limit of the related Credit Line Agreement.
The Company will cause the Trust Assets constituting each Pool (or Private
Securities evidencing interests therein) to be assigned to the Owner Trustee
named in the related Prospectus Supplement, for the benefit of the holders of
all of the Securities of a series. The Master Servicer named in the related
Prospectus Supplement will service the Trust Assets, either directly or
through other mortgage servicing institutions ("SUBSERVICERS"), pursuant to a
Servicing Agreement and will receive a fee for such services. See "Trust Asset
Program" and "Description of the Notes." With respect to those Trust Assets
serviced by the Master Servicer through a Subservicer, the Master Servicer
will remain liable for its servicing obligations under the related Servicing
Agreement as if the Master Servicer alone were servicing such Trust Assets. In
addition to or in lieu of the Master Servicer for a series of Notes, the
related Prospectus Supplement may identify an Administrator for the Trust
Fund. The Administrator may be an affiliate of the Company. All references
herein to "Master Servicer" and any discussions of the servicing and
administration functions of the Master Servicer will also apply to the
Administrator to the extent applicable.
The Company's assignment of the Trust Assets to the Owner Trustee on behalf
of the Trust will be without recourse. See "Description of the Notes--
Assignment of Trust Assets." The Master Servicer's obligations with respect to
the Trust Assets will consist principally of its contractual servicing
obligations under the related Servicing Agreement (including its obligation to
enforce certain purchase obligations of Residential Funding or any Designated
Seller and other obligations of Subservicers, as described herein under "Trust
Asset Program--Representations Relating to Trust Assets," and "--Subservicing"
and "Description of the Notes--Assignment of Trust Assets" or pursuant to the
terms of any Private Securities. Residential Funding (or such other entity
specified in the related Prospectus Supplement) will be obligated to advance
funds to Mortgagors in respect of Draws made after the related Cut-off Date.
A Mortgaged Property securing a Revolving Credit Loan, Home Equity Loan and,
if applicable, a Contract may be subject to the senior liens of one or more
conventional mortgage loans at the time of origination and may be subject to
one or more junior liens at the time of origination or thereafter. A mortgage
loan secured by any such junior lien or senior lien will likely not be
included in the related Pool, and the Company, an affiliate of the Company or
an Unaffiliated Seller may have an interest in such mortgage loan. Revolving
Credit Loans, Home Equity Loans and Contracts that are secured by junior liens
generally will not be required by the Company to be covered by a primary
mortgage guaranty insurance policy insuring against default on such Trust
Assets.
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REVOLVING CREDIT LOANS
The Revolving Credit Loans will be originated pursuant to loan agreements
(the "CREDIT LINE AGREEMENTS"). Interest on each Revolving Credit Loan will be
calculated based on the average daily balance outstanding during the billing
cycle and the billing cycle generally will be the calendar month preceding a
Due Date. Each Revolving Credit Loan will have an interest rate (a "MORTGAGE
RATE") that is subject to adjustment on the day specified in the related
Mortgage Note, which may be daily or monthly, equal to the sum of (a) the
index* on such day as specified in the related Prospectus Supplement, and (b)
a fixed percentage set forth in the related Mortgage Note (the "GROSS
MARGIN"), subject to the maximum rate set forth in the Mortgage Note and
permitted by applicable law. Notwithstanding the forgoing, if so specified in
the related Prospectus Supplement, a Revolving Credit Loan may have an
introductory rate that is lower than the rate that would be in effect if the
applicable Index and Gross Margin were used to determine the Mortgage Rate and
as a result of such introductory rate, interest payments on the Notes may
initially be lower than expected. See "Risk Factors--Special Features of
Certain Trust Assets Secured by Junior Liens on Mortgaged Properties--
Revolving Credit Loan Characteristics" herein.
Unless otherwise specified in the related Prospectus Supplement, each
Revolving Credit Loan will have a term to maturity from the date of
origination of not more than 25 years. The Mortgagor for each Revolving Credit
Loan may draw money (each, an "ADDITIONAL BALANCE" or a "DRAW") under the
related Credit Line Agreement at any time during the period specified therein
(such period as to any Revolving Credit Loan, the "DRAW PERIOD"). Unless
otherwise specified in the related Prospectus Supplement, the Draw Period
generally will not be more than 15 years. Unless otherwise specified in the
related Prospectus Supplement, if the Draw Period is less than the full term
thereof, the related Mortgagor will not be permitted to make any Draw during
the period from the end of the related Draw Period to the related maturity
date. The Mortgagor for each Revolving Credit Loan will be obligated to make
monthly payments thereon in a minimum amount as specified in the related
Mortgage Note, which generally will not be less than the Finance Charge for
the related billing cycle. The Mortgagor for each Revolving Credit Loan will
be obligated to make a payment on the related maturity date in an amount equal
to the Account Balance thereof on such maturity date, which may be a
substantial principal amount. The maximum amount of any Draw is equal to the
excess, if any, of the Credit Limit over the principal balance outstanding
under such Mortgage Note at the time of such Draw.
Unless otherwise specified in the related Prospectus Supplement, (a) the
Finance Charge (the "FINANCE CHARGE") for any billing cycle generally will be
equal to interest accrued on the average daily principal balance of such
Revolving Credit Loan for such billing cycle at the related Mortgage Rate, (b)
the Account Balance (the "ACCOUNT BALANCE") on any day generally will be the
aggregate of the unpaid principal of the Revolving Credit Loan outstanding at
the beginning of such day, plus all related Draws funded on such day and
outstanding at the beginning of such day, plus the sum of any unpaid Finance
Charges and any unpaid fees, insurance premiums and other charges
(collectively, "ADDITIONAL CHARGES") that are due on such Revolving Credit
Loan minus the aggregate of all payments and credits that are applied to the
repayment of any such Draws on such day, and (c) the "principal balance" on
any day generally will be the related Account Balance minus the sum of any
unpaid Finance Charges and Additional Charges that are due on such Revolving
Credit Loan. Payments made by or on behalf of the Mortgagor for each Revolving
Credit Loan generally will be applied, first, to any unpaid Finance Charges
that are due thereon, second, to any unpaid Additional Charges that are due
thereon, and third, to any related Draws outstanding.
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* The index (the "INDEX") for a particular Pool will be specified in the
related Prospectus Supplement and may include one of the following indexes:
(i) the weekly average yield on U.S. Treasury securities adjusted to a
constant maturity of either six months or one year, (ii) the weekly auction
average investment yield of U.S. Treasury bills of six months, (iii) the
daily Bank Prime Loan rate made available by the Federal Reserve Board, (iv)
the cost of funds of member institutions for the Federal Home Loan Bank of
San Francisco, (v) the interbank offered rates for U.S. dollar deposits in
the London market, each calculated as of a date prior to each scheduled
interest rate adjustment date which will be specified in the related
Prospectus Supplement or (vi) the weekly average of secondary market
interest rates on six-month negotiable certificates of deposit.
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Unless otherwise specified in the related Prospectus Supplement, each
Revolving Credit Loan may be prepaid in full or in part at any time and
without penalty, the related Mortgagor will have the right during the related
Draw Period to make a Draw in the amount of any prepayment theretofore made
with respect to such Revolving Credit Loan. The Mortgage Note or Mortgage
related to each Revolving Credit Loan will generally contain a customary "due-
on-sale" clause.
As to each Revolving Credit Loan, the Mortgagor's rights to receive Draws
during the Draw Period may be suspended, or the Credit Limit may be reduced,
for cause under a limited number of circumstances, including, but not limited
to: a materially adverse change in the Mortgagor's financial circumstances or
a non-payment default by the Mortgagor. However, with respect to each
Revolving Credit Loan, generally such suspension or reduction will not affect
the payment terms for previously drawn balances. In the event of default under
a Revolving Credit Loan, at the discretion of the Master Servicer, the
Revolving Credit Loan may be terminated and declared immediately due and
payable in full. For this purpose, a default includes, but is not limited to:
the Mortgagor's failure to make any payment as required; any action or
inaction by the Mortgagor that materially and adversely affects the Mortgaged
Property or the rights in the Mortgaged Property; or fraud or material
misrepresentation by a Mortgagor in connection with the Loan.
The proceeds of the Revolving Credit Loans may be used by the borrower to
improve the related Mortgaged Properties, may be retained by the related
Mortgagors or may be used for purposes unrelated to such Mortgaged Properties.
THE HOME EQUITY LOANS AND THE CONTRACTS
As specified in the related Prospectus Supplement, the Home Equity Loans
will be secured by first or junior liens on the related Mortgaged Properties,
mortgage loans for property improvement, debt consolidation and/or home equity
purposes. As specified in the related Prospectus Supplement, the Manufactured
Housing Contracts will be secured by either Manufactured Homes (as defined
below), located in any of the fifty states, the District of Columbia or the
Commonwealth or Puerto Rico, or by Mortgages on the real estate on which the
Manufactured Homes are located. As specified in the related Prospectus
Supplement, the Home Improvement Contracts will either be unsecured or secured
primarily by (i) Mortgages on one- to four-family residential properties that
are generally subordinate to other mortgages on the same Mortgaged Property,
or (ii) purchase money security interests in the Home Improvements financed
thereby. The Contracts will be conventional contracts or contracts partially
insured by the FHA pursuant to Title I. Unless otherwise specified in the
related Prospectus Supplement, the Home Equity Loans and the Contracts will be
fully amortizing and may have fixed interest rates or adjustable interest
rates and may provide for other payment characteristics as described below and
in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the Home
Improvements securing the Home Improvement Contracts include, but are not
limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels. The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or
lot (or cooperative interest therein) on which to place such home or the
purchase of both a manufactured home and the lot (or cooperative interest
therein) on which such home is placed.
Unless otherwise specified in the related Prospectus Supplement, the
manufactured homes (the "MANUFACTURED HOMES") underlying the Manufactured
Housing Contracts will consist of manufactured homes within the meaning of
Title 42 of the United States Code, Section 5402(6). Section 5402(6) defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width, forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and 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; except that such term shall include
any
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structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of HUD and complies with the standards
established under [this] chapter."
Manufactured Homes and Home Improvements, unlike Mortgaged Properties,
generally depreciate in value. Consequently, at any time after origination it
is possible, especially in the case of Contracts with high Loan-to-Value
Ratios at origination, that the market value of a Manufactured Home or Home
Improvement may be lower than the principal amount outstanding under the
related Contract.
TRUST ASSET PROGRAM
The Trust Assets will have been purchased by the Company, either directly or
indirectly through Residential Funding from Sellers. The Revolving Credit
Loans will generally have been originated in accordance with the Company's
underwriting standards or alternative underwriting criteria as described below
under "Underwriting Standards Applicable to the Revolving Credit Loans" or as
described in the related Prospectus Supplement. The Home Equity Loans and the
Contracts generally will have been originated in accordance with the
underwriting standards described in the related Prospectus Supplement.
UNDERWRITING STANDARDS APPLICABLE TO THE REVOLVING CREDIT LOANS
General Standards
The Company's underwriting standards with respect to the Revolving Credit
Loans will generally conform to those published in Residential Funding's
Seller Guide (together with Residential Funding's Servicer Guide, the "GUIDE,"
as modified from time to time), including the provisions of the Guide
applicable to the Company's Home Equity Program (the "HOME EQUITY PROGRAM").
The underwriting standards as set forth in the Guide are continuously revised
based on opportunities and prevailing conditions in the residential mortgage
market, the consumer lending market and the market for mortgage securities.
The Revolving Credit Loans may be underwritten by Residential Funding or by a
designated third party. In certain circumstances, however, the Revolving
Credit Loans may be underwritten only by the Seller with little or no review
performed by Residential Funding. See "Underwriting Standards Applicable to
the Revolving Credit Loans--Guide Standards" and "Qualifications of Sellers."
Residential Funding or a designated third party may perform only sample
quality assurance reviews to determine whether the Revolving Credit Loans in
any Pool were underwritten in accordance with applicable standards.
With respect to the Company's underwriting standards, as well as any other
underwriting standards that may be applicable to any Revolving Credit Loans,
such underwriting standards generally include a set of specific criteria
pursuant to which the underwriting evaluation is made. However, the
application of such underwriting standards does not imply that each specific
criterion was satisfied individually. Rather, a Revolving Credit Loan will be
considered to be originated in accordance with a given set of underwriting
standards if, based on an overall qualitative evaluation, the loan is in
substantial compliance with such underwriting standards. For example, a
Revolving Credit Loan may be considered to comply with a set of underwriting
standards, even if one or more specific criteria included in such underwriting
standards were not satisfied, if other factors compensated for the criteria
that were not satisfied or if the Revolving Credit Loan is considered to be in
substantial compliance with the underwriting standards.
In addition, the Company purchases Revolving Credit Loans which do not
conform to the underwriting standards set forth in the Guide. Certain of the
Revolving Credit Loans will be purchased in negotiated transactions, and such
negotiated transactions may be governed by agreements ("MASTER COMMITMENTS")
relating to ongoing purchases of Revolving Credit Loans by Residential
Funding, from Sellers who will represent that the Revolving Credit Loans have
been originated in accordance with underwriting standards agreed to by
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Residential Funding. Residential Funding, on behalf of the Company or a
designated third party, will generally review only a limited portion of the
Revolving Credit Loans in any delivery of such Revolving Credit Loans from the
related Seller for conformity with the applicable underwriting standards.
Certain other Revolving Credit Loans will be purchased from Sellers who will
represent that the Revolving Credit Loans were originated pursuant to
underwriting standards acceptable to Residential Funding.
The level of review, if any, by Residential Funding or the Company of any
Revolving Credit Loan for conformity with the applicable underwriting
standards will vary depending on a number of factors, including (i) factors
relating to the experience and status of the Seller, and (ii) factors relating
to the specific Revolving Credit Loan, including the principal amount or
Credit Limit, the Combined Loan-to-Value Ratio, the loan type or loan program,
and the applicable credit score of the related Mortgagor used in connection
with the origination of the Revolving Credit Loan (as determined based on a
credit scoring model acceptable to the Company). Generally, such credit
scoring models provide a means for evaluating the information about a
prospective borrower that is available from a credit reporting agency. The
underwriting criteria applicable to any program under which the Mortgage Loans
may be originated may provide that qualification for the loan, the level of
review of the loan's documentation, or the availability of certain loan
features (such as maximum loan amount, maximum Loan-to-Value Ratio, property
type and use, and documentation level) may depend on the mortgagor's credit
score.
The underwriting standards utilized in negotiated transactions and Master
Commitments and the underwriting standards applicable to Revolving Credit
Loans underlying Private Securities may vary substantially from the
underwriting standards set forth in the Guide. Such underwriting standards are
generally intended to provide an underwriter with information to evaluate the
borrower's repayment ability and the value of the Mortgaged Property as
collateral. Due to the variety of underwriting standards and review procedures
that may be applicable to the Revolving Credit Loans included in any Pool, the
related Prospectus Supplement generally will not distinguish among the various
underwriting standards applicable to the Revolving Credit Loans nor describe
any review for compliance with applicable underwriting standards performed by
the Company or Residential Funding. Moreover, there can be no assurance that
every Revolving Credit Loan was originated in conformity with the applicable
underwriting standards in all material respects, or that the quality or
performance of Revolving Credit Loans underwritten pursuant to varying
standards as described above will be equivalent under all circumstances. In
the case of a Designated Seller Transaction, the applicable underwriting
standards will be those of the Designated Seller or of the originator of the
Revolving Credit Loans, and will be described in the related Prospectus
Supplement.
The Company, either directly or indirectly through Residential Funding, will
also purchase Revolving Credit Loans from its affiliates, including GMAC
Mortgage and Homecomings Financial Network, Inc., with underwriting standards
generally in accordance with the Guide or as otherwise agreed to by the
Company. However, in certain limited circumstances such Revolving Credit Loans
may be employee or preferred customer loans with respect to which, in
accordance with such affiliate's mortgage loan programs, income, asset and
employment verifications and appraisals may not have been required. With
respect to Revolving Credit Loans made under any employee loan program
maintained by Residential Funding, or its affiliates, in certain limited
circumstances preferential interest rates may be allowed. Neither the Company
nor Residential Funding will review any affiliate's mortgage loans for
conformity with the underwriting standards set forth in the Guide.
Guide Standards
The following is a brief description of the underwriting standards under the
Home Equity Program set forth in the Guide for full documentation loan
programs. Initially, a prospective borrower (other than a trust if the trust
is the borrower) is required to fill out a detailed application providing
pertinent credit information. As part of the application, the borrower is
required to provide a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the borrower's
credit history with merchants and lenders and any record of bankruptcy. Under
the Home Equity Program, the borrower generally must show, among other things,
a minimum of one year credit history reported on the credit report and that no
mortgage delinquencies (thirty days or greater) in the past 12 months existed.
Borrowers who have less than a 12 month
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first mortgage payment history may be subject to certain additional lending
restrictions. In addition, under the Home Equity Program, borrowers with a
previous foreclosure or bankruptcy within the past seven years may not be
allowed and a borrower generally must satisfy all judgments, liens and other
legal actions with an original amount of $1,000 or greater prior to closing.
In addition, an employment verification is obtained which reports the
borrower's current salary and may contain the length of employment and an
indication as to whether it is expected that the borrower will continue such
employment in the future. If a prospective borrower is self-employed, the
borrower may be required to submit copies of signed tax returns. The borrower
may also be required to authorize verification of deposits at financial
institutions where the borrower has accounts. In the case of a Revolving
Credit Loan secured by a property owned by a trust, the foregoing procedures
may be waived where the Mortgage Note is executed on behalf of the trust.
Unless otherwise specified in the related Prospectus Supplement, an
appraisal is made of the Mortgaged Property securing each Revolving Credit
Loan. Such appraisals may be performed by appraisers independent from or
affiliated with the Company, Residential Funding or their affiliates. Such
appraisals, however, will not establish that the Mortgaged Properties provide
assurance of repayment of the Revolving Credit Loans. See "Risk Factors" and
"Servicing of Trust Assets--Realization Upon Defaulted Loans" herein. The
appraiser is required to inspect the property and verify that it is in good
condition and that construction, if new, has been completed. In certain
circumstances, the appraiser is only required to perform an exterior
inspection of the property. The appraisal is based on various factors,
including the market value of comparable homes and the cost of replacing the
improvements. Except as otherwise provided in the related Prospectus
Supplement, under the Home Equity Program, each appraisal is required to be
dated no more than 180 days prior to the date of origination of the Revolving
Credit Loan; provided, that depending on the Credit Limit an earlier appraisal
may be utilized if such appraisal was made not earlier than two years prior to
the date of origination of the mortgage loan and the related appraiser
certifies that the value of the related mortgaged property has not declined
since the date of the original appraisal or if a field review or statistical
property valuation is obtained. Title searches are undertaken in most cases,
and title insurance is required on all Revolving Credit Loans with Credit
Limits in excess of $100,000.
Under the Home Equity Program, the CLTV is generally calculated by reference
to the lower of the appraised value as so determined or the sales price, if
the Revolving Credit Loan is originated concurrently with or not more than 12
months after the origination of a first mortgage loan. In all other cases, the
value used is generally the appraised value as so determined.
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 (such as
property taxes and hazard insurance) and other financial obligations
(including debt service on any related mortgage loan secured by a senior lien
on the related Mortgaged Property). Unless otherwise provided in the related
Prospectus Supplement, for qualification purposes the monthly payment will be
assumed to be an amount equal to 1.00% times the applicable Credit Limit. The
Mortgage Rate in effect from the origination date of a Revolving Credit Loan
to the first adjustment date generally will be lower, and may be significantly
lower, than the sum of the then applicable Index and Gross Margin. Unless
otherwise specified in the related Prospectus Supplement, the Revolving Credit
Loans will not provide for negative amortization. Payment of the full
outstanding principal balance at maturity may depend on the borrower's ability
to obtain refinancing or to sell the Mortgaged Property prior to the maturity
of the mortgage loan, and there can be no assurance that such refinancing will
be available to the borrower or that such a sale will be possible.
The underwriting standards set forth in the Guide may be varied in
appropriate cases, including in "limited" or "reduced loan documentation"
mortgage loan programs. Limited documentation programs generally permit fewer
supporting documents to be obtained or waive income, asset and employment
documentation requirements, and limited documentation programs generally
compensate for increased credit risk by placing greater emphasis
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on either the review of the property to be financed or the borrower's ability
to repay the Revolving Credit Loan. For example, under Residential Funding's
Easy Docs limited mortgage loan documentation program, certain submission
requirements regarding income verification and debt-to-income ratios are
removed, but the Seller is still required to perform a thorough credit
underwriting of the mortgage loan. Generally, in order to be eligible for a
reduced loan documentation program, a Mortgagor must have a good credit
history, and other compensating factors (such as a relatively low Combined
Loan-to-Value Ratio, or other favorable underwriting factors) must be present
and the borrower's eligibility for such program may be determined by use of a
credit scoring model.
The Home Equity Program sets forth certain limitations with respect to the
CLTV for the Revolving Credit Loans and certain restrictions with respect to
any related underlying first mortgage loan. The underwriting guidelines for
the Home Equity Program generally permit CLTVs as high as 100% except as
otherwise provided in the related Prospectus Supplement; however, the maximum
permitted CLTV may be reduced due to a variety of underwriting criteria. In
areas where property values are considered to be declining, the maximum
permitted CLTV is 75%. The underwriting guidelines also include restrictions
based on the borrower's debt-to-income ratio. In addition to the foregoing, an
evaluation of the prospective borrower's credit quality will be made based on
a credit scoring model approved by the Company. The Home Equity Program
underwriting guidelines include minimum credit score levels that may apply
depending on certain factors of the Revolving Credit Loan. The required Gross
Margins for Revolving Credit Loans purchased under the Home Equity Program, as
announced from time to time, vary based on a number of factors including CLTV,
Credit Limit, documentation level, property type, and borrower debt-to-income
ratio and credit score.
In its evaluation of mortgage loans which have twenty-four or more months of
payment experience, Residential Funding generally places greater weight on
payment history and may take into account market and other economic trends
while placing less weight on underwriting factors generally applied to newly
originated mortgage loans.
QUALIFICATIONS OF SELLERS
Except with respect to Designated Seller Transactions or unless otherwise
specified in the related Prospectus Supplement, each Seller (other than the
Federal Deposit Insurance Corporation (the "FDIC") and investment banking
firms) will have been approved by Residential Funding for participation in
Residential Funding's loan purchase program. In determining whether to approve
a seller for participation in the loan purchase program, Residential Funding
generally will consider, among other things, the financial status (including
the net worth) of the seller, the previous experience of the seller in
originating home equity, home improvement, manufactured housing or first
mortgage loans, the prior delinquency and loss experience of the seller, the
underwriting standards employed by the seller and the quality control and, if
applicable, servicing operations established by the seller. There can be no
assurance that any Seller presently meets any qualifications or will continue
to meet any qualifications at the time of inclusion of mortgage loans sold by
it in the Trust Fund for a series of Notes, or thereafter. If a Seller becomes
subject to the direct or indirect control of the FDIC, or if a Seller's net
worth, financial performance or delinquency and foreclosure rates deteriorate,
such institution may continue to be treated as a Seller. Any such event may
adversely affect the ability of any such Seller to repurchase the Mortgage
Loans in the event of a breach of a representation or warranty which has not
been cured.
Residential Funding generally monitors which Sellers are under control of
the FDIC or are insolvent, otherwise in receivership or conservatorship or
financially distressed. Any such Seller may make no representations and
warranties with respect to Trust Assets sold by it. The FDIC (either in its
corporate capacity or as receiver for a depository institution) may also be a
Seller of Trust Assets, in which event neither the FDIC nor the related
depository institution may make representations and warranties with respect to
the Trust Assets sold, or only limited representations and warranties may be
made (for example, that the related legal documents are enforceable). The FDIC
may have no obligation to repurchase any Trust Asset for a breach of a
representation and warranty.
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Unless otherwise specified in the related Prospectus Supplement, the
qualifications required of Sellers for approval by Residential Funding as
participants in its loan purchase programs may not apply to Designated
Sellers. To the extent the Designated Seller fails to or is unable to
repurchase the Trust Asset due to a breach of representation and warranty,
neither the Company, Residential Funding nor any other entity will have
assumed the representations and warranties, and any related losses will be
borne by the Noteholders or by the Credit Enhancement, if any.
REPRESENTATIONS RELATING TO TRUST ASSETS
Except as set forth above, each Seller (other than a Designated Seller) will
have made representations and warranties to Residential Funding with respect
to the Trust Assets sold by such Seller. However, except as otherwise provided
in the related Prospectus Supplement, the representations and warranties of
the Seller will not be assigned to the Indenture Trustee for the benefit of
the holders of the related series of Notes, and therefore a breach of the
representations and warranties of the Seller generally will not be enforceable
on behalf of the Trust Fund.
In the case of a Pool consisting of Trust Assets purchased by the Company
from Sellers through Residential Funding, Residential Funding, except in the
case of a Designated Seller Transaction or as to Trust Assets underlying any
Private Securities or unless otherwise specified in the related Prospectus
Supplement, will have made certain limited representations and warranties
regarding the Trust Assets to the Company at the time that they are sold to
the Company. Such representations and warranties will generally include, among
other things, that: (i) as of the Cut-off Date, the information set forth in a
listing of the related Trust Assets is true and correct in all material
respects; (ii) Residential Funding was the sole holder and owner of the Trust
Assets free and clear of any and all liens and security interests; (iii) each
Trust Asset complied in all material respects with all applicable local, state
and federal laws; (iv) except as otherwise indicated in the related Prospectus
Supplement, no Trust Asset is one month or more delinquent in payment of
principal and interest; (v) there is no delinquent tax, or to the best of
Residential Funding's knowledge, assessment lien against any Mortgaged
Property; and (vi) to the best of Residential Funding's knowledge, any
Contract that is partially insured by the FHA pursuant to Title I was
originated in accordance with applicable FHA regulations and is insured,
without set-off, surcharge or defense by the FHA. In the event of a breach of
a representation or warranty made by Residential Funding that materially
adversely affects the interests of the Noteholders in a Trust Asset,
Residential Funding will be obligated to repurchase or substitute for such
Trust Asset as described below. In addition, Residential Funding will be
obligated to repurchase or substitute for any Revolving Credit Loan, Home
Equity Loan and any Contract secured by a lien on Mortgaged Property as to
which it is discovered that the related Mortgage is not a valid lien on the
related Mortgaged Property having at least the priority set forth with respect
to such Revolving Credit Loan, Home Equity Loan or such Contract, as
applicable, in the listing of related Trust Assets, subject only to (a) liens
of real property taxes and assessments not yet due and payable, (b) covenants,
conditions and restrictions, rights of way, easements and other matters of
public record as of the date of recording of such Mortgage and certain other
permissible title exceptions, (c) other matters to which like properties are
commonly subject which do not materially adversely affect the value, use,
enjoyment or marketability of the Mortgaged Property, and (d) if applicable,
the liens of the related senior mortgage loans. In addition, with respect to
any Revolving Credit Loan, Home Equity Loan or Contract as to which the
Company delivers to the Indenture Trustee or the custodian an affidavit
certifying that the original Mortgage Note has been lost or destroyed, if such
Trust Asset subsequently is in default and the enforcement thereof or of the
related Mortgage is materially adversely affected by the absence of the
original Mortgage Note, Residential Funding will be obligated to repurchase or
substitute for such Trust Asset, in the manner described below. However,
Residential Funding will not be required to repurchase or substitute for any
Trust Asset as described above if the circumstances giving rise to such
requirement also constitute fraud in the origination of the related Revolving
Credit Loan, Home Equity Loan or Contract. Furthermore, because the listing of
the related Trust Assets generally contains information with respect to the
Trust Assets 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 Trust
Assets between the Cut-off Date and the Closing Date. Residential Funding will
not be required to purchase or substitute for any Trust Asset as a result of
such prepayment or modification.
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In a Designated Seller Transaction, unless otherwise specified in the
related Prospectus Supplement, the Designated Seller will have made certain
representations and warranties regarding the Trust Assets to the Company
generally similar to those made in the preceding paragraph by Residential
Funding.
The Company will assign to the Owner Trustee (or the Special Purpose Entity,
if applicable) all of its right, title and interest in each agreement by which
it purchased a Trust Asset from Residential Funding or a Designated Seller,
insofar as such agreement relates to the representations and warranties made
by a Designated Seller or Residential Funding, as the case may be, in respect
of such Trust Asset and any remedies provided for with respect to any breach
of such representations and warranties. If a Designated Seller or Residential
Funding, as the case may be, cannot cure a breach of any representation or
warranty made by it in respect of a Trust Asset which materially and adversely
affects the interests of the Noteholders in such Trust Asset, within 90 days
after notice from the Master Servicer, such Designated Seller or Residential
Funding, as the case may be, will be obligated to purchase such Trust Asset at
a price (the "PURCHASE PRICE") set forth in the related Agreement, which
Purchase Price generally 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 at the Mortgage Rate (less the amount,
expressed as a percentage per annum, payable in respect of master servicing
compensation or subservicing compensation, as applicable, and if applicable,
the Excluded Spread (as defined herein).
Unless otherwise specified in the related Prospectus Supplement, as to any
such Trust Asset required to be purchased by Residential Funding as provided
above, rather than purchase the Trust Asset, Residential Funding may, at its
sole option, remove such Trust Asset (a "DELETED LOAN") from the Trust Fund
(or from the assets underlying any Private Securities, if applicable) and
cause the Company to substitute in its place another Trust Asset of like kind
(an "ELIGIBLE SUBSTITUTE LOAN"). The related Prospectus Supplement will set
forth the condition of any Eligible Substitute Loan. The related Agreement may
include additional requirements or additional provisions relating to meeting
the foregoing requirements on an aggregate basis where a number of
substitutions occur contemporaneously. Unless otherwise specified in the
related Prospectus Supplement, a Designated Seller will have no option to
substitute for a Trust Asset that it is obligated to repurchase in connection
with a breach of a representation and warranty.
The Master Servicer will be required under the Servicing Agreement to use
its best reasonable efforts to enforce this purchase or substitution
obligation for the benefit of the Indenture Trustee and the Noteholders, using
practices it would employ in its good faith business judgment and which are
normal and usual in its general mortgage servicing activities; provided,
however, that this purchase or substitution obligation will not become an
obligation of the Master Servicer in the event the Designated Seller or
Residential Funding, as the case may be, fails to honor such obligation. The
Master Servicer will be entitled to reimbursement for any costs and expenses
incurred in pursuing such a purchase or substitution obligation, including but
not limited to any costs or expenses associated with litigation. In instances
where a Designated Seller is unable, or disputes its obligation, to purchase
affected Trust Assets, the Master Servicer, employing the standards set forth
in the preceding sentence, may negotiate and enter into one or more settlement
agreements with such Designated Seller that may provide for, among other
things, the purchase of only a portion of the affected Trust Assets or
coverage of certain loss amounts. Any such settlement could lead to losses on
the Trust Assets which would be borne by the Credit Enhancement supporting the
related series of Notes, and to the extent not available, by the Noteholders
of such series. Furthermore, if applicable, the Master Servicer may pursue
foreclosure (or similar remedies) concurrently with pursuing any remedy for a
breach of a representation and warranty. However, the Master Servicer is not
required to continue to pursue both such remedies if it determines that one
such remedy is more likely to result in a greater recovery. In accordance with
the above described practices, the Master Servicer will not be required to
enforce any purchase of a Designated Seller arising from any misrepresentation
by the Designated Seller, if the Master Servicer determines in the reasonable
exercise of its business judgment that the matters related to such
misrepresentation did not directly cause or are not likely to directly cause a
loss on the related Trust Asset. If the Designated Seller fails to repurchase
and no breach of either the Company's or Residential Funding's representations
has occurred, the Designated Seller's purchase obligation will not become an
obligation of the Company or Residential Funding. Unless otherwise specified
in the related Prospectus Supplement, the foregoing obligations will
constitute the sole remedies available to Noteholders or the Indenture Trustee
for a breach of
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any representation by a Designated Seller or by Residential Funding in its
capacity as a seller of Trust Assets to the Company, or for any other event
giving rise to such obligations as described above.
Neither the Company nor the Master Servicer will be obligated to purchase a
Trust Asset if a Designated Seller defaults on its obligation to do so, and no
assurance can be given that the Designated Sellers will carry out such
obligations with respect to Trust Assets. Such a default by a Designated
Seller is not a default by the Company or by the Master Servicer. Any Trust
Asset not so purchased or substituted for shall remain in the related Trust
Fund and any losses related thereto shall be allocated to the related credit
enhancement, and to the extent not available to the related Notes.
Notwithstanding the foregoing, with respect to any Designated Seller that
requests Residential Funding's consent to the transfer of subservicing rights
relating to any Trust Assets to a successor servicer, Residential Funding may
release such Designated Seller from liability under its representations and
warranties described above, upon the assumption of such successor servicer of
the Designated Seller's liability for such representations and warranties as
of the date they were made. In that event, Residential Funding's rights under
the instrument by which such successor servicer assumes the Designated
Seller's liability will be assigned to the Owner Trustee (or the Special
Purpose Entity, if applicable), and such successor servicer shall be deemed to
be the "Designated Seller" for purposes of the foregoing provisions.
SUBSERVICING
The servicing for each Trust Asset will generally either be retained by the
Seller (or its designee approved by the Master Servicer) as Subservicer, or
will be released by the Seller to the Master Servicer and will be subsequently
transferred to a Subservicer approved by the Master Servicer, and in either
case will thereafter be serviced by the Subservicer pursuant to an agreement
between the Master Servicer and the Subservicer (a "SUBSERVICING AGREEMENT").
The Master Servicer may, but is not obligated to, assign such subservicing to
designated subservicers which will be qualified Sellers and which may include
GMAC Mortgage or its affiliates. While such Subservicing Agreement will be a
contract solely between the Master Servicer and the Subservicer, the Servicing
Agreement applicable to any series of Notes will provide that, if for any
reason the Master Servicer for such series of Notes is no longer the master
servicer of the related Trust Assets, any successor Master Servicer must
recognize the Subservicer's rights and obligations under such Subservicing
Agreement.
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued in series. Each series of Notes will be issued
pursuant to an Indenture between the related Trust Fund and the entity named
in the related Prospectus Supplement as Indenture Trustee with respect to such
series. A form of Indenture has been filed as an exhibit to the Registration
Statement of which this prospectus forms a part. Each Indenture and Trust
Agreement will be filed with the Commission as an exhibit to a Form 8-K. The
following summaries (together with additional summaries under "The Agreements"
below as well as other pertinent information included elsewhere in this
Prospectus, and subject to the related Prospectus Supplement) do not describe
all terms thereof but reflect the material provisions relating to the Notes
common to each Agreement.
Each series of Notes may consist of any one or a combination of the
following: (i) a single class of Notes; (ii) two or more classes of Notes, one
or more classes of Notes that are senior to any class or classes of any class
or classes of Subordinate Securities as described in the respective Prospectus
Supplement (any such series, a "SENIOR/SUBORDINATE SERIES"); (iii) one or more
classes of Strip Notes which will be entitled to (a) principal payments, with
disproportionate, nominal or no interest payments or (b) interest payments,
with disproportionate, nominal or no principal payments; (iv) two or more
classes of Notes which differ as to the timing, sequential order, rate or
amount of payments of principal or interest or both, or as to which payments
of principal or interest or both on any class may be made upon the occurrence
of specified events, in accordance with a schedule or formula (including
"planned amortization classes" and "targeted amortization classes" and "very
accurately
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defined maturity classes"), or on the basis of collections from designated
portions of the Pool, which series may include one or more classes of Accrual
Notes with respect to which certain accrued interest will not be paid but
rather will be added to the principal balance thereof on each Payment Date for
the period described in the related Prospectus Supplement; or (v) similar
classes of Notes with other payment characteristics, as described in the
related Prospectus Supplement. Credit support for each series of Notes will be
provided by a Financial Guaranty Insurance Policy, Letter of Credit, Reserve
Fund, by the subordination of one or more classes of Subordinate Securities,
Overcollateralization or other credit enhancement as described in the
Prospectus Supplement or under "Description of Credit Enhancement," or by any
combination of the foregoing.
FORM OF NOTES
As specified in the related Prospectus Supplement, the Notes of each series
will be issued either as physical certificates or in book-entry form. If
issued as physical certificates, the Notes will be in fully-registered form
only in the denominations specified in the related Prospectus Supplement, and
will be transferrable and exchangeable at the corporate trust office of the
person appointed under the related Agreement to register the Notes (the "NOTE
REGISTRAR"). No service charge will be made for any registration of exchange
or transfer of Notes, but the Indenture Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge. The term
"NOTEHOLDER" as used herein refers to the entity whose name appears on the
records of the Note Registrar (or, if applicable, a transfer agent) as the
registered holder thereof, except as otherwise indicated in the related
Prospectus Supplement.
If issued in book-entry form certain classes of a series of Notes will be
initially issued through the book-entry facilities of The Depository Trust
Company ("DTC"), or Cedel Bank, societe anonyme ("CEDEL") or the Euroclear
System ("EUROCLEAR") (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems, or
through such other depository or facility as may be specified in the related
Prospectus Supplement. As to any such class of Notes so issued ("BOOK-ENTRY
NOTES"), the record holder of such Notes will be DTC's nominee. CEDEL and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in CEDEL's and Euroclear's names on the books
of their respective depositaries (the "DEPOSITARIES"), which in turn will hold
such positions in customers' securities accounts in the depositaries' names on
the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the State
of New York, which holds securities for its participating organizations ("DTC
PARTICIPANTS," and together with the CEDEL and Euroclear participating
organizations "PARTICIPANTS") and facilitates the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in the accounts of Participants. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Other institutions that are not
Participants but clear through or maintain a custodial relationship with
Participants (such institutions, "INDIRECT PARTICIPANTS") have indirect access
to DTC's clearance system.
Unless otherwise specified in the related Prospectus Supplement, no person
acquiring an interest in any Book-Entry Notes (each such person, a "BENEFICIAL
OWNER") will be entitled to receive a Note representing such interest in
registered, certificated form, unless either (i) DTC ceases to act as
depository in respect thereof and a successor depository is not obtained or
(ii) the Indenture Trustee elects in its sole discretion to discontinue the
registration of such Notes through DTC. Prior to any such event, Beneficial
Owners will not be recognized by the Indenture Trustee or the Master Servicer
as holders of the related Notes for purposes of the related Agreement, and
Beneficial Owners will be able to exercise their rights as owners of such
Notes only indirectly through DTC, Participants and Indirect Participants. Any
Beneficial Owner that desires to purchase, sell or otherwise transfer any
interest in Book-Entry Notes may do so only through DTC, either directly if
such Beneficial Owner is a Participant or indirectly through Participants and,
if applicable, Indirect Participants. Pursuant to the procedures of DTC,
transfers of the beneficial ownership of any Book-Entry Notes will be required
to be made in minimum denominations specified in the related Prospectus
Supplement. The ability of a Beneficial Owner to pledge Book-Entry Notes to
persons or entities that are not Participants in the DTC system, or to
otherwise act with respect to such Notes, may be limited because of the lack
of physical certificates evidencing such Notes and because DTC may act only on
behalf of Participants.
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Because of time zone differences, the securities account of a CEDEL or
Euroclear Participant as a result of a transaction with a DTC Participant
(other than a depositary holding on behalf of CEDEL or Euroclear) will be
credited during subsequent securities settlement processing day (which must be
a business day for CEDEL or Euroclear, as the case may be) immediately
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear Participant or CEDEL Participants on such business day. Cash
received in CEDEL or Euroclear as a result of sales of securities by or
through a CEDEL Participant or Euroclear Participant to a DTC Participant
(other than the depositary for CEDEL or Euroclear) will be received with value
on the DTC settlement date, but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in
DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant Depositaries; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver
instructions directly to the Depositaries.
CEDEL as a professional depository holds securities for its participating
organizations ("CEDEL PARTICIPANTS") and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. As a professional
depository, CEDEL is subject to regulation by the Luxembourg Monetary
Institute.
Euroclear was created to hold securities for participants of Euroclear
("EUROCLEAR PARTICIPANTS") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities
and cash. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "EUROCLEAR OPERATOR"), under contract
with Euroclear Clearance Systems S.C., a Belgian co-operative corporation (the
"CLEARANCE COOPERATIVE"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Clearance
Cooperative. The Clearance Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. The Euroclear Operator is the Belgian branch
of a New York banking corporation which is a member bank of the Federal
Reserve System. As such, it is regulated and examined by the Board of
Governors of the Federal Reserve System and the New York State Banking
Department, as well as the Belgian Banking Commission. Securities clearance
accounts and cash accounts with the Euroclear Operator are governed by the
Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law (collectively,
the "TERMS AND CONDITIONS"). The Terms and Conditions govern transfers of
securities and cash within Euroclear, withdrawals of securities and cash from
Euroclear, and receipts of payments with respect to securities in Euroclear.
All securities in Euroclear are held on a fungible basis without attribution
of specific certificates to specific securities clearance accounts.
Payments in respect of the Book-Entry Notes will be forwarded by the
Indenture Trustee to DTC, and DTC will be responsible for forwarding such
payments to Participants, each of which will be responsible for disbursing
such payments to the Beneficial Owners it represents or, if applicable, to
Indirect Participants. Accordingly,
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Beneficial Owners may experience delays in the receipt of payments in respect
of their Notes. Under DTC's procedures, DTC will take actions permitted to be
taken by holders of any class of Book-Entry Notes under the related Agreement
only at the direction of one or more Participants to whose account the Book-
Entry Notes are credited and whose aggregate holdings represent no less than
any minimum amount of Percentage Interests or voting rights required therefor.
DTC may take conflicting actions with respect to any action of Noteholders of
any Class to the extent that Participants authorize such actions. None of the
Master Servicer, the Company, the Indenture Trustee, the Owner 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 Notes, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
ASSIGNMENT OF THE TRUST ASSETS
At the time of issuance of a series of Notes, the Company will cause the
Trust Assets and any other assets being included in the related Trust Fund to
be assigned without recourse to the Owner Trustee or its nominee (which may be
the Custodian), on behalf of the related Trust, together with, if specified in
the related Prospectus Supplement, all principal and interest received on or
with respect to such Trust Assets after the Cut-off Date (other than principal
and interest due on or before the Cut-off Date and any Excluded Spread). The
Owner Trustee will, concurrently with such assignment, grant a security
interest in the related Trust Fund to the Indenture Trustee to secure such
Notes. Each Trust Asset will be identified in a schedule appearing as an
exhibit to the related Agreement. Such schedule will include, among other
things, information as to the principal balance of each Trust Asset 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 Combined Loan-to-Value Ratio at origination or
modification.
The Company will, as to each Trust Asset other than Trust Assets underlying
any Private Securities, deliver to an entity specified in the related
Prospectus Supplement (which may be the Indenture Trustee, a Custodian or
another entity appointed by the Indenture Trustee) the legal documents
relating to such Trust Assets that are in possession of the Company, which may
include, as applicable, depending upon whether such Trust Asset is secured by
a lien on Mortgaged Property: (i) the Mortgage Note (and any modification or
amendment thereto) endorsed without recourse either in blank or to the order
of the Owner Trustee or the Indenture Trustee (or a nominee thereof); (ii) the
Mortgage (except for any Mortgage not returned from the public recording
office) with evidence of recording indicated thereon or, in the case of a
Cooperative Loan, the respective security agreements and any applicable UCC
financing statements; (iii) an assignment in recordable form of the Mortgage
(or, with respect to a Cooperative Loan, an assignment of the respective
security agreements, any applicable UCC financing statements, recognition
agreements, relevant stock certificates, related blank stock powers and the
related proprietary leases or occupancy agreements); (iv) if applicable, any
riders or modifications to such Mortgage Note and Mortgage, together with
certain other documents at such times as set forth in the related Agreement;
and (v) the original Contract and copies of documents and instruments related
to each Contract and, other than in the case of unsecured Contracts, the
security interest in the property securing such Contract. Such assignments may
be blanket assignments covering Mortgages secured by Mortgaged Properties
located in the same county, if permitted by law. If so specified in the
related Prospectus Supplement, the Company may not be required to deliver one
or more of such documents if such documents are missing from the files of the
party from whom such Revolving Credit Loans, Home Equity Loans and certain
Contracts were purchased.
In the event that, with respect to any Revolving Credit Loan, Home Equity
Loan or Contract secured by a lien on Mortgaged Property, the Company cannot
deliver the Mortgage or any assignment with evidence of recording thereon
concurrently with the execution and delivery of the related Trust Agreement
because of a delay caused by the public recording office, the Company will
deliver or cause to be delivered to the Indenture Trustee, the Custodian or
another entity appointed by the Indenture Trustee a true and correct photocopy
of such Mortgage or assignment. The Company will deliver or cause to be
delivered to the Indenture 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 Subservicer.
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Assignments of the Revolving Credit Loans, Home Equity Loans and Contracts
secured by a lien on Mortgaged Property will be recorded in the appropriate
public recording office, except in states where, in the opinion of counsel
acceptable to the Indenture Trustee or Owner Trustee, such recording is not
required to protect the Indenture Trustee's or Owner Trustee's interests in
such Revolving Credit Loans, Home Equity Loans and Contracts against the claim
of any subsequent transferee or any successor to or creditor of the Company or
the originator of such Revolving Credit Loans, Home Equity Loans or Contracts,
or except as otherwise specified in the related Prospectus Supplement.
Under certain circumstances, as to any series of Notes, the Company may have
the option to repurchase Trust Assets from the Trust Fund for cash, or in
exchange for other Trust Assets or Permitted Investments. Alternatively, for
any series of Notes secured by Private Securities, the Company may have the
right to so repurchase Revolving Credit Loans, Home Equity Loans and/or
Contracts from the entity that issued such Private Securities. All provisions
relating to such optional repurchase provisions will be described in the
related Prospectus Supplement.
REVIEW OF TRUST ASSETS
The Indenture Trustee will be authorized to appoint one or more custodians
(each, a "CUSTODIAN") pursuant to a custodial agreement to maintain possession
of and review documents relating to the Trust Assets as the agent of the
Indenture Trustee or, following payment in full of the Notes and discharge of
the Indenture, the Owner Trustee. The identity of such Custodian, if any, will
be set forth in the related Prospectus Supplement.
The Indenture Trustee or the Custodian will hold such documents in trust for
the benefit of the holders of the Securities (the "SECURITYHOLDERS") and,
generally will review such documents within such period specified in the
related Prospectus Supplement. If any such document is found to be defective
in any material respect, the Indenture Trustee or such Custodian shall notify
the Master Servicer and the Company, and if so specified in the related
Prospectus Supplement, the Master Servicer, the Servicer or the Indenture
Trustee shall notify Residential Funding or the Designated Seller. If
Residential Funding or, in a Designated Seller Transaction, the Designated
Seller cannot cure such defect within such period specified in the related
Prospectus Supplement after notice of the defect is given to Residential
Funding (or, if applicable, the Designated Seller), Residential Funding (or,
if applicable, the Designated Seller) is required to, within such period
specified in the related Prospectus Supplement, either repurchase the related
Trust Asset or any property acquired in respect thereof from the Indenture
Trustee, or if permitted substitute for such Trust Asset a new Trust Asset in
accordance with the standards set forth herein. The Master Servicer will be
obligated to enforce this obligation of Residential Funding or the Designated
Seller to the extent described above under "Trust Asset Program--
Representations Relating to Trust Assets," but such obligation is subject to
the provisions described below under "Servicing of Trust Assets--Realization
Upon Defaulted Loans." There can be no assurance that the applicable
Designated Seller will fulfill its obligation to purchase any Trust Asset as
described above. Unless otherwise specified in the related Prospectus
Supplement, neither Residential Funding, the Master Servicer nor the Company
will be obligated to purchase or substitute for such Trust Asset if the
Designated Seller defaults on its obligation to do so. Unless otherwise
specified in the related Prospectus Supplement, the obligation to repurchase
or substitute for a Trust Asset constitutes the sole remedy available to the
Noteholders or the Indenture Trustee for a material defect in a constituent
document. Any Trust Asset not so purchased or substituted for shall remain in
the related Trust Fund.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under the Servicing Agreement. Upon a breach of any such
representation of the Master Servicer which materially adversely affects the
interests of the Securityholders in a Trust Asset, the Master Servicer will be
obligated either to cure the breach in all material respects or to purchase
the Trust Asset at its Purchase Price (less unreimbursed advances, if
applicable, made by the Master Servicer with respect to such Trust Asset) or,
unless otherwise specified in the related Prospectus Supplement, to substitute
for such Trust Asset an Eligible Substitute Loan in accordance with the
provisions for such substitution described above under "Trust Asset Program--
Representations Relating to Trust Assets." Unless otherwise
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specified in the related Prospectus Supplement, this purchase obligation will
constitute the sole remedy available to Noteholders or the Indenture Trustee
for such a breach of representation by the Master Servicer. Any Trust Asset
not so purchased or substituted for shall remain in the related Trust Fund.
EXCESS SPREAD AND EXCLUDED SPREAD
The Company, the Master Servicer or any of their affiliates, or such other
entity as may be specified in the related Prospectus Supplement may retain or
be paid a portion of interest due with respect to the related Trust Assets.
The payment of any such portion of interest will be disclosed in the related
Prospectus Supplement. This payment may be in addition to any other payment
(such as the servicing fee) that any such entity is otherwise entitled to
receive with respect to the Trust Assets. Any such payment in respect of the
Trust Assets will represent a specified portion of the interest payable
thereon and as specified in the related Prospectus Supplement, will either be
part of the assets transferred to the related Trust Fund (the "EXCESS SPREAD")
or will be excluded from the assets transferred to the related Trust Fund (the
"EXCLUDED SPREAD"). The interest portion of a Realized Loss or Extraordinary
Loss and any partial recovery of interest in respect of the Trust Assets will
be allocated between the owners of any Excess Spread or Excluded Spread and
the Noteholders entitled to payments of interest as provided in the applicable
Agreement.
PAYMENTS ON TRUST ASSETS; DEPOSITS TO PAYMENT ACCOUNT
Each Subservicer servicing a Trust Asset pursuant to a Subservicing
Agreement will establish and maintain an account (the "SUBSERVICING ACCOUNT")
which generally meets the requirements set forth in the Guide from time to
time or is approved by Residential Funding. A Subservicer is required to
deposit into its Subservicing Account on a daily basis all amounts that are
received by it in respect of the Trust Assets, less its servicing or other
compensation.
As specified in the Subservicing Agreement, the Subservicer must remit or
cause to be remitted to the Master Servicer all funds held in the Subservicing
Account with respect to Trust Assets that are required to be so remitted on a
periodic basis not less frequently than monthly. If so specified in the
related Prospectus Supplement, the Subservicer may also be required to advance
on the scheduled date of remittance any monthly installment of principal and
interest, less its servicing or other compensation, on any Trust Asset for
which payment was not received from the Mortgagor.
The Master Servicer will deposit or will cause to be deposited into an
account (the "CUSTODIAL ACCOUNT") certain payments and collections received by
it subsequent to the Cut-off Date (other than payments due on or before the
Cut-off Date), as specifically set forth in the related Agreement, which
(except as otherwise provided therein) generally will include the following:
(i) payments on account of principal on the Trust Assets comprising a
Trust Fund;
(ii) payments on account of interest on the Trust Assets comprising such
Trust Fund, net of the portion of each payment thereof retained by the
Subservicer, if any, as its servicing or other compensation;
(iii) amounts (net of unreimbursed liquidation expenses and insured
expenses incurred, and unreimbursed Servicing Advances, if any, made by the
related Subservicer) received and retained in connection with the
liquidation of any defaulted Trust Asset, by foreclosure or otherwise
("LIQUIDATION PROCEEDS"), including all proceeds of any hazard or other
insurance policy or guaranty covering any Trust Asset in such Pool
including proceeds from FHA insurance (with respect to any Contract
partially insured by the FHA pursuant to Title I included in the Pool))
(together with any payments under any Letter of Credit, "INSURANCE
PROCEEDS") or proceeds from any alternative arrangements established in
lieu of any such insurance and described in the applicable Prospectus
Supplement, other than proceeds to be applied to the restoration of the
related property or released to the Mortgagor in accordance with the Master
Servicer's normal servicing procedures;
(iv) proceeds of any Trust Asset in such Trust Fund purchased (or, in the
case of a substitution, certain amounts representing a principal
adjustment) by the Master Servicer, the Company, Residential Funding,
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any Subservicer or Seller or any other person pursuant to the terms of the
related Agreement. See "Trust Asset Program--Representations Relating to
Trust Assets," and "--Assignment of Trust Assets" above;
(v) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments of funds held in the
Custodial Account, as described below; and
(vi) any amounts required to be transferred from the Payment Account to
the Custodial Account.
In addition to the Custodial Account, the Master Servicer will establish and
maintain, in the name of the Indenture Trustee for the benefit of the holders
of each series of Notes, an account for the disbursement of payments on the
Trust Assets evidenced by each series of Notes (the "PAYMENT ACCOUNT"). Both
the Custodial Account and the Payment Account must be either (i) maintained
with a depository institution whose debt obligations at the time of any
deposit therein are rated by any Rating Agency that rated any Notes of the
related series not less than a specified level comparable to the rating
category of such Notes, (ii) an account or accounts the deposits in which are
fully insured to the limits established by the FDIC, provided that any
deposits not so insured shall be otherwise maintained such that, as evidenced
by an opinion of counsel, the Noteholders have a claim with respect to the
funds in such accounts or a perfected first priority security interest in any
collateral securing such funds that is superior to the claims of any other
depositors or creditors of the depository institution with which such accounts
are maintained, (iii) in the case of the Custodial Account, a trust account or
accounts maintained in either the corporate trust department or the corporate
asset services department of a financial institution which has debt
obligations that meet certain rating criteria, (iv) in the case of the Payment
Account, a trust account or accounts maintained with the Indenture Trustee, or
(v) such other account or accounts acceptable to any applicable Rating Agency
(an "ELIGIBLE ACCOUNT"). The collateral that is eligible to secure amounts in
an Eligible Account is limited to certain permitted investments, which are
generally limited to United States government securities and other investments
that are rated, at the time of acquisition, in one of the categories permitted
by the related Agreement ("PERMITTED INVESTMENTS").
On the day set forth in the related Prospectus Supplement, the Master
Servicer will withdraw from the Custodial Account and deposit into the
applicable Payment Account, in immediately available funds, the amount to be
paid therefrom to Noteholders on such Payment Date, except as otherwise
provided in the related Prospectus Supplement. The Master Servicer or the
Indenture Trustee will also deposit or cause to be deposited into the Payment
Account (i) any payments under any Letter of Credit, Financial Guaranty
Insurance Policy and any amounts required to be transferred to the Payment
Account from a Reserve Fund, as described under "Credit Enhancement" below or
(iii) any amounts required to be paid by the Master Servicer out of its own
funds due to the operation of a deductible clause in any blanket policy
maintained by the Master Servicer to cover hazard losses on the Trust Assets
as described under "Description of the Notes--Hazard Insurance; Claims
Thereunder" below, any payments received on any Private Securities included in
the Trust Fund and any other amounts as set forth in the related Agreement.
The portion of any payment received by the Master Servicer in respect of a
Trust Asset that is allocable to Excess Spread or Excluded Spread, as
applicable, will generally be deposited into the Custodial Account, but any
Excluded Spread will not be deposited in the Payment Account for the related
series of Notes and will be paid as provided in the related 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 Payment Date, and funds on deposit in the related Payment Account may be
invested in Permitted Investments maturing, in general, no later than the
Payment Date. Unless otherwise specified in the related Prospectus Supplement,
all income and gain realized from any such investment will be for the account
of the 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 Payment Account, as the case may be, by the Master
Servicer out of its own funds upon realization of such loss.
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WITHDRAWALS FROM THE CUSTODIAL ACCOUNT
The Master Servicer may, from time to time, make withdrawals from the
Custodial Account for certain purposes, as specifically set forth in the
related Agreement, which (except as otherwise provided therein) generally will
include the following:
(i) to make deposits to the Payment Account in the amounts and in the
manner provided in the related Agreement and described above under "--
Payments on Trust Assets; Deposits to Payment Account" or in the related
Prospectus Supplement;
(ii) to reimburse itself or any Subservicer for amounts advanced in
respect of taxes, insurance premiums or similar expenses ("SERVICING
ADVANCES") as to any Mortgaged Property, out of late payments, Insurance
Proceeds, Liquidation Proceeds or collections on the Trust Asset with
respect to which such Servicing Advances were made;
(iii) to pay to itself or any Subservicer unpaid Servicing Fees and
Subservicing Fees, out of payments or collections of interest on each Trust
Asset;
(iv) 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 in respect of partial prepayments on the Trust
Assets, and, if so provided in the 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 Agreement;
(v) to pay to itself, a Subservicer, Residential Funding, the Company or
the Seller all amounts received with respect to each Trust Asset purchased,
repurchased or removed pursuant to the terms of the related Agreement and
not required to be paid as of the date on which the related Purchase Price
is determined;
(vi) to pay the Company or its assignee, or any other party named in the
related Prospectus Supplement all amounts allocable to the Excluded Spread,
if any, out of collections or payments which represent interest on each
Trust Asset (including any Trust Asset as to which title to the underlying
Mortgaged Property was acquired);
(vii) to reimburse itself or the Company for certain other expenses
incurred for which it or the Company is entitled to reimbursement
(including reimbursement in connection with enforcing any repurchase,
substitution or indemnification obligation of any Designated Seller),
including payment of FHA insurance premiums, if applicable, or against
which it or the Company is indemnified pursuant to the related Agreement;
(viii) to withdraw any amount deposited in the Custodial Account that was
not required to be deposited therein;
(ix) to pay to itself or any Subservicer for the funding of any Draws
made on the Revolving Credit Loans, if applicable; and
(x) to make deposits to the Funding Account in the amounts and in the
manner provided in the related Agreement, if applicable.
PAYMENTS
On each Payment Date, payments of principal and interest (or, where
applicable, of principal only or interest only) on each class of Notes
entitled thereto will be made from amounts on deposit in the Payment Account
by the Indenture Trustee, the Master Servicer acting on behalf of the
Indenture Trustee or a paying agent appointed by the Indenture Trustee or the
Issuer (the "PAYING AGENT"). Unless otherwise specified in the related
Prospectus Supplement, such payments will be made to the persons who are
registered as the holders of such Notes at the close of business on the last
business day of the preceding month (the "RECORD DATE"). Payments will be made
in immediately available funds (by wire transfer or otherwise) to the account
of a Noteholder at a bank or other entity having appropriate facilities
therefor, if such Noteholder has so notified the Indenture Trustee, the Master
Servicer or the Paying Agent, as the case may be, and the applicable Agreement
provides for such form of payment, or by check mailed to the address of the
person entitled thereto as it appears on the Note
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Register. The final payment in redemption of the Notes will be made only upon
presentation and surrender of the Notes at the office or agency of the
Indenture Trustee specified in the notice to Noteholders. Payments will be
made to each Noteholder in accordance with such holder's Percentage Interest
in a particular class. The ("PERCENTAGE INTEREST") represented by a Note of a
particular class will be equal to the percentage obtained by dividing the
initial principal balance or notional amount of such Note by the aggregate
initial amount or notional balance of all the Notes of such class. In
addition, amounts remaining in the Payment Account on each Payment Date after
payments on the Notes will be applied for the purposes set forth in the
Agreements, as described in the related Prospectus Supplement, including
distributions on the related Certificates. Any amounts so distributed on the
Certificates will be released from the lien of the Indenture.
Principal and Interest on the Notes
The method of determining, and the amount of, payments of principal and
interest (or, where applicable, of principal only or interest only) on a
particular series of Notes will be described in the related Prospectus
Supplement. Payments of interest on each class of Notes will be made prior to
payments of principal thereon. Each class of Notes (other than certain classes
of Strip Notes) may have a different Interest Rate, which may be a fixed,
variable or adjustable Interest Rate, or any combination of two or more such
Interest Rates. The related Prospectus Supplement will specify the Interest
Rate or Rates for each class, or the initial Interest Rate or Rates and the
method for determining the Interest Rate or Rates. Unless otherwise specified
in the related Prospectus Supplement, interest on the Notes will be calculated
on the basis of a 360-day year consisting of twelve 30-day months.
On each Payment Date for a series of Notes, the Indenture Trustee or the
Master Servicer on behalf of the Indenture Trustee will pay or cause the
Paying Agent to pay, as the case may be, principal and interest to each holder
of record on the Record Date of a class of Notes. Unless otherwise specified
in the related Prospectus Supplement, payments to Noteholders of all classes
within a series in respect of interest will have the same priority.
In the case of a series of Notes which includes two or more classes of
Notes, the timing, sequential order, priority of payment or amount of payments
in respect of principal, and any schedule or formula or other provisions
applicable to the determination thereof shall be as set forth in the related
Prospectus Supplement. Payments in respect of principal of any class of Notes
will be made on a pro rata basis among all of the Notes of such class unless
otherwise set forth in the related Prospectus Supplement. In addition, unless
otherwise specified in the related Prospectus Supplement, payments of
principal on the Notes will be limited to monthly principal payments on the
Trust Assets, any Excess Interest, if applicable, applied as principal
payments on the Notes and any amount paid as a payment of principal under the
related form of Credit Enhancement. If so specified in the related Prospectus
Supplement, a series of Notes may provide for a period during which all or a
portion of the principal collections on the Trust Assets otherwise available
for payment to the Notes are reinvested in Additional Balances or additional
Trust Assets or accumulated in a trust account pending the commencement of an
amortization period specified in the related Prospectus Supplement or the
occurrence of certain events specified in the related Prospectus Supplement.
On the day specified in the related Prospectus Supplement as the
determination date (the "DETERMINATION DATE"), the Master Servicer will
determine the amounts of principal and interest which will be paid to
Noteholders on the succeeding Payment Date. Prior to the close of business on
the business day succeeding each Determination Date, the Master Servicer will
furnish a statement to the Indenture Trustee setting forth, among other
things, the amount to be paid on the next succeeding Payment Date.
FUNDING ACCOUNT
If so specified in the related Prospectus Supplement, the Trust Agreement or
other agreement may provide for the transfer by the Sellers of additional
Trust Assets to the related Trust after the Closing Date. Such additional
Trust Assets will be required to conform to the requirements set forth in the
related Agreement or
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other agreement providing for such transfer. As specified in the related
Prospectus Supplement, such transfer may be funded by the establishment of a
Funding Account (a "FUNDING ACCOUNT"). If a Funding Account is established,
all or a portion of the proceeds of the sale of one or more classes of Notes
of the related series or a portion of collections on the Trust Assets in
respect of principal will be deposited in such account to be released as
additional Trust Assets are transferred. Unless otherwise specified in the
related Prospectus Supplement, a Funding Account will be required to be
maintained as an Eligible Account, all amounts therein will be required to be
invested in Permitted Investments and the amount held therein shall at no time
exceed 25% of the aggregate outstanding principal balance of the Notes. Unless
otherwise specified in the related Prospectus Supplement, the related
Agreement or other agreement providing for the transfer of additional Trust
Assets will provide that all such transfers must be made within 9 months (as
to amounts representing proceeds of the sale of the Securities) or 12 months
(as to amounts representing principal collections on the Trust Assets ) after
the Closing Date, and that amounts set aside to fund such transfers (whether
in a Funding Account or otherwise) and not so applied within the required
period of time will be deemed to be principal prepayments and applied in the
manner set forth in such Prospectus Supplement.
REPORTS TO NOTEHOLDERS
On each Payment Date, the Master Servicer will forward or cause to be
forwarded to each Noteholder of record a statement or statements with respect
to the related Trust Fund setting forth the information described in the
related Agreement. Except as otherwise provided in the related Agreement, such
information generally will include the following, as applicable:
(i) the amount, if any, of such payment allocable to principal;
(ii) the amount, if any, of such payment allocable to interest, and the
amount, if any, of any shortfall in the amount of interest and principal;
(iii) the aggregate unpaid principal balance of the Trust Assets after
giving effect to the payment of principal on such Payment Date;
(iv) the outstanding principal balance or notional amount of each class
of Notes after giving effect to the payment of principal on such Payment
Date;
(v) based on the most recent reports furnished by Subservicers, the
number of Trust Assets in the related Pool that are delinquent (a) one
month, (b) two months and (c) three months, and that are in foreclosure and
the aggregate principal balances of such Trust Assets or;
(vi) the book value of any property acquired by such Trust Fund through
foreclosure or grant of a deed in lieu of foreclosure;
(vii) the balance of the Reserve Fund, if any, at the close of business
on such Payment Date;
(viii) the amount of coverage under any Letter of Credit 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;
(ix) if applicable, any limited amounts available under the applicable
credit support to cover Special Hazard Losses, Fraud Losses and Bankruptcy
Losses, as of the close of business on the applicable Payment Date and a
description of any change in the calculation of such amounts;
(x) in the case of Notes benefiting from alternative credit enhancement
arrangements described in a Prospectus Supplement, the amount of coverage
under such alternative arrangements as of the close of business on the
applicable Determination Date;
(xi) with respect to any series of Notes as to which the Trust Fund
includes Private Securities, certain additional information as required
under the related Agreement; and
(xii) the FHA Insurance Amount.
Each amount set forth pursuant to clause (i) or (ii) above will be expressed
as a dollar amount per Single Note. As to a particular class of Notes, a
"Single Note" generally will evidence a Percentage Interest obtained
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by dividing $1,000 by the initial principal balance or notional balance of all
the Notes of such class, except as otherwise provided in the related
Agreement. In addition to the information described above, reports to
Noteholders will contain such other information as is set forth in the
applicable Agreement, which may include, without limitation, reimbursements to
Subservicers and the Master Servicer and losses borne by the related Trust
Fund.
In addition, to the extent described in the related Agreement, within a
reasonable period of time after the end of each calendar year, the Master
Servicer will furnish a report to each holder of record of a class of Notes at
any time during such calendar year. Such report will include information as to
the aggregate of amounts reported pursuant to clauses (i) and (ii) above for
such calendar year or, in the event such person was a holder of record of a
class of Notes during a portion of such calendar year, for the applicable
portion of such year.
HAZARD INSURANCE; CLAIMS THEREUNDER
Unless otherwise specified in the related Prospectus Supplement, each
Revolving Credit Loan, Home Equity Loan and Contract that is secured by a lien
on a Mortgaged Property (in each case, other than a Cooperative Loan) will be
required to be covered by a hazard insurance policy (as described below). See
"Risk Factors--Risks Associated with Certain Trust Assets--No Hazard Insurance
for Title I Contracts." The following summary, as well as other pertinent
information included elsewhere in this Prospectus, do not describe all terms
of a hazard insurance policy but will reflect all material terms thereof
relevant to an investment in the Notes. Such insurance is subject to
underwriting and approval of individual Trust Assets by the respective
insurers. The descriptions of any insurance policies 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
such forms of policies.
Unless otherwise specified in the related Prospectus Supplement, the
Servicing Agreement will require the Master Servicer to cause to be maintained
for each Mortgaged Property a hazard insurance policy providing for no less
than the coverage of the standard form of fire insurance policy with extended
coverage customary in the state in which the property is located. Such
coverage generally will be in an amount equal to the lesser of (i) the maximum
insurable value of the Mortgaged Property or (ii) the outstanding balance of
the related Revolving Credit Loan, Home Equity Loan or Contract plus the
outstanding balance on any mortgage loan senior to such Revolving Credit Loan,
Home Equity Loan or Contract except that, if generally available, such
coverage must not be less than the minimum amount required under the terms
thereof to fully compensate for any damage or loss on a replacement cost
basis. The ability of the Master 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 or upon the extent to
which information in this regard is furnished to the Master Servicer by
Mortgagors or Subservicers.
As set forth above, all amounts collected by the Master Servicer under any
hazard policy (except for amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures) will be deposited initially in
the Custodial Account and ultimately in the Payment Account. The Master
Servicer may satisfy its obligation to cause hazard policies to be maintained
by maintaining a blanket policy insuring against losses on such Trust Assets.
If such blanket policy contains a deductible clause, the Master Servicer will
deposit in the Custodial Account or the applicable Payment Account all amounts
which would have been deposited therein but for such clause.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer shall also cause to be maintained on property acquired upon
foreclosure, or deed in lieu of foreclosure, of any applicable Trust Asset,
fire insurance with extended coverage in an amount which is at least equal to
the amount necessary to avoid the application of any co-insurance clause
contained in the related hazard insurance policy. See "Risk Factors--Risks
Associated with Certain Trust Assets--No Hazard Insurance for Title I
Contracts."
Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the Revolving Credit Loans, Home Equity
Loans and Contracts 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.
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DESCRIPTION OF CREDIT ENHANCEMENT
As set forth in the related Prospectus Supplement, the credit support
provided with respect to each series of Notes will include one or more of the
following: subordination provided by the related Certificates, and by any
other class of Subordinated Securities related to such series of Notes;
Overcollateralization; a Reserve Fund; a Financial Guaranty Insurance Policy;
a Letter of Credit; mortgage repurchase bond, mortgage pool insurance policy,
special hazard insurance policy, bankruptcy bond or other types of insurance
policies, or a secured or unsecured corporate guaranty, as described in the
related Prospectus Supplement; or in such other form as may be described in
the related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Contracts may be partially insured by the FHA pursuant to
Title I. See "Risk Factors--Limitations on FHA Insurance for Title I
Contracts" and "Description of FHA Insurance Under Title I" herein.
As to each series of Notes, each element of the credit support will cover
losses or shortfalls incurred on the Trust Assets, or losses or shortfalls
allocated to or borne by the Notes, as and to the extent described in the
related Prospectus Supplement and at such times as described therein. If so
provided in the related Prospectus Supplement, any element of the credit
support may not be subject to limitations relating to the specific type of
loss or shortfall incurred as to any Trust Asset. Alternatively, if so
provided in the related Prospectus Supplement, the coverage provided by any
element of the credit support may be comprised of one or more of the
components described below. Each such component may have a dollar limit and
will generally provide coverage with respect to Realized Losses, as defined
below, that are, as applicable, (i) attributable to the Mortgagor's failure to
make any payment of principal or interest as required under the Mortgage Note,
but not including Special Hazard Losses, Extraordinary Losses or other losses
resulting from damage to a Mortgaged Property, Bankruptcy Losses or Fraud
Losses (any such loss, a "DEFAULTED LOAN LOSS"); (ii) of a type generally
covered by a special hazard insurance policy (any such loss, a "SPECIAL HAZARD
LOSS") as described in the related Prospectus Supplement; (iii) attributable
to certain actions which may be taken by a bankruptcy court in connection with
a Trust Asset, including a reduction by a bankruptcy court of the principal
balance of or the Mortgage Rate on a Trust Asset or an extension of its
maturity (any such loss, a "BANKRUPTCY LOSS"); and (iv) incurred on defaulted
Trust Assets as to which there was fraud in the origination of such Trust
Assets (any such loss, a "FRAUD LOSS").
Unless otherwise specified in the related Prospectus Supplement, credit
support will not provide protection against all risks of loss and will not
guarantee repayment of the entire outstanding principal balance of the Notes
and interest thereon. If losses occur which exceed the amount covered by
credit support or which are not covered by the credit support, Noteholders
will bear their allocable share of deficiencies. In particular, if so provided
in the related Prospectus Supplement, Defaulted Loan Losses, Special Hazard
Losses, Bankruptcy Losses and Fraud Losses in excess of the amount of coverage
provided therefor and losses occasioned by war, civil insurrection, certain
governmental actions, nuclear reaction and certain other risks ("EXTRAORDINARY
LOSSES") will not be covered. To the extent that the credit enhancement for
any series of Notes is exhausted or unavailable for any reason, the
Noteholders will bear all further risks of loss not otherwise insured against.
With respect to any defaulted Trust Asset that is finally liquidated, the
amount of loss realized, if any (as described in the related Agreement, a
"REALIZED LOSS"), will equal the portion of the Stated Principal Balance
remaining after application of all amounts recovered (net of expenses
allocable to the Trust Fund) towards interest and principal owing on the Trust
Asset. With respect to a Trust Asset the principal balance of which has been
reduced in connection with bankruptcy proceedings, the amount of such
reduction will be treated as a Realized Loss. The "Stated Principal Balance"
of any Trust Asset as of any date of determination is equal to the principal
balance thereof as of the Cut-off Date, after application of all scheduled
principal payments due on or before the Cut-off Date whether received or not,
reduced by all amounts allocable to principal that are paid to Noteholders on
or before the date of determination, and as further reduced to the extent that
any Realized Loss thereon has been allocated to any Notes on or before such
date.
Each Prospectus Supplement will include a description of (a) the amount
payable under the credit enhancement arrangement, if any, provided with
respect to a series, (b) any conditions to payment thereunder
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not otherwise described herein, (c) the conditions under which the amount
payable under such credit support may be reduced and under which such credit
support may be terminated or replaced and (d) the material provisions of any
agreement relating to such credit support. Additionally, each such Prospectus
Supplement will set forth certain information with respect to the issuer of
any third-party credit enhancement (the "CREDIT ENHANCER"). As to any series
of Notes, the related Agreements may be modified from the descriptions set
forth herein to provide for reimbursement rights, control rights or other
provisions that may be required by the Credit Enhancer.
The descriptions of any insurance policies, bonds or other instruments
described in this Prospectus or any Prospectus Supplement and the coverage
thereunder do not describe all terms thereof but will reflect all relevant
terms thereof material to an investment in the Notes. Copies of such
instruments will be included as exhibits to the Form 8-K to be filed with the
Commission in connection with the issuance of the related series of Notes.
FINANCIAL GUARANTY INSURANCE POLICY
If so specified in the related Prospectus Supplement, a financial guaranty
insurance policy (a "FINANCIAL GUARANTY INSURANCE POLICY") may be obtained and
maintained for a Class or series of Notes. The issuer of the Financial
Guaranty Insurance Policy (the "INSURER") will be described in the related
Prospectus Supplement and a copy of the form of Financial Guaranty Insurance
Policy will be filed with the related Current Report on Form 8-K.
Unless otherwise specified in the related Prospectus Supplement, a Financial
Guaranty Insurance Policy will be unconditional and irrevocable and will
guarantee to holders of the applicable Notes that an amount equal to the full
amount of payments due to such holders will be received by the Indenture
Trustee or its agent on behalf of such holders for payment on each Payment
Date. The specific terms of any Financial Guaranty Insurance Policy will be
set forth in the related Prospectus Supplement. A Financial Guaranty Insurance
Policy may have limitations and generally will not insure the obligation of
the Sellers or the Master Servicer to purchase or substitute for a defective
Trust Asset and will not guarantee any specific rate of principal prepayments.
Unless otherwise specified in the related Prospectus Supplement, the Insurer
will be subrogated to the rights of each holder to the extent the Insurer
makes payments under the Financial Guaranty Insurance Policy.
LETTER OF CREDIT
If any component of credit enhancement as to any series of Notes is to be
provided by a letter of credit (the "LETTER OF CREDIT"), a bank (the "LETTER
OF CREDIT BANK") will deliver to the Indenture Trustee an irrevocable Letter
of Credit. The Letter of Credit may provide direct coverage with respect to
the Trust Assets. The Letter of Credit Bank, the amount available under the
Letter of Credit with respect to each component of credit enhancement, the
expiration date of the Letter of Credit, and a more detailed description of
the Letter of Credit will be specified in the related Prospectus Supplement.
On or before each Payment Date, the Letter of Credit Bank will be required to
make certain payments after notification from the Indenture Trustee, to be
deposited in the related Payment Account with respect to the coverage provided
thereby.
SUBORDINATION
With respect to each series of Notes, the related Certificates will be
subordinate thereto as described in the Prospectus Supplement. A
Senior/Subordinate Series of Notes will consist of one or more classes of
Notes and one or more classes of Subordinate Securities, as set forth in the
related Prospectus Supplement. With respect to any Senior/Subordinate Series,
the total amount available for payment on each Payment Date, as well as the
method for allocating such amount among the various classes of Notes included
in such series, will be described in the related Prospectus Supplement.
Generally, with respect to any such series the amount available for payment
will be allocated first to interest on the Notes of such series, and then to
principal of the Notes up to the amounts described in the related Prospectus
Supplement, prior to allocation of any amounts to the Subordinate Securities
of such series.
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Realized Losses will be allocated to the Subordinate Securities of the
related series in the order specified in the related Prospectus Supplement
until the outstanding principal balance of such Class has been reduced to
zero. Additional Realized Losses, if any, will be allocated to the Notes. If
such series includes more than one class of Notes, such additional Realized
Losses will be allocated either on a pro rata basis among all of the Notes in
proportion to their respective outstanding principal balances or as otherwise
provided in the related Prospectus Supplement. The respective amounts of
specified types of losses (including certain Special Hazard Losses, Fraud
Losses and Bankruptcy Losses) that may be borne solely by the Subordinate
Securities may be limited to an amount described in the related Prospectus
Supplement, in which case such losses would be allocated on a pro rata basis
among all outstanding classes of Notes. Generally, any allocation of a
Realized Loss to a Note will be made by reducing the outstanding principal
balance thereof as of the Payment Date following the calendar month in which
such Realized Loss was incurred.
To the extent provided in the related Prospectus Supplement, certain amounts
otherwise payable on any Payment Date to holders of Subordinate Securities 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"
in the related Prospectus Supplement.
With respect to any Senior/Subordinate Series, the terms and provisions of
the subordination may vary from those described above. Any such variation and
any additional credit enhancement will be described in the related Prospectus
Supplement.
OVERCOLLATERALIZATION
If so specified in the related Prospectus Supplement, interest collections
on the Trust Assets may exceed interest payments on the Securities for the
related Payment Date (such excess referred to as "EXCESS INTEREST"). Such
Excess Interest may be deposited into a Reserve Fund or applied as a payment
of principal on the Notes. To the extent Excess Interest is applied as
principal payments on the Notes, the effect will be to reduce the principal
balance of the Notes relative to the outstanding balance of the Trust Assets,
thereby creating "Overcollateralization" and additional protection to the
Noteholders, as specified in the related Prospectus Supplement.
RESERVE FUNDS
If so specified in the related Prospectus Supplement, the Company will
deposit or cause to be deposited in an account (a "RESERVE FUND") any
combination of cash or Permitted Investments in specified amounts, or any
other instrument satisfactory to the Rating Agency or Agencies, which will be
applied and maintained in the manner and under the conditions specified in the
related Prospectus Supplement and related Agreement. In the alternative or in
addition to such deposit, to the extent described in the related Prospectus
Supplement, a Reserve Fund may be funded through application of all or a
portion of amounts otherwise payable on any related Securities, from the
Excess Spread, Excluded Spread or otherwise. A Reserve Fund for a series of
Notes which is funded over time by depositing therein a portion of the
interest payment on each Trust Asset may be referred to as a "Spread Account"
in the related Prospectus Supplement and related Agreement. To the extent that
the funding of the Reserve Fund is dependent on amounts otherwise payable on
related Subordinate Securities, Excess Spread, Excluded Spread or other cash
flows attributable to the related Trust Assets or on reinvestment income, the
Reserve Fund may provide less coverage than initially expected if the cash
flows or reinvestment income on which such funding is dependent are lower than
anticipated. With respect to any series of Notes as to which credit
enhancement includes a Letter of Credit, if so specified in the related
Prospectus Supplement, under certain circumstances the remaining amount of the
Letter of Credit may be drawn by the Indenture Trustee and deposited in a
Reserve Fund.
Amounts in a Reserve Fund may be paid to Noteholders, or applied to
reimburse the Master Servicer for outstanding advances, or may be used for
other purposes, in the manner and to the extent specified in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, any such Reserve Fund will not be deemed to be part of the related
Trust Fund. A Reserve Fund may provide coverage to more than one
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series of Notes if set forth in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, Reserve Funds may be
established to provide limited protection against only certain types of losses
and shortfalls. Following each Payment Date amounts in a Reserve Fund in
excess of any amount required to be maintained therein may be released from
the Reserve Fund under the conditions and to the extent specified in the
related Prospectus Supplement and will not be available for further
application to the Notes.
Unless otherwise specified in the related Prospectus Supplement, the
Indenture Trustee will have a perfected security interest for the benefit of
the Noteholders in the assets in the Reserve Fund. However, to the extent that
the Company, any affiliate thereof or any other entity has an interest in any
Reserve Fund, in the event of the bankruptcy, receivership or insolvency of
such entity, there could be delays in withdrawals from the Reserve Fund and
the corresponding payments to the Noteholders. Such delays could adversely
affect the yield to investors on the related Notes.
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 the
Master Servicer or any other person named in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
any reinvestment income or other gain from such investments will be credited
to the related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to the Master Servicer or another service provider as additional
compensation.
MAINTENANCE OF CREDIT ENHANCEMENT
If credit enhancement has been obtained for a series of Notes, the Indenture
Trustee or Master Servicer (as set forth in the related Agreement) will be
obligated to exercise its best reasonable efforts to keep or cause to be kept
such credit enhancement in full force and effect throughout the term of the
applicable Agreements, 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, on behalf of itself, the Indenture Trustee and Noteholders, will
provide the Indenture Trustee information required for the Indenture Trustee
to draw any applicable credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will agree to pay the premiums for each Financial Guaranty Insurance
Policy on a timely basis. In the event the related insurer ceases to be a
"Qualified Insurer" because it ceases to be qualified under applicable law to
transact such insurance business or coverage is terminated for any reason
other than exhaustion of such coverage, the Master Servicer will use its best
reasonable efforts to obtain from another Qualified Insurer a comparable
replacement insurance policy or bond with a total coverage equal to the then
outstanding coverage of such policy or bond. If the cost of the replacement
policy is greater than the cost of such policy or bond, the coverage of the
replacement policy or bond will, unless otherwise agreed to by the Company, be
reduced to a level such that its premium rate does not exceed the premium rate
on the original insurance policy. Any losses in market value of the Notes
associated with any reduction or withdrawal in rating by an applicable Rating
Agency shall be borne by the Noteholders.
For Trust Assets secured by a lien on Mortgaged Property, if any property
securing such a defaulted Trust Asset is damaged and proceeds, if any, from
the related hazard insurance policy are insufficient to restore the damaged
property to a condition sufficient to permit recovery under any Letter of
Credit, the Master Servicer is not required to expend its own funds to restore
the damaged property unless it determines (i) that such restoration will
increase the proceeds to one or more classes of Noteholders on liquidation of
such Trust Asset after reimbursement of the Master Servicer for its expenses
and (ii) that such expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds. If recovery under any Letter of Credit or
other credit enhancement is not available because the Master Servicer has been
unable to make the above determinations, has made such determinations
incorrectly or recovery is not available for any other reason, the Master
Servicer is nevertheless obligated to follow such normal practices and
procedures (subject to the preceding sentence) as it deems necessary or
advisable to realize upon the defaulted Trust Asset and in the event such
determination has been incorrectly made, is entitled to reimbursement of its
expenses in connection with such restoration.
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REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
The amount of credit support provided with respect to any series of Notes
and relating to various types of losses incurred may be reduced under certain
specified circumstances. In most cases, the amount available as credit support
will be subject to periodic reduction on a non-discretionary basis in
accordance with a schedule or formula set forth in the related Agreement.
Additionally, in most cases, such credit support may be replaced, reduced or
terminated, and the formula used in calculating the amount of coverage with
respect to Bankruptcy Losses, Special Hazard Losses or Fraud Losses may be
changed, without the consent of the Noteholders, upon the written assurance
from each applicable Rating Agency that the then-current rating of the related
series of Notes will not be adversely affected thereby. Furthermore, in the
event that the credit rating of any obligor under any applicable credit
enhancement is downgraded, the credit rating of each class of the related
Notes may be downgraded to a corresponding level, and, unless otherwise
specified in the related Prospectus Supplement, neither the Master Servicer
nor the Company will be obligated to obtain replacement credit support in
order to restore the rating of the Notes. The Master Servicer will also be
permitted to replace such credit support with other credit enhancement
instruments issued by obligors whose credit ratings are equivalent to such
downgraded level and in lower amounts which would satisfy such downgraded
level, provided that the then-current rating of each class of the related
series of Notes is maintained. Where the credit support is in the form of a
Reserve Fund, a permitted reduction in the amount of credit enhancement will
result in a release of all or a portion of the assets in the Reserve Fund to
the Company, the Master Servicer or such other person that is entitled
thereto. Any assets so released and any amount by which the credit enhancement
is reduced will not be available for payments in future periods.
DESCRIPTION OF FHA INSURANCE UNDER TITLE I
Certain of the Contracts contained in a Trust Fund may be loans insured
under the Title I Program (the "TITLE I LOANS") as described below and in the
related Prospectus Supplement. The regulations, rules and procedures
promulgated by the FHA under the Title I (the "FHA REGULATIONS") contain the
requirements under which lenders approved for participation in the Title I
Program (the "TITLE I LENDERS") may obtain insurance against a portion of
losses incurred with respect to eligible loans that have been originated and
serviced in accordance with FHA Regulations, subject to the amount of
insurance coverage available in such Title I Lender's FHA Reserve, as
described below and in the related Prospectus Supplement, and subject to the
terms and conditions established under the National Housing Act and FHA
Regulations. While FHA Regulations permit the Secretary of the Department of
Housing and Urban Development ("HUD"), subject to statutory limitations, to
waive a Title I Lender's noncompliance with FHA Regulations if enforcement
would impose an injustice on the lender (provided the Title I Lender has acted
in good faith, is in substantial compliance with FHA Regulations and has
credited the borrower for any excess charges), in general, an insurance claim
against the FHA will be denied if the Title I Loan to which it relates does
not strictly satisfy the requirements of the National Housing Act and FHA
Regulations.
Unlike certain other government loan insurance programs, loans under the
Title I Program (other than loans in excess of $25,000) are not subject to
prior review by the FHA. Under the Title I Program, the FHA disburses
insurance proceeds with respect to defaulted loans for which insurance claims
have been filed by a Title I Lender prior to any review of such loans. A Title
I Lender is required to repurchase a Title I Loan from the FHA that is
determined to be ineligible for insurance after insurance claim payments for
such loan have been paid to such lender. Under the FHA Regulations, if the
Title I Lender's obligation to repurchase the Title I Loan is unsatisfied, the
FHA is permitted to offset the unsatisfied obligation against future insurance
claim payments owed by the FHA to such lender. FHA Regulations permit the FHA
to disallow an insurance claim with respect to any loan that does not qualify
for insurance for a period of up to two years after the claim is made and to
require the Title I Lender that has submitted the insurance claim to
repurchase the loan.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home
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or lot (or cooperative interest therein) on which to place such home or the
purchase of both a manufactured home loan and the lot (or cooperative interest
therein) on which such home is placed.
Subject to certain limitations described below, eligible Title I Loans are
generally insured by the FHA for 90% of an amount equal to the sum of (i) the
net unpaid principal amount and the uncollected interest earned to the date of
default, (ii) interest on the unpaid loan obligation from the date of default
to the date of the initial submission of the insurance claim, plus 15 calendar
days (the total period not to exceed nine months) at a rate of 7% per annum,
(iii) uncollected court costs, (iv) title examination costs, (v) fees for
required inspections by the lenders or its agents, up to $75, and (vi)
origination fees up to a maximum of 5% of the loan amount. However, the
insurance coverage provided by the FHA is limited to the extent of the balance
in the Title I Lender's FHA Reserve maintained by the FHA. Accordingly if
sufficient insurance coverage is available in such FHA Reserve, then the Title
I Lender bears the risk of losses on a Title I Loan for which a claim for
reimbursement is paid by the FHA of at least 10% of the unpaid principal,
uncollected interest earned to the date of default, interest from the date of
default to the date of the initial claim submission and certain expenses.
Unlike most other FHA insurance programs, the obligation of the FHA to
reimburse a Title I Lender for losses in the portfolio of insured loans held
by such Title I Lender is limited to the amount in an FHA Reserve maintained
on a lender-by-lender basis and not on a loan-by-loan basis.
Under Title I, the FHA maintains an FHA insurance coverage reserve account
(a "FHA RESERVE") for each Title I Lender. The amount in each Title I Lender's
FHA Reserve is a maximum of 10% of the amounts disbursed, advanced or expended
by a Title I Lender in originating or purchasing eligible loans registered
with the FHA for Title I insurance, with certain adjustments permitted or
required by FHA Regulations. The balance of such FHA Reserve is the maximum
amount of insurance claims the FHA is required to pay to the related Title I
Lender. Title I Loans to be insured under Title I will be registered for
insurance by the FHA. Following either the origination or transfer of loans
eligible under Title I, the Title I Lender will submit such loans for FHA
insurance coverage within its FHA Reserve by delivering a transfer of note
report or through an electronic submission to the FHA in the form prescribed
under the FHA Regulations (the "TRANSFER REPORT"). The increase in the FHA
insurance coverage for such loans in the Title I Lender's FHA Reserve will
occur on the date following the receipt and acknowledgement by the FHA of the
Transfer Report for such loans. The insurance available to any Trust Fund will
be subject to the availability, from time to time, of amounts in each Title I
Lender's FHA Reserve, which will initially be limited to the amount specified
in the related Prospectus Supplement (the "FHA INSURANCE AMOUNT").
Under Title I, the FHA will reduce the insurance coverage available in a
Title I Lender's FHA Reserve with the respect to loans insured under such
Title I Lender's contract of insurance by (i) the amount of FHA insurance
claims approved for payment related to such loans and (ii) the amount of
reduction of the Title I Lender's FHA Reserve by reason of the sale,
assignment or transfer of loans registered under the Title I Lender's contract
of insurance. Such insurance coverage also may be reduced for any FHA
insurance claims previously disbursed to the Title I Lender that are
subsequently rejected by the FHA.
In general, the FHA will insure Home Improvement Contracts up to $25,000 for
a single-family property, with a maximum term of 20 years. The FHA will insure
loans of up to $17,500 for manufactured homes which qualify as real estate
under applicable state law and loans of up to $12,000 per unit for a $48,000
limit for four units for owner-occupied multiple-family homes. If the loan
amount is $15,000 or more, the FHA requires a drive-by appraisal, the current
tax assessment value, or a full Uniform Residential Appraisal Report dated
within 12 months of the closing to verify the property's value. The maximum
loan amount on transactions requiring an appraisal is the amount of equity in
the property shown by the market value determination of the property.
Following a default on a Home Improvement Contract partially insured by the
FHA, the Master Servicer, either directly or through a subsidiary, may,
subject to certain conditions, either commence foreclosure proceedings against
the improved property securing the loan, if applicable, or submit a claim to
FHA, but may submit a claim to FHA after proceeding against the improved
property only with the prior approval of the Secretary of HUD. The
availability of FHA Insurance following a default on a Contract is subject to
a number
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of conditions, including strict compliance with FHA Regulations in originating
and servicing the Contract. Failure to comply with FHA Regulations may result
in a denial of or surcharge on the FHA insurance claim. Prior to declaring a
Contract, in default and submitting a claim to FHA, the Master Servicer must
take certain steps to attempt to cure the default, including personal contact
with the borrower either by telephone or in a meeting and providing the
borrower with 30 days' written notice prior to declaration of default. FHA may
deny insurance coverage if the borrower's nonpayment is related to a valid
objection to faulty contractor performance. In such event, the Master Servicer
or other entity as specified in the related Prospectus Supplement will seek to
obtain payment by or a judgment against the borrower, and may resubmit the
claim to FHA following such a judgment.
THE COMPANY
The Company is an indirect wholly-owned subsidiary of GMAC Mortgage, which
is a wholly-owned subsidiary of General Motors Acceptance Corporation. The
Company was incorporated in the State of Delaware on May 5, 1995. The Company
was organized for the purpose of acquiring first or junior lien home equity
mortgage loans, home improvement contracts, manufactured housing contracts and
mortgage securities and issuing securities backed by such mortgage loans,
contracts and mortgage securities. The Company anticipates that it will in
many cases have acquired Trust Assets indirectly through Residential Funding,
which is also an indirect wholly-owned subsidiary of GMAC Mortgage. The
Company does not have, nor is it expected in the future to have, any
significant assets.
The Notes do not represent an interest in or an obligation of the Company.
The Company's only obligations with respect to a series of Notes will be
pursuant to certain limited representations and warranties made by the Company
or as otherwise provided in the related Prospectus Supplement.
The Company maintains its principal office at 8400 Normandale Lake
Boulevard, Suite 700, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000.
RESIDENTIAL FUNDING CORPORATION
If so specified in the related Prospectus Supplement, Residential Funding,
an affiliate of the Company, will act as the Master Servicer or Administrator
for a series of Notes.
Residential Funding buys 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's principal
executive offices are located at 8400 Normandale Lake Boulevard, Suite 700,
Minneapolis, Minnesota 55437. Its telephone number is (612) 832-7000.
Residential Funding conducts operations from its headquarters in Minneapolis
and from offices located in California, Colorado, Connecticut, Florida,
Georgia, Maryland, New York, North Carolina, Rhode Island and Texas. At
September 30, 1996, Residential Funding was master servicing a first lien loan
portfolio of approximately $32.4 billion and a second lien revolving credit
and home equity loan portfolio of approximately $1.3 billion.
SERVICING OF TRUST ASSETS
The Master Servicer will be required to service and administer the Trust
Assets in a manner generally consistent with the terms of the servicing
agreement entered into by the Master Servicer with the Company, an affiliate
of the Company or other applicable entity (each, a "SERVICING AGREEMENT") and
the Guide with respect to the Revolving Credit Loans or with respect to a
Designated Seller Transaction, as specified in the related Prospectus
Supplement.
As to any series of Notes secured by Private Securities, the applicable
procedures for servicing of the related Revolving Credit Loans, Home Equity
Loans, Home Improvement Contracts and Manufactured Housing Contracts will be
described in the related Prospectus Supplement.
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SUBSERVICING
In connection with any series of Securities the Master Servicer may enter
into one or more Subservicing Agreements. See "Trust Asset Program--
Subservicing." Each Subservicer generally will be required to perform the
customary functions of a servicer, including but not limited to, collection of
payments from Mortgagors and remittance of such collections to the Master
Servicer; maintenance of escrow or impoundment accounts of Mortgagors for
payment of taxes, insurance and other items required to be paid by the
Mortgagor pursuant to the Trust Asset, if applicable; processing of
assumptions or substitutions (although, unless otherwise specified in the
related Prospectus Supplement, the Master Servicer is generally required to
exercise due-on-sale clauses to the extent such exercise is permitted by law
and would not adversely affect insurance coverage); attempting to cure
delinquencies; supervising foreclosures; inspection and management of
Mortgaged Properties under certain circumstances; and maintaining accounting
records relating to the Trust Assets. The Subservicer may be required to make
advances to the holder of any related first mortgage loan to avoid or cure any
delinquencies to the extent that doing so would be prudent and necessary to
protect the interests of the Securityholders. A Subservicer also may be
obligated to make advances to the Master Servicer in respect of certain taxes
and insurance premiums not paid on a timely basis by Mortgagors. The
Subservicer generally shall be responsible for performing all collection and
other servicing functions with respect to any delinquent loan or foreclosure
proceeding. In addition, the Subservicer is required to advance funds to cover
any Draws made on a Revolving Credit Loan subject to reimbursement by the
entity specified in the related Prospectus Supplement. No assurance can be
given that the Subservicers will carry out their advance or payment
obligations with respect to the Trust Assets. Unless otherwise specified in
the related Prospectus Supplement, a Subservicer may transfer its servicing
obligations to another entity that has been approved for participation in
Residential Funding's loan purchase programs, but only with the approval of
the Master Servicer.
Each Subservicer will be required to agree to indemnify the Master Servicer
for any liability or obligation sustained by the Master Servicer in connection
with any act or failure to act by the Subservicer in its servicing capacity.
Each Subservicer is required to maintain a fidelity bond and an errors and
omissions policy with respect to its officers, employees and other persons
acting on its behalf or on behalf of the Master Servicer.
Each Subservicer will be required to service each Trust Asset pursuant to
the terms of the Subservicing Agreement for the entire term of such Trust
Asset, unless the Subservicing Agreement is earlier terminated by the Master
Servicer or unless servicing is released to the Master Servicer. Subject to
applicable law, the Master Servicer may have the right to terminate a
Subservicing Agreement immediately upon the giving of notice upon certain
stated events, including the violation of such Subservicing Agreement by the
Subservicer, or up to ninety days' notice to the Subservicer without cause
upon payment of certain amounts set forth in the Subservicing Agreement. Upon
termination of a Subservicing Agreement, the Master Servicer may act as
servicer of the related Trust Assets or enter into one or more new
Subservicing Agreements. The Master Servicer may agree with a Subservicer to
amend a Subservicing Agreement. Any amendments to a Subservicing Agreement or
to a new Subservicing Agreement may contain provisions different from those
described above which are in effect in the original Subservicing Agreements.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Subservicers, as the case may be,
will make reasonable efforts to collect all payments called for under the
Trust Assets and will, consistent with the related Servicing Agreement and any
applicable insurance policy, FHA insurance or other credit enhancement, follow
such collection procedures which shall be normal and usual in its general
mortgage servicing activities with respect to mortgage loans comparable to the
Trust Assets. Consistent with the foregoing, the Master Servicer may in its
discretion waive any prepayment charge in connection with the prepayment of a
Trust Asset or extend the Due Dates for payments due on a Trust Asset,
provided that the insurance coverage for such Trust Asset or any coverage
provided by any alternative credit enhancement will not be adversely affected
thereby. With respect to any series of Notes as to which the Trust Fund
includes Private Securities, the Master Servicer's servicing and
administration obligations will be pursuant to the terms of such Private
Securities.
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Under its Subservicing Agreement, a Subservicer is granted certain
discretion to extend relief to Mortgagors whose payments become delinquent. A
Subservicer may grant a period of temporary indulgence (generally up to three
months) to a Mortgagor or may enter into a liquidating plan providing for
repayment by the Mortgagor of delinquent amounts within six months from the
date of execution of the plan, in each case without the prior approval of the
Master Servicer. Other types of forbearance generally require Master Servicer
approval. Neither indulgence nor forbearance with respect to a Trust Asset
will affect the interest rate or rates used in calculating payments to
Securityholders. See "Description of the Notes--Payments."
In certain instances in which a Trust Asset 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 Noteholders, the Master Servicer may permit
certain modifications of the Trust Asset or make forbearances on the Trust
Asset rather than proceeding with foreclosure or repossession (if applicable).
In making such determination, the estimated Realized Loss that might result if
such Trust Asset were liquidated would be taken into account. Such
modifications may have the effect of reducing the Mortgage Rate or extending
the final maturity date of the Trust Asset. Any such modified Trust Asset may
remain in the related Trust Fund, and the reduction in collections resulting
from such 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 Notes.
In any case in which property subject to a Trust Asset is being conveyed by
the Mortgagor, the Master Servicer, directly or through a Subservicer, shall
in general be obligated, to the extent it has knowledge of such conveyance, to
exercise its rights to accelerate the maturity of such Trust Asset under any
due-on-sale clause applicable thereto, but 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 applicable credit enhancement
arrangements. If the Master Servicer or Subservicer is prevented from
enforcing such due-on-sale clause under applicable law or if the Master
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 or Subservicer will enter into an
assumption and modification agreement with the person to whom such property
has been or is about to be conveyed, pursuant to which such person will become
liable under the Mortgage Note subject to certain specified conditions. The
original Mortgagor may be released from liability on a Trust Asset if the
Master Servicer or Subservicer shall have determined in good faith that such
release will not adversely affect the ability to make full and timely
collections on the related Trust Asset. Any fee collected by the Master
Servicer or Subservicer for entering into an assumption or substitution of
liability agreement will be retained by the Master Servicer or Subservicer as
additional servicing compensation unless otherwise set forth in the related
Prospectus Supplement. See "Certain Legal Aspects of Trust Assets and Related
Matters--Enforceability of Certain Provisions" herein. In connection with any
such assumption, the Mortgage Rate borne by the related Mortgage Note 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 or the related Subservicer may approve such a
request if it has determined, exercising its good faith business judgment in
the same manner as it would if it were the owner of the related Trust Asset,
that such approval will not adversely affect the security for, and the timely
and full collectability of, the related Trust Asset. Any fee collected by the
Master Servicer or the Subservicer for processing such request will be
retained by the Master Servicer or Subservicer as additional servicing
compensation.
The Master Servicer is required to maintain a fidelity bond and errors and
omissions policy with respect to its officers and employees and other persons
acting on behalf of the Master Servicer in connection with its activities
under the Servicing Agreement. The Master Servicer may be subject to certain
restrictions under the Servicing Agreement with respect to the refinancing of
a lien senior to a Revolving Credit Loan, Home Equity Loan or a Contract
secured by a lien on the related Mortgaged Property.
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REALIZATION UPON DEFAULTED LOANS
With respect to a Revolving Credit Loan, Home Equity Loan or a Contract
secured by a lien on a Mortgaged Property in default, the Master Servicer or
the related Subservicer will decide whether to foreclose upon the Mortgaged
Property or with respect to any such Trust Asset, write off the principal
balance of the Trust Asset as a bad debt or take an unsecured note.
Realization on other defaulted Contracts may be accomplished through
repossession and subsequent resale of the underlying Manufactured Home or Home
Improvement. 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 or repossession and resale
activities, estimate the proceeds expected to be received and the expenses
expected to be incurred in connection with such foreclosure or repossession
and resale to determine whether a foreclosure proceeding or a repossession and
resale is appropriate. To the extent that a Revolving Credit Loan, Home Equity
Loan or a Contract secured by a lien on a Mortgaged Property is junior to
another lien on the related Mortgaged Property, following any default thereon,
unless foreclosure proceeds for such Trust Asset are expected to at least
satisfy the related senior mortgage loan in full and to pay foreclosure costs,
it is likely that such Trust Asset will be written off as bad debt with no
foreclosure proceeding. See "Risk Factors--Special Features of Certain Trust
Assets Secured by Junior Liens on Mortgaged Properties" herein. In the event
that title to any Mortgaged Property is acquired in foreclosure or by deed in
lieu of foreclosure, the deed or certificate of sale will be issued to the
Indenture Trustee or to its nominee on behalf of Noteholders. Notwithstanding
any such acquisition of title and cancellation of the related Trust Asset,
such Revolving Credit Loan, Home Equity Loan or Contract secured by a lien on
a Mortgaged Property (an "REO LOAN") will be considered for most purposes to
be an outstanding Trust Asset held in the Trust Fund until such time as the
Mortgaged Property is sold and all recoverable Liquidation Proceeds and
Insurance Proceeds have been received with respect to such defaulted Trust
Asset (a "LIQUIDATED LOAN"). To the extent provided in the related Agreement
and related Servicing Agreement, any income (net of expenses and other than
gains described below) received by the Subservicer or the Master Servicer on
such Mortgaged Property, prior to its disposition will be deposited in the
Custodial Account upon receipt and will be available at such time for making
payments to Noteholders.
With respect to a Revolving Credit Loan, Home Equity Loan or a Contract
secured by a lien on a Mortgaged Property in default, the Master Servicer may
pursue foreclosure (or similar remedies) subject to any senior lien positions
and certain other restrictions pertaining to junior loans as described under
"Certain Legal Aspects of Trust Assets and Related Matters--Foreclosure on
Revolving Credit Loans, Home Equity Loans and Certain Contracts" concurrently
with pursuing any remedy for a breach of a representation and warranty.
However, the Master Servicer is not required to continue to pursue both such
remedies if it determines that one such remedy is more likely to result in a
greater recovery. Upon the first to occur of final liquidation and a
repurchase or substitution pursuant to a breach of a representation and
warranty, such Trust Asset will be removed from the related Trust Fund. The
Master Servicer may elect to treat a defaulted Trust Asset as having been
finally liquidated if substantially all amounts expected to be received in
connection therewith have been received. Any additional liquidation expenses
relating to such Trust Asset thereafter incurred will be reimbursable to the
Master Servicer (or any Subservicer) from any amounts otherwise payable to the
related Noteholders, or may be offset by any subsequent recovery related to
such Trust Asset. Alternatively, for purposes of determining the amount of
related Liquidation Proceeds to be paid to Noteholders, the amount of any
Realized Loss or the amount required to be drawn under any applicable form of
credit enhancement, the Master Servicer may take into account minimal amounts
of additional receipts expected to be received, as well as estimated
additional liquidation expenses expected to be incurred in connection with
such defaulted Trust Asset.
With respect to certain series of Notes, if so provided in the related
Prospectus Supplement, the applicable form of credit enhancement may provide,
to the extent of coverage thereunder, that a defaulted Trust Asset or REO Loan
will be removed from the Trust Fund prior to the final liquidation thereof. In
addition, the Master Servicer will generally have the option to purchase from
the Trust Fund any defaulted Trust Asset after a specified period of
delinquency. If a defaulted Trust Asset or REO Loan is not so removed from the
Trust Fund, then, upon the final liquidation thereof, if a loss is realized
which is not covered by any applicable form of credit enhancement or other
insurance, the Noteholders will bear such loss. However, if a gain results
from the final
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liquidation of an REO Loan which is not required by law to be remitted to the
related Mortgagor, the Master Servicer will be entitled to retain such gain as
additional servicing compensation unless the related Prospectus Supplement
provides otherwise. For a description of the Master Servicer's obligations to
maintain and make claims under applicable forms of credit enhancement and
insurance relating to the Trust Assets, see "Description of Credit
Enhancement" and "Description of the Securities--Hazard Insurance; Claims
Thereunder."
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each series of Notes will be
equal to the percentage per annum described in the related Prospectus
Supplement (which may vary under certain circumstances). As compensation for
its servicing duties, a Subservicer or, if there is no Subservicer, the Master
Servicer will be entitled to a monthly servicing fee as described in the
related Prospectus Supplement, which may vary under certain circumstances from
the amounts described in the Prospectus Supplement. Certain Subservicers may
also receive additional compensation in the amount of all or a portion of the
interest due and payable on the applicable Trust Asset which is over and above
the interest rate specified at the time the Company or Residential Funding, as
the case may be, committed to purchase the Trust Asset. See "Trust Asset
Program--Subservicing." Subservicers will be required to pay to the Master
Servicer an amount equal to one month's interest (net of its servicing or
other compensation) on the amount of any partial Principal Prepayment. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will retain such amounts to the extent collected from Subservicers. The Master
Servicer or a Subservicer will retain all prepayment charges, assumption fees
and late payment charges, to the extent collected from Mortgagors, and any
benefit which may accrue as a result of the investment of funds in the
Custodial Account or the applicable Payment Account (unless otherwise
specified in the related Prospectus Supplement) or in a Subservicing Account,
as the case may be. In addition, certain duties of the Master Servicer may be
performed by an affiliate of the Master Servicer who will be entitled to
reasonable compensation therefor from the Trust Fund.
The Master Servicer (or, if specified in the related Agreement, the
Indenture Trustee on behalf of the applicable Trust Fund) will pay or cause to
be paid certain ongoing expenses associated with each Trust Fund and incurred
by it in connection with its responsibilities under the Servicing Agreement,
including, without limitation, payment of any fee or other amount payable in
respect of certain credit enhancement arrangements, payment of any FHA
insurance premiums, if applicable, payment of the fees and disbursements of
the Indenture Trustee, the Owner Trustee, any custodian, the Note Registrar
and any Paying Agent, and payment of expenses incurred in enforcing the
obligations of Subservicers and Designated Sellers. The Master Servicer will
be entitled to reimbursement of expenses incurred in enforcing the obligations
of Subservicers and Designated Sellers under certain limited circumstances. In
addition, as indicated in the preceding section, the Master Servicer will be
entitled to reimbursements for certain expenses incurred by it in connection
with Liquidated Loans and in connection with the restoration of Mortgaged
Properties, such right of reimbursement being prior to the rights of
Noteholders to receive any related Liquidation Proceeds (including Insurance
Proceeds).
EVIDENCE AS TO COMPLIANCE
Each Servicing Agreement will provide for delivery (on or before a specified
date in each year) to the Indenture Trustee of an annual statement signed by
an officer of the Master Servicer to the effect that the Master Servicer has
fulfilled in all material respects the minimum servicing standards set forth
in the audit guide for audits of non-supervised mortgagees approved by the
Department of Housing and Urban Development for use by independent public
accountants, the Uniform Single Attestation Program for Mortgage Bankers or
the Audit Program for Mortgages serviced for Federal Home Loan Mortgage
Corporation (each, an "AUDIT GUIDE") throughout the preceding year or, if
there has been a material default in the fulfillment of any such obligation,
such statement shall specify each such known default and the nature and status
thereof. Such statement may be provided as a single form making the required
statements as to more than one Servicing Agreement.
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Each Servicing Agreement will also provide that on or before a specified
date in each year, beginning the first such date that is at least a specified
number of months after the Cut-off Date, a firm of independent public
accountants will furnish a statement to the Company and the Indenture Trustee
to the effect that, on the basis of an examination by such firm conducted
substantially in compliance with the standards established by the American
Institute of Certified Public Accountants, the servicing of mortgage loans
under agreements (including the related Servicing Agreement) was conducted
substantially in compliance with the minimum servicing standards set forth in
the related Audit Guide (to the extent that procedures in such Audit Guide are
applicable to the servicing obligations set forth in such agreements) except
for such significant exceptions or errors in records that shall be reported in
such statement. In rendering its statement such firm may rely, as to the
matters relating to the direct servicing of mortgage loans by Subservicers,
upon comparable statements for examinations conducted substantially in
compliance with the related Audit Guide described above (rendered within one
year of such statement) of firms of independent public accountants with
respect to those Subservicers which also have been the subject of such an
examination.
Copies of the annual statement of an officer of the Master Servicer may be
obtained by Noteholders without charge upon written request to the Master
Servicer, at the address indicated in the monthly statement to Noteholders.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
The Servicing Agreement for each series of Notes will provide that the
Master Servicer may not resign from its obligations and duties thereunder
except upon a determination that performance of such duties is no longer
permissible under applicable law or except in connection with a permitted
transfer of servicing. No such resignation will become effective until the
Indenture Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the Servicing Agreement.
Each Servicing Agreement will also provide that, except as set forth below,
neither the Master Servicer, the Company nor any director, officer, employee
or agent of the Master Servicer or the Company will be under any liability to
the Trust Fund or the Noteholders for any action taken or for refraining from
the taking of any action in good faith pursuant to the Servicing Agreement, or
for errors in judgment; provided, however, that neither the Master Servicer,
the Company nor any such person will be protected against any liability which
would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties or by reason of reckless
disregard of obligations and duties thereunder. Each Servicing Agreement will
further provide that the Master Servicer, the Company and any director,
officer, employee or agent of the Master Servicer or the Company is entitled
to indemnification by the Trust Fund (or the Special Purpose Entity, if
applicable) and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the Servicing
Agreement or the related series of Notes, other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, each Servicing
Agreement will provide that the Master Servicer and the Company will not be
under any obligation to appear in, prosecute or defend any legal or
administrative action that is not incidental to its respective duties under
the Servicing Agreement and which in its opinion may involve it in any expense
or liability. The Master Servicer or the Company may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the Servicing Agreement and the rights and duties of the
parties thereto and the interests of the Noteholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund (or the
Special Purpose Entity, if applicable) and the Master Servicer or the Company,
as the case may be will be entitled to be reimbursed therefor out of funds
otherwise payable to Noteholders.
Any person into which the Master Servicer may be merged or consolidated, any
person resulting from any merger or consolidation to which the Master Servicer
is a party or any person succeeding to the business of the Master Servicer
will be the successor of the Master Servicer under the Servicing Agreement,
provided that such person meets the requirements set forth in the Servicing
Agreement. In addition, notwithstanding the prohibition
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on its resignation, the Master Servicer may assign its rights and delegate its
duties and obligations under a Servicing Agreement to any person reasonably
satisfactory to the Company and the Indenture Trustee and meeting the
requirements set forth in the related Servicing Agreement. In the case of any
such assignment, the Master Servicer will be released from its obligations
under such Servicing Agreement, exclusive of liabilities and obligations
incurred by it prior to the time of such assignment.
THE AGREEMENTS
The following summaries describe certain provisions of the Trust Agreement,
the Indenture and Servicing Agreement relating to a series of Notes (each, an
"AGREEMENT" and, collectively, the "AGREEMENTS"). The summaries do not purport
to be complete and are qualified entirely by reference to the actual terms of
the Agreements relating to a series of Notes.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Servicing Agreement
A "Servicing Default" under the Servicing Agreement in respect of a series
of Securities, unless otherwise specified in the Prospectus Supplement,
generally will include: (i) any failure by the Master Servicer to make a
required deposit to the Custodial Account or the Payment Account or, if the
Master Servicer is the Paying Agent, to pay to the holders of any class of
Securities of such series any required payment which continues unremedied for
five business days after the giving of written notice of such failure to the
Master Servicer by the Indenture Trustee or the Issuer (or the majority holder
of the Ownership Interest in the Special Purpose Entity or the Credit
Enhancer, if applicable); (ii) any failure by the Master Servicer duly to
observe or perform in any material respect any other of its covenants or
agreements in the Servicing Agreement with respect to such series of
Securities which continues unremedied for 45 days after the giving of written
notice of such failure to the Master Servicer by the Indenture Trustee or the
Issuer (or the majority holder of the Ownership Interest in the Special
Purpose Entity or the Credit Enhancer, if applicable); (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings regarding the Master Servicer and certain actions by the
Master Servicer indicating its insolvency or inability to pay its obligations
and (iv) any other Servicing Default as set forth in the Servicing Agreement.
A default pursuant to the terms of any Servicing Agreement relating to any
Private Securities included in any Trust Fund will not constitute an Event of
Default under the related Trust Agreement or Indenture.
So long as a Servicing Default remains unremedied, either the Company or the
Indenture Trustee may (except as otherwise provided for in the related
Agreement with respect to the Special Purpose Entity or the Credit Enhancer,
if applicable), by written notification to the Master Servicer and to the
Issuer or the Indenture Trustee or Trust Fund, as applicable, terminate all of
the rights and obligations of the Master Servicer under the Servicing
Agreement (other than any right of the Master Servicer as Securityholder and
other than the right to receive servicing compensation, expenses for servicing
the Trust Assets during any period prior to the date of such termination, and
such other reimbursement, of amounts the Master Servicer is entitled to
withdraw from the Custodial Account) whereupon the Indenture Trustee will
succeed to all responsibilities, duties and liabilities of the Master Servicer
under such Servicing Agreement (other than the obligation to purchase Trust
Assets under certain circumstances) and will be entitled to similar
compensation arrangements. In the event that the Indenture 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 an approved mortgage
servicing institution with a net worth of at least $10,000,000 to act as
successor to the Master Servicer under the Servicing Agreement (unless
otherwise set forth in the Servicing Agreement). Pending such appointment, the
Indenture Trustee is obligated to act in such capacity. The Indenture 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 under the Servicing Agreement.
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Indenture
An "Event of Default" under the Indenture in respect of each series of
Notes, unless otherwise specified in the Prospectus Supplement, generally will
include: (i) a default for five days or more in the payment of any principal
of or interest on any Note of such series; (ii) failure to perform any other
covenant of the Company or the Trust Fund in the Indenture which continues for
a period of thirty days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement (and if the Credit
Enhancer defaults in the performance of its obligations, if applicable); (iii)
any representation or warranty made by the Company or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such series having been
incorrect in a material respect as of the time made, and such breach is not
cured within thirty days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iv) certain events
of bankruptcy, insolvency, receivership or liquidation of the Company or the
Trust Fund (and if the Credit Enhancer defaults in the performance of its
obligations, if applicable); or (v) any other Event of Default provided with
respect to Notes of that series.
If an Event of Default with respect to the Notes of any series at the time
outstanding occurs and is continuing, either the Indenture Trustee, the Credit
Enhancer (if applicable) or the holders of a majority of the then aggregate
outstanding amount of the Notes of such series may declare the principal
amount (or, if the Notes of that series are Accrual Notes, such portion of the
principal amount as may be specified in the terms of that series, as provided
in the related Prospectus Supplement) of all the Notes of such series to be
due and payable immediately. Such declaration may, under certain
circumstances, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the related Notes.
If, following an Event of Default with respect to any series of Notes, the
Notes of such series have been declared to be due and payable, the Indenture
Trustee (with the consent of the Credit Enhancer, if applicable) may, in its
discretion, notwithstanding such acceleration, elect to maintain possession of
the collateral securing the Notes of such series and to continue to apply
payments on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such series as they would
have become due if there had not been such a declaration. In addition, the
Indenture Trustee may not sell or otherwise liquidate the collateral securing
the Notes of a series following an Event of Default, unless (a) the holders of
100% of the then aggregate outstanding amount of the Notes of such series
consent to such sale, (b) the proceeds of such sale or liquidation are
sufficient to pay in full the principal of and accrued interest, due and
unpaid, on the outstanding Notes of such series (and to reimburse the Credit
Enhancer, if applicable) at the date of such sale or (c) the Indenture Trustee
determines that such collateral would not be sufficient on an ongoing basis to
make all payments on such Notes as such payments would have become due if such
Notes had not been declared due and payable, and the Indenture Trustee obtains
the consent of the holders of 66 2/3% of the then aggregate outstanding amount
of the Notes of such series (and the Credit Enhancer, if applicable).
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default, the Indenture provides that the Indenture
Trustee will have a prior lien on the proceeds of any such liquidation for
unpaid fees and expenses. As a result, upon the occurrence of such an Event of
Default, the amount available for payments to the Noteholders would be less
than would otherwise be the case. However, the Indenture Trustee may not
institute a proceeding for the enforcement of its lien except in connection
with a proceeding for the enforcement of the lien of the Indenture for the
benefit of the Noteholders after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount that is unamortized.
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No Securityholder generally will have any right under a Trust Agreement or
Indenture to institute any proceeding with respect to such Agreement unless
(a) such holder previously has given to the Indenture Trustee written notice
of default and the continuance thereof, (b) the holders of Securities of any
class evidencing not less than 25% of the aggregate Percentage Interests
constituting such class (i) have made written request upon the Indenture
Trustee to institute such proceeding in its own name as Indenture Trustee
thereunder and (ii) have offered to the Indenture Trustee reasonable
indemnity, (c) the Indenture Trustee has neglected or refused to institute any
such proceeding for 60 days after receipt of such request and indemnity and
(d) no direction inconsistent with such written request has been given to the
Indenture Trustee during such 60 day period by the Holders of a majority of
the Security Balances of such class (except as otherwise provided for in the
related Agreement with respect to the Credit Enhancer). However, the Indenture
Trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the applicable 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 Securities covered by such Agreement,
unless such Securityholders have offered to the Indenture Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
AMENDMENT
Unless otherwise stated in the related Prospectus Supplement, each Agreement
may be amended by the parties thereto (except as otherwise provided for in the
related Agreement with respect to the Credit Enhancer) without the consent of
the related Noteholders, (i) to cure any ambiguity; (ii) to correct or
supplement any provision therein which may be inconsistent with any other
provision therein or to correct any error; (iii) to change the timing and/or
nature of deposits in the Custodial Account or the Payment Account or to
change the name in which the Custodial Account is maintained (except that (a)
deposits to the Payment Account may not occur later than the related Payment
Date, (b) such change may not adversely affect in any material respect the
interests of any Securityholder, as evidenced by an opinion of counsel, and
(c) such change may not adversely affect the then-current rating of any rated
Securities, as evidenced by a letter from each applicable Rating Agency) as
specified in the related Prospectus Supplement; or (iv) to make any other
provisions with respect to matters or questions arising under such Agreement
which are not materially inconsistent with the provisions thereof, so long as
such action will not adversely affect in any material respect the interests of
any Securityholder.
Unless otherwise stated in the related Prospectus Supplement, each Agreement
may also be amended by the parties thereto (except as otherwise provided for
in the related Agreement with respect to the Credit Enhancer) with the consent
of the holders of Securities of each class affected thereby evidencing, in
each case, not less than 66% of the aggregate Percentage Interests
constituting such class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Agreement
or of modifying in any manner the rights of the related Securityholders,
except that no such amendment may (i) reduce in any manner the amount of, or
delay the timing of, payments received on Trust Assets which are required to
be paid on a Security of any class without the consent of the holder of such
Security, (ii) impair the right of any Securityholder to institute suit for
the enforcement of the provisions of the Agreements or (iii) reduce the
percentage of Securities of any class the holders of which are required to
consent to any such amendment unless the holders of all Securities of such
class have consented to the change in such percentage.
TERMINATION; REDEMPTION OF NOTES
Trust Agreement
The obligations created by the Trust Agreement for each series of Securities
(other than certain limited payment and notice obligations of the Owner
Trustee and the Company, respectively) will terminate upon the payment to the
related Securityholders (including, the Notes issued pursuant to the related
Indenture) of all amounts held by the Master Servicer and required to be paid
to such Securityholders following the earlier of (i) the final payment or
other liquidation or disposition (or any advance with respect thereto) of the
last Trust Asset subject thereto and all property acquired upon foreclosure or
deed in lieu of foreclosure of any Trust Asset and (ii) the purchase by the
Master Servicer or the Company from the Trust Fund (or from the Special
Purpose Entity, if applicable) for such series of all remaining Trust Assets
and all property acquired in respect of such Trust Assets.
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Indenture
The Indenture will be discharged with respect to a series of Notes (except
with respect to certain continuing rights specified in the Indenture) upon the
distribution to Noteholders of all amounts required to be distributed pursuant
to the Indenture.
THE OWNER TRUSTEE
The Owner Trustee under the Trust Agreement will be named in the related
Prospectus Supplement. The commercial bank or trust company serving as Owner
Trustee may have normal banking relationships with the Company and/or its
affiliates, including Residential Funding.
The Owner Trustee may resign at any time, in which event the Administrator
or the Indenture Trustee will be obligated to appoint a successor owner
trustee as set forth in the Agreements. The Administrator or the Indenture
Trustee may also remove the Owner Trustee if the Owner Trustee ceases to be
eligible to continue as such under the Trust Agreement or if the Owner Trustee
becomes insolvent. Upon becoming aware of such circumstances, the
Administrator or the Indenture Trustee will be obligated to appoint a
successor Owner Trustee. Any resignation or removal of the Owner Trustee and
appointment of a successor Owner Trustee will not become effective until
acceptance of the appointment by the successor Owner Trustee.
THE INDENTURE TRUSTEE
The Indenture Trustee under the Indenture will be named in the related
Prospectus Supplement. The commercial bank or trust company serving as
Indenture Trustee may have normal banking relationships with the Company
and/or its affiliates, including Residential Funding.
The Indenture Trustee may resign at any time, in which event the Company,
the Owner Trustee or the Administrator will be obligated to appoint a
successor indenture trustee as set forth in the Indenture. The Company, the
Owner Trustee or the Administrator as set forth in the Indenture may also
remove the Indenture Trustee if the Indenture Trustee ceases to be eligible to
continue as such under the Indenture or if the Indenture Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Company, the Owner
Trustee or the Administrator will be obligated to appoint a successor
Indenture Trustee. If so specified in the Indenture, the Indenture Trustee may
also be removed at any time by the holders of a majority principal balance of
the Notes. Any resignation or removal of the Indenture Trustee and appointment
of a successor Indenture Trustee will not become effective until acceptance of
the appointment by the successor Indenture Trustee.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a Note will depend on the price paid by the holder
for such Note, the Interest Rate on any such Note entitled to payments of
interest (which Interest Rate may vary if so specified in the related
Prospectus Supplement) and the rate and timing of principal payments
(including payments in excess of required installments, prepayments or
terminations, liquidations and repurchases) on the Trust Assets and the rate
and timing of Draws (if applicable) and the allocation thereof to reduce the
principal balance of such Note (or notional amount thereof, if applicable).
The amount of interest payments on a Trust Asset made monthly to holders of
a class of Notes entitled to payments of interest will be calculated on the
basis of such class's specified percentage of each such payment of interest
(or accrual in the case of Accrual Notes) and will be expressed as a fixed,
adjustable or variable Interest Rate payable on the outstanding principal
balance or notional amount of such Note, or any combination of such Interest
Rates, calculated as described herein and in the related Prospectus
Supplement. See "Description of the Notes--Payments." Holders of Strip Notes
or a class of Notes having an Interest Rate that varies based on the weighted
average Mortgage Rate of the underlying Trust Assets will be affected by
disproportionate prepayments and repurchases of Trust Assets having higher Net
Mortgage Rates or rates applicable to the Strip Notes, as applicable.
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The effective yield to maturity to each holder of Notes entitled to payments
of interest will be below that otherwise produced by the applicable Interest
Rate and purchase price of such Note to the extent that interest accrues on
each Trust Asset during the calendar month or a period preceding a Payment
Date instead of through the day immediately preceding such Payment Date.
A class of Notes may be entitled to payments of interest at a variable or
adjustable Interest Rate, or any combination of such Interest Rates, as
specified in the related Prospectus Supplement. A variable Interest Rate may
be calculated based on the weighted average of the Mortgage Rates (net of
Servicing Fees and any Excess Spread or Excluded Spread) of the related Trust
Assets (the "NET MORTGAGE RATE") or certain balances thereof for the month
preceding the Payment Date, by reference to an index or otherwise. The
aggregate payments of interest on a class of Notes, and the yield to maturity
thereon, will be affected by the rate of payment of principal on the Notes (or
the rate of reduction in the notional amount of Notes entitled to payments of
interest only). The yield on the Notes will also be affected by liquidations
of Trust Assets following Mortgagor defaults and by purchases of Trust Assets
in the event of certain breaches of representations made in respect of such
Trust Assets. See "Trust Asset Program--Representations Relating to Trust
Assets" and "Description of the Notes--Assignment of Trust Assets" above. In
addition, if the index used to determine the Interest Rate for the Notes is
different than the Index applicable to the Mortgage Rates, the yield on the
Notes will be sensitive to changes in the index related to the Interest Rate
and the yield on the Notes may be reduced by application of a cap on the
Interest Rate based on the weighted average of the Net Mortgage Rates or such
other formulas as may be set forth in the related Prospectus Supplement.
In general, if a Note is purchased at a premium over its face amount and
payments of principal on such Note occur at a rate faster than anticipated at
the time of purchase, the purchaser's actual yield to maturity will be lower
than that assumed at the time of purchase. Conversely, if a Note is purchased
at a discount from its face amount and payments of principal on such Note
occur at a rate slower than that assumed at the time of purchase, the
purchaser's actual yield to maturity will be lower than that originally
anticipated. If Strip Notes are issued evidencing a right to payments of
interest only or disproportionate payments of interest, a faster than expected
rate of principal payments on the Trust Assets (net of Draws, if applicable)
will negatively affect the total return to investors in any such Notes. The
yield on a class of Strip Notes that is entitled to receive payments of
interest only will nevertheless be affected by any losses on the related Trust
Assets because of the effect on the timing and amount of payments. In certain
circumstances, rapid principal payments on the Trust Assets (net of Draws, if
applicable) may result in the failure of such holders to recoup their original
investment. If Strip Notes are issued evidencing a right to payments of
principal only or disproportionate payments of principal, a slower than
expected rate of principal payments on the Trust Assets (net of Draws, if
applicable) could negatively affect the anticipated yield on such Strip Notes.
In addition, the total return to investors of Notes evidencing a right to
payments of interest at a rate that is based on the weighted average Net
Mortgage Rate of the Trust Assets from time to time will be adversely affected
by principal payments on Trust Assets with Mortgage Rates higher than the
weighted average Mortgage Rate on the Trust Assets. In general, mortgage loans
with higher Mortgage Rates or Gross Margins are likely to prepay at a faster
rate than mortgage loans with lower Mortgage Rates or Gross Margins. In
addition, the yield to maturity on certain other types of classes of Notes,
including Accrual Notes, Notes with an Interest Rate that fluctuates inversely
with or at a multiple of an index or certain other classes in a series
including more than one class of Notes, may be relatively more sensitive to
the rate of principal payments on the related Trust Assets (net of Draws if
applicable) than other classes of Notes.
The outstanding principal balances of manufactured housing contracts, home
equity loans and home improvement contracts are, in general, much smaller than
traditional first lien mortgage loan balances, and the original terms to
maturity of such contracts are generally shorter than those of traditional
first lien mortgage loans. As a result, changes in interest rates will not
affect the monthly payments on manufactured housing contracts and home
improvement contracts to the same degree that changes in mortgage interest
rates will affect the monthly payments on such mortgage loans. Consequently,
the effect of changes in prevailing interest rates on the prepayment rates on
manufactured housing contracts and home improvement contracts may not be
similar to the effects of such changes on mortgage loan prepayment rates, or
such effects may be similar to the effects of such changes on mortgage loan
prepayment rates, but to a smaller degree.
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The timing of changes in the rate of principal payments on a Note 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 payment of principal on a
Note, 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 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 Notes would not be
fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
The rate and timing of defaults on the Trust Assets will also affect the
rate and timing of principal payments on the Trust Assets and thus the yield
on the related Notes. For a general discussion of the risk of defaults on the
Trust Assets, see "Risk Factors" herein. There can be no assurance as to the
rate of losses or delinquencies on any of the Trust Assets, however, such
losses and delinquencies may be expected to be higher than those of
traditional first lien mortgage loans. To the extent that any losses are
incurred on any of the Trust Assets that are not covered by the applicable
credit enhancement, holders of Notes of the series evidencing interests in the
related Pool (or certain classes thereof) will bear all risk of such losses
resulting from default by Mortgagors. See "Risk Factors--Limitations,
Reduction and Substitution of Credit Enhancement" herein. Even where the
applicable credit enhancement covers all losses incurred on the Trust Assets,
the effect of losses may be to increase prepayment experience on the Trust
Assets, thus reducing average weighted life and affecting yield to maturity.
With respect to certain Trust Assets, the Mortgage Rate at origination may
be below the rate that would result from the sum of the then-applicable Index
and Gross Margin. Under the applicable underwriting standards, Mortgagors are
generally qualified based on an assumed payment which reflects a rate
significantly lower than the maximum rate. The repayment of any such Trust
Asset may thus be dependent on the ability of the mortgagor to make larger
interest payments following the adjustment of the Mortgage Rate.
As discussed under "Risk Factors--Special Features of Certain Trust Assets
Secured by Junior Liens on Mortgaged Properties--Revolving Credit Loan
Characteristics," the Revolving Credit Loans are not expected to significantly
amortize prior to maturity. As a result, a borrower will generally be required
to pay a substantial principal amount at the maturity of a Revolving Credit
Loan. Such Revolving Credit Loans pose a greater risk of default than fully-
amortizing Revolving Credit Loans, because the Mortgagor's ability to make
such a substantial payment at maturity will generally depend on the
Mortgagor's ability to obtain refinancing of such Revolving Credit Loans or to
sell the Mortgaged Property prior to the maturity of the Revolving Credit
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, the Mortgagor's personal economic circumstances, the Mortgagor's
equity in the related Mortgaged Property, real estate values, prevailing
market interest rates, tax laws and national and regional economic conditions.
For a general discussion of factors that may affect a Mortgagor's personal
economic circumstances, see "Risk Factors--Special Features of Certain Trust
Assets Secured by Junior Liens on Mortgaged Properties--Mortgagor Credit"
herein. Unless otherwise specified in the related Prospectus Supplement,
neither the Company, Residential Funding, GMAC Mortgage nor any of their
affiliates will be obligated to refinance or repurchase any Trust Asset or to
sell any Mortgaged Property.
For any Revolving Credit Loans, Home Equity Loans and any Contracts secured
by junior mortgages, any inability of the Mortgagor to pay off the balance
thereof may also affect the ability of the Mortgagor to obtain refinancing at
any time of any related senior mortgage loan, thereby preventing a potential
improvement in the Mortgagor's circumstances. Furthermore, if so specified in
the related Prospectus Supplement, under the 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 Revolving Credit Loan, Home Equity Loan or Contract, as
applicable.
In addition to the Mortgagor's personal economic circumstances, a number of
factors, including homeowner mobility, job transfers, changes in the
Mortgagor's housing needs, the Mortgagor's net equity in the Mortgaged
Property, changes in the value of the Mortgaged Property, national and
regional economic conditions,
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enforceability of due-on-sale clauses, prevailing market interest rates,
servicing decisions, solicitations and the availability of mortgage funds,
seasonal purchasing and payment habits of borrowers or changes in the
deductibility for federal income tax purposes of interest payments on home
equity loans, may affect the rate and timing of principal payments on the
Trust Assets or Draws on the Revolving Credit Loans. For a discussion of
certain factors that may affect national and regional economic conditions, see
"Risk Factors--Special Features of Certain Trust Assets Secured by Junior
Liens on Mortgaged Properties--Mortgagor Credit" herein. There can be no
assurance as to the rate of principal payments or Draws on the Revolving
Credit Loans. The Trust Assets generally may be prepaid in full or in part
without penalty. The Company has no significant experience with respect to the
rate of principal prepayments on home improvement contracts or manufactured
housing contracts, but generally expects that prepayments on home improvement
contracts will be higher than certain other Trust Assets due to the
possibility of increased property value resulting from the home improvement
and greater refinance options. The Company generally expects that prepayments
on manufactured housing contracts will be lower than on other Trust Assets
because manufactured housing contracts may have less refinance options. The
rate of principal payments and the rate of Draws (if applicable) may fluctuate
substantially from time to time. Generally, home equity loans are not viewed
by mortgagors as permanent financing. Due to the unpredictable nature of both
principal payments and Draws, the rates of principal payments net of Draws for
such loans may be much more volatile than for typical first lien mortgage
loans.
The yield to maturity of the Notes of any series, or the rate and timing of
principal payments or Draws (if applicable) on the related Trust Assets, may
also be affected by a wide variety of specific terms and conditions applicable
to the respective programs under which the Trust Assets were originated. For
example, the Revolving Credit Loans may provide for future Draws to be made
only in specified minimum amounts, or alternatively may permit Draws to be
made by check or through a credit card in any amount. A pool of Revolving
Credit Loans subject to the latter provisions may be likely to remain
outstanding longer with a higher aggregate principal balance than a pool of
Revolving Credit Loans with the former provisions, because of the relative
ease of making new Draws. Furthermore, the Trust Assets may provide for
interest rate changes on a daily or monthly basis, or may have Gross Margins
that may vary under certain circumstances over the term of the loan. In
extremely high market interest rate scenarios, Notes backed by Trust Assets
with adjustable rates subject to substantially higher maximum rates than
typically apply to adjustable rate first mortgage loans may experience rates
of default and liquidation substantially higher than those that have been
experienced on other adjustable rate mortgage loan pools.
The yield to maturity of the Notes of any series, or the rate and timing of
principal payments on the Trust Assets or Draws on the related Revolving
Credit Loans and corresponding payments on the Notes, will also be affected by
the specific terms and conditions applicable to the Notes. For example, if the
index used to determine the Interest Rates for a series of Notes is different
from the Index applicable to the Mortgage Rates of the underlying Trust
Assets, the yield on the Notes may be reduced by application of a cap on the
Interest Rates based on the weighted average of the Mortgage Rates. Depending
on applicable cash flow allocation provisions, changes in the relationship
between the two indexes may also affect the timing of certain principal
payments on the Notes, or may affect the amount of any Overcollateralization
(or the amount on deposit in any Reserve Fund) which could in turn accelerate
the payment of principal on the Notes if so provided in the Prospectus
Supplement. For any series of Notes backed by Revolving Credit Loans,
provisions governing whether future Draws on the Revolving Credit Loans will
be included in the Trust Fund will have a significant effect on the rate and
timing of principal payments on the Notes. The yield to maturity of the Notes
of any series, or the rate and timing of principal payments on the Trust
Assets may also be affected by the risks associated with certain Trust Assets.
See "Risk Factors--Risks Associated with Certain Trust Assets" herein and
"Risk Factors" in the related Prospectus Supplement.
As a result of the payment terms of the Revolving Credit Loans or of the
Note provisions relating to future Draws, there may be no principal payments
on such Notes in any given month. In addition, it is possible that the
aggregate Draws on Revolving Credit Loans included in a Pool may exceed the
aggregate payments with respect to principal on such Revolving Credit Loans
for the related period. If specified in the related Prospectus
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Supplement, a series of Notes may provide for a period during which all or a
portion of the principal collections on the Revolving Credit Loans are
reinvested in Additional Balances or are accumulated in a trust account
pending commencement of an amortization period with respect to the Notes.
Unless otherwise specified in the related Prospectus Supplement, Revolving
Credit Loans generally will and Home Equity Loans and, as applicable,
Contracts may contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of such Trust Asset upon sale or certain transfers by
the Mortgagor of the underlying Mortgaged Property. Unless the related
Prospectus Supplement indicates otherwise, the Master Servicer will generally
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 that would adversely affect or jeopardize coverage under any
applicable insurance policy. Adjustable Rate Home Equity Loans and, as
applicable, Contracts may be assumable under certain conditions if the
proposed transferee of the related Mortgaged Property establishes its ability
to repay such Trust Asset and, in the reasonable judgment of the Master
Servicer or the related Subservicer, the security for such Trust Asset would
not be impaired by the assumption. The extent to which Trust Assets are
assumed by purchasers of the Mortgaged Properties rather than prepaid by the
related Mortgagors in connection with the sales of the Mortgaged Properties
will affect the weighted average life of the related series of Notes. See
"Servicing of Trust Assets--Collection and Other Servicing Procedures" and
"Certain Legal Aspects of the Trust Assets and Related Matters--Enforceability
of Certain Provisions" for a description of certain provisions of the
Servicing Agreement and certain legal developments that may affect the
prepayment experience on the Trust Assets.
In addition, certain Private Securities included in a Pool may be backed by
underlying Trust Assets having differing interest rates. Accordingly, the rate
at which principal payments are received on the related Notes will, to a
certain extent, depend on the interest rates on such underlying Trust Assets.
At the request of the Mortgagor, the Master Servicer or a Subservicer may
allow the refinancing of a Trust Asset in any Trust Fund by accepting
prepayments thereon and permitting a new loan. In the event of such a
refinancing, the new loan would not be included in the related Trust Fund and,
therefore, such refinancing would have the same effect as a prepayment in full
of the related Trust Asset. A Subservicer or the Master Servicer may, from
time to time, implement programs designed to encourage refinancing. Such
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. In
addition, the Master Servicer or any Subservicers may encourage the
refinancing of Trust Assets, including defaulted Trust Assets, that would
permit creditworthy borrowers to assume the outstanding indebtedness of such
Trust Assets.
If the applicable Agreement for a series of Notes provides for a Funding
Account or other means of funding the transfer of additional Trust Assets to
the related Trust, as described under "Description of the Notes--Funding
Account" herein, and the Trust is unable to acquire such additional Trust
Assets within any applicable time limit, the amounts set aside for such
purpose may be applied as principal payments on one or more classes of Notes
of such series. In addition, if the Trust Fund for a series of Notes includes
Additional Balances and the rate at which such Additional Balances are
generated decreases, the rate and timing of principal payments on the Notes
will be affected and the weighted average life of the Notes will vary
accordingly. The rate at which Additional Balances are generated may be
affected by a variety of factors. See "Risk Factors--Yield and Prepayment
Considerations."
Although the Mortgage Rates on Revolving Credit Loans will and certain Trust
Assets may be subject to periodic adjustments, such adjustments generally (i)
will not increase such Mortgage Rates over a fixed maximum rate during the
life of any Trust Asset and (ii) will be based on an Index (which may not rise
and fall consistently with prevailing market interest rates) plus the related
Gross Margin (which may vary under certain circumstances, and 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 Trust Assets in
any Pool at any time may not equal the prevailing rates for similar, newly
originated adjustable rate home equity mortgage loans, lines of credit,
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home improvement loans or manufactured housing contracts and accordingly the
rate of principal payments and Draws (if applicable) may be lower or higher
that would otherwise be anticipated. In certain rate environments, the
prevailing rates on fixed-rate mortgage loans may be sufficiently low in
relation to the then-current Mortgage Rates on Trust Assets that the rate of
prepayment may increase as a result of refinancings. There can be no certainty
as to the rate of principal payments on the Trust Assets or Draws on the
Revolving Credit Loans during any period or over the life of any series of
Notes.
With respect to any index used in determining the Interest Rates for a
series of Notes or Mortgage Rates of the underlying Trust Assets, a number of
factors affect the performance of such index and may cause such index to move
in a manner different from other indices. To the extent that such index may
reflect changes in the general level of interest rates less quickly than other
indices, in a period of rising interest rates, increases in the yield to
Noteholders due to such rising interest rates may occur later than that which
would be produced by other indices, and in a period of declining rates, such
index may remain higher than other market interest rates which may result in a
higher level prepayments of the Trust Assets, which adjust in accordance with
such index, than of mortgage loans which adjust in accordance with other
indices.
Under certain circumstances, the Master Servicer, the Company or, if
specified in the related Prospectus Supplement, another person may have the
option to purchase the Trust Assets in a Trust Fund, thus resulting in the
early retirement of the related Notes. See "The Agreements--Termination;
Redemption of Notes."
CERTAIN LEGAL ASPECTS OF THE TRUST ASSETS
AND RELATED MATTERS
The following discussion contains summaries of certain legal aspects of the
Trust Assets that are general in nature. Because such legal aspects are
governed in part by state law (which laws may differ 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 Trust Assets may be
situated. These legal aspects are in addition to the requirements of any
applicable FHA Regulations described in "Description of FHA Insurance" herein
and in the related Prospectus Supplement with respect to the Contracts
partially insured by FHA pursuant to Title I. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Revolving Credit Loans, Home Equity Loans, Home Improvement Contracts and
Manufactured Housing Contracts.
GENERAL; TRUST ASSETS SECURED BY MORTGAGES ON MORTGAGED PROPERTY
The Revolving Credit Loans and Home Equity Loans will and, if applicable,
Contracts (in each case other than Cooperative Loans) may be secured by either
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, and may have first, second or third priority. Mortgages and deeds to
secure debt are herein referred to as "mortgages." Manufactured Housing
Contracts evidence both the obligation of the obligor to repay the loan
evidenced thereby and grant a security interest in the related Manufactured
Homes to secure repayment of such loan. However, as Manufactured Homes have
become larger and often have been attached to their sites without any apparent
intention by the borrowers to move them, courts in many states have held that
Manufactured Homes may, under certain circumstances become subject to real
estate title and recording laws. See "--Manufactured Housing Contracts" below.
In some states, a mortgage or deed of trust creates a lien upon the real
property encumbered by the mortgage or deed of trust. However, in other
states, the mortgage or deed of trust conveys legal title to the property
respectively, to the mortgagee or to a trustee for the benefit of the
mortgagee subject to a condition subsequent (i.e., the payment of the
indebtedness secured thereby). The lien created by the mortgage or deed of
trust is not prior to the lien for real estate taxes and assessments and other
charges imposed under governmental police powers. Priority between mortgages
depends on their terms or on the terms of separate subordination or inter-
creditor agreements, the knowledge of the parties in some cases and generally
on the order of recordation of the mortgage in the appropriate recording
office. There are two parties to a mortgage, the mortgagor, who is the
borrower and homeowner, and the mortgagee, who is the lender. Under the
mortgage instrument, the
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mortgagor delivers to the mortgagee a note or bond and the mortgage. In the
case of a land trust, there are three parties because title to the property is
held by a land trustee under a land trust agreement of which the borrower is
the beneficiary; at origination of a mortgage loan, the borrower executes a
separate undertaking to make payments on the mortgage note. Although a deed of
trust is similar to a mortgage, a deed of trust has three parties: the trustor
who is the borrower-homeowner; the beneficiary who is the lender; and a third-
party grantee called the trustee. Under a deed of trust, the borrower grants
the property, irrevocably until the debt is paid, in trust, generally with a
power of sale, to the trustee to secure payment of the obligation. The
trustee's authority under a deed of trust, the grantee's authority under a
deed to secure debt and the mortgagee's authority under a mortgage are
governed by the law of the state in which the real property is located, the
express provisions of the deed of trust or mortgage, and, in certain deed of
trust transactions, the directions of the beneficiary.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of Notes, the
Revolving Credit Loans, Home Equity Loans and Contracts may include
Cooperative Loans. Each debt instrument (a "COOPERATIVE NOTE") evidencing a
Cooperative Loan will be secured by a security interest in shares issued by
the related corporation (a "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 the shares of the Cooperative, the priority of which will depend on,
among other things, the terms of the particular security agreement as well as
the order of recordation and/or filing of the agreement (or financing
statements related thereto) in the appropriate recording office.
Unless otherwise specified in the related Prospectus Supplement, all
Cooperative buildings relating to the Cooperative Loans are located in the
State of New York. Generally, 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 generally the case, or an underlying lease of the land,
as is the case in some instances, the Cooperative, as mortgagor or lessor, as
the case may be, is also responsible for fulfilling such 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 generally 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 such final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the
land, could lead to termination of the Cooperative's interest in the property
and termination of all proprietary leases and occupancy agreements. In either
event, a foreclosure by the holder of an underlying mortgage or the
termination of the underlying lease could eliminate or significantly diminish
the value of any collateral held by the mortgagee who financed the purchase by
an individual tenant-stockholder of shares of the Cooperative or, in the case
of the Revolving Credit Loans and the Home Equity 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. Generally, a tenant-stockholder of a
Cooperative must make a monthly
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payment to the Cooperative pursuant to the proprietary lease, which payment
represents such 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
mortgagee generally takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the mortgagee's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue
for judgment on the Cooperative Note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares. See "--Foreclosure on Shares of Cooperatives" below.
TAX ASPECTS OF COOPERATIVE OWNERSHIP
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of the
Code of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and certain
real estate taxes allowable as a deduction under Section 216(a) of the Code to
the corporation under Sections 163 and 164 of the Code. In order for a
corporation to qualify under Section 216(b)(1) of the Code for its taxable
year in which such items are allowable as a deduction to the corporation, such
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 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 such section for any particular year. In the event that such 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 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 Code, the likelihood that such a
failure would be permitted to continue over a period of years appears remote.
MANUFACTURED HOUSING CONTRACTS
Except as set forth below, under the laws of most states, manufactured
housing constitutes personal property and is subject to the motor vehicle
registration laws of the state or other jurisdiction in which the unit is
located. In the few states in which certificates of title are not required for
manufactured homes, security interests are perfected by the filing of a
financing statement under Article 9 of the UCC, which has been adopted by all
states. Such financing statements are effective for five years and must be
renewed prior to the end of each five year period. The certificate of title
laws adopted by the majority of states provide that ownership of motor
vehicles and manufactured housing shall be evidenced by a certificate of title
issued by the motor vehicles department (or a similar entity) of such state.
In the states that have enacted certificate of title laws, a security interest
in a unit of manufactured housing, so long as it is not attached to land in so
permanent a fashion as to become a fixture, is generally perfected by the
recording of such interest on the certificate of title to the unit in the
appropriate motor vehicle registration office or by delivery of the required
documents and payment of a fee to such office, depending on state law.
The Master Servicer will be required under the related agreement to effect
such notation or delivery of the required documents and fees, and to obtain
possession of the certificate of title, as appropriate under the laws of the
state in which any Manufactured Home is registered. In the event the Master
Servicer fails, due to clerical errors or otherwise, to effect such notation
or delivery, or files the security interest under the wrong law (for example,
under a motor vehicle title statute rather than under the UCC, in a few
states), the Indenture Trustee may not have a first priority perfected
security interest in the Manufactured Home securing a Manufactured
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Housing Contract. As Manufactured Homes have become larger and often have been
attached to their sites without any apparent intention by the borrowers to
move them, courts in many states have held that Manufactured Homes may, under
certain circumstances, 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
Manufactured 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 file either a "fixture filing" under the
provisions of the UCC or a real estate mortgage under the real estate laws of
the state where the home is located. These filings must be made in the real
estate records office of the county where the home is located. Generally,
Manufactured Housing Contracts will contain provisions prohibiting the obligor
from permanently attaching the Manufactured Home to its site. So long as the
obligor does not violate this agreement, 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 security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to its site, other parties could
obtain an interest in the Manufactured Home that is prior to the security
interest originally retained by the seller and transferred to the Depositor.
The Depositor will assign or cause to be assigned a security interest in the
Manufactured Homes to the Indenture Trustee, on behalf of the Securityholders.
Unless otherwise specified in the related Prospectus Supplement, neither the
Depositor, the Master Servicer nor the Indenture Trustee will amend the
certificates of title to identify the Indenture Trustee, on behalf of the
Securityholders, as the new secured party and, accordingly, the Depositor or
the Seller will continue to be named as the secured party on the certificates
of title relating to the Manufactured Homes. In most states, such assignment
is an effective conveyance of such security interest without amendment of any
lien noted on the related certificate of title and the new secured party
succeeds to the Depositor's rights as the secured party. However, in some
states there exists a risk that, in the absence of an amendment to the
certificate of title, such assignment of the security interest might not be
effective against creditors of the Depositor or Seller.
In the absence of fraud, forgery, permanent affixation of the Manufactured
Home to its site, or administrative error by state recording officials, the
notation of the lien of the Depositor on the certificate of title or delivery
of the required documents and fees would be sufficient to protect the
Indenture Trustee against the rights of subsequent purchasers of a
Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the
Depositor has failed to perfect or cause to be perfected the security interest
assigned to the Trust Fund, such security interest would be subordinate to,
among others, subsequent purchasers for value of such Manufactured Home and
holders of perfected security interests in such Manufactured Home. There also
exists a risk in not identifying the Indenture Trustee, on behalf of the
Securityholders, as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the Indenture Trustee
could be released.
In the event that the owner of a Manufactured Home moves such house to a
state other than the state in which such Manufactured Home initially is
registered, under the laws of most states the perfected security interest in
the Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in the new
state. If the owner were to relocate a Manufactured Home to another state and
re-register the Manufactured Home in such state, and if the Depositor did not
take steps to re-perfect its security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Depositor must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states that provide for notation of lien, the
Depositor would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the
Depositor would have the opportunity to re-perfect its security interest in
the Manufactured Home in the state of relocation. In states that do not
require a certificate of title for registration of a Manufactured Home, re-
registration could defeat perfection. Similarly, when an obligor under a
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manufactured housing conditional sales contract sells a Manufactured Home, the
obligee must surrender possession of the certificate of title or it will
receive notice as a result of its lien noted thereon and accordingly will have
an opportunity to require satisfaction of the related manufactured housing
conditional sales contract before release of the lien. Under each related
agreement, the Master Servicer will be obligated to take such steps, at the
Master Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a Manufactured
Home take priority even over a prior perfected security interest therein. The
Depositor will obtain the representation of the Seller that it has no
knowledge of any such liens with respect to any Manufactured Home securing a
Manufactured Housing Contract. However, such liens could arise at any time
during the term of a Manufactured Housing Contract. No notice will be given to
the Indenture Trustee or Noteholders in the event such a lien arises.
FORECLOSURE ON REVOLVING CREDIT LOANS, HOME EQUITY LOANS AND CERTAIN CONTRACTS
Although a deed of trust may also be foreclosed by judicial action,
foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property upon any default by the borrower
under the terms of the note or deed of trust. In addition to any notice
requirements contained in a deed of trust, in some states, prior to a sale the
trustee must record a notice of default and send a copy to the
borrower/trustor and to any person who has recorded a request for a copy of
notice of default and notice of sale. In addition, in some states, prior to
such sale, the trustee must provide notice to any other individual having an
interest of record in the real property, including any junior lienholders. If
the deed of trust is not reinstated within a specified period, a notice of
sale must be posted in a public place and, in most states, published for a
specific period of time in one or more newspapers in a specified manner prior
to the date of trustee's sale. 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.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
Foreclosure of a mortgage generally is accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in
completion of the foreclosure may occasionally result from difficulties in
locating necessary parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be time
consuming.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is generally
a public sale. However, because of the difficulty a potential third-party
buyer at the sale might have in determining the exact status of title, and
because the physical condition of the property may have deteriorated during
the foreclosure proceedings, it is uncommon for a third party to purchase the
property at a foreclosure sale. Rather, it is common for the lender to
purchase the property from the trustee or referee for a credit bid less than
or equal to the unpaid principal amount of note plus the 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 in order to preserve its right against a borrower to seek a deficiency
judgment and such 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 such repairs at its own expense as are
necessary to render the property suitable for sale. Generally, the lender will
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions,
the ultimate
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proceeds of the sale of the property may not equal the lender's investment in
the property and, in some states, the lender may be entitled to a deficiency
judgment. Any loss may be reduced by the receipt of any mortgage insurance
proceeds or other forms of credit enhancement for a series of Notes. See
"Description of Credit Enhancement."
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case
it must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure by a junior
mortgagee triggers the enforcement of a "due-on-sale" clause in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees to avoid foreclosure. Accordingly,
with respect to those Trust Assets which are junior mortgage loans, if the
lender purchases the property, the lender's title will be subject to all
senior liens and claims and certain governmental liens. The proceeds received
by the referee or trustee from the sale are applied first to the costs, fees
and expenses of sale and then in satisfaction of the indebtedness secured by
the mortgage or deed of trust under which the sale was conducted. Any
remaining proceeds are generally payable to the holders of junior mortgages or
deeds of trust and other liens and claims in order of their priority, whether
or not the borrower is in default. Any additional proceeds are generally
payable to the mortgagor or trustor. The payment of the proceeds to the
holders of junior mortgages may occur in the foreclosure action of the senior
mortgagee or may require the institution of separate legal proceedings. See
"Risk Factors--Special Features of Certain Trust Assets Secured by Junior
Liens on Mortgaged Properties" and "Servicing of Trust Assets--Realization
Upon Defaulted Loans" herein.
FORECLOSURE ON SHARES OF COOPERATIVES
The Cooperative shares owned by the tenant-stockholder, together with the
rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged,
may be cancelled by the Cooperative for failure by the tenant-stockholder to
pay its obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the Cooperative's building incurred by such tenant-
stockholder. Generally, obligations and charges arising under a proprietary
lease or occupancy agreement which are owed to the Cooperative are made liens
upon the shares to which the proprietary lease or occupancy agreement relates.
In addition, the proprietary lease or occupancy agreement generally permits
the Cooperative to terminate such lease or agreement in the event the borrower
defaults in the performance of covenants thereunder. Typically, the lender and
the Cooperative enter into a recognition agreement which, together with any
lender protection provisions contained in the proprietary lease 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, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under such proprietary lease
or occupancy agreement or which have become liens on the shares relating to
the proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the amount realized upon a sale of
the collateral below the outstanding principal balance of the Cooperative Loan
and accrued and unpaid interest thereon.
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Recognition agreements also generally provide that in the event the lender
succeeds to the tenant-shareholder's shares and proprietary lease or occupancy
agreement as the result of realizing upon its collateral for a Cooperative
Loan, the lender must obtain the approval or consent of the board of directors
of the Cooperative as required by the proprietary lease before transferring
the Cooperative shares or assigning the proprietary lease. Such approval or
consent is usually based on the prospective purchaser's income and net worth,
among other factors, and may significantly reduce the number of potential
purchasers, which could limit the ability of the lender to sell and realize
upon the value of the collateral. Generally, the lender is not limited in any
rights it may have to dispossess the tenant-stockholder.
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.
In New York, foreclosure on the Cooperative shares is accomplished by public
sale in accordance with the provisions of Article 9 of the New York Uniform
Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given
the debtor and the method, manner, time, place and terms of the sale and the
sale price. Generally, a sale conducted according to the usual practice of
banks selling similar collateral in the same area will be considered
reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the Cooperative corporation to
receive sums due under the proprietary lease or occupancy agreement. If there
are proceeds remaining, the lender must account to the tenant-stockholder for
the surplus. Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See "--Anti-
Deficiency Legislation and Other Limitations on Lenders" below.
REPOSSESSION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
Repossession of manufactured housing is governed by state law. A few states
have enacted legislation that requires that the debtor be given an opportunity
to cure its default (typically 30 days to bring the account current) before
repossession can commence. So long as a manufactured home has not become so
attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in
the event of a default by the obligor will generally be governed by the UCC
(except in Louisiana). Article 9 of the UCC provides the statutory framework
for the repossession of manufactured housing units. While the UCC as adopted
by the various states may vary in certain small particulars, the general
repossession procedure established by the UCC is as follows:
(i) Except in those states where the debtor must receive notice of the
right to cure a default, repossession can commence immediately upon default
without prior notice. Repossession may be effected either through self-help
(peaceable retaking without court order), voluntary repossession or through
judicial process (repossession pursuant to court-issued writ of replevin).
The self-help and/or voluntary repossession methods are more commonly
employed, and are accomplished simply by retaking possession of the
manufactured home. In cases in which the debtor objects or raises a defense
to repossession, a court order must be obtained from the appropriate state
court, and the manufactured home must then be repossessed in accordance
with that order. Whether the method employed is self-help, voluntary
repossession or judicial repossession, the repossession can be accomplished
either by an actual physical removal of the manufactured home to a secure
location for refurbishment and resale or by removing the occupants and
their belongings from the manufactured home and maintaining possession of
the manufactured home on the location where the occupants were residing.
Various factors may affect whether the manufactured home is physically
removed or left on location, such as the nature and term of any lease of
the site on which it is
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located and the condition of the unit. In many cases, leaving the
manufactured home on location is preferable, in the event that the home is
already constructed, in order to avoid the cost of removing the structure.
However, in cases where the home is not moved, expenses for site rentals
will usually be incurred.
(ii) Once repossession has been achieved, preparation for the subsequent
sale of the manufactured home can commence. Such disposition may be by
public or private sale provided the method, manner, time, place and terms
of the sale are commercially reasonable.
(iii) Sale proceeds will be applied first to repossession expenses
(including expenses incurred in repossessing, storing, refurbishing and
selling costs) and then to satisfaction of the indebtedness. While some
states impose prohibitions or limitations on deficiency judgments if the
net proceeds from resale do not cover the full amount of the indebtedness,
the remainder may be sought from the debtor in the form of a deficiency
judgment in those states that do not prohibit or limit such judgments. The
deficiency judgment is a personal judgment against the debtor for the
deficiency. Occasionally, after resale of a manufactured home and payment
of all expenses and indebtedness, there is a surplus of funds. In such
event, the UCC requires the party suing for the deficiency judgment to
remit the surplus to the debtor. Because the defaulting owner of a
manufactured home generally has very little capital or income available
following repossession, a deficiency judgment is generally not sought or,
if obtained, will be settled at a significant discount in light of the
defaulting owner's limited financial condition.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors or other parties are
given a statutory period (generally ranging from six months to two years) in
which to redeem the property from the foreclosure sale. In some states,
redemption may occur only upon payment of the entire principal balance of the
loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. In some states, the right to redeem is an equitable right. The
equity of redemption, which is a non-statutory right that must be exercised
prior to a foreclosure sale, 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. 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.
NOTICE OF SALE; REDEMPTION RIGHTS WITH RESPECT TO MANUFACTURED HOMES
While state laws do not usually require notice to be given to debtors prior
to repossession, many states require delivery of a notice of default and
notice of the debtor's right to cure defaults before repossession. The law in
most states also requires that the debtor be given notice of sale prior to the
resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In
some states (including California), statutes limit the right of the
beneficiary or mortgagee to obtain a deficiency judgment against the borrower
following foreclosure. A deficiency judgment is a personal judgment against
the former borrower equal in most cases to the difference between the net
amount realized upon the public sale of the real property and the amount due
to the lender. In the case of a Revolving Credit Loan, Home Equity Loan and a
Contract secured by a property owned by a trust where the Mortgage Note is
executed on behalf of the trust, a deficiency judgment against the trust
following foreclosure or sale under a deed of trust, even if obtainable under
applicable law, may be of little value to the mortgagee or beneficiary if
there are no trust assets against which such deficiency judgment may be
executed. Some state statutes require the beneficiary or mortgagee to exhaust
the security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
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borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, in those states permitting
such election, is that lenders will usually proceed against the security first
rather than bringing a personal action against the borrower.
Finally, in certain other states, statutory provisions limit any deficiency
judgment against the borrower following a foreclosure to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a
beneficiary or mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the judicial sale.
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 certain
circumstances, including circumstances where the disposition of the collateral
(which, in the case of a Cooperative Loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement) was not
conducted in a commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon its collateral
and/or enforce a deficiency judgment. For example, under the federal
bankruptcy law, all actions against the debtor, the debtor's property and any
co-debtor are automatically stayed upon the filing of a bankruptcy petition.
Moreover, a court having federal bankruptcy jurisdiction may permit a debtor
through its Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary
default in respect of a mortgage loan on such debtor's residence by paying
arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule, even though the lender accelerated the
mortgage loan and final judgment of foreclosure had been entered in state
court (provided no sale of the residence had yet occurred) prior to the filing
of the debtor's petition. Some courts with federal bankruptcy jurisdiction
have approved plans, based on the particular facts of the reorganization case,
that effected the curing of a mortgage loan default by permitting the borrower
to pay over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property which is not the principal
residence of the debtor may be modified. These courts have allowed
modifications that include reducing the amount of each monthly payment,
changing the rate of interest, altering the repayment schedule, forgiving all
or a portion of the debt and reducing the lender's security interest to the
value of the residence, thus leaving the lender a general unsecured creditor
for the difference between the value of the residence and the outstanding
balance of the loan. Generally, however, the terms of a mortgage loan secured
only by a mortgage on real property that is the debtor's principal residence
may not be modified pursuant to a plan confirmed pursuant to Chapter 13 except
with respect to mortgage payment arrearages, which may be cured within a
reasonable time period. Courts with federal bankruptcy jurisdiction similarly
may be able to modify the terms of a Cooperative Loan.
Certain tax liens arising under the Code may, in certain circumstances, have
priority over the lien of a mortgage or deed of trust. This may have the
effect of delaying or interfering with the enforcement of rights with respect
to a defaulted Revolving Credit Loan, Home Equity Loan or a Contract. 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.
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The Revolving Credit Loans, Home Equity Loans and Contracts may be subject
to special rules, disclosure requirements and other provisions that were added
to the federal Truth-in-Lending Act by the Home Ownership and Equity
Protection Act of 1994 (such Revolving Credit Loans, Home Equity Loans and
Contracts, "HIGH COST LOANS"), if such Trust Assets were originated on or
after October 1, 1995, are not loans made to finance the purchase of the
mortgaged property and have interest rates or origination costs in excess of
certain prescribed levels. Purchasers or assignees of any High Cost Loan,
including any Trust Fund, could be liable for all claims and subject to all
defenses arising under such provisions that the borrower could assert against
the originator thereof. Remedies available to the borrower include monetary
penalties, as well as recision rights if the appropriate disclosures were not
given as required.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain 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 certain 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. What constitutes sufficient participation
in the management of a property securing a loan or the business of a borrower
to render the exemption unavailable to a lender has been a matter of
interpretation by the courts. CERCLA has been interpreted to impose liability
on a secured party, even absent foreclosure, where the party participated in
the financial management of the borrower's business to a degree indicating a
capacity to influence waste disposal decisions. However, court interpretations
of the secured creditor exemption have been inconsistent. In addition, when
lenders foreclose and thereupon become owners of collateral property, courts
are inconsistent as to whether such ownership renders the secured creditor
exemption unavailable. Other federal and state laws in certain 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. Such cleanup costs may be
substantial. It is possible that such cleanup costs could become a liability
of a Trust Fund and reduce the amounts otherwise payable to the holders of the
related series of Notes. Moreover, certain federal statutes and certain states
by statute impose a lien for any cleanup costs incurred by such state on the
property that is the subject of such cleanup costs (an "ENVIRONMENTAL LIEN").
All subsequent liens on such property generally are subordinated to such 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 such 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. Accordingly, the Company has not
made and will not make such evaluations prior to the origination of the
Secured Contracts. Neither the Company nor any replacement Servicer will be
required by any Agreement to undertake any such evaluations prior to
foreclosure or accepting a deed-in-lieu of foreclosure. The Company does not
make any representations or warranties or assume any liability with respect to
the absence or effect of contaminants on any related real property or any
casualty resulting from the presence or effect of contaminants. However, the
Company will not be obligated to foreclose on related real property or accept
a deed-in-lieu of foreclosure if it knows or reasonably believes that there
are material contaminated conditions on such property. A failure so to
foreclose may reduce the amounts otherwise available to Noteholders of the
related series.
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CONSUMER PROTECTION LAWS WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity
Act, Regulation "B", the Fair Credit Reporting Act and related statutes. These
laws can impose specific statutory liabilities upon creditors who fail to
comply with their provisions. In some cases, this liability may affect an
assignee's ability to enforce the related contract. In addition, certain of
the Contracts may be subject to special rules, disclosure requirements and
other provisions that are applicable to High Cost Loans discussed above.
Manufactured housing contracts often contain provisions requiring the
obligor to pay late charges if payments are not timely made. In certain cases,
federal and state law may specifically limit the amount of late charges that
may be collected. Unless otherwise provided in the related Prospectus
Supplement, under the related agreement, late charges will be retained by the
Master Servicer as additional servicing compensation and any inability to
collect these amounts will not affect payments to Noteholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the
United States. For the most part, courts have upheld the notice provisions of
the UCC and related laws as reasonable or have found that the repossession and
resale by the creditor does not involve sufficient state action to afford
constitutional protection to consumers.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC RULE") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses that the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder.
Most of the Manufactured Housing Contracts in a Trust Fund will be subject
to the requirements of the FTC Rule. Accordingly, the Indenture Trustee, as
holder of the Manufactured Housing Contracts, will be subject to any claims or
defenses that the purchaser of the related Manufactured Home may assert
against the seller of the Manufactured Home, subject to a maximum liability
equal to the amounts paid by the obligor on the Manufactured Housing Contract.
If an obligor is successful in asserting any such claim or defense, and if the
Seller had or should have had knowledge of such claim or defense, the Master
Servicer will have the right to require the Seller to repurchase the
Manufactured Housing Contract because of a breach of its Seller's
representation and warranty that no claims or defenses exist that would affect
the obligor's obligation to make the required payments under the Manufactured
Housing Contract. The Seller would then have the right to require the
originating dealer to repurchase the Manufactured Housing Contract from it and
might also have the right to recover from the dealer any losses suffered by
the Seller with respect to which the dealer would have been primarily liable
to the obligor.
ENFORCEABILITY OF CERTAIN PROVISIONS
The Revolving Credit Loans, Home Equity Loans and, as applicable, Contracts
generally contain due-on-sale clauses. These clauses permit the mortgagee to
accelerate the maturity of the loan if the borrower sells, transfers or
conveys the property without the prior consent of the mortgagee. The
enforceability of these clauses has been the subject of legislation or
litigation in many states, and in some cases the enforceability of these
clauses has been limited or denied. However, the Garn-St Germain Depository
Institutions Act of 1982 (the "GARN-ST GERMAIN ACT"), subject to certain
exceptions, preempts state law that prohibits the enforcement of due-on-sale
clauses and permits lenders to enforce these clauses in accordance with their
terms. 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.
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The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act may not exercise a due-on-
sale clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a
loan pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the
average life of the related Trust Assets and the number of Trust Assets which
may be outstanding until maturity.
Forms of notes and mortgages used by lenders may contain provisions
obligating the borrower to pay a late charge if payments are not timely made,
and in some circumstances may provide for prepayment fees or penalties if the
obligation is paid prior to maturity. In addition to limitations imposed by
FHA Regulations with respect to Contracts partially insured by the FHA
pursuant to Title I, in certain states, there are or may be specific
limitations upon the late charges that a lender may collect from a borrower
for delinquent payments. Certain states also limit the amounts that a lender
may collect from a borrower as an additional charge if the loan is prepaid.
In foreclosure actions, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of its defaults under the loan documents. Examples of
judicial remedies that have been fashioned include judicial requirements that
the lender undertake affirmative and expensive actions to determine the causes
for the borrower's default and the likelihood that the borrower will be able
to reinstate the loan. In some cases, courts have required that lenders
reinstate loans or recast payment schedules in order to accommodate borrowers
who are suffering from temporary financial disability. In other cases, courts
have limited the right of the lender to foreclose if the default under the
mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second mortgage
or deed of trust affecting the property. Finally, some courts have been faced
with the issue of whether or not federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers
under deeds of trust or mortgages receive notices in addition to the
statutorily prescribed minimum. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that the sale by a trustee
under a deed of trust or under a mortgage having a power of sale, does not
involve sufficient state action to afford constitutional protections to the
borrower.
TRANSFER OF MANUFACTURED HOMES
Generally, Manufactured Housing Contracts contain provisions prohibiting the
sale or transfer of the related manufactured homes without the consent of the
obligee on the contract and permitting the acceleration of the maturity of
such contracts by the obligee on the contract upon any such sale or transfer
to which consent has not been given. Unless otherwise provided in the related
Prospectus Supplement, the Master Servicer will, to the extent it has
knowledge of such conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of the related Manufactured
Housing Contracts through enforcement of due-on-sale clauses, subject to
applicable state law. In certain cases, the transfer may be made by a
delinquent obligor in order to avoid a repossession proceeding with respect to
a Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the
Master Servicer's ability to do so will depend on the enforceability under
state law of the related 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.
Consequently, in some cases the Master Servicer may be prohibited from
enforcing a due-on-sale clause in respect of certain Manufactured Homes.
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THE HOME IMPROVEMENT CONTRACTS
General
The Home Improvement Contracts, other than those Home Improvement Contracts
that are unsecured or secured by mortgages on real estate (such Home
Improvement Contracts are hereinafter referred to in this section as
"contracts") generally are "chattel paper" or constitute "purchase money
security interests" each as defined in the UCC. Pursuant to the UCC, the sale
of chattel paper is treated in a manner similar to perfection of a security
interest in chattel paper. Under the related agreement, the Depositor will
transfer physical possession of the contracts to the Indenture Trustee or a
designated custodian or may retain possession of the contracts as custodian
for the Indenture Trustee. In addition, the Depositor will make an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the Indenture Trustee's ownership of the contracts. Unless otherwise
specified in the related Prospectus Supplement, the contracts will not be
stamped or otherwise marked to reflect their assignment from the Depositor to
the Indenture Trustee. Therefore, if through negligence, fraud or otherwise, a
subsequent purchaser were able to take physical possession of the contracts
without notice of such assignment, the Indenture Trustee's interest in the
contracts could be defeated.
Security Interests in Home Improvements
The contracts that are secured by the Home Improvements financed thereby
grant to the originator of such contracts a purchase money security interest
in such Home Improvements to secure all or part of the purchase price of such
Home Improvements and related services. A financing statement generally is not
required to be filed to perfect a purchase money security interest in consumer
goods. Such purchase money security interests are assignable. In general, a
purchase money security interest grants to the holder a security interest that
has priority over a conflicting security interest in the same collateral and
the proceeds of such collateral. However, to the extent that the collateral
subject to a purchase money security interest becomes a fixture, in order for
the related purchase money security interest to take priority over a
conflicting interest in the fixture, the holder's interest in such Home
Improvement must generally be perfected by a timely fixture filing. In
general, under the UCC, a security interest does not exist under the UCC in
ordinary building material incorporated into an improvement on land. Home
Improvement Contracts that finance lumber, bricks, other types of ordinary
building material or other goods that are deemed to lose such
characterization, upon incorporation of such materials into the related
property, will not be secured by a purchase money security interest in the
Home Improvement being financed.
Enforcement of Security Interest in Home Improvements
So long as the Home Improvement has not become subject to the real estate
law, a creditor can repossess a Home Improvement securing a contract by
voluntary surrender, "self-help" repossession that is "peaceful" (i.e.,
without breach of the peace) or, in the absence of voluntary surrender and the
ability to repossess without breach of the peace, judicial process. The holder
of a contract must give the debtor a number of days' notice, which varies from
10 to 30 days or more depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states restrict
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states
also requires that the debtor be given notice of any sale prior to resale of
the related property so that the debtor may redeem it at or before such
resale.
Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equity principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
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Consumer Protection Laws
The FTC Rule is intended to defeat the ability of the transferor of a
consumer credit contract that is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
that the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a contract; however, the obligor also
may be able to assert the rule to set off remaining amounts due as a defense
against a claim brought by the Indenture Trustee against such obligor.
Numerous other federal and state consumer protections laws impose requirements
applicable to the origination and lending pursuant to the contracts, including
the Truth in Lending Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act,
the Fair Debt Collection Practices Act and the Uniform Consumer Credit Code.
In the case of some of these laws, the failure to comply with their provisions
may affect the enforceability of the related contract.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980 ("TITLE V") provides that, subject to the following conditions, state
usury limitations shall not apply to any contract that is secured by a first
lien on certain kinds of consumer goods. The contracts would be covered if
they satisfy certain conditions, among other things, governing the terms of
any prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of the related
unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V.
Title V also provides that, subject to the following conditions, state usury
limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of or
foreclosure with respect to the related unit. Title V authorized any state to
reimpose limitations on interest rates and finance charges by adopting before
April 1, 1983 a law or constitutional provision which expressly rejects
application of the federal law. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where Title V was not so rejected,
any state is authorized by the law to adopt a provision limiting discount
points or other charges on loans covered by Title V. In any state in which
application of Title V was expressly rejected or a provision limiting discount
points or other charges has been adopted, no contract that imposes finance
charges or provides for discount points or charges in excess of permitted
levels has been included in the Trust Fund.
Installment Contracts
The Trust Assets may also consist of installment sales contracts. Under an
installment contract ("INSTALLMENT CONTRACT") the seller (hereinafter referred
to in this section as the "lender") retains legal title to the property and
enters into an agreement with the purchaser (hereinafter referred to in this
section as the "borrower") for the payment of the purchase price, plus
interest, over the term of such contract. Only after full performance by the
borrower of the Installment Contract is the lender obligated to convey title
to the property to the purchaser. As with mortgage or deed of trust financing,
during the effective period of the Installment Contract, the borrower is
generally responsible for maintaining the property in good condition and for
paying real estate taxes, assessments and hazard insurance premiums associated
with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
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contract strictly according to its terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his
or her right to occupy the property, the entire indebtedness is accelerated
and the buyer's equitable interest in the property is forfeited. The lender in
such a situation is not required to foreclose in order to obtain title to the
property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the
borrower may be granted some grace period during which the Installment
Contract may be reinstated upon full payment of the defaulted amount and the
borrower may have a post-foreclosure statutory redemption right. In other
states, courts in equity may permit a borrower with significant investment in
the property under an Installment Contract for the sale of real estate to
share in the proceeds of sale of the property after the indebtedness is repaid
or may otherwise refuse to enforce the forfeiture clause. Nevertheless, the
lender's procedures for obtaining possession and clear title under an
Installment Contract in a given state are simpler and less time consuming and
costly than are the procedures for foreclosing and obtaining clear title to a
property subject to one or more liens.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980 ("TITLE V"), provides that state usury limitations shall not apply to
certain types of residential first mortgage loans, including cooperative loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of
Title V. The statute authorized any state to impose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. In addition, even where
Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered
by Title V. Certain states have taken action to reimpose interest rate limits
or to limit discount points or other charges.
Usury limits apply to junior mortgage loans in many states. Any applicable
usury limits in effect at origination will be reflected in the maximum
Mortgage Rates for the Trust Assets, as set forth in the related Prospectus
Supplement.
Unless otherwise set forth in the related Prospectus Supplement, each Seller
of a Revolving Credit Loan, Home Equity Loan and a Contract will have
represented that such Revolving Credit Loan, Home Equity Loan or Contract was
originated in compliance with then applicable state laws, including usury
laws, in all material respects. However, the Mortgage Rates on the Revolving
Credit Loans and the Home Equity 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 adjustable rate cooperative loans, and early ownership mortgage loans,
originated by non-federally chartered lenders have historically been subjected
to a variety of restrictions. Such restrictions differed from state to state,
resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act ("TITLE
VIII"). Title VIII provides that, notwithstanding any state law to the
contrary, (i) state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the Comptroller of
the Currency with respect to the origination of alternative mortgage
instruments by national banks, (ii) state-chartered credit unions may
originate alternative mortgage instruments in accordance with regulations
promulgated by the National Credit Union Administration with
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respect to origination of alternative mortgage instruments by federal credit
unions and (iii) all other non-federally chartered housing creditors,
including state-chartered savings and loan associations, state-chartered
savings banks and mutual savings banks and mortgage banking companies, may
originate alternative mortgage instruments in accordance with the regulations
promulgated by the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, with respect to origination of alternative mortgage
instruments by federal savings and loan associations. Title VIII also provides
that any state may reject applicability of the provisions of Title VIII by
adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
FORMALDEHYDE LITIGATION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as
plywood flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts and
related persons in the distribution process. The Depositor is aware of a
limited number of cases in which plaintiffs have won judgments in these
lawsuits.
Under the FTC Rule, which is described above under "--Consumer Protection
Laws" and "Consumer Protection Laws with Respect to Manufactured Housing
Contracts", the holder of any Contract secured by a Manufactured Home with
respect to which a formaldehyde claim has been successfully asserted may be
liable to the obligor for the amount paid by the obligor on the related
Contract and may be unable to collect amounts still due under the Contract.
The successful assertion of such claim constitutes a breach of a
representation or warranty of the Seller, and the related Trust Fund would
suffer a loss only to the extent that (i) the Seller breached its obligation
to repurchase the Contract in the event an obligor is successful in asserting
such a claim, and (ii) the Seller, the Depositor or the Indenture Trustee were
unsuccessful in asserting any claim of contribution or subrogation on behalf
of the Noteholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of Manufactured Homes
may not cover liabilities arising from formaldehyde in manufactured housing,
with the result that recoveries from such manufacturers, suppliers or other
persons may be limited to their corporate assets without the benefit of
insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "RELIEF ACT"), a Mortgagor who enters military service after the
origination of such Mortgagor's Revolving Credit Loan, Home Equity Loan and
certain Contracts (including a Mortgagor who was in reserve status and is
called to active duty after origination of the Revolving Credit Loan, Home
Equity Loan and certain Contracts) may not be charged interest (including fees
and charges) above an annual rate of 6% during the period of such Mortgagor's
active duty status, unless a court orders otherwise upon application of the
lender. The Relief Act applies to Mortgagors who are members of the Air Force,
Army, Marines, Navy, National Guard, Reserves, Coast Guard, and officers of
the U.S. Public Health Service assigned to duty with the military. Because the
Relief Act applies to Mortgagors who enter military service (including
reservists who are called to active duty) after origination of the related
Revolving Credit Loan, Home Equity Loan and related Contract, no information
can be provided as to the number of loans that may be affected by the Relief
Act. Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of the Master Servicer to collect
full amounts of interest on certain of the Revolving Credit Loans, Home Equity
Loans and Contracts. 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 Revolving Credit Loans, Home Equity
Loans and Contracts, would result in a reduction of the amounts payable to the
holders of the related Notes, and may not be covered by the applicable form of
credit enhancement provided in connection with the related series of Notes. In
addition, the Relief Act imposes limitations that would impair the ability of
the Master Servicer to foreclose on an affected Revolving Credit Loan, Home
Equity Loan or Contract during the Mortgagor's period of active duty status,
and, under certain
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circumstances, during an additional three month period thereafter. Thus, in
the event that the Relief Act or similar legislation or regulations applies to
any Revolving Credit Loan, Home Equity Loan and Contract which goes into
default, there may be delays in payment and losses on the related Notes in
connection therewith. Any other interest shortfalls, deferrals or forgiveness
of payments on the Revolving Credit Loans, Home Equity Loans and Contracts
resulting from similar legislation or regulations may result in delays in
payments or losses to Noteholders of the related series.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of drug-
related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the
"CRIME CONTROL ACT"), the government may seize the property even before
conviction. The government must publish notice of the forfeiture proceeding
and may give notice to all parties "known to have an alleged interest in the
property," including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at
the time of execution of the mortgage, "reasonably without cause to believe"
that the property was used in, or purchased with the proceeds of, illegal drug
or RICO activities.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
The Revolving Credit Loans, Home Equity Loans, certain Contracts or certain
Private Securities included in the Trust Fund for a series will be secured by
mortgages or deeds of trust which generally will be junior to other mortgages
or deeds of trust held by other lenders or institutional investors. The rights
of the Trust Fund (and therefore the Noteholders), 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 Revolving
Credit Loan, Home Equity Loan or Contract to be sold upon default of the
mortgagor, which may extinguish the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, in certain cases, either reinitiates or satisfies the
defaulted senior loan or loans. A junior mortgagee may satisfy a defaulted
senior loan in full or, in some states, may cure such default and bring the
senior loan current thereby reinstating the senior loan, in either event
usually adding the amounts expended to the balance due on the junior loan. In
most states, absent a provision in the mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee. Where applicable law or
the terms of the senior mortgage or deed of trust do not require notice of
default to the junior mortgagee, the lack of any such notice may prevent the
junior mortgagee from exercising any right to reinstate the loan which
applicable law may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply such proceeds and
awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event
the property is taken by condemnation, the mortgagee or beneficiary under
underlying senior mortgages will have the prior right to collect any insurance
proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the senior mortgages. Proceeds in excess of the amount of senior
mortgage indebtedness, in most cases, may be applied to the indebtedness of
junior mortgages in the order of their priority. Another provision sometimes
found in the form of the mortgage or deed of trust used by institutional
lenders obligates the mortgagor to pay before delinquency all taxes and
assessments on the property and, when due, all encumbrances, charges and liens
on the property which are prior to the mortgage or deed of trust, to provide
and maintain fire insurance on the property, to
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maintain and repair the property and not to commit or permit any waste
thereof, and to appear in and defend any action or proceeding purporting to
affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee or
beneficiary is given the right under certain mortgages or deeds of trust to
perform the obligation itself, at its election, with the mortgagor agreeing to
reimburse the mortgagee for any sums expended by the mortgagee on behalf of
the mortgagor. All sums so expended by a senior mortgagee become part of the
indebtedness secured by the senior mortgage.
The form of credit line trust deed or mortgage used by most institutional
lenders which make Revolving Credit Loans typically contains a "future
advance" clause, which provides, in essence, that additional amounts advanced
to or on behalf of the borrower by the beneficiary or lender are to be secured
by the deed of trust or mortgage. The priority of the lien securing any
advance made under the clause may depend in most states on whether the deed of
trust or mortgage is designated as a credit line deed of trust or mortgage. If
the beneficiary or lender advances additional amounts, the advance is entitled
to receive the same priority as amounts initially advanced under the trust
deed or mortgage, notwithstanding the fact that there may be junior trust
deeds or mortgages and other liens which intervene between the date of
recording of the trust deed or mortgage and the date of the future advance,
and notwithstanding that the beneficiary or lender had actual knowledge of
such intervening junior trust deeds or mortgages and other liens at the time
of the advance. In most states, the trust deed or mortgage lien securing
mortgage loans of the type which includes Revolving Credit Loans applies
retroactively to the date of the original recording of the trust deed or
mortgage, provided that the total amount of advances under the Credit Limit
does not exceed the maximum specified principal amount of the recorded trust
deed or mortgage, except as to advances made after receipt by the lender of a
written notice of lien from a judgment lien creditor of the trustor.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of certain anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Notes offered hereunder. This discussion has been prepared with the advice
of Thacher Proffitt & Wood and Orrick, Herrington & Sutcliffe LLP, counsel to
the Company. This discussion is directed solely to Noteholders that hold the
Notes as capital assets within the meaning of Section 1221 of the Code and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as
banks, insurance companies and foreign investors) may be subject to special
rules. Further, 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 should be aware that under applicable Treasury regulations a
provider of advice on specific issues of law is not considered an income tax
return preparer unless the advice (i) is given with respect to events that
have occurred at the time the advice is rendered and is not given with respect
to the consequences of contemplated actions, and (ii) is directly relevant to
the determination of an entry on a tax return. Accordingly, taxpayers should
consult their tax advisors and tax return preparers regarding the preparation
of any item on a tax return, even where the anticipated tax treatment has been
discussed herein. In addition to the federal income tax consequences described
herein, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the Notes.
See "State and Other Tax Consequences." Noteholders 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 Notes
offered hereunder.
Upon the issuance of the Notes, Thacher Proffitt & Wood or Orrick,
Herrington & Sutcliffe LLP ("TAX COUNSEL"), counsel to the Company, will
deliver its opinion generally to the effect that, for federal income tax
purposes, assuming compliance with all provisions of the Indenture, Trust
Agreement and certain related documents, (i) the Notes will be treated as
indebtedness and (ii) the Issuer, as created pursuant to the terms and
conditions of the Trust Agreement, will not be characterized as an association
(or publicly traded partnership within the meaning of Code section 7704)
taxable as a corporation or as a taxable mortgage pool within the
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meaning of Code section 7701(i). The following discussion is based in part
upon the rules governing original issue discount that are set forth in Code
sections 1271-1273 and 1275 and in the Treasury regulations issued thereunder
(the "OID REGULATIONS"). The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, securities such as the Notes. For purposes of this tax discussion,
references to a "Noteholder" or a "holder" are to the beneficial owner of a
Note.
Status as Real Property Loans
(i) Notes held by a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Code section 7701(a)(19)(C)(v); and (ii) Notes held by a real
estate investment trust will not constitute "real estate assets" within the
meaning of Code section 856(c)(5)(A) and interest on Notes will not be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Code section 856(c)(3)(B).
Original Issue Discount
The Notes are not expected to be considered issued with original issue
discount since the principal amount of the Notes will not exceed their issue
price by more than a de minimis amount. The stated interest thereon will be
taxable to a Noteholder as ordinary interest income when received or accrued
in accordance with such Noteholder's method of tax accounting. Under the OID
Regulations, a holder of a Note issued with a de minimis amount of original
issue discount must include such discount in income, on a pro rata basis, as
principal payments are made on the Note.
The original issue discount, if any, on a Note would be the excess of its
stated redemption price at maturity over its issue price. The issue price of a
particular class of Notes will be the first cash price at which a substantial
amount of Notes of that class is sold (excluding sales to bond houses, brokers
and underwriters) on the date of their initial issuance (the "CLOSING DATE").
Under the OID Regulations, the stated redemption price of a Note is equal to
the total of all payments to be made on such Note other than "qualified stated
interest." "Qualified stated interest" includes interest that is
unconditionally payable at least annually at a single fixed rate, or in the
case of a variable rate debt instrument, at a "qualified floating rate," an
"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate," or a
combination of "qualified floating rates" that generally does not operate in a
manner that accelerates or defers interest payments on such Note.
In the case of Notes bearing adjustable interest rates, the determination of
the total amount of original issue discount and the timing of the inclusion
thereof will vary according to the characteristics of such Notes. In general
terms original issue discount is accrued by treating the interest rate of the
Notes as fixed and making adjustments to reflect actual interest rate
adjustments.
Certain classes of the Notes may provide for the first interest payment with
respect to such Notes 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 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 Note and accounted for as original issue discount.
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 Note will reflect such
accrued interest. In such cases, information returns to the Noteholders 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 purchase price of such Note (and not as
a separate asset the purchase price 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
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the number of days from the Closing Date to the first Distribution Date should
be included in the stated redemption price of such Note. However, the OID
Regulations state that all or some portion of such accrued interest may be
treated as a separate asset the cost of which is recovered entirely out of
interest paid on the first Distribution Date. It is unclear how an election to
do so would be made under the OID Regulations and whether such an election
could be made unilaterally by a Noteholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a Note will be considered to be de minimis if it is less
than 0.25% of the stated redemption price of the Note multiplied by its
weighted average maturity. For this purpose, the weighted average maturity of
the Note is computed as the sum of the amounts determined, as to each payment
included in the stated redemption price of such Note, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (possibly taking into account a
prepayment assumption) by (ii) a fraction, the numerator of which is the
amount of the payment, and the denominator of which is the stated redemption
price at maturity of such Note. Under the OID Regulations, original issue
discount of only a de minimis amount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated
principal is made, based on the product of the total amount of such de minimis
original issue discount and a fraction, the numerator of which is the amount
of such principal payment and the denominator of which is the outstanding
stated principal amount of the Note. The OID Regulations also would permit a
Noteholder to elect to accrue de minimis original issue discount into income
currently based on a constant yield method. See "--Market Discount" for a
description of such election under the OID Regulations.
If original issue discount on a Note is in excess of a de minimis amount,
the holder of such Certificate must include in ordinary gross income the sum
of the "daily portions" of original issue discount for each day during its
taxable year on which it held such Note, including the purchase date but
excluding the disposition date. In the case of an original holder of a Note,
the daily portions of original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the related
Prospectus Supplement, each period that ends on a date that corresponds to the
day prior to each Distribution Date and begins on the first day following the
immediately preceding accrual period (or in the case of the first such period,
begins on the Closing Date), a calculation will be made of the portion of the
original issue discount that accrued during such accrual period. The portion
of original issue discount that accrues in any accrual period will equal the
excess, if any, of (i) the sum of (A) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the Note,
if any, in future periods and (B) the distributions made on such Note during
the accrual period of amounts included in the stated redemption price, over
(ii) the adjusted issue price of such Note at the beginning of the accrual
period. The present value of the remaining distributions referred to in the
preceding sentence will be calculated using a discount rate equal to the
original yield to maturity of the Notes, and possibly assuming that
distributions on the Note will be received in future periods based on the
Trust Assets being prepaid at a rate equal to a prepayment assumption. For
these purposes, the original yield to maturity of the Note would be calculated
based on its issue price and possibly assuming that distributions on the Note
will be made in all accrual periods based on the Trust Assets being prepaid at
a rate equal to a prepayment assumption. The adjusted issue price of a Note at
the beginning of any accrual period will equal the issue price of such Note,
increased by the aggregate amount of original issue discount that accrued with
respect to such Note in prior accrual periods, and reduced by the amount of
any distributions made on such Note in prior accrual periods of amounts
included in its stated redemption price. The original issue discount accruing
during any accrual period, computed as described above, will be allocated
ratably to each day during the accrual period to determine the daily portion
of original issue discount for such day.
A subsequent purchaser of a Note that purchases such Note at a price
(excluding any portion of such price attributable to accrued qualified stated
interest) less than its remaining stated redemption price will also be
required to include in gross income the daily portions of any original issue
discount with respect to such Note. However, each such daily portion will be
reduced, if such cost is in excess of its "adjusted issue price," in
proportion to the ratio such excess bears to the aggregate original issue
discount remaining to be accrued on
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such Note. The adjusted issue price of a Note on any given day equals the sum
of (i) the adjusted issue price (or, in the case of the first accrual period,
the issue price) of such Note at the beginning of the accrual period which
includes such day and (ii) the daily portions of original issue discount for
all days during such accrual period prior to such day.
Market Discount
A Noteholder that purchases a Note at a market discount, that is, assuming
the Note is issued without original issue discount, at a purchase price less
than its remaining stated principal amount, will recognize gain upon receipt
of each distribution representing stated principal. In particular, under Code
section 1276 such a Noteholder generally will be required to allocate the
portion of each such distribution representing stated principal first to
accrued market discount not previously included in income, and to recognize
ordinary income to that extent. A Noteholder may elect to include market
discount in income currently as it accrues rather than including it on a
deferred basis in accordance with the foregoing. If made, such election will
apply to all market discount bonds acquired by such Noteholder on or after the
first day of the first taxable year to which such election applies. In
addition, the OID Regulations permit a Noteholder to elect to accrue all
interest, discount (including de minimis market or original issue discount)
and premium in income as interest, based on a constant yield method. If such
an election were made with respect to a Note with market discount, the
Noteholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Noteholder acquires during the taxable year of the
election or thereafter, and possibly previously acquired instruments.
Similarly, a Noteholder that made this election for a Note that is acquired at
a premium would be deemed to have made an election to amortize bond premium
with respect to all debt instruments having amortizable bond premium that such
Noteholder owns or acquires. See "--Premium" below. Each of these elections to
accrue interest, discount and premium with respect to a Note on a constant
yield method or as interest would be irrevocable.
However, market discount with respect to a Note will be considered to be de
minimis for purposes Code section 1276 if such market discount is less than
0.25% of the remaining principal amount of such Note multiplied by the number
of complete years to maturity remaining after the date of its purchase. In
interpreting a similar rule with respect to original issue discount on
obligations payable in installments, the OID Regulations refer to the weighted
average maturity of obligations, and it is likely that the same rule will be
applied with respect to market discount, possibly taking into account a
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" above. Such treatment would result in discount being included in
income at a slower rate than discount would be required to be included in
income using the method described above.
Code section 1276(b)(3) 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 legislative history to Code section 1276 (the
"COMMITTEE REPORT") apply. The Committee Report indicates that in each accrual
period market discount on Notes should accrue, at the Noteholder's option: (i)
on the basis of a constant yield method, or (ii) in the case of a Note 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 Notes as of the beginning of the accrual period. Moreover, any prepayment
assumption used in calculating the accrual of original issue discount is also
used in calculating the accrual of market discount. Because the regulations
referred to in this paragraph have not been issued, it is not possible to
predict what effect such regulations might have on the tax treatment of a Note
purchased at a discount in the secondary market. Further, it is uncertain
whether a prepayment assumption would be required to be used for the Notes if
they were issued with original issue discount.
To the extent that Notes 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
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slower than the rate at which such discount would accrue if it were original
issue discount. Moreover, in any event a holder of a Note generally will be
required to treat a portion of any gain on the sale or exchange of such Note
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.
Further, under Code section 1277 a holder of a Note 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 Note purchased with
market discount. For these purposes, the de minimis rule referred to above
applies. Any such deferred interest expense would not exceed the market
discount that accrues during such taxable year and is, in general, allowed as
a deduction not later than the year in which such market discount is
includible in income. If such holder elects to include market discount in
income currently as it accrues on all market discount instruments acquired by
such holder in that taxable year or thereafter, the interest deferral rule
described above will not apply.
Premium
If a holder purchases a Note for an amount greater than its remaining
principal amount, such holder will be considered to have purchased such Note
with amortizable bond premium equal in amount to such excess, and may elect to
amortize such premium using a constant yield method over the remaining term of
the Note and to offset interest otherwise to be required to be included in
income in respect of such Note by the premium amortized in such taxable year.
If such an election is made, it will apply to all debt instruments having
amortizable bond premium that the holder owns or subsequently acquires. The
OID Regulations also permit Noteholders to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating the Noteholder as having made the election to amortize premium
generally. See "--Market Discount" above. The Committee Report states that the
same rules that apply to accrual of market discount (which rules may require
use of a prepayment assumption in accruing market discount with respect to
Notes without regard to whether such Notes have original issue discount) would
also apply in amortizing bond premium under Code section 171.
Realized Losses
Under Code section 166, both corporate and noncorporate holders of the Notes
that acquire such Notes 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 Notes become wholly or partially worthless as the result
of one or more realized losses on the Trust Assets. However, it appears that a
noncorporate holder that does not acquire a Note in connection with a trade or
business will not be entitled to deduct a loss under Section 166 of the Code
until such holder's Note becomes wholly worthless (i.e., until its outstanding
principal balance has been reduced to zero) and that the loss will be
characterized as a short-term capital loss.
Each holder of a Note will be required to accrue interest and original issue
discount with respect to such Note, without giving effect to any reductions in
distributions attributable to defaults or delinquencies on the Trust Assets
until it can be established that any such reduction ultimately will not be
recoverable. As a result, the amount of taxable income reported in any period
by the holder of a Note could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a Note
eventually will recognize a loss or reduction in income attributable to
previously accrued and included income that, as the result of a realized loss,
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
Sales of Notes
If a Note is sold, the selling Noteholder will recognize gain or loss equal
to the difference between the amount realized on the sale and its adjusted
basis in the Note. The adjusted basis of a Note generally will equal the cost
of such Note to such Noteholder, increased by the amount of any original issue
discount or market discount previously reported by such Noteholder with
respect to such Note and reduced by any amortized
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premium and any principal payment received by such Noteholder. Except as
provided in the following three paragraphs, any such gain or loss will be
capital gain or loss, provided such Note is held as a capital asset
(generally, property held for investment) within the meaning of Code section
1221. The Code as of the date of this Prospectus provides for a top marginal
tax rate of 39.6% for individuals and a maximum marginal rate for long-term
capital gains of individuals of 28%. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
Gain recognized on the sale of a Note by a seller who purchased such Note at
a market discount will be taxable as ordinary income in an amount not
exceeding the portion of such discount that accrued during the period such
Note was held by such holder, reduced by any market discount included in
income under the rules described above under "--Market Discount" and "--
Premium."
A portion of any gain from the sale of a Note that might otherwise be
capital gain may be treated as ordinary income to the extent that such Note is
held as part of a "conversion transaction" within the meaning of Code section
1258. A conversion transaction generally is one in which the taxpayer has
taken two or more positions in the same or similar property that reduce or
eliminate market risk, if substantially all of the taxpayer's return is
attributable to the time value of the taxpayer's net investment in such
transaction. The amount of gain so realized in a conversion transaction that
is recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment at 120% of
the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion
of interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Backup Withholding
Payments of interest and principal, as well as payments of proceeds from the
sale of Notes, may be subject to the "backup withholding tax" under Section
3406 of the Code at a rate of 31% if recipients of such payments fail to
furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient
would be allowed as a credit against such recipient's federal income tax.
Furthermore, certain penalties may be imposed by the IRS on a recipient of
payments that is required to supply information but that does not do so in the
proper manner.
The Issuer will report to the Holders and to the IRS for each calendar year
the amount of any "reportable payments" during such year and the amount of tax
withheld, if any, with respect to payments on the Notes.
Tax Treatment of Foreign Investors
Interest paid on a Note to a nonresident alien individual, foreign
partnership or foreign corporation that has no connection with the United
States other than holding Notes ("NONRESIDENTS") will normally qualify as
portfolio interest (except where (i) the recipient is a holder, directly or by
attribution, of 10% or more of the capital or profits interest in the Issuer,
or (ii) the recipient is a controlled foreign corporation to which the Issuer
is a related person) and will be exempt from federal income tax. Upon receipt
of appropriate ownership statements, the Issuer normally will be relieved of
obligations to withhold tax from such interest payments. These provisions
supersede the generally applicable provisions of United States law that would
otherwise require the issuer to withhold at a 30% rate (unless such rate were
reduced or eliminated by an applicable tax treaty) on, among other things,
interest and other fixed or determinable, annual or periodic income paid to
Nonresidents. For these purposes a Noteholder may be considered to be related
to the Issuer by holding a Certificate or by having common ownership with any
other holder of a Certificate or any affiliate thereof.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the
state and local tax consequences of the acquisition, ownership, and
disposition of the Notes 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
Notes offered hereunder.
ERISA CONSIDERATIONS
ERISA imposes certain fiduciary responsibility requirements and prohibited
transaction restrictions on employee pension and welfare benefit plans subject
to ERISA ("ERISA PLANS"). Section 4975 of the Code imposes similar prohibited
transaction restrictions on tax-qualified retirement plans described in
Section 401(a) of the Code ("QUALIFIED RETIREMENT PLANS") and on individual
retirement accounts and annuities ("IRAS") described in Section 408 of the
Code (collectively, "TAX-FAVORED PLANS").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), and, if no election has been made under Section
410(d) of the Code, church plans (as defined in Section 3(33) of ERISA), are
not subject to the ERISA requirements discussed herein. Accordingly, assets of
such plans may be invested in Notes without regard to the ERISA considerations
described below, subject to the provisions of applicable federal, state and
local law. Any such plan that is a Qualified Retirement Plan and exempt from
taxation under Sections 401(a) and 501(a) of the Code, however, is subject to
the prohibited transaction rules set forth in Section 503 of the Code.
In addition to imposing general fiduciary responsibility requirements,
including those of investment prudence and diversification and the requirement
that a Plan's investment be made in accordance with the documents governing
the Plan, Section 406 of ERISA and Section 4975 of the Code prohibit a broad
range of transactions involving assets of ERISA Plans and Tax-Favored Plans
(collectively, "PLANS") and persons ("PARTIES IN INTEREST" under ERISA or
"DISQUALIFIED PERSONS" under the Code, collectively, "PARTIES IN INTEREST")
who have certain specified relationships to the Plans, unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to a penalty (or an
excise tax) imposed pursuant to Section 502(i) of ERISA or Section 4975 of the
Code, unless a statutory or administrative exemption is available.
PLAN ASSET REGULATIONS
An investment of the assets of a Plan in Notes may cause the underlying
Trust Assets and other assets included in the Trust Fund to be deemed "Plan
Assets" of such Plan. The U.S. Department of Labor (the "DOL") has promulgated
regulations at 29 C.F.R. Section 2510.3-101 (the "DOL REGULATIONS") defining
the term "Plan Assets" for purposes of applying the general fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions
of ERISA and Section 4975 of the Code. Under the DOL Regulations, generally,
when a Plan acquires an "equity interest" in another entity (such as the Trust
Fund), the underlying assets of that entity may be considered to be Plan
Assets unless certain exceptions apply. Exceptions contained in the DOL
Regulations provide that a Plan's assets will not include an undivided
interest in each asset of an entity in which it makes an equity investment if:
(1) the entity is an operating company; or (2) the equity investment made by
the Plan is either a "publicly-offered security" that is "widely held" (both
as defined in the DOL Regulations) or a security issued by an investment
company registered under the Investment Company Act of 1940, as amended; or
(3) Benefit Plan Investors do not own 25% or more in value of any class of
equity interests issued by the entity. For this purpose, the term "Benefit
Plan Investors" include Plans, as well as any "employee benefit plan" (as
defined in Section 3(3) or ERISA) which is not subject to Title I of ERISA,
such as governmental plans (as defined in Section 3(32) of ERISA), church
plans (as defined in Section 3(33) of
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ERISA) which have not made an election under Section 410(d) of the Code,
foreign plans and any entity whose underlying assets include Plan Assets by
reason of a Plan's investment in the entity. The DOL Regulations provide that
the term "equity interest" means any interest in an entity other than an
instrument which is treated as indebtedness under applicable local law and
which has no "substantial equity features." Because of the factual nature of
certain of the rules governing the applicability of the above-described
exceptions under the DOL Regulations, Plans or persons investing Plan Assets
should not acquire any Note which may be deemed in the respective Prospectus
Supplement to have "substantial equity features" in reliance upon the
availability of any such exception. For purposes of this section "ERISA
Considerations," the term "Plan Assets" or "assets of a Plan" has the meaning
specified in the DOL Regulations and includes an undivided interest in the
underlying assets of certain entities in which a Plan invests.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Fund and cause the Company, the Master
Servicer, any Subservicer, any Administrator, the Indenture Trustee, the Owner
Trustee, the obligor under any credit enhancement mechanism or certain
affiliates thereof to be considered or become Parties in Interest with respect
to an investing Plan (or of a Plan holding an interest in an investing
entity). If so, the acquisition or holding of Notes by or on behalf of the
investing Plan could also give rise to a prohibited transaction under ERISA
and Section 4975 of the Code, unless a statutory or administrative exemption
is available. Notes acquired by a Plan may be assets of that Plan. Under the
DOL Regulations, the Trust Fund, including the Trust Assets and the other
assets held in the Trust Fund, may also be deemed to be assets of each Plan
that acquires Notes. Special caution should be exercised before Plan Assets
are used to acquire a Note in such circumstances, especially if, with respect
to such assets, the Company, the Master Servicer, any Subservicer, any
Administrator, the Indenture Trustee, the Owner Trustee, the obligor under any
credit enhancement mechanism or an affiliate thereof either (i) has investment
discretion with respect to the investment of Plan Assets or (ii) has authority
or responsibility to give (or regularly gives) investment advice with respect
to Plan Assets for a fee pursuant to an agreement or understanding that such
advice will serve as a primary basis for investment decisions with respect to
such Plan Assets.
Any person who has discretionary authority or control with respect to the
management or disposition of Plan Assets and any person who provides
investment advice with respect to such Plan Assets for a fee (in the manner
described above) is a fiduciary of the investing Plan. If the Trust Assets or
other assets in the Trust Fund were to constitute Plan Assets, then any party
exercising management or discretionary control with respect to those Plan
Assets may be deemed to be a Plan "fiduciary," and thus subject to the
fiduciary responsibility requirements of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to any investing
Plan. Therefore, if the Trust Assets and other assets included in the Trust
Fund were to constitute Plan Assets, then the acquisition or holding of Notes
by or on behalf of a Plan or with Plan Assets, as well as the operation of the
Trust Fund, may constitute or involve a prohibited transaction under ERISA and
Section 4975 of the Code, unless a statutory or administrative exemption is
available.
PROHIBITED TRANSACTION EXEMPTIONS
A Plan fiduciary or other Plan Asset investor should consider the
availability of certain 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 the Code, including Prohibited Transaction
Class Exemption ("PTCE") 95-60, regarding transactions by insurance company
general accounts. The respective Prospectus Supplement may contain additional
information regarding the application of PTCE 95-60 or other DOL class
exemptions with respect to the Notes offered thereby.
INSURANCE COMPANY GENERAL ACCOUNTS
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Notes by an insurance company general account, the
Small Business Job Protection Act of 1996 added a new Section 401(c) to ERISA,
which provides certain exemptive relief from the provisions of Part 4 of Title
I of ERISA and Section 4975 of the Code, including the prohibited transaction
restrictions imposed by ERISA and
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the related excise taxes imposed by the Code, for transactions involving an
insurance company general account. Pursuant to Section 401(c) of ERISA, the
DOL is required to issue final regulations ("401(C) REGULATIONS") no later
than December 31, 1997 which are to provide guidance for the purpose of
determining, in cases where insurance policies supported by an insurer's
general account are issued to or for the benefit of a Plan on or before
December 31, 1998, which general account assets constitute Plan Assets.
Section 401(c) of ERISA generally provides that, until the date which is 18
months after the 401(c) Regulations become final, no person shall be subject
to liability under Part 4 of Title I of ERISA and Section 4975 of the Code on
the basis of a claim that the assets of an insurance company general account
constitute Plan Assets, unless (i) as otherwise provided by the Secretary of
Labor in the 401(c) Regulations to prevent avoidance of the regulations or
(ii) an action is brought by the Secretary of Labor for certain breaches of
fiduciary duty which would also constitute a violation of federal or state
criminal law. Any assets of an insurance company general account which support
insurance policies issued to a Plan after December 31, 1998 or issued to Plans
on or before December 31, 1998 for which the insurance company does not comply
with the 401(c) Regulations may be treated as Plan Assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan Assets of any Plan invested
in such separate account. Insurance companies contemplating the investment of
general account assets in the Notes should consult with their legal counsel
with respect to the applicability of Section 401(c) of ERISA, including the
general account's ability to continue to hold the Notes after the date which
is 18 months after the date the 401(c) Regulations become final.
REPRESENTATION FROM PLANS INVESTING IN NOTES WITH "SUBSTANTIAL EQUITY
FEATURES"
If the related Prospectus Supplement provides that any of the Notes being
issued have "substantial equity features" within the meaning of the DOL
Regulations, transfers of such Notes to a Plan, to a trustee or other person
acting on behalf of any Plan, or to any other person using the assets of any
Plan to effect such acquisition will not be registered by the Indenture
Trustee unless the transferee provides the Company, the Indenture Trustee and
the Master Servicer with an opinion of counsel satisfactory to the Company,
the Indenture Trustee and the Master Servicer, which opinion will not be at
the expense of the Company, the Indenture Trustee or the Master Servicer, that
the purchase of such Notes by or on behalf of such Plan is permissible under
applicable law and will not subject the Company, the Indenture Trustee or the
Master Servicer to any obligation in addition to those undertaken in the Trust
Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that (x) the purchase of Notes by or
on behalf of such Plan is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code and will not subject the Company, the Indenture
Trustee or the Master Servicer to any obligation in addition to those
undertaken in the Trust Agreement, and (y) the following statements in at
least one of (i) or (ii) is correct: (i) the transferee is an insurance
company and (a) the source of funds used to purchase such Notes is an
"insurance company general account" (as such term is defined in PTCE 95-60),
(b) the conditions set forth in PTCE 95-60 have been satisfied and (c) there
is no Plan with respect to which the amount of such general account's reserves
and liabilities for contracts held by or on behalf of such Plan and all other
Plans maintained by the same employer (or any "affiliate" thereof, as defined
in PTCE 95-60) or by the same employee organization exceed 10% of the total of
all reserves and liabilities of such general account (as determined under PTCE
95-60) as of the date of the acquisition of such Notes; or (ii) the transferee
is an insurance company and (a) the source of funds used to purchase such
Notes is an insurance company general account, (b) the requirements of
Sections 401(c) of ERISA and the DOL Regulations to be promulgated thereunder
have been satisfied and will continue to be satisfied and (c) the insurance
company represents that it understands that the operation of the general
account after December 31, 1998 may affect its ability to continue to hold the
Notes after the date which is 18 months after the 401(c) Regulations become
final and unless an individual exemption, a class exemption issued by the DOL
or an exception under 401(c) of ERISA is then available for the continued
holding of Notes, if the assets of the general account constitute Plan Assets,
it will dispose of the Notes prior to the date which is 18 months after the
401(c) Regulations become final.
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TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "TAX-EXEMPT INVESTOR") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code.
CONSULTATION WITH COUNSEL
There can be no assurance that any DOL exemption will apply with respect to
any particular Plan that acquires the Notes or, even if all the conditions
specified therein were satisfied, that the exemption would apply to
transactions involving the Trust Fund. Prospective Plan investors should
consult with their legal advisors concerning the impact of ERISA and Section
4975 of the Code and the potential consequences to their specific
circumstances prior to making an investment in the Notes.
Before purchasing a Note in reliance on any DOL exemption or Section 401(c)
of ERISA, a fiduciary of a Plan or other Plan Asset investor should itself
confirm that all of the specific and general conditions set forth in such
exemption or Section 401(c) of ERISA would be satisfied. In addition to making
its own determination as to the availability of the exemptive relief provided
in such exemption, a Plan fiduciary should consider its general fiduciary
obligations under ERISA in determining whether to purchase a Note on behalf of
a Plan.
LEGAL INVESTMENT MATTERS
Each class of Notes offered hereby and by the related Prospectus Supplement
will be rated at the date of issuance in one of the four highest rating
categories by at least one Rating Agency. Unless otherwise specified in the
related Prospectus Supplement, each Class of Notes will evidence an interest
in Trust Assets primarily secured by second or more junior liens, and
therefore will not constitute "mortgage related securities" for purposes of
SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their legal advisors to determine whether and to
what extent the Notes constitute legal investments for them.
All depository institutions considering an investment in the Notes should
review the Federal Financial Institutions Examination Council's Supervisory
Policy Statement on the Selection of Securities Dealers and Unsuitable
Investment Practices (to the extent adopted by their respective regulators),
setting forth, in relevant part, certain investment practices deemed to be
unsuitable for an institution's investment portfolio, as well as guidelines
for investing in certain types of mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits and
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying".
There may be other restrictions on the ability of certain investors either
to purchase certain classes of Notes or to purchase any class of Notes
representing more than a specified percentage of the investors' assets. The
Company will make no representations as to the proper characterization of any
class of Notes for legal investment or other purposes, or as to the ability of
particular investors to purchase any class of Notes under applicable legal
investment restrictions. These uncertainties may adversely affect the
liquidity of any class of Notes. 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 legal advisors in determining whether and to what extent the Notes of
any class constitute legal investments or are subject to investment, capital
or other restrictions.
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USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of Notes
will be applied by the Company to finance the purchase of, or to repay short-
term loans incurred to finance the purchase of, the Trust Assets underlying
the Notes or will be used by the Company for general corporate purposes. The
Company expects that it will make additional sales of securities similar to
the Notes from time to time, but the timing and amount of any such additional
offerings will be dependent upon a number of factors, including the volume of
mortgage loans purchased by the Company, prevailing interest rates,
availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The Notes offered hereby and by the related Prospectus Supplements will be
offered in series through one or more of the methods described below. The
Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the net proceeds to the
Company from such sale.
The Company intends that Notes 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 Notes
may be made through a combination of two or more of these methods. Such
methods are as follows:
1. by negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. by placements by the Company with institutional investors through
dealers; and
3. by direct placements by the Company with institutional investors.
In addition, if specified in the related Prospectus Supplement, a series of
Notes may be offered in whole or in part to the Seller of the related Trust
Assets (and other assets, if applicable) that would comprise the Pool in
respect of such Notes.
If underwriters are used in a sale of any Notes (other than in connection
with an underwriting on a best efforts basis), such Notes will be acquired by
the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at fixed public
offering prices or at varying prices to be determined at the time of sale or
at the time of commitment therefor. Such underwriters may be broker-dealers
affiliated with the Company whose identities and relationships to the Company
will be as set forth in the related Prospectus Supplement. The managing
underwriter or underwriters with respect to the offer and sale of a particular
series of Notes will be set forth on the cover of the Prospectus Supplement
relating to such series and the members of the underwriting syndicate, if any,
will be named in such Prospectus Supplement.
In connection with the sale of the Notes, underwriters may receive
compensation from the Company or from purchasers of the Notes in the form of
discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Notes may be deemed to be underwriters in
connection with such Notes, and any discounts or commissions received by them
from the Company and any profit on the resale of Notes 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 Notes will provide that the obligations of the underwriters will
be subject to certain conditions precedent, that the underwriters will be
obligated to purchase all such Notes if any are purchased (other than in
connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the Company will indemnify the several underwriters and the
underwriters will indemnify the Company against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to distribution required to be made in respect thereof.
85
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The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Company and purchasers of
Notes of such series.
The Company anticipates that the Notes offered hereby will be sold primarily
to institutional investors or sophisticated non-institutional investors.
Purchasers of Notes, including dealers, may, depending on the facts and
circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, as amended, in connection with reoffers
and sales by them of Notes. Holders of Notes should consult with their legal
advisors in this regard prior to any such reoffer or sale.
LEGAL MATTERS
Certain legal matters, including certain federal income tax matters, will be
passed upon for the Company by Thacher Proffitt & Wood, New York, New York, or
by Orrick, Herrington & Sutcliffe LLP, New York, New York, as specified in the
Prospectus Supplement.
FINANCIAL INFORMATION
The Company has determined that its financial statements are not material to
the offering made hereby. The Notes do not represent an interest in or an
obligation of the Company. The Company's only obligations with respect to a
series of Notes will be to repurchase Trust Assets upon any breach of certain
limited representations and warranties made by the Company, or as otherwise
provided in the applicable Prospectus Supplement.
86
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
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<S> <C>
401(c) Regulations......................................................... 83
Account Balance............................................................ 19
Accrual Notes.............................................................. 5
Additional Balance......................................................... 19
Additional Charges......................................................... 19
Administrator.............................................................. 4
Affiliated Sellers......................................................... 16
Agreements................................................................. 50
Audit Guide................................................................ 48
Bankruptcy Loss............................................................ 38
Beneficial Owner........................................................... 28
Book-Entry Notes........................................................... 28
CEDEL...................................................................... 28
CEDEL Participants......................................................... 29
CERCLA..................................................................... 67
Certificates............................................................... 4
Clearance Cooperative...................................................... 29
Closing Date............................................................... 76
CLTV....................................................................... 18
Code....................................................................... 8
Combined Loan-to-Value Ratio............................................... 18
Commission................................................................. 2
Committee Report........................................................... 78
Contracts.................................................................. 1
Cooperative................................................................ 59
Cooperative Loans.......................................................... 16
Cooperative Note........................................................... 59
Cooperative Notes.......................................................... 16
Credit Enhancer............................................................ 39
Credit Line Agreements..................................................... 19
Credit Utilization Rate.................................................... 18
Crime Control Act.......................................................... 74
Custodial Account.......................................................... 32
Custodian.................................................................. 31
Defaulted Loan Loss........................................................ 38
Deleted Loan............................................................... 26
Depositaries............................................................... 28
Designated Seller.......................................................... 17
Designated Seller Transaction.............................................. 17
Determination Date......................................................... 35
Disqualified Persons....................................................... 81
DOL........................................................................ 81
DOL Regulations............................................................ 81
Draw....................................................................... 19
Draw Period................................................................ 19
DTC........................................................................ 28
DTC Participants........................................................... 28
Eligible Account........................................................... 33
Eligible Substitute Loan................................................... 26
Environmental Lien......................................................... 67
</TABLE>
87
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<TABLE>
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<S> <C>
ERISA...................................................................... 8
ERISA Plans................................................................ 81
Euroclear.................................................................. 28
Euroclear Operator......................................................... 29
Euroclear Participants..................................................... 29
Event of Default........................................................... 51
Excess Interest............................................................ 40
Excess Spread.............................................................. 4
Exchange Act............................................................... 2
Excluded Spread............................................................ 4
Extraordinary Losses....................................................... 38
FDIC....................................................................... 24
FHA........................................................................ 1
FHA Claims Administration Agreement........................................ 13
FHA Claims Administrator................................................... 13
FHA Insurance Amount....................................................... 43
FHA Regulations............................................................ 42
FHA Reserve................................................................ 43
Finance Charge............................................................. 19
Financial Guaranty Insurance Policy........................................ 39
Fraud Loss................................................................. 38
FTC Rule................................................................... 68
Funding Account............................................................ 36
Garn-St Germain Act........................................................ 68
GMAC Mortgage.............................................................. 1
Gross Margin............................................................... 19
Guide...................................................................... 21
High Cost Loans............................................................ 67
Holder-in-Due-Course....................................................... 68
Home Equity Loans.......................................................... 1
Home Equity Program........................................................ 21
Home Improvement Contracts................................................. 1
Home Improvements.......................................................... 1
HUD........................................................................ 42
Indenture.................................................................. 1
Indenture Trustee.......................................................... 4
Index...................................................................... 19
Indirect Participants...................................................... 28
Installment Contract....................................................... 71
Insurance Proceeds......................................................... 32
Insurer.................................................................... 39
Interest Rate.............................................................. 5
IRAs....................................................................... 81
Issuer..................................................................... 4
Junior Ratio............................................................... 18
Letter of Credit........................................................... 39
Letter of Credit Bank...................................................... 39
Liquidated Loan............................................................ 47
Liquidation Proceeds....................................................... 32
Manufactured Homes......................................................... 20
Manufactured Housing Contracts............................................. 1
</TABLE>
88
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<TABLE>
<CAPTION>
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<S> <C>
Master Commitments......................................................... 21
Mortgage Notes............................................................. 16
Mortgage Rate.............................................................. 19
Mortgaged Properties....................................................... 5
Mortgagor.................................................................. 10
National Housing Act....................................................... 6
Net Mortgage Rate.......................................................... 54
Nonresidents............................................................... 80
Note Registrar............................................................. 28
Noteholder................................................................. 28
Notes...................................................................... 1
OID Regulations............................................................ 76
Overcollateralization...................................................... 40
Owner Trustee.............................................................. 4
Ownership Interest......................................................... 17
Participants............................................................... 28
Parties in Interest........................................................ 81
Paying Agent............................................................... 34
Payment Account............................................................ 33
Payment Date............................................................... 6
Percentage Interest........................................................ 35
Permitted Investments...................................................... 33
Plan Assets................................................................ 81
Plans...................................................................... 81
Pool....................................................................... 1
Private Securities......................................................... 6
PTCE....................................................................... 82
Purchase Price............................................................. 26
Qualified Insurer.......................................................... 41
Qualified Retirement Plans................................................. 81
Rating Agency.............................................................. 8
Realized Loss.............................................................. 38
Record Date................................................................ 34
Registration Statement..................................................... 2
Relief Act................................................................. 73
REO Loan................................................................... 47
Reserve Fund............................................................... 40
Residential Funding........................................................ 4
Revolving Credit Loans..................................................... 1
RICO....................................................................... 74
Securities................................................................. 1
Securityholders............................................................ 31
Sellers.................................................................... 16
Senior/Subordinate Series.................................................. 27
Servicing Advances......................................................... 34
Servicing Agreement........................................................ 44
Servicing Default.......................................................... 50
Single Note................................................................ 36
SMMEA...................................................................... 8
Special Hazard Loss........................................................ 38
Special Purpose Entity..................................................... 17
</TABLE>
89
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<S> <C>
Spread Account............................................................. 40
Stated Principal Balance................................................... 38
Strip Note................................................................. 5
Subordinate Securities..................................................... 5
Subservicers............................................................... 18
Subservicing Account....................................................... 32
Subservicing Agreement..................................................... 27
Tax Counsel................................................................ 75
Tax-Exempt Investor........................................................ 84
Tax-Favored Plans.......................................................... 81
Terms and Conditions....................................................... 29
Title I.................................................................... 6
Title I Contracts.......................................................... 1
Title I Lenders............................................................ 42
Title I Loans.............................................................. 42
Title V.................................................................... 71
Title VIII................................................................. 72
Transfer Report............................................................ 43
Trust Agreement............................................................ 1
Trust Assets............................................................... 1
Trust Fund................................................................. 1, 4
UBTI....................................................................... 84
UCC........................................................................ 64
Unaffiliated Sellers....................................................... 16
Unsecured Contract......................................................... 14
</TABLE>
90
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO
WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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PROSPECTUS SUPPLEMENT
<S> <C>
Summary.................................................................... S-3
Risk Factors............................................................... S-10
Description of the Mortgage Pool........................................... S-11
Servicing of Revolving Credit Loans........................................ S-21
The 1996-RHS4 LLC.......................................................... S-23
The Issuer................................................................. S-23
The Owner Trustee.......................................................... S-23
The Indenture Trustee...................................................... S-24
The Credit Enhancer........................................................ S-24
Description of the Securities.............................................. S-25
Description of the Policy.................................................. S-34
Certain Yield and Prepayment Considerations................................ S-34
Description of the Designated Seller's Agreement........................... S-38
Description of the Servicing Agreement..................................... S-40
Description of the Trust Agreement and Indenture........................... S-42
Certain Federal Income Tax Consequences.................................... S-44
Erisa Considerations....................................................... S-44
Legal Investment........................................................... S-44
Method of Distribution..................................................... S-44
Experts.................................................................... S-45
Legal Matters.............................................................. S-45
Ratings.................................................................... S-45
Appendix A
PROSPECTUS
Additional Information..................................................... 2
Reports to Noteholders..................................................... 2
Incorporation of Certain Information by Reference.......................... 2
Summary of Prospectus...................................................... 4
Risk Factors............................................................... 10
The Pools.................................................................. 16
Trust Asset Program........................................................ 21
Description of the Notes................................................... 27
Description of Credit Enhancement.......................................... 38
Description of FHA Insurance Under Title I................................. 42
The Company................................................................ 44
Residential Funding Corporation............................................ 44
Servicing of Trust Assets.................................................. 44
The Agreements............................................................. 50
Yield and Prepayment Considerations........................................ 53
Certain Legal Aspects of the Trust Assets and Related Matters.............. 58
Certain Federal Income Tax Consequences.................................... 75
State and Other Tax Consequences........................................... 81
ERISA Considerations....................................................... 81
Legal Investment Matters................................................... 84
Use of Proceeds............................................................ 85
Methods of Distribution.................................................... 85
Legal Matters.............................................................. 86
Financial Information...................................................... 86
Index of Principal Definitions............................................. 87
</TABLE>
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
$116,693,900
HOME EQUITY LOAN-BACKED TERM NOTES, SERIES 1996-RHS4
RESIDENTIAL FUNDING
SECURITIES CORPORATION
PROSPECTUS SUPPLEMENT
DECEMBER 16, 1996
