<PAGE>
RULE NO. 424(b)(3)
REGISTRATION NO. 33-80419
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THESE +
+SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED WITHOUT THE +
+DELIVERY OF A FINAL PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS PROSPECTUS +
+SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO +
+SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF +
+THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD +
+BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUPPLEMENT (Subject to Completion)
(To Prospectus Dated May , 1996) Issued May 20, 1996
$162,077,000
Residential Funding Mortgage Securities II, Inc.
Depositor
HOME EQUITY LOAN TRUST 1996-HS1
Residential Funding Corporation
Master Servicer
HOME EQUITY LOAN-BACKED TERM NOTES, SERIES 1996-HS1
The Home Equity Loan Trust 1996-HS1 (the "Issuer" or the "Trust") will be
formed pursuant to a Trust Agreement to be dated as of May 1, 1996 between
Residential Funding Mortgage Securities II, Inc. (the "Depositor") and
Wilmington Trust Company, the Owner Trustee. The Issuer will issue $162,077,000
aggregate principal amount of Home Equity Loan-Backed Term Notes, Series 1996-
HS1 (the "Term Notes"). The Term Notes will be issued pursuant to an Indenture
to be dated as of May 1, 1996, between the Issuer and The Chase Manhattan Bank,
N.A., 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-
HS1 (the "Variable Funding Notes"). The Issuer will also issue $14,093,768
initial aggregate principal amount of Home Equity Loan-Backed Certificates,
Series 1996-HS1 (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-HS1 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-HS1 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-HS1
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 "Insurer") as described under "The Policy" herein.
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 June 20, 1996 (each, a "Payment Date"). As
described herein, interest will accrue on the Term Notes at a floating rate
(the "Note Rate") during each Interest Period at a rate equal to LIBOR (as
defined herein) plus % per annum, but not more than the Net Loan Rate Cap
(as defined herein). See "Description of the Securities--Interest on the Notes"
herein.
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.
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. Morgan Stanley &
Co. Incorporated, Lehman Brothers Inc. and Residential Funding Securities
Corporation (the "Underwriters") intend to make a secondary market in the Term
Notes, but are 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.
(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-HS1 LLC, THE
MASTER SERVICER, GMAC MORTGAGE 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-HS1 LLC, THE MASTER SERVICER, GMAC
MORTGAGE 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.
----------
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 9.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT THE DEPOSITOR(1)
-------- ------------ ----------------
<S> <C> <C> <C>
Per Term Note............................ % % %
Total.................................... $ $ $
</TABLE>
- -----
(1) Before deducting expenses, estimated to be $ .
The Term Notes are offered by the Underwriters subject to prior sale, when,
as and if delivered to and accepted by the Underwriters and subject to certain
other conditions. The Underwriters reserve 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 May 30, 1996
in book-entry form only through DTC, Cedel and Euroclear as discussed herein,
against payment therefor in immediately available funds.
----------
MORGAN STANLEY & CO. LEHMAN BROTHERS
Incorporated
RESIDENTIAL FUNDING SECURITIES CORPORATION
May , 1996
<PAGE>
(Continued from previous page)
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 MAY , 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 NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT 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.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE TERM NOTES AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET, SUCH
STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-2
<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 UNDERWRITERS. 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>
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Summary.................................................................... S- 4
Risk Factors............................................................... S-10
Description of the Mortgage Pool........................................... S-10
Servicing of Revolving Credit Loans........................................ S-19
The 1996-HS1 LLC........................................................... S-21
The Issuer................................................................. S-21
The Owner Trustee.......................................................... S-22
The Insurer................................................................ S-22
Description of the Securities.............................................. S-23
Description of the Policy.................................................. S-31
Certain Yield and Prepayment Considerations................................ S-31
Description of the Purchase Agreement...................................... S-34
Description of the Servicing Agreement..................................... S-36
Description of the Trust Agreement and Indenture........................... S-37
Certain Federal Income Tax Consequences.................................... S-39
ERISA Considerations....................................................... S-39
Legal Investment........................................................... S-39
Method of Distribution..................................................... S-40
Experts.................................................................... S-40
Legal Matters.............................................................. S-40
Ratings.................................................................... S-41
Appendix A................................................................. S-42
<CAPTION>
PROSPECTUS
<S> <C>
Additional Information..................................................... 2
Reports to Noteholders..................................................... 2
Incorporation of Certain Information by Reference.......................... 2
Summary of Prospectus...................................................... 4
Risk Factors............................................................... 9
The Mortgage Pools......................................................... 13
Revolving Credit Loan Program.............................................. 16
Description of the Notes................................................... 23
Description of Credit Enhancement.......................................... 33
The Company................................................................ 38
Residential Funding Corporation............................................ 38
Servicing of Revolving Credit Loans........................................ 38
The Agreements............................................................. 43
Yield and Prepayment Considerations........................................ 46
Certain Legal Aspects of Revolving Credit Loans And Related Matters........ 51
Certain Federal Income Tax Consequences.................................... 60
State and Other Tax Consequences........................................... 66
ERISA Considerations....................................................... 66
Legal Investment Matters................................................... 67
Use of Proceeds............................................................ 68
Methods of Distribution.................................................... 68
Legal Matters.............................................................. 69
Financial Information...................................................... 69
Index of Principal Definitions............................................. 70
</TABLE>
S-3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the
meanings assigned in the Prospectus.
Issuer.................... The Term Notes will be issued by Home Equity Loan
Trust 1996-HS1, a Delaware business trust
established pursuant to the Trust Agreement, dated
as of May 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............ $162,077,000 Home Equity Loan-Backed Term Notes,
Series 1996-HS1, are offered hereby. The Term Notes
will be issued pursuant to an Indenture, dated as
of May 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........... Residential Funding Corporation (the "Master
Servicer" or "Residential Funding"), an affiliate
of the Depositor. See "Residential Funding
Corporation" in the Prospectus.
Owner Trustee............. Wilmington Trust Company.
Indenture Trustee......... The Chase Manhattan Bank, N.A.
Closing Date.............. On or about May 30, 1996.
Payment Date.............. The 20th day of each month (or, if such day is not
a business day, the next business day), beginning
on June 20, 1996 (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 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 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-HS1 LLC (the "1996-HS1 LLC"),
a limited liability company organized under
applicable state law. Pursuant to the 1996-HS1
LLC's
S-4
<PAGE>
Operating Agreement, the 1996-HS1 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-HS1
LLC, and will be entitled to receive certain
payments with respect to the Mortgage Pool owned by
the 1996-HS1 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 acquired by Residential
Funding pursuant to its Home Equity Program,
originated pursuant to Credit Line Agreements and
secured by Mortgaged Properties. 98.2% 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 May 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 principal balance as of the
Cut-off Date, plus (i) any Additional Balances in
respect of such Revolving Credit Loan conveyed to
the 1996-HS1 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 $176,170,768. The
Combined Loan-to-Value Ratio (as defined herein)
for these Revolving Credit Loans ranged from 9% to
101% and the weighted average Combined Loan-to-
Value Ratio based on the Credit Limits of the
Revolving Credit Loans will be 84.6% as of the Cut-
off Date. The Junior Ratios for the Revolving
Credit Loans ranged from 2.2% to 100%, and the
weighted average Junior Ratio will be 21.3%, as of
the Cut-off Date. The weighted average Credit Limit
Utilization Rate based on the Credit Limits of the
Revolving Credit Loans will be 84.9% as of the Cut-
off Date. The Principal Balances of the Revolving
Credit Loans as of the Cut-off Date ranged from $2
to $311,839 and averaged $34,618. Credit Limits
under the Revolving Credit Loans as of the Cut-off
Date ranged from $10,000 to $315,000 and averaged
$40,783. Each Revolving Credit Loan was originated
in the period from June 1994 to March 1996. With
respect to 70.9% of the Revolving Credit Loans (by
the Cut-off Date Principal Balance), the related
Mortgaged Properties will be located in California.
S-5
<PAGE>
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 June 1996, at the Note
Rate for the related Interest Period (as defined
below). The Note Rate for each Interest Period will
be a floating rate equal to LIBOR plus % per
annum, but not more than the Net Loan Rate Cap, as
described herein under "Description of the
Securities--Interest on the Notes." 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 June 2022, principal payments will be due and
payable on the Term 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
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 June
2022, 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 will
Collections.............. 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-HS1
LLC following an Amortization Event.
S-6
<PAGE>
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.
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 up to the Maximum
Variable Funding Balance at such time (or, in
certain circumstances, an issuance of additional
Certificates), 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-
HS1 LLC. The Revolving Period is the period
commencing on the Closing Date and ending on May
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 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 distribution on the Certificates.
Outstanding Reserve Amount: The Outstanding Reserve
Amount will be created by distributions of the
Special Capital Distribution Amount, 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).
S-7
<PAGE>
As of the Closing Date, the Reserve Amount Target
is equal to 1.5% of the Cut-off Date Balance. The
Reserve Amount Target may decrease from time to
time pursuant to the terms of the Indenture based
on specified trigger tests. 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 Insurer 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. See "Description of the
Policy" herein and "Description of Credit
Enhancement" in the Prospectus.
The Certificates: In the event the Insurer fails to
make a payment required under the Policy in
accordance with its terms or if there is a payment
default on the Notes under the Indenture, 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.
Insurer................... AMBAC Indemnity Corporation. See "The Insurer"
herein.
The Variable Funding Home Equity Loan-Backed Variable Funding Notes,
Notes.................... Series 1996-HS1. 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.......... $14,093,768 initial principal amount of Home Equity
Loan-Backed Certificates, Series 1996-HS1. The
Certificates will be issued pursuant to the Trust
Agreement and will represent fractional undivided
interests in the Issuer. The Certificates are not
offered hereby. Interest on the Certificates will
be paid monthly on each Payment Date, at a 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.
S-8
<PAGE>
Final Payment of
Principal on the Notes...
The Notes will be payable in full on the Payment
Date in June 2022, 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) 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, or
the corresponding effect on yield to investors. See
"Certain Yield and Prepayment Considerations" and
"Ratings" herein.
S-9
<PAGE>
RISK FACTORS
PROSPECTIVE NOTEHOLDERS SHOULD CONSIDER, AMONG OTHER THINGS, THE ITEMS
DISCUSSED UNDER "RISK FACTORS" WHICH BEGINS ON PAGE 9 IN THE PROSPECTUS AND
THE FOLLOWING FACTORS IN CONNECTION WITH THE PURCHASE OF THE TERM NOTES:
RISKS ASSOCIATED WITH THE REVOLVING CREDIT LOANS
Since 98.2% 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, Mortgagors are generally qualified based on
an assumed payment which reflects a rate significantly lower than the maximum
rate and, with respect to the Teaser Loans (as defined herein), the Loan Rate
at origination will be below the rate that would result from the sum of the
then-applicable Index and Gross Margin. 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 and during the
life of such Revolving Credit Loan.
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 Program Sellers, GMAC Mortgage nor any of their affiliates will have any
obligation to replace or supplement such credit enhancement, or to take any
other action to maintain any rating of the 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, approximately 98.2% (by Principal Balance as of the Cut-off Date)
of which 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 the
Principal Balance as of the Cut-off Date.
S-10
<PAGE>
The Cut-off Date Balance of the Revolving Credit Loans will be $176,170,768,
which is equal to the aggregate of the Principal Balances of the Revolving
Credit Loans as of the close of the latest billing cycle ending prior to May
1, 1996 (the "Cut-off Date"). As of the Cut-off Date, no Revolving Credit Loan
will be more than 59 days delinquent. The average Cut-off Date Balance will be
$34,618, the minimum Cut-off Date Balance will be $2, the maximum Cut-off Date
Balance will be $311,839, the lowest Loan Rate and the highest Loan Rate on
the Cut-off Date will be 6.99% and 14.50% per annum, respectively, the
weighted average Loan Rate on the Cut-off Date will be 9.92% per annum and the
maximum Combined Loan-to-Value Ratio as of the Cut-off Date will be 101%. The
weighted average Combined Loan-to-Value Ratio based on the Credit Limits of
the Revolving Credit Loans will be 84.6% as of the Cut-off Date. The weighted
average Credit Limit Utilization Rate based on the Credit Limits of the
Revolving Credit Loans will be 84.9% as of the Cut-off Date. The weighted
average Junior Ratio of the Revolving Credit Loans will be approximately 21.3%
as of the Cut-off Date. The latest scheduled maturity of any Revolving Credit
Loan will be December 2021. With respect to 70.9% of the Revolving Credit
Loans, the related Mortgaged Properties will be located in California.
As of the Cut-off Date the Loan Rates on approximately 23.9% of the
Revolving Credit Loans (the "Teaser Loans") will be introductory rates that
are lower than the rate that would have been in effect if the applicable Index
and Gross Margin at the time these loans were originated were used to
determine the Loan Rate. Commencing on their first Adjustment Date, the Loan
Rates on the Teaser Loans will be based on the applicable Index and Gross
Margin. As of the Cut-off Date, the weighted average months until the Teaser
Loans reach their teaser expiration date is approximately two months.
All of the Revolving Credit Loans were acquired by Residential Funding (in
such capacity, the "Seller") from banks, savings and loan associations,
mortgage bankers, investment banking firms and other mortgage loan originators
and sellers (the "Program Sellers"), under the Seller's Home Equity Program
(the "Home Equity Program") on a servicing released basis.
REVOLVING CREDIT LOAN TERMS
Interest on each Revolving Credit Loan is calculated according to the daily
simple interest method, 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
the first day of each related Billing Cycle commencing on a specified date
(each such day, an "Adjustment Date") to equal the sum of (a) the prime rate
for corporate loans at United States commercial banks, as published in The
Wall Street Journal (the "Index") on the first business day of the month in
which such Billing Cycle begins, and (b) the Gross Margin specified in the
related Mortgage Note, 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 Mortgage Note (subject to the
maximum rate permitted by applicable law). If, on any day, more than one prime
rate or a range of prime rates for corporate loans at United States commercial
banks is published in The Wall Street Journal, the Index on such day will be
the highest of the prime rates.
Each Revolving Credit Loan had a term to maturity from the date of
origination of not more than 312 months. The Mortgagor for each Revolving
Credit Loan may make a Draw under the related Credit Line Agreement at any
time during the Draw Period. The Draw Period will be 5 years (with respect to
20.2% of the Revolving Credit Loans) and 15 years (with respect to 79.8% of
the Revolving Credit Loans) from the date of origination thereof. The related
Mortgagor will not be permitted to make any Draw during the 10 year period
(or, with respect to 1.0% of the Revolving Credit Loans, during a period of no
more than 11 years) from the end of the related Draw Period to the related
maturity date (the "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 amount under such Mortgage Note 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
S-11
<PAGE>
have access to make Draws with either checks or a credit card, subject to
applicable law. The Mortgage Note or Mortgage related to each Revolving Credit
Loan will 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 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, the Mortgagor for each Revolving
Credit Loan will be obligated to make monthly payments thereon in a minimum
amount that will be equal to the greatest of (i) 1.00% of the related Account
Balance (as defined below) on the last day of the related Billing Cycle, (ii)
$100.00 (but not more than the Account Balance) and (iii) the related Finance
Charge for such Billing Cycle. Notwithstanding the foregoing, the Master
Servicer in its sole discretion may permit the Mortgagor (or may enter into a
modification agreement which will allow the Mortgagor) to make monthly
payments, with respect to any Billing Cycle during the related Draw Period, in
a minimum amount that will be equal to the related Finance Charge for such
Billing Cycle. During the related Repayment Period, the Mortgagor will be
obligated to make monthly payments consisting of level principal installments
which would amortize the Principal Balance by the maturity date, plus current
Finance Charges and Additional Charges.
Notwithstanding the foregoing, with respect to 11 Revolving Credit Loans
representing approximately 0.2% of the Cut-off Balance (the "Balloon Loans"),
the Mortgagor will be obligated to make a payment on the related maturity date
in an amount equal to the related Account Balance. 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.
With respect to each Revolving Credit Loan, (a) 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 Loan Rate multiplied by a fraction, the numerator of which is the
number of days in such Billing Cycle and the denominator of which is 365 and
(b) the "Account Balance" on any day generally will be the aggregate of all
related Draws outstanding at the beginning of such day, plus the sum of any
unpaid fees, insurance premiums and other charges (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, first, to any unpaid Additional
Charges that are due thereon, second to any unpaid Finance Charges that are
due thereon, and third, to any related Draws 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. 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
S-12
<PAGE>
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. See "Revolving Credit
Loan Program--Underwriting Standards" in the Prospectus.
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.
PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
PROPERTY TYPE CREDIT LOANS BALANCE DATE BALANCE
------------- ------------ ------------ -------------
<S> <C> <C> <C>
Single Family--Detached................ 4,213 $145,382,859 82.52%
Townhouse/Rowhouse..................... 43 1,519,456 0.86
Condo 1-4 Stories...................... 198 5,000,538 2.84
Mid-rise Condo--5-8 Stories............ 4 179,727 0.10
Condo--9 or more Stories............... 4 186,933 0.11
PUD--Detached.......................... 567 22,374,010 12.70
PUD--Attached.......................... 60 1,527,245 0.87
----- ------------ ------
Total................................ 5,089 $176,170,768 100.00%
===== ============ ======
</TABLE>
OCCUPANCY TYPES
<TABLE>
<CAPTION>
PERCENT OF
OCCUPANCY NUMBER OF MORTGAGE POOL
(AS INDICATED BY REVOLVING CUT-OFF DATE BY CUT-OFF
BORROWER) CREDIT LOANS BALANCE DATE BALANCE
---------------- ------------ ------------ -------------
<S> <C> <C> <C>
Primary Residence...................... 5,081 $175,834,690 99.81%
Second/Vacation........................ 8 336,078 0.19
----- ------------ ------
Total................................ 5,089 $176,170,768 100.00%
===== ============ ======
</TABLE>
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RAGE OF PRINCIPAL BALANCESN CREDIT LOANS BALANCE DATE BALANCE
- --------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
$ 0.01 to 25,000.00................ 2,162 $ 35,691,571 20.26%
25,000.01 to 50,000.00................ 2,169 78,956,640 44.82
50,000.01 to 75,000.00................ 438 26,689,095 15.15
75,000.01 to 100,000.00................ 231 20,838,769 11.83
100,000.01 to 125,000.00................ 28 3,125,519 1.77
125,000.01 to 150,000.00................ 16 2,234,604 1.27
150,000.01 to 175,000.00................ 13 2,149,504 1.22
175,000.01 to 200,000.00................ 27 5,220,720 2.96
200,000.01 to 250,000.00................ 3 653,780 0.37
250,000.01 to 300,000.00................ 1 298,728 0.17
300,000.01 and over..................... 1 311,838 0.18
----- ------------ ------
Totals................................. 5,089 $176,170,768 100.00%
===== ============ ======
</TABLE>
The average Principal Balance as of the Cut-off Date will be $34,618.
S-13
<PAGE>
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>
California.............................. 3,427 $124,858,712 70.87%
Colorado................................ 235 7,108,888 4.04
Florida................................. 167 5,009,298 2.84
Georgia................................. 164 4,678,245 2.66
Oregon.................................. 141 4,467,464 2.54
Utah.................................... 153 4,380,967 2.49
Washington.............................. 166 5,528,786 3.14
Other(1)................................ 636 20,138,409 11.43
----- ------------ ------
Totals................................ 5,089 $176,170,768 100.00%
===== ============ ======
</TABLE>
- --------
(1) Other includes states and the District of Columbia under 2% of the Cut-off
Date Balance individually.
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENT OF
RANGE OF COMBINED NUMBER OF MORTGAGE POOL
LOAN-TO- REVOLVING CUT-OFF DATE BY CUT-OFF
VALUE RATIOS(%) CREDIT LOANS BALANCE DATE BALANCE
----------------- ------------ ------------ -------------
<S> <C> <C> <C>
00.01 to 10.00....................... 4 $ 78,744 0.04%
10.01 to 20.00....................... 10 252,418 0.14
20.01 to 30.00....................... 23 876,961 0.50
30.01 to 40.00....................... 32 1,094,653 0.62
40.01 to 50.00....................... 53 1,634,319 0.93
50.01 to 60.00....................... 94 3,848,528 2.18
60.01 to 70.00....................... 201 7,775,635 4.41
70.01 to 75.00....................... 162 7,128,780 4.05
75.01 to 80.00....................... 573 23,027,788 13.07
80.01 to 85.00....................... 342 11,456,772 6.50
85.01 to 90.00....................... 2,727 92,662,427 52.60
90.01 to 95.00....................... 132 4,736,769 2.69
95.01 to 100.00....................... 735 21,581,978 12.25
100.01 and over........................ 1 14,994 0.01
----- ------------ ------
Totals............................... 5,089 $176,170,768 100.00%
===== ============ ======
</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 84.6%.
S-14
<PAGE>
JUNIOR RATIOS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
RANGE OF REVOLVING CUT-OFF DATE BY CUT-OFF
JUNIOR RATIOS(%) CREDIT LOANS BALANCE DATE BALANCE
---------------- ------------ ------------ -------------
<S> <C> <C> <C>
0.00 to 5.00......................... 31 $ 381,731 0.22%
5.01 to 10.00......................... 489 11,044,516 6.27
10.01 to 15.00......................... 1,772 56,273,808 31.94
15.01 to 20.00......................... 1,365 45,627,004 25.90
20.01 to 25.00......................... 537 22,148,378 12.57
25.01 to 30.00......................... 341 14,951,761 8.49
30.01 to 40.00......................... 304 12,626,057 7.17
40.01 to 50.00......................... 95 4,497,497 2.55
50.01 to 60.00......................... 44 2,913,469 1.65
60.01 to 70.00......................... 25 1,426,863 0.81
70.01 to 80.00......................... 7 495,418 0.28
80.01 to 90.00......................... 7 335,030 0.19
90.01 to 100.00......................... 72 3,449,237 1.96
----- ------------ ------
Totals................................ 5,089 $176,170,768 100.00%
===== ============ ======
</TABLE>
The weighted average Junior Ratio as of the Cut-off Date will be 21.3%.
LOAN RATES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF LOAN RATES(%) CREDIT LOANS BALANCE DATE BALANCE
---------------------- ------------ ------------ -------------
<S> <C> <C> <C>
6.501 to 7.000........................ 602 $ 21,726,600 12.33%
7.001 to 7.500........................ 362 12,602,689 7.15
7.501 to 8.000........................ 23 1,267,934 0.72
8.001 to 8.500........................ 317 10,443,873 5.93
8.501 to 9.000........................ 252 7,210,475 4.09
9.001 to 9.500........................ 339 13,674,896 7.76
9.501 to 10.000........................ 140 7,328,059 4.16
10.001 to 10.500........................ 855 23,475,707 13.33
10.501 to 11.000........................ 998 36,646,181 20.80
11.001 to 11.500........................ 265 12,160,178 6.90
11.501 to 12.000........................ 921 29,015,467 16.47
12.001 to 12.500........................ 12 539,182 0.31
12.501 and over......................... 3 79,528 0.05
----- ------------ ------
Totals................................ 5,089 $176,170,768 100.00%
===== ============ ======
</TABLE>
The weighted average Loan Rate as of the Cut-off Date will be 9.92%.
S-15
<PAGE>
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.......................... 403 $ 8,764,755 4.98%
0.501 to 1.000........................... 502 22,073,452 12.53
1.001 to 1.500........................... 173 8,665,040 4.92
1.501 to 2.000........................... 172 6,872,776 3.90
2.001 to 2.500........................... 1,139 31,828,174 18.07
2.501 to 3.000........................... 1,345 49,110,501 27.88
3.001 to 3.500........................... 400 18,371,240 10.43
3.501 to 4.000........................... 947 30,154,874 17.12
4.001 to 4.500........................... 7 317,529 0.18
Over 5.500............................... 1 12,426 0.01
----- ------------ ------
Totals................................. 5,089 $176,170,768 100.00%
===== ============ ======
</TABLE>
The weighted average Gross Margin as of the Cut-off Date will be 2.46%.
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF MORTGAGE
RANGE OF CREDIT REVOLVING CREDIT CUT-OFF DATE POOL BY CUT-OFF
LIMIT UTILIZATION RATES(%) LOANS BALANCE DATE BALANCE
-------------------------- ---------------- ------------ -------------------
<S> <C> <C> <C>
00.01 to 10.00............... 42 $ 170,107 0.10%
10.01 to 20.00............... 96 787,633 0.45
20.01 to 30.00............... 123 1,463,870 0.83
30.01 to 40.00............... 123 1,921,462 1.09
40.01 to 50.00............... 171 2,904,953 1.65
50.01 to 60.00............... 175 4,065,343 2.31
60.01 to 70.00............... 207 5,721,923 3.25
70.01 to 80.00............... 264 7,883,261 4.47
80.01 to 90.00............... 316 10,474,521 5.95
90.01 to 100.00............... 3,527 138,883,326 78.83
100.01 to 110.00............... 45 1,894,369 1.08
----- ------------ ------
Totals....................... 5,089 $176,170,768 100.00%
===== ============ ======
</TABLE>
The weighted average Credit Limit Utilization Rate based on the Credit Limits
of the Revolving Credit Loans as of the Cut-off Date will be 84.9%.
S-16
<PAGE>
CREDIT LIMITS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF MORTGAGE
REVOLVING CREDIT CUT-OFF DATE POOL BY CUT-OFF
RANGE OF CREDIT LIMITS LOANS BALANCE DATE BALANCE
---------------------- ---------------- ------------ -------------------
<S> <C> <C> <C>
$ 0.01 to 25,000.00... 1,623 $ 27,243,820 15.46%
25,000.01 to 50,000.00... 2,521 82,037,689 46.57
50,000.01 to 75,000.00... 492 26,470,745 15.03
75,000.01 to 100,000.00... 335 24,875,940 14.12
100,000.01 to 125,000.00... 24 2,296,996 1.30
125,000.01 to 150,000.00... 31 3,290,509 1.87
150,000.01 to 175,000.00... 15 2,060,919 1.17
175,000.01 to 200,000.00... 44 6,829,868 3.88
200,000.01 to 250,000.00... 1 226,320 0.13
250,000.01 to 300,000.00... 2 526,124 0.30
300,000.01 and over......... 1 311,838 0.18
----- ------------ ------
Totals..................... 5,089 $176,170,768 100.00%
===== ============ ======
</TABLE>
The aggregate of the Credit Limits as of the Cut-off Date will be
$207,542,852.
MAXIMUM LOAN RATES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF MORTGAGE
REVOLVING CREDIT CUT-OFF DATE POOL BY CUT-OFF
MAXIMUM LOAN RATES(%) LOANS BALANCE DATE BALANCE
- --------------------- ---------------- ------------ -------------------
<S> <C> <C> <C>
12.75......................... 2 $ 67,102 0.04%
18.00......................... 5,084 176,009,756 99.91
24.00......................... 3 93,909 0.05
----- ------------ ------
Totals...................... 5,089 $176,170,768 100.00%
===== ============ ======
</TABLE>
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
RANGE OF
MONTHS PERCENT OF
REMAINING TO NUMBER OF MORTGAGE POOL
SCHEDULED REVOLVING CUT-OFF DATE BY CUT-OFF
MATURITY CREDIT LOANS BALANCE DATE BALANCE
------------ ------------ ------------ -------------
<S> <C> <C> <C>
1-- 96............................... 2 $ 41,392 0.02%
157--168............................... 310 9,260,428 5.26
169--180............................... 837 27,175,584 15.43
181--288............................... 178 4,730,356 2.69
289--300............................... 3,743 134,091,255 76.11
301 and over........................... 19 871,754 0.49
----- ------------ ------
Totals............................... 5,089 $176,170,768 100.00%
===== ============ ======
</TABLE>
The weighted average months remaining to scheduled maturity as of the Cut-off
Date will be 269 months.
ORIGINATION YEAR
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
ORIGINATION YEAR CREDIT LOANS BALANCE DATE BALANCE
- ---------------- ------------ ------------ -------------
<S> <C> <C> <C>
1994.................................... 131 $ 2,883,352 1.64%
1995.................................... 3,561 123,092,767 69.87
1996.................................... 1,397 50,194,649 28.49
----- ------------ ------
Totals................................ 5,089 $176,170,768 100.00%
===== ============ ======
</TABLE>
S-17
<PAGE>
LIEN PRIORITY
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
LIEN PRIORITY CREDIT LOANS BALANCE DATE BALANCE
- ------------- ------------ ------------ -------------
<S> <C> <C> <C>
First Lien.............................. 67 $ 3,124,531 1.77%
Second Lien............................. 5,022 173,046,237 98.23
----- ------------ ------
Totals................................ 5,089 $176,170,768 100.00%
===== ============ ======
</TABLE>
DAYS DELINQUENT AS OF CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
DAYS DELINQUENT CREDIT LOANS BALANCE DATE BALANCE
- --------------- ------------ ------------ -------------
<S> <C> <C> <C>
Current................................. 5,069 $175,282,089 99.50%
30-59................................... 20 888,679 0.50
----- ------------ ------
Totals................................ 5,089 $176,170,768 100.00%
===== ============ ======
</TABLE>
UNDERWRITING STANDARDS
The following is a brief description of the various underwriting standards
and procedures applicable to the Revolving Credit Loans. For a more detailed
description of the underwriting standards and procedures applicable to the
Revolving Credit Loans, see "Revolving Credit Loan Program--Underwriting
Standards" which begins on page 17 of the Prospectus.
The Seller's underwriting standards with respect to the Revolving Credit
Loans generally will conform to those published in the Seller Guide (together
with its Servicer Guide, the "Guide," as modified from time to time),
including the provisions of the Guide applicable to the Home Equity Program.
The underwriting standards as set forth in the Guide are continuously revised
based on prevailing conditions in the residential mortgage market and the
market for mortgage securities. Under the Guide, the Revolving Credit Loans
are generally underwritten by the related Program Seller or by a designated
third party, and the Seller or a designated third party may perform only
sample quality assurance reviews to determine whether Revolving Credit Loans
purchased by it were underwritten in accordance with applicable standards.
Each Program Seller is an entity approved by the Seller for participation in
the Home Equity Program. Each Program Seller was required at the time of its
approval to meet certain eligibility requirements, including minimum
origination and net worth levels determined by the Seller. However, there can
be no assurance that any Program Seller currently meets such standards.
Generally, the Program Seller will have originated the Revolving Credit Loans
sold by it to the Seller either directly or through correspondents or loan
brokers, and will have underwritten each Revolving Credit Loan prior to
funding.
The underwriting standards set forth in the Guide with respect to Revolving
Credit Loans originated under the Home Equity Program generally require that
such Revolving Credit Loans be fully documented or that such Revolving Credit
Loans be supported by alternative documentation. For fully documented loans, a
prospective borrower is required to fill out a detailed application providing
pertinent credit information. For alternatively documented loans, a borrower
may demonstrate income and employment directly by providing alternative
documentation in the form of copies of the borrower's own records relating
thereto, rather than by having the originator obtain independent verifications
from third parties (such as the borrower's employer or mortgage servicer).
In determining the adequacy of the mortgaged property as collateral for a
Revolving Credit Loan originated under the Home Equity Program, an appraisal
is made of each property considered for financing. The Revolving Credit Loans
included in the Mortgage Pool generally were originated subject to a maximum
CLTV of 100% and a maximum total monthly debt to income ratio of 50%. 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.
S-18
<PAGE>
The underwriting standards set forth in the Guide with respect to Revolving
Credit Loans originated under the 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.
REPRESENTATIONS AND WARRANTIES
Each Program Seller has made or will make certain limited representations
and warranties regarding the related Revolving Credit Loans, as of the date of
purchase thereof by the Seller. However, such representations and warranties
will not be assigned to the Owner Trustee or the Indenture Trustee for the
benefit of the holders of the related series of Securities, and therefore a
breach of such representations and warranties will not be enforceable on
behalf of the Trust Fund.
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 and the terms of the Servicing Agreement. See "Servicing of Revolving
Credit Loans" in the Prospectus.
Billing statements are mailed monthly by the Subservicers. The statement
details the monthly activity on the related Revolving Credit Loan and
specifies the minimum payment due to the Subservicers and the available credit
line. Notice of changes in the applicable Loan Rate are provided by the
related Subservicers to the Mortgagor with such statements. All payments are
due by the 25th day of the month with respect to the Revolving Credit Loans
subserviced by Bank One and the 20th day of the month with respect to the
Revolving Credit Loans subserviced by GMACMC (each, 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.
INITIAL SUBSERVICERS
Bank One, Columbus, N.A.
Bank One, Columbus, N.A. ("Bank One") is initial Subservicer (the "Initial
Subservicer") for 2,979 of the Revolving Credit Loans or approximately 57.1%
of the Cut-off Date Balance, with an aggregate Principal Balance as of the
Cut-off Date of $100,641,619. Bank One will act as Initial Subservicer for
such Revolving Credit Loans pursuant to a Subservicing Agreement with the
Master Servicer. Bank One is engaged primarily in the banking industry and has
been servicing home equity lines of credit since 1984. Bank One has been
servicing home equity loans under the Goal Line Program since the
establishment of the Goal Line Program in March 1994.
Bank One's executive offices are located at 275 West Schrock Road,
Brooksedge 7, Westerville, Ohio 43081.
GMAC Mortgage Corporation of PA
GMAC Mortgage Corporation of PA ("GMACMC"), an affiliate of the Depositor,
is Initial Subservicer for 2,110 of the Revolving Credit Loans or
approximately 42.9% of the Cut-off Date Balance, with an aggregate outstanding
Principal Balance as of the Cut-off Date of $75,529,149. GMACMC will act as
Initial Subservicer for such Revolving Credit Loans pursuant to a Subservicing
Agreement with the Master Servicer. GMACMC 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 and
commercial loans.
GMACMC's executive offices are located at 8360 Old York Road, Elkins Park,
Pennsylvania 19117-1590.
S-19
<PAGE>
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 or acquired 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 Subservicers.
<TABLE>
<CAPTION>
HELOC LOAN PORTFOLIO DELINQUENCY
EXPERIENCE
--------------------------------------------
AT DECEMBER 31, 1995 AT APRIL 30, 1996
---------------------- --------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF OF AMOUNT OF
LOANS LOANS LOANS LOANS
-------- ------------- ------ ------------
<S> <C> <C> <C> <C>
Total HELOC Loan Portfolio........ 18,029 $ 565,211,194 23,076 $708,123,555
Period of Delinquency
30-59 days...................... 195 7,140,138 188 7,742,429
60-89 days...................... 46 2,019,619 51 2,058,779
90+ days........................ 64 2,965,735 116 5,564,198
------- ------------- ------ ------------
Total delinquent loans............ 305 $ 12,125,492 355 $ 15,365,406
======= ============= ====== ============
Percent of Portfolio.............. 1.69% 2.15% 1.54% 2.17%
</TABLE>
<TABLE>
<CAPTION>
TOTAL HELOC LOAN FORECLOSURE
EXPERIENCE
--------------------------------------
AT DECEMBER 31, 1995 AT APRIL 30, 1996
-------------------- -----------------
<S> <C> <C>
Total HELOC Loan Portfolio............... $565,211,194 $708,123,555
Completed Foreclosure(1)................. $ 0 $ 90,732
Foreclosure %............................ 0.00% 0.01%
Completed Chargeoffs(2).................. $ 194,311 $ 270,617
Completed Chargeoff %.................... 0.03% 0.04%
Approved/Pending Foreclosures(3)......... $ 0 $ 785,564
Approved/Pending Foreclosure %........... 0.00% 0.11%
Approved/Pending Chargeoffs(4)........... $ 0 $ 2,706,472
Approved/Pending Chargeoff %............. 0.00% 0.38%
</TABLE>
- --------
(1) The aggregate of the outstanding principal balances of the related HELOC
loans for which foreclosure proceedings have been completed and resulted
in an REO property.
(2) The aggregate of the outstanding principal balances of the related HELOC
loans actually charged-off.
(3) The aggregate of the outstanding principal balances of the related HELOC
loans for which foreclosure action has been approved and initiated.
(4) The aggregate of the outstanding principal balances of the related HELOC
loans approved for charge-off but will not be charged-off until
foreclosure or liquidation with respect to the related senior lien is
completed.
As a result of substantial differences between the Revolving Credit Loans
and other HELOC loans serviced by the Initial Subservicers with respect to
underwriting standards and loan terms and conditions, the loss and delinquency
experience of the Initial Subservicers does not provide a sufficient basis for
meaningful evaluation of the Initial Subservicers' ability to subservice the
Revolving Credit Loans and is therefore not included herein.
S-20
<PAGE>
Furthermore, because none of the Program Sellers sold to the Seller more than
16.2% of the Revolving Credit Loans included in the Mortgage Pool (by Cut-off
Date Balance) and as a result of substantial differences between the Revolving
Credit Loans and other HELOC loans serviced by the Program Sellers, the loss
and delinquency experience of each of the Program Sellers does not provide a
sufficient basis for any meaningful evaluation of the Revolving Credit Loans
and is therefore not included herein.
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 Cut-off Date will be approximately 0.58% per annum. The
Servicing Fees consist of (a) servicing compensation payable to the Master
Servicer in respect of its master servicing activities and (b) subservicing
and other related compensation retained by the related 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-HS1 LLC
As described herein, the Mortgage Pool will be conveyed to the 1996-HS1 LLC,
a limited liability company organized under applicable state law. Pursuant to
the 1996-HS1 LLC's Operating Agreement, the 1996-HS1 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-HS1 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
Purchase Agreement. The limited purpose of the 1996-HS1 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 Purchase 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-HS1
LLC and all decisions concerning the business affairs of the 1996-HS1 LLC and
will be entitled to exercise all rights and remedies of the 1996-HS1 LLC
against the Seller under the Purchase 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-HS1 LLC, and each will be entitled to receive certain payments with
respect to the Mortgage Pool owned by the 1996-HS1 LLC as described below
under "Description of the Securities--Allocation of P&I Collections."
THE ISSUER
GENERAL
The Home Equity Loan Trust 1996-HS1, is a business trust formed under the
laws of the State of Delaware pursuant to the Trust Agreement dated as of May
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.
S-21
<PAGE>
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.
THE INSURER
The following information has been supplied by AMBAC Indemnity Corporation
("AMBAC") for inclusion in this Prospectus Supplement. No representation is
made by the Depositor, the Underwriters or any of their affiliates as to the
accuracy or completeness of such information.
AMBAC 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, AMBAC primarily insures newly issued municipal bonds.
AMBAC 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 AMBAC.
AMBAC has entered into pro rata reinsurance agreements under which a
percentage of the insurance underwritten pursuant to certain of AMBAC'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 AMBAC's capitalization as of December 31,
1993, December 31, 1994, December 31, 1995 and March 31, 1996, respectively,
on the basis of generally accepted accounting principles.
AMBAC INDEMNITY CORPORATION
CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER DECEMBER DECEMBER MARCH
31, 1993 31, 1994 31, 1995 31, 1996
-------- -------- -------- ---------
UNAUDITED
<S> <C> <C> <C> <C>
Unearned premiums......................... $ 785 $ 840 $ 906 $ 924
Other liabilities......................... 192 136 295 225
Stockholder's equity:
Common Stock............................ 82 82 82 82
Additional paid-in capital.............. 444 444 481 481
Unrealized gain (loss) on bonds; net of
tax.................................... 68 (46) 87 30
Retained earnings....................... 668 782 907 944
Total stockholder's equity................ $1,262 $1,262 $1,557 $1,537
------ ------ ------ ------
Total liabilities and stockholder's equi-
ty....................................... $2,239 $2,238 $2,758 $2,686
====== ====== ====== ======
</TABLE>
For additional financial information concerning AMBAC, see the audited
financial statements of AMBAC included in Appendix A of this Prospectus
Supplement.
S-22
<PAGE>
Effective December 31, 1993, AMBAC 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 AMBAC's stockholder's equity $63.6 million, net of tax.
The adoption of Statement 115 had no effect on earnings.
AMBAC 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 Insurer and presented under the heading "THE
INSURER" 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 May 1, 1996
between the Issuer and The Chase Manhattan Bank, N.A., as Indenture Trustee.
The Certificates will be issued pursuant to the Trust Agreement dated as of
May 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 initially will be issued to Residential Funding.
The Security Balance of the Variable Funding Notes will be increased from time
to time in consideration for Additional Balances sold to the 1996-HS1 LLC
under the Purchase Agreement, if Principal Collections are insufficient or
unavailable to cover the related Draws. The Security Balance of the Variable
Funding Notes may not exceed an aggregate amount equal to $31,372,084 minus
any amounts paid as principal on the Variable Funding Notes or such greater
amount as may be permitted under the Indenture (the "Maximum Variable Funding
Balance"). Initially Variable Funding Notes will have no Security Balance. In
addition, in certain circumstances, the Trust Agreement may provide for the
issuance of additional Certificates.
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 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.
S-23
<PAGE>
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 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-
S-24
<PAGE>
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 June 1996. 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, New York, Illinois and 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. The "Note Rate" for an Interest Period will generally
be a floating rate equal to 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) % per annum. 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 will equal or exceed % per
annum. Notwithstanding the foregoing, in no event will the Note Rate or
Certificate Rate in respect of the Securities on any Payment Date exceed a
rate (the "Net Loan Rate Cap") equal to the weighted average of the Loan Rates
for payments due in the related Collection Period (net of 0.75% 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.
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.
S-25
<PAGE>
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 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.
PRINCIPAL PAYMENTS ON THE NOTES
On each Payment Date, other than the Payment Date in June 2022, 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 June 2022, 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-HS1 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 Amount;
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<PAGE>
(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"); and
(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;
(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)(c) above over the Reserve Amount
Target; and
(iii) the remaining amount, if any, of the P&I Collections shall be
allocated on a pro rata basis 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 % per annum,
but not more than the Net Loan Rate Cap plus 0.17%. The "Class A Principal
Balance", as of any Payment Date, equals (1) 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 Insurer 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 November 1998, the
Reserve Amount Target will be 1.5% of the Cut-off Date Balance. As to any
Payment Date on or after the Payment Date in November 1998, 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% of the Pool Balance as of the beginning of the related
Collection Period (but not lower than $880,854 (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 Mortgage Loans averaged over the last six months does not
exceed 2% and (ii) the aggregate cumulative Liquidated Loss Amounts on the
Revolving Credit
S-27
<PAGE>
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 November 1998 are less than 2.0%, 3.0% and 4.0% respectively, of the
aggregate Pool 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 Insurer and the Rating
Agencies.
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 and any overdue accrued interest 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 Insurer the premium for the Policy and any previously
unpaid premium for the Policy (with interest thereon);
(v) to reimburse the Insurer 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; and
(vii) 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, the respective initial balance thereof as of
the Closing Date (or, in certain circumstances, with respect to the
Certificates any issuances of additional Certificates), and with respect to
the Variable Funding Notes, the aggregate principal amount added to the
Variable Funding Notes prior to such day, in each case reduced by all payments
of principal thereon 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 an Insurer Default has occurred and is
continuing or if an Event of Default under the Indenture due to a payment
default on the Notes has occurred and is continuing, the priorities of
distribution described above will be adjusted such that amounts to be
distributed on the Certificates in respect
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of interest and principal will be subordinated to the payment of interest and
principal on the Notes. An "Insurer Default" shall have occurred if the
Insurer 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 Seller's obligations under the
Revolving Credit Loan Purchase Agreement, (ii) the occurrence of certain
events of bankruptcy, insolvency or receivership relating to the Seller, the
1996-HS1 LLC or the Issuer, (iii) the 1996-HS1 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 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-HS1 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
$13,212,808, (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.
The "Special Hazard Amount" shall initially be equal to $ . As of any date
of determination following the Cut-off Date, the Special Hazard Amount shall
equal $ 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.
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The "Fraud Loss Amount" shall initially be equal to $ . 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 % of
the Pool Balance 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) % of the Pool Balance 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) % of the Pool Balance of
the Revolving Credit 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 $ . As of any date of
determination, the Bankruptcy Amount shall equal $ 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 June 2022, 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
$17,617,077 (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 on which such purchase occurs together with all amounts due and owing to
the Insurer.
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 Insurer 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-
HS1 LLC. Any such purchase will be subject to satisfaction of certain
conditions specified in the 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-HS1 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 Insurer
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.
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DESCRIPTION OF THE POLICY
On the Closing Date, the Insurer 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. 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, the Policy will
guarantee the payment of the outstanding Security Balance of each Security on
the Payment Date in June 2022. 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.
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 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, 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. 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.
With respect to the Teaser Loans representing 23.9% of the Cut-off Date
Balance, the Loan Rate at origination is below the rate that would result from
the sum of the then-applicable Index and Gross Margin. The repayment of any
such Teaser Loan may thus be dependent on the ability of the mortgagor to make
larger interest payments following the initial adjustment of the Loan Rate.
In addition, the repayment of any Revolving Credit Loan may be dependent on
the ability of the Mortgagor to make larger interest payments over the life of
such Revolving Credit Loan.
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<PAGE>
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 % 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 $36,551,737 and a second
pool with a principal balance of $139,619,031. Further, Revolving Credit Loans
with respect to the two pools are assumed to have Loan Rates of 11.2349% per
annum and 9.5778% per annum, respectively, which will adjust to 11.5010% per
annum and 10.5028% per annum in the first month, respectively, Credit Limit
Utilization Rates of 89% and 84%, respectively, terms in which the loans do
not amortize and in which Additional Draws may be made of 52 months and 176
months, respectively, and as of the Closing Date, remaining terms to maturity
of 171 months and 295 months, respectively. In addition, each pool is assumed
to have a Servicing Fee Rate of 0.58% per annum.
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 June 1996,
(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) no Amortization
Event occurs, (viii) the scheduled Due Date for each of the Revolving Credit
Loans is the first day of each month, (ix) each month consists of 30 days, (x)
the Closing Date is May 30, 1996, (xi) for each Payment Date, the Note Rate
and the Certificate Rate are both equal to 5.7197% per annum 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 $14,092,937.
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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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>
The Closing Date.................................. 100 100 100 100 100 100 100
May 20, 1997...................................... 99 99 94 89 84 79 74
May 20, 1998...................................... 99 99 89 80 72 64 56
May 20, 1999...................................... 99 99 85 72 61 51 42
May 20, 2000...................................... 99 99 81 65 52 41 32
May 20, 2001...................................... 98 96 74 57 43 32 24
May 20, 2002...................................... 97 86 57 41 30 21 14
May 20, 2003...................................... 95 76 44 30 20 14 9
May 20, 2004...................................... 94 68 33 22 14 9 0
May 20, 2005...................................... 92 60 26 16 10 6 0
May 20, 2006...................................... 90 53 20 12 7 0 0
May 20, 2007...................................... 88 47 15 8 5 0 0
May 20, 2008...................................... 85 42 12 6 3 0 0
May 20, 2009...................................... 83 37 9 5 2 0 0
May 20, 2010...................................... 80 33 7 3 0 0 0
May 20, 2011...................................... 77 29 5 2 0 0 0
May 20, 2012...................................... 72 24 4 2 0 0 0
May 20, 2013...................................... 67 20 3 0 0 0 0
May 20, 2014...................................... 60 16 2 0 0 0 0
May 20, 2015...................................... 54 13 0 0 0 0 0
May 20, 2016...................................... 46 10 0 0 0 0 0
May 20, 2017...................................... 38 7 0 0 0 0 0
May 20, 2018...................................... 28 5 0 0 0 0 0
May 20, 2019...................................... 18 3 0 0 0 0 0
May 20, 2020...................................... 0 0 0 0 0 0 0
Weighted Average Life (years)..................... 18.1 11.7 7.1 5.6 4.5 3.7 3.0
</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%.
S-33
<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%
ONSTANTC ---------- ---------- --------- --------- --------- --------- ---------
RAWRATED 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%..................... 18.0 03/20 7.4 12/13 3.5 05/05 2.9 12/03 2.5 10/02 2.1 12/01 1.8 03/01
10%..................... 18.1 05/20 11.6 01/19 5.1 01/11 4.1 05/07 3.4 02/05 2.8 08/03 2.4 07/02
14%..................... 18.1 05/20 11.8 06/19 6.0 02/13 4.8 05/10 3.9 11/06 3.2 09/04 2.7 04/03
18%..................... 18.1 05/20 11.7 06/19 7.1 02/15 5.6 09/12 4.5 10/09 3.7 05/06 3.0 04/04
22%..................... 18.1 05/20 11.7 06/19 8.5 12/16 6.6 07/14 5.3 04/12 4.3 02/09 3.5 10/05
<CAPTION>
CPR(4)
-----------------------------------------------------------------------
ONSTANTC 0% 10% 22% 26% 30% 34% 38%
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%..................... 18.0 12/20 7.7 06/20 3.8 04/15 3.2 11/12 2.7 08/10 2.3 10/08 2.0 04/07
10%..................... 18.1 12/20 11.7 11/20 5.2 09/18 4.2 08/16 3.5 05/14 3.0 03/12 2.5 02/10
14%..................... 18.1 12/20 11.9 11/20 6.1 07/19 4.9 11/17 4.0 09/15 3.3 08/13 2.8 09/11
18%..................... 18.1 12/20 11.7 11/20 7.1 03/20 5.6 12/18 4.6 01/17 3.8 12/14 3.1 12/12
22%..................... 18.1 12/20 11.7 11/20 8.5 07/20 6.6 10/19 5.3 04/18 4.3 04/16 3.5 04/14
</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 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.
(4) Assumes no optional termination is exercised.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Revolving Credit Loans to be transferred to the 1996-HS1 LLC by the
Depositor were or will be purchased by the Depositor from Residential Funding
Corporation (the "Seller") pursuant to the Purchase Agreement. Under the
Purchase Agreement, the 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-HS1 LLC, as well as the Depositor's rights in, to and
under the Purchase Agreement, which will include the right to purchase
Additional Balances. The following summary describes certain terms of the form
of the Purchase Agreement and is qualified in its entirety by reference to the
form of Purchase Agreement.
TRANSFER OF REVOLVING CREDIT LOANS
Pursuant to the Purchase Agreement, the 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 Purchase Agreement. The purchase price of each
Additional Balance is the amount of the related new advance and is payable by
the 1996-HS1 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 Purchase Agreement.
The Purchase Agreement will require that, within the time period specified
therein, the Seller, acting on the Depositor's behalf, deliver to the
Indenture Trustee (as the 1996-HS1 LLC's agent for such purpose) the
S-34
<PAGE>
Revolving Credit Loans and the Related Documents. In lieu of delivery of
original mortgages, the 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. In addition, under the terms
of the Purchase Agreement, the Seller will be required to record assignments
of mortgages relating to such Revolving Credit Loans.
REPRESENTATIONS AND WARRANTIES
The 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 Purchase 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 Seller was the sole owner and
holder of the Revolving Credit Loans free and clear of any and all liens and
security interests. The Seller will also represent and warrant to the
Depositor, that, among other things, as of the Closing Date, (a) the Purchase
Agreement constitutes a legal, valid and binding obligation of the Seller and
(b) the Purchase Agreement constitutes a valid transfer and assignment to the
Depositor of all right, title and interest of the 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 Seller in the
Purchase Agreement will be assigned by the Depositor to the 1996-HS1 LLC.
Within 45 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 and such defect is not cured within 60 days following
notification thereof to the Seller and the 1996-HS1 LLC by the Custodian, the
Seller will be obligated under the Purchase Agreement to deposit the
Repurchase Price into the Custodial Account. In lieu of any such deposit, the
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-HS1 LLC (each such Revolving Credit Loan, a
"Deleted Loan"). The obligation of the Seller to remove a Deleted Loan from
the 1996-HS1 LLC is the sole remedy regarding any defects in the Revolving
Credit Loans and Related Documents available to the 1996-HS1 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 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 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 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 Purchase Agreement (deemed to be made as of the
date of substitution); and (vi) satisfy certain other conditions specified in
the Indenture.
In addition the 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 Purchase
Agreement and such breach is not cured by the Seller within the time provided
in the Purchase Agreement.
S-35
<PAGE>
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing Agreement,
dated as of May 1, 1996 among the 1996-HS1 LLC, the Indenture Trustee 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.
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 Certificate
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.
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 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-HS1 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-HS1 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-HS1 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.
S-36
<PAGE>
As to any Payment Date other than the first Payment Date, the "Collection
Period" is the calendar month preceding the month of such Payment Date and in
the case of the first Payment Date the period from the Cut-off Date to the
Closing 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-HS1 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-HS1 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-HS1 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.
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE
The following summary describes certain terms of the Trust Agreement and
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 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-HS1 LLC, in the exercise of
all rights and remedies of the 1996-HS1 LLC against the Seller under the
Purchase 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.
S-37
<PAGE>
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 Insurer 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 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 Insurer, 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 Insurer, 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 of
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.
S-38
<PAGE>
The Issuer and the Indenture Trustee may also enter into supplemental
indentures, with the consent of the Insurer and without obtaining the consent
of the Noteholders, for the purpose of, among other things, to cure any
ambiguity or to correct or supplement 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 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 each
Indenture.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Notes [ ] 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.
S-39
<PAGE>
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated May , 1996 (the "Underwriting Agreement"), the Underwriters have
severally agreed to purchase and the Depositor has agreed to sell to the
Underwriters the principal amount of the Term Notes set forth opposite their
names below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF TERM NOTES
----------- ----------------
<S> <C>
Morgan Stanley & Co. Incorporated........................ $
Lehman Brothers Inc...................................... $
Residential Funding Securities Corporation............... $
----
Total................................................ $
====
</TABLE>
The Depositor has been advised by the Underwriters that they propose to
initially offer the Term Notes to the public at the offering price set forth
herein and to certain dealers at such price less a discount not in excess of
% of the Term Note denominations. The Underwriters may allow and such
dealers may reallow a discount not in excess of % of the Term Note
denominations to certain other dealers. After the initial public offering, the
public offering price, such concessions and such discounts may be changed.
The Depositor has been advised by the Underwriters that they presently
intend to make a market in the Term Notes offered hereby; however, they are
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
Underwriters and that under limited circumstances the Underwriters will
indemnify the Depositor against certain liabilities, including liabilities
under the Securities Act of 1933, or contribute payments the Underwriters may
be required to make in respect thereof.
Residential Funding Securities Corporation is an affiliate of the Depositor.
EXPERTS
The consolidated balance sheets of the Insurer, 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 by Thacher Proffitt & Wood, New York, New York and for the
Underwriters by Brown & Wood, New York, New York.
S-40
<PAGE>
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. 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-41
<PAGE>
APPENDIX A
FINANCIAL STATEMENTS OF THE INSURER
S-42
<PAGE>
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.
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
========= ======== ======== =========
<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:
Year Amount
- --------------- --------
1996........................................................... $ 3,042
1997........................................................... 3,073
1998........................................................... 3,359
1999........................................................... 3,650
2000........................................................... 3,650
All later years................................................ 53,880
-------
$70,654
=======
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:
Net Par Amount
Outstanding
--------------------
(Dollars in Millions) As of December 31 1995 1994
-------- -------
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
========= =======
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:
As of December 31,
--------------------
1995 1994
------- --------
Interest rate futures contracts................ $44,500 $164,200
Interest rate swap............................. 20,000 20,000
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 March 31, 1996 and December 31, 1995
and for the periods ended March 31, 1996 and 1995
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
(unaudited)
<S> <C> <C>
Assets
- ------
Investments:
Bonds held in available for sale account, at fair value
(amortized cost of $2,054,545 in 1996 and $2,090,101 in 1995) $2,101,319 $2,224,528
Short-term investments, at cost (approximates fair value) 186,959 163,953
------------ ------------
Total investments 2,288,278 2,388,481
Cash 542 6,912
Securities purchased under agreements to resell 7,823 4,120
Receivable for securities 29,091 8,136
Investment income due and accrued 34,045 38,319
Investment in affiliate 26,185 25,827
Deferred acquisition costs 85,405 82,620
Current income taxes - 2,171
Prepaid reinsurance 158,169 153,372
Other assets 56,725 48,472
------------ ------------
Total assets $2,686,263 $2,758,430
============ ============
Liabilities and Stockholder's Equity
- ------------------------------------
Liabilities:
Unearned premiums $924,004 $906,136
Losses and loss adjustment expenses 58,106 65,996
Ceded reinsurance balances payable 5,932 14,654
Deferred income taxes 54,426 85,008
Current income taxes 4,788 -
Accounts payable and other liabilities 41,928 43,625
Payable for securities 59,795 86,304
------------ ------------
Total liabilities 1,148,979 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 March 31, 1996 and December 31, 1995 82,000 82,000
Additional paid-in capital 481,427 481,059
Unrealized gains on investments, net of tax 30,403 87,112
Retained earnings 943,454 906,536
------------ ------------
Total stockholder's equity 1,537,284 1,556,707
------------ ------------
Total liabilities and stockholder's equity $2,686,263 $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 March 31, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
Revenues:
Gross premiums written $51,292 $40,572
Ceded premiums written (9,612) (3,459)
--------- ---------
Net premiums written 41,680 37,113
Increase in unearned premiums (13,070) (12,437)
--------- ---------
Net premiums earned 28,610 24,676
Net investment income 34,905 31,874
Net realized gains (losses) 2,356 (4,674)
Other income 6,052 2,378
--------- ---------
Total revenues 71,923 54,254
--------- ---------
Expenses:
Losses and loss adjustment expenses 810 1,028
Underwriting and operating expenses 10,083 9,330
Interest expense 514 331
--------- ---------
Total expenses 11,407 10,689
--------- ---------
Income before income taxes 60,516 43,565
--------- ---------
Income tax expense:
Current taxes 13,648 6,847
Deferred taxes (46) 1,208
--------- ---------
Total income taxes 13,602 8,055
--------- ---------
Net income 46,914 35,510
========= =========
</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 March 31, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $46,914 $35,510
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 456 337
Amortization of bond premium and discount (386) (163)
Current income taxes payable 6,959 6,768
Deferred income taxes payable (46) 1,208
Deferred acquisition costs (2,785) (3,786)
Unearned premiums 13,070 12,437
Losses and loss adjustment expenses (7,890) 68
Ceded reinsurance balances payable (8,722) 58
(Gain) loss on sales of investments (2,356) 4,674
Other, net (9,735) (8,219)
-------------- -------------
Net cash provided by operating activities 35,479 48,892
-------------- -------------
Cash flows from investing activities:
Proceeds from sales of bonds at amortized cost 378,129 431,966
Proceeds from maturities of bonds at amortized cost 24,374 13,917
Purchases of bonds at amortized cost (406,425) (505,448)
Change in short-term investments (23,006) 23,163
Securities purchased under agreements to resell (3,703) 77
Other, net (1,218) (178)
-------------- -------------
Net cash used in investing activities (31,849) (36,503)
-------------- -------------
Cash flows from financing activities:
Dividends paid (10,000) (10,000)
-------------- -------------
Net cash used in financing activities (10,000) (10,000)
-------------- -------------
Net cash flow (6,370) 2,389
Cash at beginning of year 6,912 2,117
-------------- -------------
Cash at March 31 $542 $4,506
============== =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $6,300 $ -
============== =============
</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 March 31, 1996, AMBAC
Indemnity's net insurance in force (principal and interest) was $203.7 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 both public and private clients.
AMBAC Indemnity has one wholly-owned subsidiary, American Municipal
Bond Holding Company ("AMBH"), which is a holding company for certain real
estate interests.
AMBAC Indemnity, at March 31, 1996 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 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 and,
in the opinion of management, reflect all adjustments necessary for a fair
presentation of the Company's financial condition, results of operations and
cash flows for the periods presented. The results of operations for the three
months ended March 31, 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 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.
(3) SUBSEQUENT EVENTS
As previously announced by AMBAC Inc., on April 15, 1996, HCIA filed
an amendment with the Securities and Exchange Commission to HCIA's previously
filed Registration Statement to cover a proposed secondary public offering by
AMBAC Inc. of 4,159,505 shares of HCIA common stock. After completion of the
proposed offering, AMBAC Indemnity and AMBAC Inc. will no longer own any shares
of HCIA common stock.
Subject to Completion Dated May __, 1996
PROSPECTUS
Information contained herein is subject to completion
or amendment. These securities may not be sold nor
may offers to buy be accepted without the delivery
of a final prospectus supplement and accompanying
prospectus. This Prospectus Supplement and the
accompanying Prospectus shall not constitute an
offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State
in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under
the securities laws of any such State.
Home Equity Loan-Backed Notes
Residential Funding Mortgage Securities II, Inc.
Depositor
The Home Equity Loan-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 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 "Mortgage
Pool") of one- to four-family first or junior lien home
equity revolving lines of credit (the "Revolving Credit
Loans") or certain balances thereof or interests therein
(which may include Mortgage Securities as defined
herein), acquired by the Company from one or more
affiliated or unaffiliated institutions. See "The
Mortgage Pools." Only the Notes are offered hereby. See
"Index of Principal Definitions" for the meanings of
capitalized terms and acronyms.
The Revolving Credit Loans in each Mortgage Pool or
certain interests therein and certain other assets
described herein under "The Mortgage 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 Mortgage Pool will consist of
one or more types of Revolving Credit Loans or certain
interests therein described under "The Mortgage Pools."
Information regarding each class of Notes of a series,
and the general characteristics of the Revolving Credit
Loans 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 Revolving Credit Loans 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, bankruptcy bond, special hazard
insurance policy, reserve fund 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 Revolving Credit Loans. 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 9.
PROCEEDS OF THE 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 CORPORATION OR ANY OF
THEIR AFFILIATES. NEITHER THE NOTES NOR THE UNDERLYING
REVOLVING CREDIT LOANS OR MORTGAGE SECURITIES WILL BE
GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE COMPANY, RESIDENTIAL FUNDING
CORPORATION, GMAC MORTGAGE CORPORATION OR ANY OF THEIR
AFFILIATES. 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 May ___, 1996.
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.
ADDITIONAL INFORMATION
The Company has filed with 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.
Copies of such material can also be obtained from the
Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed
rates.
REPORTS TO NOTEHOLDERS
Monthly reports which contain information concerning
the Trust Fund for a series of Notes will be sent by the
Master Servicer, 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.
TABLE OF CONTENTS
Caption Page
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . 3
REPORTS TO NOTEHOLDERS . . . . . . . . . . . . . . . 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE. . 3
SUMMARY OF PROSPECTUS. . . . . . . . . . . . . . . . 6
RISK FACTORS . . . . . . . . . . . . . . . . . . . . 13
Special Features of the Revolving Credit
Loans. . . . . . . . . . . . . . . . . . . 13
Limitations, Reduction and Substitution of
Credit Enhancement . . . . . . . . . . . . 16
Yield and Prepayment Considerations . . . . . . 16
Limited Liquidity . . . . . . . . . . . . . . . 17
Limited Obligations . . . . . . . . . . . . . . 17
THE MORTGAGE POOLS . . . . . . . . . . . . . . . . . 18
General . . . . . . . . . . . . . . . . . . . . 18
Revolving Credit Loans. . . . . . . . . . . . . 21
REVOLVING CREDIT LOAN PROGRAM. . . . . . . . . . . . 23
Underwriting Standards. . . . . . . . . . . . . 24
Qualifications of Sellers . . . . . . . . . . . 27
Representations Relating to Revolving Credit
Loans. . . . . . . . . . . . . . . . . . . 28
Subservicing. . . . . . . . . . . . . . . . . . 31
DESCRIPTION OF THE NOTES . . . . . . . . . . . . . . 31
General . . . . . . . . . . . . . . . . . . . . 31
Form of Notes . . . . . . . . . . . . . . . . . 32
Assignment of Revolving Credit Loans. . . . . . 35
Review of Revolving Credit Loans. . . . . . . . 36
Payments on Revolving Credit Loans; Deposits
to Payment Account . . . . . . . . . . . . 38
Withdrawals from the Custodial Account. . . . . 40
Payments. . . . . . . . . . . . . . . . . . . . 41
Principal and Interest on the Notes . . . . . . 42
Funding Account . . . . . . . . . . . . . . . . 42
Reports to Noteholders. . . . . . . . . . . . . 43
Hazard Insurance; Claims Thereunder . . . . . . 44
DESCRIPTION OF CREDIT ENHANCEMENT. . . . . . . . . . 46
Financial Guaranty Insurance Policy . . . . . . 47
Letter of Credit. . . . . . . . . . . . . . . . 48
Subordination . . . . . . . . . . . . . . . . . 48
Overcollateralization . . . . . . . . . . . . . 49
Reserve Funds . . . . . . . . . . . . . . . . . 49
Maintenance of Credit Enhancement . . . . . . . 50
Reduction or Substitution of Credit
Enhancement. . . . . . . . . . . . . . . . 51
THE COMPANY. . . . . . . . . . . . . . . . . . . . . 51
RESIDENTIAL FUNDING CORPORATION. . . . . . . . . . . 52
SERVICING OF REVOLVING CREDIT LOANS. . . . . . . . . 52
YIELD AND PREPAYMENT CONSIDERATIONS. . . . . . . . . 63
CERTAIN LEGAL ASPECTS OF REVOLVING CREDIT LOANS
AND RELATED MATTERS. . . . . . . . 69
General . . . . . . . . . . . . . . . . . . . . 69
Cooperative Loans . . . . . . . . . . . . . . . 70
Tax Aspects of Cooperative Ownership. . . . . . 71
Foreclosure on Revolving Credit Loans . . . . . 71
Foreclosure on Shares of Cooperatives . . . . . 73
Rights of Redemption. . . . . . . . . . . . . . 75
Anti-Deficiency Legislation and Other
Limitations on Lenders . . . . . . . . . . 75
Environmental Legislation . . . . . . . . . . . 77
Enforceability of Certain Provisions. . . . . . 78
Applicability of Usury Laws . . . . . . . . . . 79
Alternative Mortgage Instruments. . . . . . . . 79
Soldiers' and Sailors' Civil Relief Act of
1940 . . . . . . . . . . . . . . . . . . . 80
Junior Mortgages; Rights of Senior
Mortgagees . . . . . . . . . . . . . . . . 80
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. . . . . . . 82
STATE AND OTHER TAX CONSEQUENCES . . . . . . . . . . 89
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . 89
LEGAL INVESTMENT MATTERS . . . . . . . . . . . . . . 91
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . 91
METHODS OF DISTRIBUTION. . . . . . . . . . . . . . . 92
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . 93
FINANCIAL INFORMATION. . . . . . . . . . . . . . . . 93
INDEX OF PRINCIPAL DEFINITIONS . . . . . . . . . . . 94
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety
by reference to the detailed information appearing
elsewhere in this Prospectus and by reference to the
information with respect to each series of 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 . . . . . . Home Equity Loan-Backed
Notes.
Company. . . . . . . . . . . . Residential Funding
Mortgage Securities II,
Inc., the depositor.
See "The Company."
Master Servicer. . . . . . . . The related Prospectus
Supplement may identify
an entity named as
Master Servicer, which
may be Residential
Funding Corporation, an
affiliate of the Company
("Residential Funding").
See "Residential Funding
Corporation" and
"Servicing of the
Revolving Credit
Loans-Certain Matters
Regarding the Master
Servicer and the Com-
pany."
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
Mortgage Pool of
Revolving Credit Loans
as further described
herein (exclusive of any
portion of interest
payments (the "Spread")
relating to each
Revolving Credit Loan
retained by the Company
or any of its
affiliates) or certain
balances thereof or
interests therein, which
may include Mortgage
Securities as defined
herein, 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 will consist of
one or more classes,
each of which 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, 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 which
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 Trust Fund. 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.
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 Revolving
Credit Loans. See
"Description of Credit
Enhancement-Subordinati
on." 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 Revolving
Credit Loans or Mortgage
Securities will be
guaranteed or insured by
any governmental agency
or instrumentality or
the Company, Residential
Funding, GMAC Mortgage
Corporation ("GMAC
Mortgage") or any of
their affiliates. See
"Risk Factors-Limited
Obligations."
The Mortgage Pools . . . . . . As specified in the
related Prospectus
Supplement, each Trust
Fund will consist
primarily of Revolving
Credit Loans or certain
balances thereof or
interests therein
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"). All
Revolving Credit Loans
will have been purchased
by the Company, either
directly or through
Residential Funding,
from mortgage loan
originators or sellers
not affiliated with the
Company, from GMAC
Mortgage Corporation of
PA, an affiliate of the
Company or other
affiliates. See
"Revolving Credit Loan
Program." For a
description of the types
of Revolving Credit
Loans that may be
included in the Mortgage
Pools, see "The Mortgage
Pools-The Revolving
Credit Loans."
If specified in the
related Prospectus
Supplement, a Trust Fund
may include mortgage
pass-through
certificates or other
instruments evidencing
interests in or secured
by Revolving Credit
Loans ("Mortgage
Securities"), as
described herein. See
"The Mortgage
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
with no principal
balance will not receive
payments of principal.
In the event that
principal payments on
the Revolving Credit
Loans 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 the Revolving
Credit Loans, 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 Mortgage
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 Revolving Credit
Loans in respect of
principal may be
deposited in a
segregated account to be
applied to acquire
additional Revolving
Credit Loans 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 Revolving
Credit Loans 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 Considerations
The Revolving Credit Loans
supporting a series of
Notes 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
Revolving Credit Loans.
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
losses are first
allocated to such
Subordinate Securities
up to a specified limit
or in the form of
Overcollateralization.
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). 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 Mortgage
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 Prosp-
ectus 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 or
any other Plan which is
subject to ERISA or
Section 4975 of the Code
(as defined herein) 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" in the
related Prospectus
Supplement.
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.
RISK FACTORS
Investors should consider, among other things, the
following factors in connection with the purchase of the
Notes:
Special Features of the Revolving Credit Loans
General
Although all of the Revolving Credit Loans will be
secured by liens on Mortgaged Properties, such collateral
may not provide assurance of repayment of the Revolving
Credit Loan comparable to that provided under many first
lien lending programs, and the Revolving Credit Loans
(especially those with high Combined Loan-to-Value
ratios) may have risk of repayment characteristics more
similar to unsecured consumer loans.
Since the Revolving Credit Loans may be 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 junior mortgages only to the
extent that the claims of such senior mortgages have been
satisfied in full, including any related foreclosure
costs. For Revolving Credit Loans secured by junior
liens that have low Junior Ratios (as defined
herein), foreclosure costs may be substantial relative to
the outstanding balance of the Revolving Credit Loan upon
default, and therefore the amount of any liquidation
proceeds payable to Noteholders may be smaller as a
percentage of the outstanding balance of the Revolving
Credit Loan than would be the case in a typical pool of
first lien residential loans. In addition, the holder of
a Revolving Credit 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. 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 the Revolving Credit Loan 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, and (ii) incur losses if any deficiency
judgment obtained is not realized upon. See "Certain
Legal Aspects of Revolving Credit Loans 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
Revolving Credit Loans. 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 "Special Features of the Revolving
Credit Loans-Mortgagor Credit Risks"), 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 Revolving Credit Loans secured by
junior liens that have high Combined Loan-to-Value Ratios
(as defined herein) or low Junior Ratios, the
foregoing considerations may result in circumstances
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 Revolving Credit Loan 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
Revolving Credit Loan would be dependent solely on the
credit of the borrower under the Revolving Credit Loan
(the "Mortgagor"), and the ability to obtain repayment of
the Revolving Credit Loan may be generally similar to
that which would be experienced if the Revolving Credit
Loan were an unsecured consumer loan. Moreover, while in
most jurisdictions a mortgagee would be permitted to
elect to either foreclose or sue to collect the debt
evidenced by the Mortgage Note, in some jurisdictions
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. See
"-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 Revolving Credit
Loans, 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 extreme
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 Revolving
Credit Loans or on any other floating rate debt of the
Mortgagor. In addition, for any Revolving Credit Loans
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 Revolving Credit
Loan, 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 the Revolving Credit Loans.
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 Revolving Credit Loans
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 the Revolving Credit Loans.
Revolving Credit Loan Characteristics
Certain of the types of Revolving Credit Loans which
may be included in the Mortgage Pools may involve
additional uncertainties not present in traditional types
of mortgage loans, or in home equity loans originated
under other programs.
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 Mortgage Pool (or certain
classes thereof) will bear all risk of such losses
resulting from default by Mortgagors.
Limitations, Reduction and Substitution of Credit
Enhancement
With respect to each series of Notes, credit
enhancement will be provided to cover delinquencies and
losses on the underlying Revolving Credit Loans, 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. 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 Revolving Credit Loans (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 Revolving Credit Loans,
changes in the Mortgage Rates or Gross Margins applicable
to the Revolving Credit Loans pursuant to the terms
thereof, and changes in the relationship between the
Mortgage Rates on the Revolving Credit Loans 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).
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 of the obligations
of any applicable credit support provider, or as a result
of losses on the related Revolving Credit Loans 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 nor any of
their affiliates will have any obligation to replace or
supplement any credit enhancement, or to take any other
action to maintain any rating of any series of 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 Revolving Credit Loans, 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. 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, Revolving Credit Loans 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
Revolving Credit Loans 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 Revolving Credit
Loans. See "Risk Factors-Special Features of the
Revolving Credit Loans" 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.
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 or any Mortgage
Securities will be the obligations (if any) of
Residential Funding pursuant to certain limited
representations and warranties made with respect to the
Revolving Credit Loans, 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. Neither the Notes nor the
underlying Revolving Credit Loans or Mortgage Securities
will be guaranteed or insured by any governmental agency
or instrumentality, or by the Company, Residential
Funding, GMAC Mortgage or any of their affiliates.
Proceeds of the assets included in the related Trust Fund
for each series of Notes (including the Revolving Credit
Loans or Mortgage Securities 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 MORTGAGE POOLS
General
Unless otherwise specified in the related Prospectus
Supplement, each Mortgage Pool will consist primarily of
Revolving Credit Loans or certain balances thereof, minus
the Spread, if any, or any other interest retained by the
Company or any affiliate of the Company, 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, or interests in such
Revolving Credit Loans (which may include Mortgage
Securities). 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 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 Mortgage 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" includes Cooperative Loans,
"Mortgaged Properties" includes shares in the related
Cooperative and the related proprietary leases or
occupancy agreements securing Cooperative Notes,
"Mortgage Notes" includes Cooperative Notes and
"Mortgages" includes a security agreement with respect to
a Cooperative Note.
Each Revolving Credit Loan will be selected by the
Company for inclusion in a Mortgage Pool from among those
purchased by the Company, either directly or through its
affiliates, including Residential Funding, 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") or from GMAC Mortgage,
the indirect parent of the Company, and its affiliates
("Affiliated Sellers"; Unaffiliated Sellers and
Affiliated Sellers are collectively referred to herein as
"Sellers"), all as described below under "Revolving
Credit Loan Program." If a Mortgage Pool is composed of
Revolving Credit Loans acquired by the Company directly
from Sellers other than Residential Funding, the related
Prospectus Supplement will specify the extent of
Revolving Credit Loans so acquired. The characteristics
of the Revolving Credit Loans 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 Mortgage Pool but were not selected for
inclusion in such Mortgage Pool.
Under certain circumstances, the Revolving Credit
Loans 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
Revolving Credit Loans, or may be offered under any of
the other methods described herein under "Methods of
Distribution." The related Prospectus Supplement for a
Mortgage Pool composed of Revolving Credit Loans 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 Revolving Credit Loans and the
underwriting standards applicable to the Revolving Credit
Loans. None of the Company, Residential Funding, GMAC
Mortgage or any of their affiliates will make any
representation or warranty with respect to such Revolving
Credit Loans, 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
Mortgage Securities. The Mortgage 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 Mortgage Securities and any related credit
enhancement, and the Revolving Credit Loans underlying
such Mortgage Securities will be described together with
any other Revolving Credit Loans included in the Mortgage
Pool relating to such series.
In addition, with respect to any series of Notes
secured by Mortgage Securities, such Mortgage 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 Revolving Credit
Loans 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 Revolving Credit Loans and any related assets
and the issuance of ownership interests in such Revolving
Credit Loans and certain activities incidental thereto.
Any such Ownership Interest will evidence an ownership
interest in the related Revolving Credit Loans as well as
the right to receive specified cash flows derived from
such Revolving Credit Loans, 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 Revolving Credit Loans, 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, as used herein the term
"Mortgage Pool" includes the Revolving Credit Loans
underlying such Mortgage Securities.
The Prospectus Supplement for each series of Notes
will contain information as to the type of Revolving
Credit Loans which will be included in the related
Mortgage 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 Revolving
Credit Loans, (ii) the type of property securing the
Revolving Credit Loans and related lien priority, (iii)
the original or modified terms to maturity of the
Revolving Credit Loans, (iv) the earliest origination or
modification date and latest maturity date of the
Revolving Credit Loans, (v) the Loan-to-Value Ratios or
Combined Loan-to-Value Ratios of the Revolving Credit
Loans, as applicable, (vi) the Mortgage Rate or range of
Mortgage Rates borne by the Revolving Credit Loans, (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 and (x) 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 related Trust
Agreement, with the Securities and Exchange Commission
(the "Commission") within fifteen days after the initial
issuance of such Notes. The composition and
characteristics of a Mortgage Pool 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 the Mortgage Pool. In the event
that Revolving Credit Loans 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, 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. 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 Revolving Credit Loans
constituting each Mortgage Pool (or Mortgage 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 Revolving Credit
Loans, either directly or through other mortgage
servicing institutions ("Subservicers"), pursuant to a
Servicing Agreement and will receive a fee for such
services. See "Revolving Credit Loan Program" and
"Description of the Notes." With respect to those
Revolving Credit Loans 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 Revolving Credit Loans. 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 Revolving Credit
Loans (or Mortgage Securities evidencing interests
therein) to the Owner Trustee on behalf of the Trust will
be without recourse. See "Description of the
Notes-Assignment of Revolving Credit Loans." The Master
Servicer's obligations with respect to the Revolving
Credit Loans 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 "Revolving Credit Loan
Program-Representations Relating to Revolving Credit
Loans," and "-Subservicing" and "Description of the
Notes-Assignment of Revolving Credit Loans" or pursuant
to the terms of any Mortgage 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.
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.
A Mortgaged Property securing a Revolving Credit
Loan 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 Mortgage Pool, and
the Company, an affiliate of the Company or an
Unaffiliated Seller may have an interest in such mortgage
loan. Since the Revolving Credit Loans are primarily
secured by junior liens, such loans generally will not be
required by the Company to be covered by a primary
mortgage guaranty insurance policy insuring against
default on such Revolving Credit Loan.
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 according to the daily simple interest
method, 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 the Revolving Credit Loans-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 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 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
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.
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 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.
REVOLVING CREDIT LOAN PROGRAM
The Revolving Credit Loans 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" or as described in the related
Prospectus Supplement.
Underwriting Standards
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. See "Underwriting Standards-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 Mortgage 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 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 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).
The underwriting standards utilized in negotiated
transactions and Master Commitments and the underwriting
standards applicable to Revolving Credit Loans underlying
Mortgage 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
Mortgage 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
Corporation of PA and Residential Money Centers, with
underwriting standards generally in accordance with the
Guide or as otherwise agreed to by the Company. However,
certain of the Revolving Credit Loans may be employee or
preferred customer loans with respect to which, in
accordance with such affiliate's mortgage loan programs,
no income, asset or employment verifications or
appraisals were required. 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 twelve months existed. Borrowers who have less than
a twelve month first mortgage payment history will 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 will not be allowed and a borrower 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-Adequacy of Mortgaged Property" and "Description
of the Notes-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 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.
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 permit CLTV's as
high as 100%; 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 possess certain
qualifications as of the date such Seller is approved to
sell loans to Residential Funding. Each Seller from whom
a Revolving Credit Loan is acquired will have been
approved by Residential Funding for participation in
Residential Funding's loan purchase programs. 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 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.
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 Revolving Credit Loan 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.
A significant portion of the Revolving Credit Loans
in each Mortgage Pool may have been originated by Sellers
who do not possess but exceed the above-mentioned
qualifications. With respect to certain Sellers who exceed
such qualifications and also have delinquency and
foreclosure rates with respect to their conventional loan
portfolios acceptable to Residential Funding in its sole
discretion, some of the generally applicable underwriting
standards and program criteria described herein and in the
Guide are often modified or waived with respect to
Revolving Credit Loans originated or sold to the
Company by such Sellers. The extent to which standards
and criteria are modified or waived depends upon certain
factors, including, without limitation, the net worth and
financial performance of such Seller and the performance
of such Seller's mortgage loan portfolio and those
mortgage loans previously sold by it to Residential
Funding. Although a Seller's underwriting decisions
may not be reviewed prior to the initial purchase of
mortgage loans from it, such decisions will generally
have been reviewed for compliance with the applicable
underwriting standards prior to inclusion of such
mortgage loans in the Trust Fund for a series of Notes.
However, with respect to certain Sellers who exhibit
strong net worth, excellent financial performance and
low delinquency and foreclosure rates with respect
to its mortgage loans, such Seller's underwriting
decisions may not be subject to such review.
Representations Relating to Revolving Credit Loans
Unless otherwise specified in the related Prospectus
Supplement, each Seller will have made representations
and warranties in respect of the Revolving Credit Loans
sold by such Seller and evidenced by a series of Notes.
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 Mortgage Pool consisting of
Revolving Credit Loans purchased by the Company from
Sellers through Residential Funding, Residential Funding,
except in the case of a Designated Seller Transaction or
as to Revolving Credit Loans underlying any Mortgage
Securities or unless otherwise specified in the related
Prospectus Supplement, will have made certain limited
representations and warranties regarding the Revolving
Credit Loans to the Company at the time (just prior to
the initial issuance of the related series of Notes) 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 Revolving Credit Loans
is true and correct in all material respects; (ii)
Residential Funding was the sole holder and owner of the
Revolving Credit Loan free and clear of any and all liens
and security interests; (iii) each Revolving Credit Loan
complied in all material respects with all applicable
local, state and federal laws; (iv) except as otherwise
indicated in the related Prospectus Supplement, no
Revolving Credit Loan is one month or more delinquent in
payment of principal and interest; and (v) there is no
delinquent tax or assessment lien against any Mortgaged
Property. In the event of a breach of a representation
or warranty made by Residential Funding that materially
adversely affects the interests of the Noteholders in a
Revolving Credit Loan, Residential Funding will be
obligated to repurchase or substitute for such Revolving
Credit Loan as described below. In addition, Residential
Funding will be obligated to repurchase or substitute for
any Revolving Credit Loan 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 in
the listing of related Revolving Credit Loans, 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,
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 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 Revolving Credit Loan 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 Revolving Credit Loan, in the manner described
below. However, Residential Funding will not be required
to repurchase or substitute for any Revolving Credit Loan
as described above if the circumstances giving rise to
such requirement also constitute fraud in the origination
of the related Revolving Credit Loan. Furthermore,
because the listing of the related Revolving Credit Loans
generally contains information with respect to the
Revolving Credit Loans 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 Revolving Credit Loans between the
Cut-off Date and the Closing Date. Neither Residential
Funding nor any Seller will be required to purchase or
substitute for any Revolving Credit Loan as a result of
such prepayment or modification.
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 Revolving Credit Loans 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 Revolving Credit Loan 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 Revolving Credit Loan 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 Revolving Credit Loan which materially and
adversely affects the interests of the Noteholders in
such Revolving Credit Loan, 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 Revolving Credit Loan at a
price (the "Purchase Price") set forth in the related
Agreement, which Purchase Price 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 the Spread,
if any).
Unless otherwise specified in the related Prospectus
Supplement, as to any such Revolving Credit Loan required
to be purchased by Residential Funding as provided above,
rather than purchase the Revolving Credit Loan,
Residential Funding may, at its sole option, remove such
Revolving Credit Loan (a "Deleted Loan") from the Trust
Fund (or from the assets underlying any Mortgage
Securities, if applicable) and cause the Company to
substitute in its place another Revolving Credit Loan 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 Revolving Credit Loan
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,
following such 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. In
instances where a Designated Seller is unable, or
disputes its obligation, to purchase affected Revolving
Credit Loans, 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 could provide
for, among other things, the purchase of only a portion
of the affected Revolving Credit Loans. Any such
settlement could lead to losses on the Revolving Credit
Loans which would be borne by the related Notes. 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 Revolving Credit Loan. 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 any
representation by a Designated Seller or by Residential
Funding in its capacity as a seller of Revolving Credit
Loans 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 Revolving Credit Loan 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 Revolving
Credit Loans. Such a default by a Designated Seller is
not a default by the Company or by the Master Servicer.
Any Revolving Credit Loan 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, to the extent available.
Notwithstanding the foregoing, with respect to any
Designated Seller that requests Residential Funding's
consent to the transfer of subservicing rights relating
to any Revolving Credit Loans 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 Revolving Credit Loan 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 Corporation of PA 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 Revolving Credit Loans,
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"), or on the basis of collections from designated
portions of the Mortgage 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.
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 is incorporated under the laws of Luxembourg
as a professional depository. CEDEL holds securities for
its participating organizations ("CEDEL Participants")
and facilitates the clearance and settlement of
securities transactions between CEDEL Participants
through electronic book-entry changes in accounts of
CEDEL Participants, thereby eliminating the need for
physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including
United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for
safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending
and borrowing. CEDEL interfaces with domestic markets in
several countries. As a professional depository, CEDEL is
subject to regulation by the Luxembourg Monetary
Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies,
checkering corporations and certain other organizations.
Indirect access to CEDEL is also available to others,
such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with
a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for
participants of Euroclear ("Euroclear Participants") and
to clear and settle transactions between Euroclear
Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need
for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 31 currencies,
including United States dollars. Euroclear includes
various other services, including securities lending and
borrowing and interfaces with domestic markets in several
countries generally similar to the arrangements for
cross-market transfers with DTC described above.
Euroclear is operated by the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance
Systems S.C., a Belgian co-operative corporation (the
"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.
Euroclear Participants include banks (including central
banks), securities brokers and dealers and other
professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear
through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a
New York banking corporation which is a member bank of
the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well
as the Belgian Banking Commission. Securities clearance
accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the
Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from
Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are
held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and
has no record of or relationship with persons holding
through Euroclear Participants.
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, 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 Revolving Credit Loans
At the time of issuance of a series of Notes, the
Company will cause the Revolving Credit Loans or Mortgage
Securities 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 all principal and interest
received on or with respect to such Revolving Credit
Loans or Mortgage Securities after the Cut-off Date
(other than principal and interest due on or before the
Cut-off Date and any Spread). The 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 Revolving Credit Loan
or Mortgage Security 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 Revolving Credit Loan as
of the Cut-off Date, as well as information respecting
the Mortgage Rate, the currently scheduled monthly
payment of principal and interest, the maturity of the
Mortgage Note and the Combined Loan-to-Value Ratio at
origination or modification.
The Company will, as to each Revolving Credit Loan
other than Revolving Credit Loans underlying any Mortgage
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
Revolving Credit Loan that are in possession of the
Company, which may include: (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); and
(iv) if applicable, any riders or modifications to such
Mortgage Note and Mortgage, together with certain other
documents at such times as set forth in the related
Agreement. Such assignments may be blanket assignments
covering Mortgages secured by Mortgaged Properties
located in the same county, if permitted by law. If so
provided in the related Prospectus Supplement, the
Company may not be required to deliver one or more of
such documents if such documents are missing from the
files of the party from whom such Revolving Credit Loans
were purchased.
In the event that, with respect to any Revolving
Credit Loan, 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.
Assignments of the Revolving Credit Loans 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 the Revolving
Credit Loan against the claim of any subsequent
transferee or any successor to or creditor of the Company
or the originator of such Revolving Credit Loan, 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
Revolving Credit Loans from the Trust Fund for cash, or
in exchange for other Revolving Credit Loans or Permitted
Investments. Alternatively, for any series of Notes
secured by Mortgage Securities, the Company may have the
right to so repurchase Revolving Credit Loans from the
entity that issued such Mortgage Securities. All
provisions relating to such optional repurchase
provisions will be described in the related Prospectus
Supplement.
Review of Revolving Credit Loans
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 Revolving Credit Loans
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 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 Revolving Credit Loan or any
property acquired in respect thereof from the Indenture
Trustee, or if permitted substitute for such Revolving
Credit Loan a new Revolving Credit Loan 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 "Revolving Credit Loan
Program-Representations Relating to Revolving Credit
Loans," but such obligation is subject to the provisions
described below under "-Realization Upon Defaulted
Loans." There can be no assurance that the applicable
Designated Seller will fulfill its obligation to purchase
any Revolving Credit Loan 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 Revolving Credit Loan 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 Revolving
Credit Loan constitutes the sole remedy available to the
Noteholders or the Indenture Trustee for a material
defect in a constituent document. Any Revolving Credit
Loan 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
and adversely affects the interests of the
Securityholders in a Revolving Credit Loan, the Master
Servicer will be obligated either to cure the breach in
all material respects or to purchase the Revolving Credit
Loan at its Purchase Price (less unreimbursed advances,
if applicable, made by the Master Servicer with respect
to such Revolving Credit Loan) or, unless otherwise
specified in the related Prospectus Supplement, to
substitute for such Revolving Credit Loan an Eligible
Substitute Loan in accordance with the provisions for
such substitution described above under "Revolving Credit
Loan Program-Representations Relating to Revolving Credit
Loans." Unless otherwise 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 Revolving Credit Loan not so
purchased or substituted for shall remain in the related
Trust Fund.
As to any series of Notes secured by Mortgage
Securities, the applicable procedures for service of the
related Revolving Credit Loans will be described in the
related Prospectus Supplement.
Payments on Revolving Credit Loans; Deposits to Payment
Account
Each Subservicer servicing a Revolving Credit Loan
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. 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
Revolving Credit Loans, 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 Revolving Credit
Loans 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 Revolving Credit Loan 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
including principal payments received in advance of
the date on which the related monthly payment is
due (the "Due Date") ("Principal Prepayments"), on
the Revolving Credit Loans or on the Mortgage
Securities comprising a Trust Fund;
(ii) payments on account of interest on the
Revolving Credit Loans or on the Mortgage
Securities 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
Revolving Credit Loan, by foreclosure or otherwise
("Liquidation Proceeds"), including all proceeds of
any hazard or other insurance policy covering any
Revolving Credit Loan in such Mortgage 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 Revolving Credit Loan in
such Trust Fund purchased (or, in the case of a
substitution, certain amounts representing a
principal adjustment) by the Master Servicer, the
Company, Residential Funding, any Subservicer or
Seller or any other person pursuant to the terms of
the related Agreement. See "Revolving Credit Loan
Program-Representations Relating to Revolving
Credit Loans," and "-Assignment of Revolving Credit
Loans" 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 Revolving Credit Loans 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 one or more classes of
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 meets 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 each 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 Revolving Credit Loans as described under
"Description of the Notes-Hazard Insurance; Claims
Thereunder" below, any payments received on any Mortgage
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 Revolving Credit Loan that is
allocable to Spread will generally be deposited into the
Custodial Account, but 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.
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 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 in "-Payments on
Revolving Credit Loans; 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 Revolving Credit Loan 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
Revolving Credit Loan;
(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 Revolving Credit Loans,
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 Revolving
Credit Loan 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 Spread, if
any, out of collections or payments which represent
interest on each Revolving Credit Loan (including
any Revolving Credit Loan 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 or against
which it or the Company is indemnified pursuant to
the related Agreement;
(viii) to clear the Custodial Account of
amounts relating to the corresponding Revolving
Credit Loans in connection with the termination of
the Trust Fund pursuant to the related Agreement,
as described in "The Agreements-Termination;
Redemption of Notes";
(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"). 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
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 Revolving Credit Loans, 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
Revolving Credit Loans otherwise available for payment to
the Notes are reinvested in Additional Balances or
additional Revolving Credit Loans 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
Revolving Credit Loans to the related Trust after the
Closing Date. Such additional Revolving Credit Loans
will be required to conform to the requirements set forth
in the related Agreement or other agreement providing for
such transfer. As specified in the related Prospectus
Supplement, such transfer may be funded by the
establishment of a Funding Account (a "Funding Account").
If a Funding Account is established, all or a portion of
the proceeds of the sale of one or more Classes of Notes
of the related series or a portion of collections on the
Revolving Credit Loans in respect of principal will be
deposited in such account to be released as additional
Revolving Credit Loans are transferred. Unless otherwise
specified in the related Prospectus Supplement, a Funding
Account will be required to be maintained as an Eligible
Account, all amounts therein will be required to be
invested in Permitted Investments and the amount held
therein shall at no time exceed 25% of the aggregate
outstanding principal balance of the Notes. Unless
otherwise specified in the related Prospectus Supplement,
the related Agreement or other agreement providing for
the transfer of additional Revolving Credit Loans 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 Revolving
Credit Loans) 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 Revolving Credit Loans 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 Revolving
Credit Loans in the related Mortgage Pool that are
delinquent (a) one month, (b) two months and
three months, and that are in foreclosure and the
aggregate principal balances of such Revolving
Credit Loans 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; and
(xi) with respect to any series of Notes as to
which the Trust Fund includes Mortgage Securities,
certain additional information as required under
the related Agreement.
Each amount set forth pursuant to clause (I) and
(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 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, 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
Each Revolving Credit Loan (other than a Cooperative
Loan) will be required to be covered by a hazard
insurance policy (as described below). 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 Revolving Credit Loans 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.
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 such Mortgaged Property or
(ii) the outstanding balance of such Revolving Credit
Loan plus the outstanding balance on any mortgage loan
senior to such Revolving Credit Loan 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 the Revolving Credit
Loans. 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 Revolving Credit Loan,
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.
Since the amount of hazard insurance that Mortgagors
are required to maintain on the improvements securing the
Revolving Credit Loans may decline as the principal
balances owing thereon decrease, and since residential
properties have historically appreciated in value over
time, hazard insurance proceeds could be insufficient to
restore fully the damaged property in the event of a
partial loss.
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; a surety bond, 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.
As to each series of Notes, each element of the
credit support will cover losses or shortfalls incurred
on the Revolving Credit Loans, 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
Revolving Credit Loan. 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 (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 Revolving Credit Loan, including a
reduction by a bankruptcy court of the principal balance
of or the Mortgage Rate on a Revolving Credit Loan or an
extension of its maturity (any such loss, a "Bankruptcy
Loss"); and (iv) incurred on defaulted Revolving Credit
Loans as to which there was fraud in the origination of
such Revolving Credit Loans (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 Revolving Credit Loan
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
Revolving Credit Loan. With respect to a Revolving
Credit Loan 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 Revolving
Credit Loan as of any date of determination is equal to
the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due
on or before the Cut-off Date whether 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 not
otherwise described herein, 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 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 an
issuer of any third-party credit enhancement (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 or
surety bond (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 Revolving Credit Loan 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 Revolving
Credit Loans. 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.
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 Revolving Credit
Loans 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 Revolving
Credit Loans, 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 such Prospectus Supplement. In the
alternative or in addition to such deposit, to the extent
described in the related Prospectus Supplement, a Reserve
Fund may be funded through application of all or a
portion of amounts otherwise payable on any related
Subordinate Securities, from the 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 Revolving Credit Loan 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,
Spread or other cash flows attributable to the related
Revolving Credit Loans or on reinvestment income, the
Reserve Fund may provide less coverage than initially
expected if the cash flows or reinvestment income on
which such funding is dependent are lower than
anticipated. With respect to any series of 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 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.
If any property securing a defaulted Revolving
Credit Loan 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 the
Revolving Credit Loan 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 Revolving Credit
Loan and in the event such determination has been
incorrectly made, is entitled to reimbursement of its
expenses in connection with such restoration.
Reduction or Substitution of Credit Enhancement
The amount of credit support provided with respect
to any series of Notes 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, the Master Servicer will not 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 will not be available
for payments in future periods.
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 and
mortgage securities and issuing securities backed by such
mortgage loans and mortgage securities. The Company
anticipates that it will in many cases have acquired
Revolving Credit Loans indirectly through Residential
Funding, which is also an indirect wholly-owned
subsidiary of GMAC Mortgage. The Company does not have,
nor is it expected in the future to have, any significant
assets.
The 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 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 March 31, 1996, Residential Funding was master
servicing a first lien loan portfolio of approximately
$28.9 billion.
SERVICING OF REVOLVING CREDIT LOANS
The Master Servicer will be required to service and
administer the Revolving Credit Loans in a manner
generally consistent with the Guide and 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").
Subservicing
In connection with any series of Securities the
Master Servicer may enter into one or more Subservicing
Agreements. See "Revolving Credit Loan 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 Revolving Credit Loan, 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 Revolving Credit Loans. 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 Revolving Credit Loans. 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
Revolving Credit Loan pursuant to the terms of the
Subservicing Agreement for the entire term of such
Revolving Credit Loan, 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 Revolving
Credit Loans 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 required under the
Revolving Credit Loans and will, consistent with the
Servicing Agreement and any 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 Revolving
Credit Loans. Consistent with the foregoing, the Master
Servicer may in its discretion (I) waive any late payment
charge or any prepayment charge or penalty interest in
connection with the prepayment of a Revolving Credit Loan
and (ii) extend the Due Date for payments due on a
Revolving Credit Loan, provided, however, that the Master
Servicer shall first determine that any such waiver or
extension will not impair the coverage of any related
insurance policy or materially adversely affect the lien
of the related Mortgage. With respect to any series of
Notes as to which the Trust Fund includes Mortgage
Securities, the Master Servicer's servicing and
administration obligations will be pursuant to the terms
of such Mortgage Securities.
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
Revolving Credit Loan will affect the interest rate or
rates used in calculating payments to Securityholders.
See "-Payments."
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
on the related Mortgaged Property.
Realization Upon Defaulted Loans
With respect to a Revolving Credit Loan in default,
the Master Servicer or the related Subservicer will
decide whether to foreclose upon the Mortgaged Property
or write off the principal balance of the Revolving
Credit Loan, as a bad debt. In connection with such
decision, the Master Servicer or the related Subservicer
will, following usual practices in connection with senior
and junior mortgage servicing activities, estimate the
proceeds expected to be received and the expenses
expected to be incurred in connection with such
foreclosure to determine whether a foreclosure proceeding
is appropriate. To the extent that a Revolving Credit
Loan is a junior Revolving Credit Loan, following any
default thereon, unless foreclosure proceeds for such
Revolving Credit Loan are expected to at least satisfy
the related senior mortgage loan in full and to pay
foreclosure costs, it is likely that such Revolving
Credit Loan will be written off as bad debt with no
foreclosure proceeding. See "Risk Factors-Special
Features of the Revolving Credit Loans" 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 Revolving Credit Loan, such
Revolving Credit Loan (an "REO Revolving Credit Loan")
will be considered for most purposes to be an outstanding
Revolving Credit Loan 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
Revolving Credit Loan (a "Liquidated Revolving Credit
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 in default,
the Master Servicer may pursue foreclosure (or similar
remedies) subject to any senior loan positions and
certain other restrictions pertaining to junior loans as
described under "Certain Legal Aspects of Revolving
Credit Loans and Related Matters-Foreclosure on Revolving
Credit Loans" 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 Revolving Credit Loan will be removed from
the related Trust Fund. The Master Servicer may elect to
treat a defaulted Revolving Credit Loan 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 Revolving Credit Loan 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 Revolving Credit Loan. 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 Revolving
Credit Loan.
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 Revolving
Credit Loan or REO Revolving Credit 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 Revolving Credit Loan after a specified period
of delinquency. If a defaulted Revolving Credit Loan or
REO Revolving Credit 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 liquidation of an REO Revolving
Credit 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 Revolving Credit Loans, 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 Revolving Credit Loan 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 Revolving Credit Loan. See "Revolving
Credit Loan 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.
In addition, 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.
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 the fees and
disbursements of the Indenture Trustee, any custodian
appointed by the Indenture Trustee, 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 Revolving Credit
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).
The Prospectus Supplement for a series of Notes will
specify whether there will be any Spread retained. Any
such Spread will be a specified portion of the interest
payable on each Revolving Credit Loan in a Mortgage Pool.
Any such Spread will be established on a loan-by-loan
basis and the amount thereof with respect to each
Revolving Credit Loan in a Mortgage Pool will be
specified on an exhibit to the related Agreement. Any
Spread in respect of a Revolving Credit Loan will
represent a specified portion of the interest payable
thereon and will not be part of the related Trust Fund.
Any partial recovery of interest in respect of a
Revolving Credit Loan will be allocated between the
owners of any Spread and the holders of classes of
Securities entitled to payments of interest as provided
in the Prospectus Supplement and the applicable
Agreement.
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 a 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
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.
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
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
nor any director, officer, employee or agent
of the Master Servicer 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 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
and any director, officer, employee or agent
of the Master Servicer 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 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 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)
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
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 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 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 Mortgage 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 Credit Enhancer,
if applicable), by written notification
to the Master Servicer and to the Issuer or the
Indenture Trustee or the 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 and expenses for
servicing the Revolving Credit Loans during any
period prior to the date of such termination),
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
Revolving Credit Loans 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.
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.
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, (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 any of the holders of Securities covered
by such Agreement, (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); 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 Revolving Credit Loans 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 Securityholders following the earlier of (i) the
final payment or other liquidation or disposition (or any
advance with respect thereto) of the last Revolving
Credit Loan subject thereto and all property acquired
upon foreclosure or deed in lieu of foreclosure of any
such Revolving Credit Loan 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 Revolving Credit Loans and
all property acquired in respect of such Revolving Credit
Loans.
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 Revolving Credit
Loans and the rate and timing of Draws 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 Revolving
Credit Loan 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 "Payment of the
Notes-Payments." Holders of Strip Notes or a class of
Notes having a Interest Rate that varies based on the
weighted average Mortgage Rate of the underlying
Revolving Credit Loans will be affected by
disproportionate prepayments and repurchases of Revolving
Credit Loans having higher Net Mortgage Rates or rates
applicable to the Strip Notes, as applicable.
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 Revolving Credit Loan 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 Spread
(each, a "Net Mortgage Rate")) of the related Revolving
Credit Loans 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 Revolving
Credit Loans following Mortgagor defaults and by
purchases of Revolving Credit Loans in the event of
certain breaches of representations made in respect of
such Revolving Credit Loans. See "Revolving Credit Loan
Program-Representations Relating to Revolving Credit
Loans" and "Description of the Notes-Assignment of
Revolving Credit Loans" above.
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
Revolving Credit Loans (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
Revolving Credit Loans because of the effect on the
timing and amount of payments. In certain circumstances,
rapid principal payments on the Revolving Credit Loans
(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
Revolving Credit Loans (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 Revolving Credit Loans from time to time will
be adversely affected by principal payments on Revolving
Credit Loans with Mortgage Rates higher than the weighted
average Mortgage Rate on the Revolving Credit Loans. 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 a 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 Revolving Credit Loans (net of
Draws if applicable) than other classes of Notes.
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 Revolving
Credit Loans will also affect the rate and timing of
principal payments on the Revolving Credit Loans and thus
the yield on the related Notes. For a general discussion
of the risk of defaults on the Revolving Credit Loans,
see "Risk Factors-Special Features of the Revolving
Credit Loans" herein. There can be no assurance as to
the rate of losses or delinquencies on any of the
Revolving Credit Loans, 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 Revolving
Credit Loans that are not covered by the applicable
credit enhancement, holders of Notes of the series
evidencing interests in the related Mortgage 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 Revolving
Credit Loans, the effect of losses may be to increase
prepayment experience on the Revolving Credit Loans, thus
reducing average weighted life and affecting yield to
maturity.
With respect to certain Revolving Credit Loans, the
Mortgage Rate at origination may be below the rate that
would result from the sum of the then-applicable Index
and Gross Margin. Under the applicable underwriting
standards, Mortgagors are generally qualified based on an
assumed payment which reflects a rate significantly lower
than the maximum rate. The repayment of any such
Revolving Credit Loan 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," 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 the
Revolving Credit Loans-Mortgagor Credit Risks" 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 Revolving Credit
Loan or to sell any Mortgaged Property.
For any Revolving Credit Loans 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.
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,
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 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 the Revolving Credit
Loans-Mortgagor Credit Risks" herein. There can be no
assurance as to the rate of principal payments or Draws
on the Revolving Credit Loans. 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 on the
related Revolving Credit Loans, may also 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, the Revolving Credit Loans 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 Revolving Credit Loans 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 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 Revolving Credit
Loans, 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.
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
Mortgage 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 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, all Revolving Credit Loans will contain
due-on-sale provisions permitting the mortgagee to
accelerate the maturity of the Revolving Credit Loan 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 which would adversely affect or jeopardize
coverage under any applicable insurance policy. See
"Description of the Notes-Collection and Other Servicing
Procedures" and "Certain Legal Aspects of the Revolving
Credit Loans 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 Revolving Credit Loans.
In addition, certain Mortgage Securities included in
a Mortgage Pool may be backed by underlying Revolving
Credit Loans 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 Revolving
Credit Loans.
At the request of the Mortgagor, the Master Servicer
or a Subservicer may allow the refinancing of a Revolving
Credit Loan in any Trust Fund by accepting prepayments
thereon and permitting a new loan secured by a mortgage
on the same property. 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 Revolving Credit Loan. 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 Revolving
Credit Loans, including defaulted Revolving Credit Loans,
that would permit creditworthy borrowers to assume the
outstanding indebtedness of such Revolving Credit Loans.
If the applicable Agreement for a series of Notes
provides for a Funding Account or other means of funding
the transfer of additional Revolving Credit Loans to the
related Trust, as described under "Description of the
Notes; Funding Account" herein, and the Trust is unable
to acquire such additional Revolving Credit Loans 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 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
Revolving Credit Loan 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 Revolving Credit Loans
in any Mortgage Pool at any time may not equal the
prevailing rates for similar, newly originated adjustable
rate home equity mortgage loans or lines of credit, and
accordingly the rate of principal payments and Draws 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 Revolving
Credit Loans that the rate of prepayment may increase as
a result of refinancings. There can be no certainty as
to the rate of principal payments 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 Revolving Credit Loans, 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 Revolving Credit Loans, 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 Revolving Credit Loans in a Trust Fund, thus
resulting in the early retirement of the related Notes.
See "The Servicing of the Revolving Credit
Loans-Termination; Redemption of Notes."
CERTAIN LEGAL ASPECTS OF REVOLVING CREDIT LOANS
AND RELATED MATTERS
The following discussion contains summaries of
certain legal aspects of mortgage loans 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 Mortgaged Properties
may be situated. The summaries are qualified in their
entirety by reference to the applicable federal and state
laws governing the Revolving Credit Loans.
General
The Revolving Credit Loans (other than Cooperative
Loans) will be secured by either deeds of trust or
mortgages, depending upon the prevailing practice in the
state in which the related Mortgaged Property is located,
and may have first, second or third priority. 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 mortgagor delivers to
the mortgagee a note or bond and the mortgage. In the
case of a land trust, there are three parties because
title to the property is held by a land trustee under a
land trust agreement of which the borrower is the
beneficiary; at origination of a mortgage loan, the
borrower executes a separate undertaking to make payments
on the mortgage note. Although a deed of trust is
similar to a mortgage, a deed of trust has three parties:
the trustor who is the borrower-homeowner; the
beneficiary who is the lender; and a third-party grantee
called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid,
in trust, generally with a power of sale, to the trustee
to secure payment of the obligation. The trustee's
authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by the law of the
state in which the real property is located, the express
provisions of the deed of trust or mortgage, and, in
certain deed of trust transactions, the directions of the
beneficiary.
Cooperative Loans
If specified in the Prospectus Supplement relating
to a series of Notes, the Revolving Credit Loans may
include Cooperative Loans. Each debt instrument (a
"Cooperative Note") evidencing a Cooperative Loan will be
secured by a security interest in shares issued by 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 lessee, 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 lender who financed the
purchase by an individual tenant-stockholder of shares of
the Cooperative or, in the case of the Revolving Credit
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
rental payment to the Cooperative pursuant to the
proprietary lease, which rental 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 lender generally takes possession of
the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy
agreement and the Cooperative shares is filed in the
appropriate state and local offices to perfect the
lender's interest in its collateral. Subject to the
limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on
the Cooperative Note, dispose of the collateral at a
public or private sale or otherwise proceed against the
collateral or tenant-stockholder as an individual as
provided in the security agreement covering the
assignment of the proprietary lease or occupancy
agreement and the pledge of Cooperative shares. See
"-Foreclosure on Shares of Cooperatives" below.
Tax Aspects of Cooperative Ownership
In general, a "tenant-stockholder" (as defined in
Section 216(b)(2) of the Internal Revenue Code (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.
Foreclosure on Revolving Credit Loans
Although a deed of trust may also be foreclosed by
judicial action, foreclosure of a deed of trust is
generally accomplished by a non-judicial trustee's sale
under a specific provision in the deed of trust which
authorizes the trustee to sell the property upon any
default by the borrower under the terms of the note or
deed of trust. In addition to any notice requirements
contained in a deed of trust, prior to a sale, 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 some 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
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 a default with respect thereto).
Accordingly, with respect to those Revolving Credit Loans
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 the Revolving Credit Loans"
and "Description of the Notes-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
rent or other obligations or charges owed by such tenant-
stockholder, including mechanics' liens against the
Cooperative's building incurred by such
tenant-stockholder. Generally, rent and other
obligations and charges arising under a proprietary lease
or occupancy agreement which are owed to the Cooperative
are made liens upon the shares to which the proprietary
lease or occupancy agreement relates. In addition, the
proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or
agreement in the event the borrower defaults in the
performance of covenants thereunder. Typically, the
lender and the Cooperative enter into a recognition
agreement which, together with any lender protection
provisions contained in the proprietary lease 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.
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.
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.
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 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 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 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 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 paying arrearages over a number
of years.
Courts with federal bankruptcy jurisdiction have
also indicated that the terms of a mortgage loan secured
by property 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. 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.
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.
Enforceability of Certain Provisions
The Revolving Credit Loans generally contain
due-on-sale clauses. These clauses permit the lender to
accelerate the maturity of the loan if the borrower
sells, transfers or conveys the property 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"),
preempts state constitutional, statutory and case law
that prohibit the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions.
The Garn-St Germain Act does "encourage" lenders to
permit assumption of loans at the original rate of
interest or at some other rate less than the average of
the original rate and the market rate.
The Garn-St Germain Act also sets forth nine
specific instances in which a mortgage lender covered by
the Garn-St Germain Act may not exercise a due-on-sale
clause, notwithstanding the fact that a transfer of the
property may have occurred. These include intra-family
transfers, certain transfers by operation of law, leases
of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St
Germain Act also prohibit the imposition of a prepayment
penalty upon the acceleration of a loan pursuant to a
due-on-sale clause.
The inability to enforce a due-on-sale clause may
result in a mortgage loan bearing an interest rate below
the current market rate being assumed by a new home buyer
rather than being paid off, which may have an impact upon
the average life of the Revolving Credit Loans and the
number of Revolving Credit Loans which may be outstanding
until maturity.
Upon foreclosure, courts have imposed general
equitable principles. These equitable principles are
generally designed to relieve the borrower from the legal
effect of its defaults under the loan documents.
Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes
for the borrower's default and the likelihood that the
borrower will be able to reinstate the loan. In some
cases, courts have required that lenders reinstate loans
or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial
disability. In other cases, courts have limited the
right of the lender to foreclose if the default under the
mortgage instrument is not monetary, such as the borrower
failing to adequately maintain the property or the
borrower executing a second mortgage or deed of trust
affecting the property. Finally, some courts have been
faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns
for adequate notice require that borrowers under deeds of
trust or mortgages receive notices in addition to the
statutorily prescribed minimum. For the most part, these
cases have upheld the notice provisions as being
reasonable or have found that the sale by a trustee under
a deed of trust or under a mortgage having a power of
sale, does not involve sufficient state action to afford
constitutional protections to the borrower.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation
and Monetary Control Act of 1980 ("Title V"), provides
that state usury limitations shall not apply to certain
types of residential first mortgage loans, 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 Revolving Credit Loans, as set forth in the
related Prospectus Supplement.
Unless otherwise set forth in the related Prospectus
Supplement, each Seller of a Revolving Credit Loan will
have represented that such Revolving Credit Loan 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 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 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.
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
(including a Mortgagor who was in reserve status and is
called to active duty after origination of the Revolving
Credit Loan), 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, 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. 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, 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 during the
Mortgagor's period of active duty status, and, under
certain circumstances, during an additional three month
period thereafter. Thus, in the event that the Relief
Act or similar legislation or regulations applies to any
Revolving Credit Loan 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 resulting from similar legislation or
regulations may result in delays in payments or losses to
Noteholders of the related series.
Junior Mortgages; Rights of Senior Mortgagees
The Revolving Credit Loans or Mortgage 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 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 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, 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 ("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) taxable as a corporation or as a taxable
mortgage pool within the 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").
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. Notes held by a
mutual savings bank or domestic building and loan
association will not represent interests in "qualifying
real property loans" within the meaning of Code section
593(d); (ii) 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 (iii) 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). If less than a substantial amount of a
particular class of Notes is sold for cash on or prior to
the date of their initial issuance (the "Closing Date"),
the issue price for such class will be treated as the
fair market value of such class on the Closing Date.
Under the OID Regulations, the stated redemption price of
a 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.
If the original issue discount rules apply to such Notes,
the related Prospectus Supplement will describe the
manner in which such rules will be applied by the Issuer
with respect to those Notes in preparing information
returns to the Noteholders and the IRS.
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. Because interest on Notes must
in any event be accounted for under an accrual method,
applying this analysis would result in only a slight
difference in the timing of the inclusion in income of
the yield on the Notes.
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 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 Note-
holder 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 a
Distribution Date and begins on the first day following
the immediately preceding accrual period (or in the case
of the first such period, begins on the Closing Date), a
calculation will be made of the portion of the original
issue discount that accrued during such accrual period.
The portion of original issue discount that accrues in
any accrual period will equal the excess, if any, of (i)
the sum of (A) the present value, as of the end of the
accrual period, of all of the distributions remaining to
be made on the 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 Mortgage Loans
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 Mortgage Loans
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 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
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 issues 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 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 made, such an
election 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 Section 166 of the Code,
both corporate holders of the Notes 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 Mortgage Loans. However, it appears, but is
not certain 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 Mortgage Loans 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 premium and any principal payment received
by such Noteholder. Except as provided in the following
two 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"), such interest 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 Note
holder 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.
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
The Employee Retirement Income Security Act of
1974, as amended ("ERISA"), imposes certain fiduciary and
prohibited transaction restrictions on employee pension
and welfare benefit plans subject to ERISA ("ERISA
Plans"). Section 4975 of the Code imposes similar
prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code
("Qualified Retirement Plans") and on individual
retirement accounts and annuities ("IRAs") described in
Section 408 of the Code (collectively, "Tax-Favored
Plans").
Certain employee benefit plans, such as
governmental plans (as described in Section 3(32) 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 and state law. Any such plan that
is a Qualified Retirement Plan and exempt from taxation
under Sections 401(a) and 501(a) of the Code, however, is
subject to the prohibited transaction rules set forth in
Section 503 of the Code.
In addition to imposing general fiduciary
requirements, including those of investment prudence and
diversification and the requirement that a Plan's
investment be made in accordance with the documents
governing the Plan, Section 406 of ERISA and Section 4975
of the Code prohibit a broad range of transactions
involving "plan assets" of ERISA Plans and Tax-Favored
Plans (collectively, "Plans") and persons ("Parties in
Interest" under ERISA or "Disqualified Persons" under the
Code) who have certain specified relationships to the
Plans, unless a statutory or administrative exemption is
available. Certain Parties in Interest (or Disqualified
Persons) that participate in a prohibited transaction may
be subject to a penalty (or an excise tax) imposed
pursuant to Sections 502(i) or 502(l) of ERISA or Section
4975 of the Code, unless a statutory or administrative
exemption is available. These prohibited transactions
generally are set forth in Section 406 of ERISA and
Section 4975 of the Code.
The Trust Fund, the Company, the Depositor, any
underwriter, the Owner Trustee, the Indenture Trustee,
the Master Servicer, any Administrator, any Servicer, any
provider of credit support or any of their affiliates may
be considered to be or may become Parties in Interest (or
Disqualified Persons) with respect to certain Plans.
Prohibited transactions under Section 406 of ERISA and
Section 4975 of the Code may arise if a Note is acquired
by a Plan with respect to which such persons are Parties
in Interest (or Disqualified Persons) unless such
transactions are subject to one or more statutory or
administrative exemptions, such as: Prohibited
Transaction Class Exemption ("PTCE") 75-1, which exempts
certain transactions involving Plans and certain broker-
dealers, reporting dealers and banks; PTCE 90-1, which
exempts certain transactions between insurance company
separate accounts and Parties in Interest (or
Disqualified Persons); PTCE 91-38, which exempts certain
transactions between bank collective investment funds and
Parties in Interest (or Disqualified Persons); PTCE 95-
60, which exempts certain transactions between insurance
company general accounts and Parties in Interest (or
Disqualified Persons); or PTCE 84-14, which exempts
certain transactions effected on behalf of a Plan by a
"qualified professional asset manager". There can be no
assurance that any of these class exemptions will apply
with respect to any particular Plan investment in Notes
or, even if it were deemed to apply, that any exemption
would apply to all prohibited transactions that may occur
in connection with such investment. Accordingly, prior
to making an investment in the Notes, investing Plans
should determine whether the Trust Fund, the Company, the
Depositor, any underwriter, the Owner Trustee, the
Indenture Trustee, the Master Servicer, any
Administrator, any Servicer, any provider of credit
support or any of their affiliates is a Party in Interest
(or Disqualified Person) with respect to such Plan and,
if so, whether such transaction is subject to one or more
statutory or administrative exemptions.
Any Plan fiduciary considering whether to
invest in Notes on behalf of a Plan should consult with
its counsel regarding the applicability of the fiduciary
responsibility and prohibited transaction provisions of
ERISA and the Code to such investment. Each Plan
fiduciary also should determine whether, under the
general fiduciary standards of investment prudence and
diversification, an investment in the Notes is
appropriate for the Plan considering the overall
investment policy of the Plan and the composition of the
Plan's investment portfolio as well as whether such
investment is permitted under the governing Plan
instruments.
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.
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 Revolving
Credit Loans 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.
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
Revolving Credit Loans or Mortgage Securities 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 in exchange for the Revolving Credit Loans (and
other assets, if applicable) that would comprise the
Mortgage 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.
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, 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 Revolving Credit Loans or Mortgage Securities
upon any breach of certain limited representations and
warranties made by the Company, or as otherwise provided
in the applicable Prospectus Supplement.
INDEX OF PRINCIPAL DEFINITIONS
Page
Account Balance. . . . . . . . . . . . . . . . . . . 22
Accrual Notes. . . . . . . . . . . . . . . . . . . . .7
Additional Balance . . . . . . . . . . . . . . . . . 22
Additional Charges . . . . . . . . . . . . . . . . . 23
Administrator. . . . . . . . . . . . . . . . . . . . .6
Affiliated Sellers . . . . . . . . . . . . . . . . . 18
Agreements . . . . . . . . . . . . . . . . . . . . . 59
Audit Guide. . . . . . . . . . . . . . . . . . . . . 57
Bankruptcy Loss. . . . . . . . . . . . . . . . . . . 46
Bankruptcy Losses. . . . . . . . . . . . . . . . . . 46
Beneficial Owner . . . . . . . . . . . . . . . . . . 33
Book-Entry Notes . . . . . . . . . . . . . . . . . . 32
CEDEL. . . . . . . . . . . . . . . . . . . . . . . . 32
CEDEL Participants . . . . . . . . . . . . . . . . . 34
CERCLA . . . . . . . . . . . . . . . . . . . . . . . 77
Certificates . . . . . . . . . . . . . . . . . . . . .7
Clearance Cooperative. . . . . . . . . . . . . . . . 34
Closing Date . . . . . . . . . . . . . . . . . . . . 83
Code . . . . . . . . . . . . . . . . . . . . . . . . 71
Commission . . . . . . . . . . . . . . . . . . . . . 20
Cooperative. . . . . . . . . . . . . . . . . . . . . 70
Credit Enhancer. . . . . . . . . . . . . . . . . . . 47
Credit Line Agreements . . . . . . . . . . . . . . . 21
Custodian. . . . . . . . . . . . . . . . . . . . . . 36
Defaulted Loan Loss. . . . . . . . . . . . . . . . . 46
Deleted Loan . . . . . . . . . . . . . . . . . . . . 30
Depositaries . . . . . . . . . . . . . . . . . . . . 32
Designated Seller. . . . . . . . . . . . . . . . . . 19
Designated Seller Transaction. . . . . . . . . . . . 19
Determination Date . . . . . . . . . . . . . . . . . 42
Draw . . . . . . . . . . . . . . . . . . . . . . . . 22
Draw Period. . . . . . . . . . . . . . . . . . . . . 22
DTC. . . . . . . . . . . . . . . . . . . . . . . . . 32
DTC Participants . . . . . . . . . . . . . . . . . . 32
Due Date . . . . . . . . . . . . . . . . . . . . . . 38
Eligible Account . . . . . . . . . . . . . . . . . . 39
Eligible Substitute Loan . . . . . . . . . . . . . . 30
ERISA. . . . . . . . . . . . . . . . . . . . . . . . 89
Euroclear. . . . . . . . . . . . . . . . . . . . . . 32
Euroclear Operator . . . . . . . . . . . . . . . . . 34
Euroclear Participants . . . . . . . . . . . . . . . 34
Excess Interest. . . . . . . . . . . . . . . . . . . 49
Exchange Act . . . . . . . . . . . . . . . . . . . . .3
Extraordinary Losses . . . . . . . . . . . . . . . . 46
FDIC . . . . . . . . . . . . . . . . . . . . . . . . 27
Finance Charge . . . . . . . . . . . . . . . . . . . 22
Financial Guaranty Insurance Policy. . . . . . . . . 47
Fraud Loss . . . . . . . . . . . . . . . . . . . . . 46
Funding Account. . . . . . . . . . . . . . . . . . . 43
Garn-St Germain Act. . . . . . . . . . . . . . . . . 78
GMAC Mortgage. . . . . . . . . . . . . . . . . . . . .8
Gross Margin . . . . . . . . . . . . . . . . . . . . 22
Home Equity Loan Program . . . . . . . . . . . . . . 24
Indenture. . . . . . . . . . . . . . . . . . . . . . .1
Indenture Trustee. . . . . . . . . . . . . . . . . . .6
Index. . . . . . . . . . . . . . . . . . . . . . . . 22
Indirect Participants. . . . . . . . . . . . . . . . 33
Insurance Proceeds . . . . . . . . . . . . . . . . . 38
Insurer. . . . . . . . . . . . . . . . . . . . . . . 47
Interest Rate. . . . . . . . . . . . . . . . . . . . .7
IRS. . . . . . . . . . . . . . . . . . . . . . . . . 83
Letter of Credit . . . . . . . . . . . . . . . . . . 48
Letter of Credit Bank. . . . . . . . . . . . . . . . 48
Liquidated Revolving Credit Loan . . . . . . . . . . 55
Liquidation Proceeds . . . . . . . . . . . . . . . . 38
Master Commitments . . . . . . . . . . . . . . . . . 24
Mortgage Notes . . . . . . . . . . . . . . . . . . . 18
Mortgage Pool. . . . . . . . . . . . . . . . . . . . .1
Mortgage Rate. . . . . . . . . . . . . . . . . . . . 22
Mortgage Securities. . . . . . . . . . . . . . . . . .9
Mortgaged Properties . . . . . . . . . . . . . . . . .8
Mortgagor. . . . . . . . . . . . . . . . . . . . . . 14
Net Mortgage Rate. . . . . . . . . . . . . . . . . . 64
Note Registrar . . . . . . . . . . . . . . . . . . . 32
Notes. . . . . . . . . . . . . . . . . . . . . . . . .1
OID Regulations. . . . . . . . . . . . . . . . . . . 82
Overcollateralization. . . . . . . . . . . . . . . . 49
Owner Trustee. . . . . . . . . . . . . . . . . . . . .6
Ownership Interest . . . . . . . . . . . . . . . . . 19
Participants . . . . . . . . . . . . . . . . . . . . 32
Paying Agent . . . . . . . . . . . . . . . . . . . . 41
Payment Account. . . . . . . . . . . . . . . . . . . 39
Payment Date . . . . . . . . . . . . . . . . . . . . .9
Percentage Interest. . . . . . . . . . . . . . . . . 41
Permitted Investments. . . . . . . . . . . . . . . . 39
Principal Prepayments. . . . . . . . . . . . . . . . 38
PTCE . . . . . . . . . . . . . . . . . . . . . . . . 90
Purchase Price . . . . . . . . . . . . . . . . . . . 29
Rating Agency. . . . . . . . . . . . . . . . . . . . 12
Realized Loss. . . . . . . . . . . . . . . . . . . . 46
Record Date. . . . . . . . . . . . . . . . . . . . . 41
Registration Statement . . . . . . . . . . . . . . . .3
Relief Act . . . . . . . . . . . . . . . . . . . . . 80
REO Mortgage Loan. . . . . . . . . . . . . . . . . . 54
Reserve Fund . . . . . . . . . . . . . . . . . . . . 49
Residential Funding. . . . . . . . . . . . . . . . . .6
Revolving Credit Loans . . . . . . . . . . . . . . . .1
Securities . . . . . . . . . . . . . . . . . . . . . .1
Securityholders. . . . . . . . . . . . . . . . . . . 37
Sellers. . . . . . . . . . . . . . . . . . . . . . . 18
Senior/Subordinate Series. . . . . . . . . . . . . . 31
Servicing Advances . . . . . . . . . . . . . . . . . 40
Servicing Agreement. . . . . . . . . . . . . . . . . 52
SMMEA. . . . . . . . . . . . . . . . . . . . . . . . 12
Special Hazard Insurance Policy. . . . . . . . . . . 46
Special Hazard Loss. . . . . . . . . . . . . . . . . 46
Spread . . . . . . . . . . . . . . . . . . . . . . . .6
Strip Note . . . . . . . . . . . . . . . . . . . . . .7
Subordinate Securities . . . . . . . . . . . . . . . .8
Subservicers . . . . . . . . . . . . . . . . . . . . 21
Subservicing Account . . . . . . . . . . . . . . . . 38
Subservicing Agreement . . . . . . . . . . . . . . . 31
Terms and Conditions . . . . . . . . . . . . . . . . 35
Title V. . . . . . . . . . . . . . . . . . . . . . . 79
Title VIII . . . . . . . . . . . . . . . . . . . . . 79
Trust Agreement. . . . . . . . . . . . . . . . . . . .1
Trust Fund . . . . . . . . . . . . . . . . . . . . . .1
UCC. . . . . . . . . . . . . . . . . . . . . . . . . 74
Unaffiliated Sellers . . . . . . . . . . . . . . . . 18
