REGISTRATION NO. 33-80419
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 3
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
RESIDENTIAL FUNDING MORTGAGE
SECURITIES II, INC.
(Exact name of registrant as specified in governing instruments)
Delaware
(State of Incorporation)
(41-1808858)
(I.R.S. Employer Identification Number)
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
(612) 832-7000
(Address and telephone number of Registrant's principal executive offices)
Christopher J. Nordeen, President
Residential Funding Mortgage
Securities II, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
(612) 832-7000
(Name, address and telephone number of agent for service)
Copies to:
Robert L. Schwartz, Esq.
GMAC Mortgage Corporation
3031 West Grand Boulevard
Detroit, Michigan 48232
Stephen S. Kudenholdt, Esq.
Paul D. Tvetenstrand, Esq. Katharine I. Crost, Esq.
Thacher Proffitt & Wood Orrick, Herrington & Sutcliffe
Two World Trade Center 599 Lexington Avenue
New York, New York 10048 New York, New York 10022
Approximate date of commencement of proposed sale to the public: From time
to time on or after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest plans, please check the following box.
[X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
[ ]-----------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Proposed
Maximum
Amount Offering
Title of Securities Being to be Registered Price
Registered (2) Per Unit (1)
- --------------------------------------------------------------------------------
Home Equity Loan $1,000,000 100%
Pass-Through Certificates and
Home Equity Loan-Backed
Notes (Issuable in Series)
- --------------------------------------------------------------------------------
please check the following box. [ ]
- --------------------------------------------------
Proposed
Maximum
Aggregate Amount of
Offering Registration
Price (1) Fee (2)
- ---------------------------------------------------
$1,000,000 $0
- ---------------------------------------------------
[NY01:227405.2] 16069-00369 10/16/96 5:35pm
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(1) No additional registration fees in connection with $1,000,000
aggregate principal amount of Home Equity Loan Pass-Through
Certificates shall be paid by the Registrant as such fees were paid in
connection with the original filing on December 13, 1995.
(2) 2,000,000,000.00 aggregate principal amount of Home Equity Loan
Pass-Through Certificates registered by the Registrant under Registration
Statement No. 33-92096 on Form S-3 referred to below and not previously sold are
consolidated in this Registration Statement pursuant to Rule 429. All
registration fees in connection with such unsold amount of Home Equity Loan
Pass-Through Certificates have been previously paid by the Registrant under the
foregoing Registration Statement. Accordingly, the total amount registered under
the Registration Statement as so consolidated as of the date of this filing is
$2,001,000,000.00. -----------------------------
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
[NY01:227405.2] 16069-00369 10/16/96 5:35pm
<PAGE>
EXPLANATORY NOTE
The form of prospectus filed herewith is intended to amend and supersede the
prospectus relating to Home Equity Loan-Backed Notes in order to provide for
other types of loans in the related trust fund. The prospectus previously
provided that the related trust fund would include only one- to four-family
first or junior lien home equity revolving lines of credit. The amended
prospectus now provides that the related trust fund may include, in addition to
home equity revolving lines of credit, closed-end home equity loans, home
improvement contracts and manufactured housing contracts. All other documents
filed as part of Registration Statement No.
33-80419 remain unchanged.
[NY01:227405.2] 16069-00369 10/16/96 5:35pm
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Other Expenses of Issuance and Distribution (Item 14 of Form S-3).
The expenses expected to be incurred in connection with the issuance
and distribution of the Securities being registered, other than underwriting
compensation, are as set forth below.
All such expenses, except for the filing fee, are estimated.
Filing Fee for Registration Statement.......$ 344.83(1)
Legal Fees and Expenses..................... 1,500,000.00
Accounting Fees and Expenses................ 625,000.00
Trustee's Fees and Expenses
(including counsel fees)................. 300,000.00
Blue Sky Fees and Expenses.................. 45,000.00
Printing and Engraving Expenses............. 500,000.00
Rating Agency Fees.......................... 1,000,000.00
Miscellaneous............................... 50,000.00
Total......................................$ 4,020,344.83
=================
(1) $689,660 was the amount of the filing fee paid by the Registrant under
Registration Statement No. 33-92096. Accordingly, the total amount of filing
fees and the total amount of expenses expected to be incurred in connection with
the issuance and distribution of Securities being registered is $690,004.83 and
$4,710,004.83, respectively.
Indemnification of Directors and Officers (Item 15 of Form S-3).
Any underwriters who execute an Underwriting Agreement in the form
filed as Exhibit 1.1 or Exhibit 1.2 to this Registration Statement will agree to
indemnify the Registrant's directors and its officers who signed this
Registration Statement against certain liabilities which might arise under the
Securities Act of 1933 from certain information furnished to the Registrant by
or on behalf of such indemnifying party.
Subsection (a) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
<PAGE>
corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification or advancement of expenses provided
for by Section 145 shall not be deemed exclusive of any other rights to which
the indemnified party may be entitled; and empowers the corporation to purchase
and maintain insurance on behalf of a director, officer, employee or agent of
the corporation against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
The By-Laws of the Registrant provide, in effect, that to the extent
and under the circumstances permitted by subsections (a) and (b) of Section 145
of the General Corporation Law of the State of Delaware, the Registrant (i)
shall indemnify and hold harmless each person who was or is a party or is
threatened to be made a party to any action, suit or proceeding described in
subsections (a) and (b) by reason of the fact that he is or was a director or
officer, or his testator or intestate is or was a director or officer of the
Registrant, against expenses, judgments, fines and amounts paid in settlement,
and (ii) shall indemnify and hold harmless each person who was or is a party or
is threatened to be made a party to any such action, suit or proceeding if such
person is or was serving at the request of the Registrant as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
In addition, the Pooling and Servicing Agreements, if applicable, will
provide that no director, officer, employee or agent of the Registrant is liable
to the Trust Fund or the Securityholders, except for such person's own willful
misfeasance, bad faith, gross negligence in the performance of duties or
reckless disregard of obligations and duties. The Pooling and Servicing
Agreements, if applicable, will further provide that, with the exceptions stated
above, a director, officer, employee or agent of the Registrant is entitled to
be indemnified against any loss, liability or expense incurred in connection
with legal action relating to such Pooling and Servicing Agreements and related
Securities other than such expenses related to particular Mortgage Loans.
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<PAGE>
Certain controlling persons of the Registrant may also be entitled to
indemnification from General Motors Acceptance Corporation, an indirect parent
of the Registrant. Under sections 7015 and 7018-7023 of the New York Banking
Law, General Motors Acceptance Corporation may or shall, subject to various
exceptions and limitation, indemnify its directors or officers and may purchase
and maintain insurance as follows:
(a) If the director is made or threatened to be made a party to
an action by or in the right of General Motors Acceptance Corporation
to procure a judgment in its favor, by reason of the fact that such
person is or was a director or officer of General Motors Acceptance
Corporation or is or was servicing at the request of General Motors
Acceptance Corporation as a director or officer of some other
enterprise, General Motors Acceptance Corporation may indemnify such
person against amounts paid in settlement of such action or an appeal
therein, if such director or officer acted, in good faith, for a
purpose which such person reasonably believed to be in (or, in the case
of service for any other enterprise, not opposed to) the best interests
of general Motors Acceptance Corporation, except that no
indemnification is available under such statutory provisions in respect
of a threatened action or a pending action which is settled or
otherwise disposed of, or any claim or issue or matter as to which such
person is found liable to General Motors Acceptance Corporation, unless
in each such case a court determined that such person is fairly and
reasonably entitled to indemnity for such amount as the court deems
proper.
(b) With respect to any action or proceeding other than one by
or in the right of General Motors Acceptance Corporation to procure a
judgment in its favor, if a director or officer is made or threatened
to be made a party by reason of the fact that such person was a
director or officer of General Motors Acceptance Corporation, or served
some other enterprise at the request of General Motors Acceptance
Corporation, General Motors Acceptance Corporation may indemnify such
person against judgments, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees, incurred as a result of
such action or proceeding or an appeal therein, if such person acted in
good faith for a purpose which such person reasonably believed to be in
(or, in the case of service for any other enterprise, not opposed to)
the best interests of General Motors Acceptance Corporation and, in
criminal actions or proceedings, in addition, had no reasonable cause
to believe that such person's conduct was unlawful.
(c) A director or officer who has been wholly successful, on the
merits or otherwise, in the defense of a civil or criminal action or
proceeding of the character described in paragraphs (a) or (b) above,
shall be entitled to indemnification as authorized in such paragraphs.
(d) General Motors Acceptance Corporation may purchase and
maintain insurance to indemnify directors and officers in instances in
which they may not otherwise be indemnified by General Motors
Acceptance Corporation under the provisions of the New York Banking
Law, provided hat the contract of insurance provides for a retention
amount and for co-insurance, except that no such insurance may provide
for any payment, other than cost of defense, to or on behalf of any
director or officer if a judgment or other final adjudication adverse
to such director or officer establishes that
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<PAGE>
such person's acts of active and deliberate dishonesty were material to
the cause of action so adjudicated or that such person personally
gained in fact a financial profit or other advantage to which such
person was not legally entitled.
The foregoing statement is subject to the detailed provisions of
sections 7015 and 7018- 7023 of the New York Banking Law.
As a subsidiary of General Motors Corporation, General Motors
Acceptance Corporation is insured against liabilities which it may incur by
reason of the foregoing provisions of the New York Banking Law and directors and
officers of General Motors Acceptance Corporation are insured against some
liabilities which might arise out of their employment and not be subject to
indemnification under said Banking Law.
Pursuant to resolutions adopted by the Board of Directors of General
Motors Corporation, that company to the fullest extent permissible under law
will indemnify, and has purchased insurance on behalf of, directors or officers
of the company, or any of them, who incur or are threatened with personal
liability, including expenses, under Employee Retirement Income Security Act of
1974 or any amendatory or comparable legislation or regulation thereunder.
Exhibits (Item 16 of Form S-3).
1.1 Form of Underwriting Agreement for the Home Equity Loan
Pass-Through Certificates.*
1.2 Form of Underwriting Agreement for the Home Equity
Loan-Backed Notes. **
3.1 Certificate of Incorporation.*
3.2 By-Laws.*
4.1 Form of Pooling and Servicing Agreement for Closed-End Loans.*
4.2 Form of Pooling and Servicing Agreement for Revolving Credit Loans.*
4.3 Form of Servicing Agreement.**
4.4 Form of Trust Agreement.**
4.5 Form of Indenture.**
5.1 Opinion of Thacher Proffitt & Wood with respect to legality relating to
the Home Equity Loan Pass-Through Certificates.**
5.2 Opinion of Thacher Proffitt & Wood with respect to legality relating to
the Home Equity Loan-Backed Notes.**
5.3 Opinion of Orrick, Herrington &
Sutcliffe with respect to legality
relating to the Home Equity Loan
Pass-Through Certificates and the
Home Equity Loan-Backed Notes.**
8.1 Opinion of Thacher Proffitt & Wood with respect to certain tax matters
relating to the Home Equity Loan Pass-Through Certificates (included as
part of Exhibit 5.1).**
8.2 Opinion of Thacher Proffitt & Wood with respect to certain tax matters
relating to the Home Equity Loan-Backed Notes (included as part of
Exhibit 5.2).**
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<PAGE>
8.3 Opinion of Orrick, Herrington &
Sutcliffe with respect to certain
tax matters relating to the Home
Equity Loan Pass-Through
Certificates and the Home Equity
Loan-Backed Notes.**
10.1 Form of Mortgage Loan Purchase Agreement.*
23.1 Consent of Thacher Proffitt & Wood relating to the Home Equity Loan
Pass-Through Certificates (included as part of Exhibit 5.1).**
23.2 Consent of Thacher Proffitt & Wood relating to the Home Equity
Loan-Backed Notes (included as part of Exhibit 5.2).**
23.3 Consent of Orrick, Herrington & Sutcliffe relating to the Home Equity
Loan Pass-Through Certificates and the Home Equity Loan-Backed
Notes (included as part of Exhibit 5.3 and Exhibit 8.3).**
24.1 Power of Attorney.**
*Incorporated by reference from the Registration Statement on Form S-3 (File No.
33-92096).
**Previously filed with Registration Statement on Form S-3 (File No. 33-80419).
Undertakings (Item 17 of Form S-3).
A. Undertakings Pursuant to Rule 415.
The Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement;
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in this Registration Statement; and
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in this
Registration Statement or any material change to such information in
this Registration Statement;
provided however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration
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<PAGE>
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this Registration Statement shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
B. Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it reasonably believes that the security rating
requirement contained in Transaction Requirement B.5 of Form S-3 will be met by
the time of the sale of the securities registered hereunder, that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 3 to Registration Statement No. 33-80419 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis, State of
Minnesota, on November 26, 1996.
RESIDENTIAL FUNDING MORTGAGE
SECURITIES II, INC.
By: /s/ Christopher J. Nordeen
Christopher J. Nordeen
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment Mo. 3 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
* Director November 26, 1996
- -----------------------------------
Dennis W. Sheehan
* Director November 26, 1996
- -----------------------------------
Bruce J. Paradis
* Director, Treasurer and November 26, 1996
- -----------------------------------
Davee L. Olson Chief Financial Officer
(Principal Financial
Officer/Principal Accounting
Officer
* President and Chief Executive
November 26, 1996
- -----------------------------------
Christopher J. Nordeen Officer (Principal Executive
Officer)
*By:/s/ Christopher J. Nordeen
Christopher J. Nordeen
Attorney-in-fact pursuant to a power of attorney filed with the Registration
Statement.
<PAGE>
EXHIBIT INDEX
Location of Exhibit
in Sequential
Number Description Numbering System
1.1 End Loans.*
4.2 Form of Pooling and Servicing Agreement for Revolving
Credit Loans.*
4.3 Form of Servicing Agreement.*
4.4 Form of Trust Agreement.*
4.5 Form of Indenture.*
5.1 Opinion of Thacher Proffitt & Wood with respect to
legality relating to the Home Equity Loan Pass-Through
Certificates.*
5.2 Opinion of Thacher Proffitt & Wood with respect to
legality relating to the Home Equity Loan-
Backed Notes.*
5.3 Opinion of Orrick, Herrington & Sutcliffe with respect
to legality relating to the Home Equity Loan Pass-
Through Certificates and the Home Equity Loan-Backed
Notes.*
8.1 Opinion of Thacher Proffitt & Wood with respect to
certain tax matters relating to the Home Equity Loan
Pass-Through Certificates (included as part of Exhibit
5.1).*
8.2 Opinion of Thacher Proffitt & Wood
with respect to certain tax
matters relating to the Home
Equity Loan-Backed Notes (included
as part of Exhibit 5.2).*
8.3 Opinion of Orrick, Herrington &
Sutcliffe with respect to certain
tax matters relating to the Home
Equity Loan Pass-Through
Certificates and the Home Equity
Loan-Backed Notes.*
10.1 Form of Mortgage Loan Purchase Agreement.*
23.1 Consent of Thacher Proffitt & Wood relating to the
Home Equity Loan Pass-Through Certificates (included
as part of Exhibit 5.1).*
23.2 Consent of Thacher Proffitt & Wood relating to the
Home Equity Loan-Backed Notes (included as part of
Exhibit 5.2).*
23.3 Consent of Orrick, Herrington & Sutcliffe relating to the
Home Equity Loan Pass-Through Certificates and the
Home Equity Loan-Backed Notes (included as part of
Exhibit 5.3 and Exhibit 8.3).*
24.1 Power of Attorney.*
* Previously filed.
[NY01:243261.1] 16069-00377 11/25/96 11:21am
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus 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 (Subject to Completion Dated November 26, 1996)
Asset-Backed Notes
Residential Funding Mortgage Securities II, Inc.
Depositor
The Asset-Backed Notes (the "Notes") offered hereby may be sold from time to
time in series, as described in the related Prospectus Supplement. Each series
of Notes will represent indebtedness of the related trust fund (the "Trust
Fund") secured by certain assets deposited therein (the "Trust Assets")
described below. The Trust Fund for a series of Notes and the related
Certificates (as defined herein, and together with the Notes, the "Securities")
will consist primarily of a segregated pool (a "Pool") of (i) one- to
four-family first or junior lien home equity revolving lines of credit (the
"Revolving Credit Loans"); (ii) one- to-four family first or junior lien closed
end home equity loans for property improvement, debt consolidation and home
equity purposes (the "Home Equity Loans"); (iii) home improvement installment
sales contracts and installment loan agreements (the "Home Improvement
Contracts"), that are either unsecured or secured by first or junior liens on
one- to four-family residential properties or by purchase money security
interests in the home improvements financed thereby (the "Home Improvements");
(iv) manufactured housing installment sales contracts and installment loan
agreements (the "Manufactured Housing Contracts" and together with the Home
Improvement Contracts, the "Contracts") secured by either security interests in
Manufactured Homes (as defined herein) or by mortgages on real estate on which
the related Manufactured Homes are located; (v) certain balances of the
foregoing and/or (vi) certain interests in the foregoing (which may include
Private Securities, as defined herein). To the extent specified in the related
Prospectus Supplement, the Contracts may be partially insured by the Federal
Housing Administration (the "FHA") pursuant to Title I (as defined herein) (the
"Title I Contracts"). Each of the Trust Assets will be acquired by the Company
from one or more affiliated or unaffiliated institutions. See "The Pools." Only
the Notes are offered hereby. See "Index of Principal Definitions" for the
meanings of capitalized terms and acronyms.
The Trust Assets described herein under "The Pools" and in the related
Prospectus Supplement will be held in the related Trust Fund pursuant to a trust
agreement (the "Trust Agreement") and pledged pursuant to an indenture (the
"Indenture") to secure a series of Notes to the extent and as described herein
and in the related Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, each Pool will consist of one or more types of
Trust Assets described under "The Pools." Information regarding each class of
Notes of a series, and the general characteristics of the Trust Assets securing
such Notes, will be set forth in the related Prospectus Supplement.
Each series of Notes will include one or more classes. Each class of Notes of
any series will represent the right, which right may be senior or subordinate to
the rights of one or more of the other classes of Securities or other interests
in the related Trust Fund, to receive a specified portion of payments of
principal or interest (or both) on the Trust Assets in the related Trust Fund in
the manner described herein and in the related Prospectus Supplement. See
"Description of the Notes--Payments." A series may include one or more classes
of Notes entitled to principal payments, with disproportionate, nominal or no
interest payments, or to interest payments, with disproportionate, nominal or no
principal payments. A series may include two or more classes of Notes which
differ as to the timing, sequential order, priority of payment, Interest Rate or
amount of payments of principal or interest or both.
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Notes may include any one or any combination of a Financial Guaranty
Insurance Policy, Letter of Credit (each as defined herein), bankruptcy bond,
special hazard insurance policy, Reserve Fund (as defined herein), or other form
of credit support. In addition to or in lieu of the foregoing, credit
enhancement may be provided by means of subordination. See "Description of
Credit Enhancement."
The rate of payment of principal of each class of Notes will depend on the
priority of payment of such class and the rate and timing of principal payments
(including payments in excess of required installments, prepayments, Draws or
terminations, liquidations and repurchases) on the Trust Assets. A rate of
principal payment lower or higher than that anticipated may affect the yield on
each class of Notes in the manner described herein and in the related Prospectus
Supplement. See "Yield and Prepayment Considerations."
For a discussion of significant matters affecting investments in the Notes, see
"Risk Factors," which begins on page ___.
PROCEEDS OF THE TRUST ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS
ON THE NOTES. THE NOTES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
COMPANY, RESIDENTIAL FUNDING, GMAC MORTGAGE GROUP, INC. ("GMAC MORTGAGE") OR ANY
OF THEIR AFFILIATES. NEITHER THE NOTES NOR THE UNDERLYING TRUST ASSETS WILL BE
GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE
COMPANY, RESIDENTIAL FUNDING CORPORATION, GMAC MORTGAGE OR ANY OF THEIR
AFFILIATES, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT. NONE OF SUCH ENTITIES WILL HAVE ANY OBLIGATIONS IN RESPECT OF THE
NOTES, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT.
<PAGE>
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 ________ __, 1996.
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ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Notes (the "Registration Statement"). The Company
is also subject to certain of the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, accordingly, will
file reports thereunder with the Commission. The Registration Statement and the
exhibits thereto, and reports and other information filed by the Company
pursuant to the Exchange Act can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at certain of its Regional Offices located as follows: Midwest
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and Northeast Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048 and electronically through the Commission's
Electronic Data Gathering, Analysis and Retrieval System at the Commission's Web
Site (http://www.sec.gov).
REPORTS TO NOTEHOLDERS
Monthly reports that contain information concerning the Trust Fund for
a series of Notes will be sent by the Master Servicer or the Indenture Trustee
to each holder of record of the Notes of the related series. See "Description of
the Notes--Reports to Noteholders." Any reports forwarded to holders will not
contain financial information that has been examined and reported upon, with an
opinion expressed, by an independent or certified public accountant. The Company
will file with the Commission such periodic reports with respect to the Trust
Fund for a series of Notes as are required under the Exchange Act, and the rules
and regulations of the Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each series of Notes offered hereby, there are
incorporated herein and in the related Prospectus Supplement by reference all
documents and reports filed or caused to be filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of the offering of the related series of Notes, that relate specifically to such
related series of Notes. The Company will provide or cause to be provided
without charge to each person to whom this Prospectus and related Prospectus
Supplement is delivered in connection with the offering of one or more classes
of such series of Notes, upon written or oral request of such person, a copy of
any or all such reports incorporated herein by reference, in each case to the
extent such reports relate to one or more of such classes of such series of
Notes, other than the exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents. Requests should be
directed in writing to Residential Funding Mortgage Securities II, Inc., 8400
Normandale Lake Boulevard, Suite 700, Minneapolis, Minnesota 55437, or by
telephone at (612) 832-7000.
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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.
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TABLE OF CONTENTS
ADDITIONAL INFORMATION............................................ 3
REPORTS TO NOTEHOLDERS............................................ 3
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE............................................. 3
SUMMARY OF PROSPECTUS............................................. 7
RISK FACTORS...................................................... 14
Special Features of Certain Trust Assets
that are Secured by Junior Liens
on Mortgaged Properties......................... 14
Limitations on FHA Insurance for Title I
Contracts....................................... 17
Risks Associated with Certain Trust Assets............... 18
Limitations, Reduction and Substitution of
Credit Enhancement.............................. 20
Yield and Prepayment Considerations...................... 20
Limited Liquidity........................................ 21
Limited Obligations...................................... 21
THE POOLS......................................................... 22
General ................................................ 22
Revolving Credit Loans................................... 25
The Home Equity Loans and the Contracts.................. 27
TRUST ASSET PROGRAM............................................... 28
Underwriting Standards Applicable to the
Revolving Credit Loans.......................... 29
Qualifications of Sellers................................ 33
Representations Relating to Trust Assets................. 33
Subservicing............................................. 36
DESCRIPTION OF THE NOTES.......................................... 38
General ................................................ 38
Form of Notes............................................ 38
Assignment of the Trust Assets........................... 41
Review of Trust Assets................................... 42
................................................ 43
Payments on Trust Assets; Deposits to
Payment Account................................. 44
Withdrawals from the Custodial Account................... 46
Payments ................................................ 47
Funding Account.......................................... 49
Reports to Noteholders................................... 49
Hazard Insurance; Claims Thereunder...................... 50
DESCRIPTION OF CREDIT ENHANCEMENT................................. 52
Financial Guaranty Insurance Policy...................... 53
Letter of Credit......................................... 54
Subordination............................................ 54
Overcollateralization.................................... 55
Reserve Funds............................................ 55
Maintenance of Credit Enhancement........................ 56
Reduction or Substitution of Credit
Enhancement..................................... 57
DESCRIPTION OF FHA INSURANCE UNDER
TITLE I.................................................. 57
THE COMPANY....................................................... 60
RESIDENTIAL FUNDING CORPORATION................................... 60
SERVICING OF TRUST ASSETS......................................... 60
Subservicing............................................. 61
Collection and Other Servicing Procedures................ 62
Realization Upon Defaulted Loans......................... 63
Servicing Compensation and Payment of
Expenses........................................ 65
Evidence as to Compliance................................ 66
Certain Matters Regarding the Master
Servicer and the Company........................ 66
THE AGREEMENTS.................................................... 67
Events of Default; Rights Upon Event of
Default......................................... 68
Amendment................................................ 70
Termination; Redemption of Notes......................... 71
The Owner Trustee........................................ 71
The Indenture Trustee.................................... 72
YIELD AND PREPAYMENT CONSIDERATIONS............................... 72
CERTAIN LEGAL ASPECTS OF THE TRUST
ASSETS
AND RELATED MATTERS............................................... 78
General; Trust Assets Secured by
Mortgages on Mortgaged
Property........................................ 78
Cooperative Loans........................................ 79
Tax Aspects of Cooperative Ownership..................... 81
Manufactured Housing Contracts........................... 81
Foreclosure on Revolving Credit Loans,
Home Equity Loans and Certain
Contracts....................................... 83
Foreclosure on Shares of Cooperatives.................... 85
Repossession with Respect to
Manufactured Housing
Contracts....................................... 86
Rights of Redemption..................................... 87
Notice of Sale; Redemption Rights with
Respect to Manufactured Homes................... 88
Anti-Deficiency Legislation and Other
Limitations on Lenders.......................... 88
Environmental Legislation................................ 90
Consumer Protection Laws with Respect to
Manufactured Housing
Contracts....................................... 91
Enforceability of Certain Provisions..................... 92
Transfer of Manufactured Homes........................... 93
The Home Improvement Contracts........................... 94
Applicability of Usury Laws.............................. 97
Alternative Mortgage Instruments......................... 97
Formaldehyde Litigation with Respect to
Manufactured Housing
Contracts....................................... 98
Soldiers' and Sailors' Civil Relief Act of
1940............................................ 98
Forfeitures in Drug and RICO Proceedings................. 99
Junior Mortgages; Rights of Senior
Mortgagees...................................... 99
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES.............................................101
General ................................................101
STATE AND OTHER TAX CONSEQUENCES..................................108
ERISA CONSIDERATIONS..............................................108
Plan Asset Regulations...................................109
Prohibited Transaction Exemptions........................110
Insurance Company General Accounts.......................110
Representation from Plans Investing in
Notes with "Substantial Equity
Features".......................................111
Tax Exempt Investors.....................................112
Consultation with Counsel................................112
LEGAL INVESTMENT MATTERS..........................................112
USE OF PROCEEDS...................................................113
METHODS OF DISTRIBUTION...........................................113
LEGAL MATTERS.....................................................115
FINANCIAL INFORMATION.............................................115
INDEX OF PRINCIPAL DEFINITIONS....................................116
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SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each series of Notes contained in the Prospectus
Supplement to be prepared and delivered in connection with the offering of such
series. Capitalized terms used in this summary that are not otherwise defined
shall have the meanings ascribed thereto in this Prospectus. An index indicating
where certain terms used herein are defined appears at the end of this
Prospectus.
Securities Offered..Asset-Backed Notes.
Company.............Residential Funding Mortgage Securities II, Inc., the
depositor. See "The Company."
Master Servicer..... The entity identified as Master Servicer in the related
Prospectus Supplement, which may be Residential Funding
Corporation, an affiliate of the Company ("Residential
Funding"). See "Residential Funding Corporation" and
"Servicing of the Trust Assets--Certain Matters Regarding
the Master Servicer and the Company."
Administrator....... An entity may be named as the Administrator in the
related Prospectus Supplement if required in addition to or
in lieu of the Master Servicer or Servicer for a series of
Notes (the "Administrator").
Indenture Trustee... The Indenture Trustee for each series of Notes will be
specified in the related Prospectus Supplement (the
"Indenture Trustee").
Owner Trustee....... The Owner Trustee for each related Trust Fund will be
specified in the related Prospectus Supplement (the
"Owner Trustee").
The Notes...........Each series of Notes will be secured by a Pool of Trust
Assets as further described herein (exclusive of any
portion of interest payments (the "Excess Spread" or
"Excluded Spread" as further defined herein) relating to
each Trust Asset retained by the Company or any of its
affiliates), and certain other assets as described below
(collectively, a "Trust Fund"). The Trust Fund (or the
"Issuer") will be created pursuant to a Trust Agreement
between the Company and the Owner Trustee. The
ownership of the Trust Fund will be evidenced by
certificates (the "Certificates") issued under the Trust
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Agreement, which are not offered hereby. Each series of
Notes will represent indebtedness of the related Trust
Fund and will be issued
pursuant to an Indenture
between the Trust Fund and
the Indenture Trustee.
.........................................As specified in the related
Prospectus Supplement, each
series of Notes, or class of
Notes in the case of a series
consisting of two or more
classes, may have a stated
principal balance, no stated
principal balance or a
notional amount and may be
entitled to payments of
interest based on a specified
interest rate or rates (each,
an "Interest Rate"). Each
series or class of Notes may
have a different Interest
Rate, which may be a fixed,
variable or adjustable
Interest Rate, or any
combination of two or more of
such Interest Rates. The
related Prospectus Supplement
will specify the Interest Rate
or Rates for each series or
class of Notes, or the initial
Interest Rate or Rates and the
method for determining
subsequent changes to the
Interest Rate or Rates.
.........................................A series may include one or
more classes of Notes (each, a
"Strip Note") entitled to (i)
principal payments, with
disproportionate, nominal or
no interest payments, or (ii)
interest payments, with
disproportionate, nominal or
no principal payments. In
addition, a series may include
classes of Notes that differ
as to timing, sequential
order, priority of payment,
Interest Rate or amount of
payments of principal or
interest or both, or as to
which payments of principal or
interest or both on any class
may be made upon the
occurrence of specified
events, in accordance with a
schedule or formula, or on the
basis of collections from
designated portions of the
Pool. In addition, a series
may include one or more
classes of Notes ("Accrual
Notes") as to which certain
accrued interest will not be
paid but rather will be added
to the principal balance
thereof in the manner
described in the related
Prospectus Supplement. One or
more classes of Notes in a
series may be entitled to
receive principal payments
pursuant to an amortization
schedule under the
circumstances described in the
related Prospectus Supplement.
...........Each series of Notes will be senior in right of payment to
the related Certificates. If so provided in the related
Prospectus Supplement, a series of Notes may include one
or more classes of Notes which are senior to one or more
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other classes of notes
(collectively, together with
the related Certificates, the
"Subordinate Securities") in
respect of certain payments of
principal and interest and
allocations of losses on the
Trust Assets. See "Description
of Credit
Enhancement--Subordination."
The Notes will be issued in
fully-registered certificated
or book-entry form in the
authorized denominations
specified in the related
Prospectus Supplement. See
"Description of the Notes."
......Neither the Notes nor the underlying Trust Assets will be
guaranteed or insured by any governmental agency or
instrumentality or the Company, Residential Funding,
GMAC Mortgage or any of their affiliates, except as
expressly set forth herein or in the related Prospectus
Supplement. See "Risk Factors--Limited Obligations."
The Pools...... As specified in the related Prospectus Supplement, each
Trust Fund will consist primarily of a Pool of Trust Assets
which may include (i) Revolving Credit Loans secured by
first or junior liens on one- to four-family residential
properties located in any one of the fifty states, the
District of Columbia or the Commonwealth of Puerto Rico
(the "Mortgaged Properties"); (ii) Home Equity Loans;
(iii) Home Improvement Contracts; (iv) Manufactured
Housing Contracts; (v) certain balances of the foregoing
and/or (vi) Private Securities. All or a portion of the
Contracts underlying a series of Notes may be partially
insured by the FHA pursuant to Title I ("Title I") of the
National Housing Act of 1934, as amended (the "National
Housing Act"). All of the Trust Assets will have been
purchased by the Company, either directly or through
Residential Funding, from loan originators or sellers who,
as specified in the related Prospectus Supplement, may or
may not be affiliated with the Company, including GMAC
Mortgage and Homecomings Financial Network, Inc.
(each affiliates of the Company). See "Trust Asset
Program." For a description of the types of Trust Assets
that may be included in the Pools, see "The Pools."
......If specified in the related Prospectus Supplement, a Trust
Fund may include pass-through certificates or other
instruments evidencing interests in or secured by
Revolving Credit Loans, Home Equity Loans, Home
Improvement Contracts and Manufactured Housing
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Contracts, or certain balances of any of the foregoing
("Private Securities") and certain interests in the
foregoing, as described herein. See "The Pools--General"
herein.
Interest Payments. Except as otherwise specified herein or in the related
Prospectus Supplement, interest on each class of Notes of
each series, other than Strip Notes or Accrual Notes (prior
to the time when accrued interest becomes payable
thereon), will be remitted at the applicable Interest Rate on
the outstanding principal balance of such class, on the day
specified as a payment date for such series or Class in the
related Prospectus Supplement (each, a "Payment Date").
Payments, if any, with respect to interest on Strip Notes
will be made on each Payment Date as described herein
and in the related Prospectus Supplement. See
"Description of the Notes--Payments." Strip Notes that
are entitled to payments of principal only will not receive
payments in respect of interest. Interest that has accrued
but is not yet payable on any Accrual Notes will be added
to the principal balance of such class on the related
Payment Date, and will thereafter bear interest at the
applicable Interest Rate. Payments of interest with respect
to any series of Notes (or accruals thereof in the case of
Accrual Notes), or with respect to one or more classes
included therein, may be reduced to the extent of interest
shortfalls not covered by the applicable form of credit
support. See "Yield and Prepayment Considerations" and
"Description of the Notes."
Principal Payments.. Except as otherwise specified in the related Prospectus
Supplement, principal payments on the Notes of each
series, or of the class or classes of Notes then entitled
thereto, will be made on a pro rata basis among all such
Notes or among the Notes of any such class, in proportion
to their respective outstanding principal balances or the
percentage interests represented by such class, in the
priority and manner specified in the related Prospectus
Supplement. Strip Notes with no principal balance will not
receive payments of principal. In the event that principal
payments on the Trust Assets are reduced due to certain
delinquencies or losses not covered by the applicable form
of credit enhancement, the payments of principal on the
Notes may be reduced.
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............In addition, for any series of Notes, there may be no
principal payments on such Notes in any given month as
a result of the payment terms of any of the Revolving
Credit Loans in the Trust Fund, certain of which may
require only limited or no payments of principal prior to
the related maturity date, or the payment terms of such
series of Notes, including provisions whereby principal
payments on certain Revolving Credit Loans may be
applied to cover Draws on other Revolving Credit Loans.
If specified in the related Prospectus Supplement, a series
of Notes may provide for a period during which all or a
portion of the principal collections on the Revolving Credit
Loans are reinvested in Additional Balances or additional
Revolving Credit Loans or are accumulated in a trust
account pending commencement of an amortization period.
See "The Pools," "Yield and Prepayment Considerations"
and "Description of the Notes."
Funding Account. If so specified in the related Prospectus Supplement, a
portion of the proceeds of the sale of one or more classes
of Notes of a series or a portion of collections on the
Trust Assets in respect of principal may be deposited in a
segregated account to be applied to acquire additional
Trust Assets from the Sellers, subject to the limitations set
forth herein under "Description of the Notes--Funding
Account." Monies on deposit in the Funding Account and
not applied to acquire such additional Trust Assets within
the time set forth in the related Trust Agreement or other
applicable agreement may be treated as principal and
applied in the manner described in the related Prospectus
Supplement.
Yield and Prepayment
Considerations.................................. The Trust Assets
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
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other type of credit support to provide full or partial
coverage for certain defaults and losses relating to the
Trust Assets. Credit support also will be provided in the
form of subordination of the Certificates and may be
provided in the form of subordination of one or more
classes of subordinate Notes in a series under which
certain losses are first allocated to such Subordinate
Securities up to a specified limit or in the form of
Overcollateralization (as
defined herein). Any form
of credit enhancement may
have certain limitations
and exclusions from
coverage thereunder, which
will be described in the
related Prospectus
Supplement. Losses not
covered by any form of
credit enhancement will be
borne by the holders of
the related Notes (or
certain classes thereof).
If so specified in the
related Prospectus
Supplement, the Contracts
may be partially insured
by the FHA pursuant to
Title I. To the extent not
set forth herein, the
amount and types of
coverage, the
identification of any
entity providing the
coverage, the terms of any
subordination and related
information will be set
forth in the Prospectus
Supplement relating to a
series of Notes. See
"Description of Credit
Enhancement."
Optional Redemption.....
The Master Servicer, the Company or a person specified
in the related Prospectus Supplement, may at its option
either (i) effect early redemption of any series of Notes
through the purchase of the Pool in the related Trust Fund
or (ii) purchase, in whole but not in part, the Notes of any
series; in each case under the circumstances and in the
manner set forth herein under "The
Agreements--Termination; Redemption of Notes" and in
the related Prospectus Supplement.
Rating .............
..At the date of issuance, as to each series, each class of
Notes offered hereby will be rated at the request of the
Company in one of the four highest rating categories by
one or more nationally recognized statistical rating
agencies (each, a "Rating Agency"). See "Ratings" in the
related Prospectus Supplement.
Legal Investment..................................
Unless otherwise specified in the related Prospectus
Supplement, the Notes offered hereby will not constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"). See "Legal Investment Matters."
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ERISA Considerations......
A fiduciary of an employee benefit plan and certain other
plans and arrangements, including individual retirement
accounts and annuities, Keogh plans, and bank collective
investment funds, insurance company general or separate
accounts and certain other entities in which such plans,
accounts, annuities or arrangements are invested, which is
subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or Section 4975 of the
Internal Revenue Code of 1986 (the "Code"), and any
other person contemplating purchasing a Note with Plan
Assets (as defined herein), should carefully review with its
legal counsel whether the purchase or holding of Notes
could give rise to a transaction that is prohibited or is not
otherwise permissible either under ERISA or Section 4975
of the Code. See "ERISA Considerations" herein and in
the related Prospectus Supplement.
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.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Notes:
Special Features of Certain Trust Assets that are Secured by Junior Liens
on Mortgaged Properties
General
Although the Revolving Credit Loans, Home Equity Loans and, if
applicable, Contracts may be secured by liens on Mortgaged Properties, such
collateral may not provide assurance of repayment of such Trust Assets
comparable to that provided under many first lien lending programs, and such
Trust Assets (especially those with high Combined Loan-to-Value Ratios (as
defined herein)) may have risk of repayment characteristics more similar to
unsecured consumer loans.
Since the Revolving Credit Loans, Home Equity Loans and, if applicable,
Contracts may be subordinate to the rights of the mortgagee under the related
senior mortgage or mortgages, the proceeds from any foreclosure, liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of such Trust Assets secured by junior mortgages only to the
extent that the claims of such senior mortgages have been satisfied in full,
including any related foreclosure costs. With respect to a Contract partially
insured by the FHA pursuant to Title I, however, an FHA claim may be payable
subject to certain limitations, as described in the related Prospectus
Supplement and herein. With respect to the Trust Assets secured by junior liens
that have low Junior Ratios (as defined herein), foreclosure costs may be
substantial relative to the outstanding balance of such Trust Assets upon
default, and therefore the amount of any liquidation proceeds payable to
Noteholders may be smaller as a percentage of the outstanding balance of such
Trust Assets than would be the case in a typical pool of first lien residential
loans. In addition, the holder of a loan secured by a junior mortgage may not
foreclose on the Mortgaged Property unless it forecloses subject to the senior
mortgages, in which case it must either pay the entire amount due on the senior
mortgages to the senior mortgagees at or prior to the foreclosure sale or
undertake the obligation to make payments on the senior mortgages in the event
the mortgagor is in default thereunder. The Trust Fund will not have any source
of funds to satisfy the senior mortgages or make payments due to the senior
mortgagees, although the Master Servicer or Subservicer may, at its option,
advance such amounts to the extent deemed recoverable and prudent but will not
be obligated to do so. In the event that such proceeds from a foreclosure or
similar sale of the related Mortgaged Property are insufficient to satisfy all
senior liens and such Trust Asset in the aggregate, the Trust Fund, as the
holder of the junior lien, and, accordingly, Holders of one or more classes of
the Notes are likely to (i) incur losses in jurisdictions in which a deficiency
judgment against the borrower is not available or in the Master Servicer's
discretion seeking such judgment is not advisable, and (ii) incur losses if any
deficiency judgment obtained is not realized upon. See "Certain Legal Aspects of
the Trust Assets and Related Matters."
No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Trust Assets. If the
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residential real estate market should experience an overall decline in value
(including as a result of the general economic factors discussed below under
"--Mortgagor Credit"), any such decline could extinguish the value of the
interest of a junior mortgagee in the Mortgaged Property before having any
adverse effect on the interest of the related senior mortgagees.
With respect to Trust Assets secured by junior liens that have high
Combined Loan-to-Value Ratios (as defined herein) or low Junior Ratios, many
circumstances exist, including those described above, under which it would be
uneconomical to foreclose on the Mortgaged Property in the event of a default.
For purposes of the foregoing, the actual Junior Ratio for a Trust Asset at any
time may be lower than indicated in the Prospectus Supplement as a result of any
reductions in the Stated Principal Balance thereof. In such circumstances,
repayment of the Trust Asset would be dependent solely on the credit of the
borrower under the related Revolving Credit Loan, Home Equity Loan or Contract
(the "Mortgagor"), and the ability to obtain repayment of such Trust Asset may
be generally similar to that which would be experienced if such Trust Asset were
an unsecured consumer loan. Moreover, while in most jurisdictions a mortgagee
would be permitted to elect to either foreclose or sue to collect the debt
evidenced by the Mortgage Note, in some jurisdictions that prohibit suits to
collect the debt until the mortgagee has sought to foreclose against the
security, the mortgagee may be forced to foreclose first and obtain a deficiency
judgment. In addition, in some jurisdictions, where the mortgagee has chosen to
sue on the debt in lieu of foreclosure, the mortgagee will be barred from
foreclosing against the security. In addition, no assurance can be given that a
borrower under the related Home Improvement Contract (other than Title I
Contracts) will use the proceeds thereof for Home Improvements and consequently,
no additional value will have been added to the Mortgage Property. See "Certain
Legal Aspects of the Trust Assets and Related Matters--Anti-Deficiency
Legislation and Other Limitations on Lenders."
Mortgagor Credit
As a result of the foregoing considerations, the underwriting standards
and procedures applicable thereto, as well as the repayment prospects thereof,
may be more dependent on the creditworthiness of the Mortgagor and less
dependent on the adequacy of the Mortgaged Property as collateral than would be
the case under many first lien lending programs. As to such Trust Assets, future
changes in the Mortgagor's economic circumstances will have a significant effect
on the likelihood of repayment. Although the Revolving Credit Loans are
generally subject to provisions whereby the Credit Limit may be reduced as a
result of a material adverse change in the Mortgagor's economic circumstances,
the Servicer or Master Servicer generally will not monitor for such changes and
may not become aware of them until after the Mortgagor has defaulted. Under
certain circumstances, a Mortgagor may draw his entire Credit Limit in response
to personal financial needs resulting from an adverse change in circumstances.
Future changes in a Mortgagor's economic circumstances may result from
a variety of unforeseeable personal factors, including loss of employment,
reduction in income, illness and divorce. Any increase in prevailing market
interest rates may adversely affect a Mortgagor by increasing debt service on
any floating rate Revolving Credit Loans, Home Equity Loans, Contracts or other
similar debt of the Mortgagor. In addition, for any Trust Assets secured by
junior mortgages, changes in the payment terms of any related senior mortgage
loan may adversely affect the Mortgagor's ability to pay principal and interest
on such senior mortgage
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loan. For example, such changes may result if the senior mortgage loan is an
adjustable rate loan and the interest rate thereon increases, which may occur
with or without an increase in prevailing market interest rates if the increase
is due to the phasing out of a reduced initial rate. Specific information about
such senior mortgage loans, other than the amount thereof at origination of the
corresponding Trust Asset, generally will not be available and will not be
included in the related Prospectus Supplement.
General economic conditions, both on a national and regional basis,
will also have an impact on the ability of Mortgagors to repay their Revolving
Credit Loans, Home Equity Loans or Contracts. Certain geographic regions of the
United States from time to time will experience weaker regional economic
conditions and housing markets, and, consequently, will experience higher rates
of loss and delinquency than will be experienced on mortgage loans generally.
For example, a region's economic condition and housing market may be directly,
or indirectly, adversely affected by natural disasters or civil disturbances
such as earthquakes, hurricanes, floods, eruptions or riots. The economic impact
of any of these types of events may also be felt in areas beyond the region
immediately affected by the disaster or disturbance. The Trust Assets underlying
a series of Notes may be concentrated in these regions, and such concentration
may present risk considerations in addition to those generally present for
similar mortgage-backed securities without such concentration. Any change in the
deductibility for federal income tax purposes of interest payments on home
equity loans may also have an impact on the ability of Mortgagors to repay such
Trust Assets.
Revolving Credit Loan Characteristics
Certain of the types of Revolving Credit Loans that may be included in
the Pools may involve additional uncertainties not present in traditional types
of mortgage loans, or in home equity or home improvement loans originated under
other programs.
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.
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To the extent that any losses are incurred on any of the Revolving
Credit Loans that are not covered by the applicable credit enhancement, holders
of Notes of the series secured by the related Pool (or certain classes thereof)
will bear all risk of such losses resulting from default by Mortgagors.
Limitations on FHA Insurance for Title I Contracts
The related Prospectus Supplement will specify the number and
percentage of Contracts, if any, included in the related Trust Fund that are
partially insured by the FHA pursuant to Title I. Since the FHA Insurance Amount
(as defined herein) for the Title I Contracts is limited as described herein and
in the related Prospectus Supplement, and since the adequacy of such FHA
Insurance Amount is dependent upon future events, including reductions for the
payment of FHA claims, no assurance can be given that the FHA Insurance Amount
is or will be adequate to cover 90% of all potential losses on the Title I
Contracts included in the related Trust Fund. If the FHA Insurance Amount for
the Title I Contracts is reduced to zero, such contracts will be uninsured from
and after the date of such reduction. Under Title I, until a claim for insurance
reimbursement is submitted to the FHA, the FHA does not review or approve for
qualification for insurance the individual Title I Contract insured thereunder
(as is typically the case with other federal loan insurance programs).
Consequently, the FHA has not acknowledged that any of the Title I Contracts are
eligible for FHA insurance, nor has the FHA reviewed or approved the
underwriting and qualification by the originating lenders of any individual
Title I Contracts. See "Description of FHA Insurance Under Title I."
The availability of FHA insurance reimbursement following a default on
a Title I Contract is subject to a number of conditions, including strict
compliance by the originating lender of such loan, the Seller, the FHA Claims
Administrator (as defined herein), the servicer and any subservicer with the FHA
Regulations (as defined herein) in originating and servicing such Title I
Contract, and limits on the aggregate insurance coverage available in the FHA
Reserve (as defined herein). For example, the FHA Regulations provide that,
prior to originating a Title I Contract, a lender must exercise prudence and
diligence in determining whether the borrower and any co-maker or co-signer is
solvent and an acceptable credit risk with a reasonable ability to make payments
on the loan. Although the related Seller will represent and warrant that the
Title I Contracts have been originated and serviced in compliance with all FHA
Regulations, these regulations are susceptible to substantial interpretation.
Failure to comply with any FHA Regulations may result in a denial of FHA claims,
and there can be no assurance that the FHA's enforcement of the FHA Regulations
will not become more strict in the future. See "Description of FHA Insurance
Under Title I."
Because the Trust Fund is not eligible to hold an FHA contract of
insurance under Title I, the FHA will not recognize the Trust Fund or the
Noteholders as the owners of the Title I Contracts, or any portion thereof,
entitled to submit FHA claims. Accordingly, neither the Trust Fund nor the
Noteholders will have a direct right to receive insurance payments from the FHA.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will either serve as or contract with the person specified in the
Prospectus Supplement to serve as the Administrator for FHA claims (each an "FHA
Claims Administrator") pursuant to an FHA claims administration agreement (the
"FHA Claims Administration Agreement"). The FHA Claims Administrator will be
responsible for administering, processing and submitting FHA
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claims with respect to the Title I Contracts. The Noteholders will be dependent
on the FHA Claims Administrator to (i) make claims on the Title I Contracts in
accordance with FHA Regulations and (ii) remit all FHA insurance proceeds
received from the FHA in accordance with the related agreement. The Noteholders'
rights relating to the receipt of payment from and the administration,
processing and submission of FHA claims by any FHA Claims Administrator is
limited and governed by the related agreement and the FHA Claims Administration
Agreement and these functions are obligations of the FHA Claims Administrator,
but not the FHA.
Risks Associated with Certain Trust Assets
No Hazard Insurance for Title I Contracts
With respect to any Title I Contract, the FHA Regulations do not
require that a borrower obtain title or fire and casualty insurance as a
condition to obtaining a Home Improvement Contract. However, with respect to
both Manufactured Home Contracts and House Improvement Contracts that are Title
I Contracts, if the related Mortgaged Property is located in a flood hazard
area, flood insurance in an amount at least equal to the loan amount is
required. In addition, the FHA Regulations do not require that the borrower
obtain insurance against physical damage arising from earth movement (including
earthquakes, landslides and mudflows) as a condition to obtaining a property
improvement loan insured under Title I. Accordingly, if a Mortgaged Property
that secures a Title I Contract suffers any uninsured hazard or casualty losses,
holders of the related series of Notes that are secured in whole or in part by
such Title I Contract may bear the risk of loss resulting from a default by the
borrower to the extent such losses are not recovered by foreclosure on the
defaulted loans or from any FHA Insurance Proceeds (as defined herein). Such
loss may be otherwise covered by amounts available from the credit enhancement
provided for the related series of Notes, as specified in the related Prospectus
Supplement.
Contracts Secured by Manufactured Homes
The Manufactured Housing Contracts will be secured by security
interests in Manufactured Homes that are not considered to be real property
because such homes are not permanently affixed to real estate. Perfection of
security interests in such Manufactured Homes and enforcement of rights to
realize upon the value of such Manufactured Homes as collateral for such
Manufactured Housing Contracts are subject to a number of Federal and state
laws, including the UCC as adopted in each state and each state's certificate of
title statutes. The steps necessary to perfect the security interest in a
Manufactured Home will vary from state to state. Because of the expense and
administrative inconvenience involved, unless otherwise specified in the related
Prospectus Supplement, the certificate of title to Manufactured Homes will not
be amended to change the lienholder specified therein to the applicable Owner
Trustee and will not deliver any certificate of title to such Owner Trustee or
note thereon. Consequently, in some states, in the absence of such an amendment,
the assignment to such Owner Trustee of the security interest in the
Manufactured Home may not be effective or such security interest may not be
perfected and, in the absence of such notation or delivery to such Owner
Trustee, the assignment of the security interest in the Manufactured Home may
not be effective against creditors of the lienholder or a trustee in bankruptcy
of the lienholder. In addition, if the owner of a Manufactured Home were to
relocate such Manufactured Home to another state or if a
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Manufactured Home becomes permanently attached to its site, other parties could
obtain an interest in the Manufactured Home which may be prior to the original
security interest. See "Certain Legal Aspects of the Trust Assets and Related
Matters--Manufactured Housing Contracts." If any related Credit Enhancement is
exhausted and such Manufactured Housing Contract is in default, then recovery of
outstanding principal and unpaid interest due on such Contract generally is
dependent on repossession and resale of the Manufactured Home securing such
Manufactured Housing Contract. Manufactured Homes, unlike Mortgaged Properties,
generally depreciate in value and may have a limited market for resale.
Therefore, the amount recoverable upon repossession and resale may not be
sufficient to pay amounts due on the defaulted Contract. Certain other factors
may limit the ability of the Master Servicer to realize upon a Manufactured Home
or may limit the amount realized to less than the amount due.
Unsecured Contracts
The obligations of the borrower under any unsecured Contract included
as part of the related Trust Fund will not be secured by an interest in the
related real estate or otherwise (an "Unsecured Contract"), and the related
Owner Trustee on behalf of the Trust Fund, as the owner of such Unsecured
Contract, will be a general unsecured creditor as to such obligations. As a
consequence, in the event of a default under an Unsecured Contract, the related
Trust Fund will have recourse only against the borrower's assets generally,
along with all the other general unsecured creditors of such borrower. In a
bankruptcy or insolvency proceeding relating to a borrower on an Unsecured
Contract, the obligations of the borrower under such Unsecured Contract may be
discharged in their entirety or in part (for example, the amount due and owing
by such borrower under such Unsecured Contract that exceeds payments made to the
Indenture Trustee as a general unsecured creditor may be discharged). Investors
should be aware that a borrower on an Unsecured Contract may not demonstrate the
same degree of concern over performance of its obligations under such Unsecured
Contract as a borrower whose obligations were secured by a single family
residence owned by such borrower.
Consumer Protection Laws Related to Contracts
Numerous federal and state consumer protection laws impose requirements
on lending under retail installment sales contracts and installment loan
agreements such as the Contracts, and the failure by the lender or seller of
goods to comply with such requirements could cause assignees of such agreements
to be partially liable for amounts due under such agreements and claims by such
assignees may be subject to set-off or rescission as a result of such lender's
or seller's noncompliance. See "Certain Legal Aspects of the Trust Assets and
Related Matters--Consumer Protection Laws with Respect to Manufactured Housing
Contracts" and "--The Home Improvement Contracts--Consumer Protection Laws."
These laws would apply to an Indenture Trustee as an assignee of Contracts. Each
Seller will warrant that each Contract complies with all requirements of law
and, with respect to any Manufactured Housing Contract secured only by the
related Manufactured Home, will make certain warranties relating to the
validity, subsistence, perfection and priority of the security interest in each
Manufactured Home securing such Contract.
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Limitations, Reduction and Substitution of Credit Enhancement
With respect to each series of Notes, credit enhancement may be
provided to cover delinquencies and losses on the underlying Trust Assets,
subject to any applicable limitations. Credit enhancement will be provided in
one or more of the forms referred to herein, including, but not limited to:
subordination of Subordinate Securities of the same series;
Overcollateralization; a Financial Guaranty Insurance Policy; a Letter of
Credit; a Reserve Fund or any combination thereof. If so specified in the
related Prospectus Supplement, the Contracts may be partially insured by the FHA
pursuant to Title I. See "Description of Credit Enhancement" herein.
As to any series of Notes, the amount of coverage under the applicable
credit enhancement may be limited in amount, and if limited may be subject to
periodic reduction in accordance with a schedule or formula. Furthermore, such
credit enhancement may provide only very limited coverage as to certain types of
losses or risks, and may provide no coverage as to certain other types of losses
or risks. For any type of credit enhancement which is generated in whole or in
part by cash flows on the underlying Trust Assets (as may be the case for a
Reserve Fund or Overcollateralization, for example), the amount of coverage
provided thereby may be adversely affected under a variety of scenarios by
factors such as the prepayment and draw experience of the Trust Assets, changes
in the Mortgage Rates or Gross Margins applicable to the Trust Assets pursuant
to the terms thereof, and changes in the relationship between the Mortgage Rates
on the Trust Assets and the Interest Rates on the Notes (which changes may
result, in part, from changes in the relationship between different indexes
respectively used to determine the Mortgage Rates and the Interest Rates). In
the event losses exceed the amount of coverage provided by any credit
enhancement or losses of a type not covered by any credit enhancement occur,
such losses will be borne by the holders of the related Notes (or certain
classes thereof).
The rating of any series of Notes by any Rating Agency may be lowered
following the initial issuance thereof as a result of the downgrading or
nonperformance of the obligations of any applicable credit support provider, or
as a result of losses on the related Trust Assets in excess of the levels
contemplated by such Rating Agency at the time of its initial rating analysis.
None of the Company, the Master Servicer, GMAC Mortgage or any of their
affiliates will have any obligation to replace or supplement any credit
enhancement, or to take any other action to maintain any rating of any series of
Notes. See "Description of Credit Enhancement--Reduction or Substitution of
Credit Enhancement."
Yield and Prepayment Considerations
The yield to maturity of the Notes of each series will depend on the
rate and timing of principal payments (including payments in excess of required
installments, prepayments or terminations, liquidations and repurchases) on the
Trust Assets, the rate and timing of Draws, and the price paid by Noteholders.
Such yield may be adversely affected by a higher or lower than anticipated rate
of principal payments or Draws on the related Revolving Credit Loans. The Trust
Assets generally may be prepaid in full or in part without penalty. The Company
has no significant experience with respect to the rate of principal prepayments
on home improvement contracts or manufactured housing contracts, but generally
expects that prepayments on home
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improvement contracts will be higher than certain other Trust Assets due to the
possibility of increased property value resulting from the home improvement and
greater refinance options. The Company generally expects that prepayments on
manufactured housing contracts will be lower than on other Trust Assets because
manufactured housing contracts may have less refinance options. Principal
payments or Draws are influenced by a number of factors, including prevailing
market interest rates, national and regional economic conditions and changes in
Mortgagors' personal and economic circumstances. See "Yield and Prepayment
Considerations" herein. In addition, the yield to maturity of the Notes of any
series, or the rate and timing of principal payments or Draws on the related
Revolving Credit Loans, may be affected by a wide variety of specific terms and
conditions applicable to the respective programs under which the Revolving
Credit Loans were originated. For example, the Revolving Credit Loans may
provide for future Draws to be made only in specified minimum amounts, or
alternatively may permit Draws to be made by check or through a credit card in
any amount. A pool of Revolving Credit Loans subject to the latter provisions
may be likely to remain outstanding longer with a higher aggregate principal
balance than a pool of Revolving Credit Loans with the former provisions,
because of the relative ease of making new Draws. Furthermore, certain Trust
Assets may provide for interest rate changes on a daily or monthly basis, or may
have Gross Margins that may vary under certain circumstances over the term of
the loan. In extremely high market interest rate scenarios, Notes secured by
Trust Assets with adjustable rates subject to substantially higher maximum rates
than typically apply to adjustable rate first mortgage loans may experience
rates of default and liquidation substantially higher than those that have been
experienced on other adjustable rate mortgage loan pools. The yield to maturity
of the Notes of each series will also be affected by the rate and timing of
defaults on the related Trust Assets. See "--Special Features of Certain Trust
Assets Secured by Junior Liens on Mortgaged Properties" above.
The yield to maturity on any Strip Notes will be extremely sensitive to
the rate and timing of principal payments or Draws on the related Revolving
Credit Loans. In addition, the yield to maturity on certain other types of
classes of Notes, including Accrual Notes, Notes with a Interest Rate which
fluctuates inversely with an index or certain other classes in a series
including more than one class of Notes, may be relatively more sensitive to the
rate and timing of principal payments or Draws on the related Revolving Credit
Loans than other classes of Notes.
Limited Liquidity
There can be no assurance that a secondary market for the Notes of any
series will develop or, if it does develop, that it will provide Noteholders
with liquidity of investment or that it will continue for the life of the Notes
of any series. Although the Prospectus Supplement for any series of Notes may
indicate that an underwriter specified therein intends to establish a secondary
market in such Notes, no underwriter will be obligated to do so. The Notes will
not be listed on any securities exchange.
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
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Company, Residential Funding, GMAC Mortgage or any of their affiliates. The only
obligations of the foregoing entities with respect to the Notes, the Revolving
Credit Loans, the Home Equity Loans, the Contracts or any Private Securities
will be the obligations (if any) of Residential Funding pursuant to certain
limited representations and warranties made with respect to such Trust Assets,
the obligation of Residential Funding (or such other entity specified in the
related Prospectus Supplement) to advance funds to Mortgagors in respect of
Draws and the servicing obligations of Residential Funding as Master Servicer
under the related Servicing Agreement. If any affiliate of the Company has
originated any Trust Assets, such affiliate will only have an obligation with
respect to such Trust Assets to the same extent as a Seller, as described
herein. Neither the Notes nor the underlying Trust Assets will be guaranteed or
insured by any governmental agency or instrumentality, or by the Company,
Residential Funding, GMAC Mortgage or any of their affiliates, except as
expressly set forth herein or in the related Prospectus Supplement. Proceeds of
the assets included in the related Trust Fund (including the Trust Assets and
any form of credit enhancement) will be the sole source of payments on the
Notes, and there will be no recourse to the Company, Residential Funding, GMAC
Mortgage or any other entity in the event that such proceeds are insufficient or
otherwise unavailable to make all payments provided for under the Notes.
THE POOLS
General
Unless otherwise specified in the related Prospectus Supplement, each
Pool will consist primarily of (i) Revolving Credit Loans; (ii) Home Equity
Loans; (iii) Home Improvement Contracts; (iv) Manufactured Housing Contracts;
(v) certain balances of any of the foregoing and/or (vi) certain interests in
the foregoing (which may include Private Securities) excluding any interest
retained by the Company or any other entity specified in the Prospectus
Supplement. The Revolving Credit Loans, Home Equity Loans and, if applicable,
Contracts will be evidenced by promissory notes (the "Mortgage Notes") secured
by mortgages or deeds of trust or other similar security instruments creating
first or junior liens on one- to four-family residential properties. All or a
portion of the Contracts underlying a series of Notes may be partially insured
by the FHA pursuant to Title I. The Mortgaged Properties will consist primarily
of owner-occupied attached or detached one-family dwelling units, two- to
four-family dwelling units, condominiums, townhouses, row houses, individual
units in planned-unit developments, Manufactured Homes which may be permanently
affixed to the real property on which they are located and certain other
dwelling units, and the fee, leasehold or other interests in the underlying real
property. The Mortgaged Properties may include vacation, second and
non-owner-occupied homes. If specified in the related Prospectus Supplement
relating to a series of Notes, a Pool may contain cooperative apartment loans
("Cooperative Loans") evidenced by promissory notes ("Cooperative Notes")
secured by security interests in shares issued by Cooperatives and in the
related proprietary leases or occupancy agreements granting exclusive rights to
occupy specific dwelling units in the related buildings. As used herein, unless
the context indicates otherwise, "Revolving Credit Loans," "Home Equity Loans"
and, if applicable, "Contracts" include Cooperative Loans, "Mortgaged
Properties" includes shares in the related Cooperative and the related
proprietary leases or occupancy agreements securing Cooperative
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Notes, "Mortgage Notes" includes Cooperative Notes and "Mortgages" includes a
security agreement with respect to a Cooperative Note.
Each Trust Asset will be selected by the Company for inclusion in a
Pool from among those purchased by the Company, either directly or through its
affiliates, including Residential Funding, Homecomings Financial Network, Inc.
and GMAC Mortgage ("Affiliated Sellers"), or from banks, savings and loan
associations, mortgage bankers, investment banking firms, the FDIC and other
mortgage loan originators or sellers not affiliated with the Company
("Unaffiliated Sellers"); (Unaffiliated Sellers and Affiliated Sellers are
collectively referred to herein as "Sellers"), all as described below under
"Trust Asset Program." If a Pool is composed of Trust Assets acquired by the
Company directly from Sellers other than Residential Funding, the related
Prospectus Supplement will specify the extent of Trust Assets so acquired. The
characteristics of the Trust Assets are as described in the related Prospectus
Supplement. Other mortgage loans available for purchase by the Company may have
characteristics which would make them eligible for inclusion in a Pool but were
not selected for inclusion in such Pool.
Under certain circumstances, the Trust Assets will be delivered either
directly or indirectly to the Company by one or more Sellers identified in the
related Prospectus Supplement, concurrently with the issuance of the related
series of Notes (a "Designated Seller Transaction"). Such Notes may be sold in
whole or in part to any such Seller in exchange for the related Trust Assets, or
may be offered under any of the other methods described herein under "Methods of
Distribution." The related Prospectus Supplement for a Pool composed of Trust
Assets acquired by the Company pursuant to a Designated Seller Transaction will
generally include information, provided by the related Seller (the "Designated
Seller"), about the Designated Seller, the Trust Assets and the underwriting
standards applicable to the Trust Assets. None of the Company, Residential
Funding, GMAC Mortgage or any of their affiliates will make any representation
or warranty with respect to such Trust Assets, or any representation as to the
accuracy or completeness of such information provided by the Seller.
If specified in the related Prospectus Supplement, the Trust Fund
securing a series of Notes may include Private Securities. The Private
Securities may have been issued previously by the Company or an affiliate
thereof, a financial institution or other entity engaged generally in the
business of mortgage lending or a limited purpose corporation organized for the
purpose of, among other things, acquiring and depositing mortgage loans into
such trusts, and selling beneficial interests in such trusts. As to any such
series of Notes, the related Prospectus Supplement will include a description of
such Private Securities and any related credit enhancement, and the assets
underlying such Private Securities will be described together with any other
Trust Assets included in the Pool relating to such series.
In addition, with respect to any series of Notes secured by Private
Securities, such Private Securities may consist of an ownership interest (an
"Ownership Interest") in a structuring entity formed by the Company for the
limited purpose of holding the Trust Assets relating to such series of Notes (a
"Special Purpose Entity"). A Special Purpose Entity may be organized in the form
of a trust, limited partnership or limited liability company, and will be
structured in a manner that will insulate the holders of Notes from liabilities
of the Special Purpose Entity. The provisions governing such Special Purpose
Entity generally will restrict the Special Purpose Entity from engaging in or
conducting any business other than the holding of
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Trust Assets and any related assets and the issuance of ownership interests in
such Trust Assets and certain activities incidental thereto. Any such Ownership
Interest will evidence an ownership interest in the related Trust Assets as well
as the right to receive specified cash flows derived from such Trust Assets, as
described in the related Prospectus Supplement. The obligations of the Depositor
in respect of any such Ownership Interest will generally be limited to certain
representations and warranties with respect to the Trust Assets, as described
herein. Credit support of any of the types described herein under "Description
of Credit Enhancement" may be provided for the benefit of any such Ownership
Interest, if so specified in the related Prospectus Supplement. As to any such
series of Notes, the term "Pool" includes the Trust Assets underlying such
Private Securities.
The Prospectus Supplement for each series of Notes will contain
information as to the type of Trust Assets which will be included in the related
Pool. Each Prospectus Supplement applicable to a series of Notes will include
certain information, generally as of the Cut-off Date and to the extent then
available to the Company, on an approximate basis, as to (i) the aggregate
principal balance of the Trust Assets, (ii) the type of property securing the
Trust Assets and related lien priority, if any, (iii) the original or modified
terms to maturity of the Trust Assets, (iv) the earliest origination or
modification date and latest maturity date of the Trust Assets, (v) the
Loan-to-Value Ratios or Combined Loan-to-Value Ratios of the Trust Assets, as
applicable, (vi) the Mortgage Rate or range of Mortgage Rates borne by the Trust
Assets, (vii) the applicable Index, the range of Gross Margins, the weighted
average Gross Margin, the frequency of adjustments and maximum loan rate, (viii)
the geographical distribution of the Mortgaged Properties, (ix) the aggregate
Credit Limits of the related Credit Line Agreements, (x) the number and
percentage of Contracts that are partially insured by the FHA pursuant to Title
I and (xi) if applicable, the weighted average Junior Ratio and Credit
Utilization Rate. A Current Report on Form 8-K will be available upon request to
holders of the related series of Notes and will be filed, together with the
related Trust Agreement, with the Commission within fifteen days after the
initial issuance of such Notes. The composition and characteristics of a Pool
that contains Revolving Credit Loans may change from time to time as a result of
any Draws made after the related Cut-off Date under the related Credit Line
Agreements that are included in such Pool. In the event that Trust Assets are
added to or deleted from the Trust Fund after the date of the related Prospectus
Supplement other than as a result of any such Draws with respect to the
Revolving Credit Loans, such addition or deletion will be noted in the Current
Report on Form 8-K.
With respect to each Revolving Credit Loan, the "Combined Loan-to-Value
Ratio" or "CLTV" generally will be the ratio, expressed as a percentage, of the
sum of (i) the greater of the Cut-off Date Principal Balance or the Credit
Limit, if applicable, and (ii) the principal balance of any related senior
mortgage loan at origination of such Revolving Credit Loan together with any
mortgage loan subordinate thereto, to the lesser of (x) the appraised value of
the related Mortgaged Property determined in the appraisal used in the
origination of such Revolving Credit Loan and (y) if applicable under the
corresponding program, the sales price of each Mortgaged Property. With respect
to each Revolving Credit Loan, the "Junior Ratio" generally will be the ratio,
expressed as a percentage, of the greater of the Cut-off Date Principal Balance
or the Credit Limit, if applicable, of such Revolving Credit Loan to the sum of
(i) the greater of the Cut-off Date Principal Balance or the Credit Limit, if
applicable, of such Revolving Credit Loan and (ii) the principal balance of any
related senior mortgage loan at
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origination of such Revolving Credit Loan. With respect to each Home Equity Loan
or Contract, the CLTV and Junior Ratio will be computed in the manner described
in the related Prospectus Supplement. The "Credit Utilization Rate" is
determined by dividing the Cut-off Date Principal Balance of a Revolving Credit
Loan by the Credit Limit of the related Credit Line Agreement.
The Company will cause the Trust Assets constituting each Pool (or
Private Securities evidencing interests therein) to be assigned to the Owner
Trustee named in the related Prospectus Supplement, for the benefit of the
holders of all of the Securities of a series. The Master Servicer named in the
related Prospectus Supplement will service the Trust Assets, either directly or
through other mortgage servicing institutions ("Subservicers"), pursuant to a
Servicing Agreement and will receive a fee for such services. See "Trust Asset
Program" and "Description of the Notes." With respect to those Trust Assets
serviced by the Master Servicer through a Subservicer, the Master Servicer will
remain liable for its servicing obligations under the related Servicing
Agreement as if the Master Servicer alone were servicing such Trust Assets. In
addition to or in lieu of the Master Servicer for a series of Notes, the related
Prospectus Supplement may identify an Administrator for the Trust Fund. The
Administrator may be an affiliate of the Company. All references herein to
"Master Servicer" and any discussions of the servicing and administration
functions of the Master Servicer will also apply to the Administrator to the
extent applicable.
The Company's assignment of the Trust Assets to the Owner Trustee on
behalf of the Trust will be without recourse. See "Description of the
Notes--Assignment of Trust Assets." The Master Servicer's obligations with
respect to the Trust Assets will consist principally of its contractual
servicing obligations under the related Servicing Agreement (including its
obligation to enforce certain purchase obligations of Residential Funding or any
Designated Seller and other obligations of Subservicers, as described herein
under "Trust Asset Program--Representations Relating to Trust Assets," and
"--Subservicing" and "Description of the Notes--Assignment of Trust Assets" or
pursuant to the terms of any Private Securities. Residential Funding (or such
other entity specified in the related Prospectus Supplement) will be obligated
to advance funds to Mortgagors in respect of Draws made after the related
Cut-off Date.
A Mortgaged Property securing a Revolving Credit Loan, Home Equity Loan
and, if applicable, a Contract may be subject to the senior liens of one or more
conventional mortgage loans at the time of origination and may be subject to one
or more junior liens at the time of origination or thereafter. A mortgage loan
secured by any such junior lien or senior lien will likely not be included in
the related Pool, and the Company, an affiliate of the Company or an
Unaffiliated Seller may have an interest in such mortgage loan. Revolving Credit
Loans, Home Equity Loans and Contracts that are secured by junior liens
generally will not be required by the Company to be covered by a primary
mortgage guaranty insurance policy insuring against default on such Trust
Assets.
Revolving Credit Loans
The Revolving Credit Loans will be originated pursuant to loan
agreements (the "Credit Line Agreements"). Interest on each Revolving Credit
Loan will be calculated based on the average daily balance outstanding during
the billing cycle and the billing cycle generally will be the calendar month
preceding a Due Date. Each Revolving Credit Loan will have an interest rate
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(a "Mortgage Rate") that is subject to adjustment on the day specified in the
related Mortgage Note, which may be daily or monthly, equal to the sum of (a)
the index* on such day as specified in the related Prospectus Supplement, and
(b) a fixed percentage set forth in the related Mortgage Note (the "Gross
Margin"), subject to the maximum rate set forth in the Mortgage Note and
permitted by applicable law. Notwithstanding the forgoing, if so specified in
the related Prospectus Supplement, a Revolving Credit Loan may have an
introductory rate that is lower than the rate that would be in effect if the
applicable Index and Gross Margin were used to determine the Mortgage Rate and
as a result of such introductory rate, interest payments on the Notes may
initially be lower than expected. See "Risk Factors--Special Features of Certain
Trust Assets Secured by Junior Liens on Mortgaged Properties--Revolving Credit
Loan Characteristics" herein.
Unless otherwise specified in the related Prospectus Supplement, each
Revolving Credit Loan will have a term to maturity from the date of origination
of not more than 25 years. The Mortgagor for each Revolving Credit Loan may draw
money (each, an "Additional Balance" or a "Draw") under the related Credit Line
Agreement at any time during the period specified therein (such period as to any
Revolving Credit Loan, the "Draw Period"). Unless otherwise specified in the
related Prospectus Supplement, the Draw Period generally will not be more than
15 years. Unless otherwise specified in the related Prospectus Supplement, if
the Draw Period is less than the full term thereof, the related Mortgagor will
not be permitted to make any Draw during the period from the end of the related
Draw Period to the related maturity date. The Mortgagor for each Revolving
Credit Loan will be obligated to make monthly payments thereon in a minimum
amount as specified in the related Mortgage Note, which generally will not be
less than the Finance Charge for the related billing cycle. The Mortgagor for
each Revolving Credit Loan will be obligated to make a payment on the related
maturity date in an amount equal to the Account Balance thereof on such maturity
date, which may be a substantial principal amount. The maximum amount of any
Draw is equal to the excess, if any, of the Credit Limit over the principal
balance outstanding under such Mortgage Note at the time of such Draw.
Unless otherwise specified in the related Prospectus Supplement, (a)
the Finance Charge (the "Finance Charge") for any billing cycle generally will
be equal to interest accrued on the average daily principal balance of such
Revolving Credit Loan for such billing cycle at the related Mortgage Rate, (b)
the Account Balance (the "Account Balance") on any day generally will be the
aggregate of the unpaid principal of the Revolving Credit Loan outstanding at
the beginning of such day, plus all related Draws funded on such day and
outstanding at the
- --------
* The index (the "Index") for a particular Pool will be specified in the related
Prospectus Supplement and may include one of the following indexes: (i) the
weekly average yield on U.S. Treasury securities adjusted to a constant maturity
of either six months or one year, (ii) the weekly auction average investment
yield of U.S. Treasury bills of six months, (iii) the daily Bank Prime Loan rate
made available by the Federal Reserve Board, (iv) the cost of funds of member
institutions for the Federal Home Loan Bank of San Francisco, (v) the interbank
offered rates for U.S. dollar deposits in the London market, each calculated as
of a date prior to each scheduled interest rate adjustment date which will be
specified in the related Prospectus Supplement or (vi) the weekly average of
secondary market interest rates on six-month negotiable certificates of deposit.
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beginning of such day, plus the sum of any unpaid Finance Charges and any unpaid
fees, insurance premiums and other charges (collectively, "Additional Charges")
that are due on such Revolving Credit Loan minus the aggregate of all payments
and credits that are applied to the repayment of any such Draws on such day, and
(c) the "principal balance" on any day generally will be the related Account
Balance minus the sum of any unpaid Finance Charges and Additional Charges that
are due on such Revolving Credit Loan. Payments made by or on behalf of the
Mortgagor for each Revolving Credit Loan generally will be applied, first, to
any unpaid Finance Charges that are due thereon, second, to any unpaid
Additional Charges that are due thereon, and third, to any related Draws
outstanding.
Unless otherwise specified in the related Prospectus Supplement, each
Revolving Credit Loan may be prepaid in full or in part at any time and without
penalty, the related Mortgagor will have the right during the related Draw
Period to make a Draw in the amount of any prepayment theretofore made with
respect to such Revolving Credit Loan. The Mortgage Note or Mortgage related to
each Revolving Credit Loan will generally contain a customary "due-on-sale"
clause.
As to each Revolving Credit Loan, the Mortgagor's rights to receive
Draws during the Draw Period may be suspended, or the Credit Limit may be
reduced, for cause under a limited number of circumstances, including, but not
limited to: a materially adverse change in the Mortgagor's financial
circumstances or a non-payment default by the Mortgagor. However, with respect
to each Revolving Credit Loan, generally such suspension or reduction will not
affect the payment terms for previously drawn balances. In the event of default
under a Revolving Credit Loan, at the discretion of the Master Servicer, the
Revolving Credit Loan may be terminated and declared immediately due and payable
in full. For this purpose, a default includes, but is not limited to: the
Mortgagor's failure to make any payment as required; any action or inaction by
the Mortgagor that materially and adversely affects the Mortgaged Property or
the rights in the Mortgaged Property; or fraud or material misrepresentation by
a Mortgagor in connection with the Loan.
The proceeds of the Revolving Credit Loans may be used by the borrower
to improve the related Mortgaged Properties, may be retained by the related
Mortgagors or may be used for purposes unrelated to such Mortgaged Properties.
The Home Equity Loans and the Contracts
As specified in the related Prospectus Supplement, the Home Equity
Loans will be secured by first or junior liens on the related Mortgaged
Properties, mortgage loans for property improvement, debt consolidation and/or
home equity purposes. As specified in the related Prospectus Supplement, the
Manufactured Housing Contracts will be secured by either Manufactured Homes (as
defined below), located in any of the fifty states, the District of Columbia or
the Commonwealth or Puerto Rico, or by Mortgages on the real estate on which the
Manufactured Homes are located. As specified in the related Prospectus
Supplement, the Home Improvement Contracts will either be unsecured or secured
primarily by (i) Mortgages on one- to four-family residential properties that
are generally subordinate to other mortgages on the same Mortgaged Property, or
(ii) purchase money security interests in the Home Improvements financed
thereby. The Contracts will be conventional contracts or contracts
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partially insured by the FHA pursuant to Title I. Unless otherwise specified in
the related Prospectus Supplement, the Home Equity Loans and the Contracts will
be fully amortizing and may have fixed interest rates or adjustable interest
rates and may provide for other payment characteristics as described below and
in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Home Improvements securing the Home Improvement Contracts include, but are not
limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels. The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or lot
(or cooperative interest therein) on which to place such home or the purchase of
both a manufactured home loan and the lot (or cooperative interest therein) on
which such home is placed.
Unless otherwise specified in the related Prospectus Supplement, the
manufactured homes (the "Manufactured Homes") underlying the Manufactured
Housing Contracts will consist of manufactured homes within the meaning of Title
42 of the United States Code, Section 5402(6). Section 5402(6) defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width, forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air-conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of HUD and complies with the standards
established under [this] chapter."
Manufactured Homes and Home Improvements, unlike Mortgaged Properties,
generally depreciate in value. Consequently, at any time after origination it is
possible, especially in the case of Contracts with high Loan-to-Value Ratios at
origination, that the market value of a Manufactured Home or Home Improvement
may be lower than the principal amount outstanding under the related Contract.
TRUST ASSET PROGRAM
The Trust Assets will have been purchased by the Company, either
directly or indirectly through Residential Funding from Sellers. The Revolving
Credit Loans will generally have been originated in accordance with the
Company's underwriting standards or alternative underwriting criteria as
described below under "Underwriting Standards Applicable to the Revolving Credit
Loans" or as described in the related Prospectus Supplement. The Home Equity
Loans and the Contracts generally will have been originated in accordance with
the underwriting standards described in the related Prospectus Supplement.
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Underwriting Standards Applicable to the Revolving Credit Loans
General Standards
The Company's underwriting standards with respect to the Revolving
Credit Loans will generally conform to those published in Residential Funding's
Seller Guide (together with Residential Funding's Servicer Guide, the "Guide,"
as modified from time to time), including the provisions of the Guide applicable
to the Company's Home Equity Program (the "Home Equity Program"). The
underwriting standards as set forth in the Guide are continuously revised based
on opportunities and prevailing conditions in the residential mortgage market,
the consumer lending market and the market for mortgage securities. The
Revolving Credit Loans may be underwritten by Residential Funding or by a
designated third party. In certain circumstances, however, the Revolving Credit
Loans may be underwritten only by the Seller with little or no review performed
by Residential Funding. See "Underwriting Standards Applicable to the Revolving
Credit Loans--Guide Standards" and "Qualifications of Sellers." Residential
Funding or a designated third party may perform only sample quality assurance
reviews to determine whether the Revolving Credit Loans in any Pool were
underwritten in accordance with applicable standards.
With respect to the Company's underwriting standards, as well as any
other underwriting standards that may be applicable to any Revolving Credit
Loans, such underwriting standards generally include a set of specific criteria
pursuant to which the underwriting evaluation is made. However, the application
of such underwriting standards does not imply that each specific criterion was
satisfied individually. Rather, a Revolving Credit Loan will be considered to be
originated in accordance with a given set of underwriting standards if, based on
an overall qualitative evaluation, the loan is in substantial compliance with
such underwriting standards. For example, a Revolving Credit Loan may be
considered to comply with a set of underwriting standards, even if one or more
specific criteria included in such underwriting standards were not satisfied, if
other factors compensated for the criteria that were not satisfied or if the
Revolving Credit Loan is considered to be in substantial compliance with the
underwriting standards.
In addition, the Company purchases Revolving Credit Loans which do not
conform to the underwriting standards set forth in the Guide. Certain of the
Revolving Credit Loans will be purchased in negotiated transactions, and such
negotiated transactions may be governed by agreements ("Master Commitments")
relating to ongoing purchases of Revolving Credit Loans by Residential Funding,
from Sellers who will represent that the Revolving Credit Loans have been
originated in accordance with underwriting standards agreed to by 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
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(ii) factors relating to the specific Revolving Credit Loan, including the
principal amount or Credit Limit, the Combined Loan-to-Value Ratio, the loan
type or loan program, and the applicable credit score of the related Mortgagor
used in connection with the origination of the Revolving Credit Loan (as
determined based on a credit scoring model acceptable to the Company).
Generally, such credit scoring models provide a means for evaluating the
information about a prospective borrower that is available from a credit
reporting agency. The underwriting criteria applicable to any program under
which the Mortgage Loans may be originated may provide that qualification for
the loan, the level of review of the loan's documentation, or the availability
of certain loan features (such as maximum loan amount, maximum Loan-to-Value
Ratio, property type and use, and documentation level) may depend on the
mortgagor's credit score.
The underwriting standards utilized in negotiated transactions and
Master Commitments and the underwriting standards applicable to Revolving Credit
Loans underlying Private Securities may vary substantially from the underwriting
standards set forth in the Guide. Such underwriting standards are generally
intended to provide an underwriter with information to evaluate the borrower's
repayment ability and the value of the Mortgaged Property as collateral. Due to
the variety of underwriting standards and review procedures that may be
applicable to the Revolving Credit Loans included in any Pool, the related
Prospectus Supplement generally will not distinguish among the various
underwriting standards applicable to the Revolving Credit Loans nor describe any
review for compliance with applicable underwriting standards performed by the
Company or Residential Funding. Moreover, there can be no assurance that every
Revolving Credit Loan was originated in conformity with the applicable
underwriting standards in all material respects, or that the quality or
performance of Revolving Credit Loans underwritten pursuant to varying standards
as described above will be equivalent under all circumstances. In the case of a
Designated Seller Transaction, the applicable underwriting standards will be
those of the Designated Seller or of the originator of the Revolving Credit
Loans, and will be described in the related Prospectus Supplement.
The Company, either directly or indirectly through Residential Funding,
will also purchase Revolving Credit Loans from its affiliates, including GMAC
Mortgage and Homecomings Financial Network, Inc., with underwriting standards
generally in accordance with the Guide or as otherwise agreed to by the Company.
However, in certain limited circumstances such Revolving Credit Loans may be
employee or preferred customer loans with respect to which, in accordance with
such affiliate's mortgage loan programs, income, asset and employment
verifications and appraisals may not have been required. With respect to
Revolving Credit Loans made under any employee loan program maintained by
Residential Funding, or its affiliates, in certain limited circumstances
preferential interest rates may be allowed. Neither the Company nor Residential
Funding will review any affiliate's mortgage loans for conformity with the
underwriting standards set forth in the Guide.
Guide Standards
The following is a brief description of the underwriting standards
under the Home Equity Program set forth in the Guide for full documentation loan
programs. Initially, a prospective borrower (other than a trust if the trust is
the borrower) is required to fill out a detailed application providing pertinent
credit information. As part of the application, the borrower is
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required to provide a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the borrower's
credit history with merchants and lenders and any record of bankruptcy. Under
the Home Equity Program, the borrower generally must show, among other things, a
minimum of one year credit history reported on the credit report and that no
mortgage delinquencies (thirty days or greater) in the past 12 months existed.
Borrowers who have less than a 12 month first mortgage payment history may be
subject to certain additional lending restrictions. In addition, under the Home
Equity Program, borrowers with a previous foreclosure or bankruptcy within the
past seven years may not be allowed and a borrower generally must satisfy all
judgments, liens and other legal actions with an original amount of $1,000 or
greater prior to closing. In addition, an employment verification is obtained
which reports the borrower's current salary and may contain the length of
employment and an indication as to whether it is expected that the borrower will
continue such employment in the future. If a prospective borrower is
self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has accounts. In the case of a
Revolving Credit Loan secured by a property owned by a trust, the foregoing
procedures may be waived where the Mortgage Note is executed on behalf of the
trust.
Unless otherwise specified in the related Prospectus Supplement, an
appraisal is made of the Mortgaged Property securing each Revolving Credit Loan.
Such appraisals may be performed by appraisers independent from or affiliated
with the Company, Residential Funding or their affiliates. Such appraisals,
however, will not establish that the Mortgaged Properties provide assurance of
repayment of the Revolving Credit Loans. See "Risk Factors" and "Servicing of
Trust Assets--Realization Upon Defaulted Loans" herein. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. In certain circumstances, the
appraiser is only required to perform an exterior inspection of the property.
The appraisal is based on various factors, including the market value of
comparable homes and the cost of replacing the improvements. Except as otherwise
provided in the related Prospectus Supplement, under the Home Equity Program,
each appraisal is required to be dated no more than 180 days prior to the date
of origination of the Revolving Credit Loan; provided, that depending on the
Credit Limit an earlier appraisal may be utilized if such appraisal was made not
earlier than two years prior to the date of origination of the mortgage loan and
the related appraiser certifies that the value of the related mortgaged property
has not declined since the date of the original appraisal or if a field review
or statistical property valuation is obtained. Title searches are undertaken in
most cases, and title insurance is required on all Revolving Credit Loans with
Credit Limits in excess of $100,000.
Under the Home Equity Program, the CLTV is generally calculated by
reference to the lower of the appraised value as so determined or the sales
price, if the Revolving Credit Loan is originated concurrently with or not more
than 12 months after the origination of a first mortgage loan. In all other
cases, the value used is generally the appraised value as so determined.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet the borrower's monthly obligations
on the proposed mortgage loan and other expenses related to the home (such as
property taxes and hazard insurance) and other financial
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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 and the borrower's
eligibility for such program may be determined by use of a credit scoring model.
The Home Equity Program sets forth certain limitations with respect to
the CLTV for the Revolving Credit Loans and certain restrictions with respect to
any related underlying first mortgage loan. The underwriting guidelines for the
Home Equity Program generally permit CLTV's as high as 100% except as otherwise
provided in the related Prospectus Supplement; however, the maximum permitted
CLTV may be reduced due to a variety of underwriting criteria. In areas where
property values are considered to be declining, the maximum permitted CLTV is
75%. The underwriting guidelines also include restrictions based on the
borrower's debt-to-income ratio. In addition to the foregoing, an evaluation of
the prospective borrower's credit quality will be made based on a credit scoring
model approved by the Company. The Home Equity Program underwriting guidelines
include minimum credit score levels that may apply depending on certain factors
of the Revolving Credit Loan. The required Gross Margins for Revolving Credit
Loans purchased under the Home Equity Program, as announced from time to time,
vary based on a number of factors including CLTV, Credit Limit, documentation
level, property type, and borrower debt-to-income ratio and credit score.
In its evaluation of mortgage loans which have twenty-four or more
months of payment experience, Residential Funding generally places greater
weight on payment history and may take into account market and other economic
trends while placing less weight on underwriting factors generally applied to
newly originated mortgage loans.
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Qualifications of Sellers
Except with respect to Designated Seller Transactions or unless
otherwise specified in the related Prospectus Supplement, each Seller (other
than the Federal Deposit Insurance Corporation (the "FDIC") and investment
banking firms) will have been approved by Residential Funding for participation
in Residential Funding's loan purchase program. In determining whether to
approve a seller for participation in the loan purchase program, Residential
Funding generally will consider, among other things, the financial status
(including the net worth) of the seller, the previous experience of the seller
in originating home equity, home improvement, manufactured housing or first
mortgage loans, the prior delinquency and loss experience of the seller, the
underwriting standards employed by the seller and the quality control and, if
applicable, servicing operations established by the seller. There can be no
assurance that any Seller presently meets any qualifications or will continue to
meet any qualifications at the time of inclusion of mortgage loans sold by it in
the Trust Fund for a series of Notes, or thereafter. If a Seller becomes subject
to the direct or indirect control of the FDIC, or if a Seller's net worth,
financial performance or delinquency and foreclosure rates deteriorate, such
institution may continue to be treated as a Seller. Any such event may adversely
affect the ability of any such Seller to repurchase the Mortgage Loans in the
event of a breach of a representation or warranty which has not been cured.
Residential Funding generally monitors which Sellers are under control
of the FDIC or are insolvent, otherwise in receivership or conservatorship or
financially distressed. Any such Seller may make no representations and
warranties with respect to Trust Assets sold by it. The FDIC (either in its
corporate capacity or as receiver for a depository institution) may also be a
Seller of Trust Assets, in which event neither the FDIC nor the related
depository institution may make representations and warranties with respect to
the Trust Assets sold, or only limited representations and warranties may be
made (for example, that the related legal documents are enforceable). The FDIC
may have no obligation to repurchase any Trust Asset for a breach of a
representation and warranty.
Unless otherwise specified in the related Prospectus Supplement, the
qualifications required of Sellers for approval by Residential Funding as
participants in its loan purchase programs may not apply to Designated Sellers.
To the extent the Designated Seller fails to or is unable to repurchase the
Trust Asset due to a breach of representation and warranty, neither the Company,
Residential Funding nor any other entity will have assumed the representations
and warranties, and any related losses will be borne by the Noteholders or by
the credit enhancement, if any.
Representations Relating to Trust Assets
Except as set forth above, each Seller (other than a Designated Seller)
will have made representations and warranties to Residential Funding with
respect to the Trust Assets sold by such Seller. However, except as otherwise
provided in the related Prospectus Supplement, the representations and
warranties of the Seller will not be assigned to the Indenture Trustee for the
benefit of the holders of the related series of Notes, and therefore a breach of
the representations and warranties of the Seller generally will not be
enforceable on behalf of the Trust Fund.
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In the case of a Pool consisting of Trust Assets purchased by the
Company from Sellers through Residential Funding, Residential Funding, except in
the case of a Designated Seller Transaction or as to Trust Assets underlying any
Private Securities or unless otherwise specified in the related Prospectus
Supplement, will have made certain limited representations and warranties
regarding the Trust Assets to the Company at the time that they are sold to the
Company. Such representations and warranties will generally include, among other
things, that: (i) as of the Cut-off Date, the information set forth in a listing
of the related Trust Assets is true and correct in all material respects; (ii)
Residential Funding was the sole holder and owner of the Trust Assets free and
clear of any and all liens and security interests; (iii) each Trust Asset
complied in all material respects with all applicable local, state and federal
laws; (iv) except as otherwise indicated in the related Prospectus Supplement,
no Trust Asset is one month or more delinquent in payment of principal and
interest; (v) there is no delinquent tax, or to the best of Residential
Funding's knowledge, assessment lien against any Mortgaged Property; and (vi) to
the best of Residential Funding's knowledge, any Contract that is partially
insured by the FHA pursuant to Title I was originated in accordance with
applicable FHA regulations and is insured, without set-off, surcharge or defense
by the FHA. In the event of a breach of a representation or warranty made by
Residential Funding that materially adversely affects the interests of the
Noteholders in a Trust Asset, Residential Funding will be obligated to
repurchase or substitute for such Trust Asset as described below. In addition,
Residential Funding will be obligated to repurchase or substitute for any
Revolving Credit Loan, Home Equity Loan and any Contract secured by a lien on
Mortgaged Property as to which it is discovered that the related Mortgage is not
a valid lien on the related Mortgaged Property having at least the priority set
forth with respect to such Revolving Credit Loan, Home Equity Loan or such
Contract, as applicable, in the listing of related Trust Assets, subject only to
(a) liens of real property taxes and assessments not yet due and payable, (b)
covenants, conditions and restrictions, rights of way, easements and other
matters of public record as of the date of recording of such Mortgage and
certain other permissible title exceptions, (c) other matters to which like
properties are commonly subject which do not materially adversely affect the
value, use, enjoyment or marketability of the Mortgaged Property, and (d) if
applicable, the liens of the related senior mortgage loans. In addition, with
respect to any Revolving Credit Loan, Home Equity Loan or Contract as to which
the Company delivers to the Indenture Trustee or the custodian an affidavit
certifying that the original Mortgage Note has been lost or destroyed, if such
Trust Asset subsequently is in default and the enforcement thereof or of the
related Mortgage is materially adversely affected by the absence of the original
Mortgage Note, Residential Funding will be obligated to repurchase or substitute
for such Trust Asset, in the manner described below. However, Residential
Funding will not be required to repurchase or substitute for any Trust Asset as
described above if the circumstances giving rise to such requirement also
constitute fraud in the origination of the related Revolving Credit Loan, Home
Equity Loan or Contract. Furthermore, because the listing of the related Trust
Assets generally contains information with respect to the Trust Assets as of the
Cut-off Date, prepayments and, in certain limited circumstances, modifications
to the interest rate and principal and interest payments may have been made with
respect to one or more of the related Trust Assets between the Cut-off Date and
the Closing Date. Residential Funding will not be required to purchase or
substitute for any Trust Asset as a result of such prepayment or modification.
In a Designated Seller Transaction, unless otherwise specified in the
related Prospectus Supplement, the Designated Seller will have made certain
representations and warranties
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regarding the Trust Assets to the Company generally similar to those made in the
preceding paragraph by Residential Funding.
The Company will assign to the Owner Trustee (or the Special Purpose
Entity, if applicable) all of its right, title and interest in each agreement by
which it purchased a Trust Asset from Residential Funding or a Designated
Seller, insofar as such agreement relates to the representations and warranties
made by a Designated Seller or Residential Funding, as the case may be, in
respect of such Trust Asset and any remedies provided for with respect to any
breach of such representations and warranties. If a Designated Seller or
Residential Funding, as the case may be, cannot cure a breach of any
representation or warranty made by it in respect of a Trust Asset which
materially and adversely affects the interests of the Noteholders in such Trust
Asset, within 90 days after notice from the Master Servicer, such Designated
Seller or Residential Funding, as the case may be, will be obligated to purchase
such Trust Asset at a price (the "Purchase Price") set forth in the related
Agreement, which Purchase Price generally will be equal to the principal balance
thereof as of the date of purchase plus accrued and unpaid interest to the first
day of the month following the month of repurchase at the Mortgage Rate (less
the amount, expressed as a percentage per annum, payable in respect of master
servicing compensation or subservicing compensation, as applicable, and if
applicable, the Excluded Spread (as defined herein).
Unless otherwise specified in the related Prospectus Supplement, as to
any such Trust Asset required to be purchased by Residential Funding as provided
above, rather than purchase the Trust Asset, Residential Funding may, at its
sole option, remove such Trust Asset (a "Deleted Loan") from the Trust Fund (or
from the assets underlying any Private Securities, if applicable) and cause the
Company to substitute in its place another Trust Asset of like kind (an
"Eligible Substitute Loan"). The related Prospectus Supplement will set forth
the condition of any Eligible Substitute Loan. The related Agreement may include
additional requirements or additional provisions relating to meeting the
foregoing requirements on an aggregate basis where a number of substitutions
occur contemporaneously. Unless otherwise specified in the related Prospectus
Supplement, a Designated Seller will have no option to substitute for a Trust
Asset that it is obligated to repurchase in connection with a breach of a
representation and warranty.
The Master Servicer will be required under the Servicing Agreement to
use its best reasonable efforts to enforce this purchase or substitution
obligation for the benefit of the Indenture Trustee and the Noteholders, using
practices it would employ in its good faith business judgment and which are
normal and usual in its general mortgage servicing activities; provided,
however, that this purchase or substitution obligation will not become an
obligation of the Master Servicer in the event the Designated Seller or
Residential Funding, as the case may be, fails to honor such obligation. The
Master Servicer will be entitled to reimbursement for any costs and expenses
incurred in pursuing such a purchase or substitution obligation, including but
not limited to any costs or expenses associated with litigation. In instances
where a Designated Seller is unable, or disputes its obligation, to purchase
affected Trust Assets, the Master Servicer, employing the standards set forth in
the preceding sentence, may negotiate and enter into one or more settlement
agreements with such Designated Seller that may provide for, among other things,
the purchase of only a portion of the affected Trust Assets or coverage of
certain loss amounts. Any such settlement could lead to losses on the Trust
Assets which would be borne by the Credit Enhancement supporting the related
series of Notes, and to the extent not
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available, by the Noteholders of such series. Furthermore, if applicable, the
Master Servicer may pursue foreclosure (or similar remedies) concurrently with
pursuing any remedy for a breach of a representation and warranty. However, the
Master Servicer is not required to continue to pursue both such remedies if it
determines that one such remedy is more likely to result in a greater recovery.
In accordance with the above described practices, the Master Servicer will not
be required to enforce any purchase of a Designated Seller arising from any
misrepresentation by the Designated Seller, if the Master Servicer determines in
the reasonable exercise of its business judgment that the matters related to
such misrepresentation did not directly cause or are not likely to directly
cause a loss on the related Trust Asset. If the Designated Seller fails to
repurchase and no breach of either the Company's or Residential Funding's
representations has occurred, the Designated Seller's purchase obligation will
not become an obligation of the Company or Residential Funding. Unless otherwise
specified in the related Prospectus Supplement, the foregoing obligations will
constitute the sole remedies available to Noteholders or the Indenture Trustee
for a breach of any representation by a Designated Seller or by Residential
Funding in its capacity as a seller of Trust Assets to the Company, or for any
other event giving rise to such obligations as described above.
Neither the Company nor the Master Servicer will be obligated to
purchase a Trust Asset if a Designated Seller defaults on its obligation to do
so, and no assurance can be given that the Designated Sellers will carry out
such obligations with respect to Trust Assets. Such a default by a Designated
Seller is not a default by the Company or by the Master Servicer. Any Trust
Asset not so purchased or substituted for shall remain in the related Trust Fund
and any losses related thereto shall be allocated to the related credit
enhancement, and to the extent not available to the related Notes.
Notwithstanding the foregoing, with respect to any Designated Seller
that requests Residential Funding's consent to the transfer of subservicing
rights relating to any Trust Assets to a successor servicer, Residential Funding
may release such Designated Seller from liability under its representations and
warranties described above, upon the assumption of such successor servicer of
the Designated Seller's liability for such representations and warranties as of
the date they were made. In that event, Residential Funding's rights under the
instrument by which such successor servicer assumes the Designated Seller's
liability will be assigned to the Owner Trustee (or the Special Purpose Entity,
if applicable), and such successor servicer shall be deemed to be the
"Designated Seller" for purposes of the foregoing provisions.
Subservicing
The servicing for each Trust Asset will generally either be retained by
the Seller (or its designee approved by the Master Servicer) as Subservicer, or
will be released by the Seller to the Master Servicer and will be subsequently
transferred to a Subservicer approved by the Master Servicer, and in either case
will thereafter be serviced by the Subservicer pursuant to an agreement between
the Master Servicer and the Subservicer (a "Subservicing Agreement"). The Master
Servicer may, but is not obligated to, assign such subservicing to designated
subservicers which will be qualified Sellers and which may include GMAC Mortgage
or its affiliates. While such Subservicing Agreement will be a contract solely
between the Master Servicer and the Subservicer, the Servicing Agreement
applicable to any series of Notes will provide that, if for any reason the
Master Servicer for such series of Notes is no longer the master servicer of the
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related Trust Assets, any successor Master Servicer must recognize the
Subservicer's rights and obligations under such Subservicing Agreement.
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DESCRIPTION OF THE NOTES
General
The Notes will be issued in series. Each series of Notes will be issued
pursuant to an Indenture between the related Trust Fund and the entity named in
the related Prospectus Supplement as Indenture Trustee with respect to such
series. A form of Indenture has been filed as an exhibit to the Registration
Statement of which this prospectus forms a part. Each Indenture and Trust
Agreement will be filed with the Commission as an exhibit to a Form 8-K. The
following summaries (together with additional summaries under "The Agreements"
below as well as other pertinent information included elsewhere in this
Prospectus, and subject to the related Prospectus Supplement) do not describe
all terms thereof but reflect the material provisions relating to the Notes
common to each Agreement.
Each series of Notes may consist of any one or a combination of the
following: (i) a single class of Notes; (ii) two or more classes of Notes, one
or more classes of Notes that are senior to any class or classes of any class or
classes of Subordinate Securities as described in the respective Prospectus
Supplement (any such series, a "Senior/Subordinate Series"); (iii) one or more
classes of Strip Notes which will be entitled to (a) principal payments, with
disproportionate, nominal or no interest payments or (b) interest payments, with
disproportionate, nominal or no principal payments; (iv) two or more classes of
Notes which differ as to the timing, sequential order, rate or amount of
payments of principal or interest or both, or as to which payments of principal
or interest or both on any class may be made upon the occurrence of specified
events, in accordance with a schedule or formula (including "planned
amortization classes" and "targeted amortization classes" and "very accurately
defined maturity classes"), or on the basis of collections from designated
portions of the Pool, which series may include one or more classes of Accrual
Notes with respect to which certain accrued interest will not be paid but rather
will be added to the principal balance thereof on each Payment Date for the
period described in the related Prospectus Supplement; or (v) similar classes of
Notes with other payment characteristics, as described in the related Prospectus
Supplement. Credit support for each series of Notes will be provided by a
Financial Guaranty Insurance Policy, Letter of Credit, Reserve Fund, by the
subordination of one or more classes of Subordinate Securities,
Overcollateralization or other credit enhancement as described in the Prospectus
Supplement or under "Description of Credit Enhancement," or by any combination
of the foregoing.
Form of Notes
As specified in the related Prospectus Supplement, the Notes of each
series will be issued either as physical certificates or in book-entry form. If
issued as physical certificates, the Notes will be in fully registered form only
in the denominations specified in the related Prospectus Supplement, and will be
transferrable and exchangeable at the corporate trust office of the person
appointed under the related Agreement to register the Notes (the "Note
Registrar"). No service charge will be made for any registration of exchange or
transfer of Notes, but the Indenture Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge. The term "Noteholder"
as used herein refers to the entity whose name
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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
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processing day (which must be a business day for CEDEL or Euroclear, as the case
may be) immediately following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be reported
to the relevant Euroclear Participant or CEDEL Participants on such business
day. Cash received in CEDEL or Euroclear as a result of sales of securities by
or through a CEDEL Participant or Euroclear Participant to a DTC Participant
(other than the depositary for CEDEL or Euroclear) will be received with value
on the DTC settlement date, but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant Depositaries; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC. CEDEL
Participants and Euroclear Participants may not deliver instructions directly to
the Depositaries.
CEDEL as a professional depository holds securities for its
participating organizations ("CEDEL Participants") and facilitates the clearance
and settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. As a professional
depository, CEDEL is subject to regulation by the Luxembourg Monetary Institute.
Euroclear was created to hold securities for participants of Euroclear
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty
Trust Company of New York (the "Euroclear Operator"), under contract with
Euroclear Clearance Systems S.C., a Belgian co-operative corporation (the
"Clearance Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Clearance
Cooperative. The Clearance Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. The Euroclear Operator is the Belgian branch
of a New York banking corporation which is a member bank of the Federal Reserve
System. As such, it is regulated and examined by the Board of Governors of the
Federal Reserve System and the New York State Banking Department, as well as the
Belgian Banking Commission. Securities clearance accounts and cash accounts with
the Euroclear Operator are governed by the Terms and Conditions Governing Use
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of Euroclear and the related Operating Procedures of the Euroclear System and
applicable Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts.
Payments in respect of the Book-Entry Notes will be forwarded by the
Indenture Trustee to DTC, and DTC will be responsible for forwarding such
payments to Participants, each of which will be responsible for disbursing such
payments to the Beneficial Owners it represents or, if applicable, to Indirect
Participants. Accordingly, Beneficial Owners may experience delays in the
receipt of payments in respect of their Notes. Under DTC's procedures, DTC will
take actions permitted to be taken by holders of any class of Book-Entry Notes
under the related Agreement only at the direction of one or more Participants to
whose account the Book-Entry Notes are credited and whose aggregate holdings
represent no less than any minimum amount of Percentage Interests or voting
rights required therefor. DTC may take conflicting actions with respect to any
action of Noteholders of any Class to the extent that Participants authorize
such actions. None of the Master Servicer, the Company, the Indenture Trustee,
the Owner Trustee or any of their respective affiliates will have any liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the Book-Entry Notes, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
Assignment of the Trust Assets
At the time of issuance of a series of Notes, the Company will cause
the Trust Assets and any other assets being included in the related Trust Fund
to be assigned without recourse to the Owner Trustee or its nominee (which may
be the Custodian), on behalf of the related Trust, together with, if specified
in the related Prospectus Supplement, all principal and interest received on or
with respect to such Trust Assets after the Cut-off Date (other than principal
and interest due on or before the Cut-off Date and any Excluded Spread). The
Owner Trustee will, concurrently with such assignment, grant a security interest
in the related Trust Fund to the Indenture Trustee to secure such Notes. Each
Trust Asset will be identified in a schedule appearing as an exhibit to the
related Agreement. Such schedule will include, among other things, information
as to the principal balance of each Trust Asset as of the Cut-off Date, as well
as information respecting the Mortgage Rate, the currently scheduled monthly
payment of principal and interest, the maturity of the Mortgage Note and the
Combined Loan-to-Value Ratio at origination or modification.
The Company will, as to each Trust Asset other than Trust Assets
underlying any Private Securities, deliver to an entity specified in the related
Prospectus Supplement (which may be the Indenture Trustee, a Custodian or
another entity appointed by the Indenture Trustee) the legal documents relating
to such Trust Assets that are in possession of the Company, which may include,
as applicable, depending upon whether such Trust Asset is secured by a lien on
Mortgaged Property: (i) the Mortgage Note (and any modification or amendment
thereto) endorsed without recourse either in blank or to the order of the Owner
Trustee or the Indenture Trustee (or a nominee thereof); (ii) the Mortgage
(except for any Mortgage not returned from
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the public recording office) with evidence of recording indicated thereon or, in
the case of a Cooperative Loan, the respective security agreements and any
applicable UCC financing statements; (iii) an assignment in recordable form of
the Mortgage (or, with respect to a Cooperative Loan, an assignment of the
respective security agreements, any applicable UCC financing statements,
recognition agreements, relevant stock certificates, related blank stock powers
and the related proprietary leases or occupancy agreements); (iv) if applicable,
any riders or modifications to such Mortgage Note and Mortgage, together with
certain other documents at such times as set forth in the related Agreement; and
(v) the original Contract and copies of documents and instruments related to
each Contract and, other than in the case of unsecured Contracts, the security
interest in the property securing such Contract. Such assignments may be blanket
assignments covering Mortgages secured by Mortgaged Properties located in the
same county, if permitted by law. If so specified in the related Prospectus
Supplement, the Company may not be required to deliver one or more of such
documents if such documents are missing from the files of the party from whom
such Revolving Credit Loans, Home Equity Loans and certain Contracts were
purchased.
In the event that, with respect to any Revolving Credit Loan, Home
Equity Loan or Contract secured by a lien on Mortgaged Property, the Company
cannot deliver the Mortgage or any assignment with evidence of recording thereon
concurrently with the execution and delivery of the related Trust Agreement
because of a delay caused by the public recording office, the Company will
deliver or cause to be delivered to the Indenture Trustee, the Custodian or
another entity appointed by the Indenture Trustee a true and correct photocopy
of such Mortgage or assignment. The Company will deliver or cause to be
delivered to the Indenture Trustee or the Custodian such Mortgage or assignment
with evidence of recording indicated thereon after receipt thereof from the
public recording office or from the related Subservicer.
Assignments of the Revolving Credit Loans, Home Equity Loans and
Contracts secured by a lien on Mortgaged Property will be recorded in the
appropriate public recording office, except in states where, in the opinion of
counsel acceptable to the Indenture Trustee or Owner Trustee, such recording is
not required to protect the Indenture Trustee's or Owner Trustee's interests in
such Revolving Credit Loans, Home Equity Loans and Contracts against the claim
of any subsequent transferee or any successor to or creditor of the Company or
the originator of such Revolving Credit Loans, Home Equity Loans or Contracts,
or except as otherwise specified in the related Prospectus Supplement.
Under certain circumstances, as to any series of Notes, the Company may
have the option to repurchase Trust Assets from the Trust Fund for cash, or in
exchange for other Trust Assets or Permitted Investments. Alternatively, for any
series of Notes secured by Private Securities, the Company may have the right to
so repurchase Revolving Credit Loans, Home Equity Loans and/or Contracts from
the entity that issued such Private Securities. All provisions relating to such
optional repurchase provisions will be described in the related Prospectus
Supplement.
Review of Trust Assets
The Indenture Trustee will be authorized to appoint one or more
custodians (each, a "Custodian") pursuant to a custodial agreement to maintain
possession of and review documents relating to the Trust Assets as the agent of
the Indenture Trustee or, following payment in full
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of the Notes and discharge of the Indenture, the Owner Trustee. The identity of
such Custodian, if any, will be set forth in the related Prospectus Supplement.
The Indenture Trustee or the Custodian will hold such documents in
trust for the benefit of the holders of the Securities (the "Securityholders")
and, generally will review such documents within such period specified in the
related Prospectus Supplement. If any such document is found to be defective in
any material respect, the Indenture Trustee or such Custodian shall notify the
Master Servicer and the Company, and if so specified in the related Prospectus
Supplement, the Master Servicer, the Servicer or the Indenture Trustee shall
notify Residential Funding or the Designated Seller. If Residential Funding or,
in a Designated Seller Transaction, the Designated Seller cannot cure such
defect within such period specified in the related Prospectus Supplement after
notice of the defect is given to Residential Funding (or, if applicable, the
Designated Seller), Residential Funding (or, if applicable, the Designated
Seller) is required to, within such period specified in the related Prospectus
Supplement, either repurchase the related Trust Asset or any property acquired
in respect thereof from the Indenture Trustee, or if permitted substitute for
such Trust Asset a new Trust Asset in accordance with the standards set forth
herein. The Master Servicer will be obligated to enforce this obligation of
Residential Funding or the Designated Seller to the extent described above under
"Trust Asset Program--Representations Relating to Trust Assets," but such
obligation is subject to the provisions described below under "Servicing of
Trust Assets--Realization Upon Defaulted Loans." There can be no assurance that
the applicable Designated Seller will fulfill its obligation to purchase any
Trust Asset as described above. Unless otherwise specified in the related
Prospectus Supplement, neither Residential Funding, the Master Servicer nor the
Company will be obligated to purchase or substitute for such Trust Asset if the
Designated Seller defaults on its obligation to do so. Unless otherwise
specified in the related Prospectus Supplement, the obligation to repurchase or
substitute for a Trust Asset constitutes the sole remedy available to the
Noteholders or the Indenture Trustee for a material defect in a constituent
document. Any Trust Asset not so purchased or substituted for shall remain in
the related Trust Fund.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under the Servicing Agreement. Upon a breach of any such
representation of the Master Servicer which materially adversely affects the
interests of the Securityholders in a Trust Asset, the Master Servicer will be
obligated either to cure the breach in all material respects or to purchase the
Trust Asset at its Purchase Price (less unreimbursed advances, if applicable,
made by the Master Servicer with respect to such Trust Asset) or, unless
otherwise specified in the related Prospectus Supplement, to substitute for such
Trust Asset an Eligible Substitute Loan in accordance with the provisions for
such substitution described above under "Trust Asset Program--Representations
Relating to Trust Assets." Unless otherwise specified in the related Prospectus
Supplement, this purchase obligation will constitute the sole remedy available
to Noteholders or the Indenture Trustee for such a breach of representation by
the Master Servicer. Any Trust Asset not so purchased or substituted for shall
remain in the related Trust Fund.
Excess Spread and Excluded Spread
The Company, the Master Servicer or any of their affiliates, or such
other entity as may be specified in the related Prospectus Supplement may retain
or be paid a portion of interest due
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with respect to the related Trust Assets. The payment of any such portion of
interest will be disclosed in the related Prospectus Supplement. This payment
may be in addition to any other payment (such as the servicing fee) that any
such entity is otherwise entitled to receive with respect to the Trust Assets.
Any such payment in respect of the Trust Assets will represent a specified
portion of the interest payable thereon and as specified in the related
Prospectus Supplement, will either be part of the assets transferred to the
related Trust Fund (the "Excess Spread") or will be excluded from the assets
transferred to the related Trust Fund (the "Excluded Spread"). The interest
portion of a Realized Loss or Extraordinary Loss and any partial recovery of
interest in respect of the Trust Assets will be allocated between the owners of
any Excess Spread or Excluded Spread and the Noteholders entitled to payments of
interest as provided in the applicable Agreement.
Payments on Trust Assets; Deposits to Payment Account
Each Subservicer servicing a Trust Asset pursuant to a Subservicing
Agreement will establish and maintain an account (the "Subservicing Account")
which generally meets the requirements set forth in the Guide from time to time
or is approved by Residential Funding. A Subservicer is required to deposit into
its Subservicing Account on a daily basis all amounts that are received by it in
respect of the Trust Assets, less its servicing or other compensation.
As specified in the Subservicing Agreement, the Subservicer must remit
or cause to be remitted to the Master Servicer all funds held in the
Subservicing Account with respect to Trust Assets that are required to be so
remitted on a periodic basis not less frequently than monthly. If so specified
in the related Prospectus Supplement, the Subservicer may also be required to
advance on the scheduled date of remittance any monthly installment of principal
and interest, less its servicing or other compensation, on any Trust Asset for
which payment was not received from the Mortgagor.
The Master Servicer will deposit or will cause to be deposited into an
account (the "Custodial Account") certain payments and collections received by
it subsequent to the Cut-off Date (other than payments due on or before the
Cut-off Date), as specifically set forth in the related Agreement, which (except
as otherwise provided therein) generally will include the following:
(i) payments on account of principal on the Trust Assets
comprising a Trust Fund;
(ii) payments on account of interest on the Trust Assets
comprising such Trust Fund, net of the portion of each payment thereof
retained by the Subservicer, if any, as its servicing or other
compensation;
(iii) amounts (net of unreimbursed liquidation expenses and
insured expenses incurred, and unreimbursed Servicing Advances, if any,
made by the related Subservicer) received and retained in connection
with the liquidation of any defaulted Trust Asset, by foreclosure or
otherwise ("Liquidation Proceeds"), including all proceeds of any
hazard or other insurance policy or guaranty covering any Trust Asset
in such Pool including proceeds from FHA insurance (with respect to any
Contract partially insured by the FHA pursuant to Title I included in
the Pool)) (together with any payments under any Letter
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of Credit, "Insurance Proceeds") or proceeds from any alternative
arrangements established in lieu of any such insurance and described in
the applicable Prospectus Supplement, other than proceeds to be applied
to the restoration of the related property or released to the Mortgagor
in accordance with the Master Servicer's normal servicing procedures;
(iv) proceeds of any Trust Asset in such Trust Fund purchased
(or, in the case of a substitution, certain amounts representing a
principal adjustment) by the Master Servicer, the Company, Residential
Funding, any Subservicer or Seller or any other person pursuant to the
terms of the related Agreement. See "Trust Asset
Program--Representations Relating to Trust Assets," and "--Assignment
of Trust Assets" above;
(v) any amount required to be deposited by the Master Servicer
in connection with losses realized on investments of funds held in the
Custodial Account, as described below; and
(vi) any amounts required to be transferred from the Payment
Account to the
Custodial Account.
In addition to the Custodial Account, the Master Servicer will
establish and maintain, in the name of the Indenture Trustee for the benefit of
the holders of each series of Notes, an account for the disbursement of payments
on the Trust Assets evidenced by each series of Notes (the "Payment Account").
Both the Custodial Account and the Payment Account must be either (i) maintained
with a depository institution whose debt obligations at the time of any deposit
therein are rated by any Rating Agency that rated any Notes of the related
series not less than a specified level comparable to the rating category of such
Notes, (ii) an account or accounts the deposits in which are fully insured to
the limits established by the FDIC, provided that any deposits not so insured
shall be otherwise maintained such that, as evidenced by an opinion of counsel,
the Noteholders have a claim with respect to the funds in such accounts or a
perfected first priority security interest in any collateral securing such funds
that is superior to the claims of any other depositors or creditors of the
depository institution with which such accounts are maintained, (iii) in the
case of the Custodial Account, a trust account or accounts maintained in either
the corporate trust department or the corporate asset services department of a
financial institution which has debt obligations that meet certain rating
criteria, (iv) in the case of the Payment Account, a trust account or accounts
maintained with the Indenture Trustee, or (v) such other account or accounts
acceptable to any applicable Rating Agency (an "Eligible Account"). The
collateral that is eligible to secure amounts in an Eligible Account is limited
to certain permitted investments, which are generally limited to United States
government securities and other investments that are rated, at the time of
acquisition, in one of the categories permitted by the related Agreement
("Permitted Investments").
On the day set forth in the related Prospectus Supplement, the Master
Servicer will withdraw from the Custodial Account and deposit into the
applicable Payment Account, in immediately available funds, the amount to be
paid therefrom to Noteholders on such Payment Date, except as otherwise provided
in the related Prospectus Supplement. The Master Servicer or the Indenture
Trustee will also deposit or cause to be deposited into the Payment Account (i)
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any payments under any Letter of Credit, Financial Guaranty Insurance Policy and
any amounts required to be transferred to the Payment Account from a Reserve
Fund, as described under "Credit Enhancement" below or (iii) any amounts
required to be paid by the Master Servicer out of its own funds due to the
operation of a deductible clause in any blanket policy maintained by the Master
Servicer to cover hazard losses on the Trust Assets as described under
"Description of the Notes--Hazard Insurance; Claims Thereunder" below, any
payments received on any Private Securities included in the Trust Fund and any
other amounts as set forth in the related Agreement.
The portion of any payment received by the Master Servicer in respect
of a Trust Asset that is allocable to Excess Spread or Excluded Spread, as
applicable, will generally be deposited into the Custodial Account, but any
Excluded Spread will not be deposited in the Payment Account for the related
series of Notes and will be paid as provided in the related Agreement.
Funds on deposit in the Custodial Account may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next Payment Date, and funds on deposit in the related Payment Account may be
invested in Permitted Investments maturing, in general, no later than the
Payment Date. Unless otherwise specified in the related Prospectus Supplement,
all income and gain realized from any such investment will be for the account of
the Master Servicer as additional servicing compensation. The amount of any loss
incurred in connection with any such investment must be deposited in the
Custodial Account or in the Payment Account, as the case may be, by the Master
Servicer out of its own funds upon realization of such loss.
Withdrawals from the Custodial Account
The Master Servicer may, from time to time, make withdrawals from the
Custodial Account for certain purposes, as specifically set forth in the related
Agreement, which (except as otherwise provided therein) generally will include
the following:
(i) to make deposits to the Payment Account in the amounts and
in the manner provided in the related Agreement and described above
under "--Payments on Trust Assets; Deposits to Payment Account" or in
the related Prospectus Supplement;
(ii) to reimburse itself or any Subservicer for amounts advanced
in respect of taxes, insurance premiums or similar expenses ("Servicing
Advances") as to any Mortgaged Property, out of late payments,
Insurance Proceeds, Liquidation Proceeds or collections on the Trust
Asset with respect to which such Servicing Advances were made;
(iii) to pay to itself or any Subservicer unpaid Servicing Fees
and Subservicing Fees, out of payments or collections of interest on
each Trust Asset;
(iv) to pay to itself as additional servicing compensation any
investment income on funds deposited in the Custodial Account, any
amounts remitted by Subservicers as interest in respect of partial
prepayments on the Trust Assets, and, if so provided in the Servicing
Agreement, any profits realized upon disposition of a Mortgaged
Property
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acquired by deed in lieu of foreclosure or repossession or otherwise
allowed under the
Agreement;
(v) to pay to itself, a Subservicer, Residential Funding, the
Company or the Seller all amounts received with respect to each Trust
Asset purchased, repurchased or removed pursuant to the terms of the
related Agreement and not required to be paid as of the date on which
the related Purchase Price is determined;
(vi) to pay the Company or its assignee, or any other party named
in the related Prospectus Supplement all amounts allocable to the
Excluded Spread, if any, out of collections or payments which represent
interest on each Trust Asset (including any Trust Asset as to which
title to the underlying Mortgaged Property was acquired);
(vii) to reimburse itself or the Company for certain other
expenses incurred for which it or the Company is entitled to
reimbursement (including reimbursement in connection with enforcing any
repurchase, substitution or indemnification obligation of any
Designated Seller), including payment of FHA insurance premiums, if
applicable, or against which it or the Company is indemnified pursuant
to the related Agreement;
(viii) to withdraw any amount deposited in the Custodial Account
that was not
required to be deposited therein;
(ix) to pay to itself or any Subservicer for the funding of any
Draws made on the
Revolving Credit Loans, if applicable; and
(x) to make deposits to the Funding Account in the amounts and
in the manner provided in the related Agreement, if applicable.
Payments
On each Payment Date, payments of principal and interest (or, where
applicable, of principal only or interest only) on each class of Notes entitled
thereto will be made from amounts on deposit in the Payment Account by the
Indenture Trustee, the Master Servicer acting on behalf of the Indenture Trustee
or a paying agent appointed by the Indenture Trustee or the Issuer (the "Paying
Agent"). Unless otherwise specified in the related Prospectus Supplement, such
payments will be made to the persons who are registered as the holders of such
Notes at the close of business on the last business day of the preceding month
(the "Record Date"). Payments will be made in immediately available funds (by
wire transfer or otherwise) to the account of a Noteholder at a bank or other
entity having appropriate facilities therefor, if such Noteholder has so
notified the Indenture Trustee, the Master Servicer or the Paying Agent, as the
case may be, and the applicable Agreement provides for such form of payment, or
by check mailed to the address of the person entitled thereto as it appears on
the Note 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
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of such Note by the aggregate initial amount or notional balance of all the
Notes of such class. In addition, amounts remaining in the Payment Account on
each Payment Date after payments on the Notes will be applied for the purposes
set forth in the Agreements, as described in the related Prospectus Supplement,
including distributions on the related Certificates. Any amounts so distributed
on the Certificates will be released from the lien of the Indenture.
Principal and Interest on the Notes
The method of determining, and the amount of, payments of principal and
interest (or, where applicable, of principal only or interest only) on a
particular series of Notes will be described in the related Prospectus
Supplement. Payments of interest on each class of Notes will be made prior to
payments of principal thereon. Each class of Notes (other than certain classes
of Strip Notes) may have a different Interest Rate, which may be a fixed,
variable or adjustable Interest Rate, or any combination of two or more such
Interest Rates. The related Prospectus Supplement will specify the Interest Rate
or Rates for each class, or the initial Interest Rate or Rates and the method
for determining the Interest Rate or Rates. Unless otherwise specified in the
related Prospectus Supplement, interest on the Notes will be calculated on the
basis of a 360- day year consisting of twelve 30-day months.
On each Payment Date for a series of Notes, the Indenture Trustee or
the Master Servicer on behalf of the Indenture Trustee will pay or cause the
Paying Agent to pay, as the case may be, principal and interest to each holder
of record on the Record Date of a class of Notes. Unless otherwise specified in
the related Prospectus Supplement, payments to Noteholders of all classes within
a series in respect of interest will have the same priority.
In the case of a series of Notes which includes two or more classes of
Notes, the timing, sequential order, priority of payment or amount of payments
in respect of principal, and any schedule or formula or other provisions
applicable to the determination thereof shall be as set forth in the related
Prospectus Supplement. Payments in respect of principal of any class of Notes
will be made on a pro rata basis among all of the Notes of such class unless
otherwise set forth in the related Prospectus Supplement. In addition, unless
otherwise specified in the related Prospectus Supplement, payments of principal
on the Notes will be limited to monthly principal payments on the Trust Assets,
any Excess Interest, if applicable, applied as principal payments on the Notes
and any amount paid as a payment of principal under the related form of Credit
Enhancement. If so specified in the related Prospectus Supplement, a series of
Notes may provide for a period during which all or a portion of the principal
collections on the Trust Assets otherwise available for payment to the Notes are
reinvested in Additional Balances or additional Trust Assets or accumulated in a
trust account pending the commencement of an amortization period specified in
the related Prospectus Supplement or the occurrence of certain events specified
in the related Prospectus Supplement.
On the day specified in the related Prospectus Supplement as the
determination date (the "Determination Date"), the Master Servicer will
determine the amounts of principal and interest which will be paid to
Noteholders on the succeeding Payment Date. Prior to the close of business on
the business day succeeding each Determination Date, the Master Servicer will
furnish a statement to the Indenture Trustee setting forth, among other things,
the amount to be paid on the next succeeding Payment Date.
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Funding Account
If so specified in the related Prospectus Supplement, the Trust
Agreement or other agreement may provide for the transfer by the Sellers of
additional Trust Assets to the related Trust after the Closing Date. Such
additional Trust Assets will be required to conform to the requirements set
forth in the related Agreement or other agreement providing for such transfer.
As specified in the related Prospectus Supplement, such transfer may be funded
by the establishment of a Funding Account (a "Funding Account"). If a Funding
Account is established, all or a portion of the proceeds of the sale of one or
more classes of Notes of the related series or a portion of collections on the
Trust Assets in respect of principal will be deposited in such account to be
released as additional Trust Assets are transferred. Unless otherwise specified
in the related Prospectus Supplement, a Funding Account will be required to be
maintained as an Eligible Account, all amounts therein will be required to be
invested in Permitted Investments and the amount held therein shall at no time
exceed 25% of the aggregate outstanding principal balance of the Notes. Unless
otherwise specified in the related Prospectus Supplement, the related Agreement
or other agreement providing for the transfer of additional Trust Assets will
provide that all such transfers must be made within 9 months (as to amounts
representing proceeds of the sale of the Securities) or 12 months (as to amounts
representing principal collections on the Trust Assets ) after the Closing Date,
and that amounts set aside to fund such transfers (whether in a Funding Account
or otherwise) and not so applied within the required period of time will be
deemed to be principal prepayments and applied in the manner set forth in such
Prospectus Supplement.
Reports to Noteholders
On each Payment Date, the Master Servicer will forward or cause to be
forwarded to each Noteholder of record a statement or statements with respect to
the related Trust Fund setting forth the information described in the related
Agreement. Except as otherwise provided in the related Agreement, such
information generally will include the following, as applicable:
(i) the amount, if any, of such payment allocable to principal;
(ii) the amount, if any, of such payment allocable to interest,
and the amount, if
any, of any shortfall in the amount of interest and principal;
(iii) the aggregate unpaid principal balance of the Trust Assets
after giving effect to the payment of principal on such Payment Date;
(iv) the outstanding principal balance or notional amount of each
class of Notes after giving effect to the payment of principal on such
Payment Date;
(v) based on the most recent reports furnished by Subservicers,
the number of Trust Assets in the related Pool that are delinquent (a)
one month, (b) two months and (c) three months, and that are in
foreclosure and the aggregate principal balances of such Trust Assets
or;
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(vi) the book value of any property acquired by such Trust Fund
through foreclosure or grant of a deed in lieu of foreclosure;
(vii) the balance of the Reserve Fund, if any, at the close of
business on such
Payment Date;
(viii) the amount of coverage under any Letter of Credit or other
form of credit enhancement covering default risk as of the close of
business on the applicable Determination Date and a description of any
credit enhancement substituted therefor;
(ix) if applicable, any limited amounts available under the
applicable credit support to cover Special Hazard Losses, Fraud Losses
and Bankruptcy Losses, as of the close of business on the applicable
Payment Date and a description of any change in the calculation of such
amounts;
(x) in the case of Notes benefiting from alternative credit
enhancement arrangements described in a Prospectus Supplement, the
amount of coverage under such alternative arrangements as of the close
of business on the applicable Determination Date;
(xi) with respect to any series of Notes as to which the Trust
Fund includes Private Securities, certain additional information as
required under the related Agreement; and
(xii) the FHA Insurance Amount.
Each amount set forth pursuant to clause (i) or (ii) above will be
expressed as a dollar amount per Single Note. As to a particular class of Notes,
a "Single Note" generally will evidence a Percentage Interest obtained by
dividing $1,000 by the initial principal balance or notional balance of all the
Notes of such class, except as otherwise provided in the related Agreement. In
addition to the information described above, reports to Noteholders will contain
such other information as is set forth in the applicable Agreement, which may
include, without limitation, reimbursements to Subservicers and the Master
Servicer and losses borne by the related Trust Fund.
In addition, to the extent described in the related Agreement, within a
reasonable period of time after the end of each calendar year, the Master
Servicer will furnish a report to each holder of record of a class of Notes at
any time during such calendar year. Such report will include information as to
the aggregate of amounts reported pursuant to clauses (i) and (ii) above for
such calendar year or, in the event such person was a holder of record of a
class of Notes during a portion of such calendar year, for the applicable
portion of such year.
Hazard Insurance; Claims Thereunder
Unless otherwise specified in the related Prospectus Supplement, each
Revolving Credit Loan, Home Equity Loan and Contract that is secured by a lien
on a Mortgaged Property (in each case, other than a Cooperative Loan) will be
required to be covered by a hazard insurance policy (as described below). See
"Risk Factors--Risks Associated with Certain Trust Assets--No Hazard Insurance
for Title I Contracts." The following summary, as well as other pertinent
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information included elsewhere in this Prospectus, do not describe all terms of
a hazard insurance policy but will reflect all material terms thereof relevant
to an investment in the Notes. Such insurance is subject to underwriting and
approval of individual Trust Assets by the respective insurers. The descriptions
of any insurance policies described in this Prospectus or any Prospectus
Supplement and the coverage thereunder do not purport to be complete and are
qualified in their entirety by reference to such forms of policies.
Unless otherwise specified in the related Prospectus Supplement, the
Servicing Agreement will require the Master Servicer to cause to be maintained
for each Mortgaged Property a hazard insurance policy providing for no less than
the coverage of the standard form of fire insurance policy with extended
coverage customary in the state in which the property is located. Such coverage
generally will be in an amount equal to the lesser of (i) the maximum insurable
value of the Mortgaged Property or (ii) the outstanding balance of the related
Revolving Credit Loan, Home Equity Loan or Contract plus the outstanding balance
on any mortgage loan senior to such Revolving Credit Loan, Home Equity Loan or
Contract except that, if generally available, such coverage must not be less
than the minimum amount required under the terms thereof to fully compensate for
any damage or loss on a replacement cost basis. The ability of the Master
Servicer to ensure that hazard insurance proceeds are appropriately applied may
be dependent on its being named as an additional insured under any hazard
insurance policy or upon the extent to which information in this regard is
furnished to the Master Servicer by Mortgagors or Subservicers.
As set forth above, all amounts collected by the Master Servicer under
any hazard policy (except for amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures) will be deposited initially in
the Custodial Account and ultimately in the Payment Account. The Master Servicer
may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy insuring against losses on such Trust Assets. If
such blanket policy contains a deductible clause, the Master Servicer will
deposit in the Custodial Account or the applicable Payment Account all amounts
which would have been deposited therein but for such clause.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer shall also cause to be maintained on property acquired upon
foreclosure, or deed in lieu of foreclosure, of any applicable Trust Asset, fire
insurance with extended coverage in an amount which is at least equal to the
amount necessary to avoid the application of any co-insurance clause contained
in the related hazard insurance policy. See "Risk Factors--Risks Associated with
Certain Trust Assets--No Hazard Insurance for Title I Contracts."
Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the Revolving Credit Loans, Home Equity
Loans and Contracts may decline as the principal balances owing thereon
decrease, and since residential properties have historically appreciated in
value over time, hazard insurance proceeds could be insufficient to restore
fully the damaged property in the event of a partial loss.
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DESCRIPTION OF CREDIT ENHANCEMENT
As set forth in the related Prospectus Supplement, the credit support
provided with respect to each series of Notes will include one or more of the
following: subordination provided by the related Certificates, and by any other
class of Subordinated Securities related to such series of Notes;
Overcollateralization; a Reserve Fund; a Financial Guaranty Insurance Policy; a
Letter of Credit; mortgage repurchase bond, mortgage pool insurance policy,
special hazard insurance policy, bankruptcy bond or other types of insurance
policies, or a secured or unsecured corporate guaranty, as described in the
related Prospectus Supplement; or in such other form as may be described in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Contracts may be partially insured by the FHA pursuant to Title
I. See "Risk Factors--Limitations on FHA Insurance for Title I Contracts" and
"Description of FHA Insurance Under Title I" herein.
As to each series of Notes, each element of the credit support will
cover losses or shortfalls incurred on the Trust Assets, or losses or shortfalls
allocated to or borne by the Notes, as and to the extent described in the
related Prospectus Supplement and at such times as described therein. If so
provided in the related Prospectus Supplement, any element of the credit support
may not be subject to limitations relating to the specific type of loss or
shortfall incurred as to any Trust Asset. Alternatively, if so provided in the
related Prospectus Supplement, the coverage provided by any element of the
credit support may be comprised of one or more of the components described
below. Each such component may have a dollar limit and will generally provide
coverage with respect to Realized Losses, as defined below, that are, as
applicable, (i) attributable to the Mortgagor's failure to make any payment of
principal or interest as required under the Mortgage Note, but not including
Special Hazard Losses, Extraordinary Losses or other losses resulting from
damage to a Mortgaged Property, Bankruptcy Losses or Fraud Losses (any such
loss, a "Defaulted Loan Loss"); (ii) of a type generally covered by a special
hazard insurance policy (any such loss, a "Special Hazard Loss") as described in
the related Prospectus Supplement; (iii) attributable to certain actions which
may be taken by a bankruptcy court in connection with a Trust Asset, including a
reduction by a bankruptcy court of the principal balance of or the Mortgage Rate
on a Trust Asset or an extension of its maturity (any such loss, a "Bankruptcy
Loss"); and (iv) incurred on defaulted Trust Assets as to which there was fraud
in the origination of such Trust Assets (any such loss, a "Fraud Loss").
Unless otherwise specified in the related Prospectus Supplement, credit
support will not provide protection against all risks of loss and will not
guarantee repayment of the entire outstanding principal balance of the Notes and
interest thereon. If losses occur which exceed the amount covered by credit
support or which are not covered by the credit support, Noteholders will bear
their allocable share of deficiencies. In particular, if so provided in the
related Prospectus Supplement, Defaulted Loan Losses, Special Hazard Losses,
Bankruptcy Losses and Fraud Losses in excess of the amount of coverage provided
therefor and losses occasioned by war, civil insurrection, certain governmental
actions, nuclear reaction and certain other risks ("Extraordinary Losses") will
not be covered. To the extent that the credit enhancement for any series of
Notes is exhausted or unavailable for any reason, the Noteholders will bear all
further risks of loss not otherwise insured against.
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With respect to any defaulted Trust Asset that is finally liquidated,
the amount of loss realized, if any (as described in the related Agreement, a
"Realized Loss"), will equal the portion of the Stated Principal Balance
remaining after application of all amounts recovered (net of expenses allocable
to the Trust Fund) towards interest and principal owing on the Trust Asset. With
respect to a Trust Asset the principal balance of which has been reduced in
connection with bankruptcy proceedings, the amount of such reduction will be
treated as a Realized Loss. The "Stated Principal Balance" of any Trust Asset as
of any date of determination is equal to the principal balance thereof as of the
Cut-off Date, after application of all scheduled principal payments due on or
before the Cut-off Date whether received or not, reduced by all amounts
allocable to principal that are paid to Noteholders on or before the date of
determination, and as further reduced to the extent that any Realized Loss
thereon has been allocated to any Notes on or before such date.
Each Prospectus Supplement will include a description of (a) the amount
payable under the credit enhancement arrangement, if any, provided with respect
to a series, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions under which the amount payable under such credit
support may be reduced and under which such credit support may be terminated or
replaced and (d) the material provisions of any agreement relating to such
credit support. Additionally, each such Prospectus Supplement will set forth
certain information with respect to the issuer of any third-party credit
enhancement (the "Credit Enhancer"). As to any series of Notes, the related
Agreements may be modified from the descriptions set forth herein to provide for
reimbursement rights, control rights or other provisions that may be required by
the Credit Enhancer.
The descriptions of any insurance policies, bonds or other instruments
described in this Prospectus or any Prospectus Supplement and the coverage
thereunder do not describe all terms thereof but will reflect all relevant terms
thereof material to an investment in the Notes. Copies of such instruments will
be included as exhibits to the Form 8-K to be filed with the Commission in
connection with the issuance of the related series of Notes.
Financial Guaranty Insurance Policy
If so specified in the related Prospectus Supplement, a financial
guaranty insurance policy (a "Financial Guaranty Insurance Policy") may be
obtained and maintained for a Class or series of Notes. The issuer of the
Financial Guaranty Insurance Policy (the "Insurer") will be described in the
related Prospectus Supplement and a copy of the form of Financial Guaranty
Insurance Policy will be filed with the related Current Report on Form 8-K.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will be unconditional and irrevocable and
will guarantee to holders of the applicable Notes that an amount equal to the
full amount of payments due to such holders will be received by the Indenture
Trustee or its agent on behalf of such holders for payment on each Payment Date.
The specific terms of any Financial Guaranty Insurance Policy will be set forth
in the related Prospectus Supplement. A Financial Guaranty Insurance Policy may
have limitations and generally will not insure the obligation of the Sellers or
the Master Servicer to purchase or substitute for a defective Trust Asset and
will not guarantee any specific rate of principal prepayments. Unless otherwise
specified in the related Prospectus Supplement, the
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Insurer will be subrogated to the rights of each holder to the extent the
Insurer makes payments under the Financial Guaranty Insurance Policy.
Letter of Credit
If any component of credit enhancement as to any series of Notes is to
be provided by a letter of credit (the "Letter of Credit"), a bank (the "Letter
of Credit Bank") will deliver to the Indenture Trustee an irrevocable Letter of
Credit. The Letter of Credit may provide direct coverage with respect to the
Trust Assets. The Letter of Credit Bank, the amount available under the Letter
of Credit with respect to each component of credit enhancement, the expiration
date of the Letter of Credit, and a more detailed description of the Letter of
Credit will be specified in the related Prospectus Supplement. On or before each
Payment Date, the Letter of Credit Bank will be required to make certain
payments after notification from the Indenture Trustee, to be deposited in the
related Payment Account with respect to the coverage provided thereby.
Subordination
With respect to each series of Notes, the related Certificates will be
subordinate thereto as described in the Prospectus Supplement. A
Senior/Subordinate Series of Notes will consist of one or more classes of Notes
and one or more classes of Subordinate Securities, as set forth in the related
Prospectus Supplement. With respect to any Senior/Subordinate Series, the total
amount available for payment on each Payment Date, as well as the method for
allocating such amount among the various classes of Notes included in such
series, will be described in the related Prospectus Supplement. Generally, with
respect to any such series the amount available for payment will be allocated
first to interest on the Notes of such series, and then to principal of the
Notes up to the amounts described in the related Prospectus Supplement, prior to
allocation of any amounts to the Subordinate Securities of such series.
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.
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With respect to any Senior/Subordinate Series, the terms and provisions
of the subordination may vary from those described above. Any such variation and
any additional credit enhancement will be described in the related Prospectus
Supplement.
Overcollateralization
If so specified in the related Prospectus Supplement, interest
collections on the Trust Assets may exceed interest payments on the Securities
for the related Payment Date (such excess referred to as "Excess Interest").
Such Excess Interest may be deposited into a Reserve Fund or applied as a
payment of principal on the Notes. To the extent Excess Interest is applied as
principal payments on the Notes, the effect will be to reduce the principal
balance of the Notes relative to the outstanding balance of the Trust Assets,
thereby creating "Overcollateralization" and additional protection to the
Noteholders, as specified in the related Prospectus Supplement.
Reserve Funds
If so specified in the related Prospectus Supplement, the Company will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash or Permitted Investments in specified amounts, or any other
instrument satisfactory to the Rating Agency or Agencies, which will be applied
and maintained in the manner and under the conditions specified in the related
Prospectus Supplement and related Agreement. In the alternative or in addition
to such deposit, to the extent described in the related Prospectus Supplement, a
Reserve Fund may be funded through application of all or a portion of amounts
otherwise payable on any related Securities, from the Excess Spread, Excluded
Spread or otherwise. A Reserve Fund for a series of Notes which is funded over
time by depositing therein a portion of the interest payment on each Trust Asset
may be referred to as a "Spread Account" in the related Prospectus Supplement
and related Agreement. To the extent that the funding of the Reserve Fund is
dependent on amounts otherwise payable on related Subordinate Securities, Excess
Spread, Excluded Spread or other cash flows attributable to the related Trust
Assets or on reinvestment income, the Reserve Fund may provide less coverage
than initially expected if the cash flows or reinvestment income on which such
funding is dependent are lower than anticipated. With respect to any series of
Notes as to which credit enhancement includes a Letter of Credit, if so
specified in the related Prospectus Supplement, under certain circumstances the
remaining amount of the Letter of Credit may be drawn by the Indenture Trustee
and deposited in a Reserve Fund.
Amounts in a Reserve Fund may be paid to Noteholders, or applied to
reimburse the Master Servicer for outstanding advances, or may be used for other
purposes, in the manner and to the extent specified in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement, any
such Reserve Fund will not be deemed to be part of the related Trust Fund. A
Reserve Fund may provide coverage to more than one 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.
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Unless otherwise specified in the related Prospectus Supplement, the
Indenture Trustee will have a perfected security interest for the benefit of the
Noteholders in the assets in the Reserve Fund. However, to the extent that the
Company, any affiliate thereof or any other entity has an interest in any
Reserve Fund, in the event of the bankruptcy, receivership or insolvency of such
entity, there could be delays in withdrawals from the Reserve Fund and the
corresponding payments to the Noteholders. Such delays could adversely affect
the yield to investors on the related Notes.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
Master Servicer or any other person named in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited to the
related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to the Master Servicer or another service provider as additional
compensation.
Maintenance of Credit Enhancement
If credit enhancement has been obtained for a series of Notes, the
Indenture Trustee or Master Servicer (as set forth in the related Agreement)
will be obligated to exercise its best reasonable efforts to keep or cause to be
kept such credit enhancement in full force and effect throughout the term of the
applicable Agreements, unless coverage thereunder has been exhausted through
payment of claims or otherwise, or substitution therefor is made as described
below under "--Reduction or Substitution of Credit Enhancement." The Master
Servicer, on behalf of itself, the Indenture Trustee and Noteholders, will
provide the Indenture Trustee information required for the Indenture Trustee to
draw any applicable credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will agree to pay the premiums for each Financial Guaranty
Insurance Policy on a timely basis. In the event the related insurer ceases to
be a "Qualified Insurer" because it ceases to be qualified under applicable law
to transact such insurance business or coverage is terminated for any reason
other than exhaustion of such coverage, the Master Servicer will use its best
reasonable efforts to obtain from another Qualified Insurer a comparable
replacement insurance policy or bond with a total coverage equal to the then
outstanding coverage of such policy or bond. If the cost of the replacement
policy is greater than the cost of such policy or bond, the coverage of the
replacement policy or bond will, unless otherwise agreed to by the Company, be
reduced to a level such that its premium rate does not exceed the premium rate
on the original insurance policy. Any losses in market value of the Notes
associated with any reduction or withdrawal in rating by an applicable Rating
Agency shall be borne by the Noteholders.
For Trust Assets secured by a lien on Mortgaged Property, if any
property securing such a defaulted Trust Asset is damaged and proceeds, if any,
from the related hazard insurance policy are insufficient to restore the damaged
property to a condition sufficient to permit recovery under any Letter of
Credit, the Master Servicer is not required to expend its own funds to restore
the damaged property unless it determines (i) that such restoration will
increase the proceeds to one or more classes of Noteholders on liquidation of
such Trust Asset after reimbursement of the Master Servicer for its expenses and
(ii) that such expenses will be
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recoverable by it through Liquidation Proceeds or Insurance Proceeds. If
recovery under any Letter of Credit or other credit enhancement is not available
because the Master Servicer has been unable to make the above determinations,
has made such determinations incorrectly or recovery is not available for any
other reason, the Master Servicer is nevertheless obligated to follow such
normal practices and procedures (subject to the preceding sentence) as it deems
necessary or advisable to realize upon the defaulted Trust Asset and in the
event such determination has been incorrectly made, is entitled to reimbursement
of its expenses in connection with such restoration.
Reduction or Substitution of Credit Enhancement
The amount of credit support provided with respect to any series of
Notes and relating to various types of losses incurred may be reduced under
certain specified circumstances. In most cases, the amount available as credit
support will be subject to periodic reduction on a non-discretionary basis in
accordance with a schedule or formula set forth in the related Agreement.
Additionally, in most cases, such credit support may be replaced, reduced or
terminated, and the formula used in calculating the amount of coverage with
respect to Bankruptcy Losses, Special Hazard Losses or Fraud Losses may be
changed, without the consent of the Noteholders, upon the written assurance from
each applicable Rating Agency that the then-current rating of the related series
of Notes will not be adversely affected thereby. Furthermore, in the event that
the credit rating of any obligor under any applicable credit enhancement is
downgraded, the credit rating of each class of the related Notes may be
downgraded to a corresponding level, and, unless otherwise specified in the
related Prospectus Supplement, neither the Master Servicer nor the Company will
be obligated to obtain replacement credit support in order to restore the rating
of the Notes. The Master Servicer will also be permitted to replace such credit
support with other credit enhancement instruments issued by obligors whose
credit ratings are equivalent to such downgraded level and in lower amounts
which would satisfy such downgraded level, provided that the then-current rating
of each class of the related series of Notes is maintained. Where the credit
support is in the form of a Reserve Fund, a permitted reduction in the amount of
credit enhancement will result in a release of all or a portion of the assets in
the Reserve Fund to the Company, the Master Servicer or such other person that
is entitled thereto. Any assets so released and any amount by which the credit
enhancement is reduced will not be available for payments in future periods.
DESCRIPTION OF FHA INSURANCE UNDER TITLE I
Certain of the Contracts contained in a Trust Fund may be loans insured
under the Title I Program (the "Title I Loans") as described below and in the
related Prospectus Supplement. The regulations, rules and procedures promulgated
by the FHA under the Title I (the "FHA Regulations") contain the requirements
under which lenders approved for participation in the Title I Program (the
"Title I Lenders") may obtain insurance against a portion of losses incurred
with respect to eligible loans that have been originated and serviced in
accordance with FHA Regulations, subject to the amount of insurance coverage
available in such Title I Lender's FHA Reserve, as described below and in the
related Prospectus Supplement, and subject to the terms and conditions
established under the National Housing Act and FHA Regulations. While FHA
Regulations permit the Secretary of the Department of Housing and Urban
Development
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("HUD"), subject to statutory limitations, to waive a Title I Lender's
noncompliance with FHA Regulations if enforcement would impose an injustice on
the lender (provided the Title I Lender has acted in good faith, is in
substantial compliance with FHA Regulations and has credited the borrower for
any excess charges), in general, an insurance claim against the FHA will be
denied if the Title I Loan to which it relates does not strictly satisfy the
requirements of the National Housing Act and FHA Regulations.
Unlike certain other government loan insurance programs, loans under
the Title I Program (other than loans in excess of $25,000) are not subject to
prior review by the FHA. Under the Title I Program, the FHA disburses insurance
proceeds with respect to defaulted loans for which insurance claims have been
filed by a Title I Lender prior to any review of such loans. A Title I Lender is
required to repurchase a Title I Loan from the FHA that is determined to be
ineligible for insurance after insurance claim payments for such loan have been
paid to such lender. Under the FHA Regulations, if the Title I Lender's
obligation to repurchase the Title I Loan is unsatisfied, the FHA is permitted
to offset the unsatisfied obligation against future insurance claim payments
owed by the FHA to such lender. FHA Regulations permit the FHA to disallow an
insurance claim with respect to any loan that does not qualify for insurance for
a period of up to two years after the claim is made and to require the Title I
Lender that has submitted the insurance claim to repurchase the loan.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or lot
(or cooperative interest therein) on which to place such home or the purchase of
both a manufactured home loan and the lot (or cooperative interest therein) on
which such home is placed.
Subject to certain limitations described below, eligible Title I Loans
are generally insured by the FHA for 90% of an amount equal to the sum of (i)
the net unpaid principal amount and the uncollected interest earned to the date
of default, (ii) interest on the unpaid loan obligation from the date of default
to the date of the initial submission of the insurance claim, plus 15 calendar
days (the total period not to exceed nine months) at a rate of 7% per annum,
(iii) uncollected court costs, (iv) title examination costs, (v) fees for
required inspections by the lenders or its agents, up to $75, and (vi)
origination fees up to a maximum of 5% of the loan amount. However, the
insurance coverage provided by the FHA is limited to the extent of the balance
in the Title I Lender's FHA Reserve maintained by the FHA. Accordingly if
sufficient insurance coverage is available in such FHA Reserve, then the Title I
Lender bears the risk of losses on a Title I Loan for which a claim for
reimbursement is paid by the FHA of at least 10% of the unpaid principal,
uncollected interest earned to the date of default, interest from the date of
default to the date of the initial claim submission and certain expenses. Unlike
most other FHA insurance programs, the obligation of the FHA to reimburse a
Title I Lender for losses in the portfolio of insured loans held by such Title I
Lender is limited to the amount in an FHA Reserve maintained on a
lender-by-lender basis and not on a loan-by-loan basis.
Under Title I, the FHA maintains an FHA insurance coverage reserve
account (a "FHA Reserve") for each Title I Lender. The amount in each Title I
Lender's FHA Reserve is a maximum of 10% of the amounts disbursed, advanced or
expended by a Title I Lender in originating or purchasing eligible loans
registered with the FHA for Title I insurance, with
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certain adjustments permitted or required by FHA Regulations. The balance of
such FHA Reserve is the maximum amount of insurance claims the FHA is required
to pay to the related Title I Lender. Title I Loans to be insured under Title I
will be registered for insurance by the FHA. Following either the origination or
transfer of loans eligible under Title I, the Title I Lender will submit such
loans for FHA insurance coverage within its FHA Reserve by delivering a transfer
of note report or through an electronic submission to the FHA in the form
prescribed under the FHA Regulations (the "Transfer Report"). The increase in
the FHA insurance coverage for such loans in the Title I Lender's FHA Reserve
will occur on the date following the receipt and acknowledgement by the FHA of
the Transfer Report for such loans. The insurance available to any Trust Fund
will be subject to the availability, from time to time, of amounts in each Title
I Lender's FHA Reserve, which will initially be limited to the amount specified
in the related Prospectus Supplement (the "FHA Insurance Amount").
Under the Title I, the FHA will reduce the insurance coverage available
in a Title I Lender's FHA Reserve with the respect to loans insured under such
Title I Lender's contract of insurance by (i) the amount of FHA insurance claims
approved for payment related to such loans and (ii) the amount of reduction of
the Title I Lender's FHA Reserve by reason of the sale, assignment or transfer
of loans registered under the Title I Lender's contract of insurance. Such
insurance coverage also may be reduced for any FHA insurance claims previously
disbursed to the Title I Lender that are subsequently rejected by the FHA.
In general, the FHA will insure Home Improvement Contracts up to
$25,000 for a single-family property, with a maximum term of 20 years. The FHA
will insure loans of up to $17,500 for manufactured homes which qualify as real
estate under applicable state law and loans of up to $12,000 per unit for a
$48,000 limit for four units for owner-occupied multiple-family homes. If the
loan amount is $15,000 or more, the FHA requires a drive-by appraisal, the
current tax assessment value, or a full Uniform Residential Appraisal Report
dated within 12 months of the closing to verify the property's value. The
maximum loan amount on transactions requiring an appraisal is the amount of
equity in the property shown by the market value determination of the property.
Following a default on a Home Improvement Contract partially insured by
the FHA, the Master Servicer, either directly or through a subsidiary, may,
subject to certain conditions, either commence foreclosure proceedings against
the improved property securing the loan, if applicable, or submit a claim to
FHA, but may submit a claim to FHA after proceeding against the improved
property only with the prior approval of the Secretary of HUD. The availability
of FHA Insurance following a default on a Contract is subject to a number of
conditions, including strict compliance with FHA Regulations in originating and
servicing the Contract. Failure to comply with FHA Regulations may result in a
denial of or surcharge on the FHA insurance claim. Prior to declaring a
Contract, in default and submitting a claim to FHA, the Master Servicer must
take certain steps to attempt to cure the default, including personal contact
with the borrower either by telephone or in a meeting and providing the borrower
with 30 days' written notice prior to declaration of default. FHA may deny
insurance coverage if the borrower's nonpayment is related to a valid objection
to faulty contractor performance. In such event, the Master Servicer or other
entity as specified in the related Prospectus Supplement will seek to obtain
payment by or a judgment against the borrower, and may resubmit the claim to FHA
following such a judgment.
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THE COMPANY
The Company is an indirect wholly-owned subsidiary of GMAC Mortgage,
which is a wholly-owned subsidiary of General Motors Acceptance Corporation. The
Company was incorporated in the State of Delaware on May 5, 1995. The Company
was organized for the purpose of acquiring first or junior lien home equity
mortgage loans, home improvement contracts, manufactured housing contracts and
mortgage securities and issuing securities backed by such mortgage loans,
contracts and mortgage securities. The Company anticipates that it will in many
cases have acquired Trust Assets indirectly through Residential Funding, which
is also an indirect wholly-owned subsidiary of GMAC Mortgage. The Company does
not have, nor is it expected in the future to have, any significant assets.
The Notes do not represent an interest in or an obligation of the
Company. The Company's only obligations with respect to a series of Notes will
be pursuant to certain limited representations and warranties made by the
Company or as otherwise provided in the related Prospectus Supplement.
The Company maintains its principal office at 8400 Normandale Lake
Boulevard, Suite 700, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000.
RESIDENTIAL FUNDING CORPORATION
If so specified in the related Prospectus Supplement, Residential
Funding, an affiliate of the Company, will act as the Master Servicer or
Administrator for a series of Notes.
Residential Funding buys mortgage loans under several loan purchase
programs from mortgage loan originators or sellers nationwide, including
affiliates that meet its seller/servicer eligibility requirements and services
mortgage loans for its own account and for others. Residential Funding's
principal executive offices are located at 8400 Normandale Lake Boulevard, Suite
700, Minneapolis, Minnesota 55437. Its telephone number is (612) 832-7000.
Residential Funding conducts operations from its headquarters in Minneapolis and
from offices located in California, Colorado, Connecticut, Florida, Georgia,
Maryland, New York, North Carolina, Rhode Island and Texas. At September 30,
1996, Residential Funding was master servicing a first lien loan portfolio of
approximately $32.4 billion and a second lien revolving credit and home equity
loan portfolio of approximately $1.3 billion.
SERVICING OF TRUST ASSETS
The Master Servicer will be required to service and administer the
Trust Assets in a manner generally consistent with the terms of the servicing
agreement entered into by the Master Servicer with the Company, an affiliate of
the Company or other applicable entity (each, a "Servicing Agreement") and the
Guide with respect to the Revolving Credit Loans or with respect to a Designated
Seller Transaction, as specified in the related Prospectus Supplement.
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As to any series of Notes secured by Private Securities, the applicable
procedures for servicing of the related Revolving Credit Loans, Home Equity
Loans, Home Improvement Contracts and Manufactured Housing Contracts will be
described in the related Prospectus Supplement.
Subservicing
In connection with any series of Securities the Master Servicer may
enter into one or more Subservicing Agreements. See "Trust Asset
Program--Subservicing." Each Subservicer generally will be required to perform
the customary functions of a servicer, including but not limited to, collection
of payments from Mortgagors and remittance of such collections to the Master
Servicer; maintenance of escrow or impoundment accounts of Mortgagors for
payment of taxes, insurance and other items required to be paid by the Mortgagor
pursuant to the Trust Asset, if applicable; processing of assumptions or
substitutions (although, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer is generally required to exercise due-on-sale
clauses to the extent such exercise is permitted by law and would not adversely
affect insurance coverage); attempting to cure delinquencies; supervising
foreclosures; inspection and management of Mortgaged Properties under certain
circumstances; and maintaining accounting records relating to the Trust Assets.
The Subservicer may be required to make advances to the holder of any related
first mortgage loan to avoid or cure any delinquencies to the extent that doing
so would be prudent and necessary to protect the interests of the
Securityholders. A Subservicer also may be obligated to make advances to the
Master Servicer in respect of certain taxes and insurance premiums not paid on a
timely basis by Mortgagors. The Subservicer generally shall be responsible for
performing all collection and other servicing functions with respect to any
delinquent loan or foreclosure proceeding. In addition, the Subservicer is
required to advance funds to cover any Draws made on a Revolving Credit Loan
subject to reimbursement by the entity specified in the related Prospectus
Supplement. No assurance can be given that the Subservicers will carry out their
advance or payment obligations with respect to the Trust Assets. Unless
otherwise specified in the related Prospectus Supplement, a Subservicer may
transfer its servicing obligations to another entity that has been approved for
participation in Residential Funding's loan purchase programs, but only with the
approval of the Master Servicer.
Each Subservicer will be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Subservicer in its servicing
capacity. Each Subservicer is required to maintain a fidelity bond and an errors
and omissions policy with respect to its officers, employees and other persons
acting on its behalf or on behalf of the Master Servicer.
Each Subservicer will be required to service each Trust Asset pursuant
to the terms of the Subservicing Agreement for the entire term of such Trust
Asset, unless the Subservicing Agreement is earlier terminated by the Master
Servicer or unless servicing is released to the Master Servicer. Subject to
applicable law, the Master Servicer may have the right to terminate a
Subservicing Agreement immediately upon the giving of notice upon certain stated
events, including the violation of such Subservicing Agreement by the
Subservicer, or up to ninety days' notice to the Subservicer without cause upon
payment of certain amounts set forth in the Subservicing Agreement. Upon
termination of a Subservicing Agreement, the Master Servicer
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may act as servicer of the related Trust Assets or enter into one or more new
Subservicing Agreements. The Master Servicer may agree with a Subservicer to
amend a Subservicing Agreement. Any amendments to a Subservicing Agreement or to
a new Subservicing Agreement may contain provisions different from those
described above which are in effect in the original Subservicing Agreements.
Collection and Other Servicing Procedures
The Master Servicer, directly or through Subservicers, as the case may
be, will make reasonable efforts to collect all payments called for under the
Trust Assets and will, consistent with the related Servicing Agreement and any
applicable insurance policy, FHA insurance or other credit enhancement, follow
such collection procedures which shall be normal and usual in its general
mortgage servicing activities with respect to mortgage loans comparable to the
Trust Assets. Consistent with the foregoing, the Master Servicer may in its
discretion waive any prepayment charge in connection with the prepayment of a
Trust Asset or extend the Due Dates for payments due on a Trust Asset, provided
that the insurance coverage for such Trust Asset or any coverage provided by any
alternative credit enhancement will not be adversely affected thereby. With
respect to any series of Notes as to which the Trust Fund includes Private
Securities, the Master Servicer's servicing and administration obligations will
be pursuant to the terms of such Private Securities.
Under its Subservicing Agreement, a Subservicer is granted certain
discretion to extend relief to Mortgagors whose payments become delinquent. A
Subservicer may grant a period of temporary indulgence (generally up to three
months) to a Mortgagor or may enter into a liquidating plan providing for
repayment by the Mortgagor of delinquent amounts within six months from the date
of execution of the plan, in each case without the prior approval of the Master
Servicer. Other types of forbearance generally require Master Servicer approval.
Neither indulgence nor forbearance with respect to a Trust Asset will affect the
interest rate or rates used in calculating payments to Securityholders. See
"Description of the Notes--Payments."
In certain instances in which a Trust Asset is in default (or if
default is reasonably foreseeable), and if determined by the Master Servicer to
be in the best interests of the related Noteholders, the Master Servicer may
permit certain modifications of the Trust Asset or make forbearances on the
Trust Asset rather than proceeding with foreclosure or repossession (if
applicable). In making such determination, the estimated Realized Loss that
might result if such Trust Asset were liquidated would be taken into account.
Such modifications may have the effect of reducing the Mortgage Rate or
extending the final maturity date of the Trust Asset. Any such modified Trust
Asset may remain in the related Trust Fund, and the reduction in collections
resulting from such modification may result in reduced distributions of interest
(or other amounts) on, or may extend the final maturity of, one or more classes
of the related Notes.
In any case in which property subject to a Trust Asset is being
conveyed by the Mortgagor, the Master Servicer, directly or through a
Subservicer, shall in general be obligated, to the extent it has knowledge of
such conveyance, to exercise its rights to accelerate the maturity of such Trust
Asset under any due-on-sale clause applicable thereto, but only if the exercise
of such rights is permitted by applicable law and only to the extent it would
not adversely affect or jeopardize coverage under any applicable credit
enhancement arrangements.
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If the Master Servicer or Subservicer is prevented from enforcing such
due-on-sale clause under applicable law or if the Master Servicer or Subservicer
determines that it is reasonably likely that a legal action would be instituted
by the related Mortgagor to avoid enforcement of such due-on-sale clause, the
Master Servicer or Subservicer will enter into an assumption and modification
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person will become liable under the Mortgage
Note subject to certain specified conditions. The original Mortgagor may be
released from liability on a Trust Asset if the Master Servicer or Subservicer
shall have determined in good faith that such release will not adversely affect
the ability to make full and timely collections on the related Trust Asset. Any
fee collected by the Master Servicer or Subservicer for entering into an
assumption or substitution of liability agreement will be retained by the Master
Servicer or Subservicer as additional servicing compensation unless otherwise
set forth in the related Prospectus Supplement. See "Certain Legal Aspects of
Trust Assets and Related Matters--Enforceability of Certain Provisions" herein.
In connection with any such assumption, the Mortgage Rate borne by the related
Mortgage Note may not be altered.
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. The Master Servicer or the related Subservicer may approve such
a request if it has determined, exercising its good faith business judgment in
the same manner as it would if it were the owner of the related Trust Asset,
that such approval will not adversely affect the security for, and the timely
and full collectability of, the related Trust Asset. Any fee collected by the
Master Servicer or the Subservicer for processing such request will be retained
by the Master Servicer or Subservicer as additional servicing compensation.
The Master Servicer is required to maintain a fidelity bond and errors
and omissions policy with respect to its officers and employees and other
persons acting on behalf of the Master Servicer in connection with its
activities under the Servicing Agreement. The Master Servicer may be subject to
certain restrictions under the Servicing Agreement with respect to the
refinancing of a lien senior to a Revolving Credit Loan, Home Equity Loan or a
Contract secured by a lien on the related Mortgaged Property.
Realization Upon Defaulted Loans
With respect to a Revolving Credit Loan, Home Equity Loan or a Contract
secured by a lien on a Mortgaged Property in default, the Master Servicer or the
related Subservicer will decide whether to foreclose upon the Mortgaged Property
or with respect to any such Trust Asset, write off the principal balance of the
Trust Asset as a bad debt or take an unsecured note. Realization on other
defaulted Contracts may be accomplished through repossession and subsequent
resale of the underlying Manufactured Home or Home Improvement. In connection
with such decision, the Master Servicer or the related Subservicer will,
following usual practices in connection with senior and junior mortgage
servicing activities or repossession and resale activities, estimate the
proceeds expected to be received and the expenses expected to be incurred in
connection with such foreclosure or repossession and resale to determine whether
a foreclosure proceeding or a repossession and resale is appropriate. To the
extent that a Revolving Credit Loan, Home Equity Loan or a Contract secured by a
lien on a Mortgaged Property is junior to another lien on the related Mortgaged
Property, following any default
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thereon, unless foreclosure proceeds for such Trust Asset are expected to at
least satisfy the related senior mortgage loan in full and to pay foreclosure
costs, it is likely that such Trust Asset will be written off as bad debt with
no foreclosure proceeding. See "Risk Factors--Special Features of Certain Trust
Assets Secured by Junior Liens on Mortgaged Properties" herein. In the event
that title to any Mortgaged Property is acquired in foreclosure or by deed in
lieu of foreclosure, the deed or certificate of sale will be issued to the
Indenture Trustee or to its nominee on behalf of Noteholders. Notwithstanding
any such acquisition of title and cancellation of the related Trust Asset, such
Revolving Credit Loan, Home Equity Loan or Contract secured by a lien on a
Mortgaged Property (an "REO Loan") will be considered for most purposes to be an
outstanding Trust Asset held in the Trust Fund until such time as the Mortgaged
Property is sold and all recoverable Liquidation Proceeds and Insurance Proceeds
have been received with respect to such defaulted Trust Asset (a "Liquidated
Loan"). To the extent provided in the related Agreement and related Servicing
Agreement, any income (net of expenses and other than gains described below)
received by the Subservicer or the Master Servicer on such Mortgaged Property,
prior to its disposition will be deposited in the Custodial Account upon receipt
and will be available at such time for making payments to Noteholders.
With respect to a Revolving Credit Loan, Home Equity Loan or a Contract
secured by a lien on a Mortgaged Property in default, the Master Servicer may
pursue foreclosure (or similar remedies) subject to any senior lien positions
and certain other restrictions pertaining to junior loans as described under
"Certain Legal Aspects of Trust Assets and Related Matters--Foreclosure on
Revolving Credit Loans, Home Equity Loans and Certain Contracts" concurrently
with pursuing any remedy for a breach of a representation and warranty. However,
the Master Servicer is not required to continue to pursue both such remedies if
it determines that one such remedy is more likely to result in a greater
recovery. Upon the first to occur of final liquidation and a repurchase or
substitution pursuant to a breach of a representation and warranty, such Trust
Asset will be removed from the related Trust Fund. The Master Servicer may elect
to treat a defaulted Trust Asset as having been finally liquidated if
substantially all amounts expected to be received in connection therewith have
been received. Any additional liquidation expenses relating to such Trust Asset
thereafter incurred will be reimbursable to the Master Servicer (or any
Subservicer) from any amounts otherwise payable to the related Noteholders, or
may be offset by any subsequent recovery related to such Trust Asset.
Alternatively, for purposes of determining the amount of related Liquidation
Proceeds to be paid to Noteholders, the amount of any Realized Loss or the
amount required to be drawn under any applicable form of credit enhancement, the
Master Servicer may take into account minimal amounts of additional receipts
expected to be received, as well as estimated additional liquidation expenses
expected to be incurred in connection with such defaulted Trust Asset.
With respect to certain series of Notes, if so provided in the related
Prospectus Supplement, the applicable form of credit enhancement may provide, to
the extent of coverage thereunder, that a defaulted Trust Asset or REO Loan will
be removed from the Trust Fund prior to the final liquidation thereof. In
addition, the Master Servicer will generally have the option to purchase from
the Trust Fund any defaulted Trust Asset after a specified period of
delinquency. If a defaulted Trust Asset or REO Loan is not so removed from the
Trust Fund, then, upon the final liquidation thereof, if a loss is realized
which is not covered by any applicable form of credit enhancement or other
insurance, the Noteholders will bear such loss. However, if a gain results from
the final liquidation of an REO Loan which is not required by
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law to be remitted to the related Mortgagor, the Master Servicer will be
entitled to retain such gain as additional servicing compensation unless the
related Prospectus Supplement provides otherwise. For a description of the
Master Servicer's obligations to maintain and make claims under applicable forms
of credit enhancement and insurance relating to the Trust Assets, see
"Description of Credit Enhancement" and "Description of the Securities--Hazard
Insurance; Claims Thereunder."
Servicing Compensation and Payment of Expenses
The principal servicing compensation to be paid to the Master Servicer
in respect of its master servicing activities for each series of Notes will be
equal to the percentage per annum described in the related Prospectus Supplement
(which may vary under certain circumstances). As compensation for its servicing
duties, a Subservicer or, if there is no Subservicer, the Master Servicer will
be entitled to a monthly servicing fee as described in the related Prospectus
Supplement, which may vary under certain circumstances from the amounts
described in the Prospectus Supplement. Certain Subservicers may also receive
additional compensation in the amount of all or a portion of the interest due
and payable on the applicable Trust Asset which is over and above the interest
rate specified at the time the Company or Residential Funding, as the case may
be, committed to purchase the Trust Asset. See "Trust Asset
Program--Subservicing." Subservicers will be required to pay to the Master
Servicer an amount equal to one month's interest (net of its servicing or other
compensation) on the amount of any partial Principal Prepayment. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will retain such amounts to the extent collected from Subservicers. The Master
Servicer or a Subservicer will retain all prepayment charges, assumption fees
and late payment charges, to the extent collected from Mortgagors, and any
benefit which may accrue as a result of the investment of funds in the Custodial
Account or the applicable Payment Account (unless otherwise specified in the
related Prospectus Supplement) or in a Subservicing Account, as the case may be.
In addition, certain duties of the Master Servicer may be performed by an
affiliate of the Master Servicer who will be entitled to reasonable compensation
therefor from the Trust Fund.
The Master Servicer (or, if specified in the related Agreement, the
Indenture Trustee on behalf of the applicable Trust Fund) will pay or cause to
be paid certain ongoing expenses associated with each Trust Fund and incurred by
it in connection with its responsibilities under the Servicing Agreement,
including, without limitation, payment of any fee or other amount payable in
respect of certain credit enhancement arrangements, payment of any FHA insurance
premiums, if applicable, payment of the fees and disbursements of the Indenture
Trustee, the Owner Trustee, any custodian, the Note Registrar and any Paying
Agent, and payment of expenses incurred in enforcing the obligations of
Subservicers and Designated Sellers. The Master Servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of Subservicers
and Designated Sellers under certain limited circumstances. In addition, as
indicated in the preceding section, the Master Servicer will be entitled to
reimbursements for certain expenses incurred by it in connection with Liquidated
Loans and in connection with the restoration of Mortgaged Properties, such right
of reimbursement being prior to the rights of Noteholders to receive any related
Liquidation Proceeds (including Insurance Proceeds).
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Evidence as to Compliance
Each Servicing Agreement will provide for delivery (on or before a
specified date in each year) to the Indenture Trustee of an annual statement
signed by an officer of the Master Servicer to the effect that the Master
Servicer has fulfilled in all material respects the minimum servicing standards
set forth in the audit guide for audits of non-supervised mortgagees approved by
the Department of Housing and Urban Development for use by independent public
accountants, the Uniform Single Attestation Program for Mortgage Bankers or the
Audit Program for Mortgages serviced for Federal Home Loan Mortgage Corporation
(each, an "Audit Guide") throughout the preceding year or, if there has been a
material default in the fulfillment of any such obligation, such statement shall
specify each such known default and the nature and status thereof. Such
statement may be provided as a single form making the required statements as to
more than one Servicing Agreement.
Each Servicing Agreement will also provide that on or before a
specified date in each year, beginning the first such date that is at least a
specified number of months after the Cut-off Date, a firm of independent public
accountants will furnish a statement to the Company and the Indenture Trustee to
the effect that, on the basis of an examination by such firm conducted
substantially in compliance with the standards established by the American
Institute of Certified Public Accountants, the servicing of mortgage loans under
agreements (including the related Servicing Agreement) was conducted
substantially in compliance with the minimum servicing standards set forth in
the related Audit Guide (to the extent that procedures in such Audit Guide are
applicable to the servicing obligations set forth in such agreements) except for
such significant exceptions or errors in records that shall be reported in such
statement. In rendering its statement such firm may rely, as to the matters
relating to the direct servicing of mortgage loans by Subservicers, upon
comparable statements for examinations conducted substantially in compliance
with the related Audit Guide described above (rendered within one year of such
statement) of firms of independent public accountants with respect to those
Subservicers which also have been the subject of such an examination.
Copies of the annual statement of an officer of the Master Servicer may
be obtained by Noteholders without charge upon written request to the Master
Servicer, at the address indicated in the monthly statement to Noteholders.
Certain Matters Regarding the Master Servicer and the Company
The Servicing Agreement for each series of Notes will provide that the
Master Servicer may not resign from its obligations and duties thereunder except
upon a determination that performance of such duties is no longer permissible
under applicable law or except in connection with a permitted transfer of
servicing. No such resignation will become effective until the Indenture Trustee
or a successor servicer has assumed the Master Servicer's obligations and duties
under the Servicing Agreement.
Each Servicing Agreement will also provide that, except as set forth
below, neither the Master Servicer, the Company nor any director, officer,
employee or agent of the Master Servicer or the Company will be under any
liability to the Trust Fund or the Noteholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the
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Servicing Agreement, or for errors in judgment; provided, however, that neither
the Master Servicer, the Company nor any such person will be protected against
any liability which would otherwise be imposed by reason of willful misfeasance,
bad faith or gross negligence in the performance of duties or by reason of
reckless disregard of obligations and duties thereunder. Each Servicing
Agreement will further provide that the Master Servicer, the Company and any
director, officer, employee or agent of the Master Servicer or the Company is
entitled to indemnification by the Trust Fund (or the Special Purpose Entity, if
applicable) and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the Servicing Agreement
or the related series of Notes, other than any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, each Servicing Agreement will
provide that the Master Servicer and the Company will not be under any
obligation to appear in, prosecute or defend any legal or administrative action
that is not incidental to its respective duties under the Servicing Agreement
and which in its opinion may involve it in any expense or liability. The Master
Servicer or the Company may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the Servicing
Agreement and the rights and duties of the parties thereto and the interests of
the Noteholders thereunder. In such event, the legal expenses and costs of such
action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust Fund (or the Special Purpose Entity, if applicable) and
the Master Servicer or the Company, as the case may be will be entitled to be
reimbursed therefor out of funds otherwise payable to Noteholders.
Any person into which the Master Servicer may be merged or
consolidated, any person resulting from any merger or consolidation to which the
Master Servicer is a party or any person succeeding to the business of the
Master Servicer will be the successor of the Master Servicer under the Servicing
Agreement, provided that such person meets the requirements set forth in the
Servicing Agreement. In addition, notwithstanding the prohibition on its
resignation, the Master Servicer may assign its rights and delegate its duties
and obligations under a Servicing Agreement to any person reasonably
satisfactory to the Company and the Indenture Trustee and meeting the
requirements set forth in the related Servicing Agreement. In the case of any
such assignment, the Master Servicer will be released from its obligations under
such Servicing Agreement, exclusive of liabilities and obligations incurred by
it prior to the time of such assignment.
THE AGREEMENTS
The following summaries describe certain provisions of the Trust
Agreement, the Indenture and Servicing Agreement relating to a series of Notes
(each, an "Agreement" and, collectively, the "Agreements"). The summaries do not
purport to be complete and are qualified entirely by reference to the actual
terms of the Agreements relating to a series of Notes.
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Events of Default; Rights Upon Event of Default
Servicing Agreement
A "Servicing Default" under the Servicing Agreement in respect of a
series of Securities, unless otherwise specified in the Prospectus Supplement,
generally will include: (i) any failure by the Master Servicer to make a
required deposit to the Custodial Account or the Payment Account or, if the
Master Servicer is the Paying Agent, to pay to the holders of any class of
Securities of such series any required payment which continues unremedied for
five business days after the giving of written notice of such failure to the
Master Servicer by the Indenture Trustee or the Issuer (or the majority holder
of the Ownership Interest in the Special Purpose Entity or the Credit Enhancer,
if applicable); (ii) any failure by the Master Servicer duly to observe or
perform in any material respect any other of its covenants or agreements in the
Servicing Agreement with respect to such series of Securities which continues
unremedied for 45 days after the giving of written notice of such failure to the
Master Servicer by the Indenture Trustee or the Issuer (or the majority holder
of the Ownership Interest in the Special Purpose Entity or the Credit Enhancer,
if applicable); (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings regarding the
Master Servicer and certain actions by the Master Servicer indicating its
insolvency or inability to pay its obligations and (iv) any other Servicing
Default as set forth in the Servicing Agreement. A default pursuant to the terms
of any Servicing Agreement relating to any Private Securities included in any
Trust Fund will not constitute an Event of Default under the related Trust
Agreement or Indenture.
So long as a Servicing Default remains unremedied, either the Company
or the Indenture Trustee may (except as otherwise provided for in the related
Agreement with respect to the Special Purpose Entity or the Credit Enhancer, if
applicable), by written notification to the Master Servicer and to the Issuer or
the Indenture Trustee or Trust Fund, as applicable, terminate all of the rights
and obligations of the Master Servicer under the Servicing Agreement (other than
any right of the Master Servicer as Securityholder and other than the right to
receive servicing compensation, expenses for servicing the Trust Assets during
any period prior to the date of such termination, and such other reimbursement,
of amounts the Master Servicer is entitled to withdraw from the Custodial
Account) whereupon the Indenture Trustee will succeed to all responsibilities,
duties and liabilities of the Master Servicer under such Servicing Agreement
(other than the obligation to purchase Trust Assets under certain circumstances)
and will be entitled to similar compensation arrangements. In the event that the
Indenture Trustee would be obligated to succeed the Master Servicer but is
unwilling so to act, it may appoint (or if it is unable so to act, it shall
appoint) or petition a court of competent jurisdiction for the appointment of an
approved mortgage servicing institution with a net worth of at least $10,000,000
to act as successor to the Master Servicer under the Servicing Agreement (unless
otherwise set forth in the Servicing Agreement). Pending such appointment, the
Indenture Trustee is obligated to act in such capacity. The Indenture Trustee
and such successor may agree upon the servicing compensation to be paid, which
in no event may be greater than the compensation to the initial Master Servicer
under the Servicing Agreement.
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Indenture
An "Event of Default" under the Indenture in respect of each series of
Notes, unless otherwise specified in the Prospectus Supplement, generally will
include: (i) a default for five days or more in the payment of any principal of
or interest on any Note of such series; (ii) failure to perform any other
covenant of the Company or the Trust Fund in the Indenture which continues for a
period of thirty days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement (and if the Credit
Enhancer defaults in the performance of its obligations, if applicable); (iii)
any representation or warranty made by the Company or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such series having been
incorrect in a material respect as of the time made, and such breach is not
cured within thirty days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iv) certain events
of bankruptcy, insolvency, receivership or liquidation of the Company or the
Trust Fund (and if the Credit Enhancer defaults in the performance of its
obligations, if applicable); or (v) any other Event of Default provided with
respect to Notes of that series.
If an Event of Default with respect to the Notes of any series at the
time outstanding occurs and is continuing, either the Indenture Trustee, the
Credit Enhancer (if applicable) or the holders of a majority of the then
aggregate outstanding amount of the Notes of such series may declare the
principal amount (or, if the Notes of that series are Accrual Notes, such
portion of the principal amount as may be specified in the terms of that series,
as provided in the related Prospectus Supplement) of all the Notes of such
series to be due and payable immediately. Such declaration may, under certain
circumstances, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the related Notes.
If, following an Event of Default with respect to any series of Notes,
the Notes of such series have been declared to be due and payable, the Indenture
Trustee (with the consent of the Credit Enhancer, if applicable) may, in its
discretion, notwithstanding such acceleration, elect to maintain possession of
the collateral securing the Notes of such series and to continue to apply
payments on such collateral as if there had been no declaration of acceleration
if such collateral continues to provide sufficient funds for the payment of
principal of and interest on the Notes of such series as they would have become
due if there had not been such a declaration. In addition, the Indenture Trustee
may not sell or otherwise liquidate the collateral securing the Notes of a
series following an Event of Default, unless (a) the holders of 100% of the then
aggregate outstanding amount of the Notes of such series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding Notes of
such series (and to reimburse the Credit Enhancer, if applicable) at the date of
such sale or (c) the Indenture Trustee determines that such collateral would not
be sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such Notes had not been declared due and
payable, and the Indenture Trustee obtains the consent of the holders of 66 2/3%
of the then aggregate outstanding amount of the Notes of such series (and the
Credit Enhancer, if applicable).
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default, the Indenture provides that the Indenture
Trustee will have a prior lien on the
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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 and (d) no direction inconsistent with
such written request has been given to the Indenture Trustee during such 60 day
period by the Holders of a majority of the Security Balances of such class
(except as otherwise provided for in the related Agreement with respect to the
Credit Enhancer). However, the Indenture Trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the applicable Agreement or
to institute, conduct or defend any litigation thereunder or in relation thereto
at the request, order or direction of any of the holders of Securities covered
by such Agreement, unless such Securityholders have offered to the Indenture
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
Amendment
Unless otherwise stated in the related Prospectus Supplement, each
Agreement may be amended by the parties thereto (except as otherwise provided
for in the related Agreement with respect to the Credit Enhancer) without the
consent of the related Noteholders, (i) to cure any ambiguity; (ii) to correct
or supplement any provision therein which may be inconsistent with any other
provision therein or to correct any error; (iii) to change the timing and/or
nature of deposits in the Custodial Account or the Payment Account or to change
the name in which the Custodial Account is maintained (except that (a) deposits
to the Payment Account may not occur later than the related Payment Date, (b)
such change may not adversely affect in any material respect the interests of
any Securityholder, as evidenced by an opinion of counsel, and (c) such change
may not adversely affect the then-current rating of any rated Securities, as
evidenced by a letter from each applicable Rating Agency) as specified in the
related Prospectus Supplement; or (iv) to make any other provisions with respect
to matters or questions arising under such Agreement which are not materially
inconsistent with the provisions thereof, so long as such action will not
adversely affect in any material respect the interests of any Securityholder.
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Unless otherwise stated in the related Prospectus Supplement, each
Agreement may also be amended by the parties thereto (except as otherwise
provided for in the related Agreement with respect to the Credit Enhancer) with
the consent of the holders of Securities of each class affected thereby
evidencing, in each case, not less than 66% of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Agreement or
of modifying in any manner the rights of the related Securityholders, except
that no such amendment may (i) reduce in any manner the amount of, or delay the
timing of, payments received on Trust Assets which are required to be paid on a
Security of any class without the consent of the holder of such Security, (ii)
impair the right of any Securityholder to institute suit for the enforcement of
the provisions of the Agreements or (iii) reduce the percentage of Securities of
any class the holders of which are required to consent to any such amendment
unless the holders of all Securities of such class have consented to the change
in such percentage.
Termination; Redemption of Notes
Trust Agreement
The obligations created by the Trust Agreement for each series of
Securities (other than certain limited payment and notice obligations of the
Owner Trustee and the Company, respectively) will terminate upon the payment to
the related Securityholders (including, the Notes issued pursuant to the related
Indenture) of all amounts held by the Master Servicer and required to be paid to
such Securityholders following the earlier of (i) the final payment or other
liquidation or disposition (or any advance with respect thereto) of the last
Trust Asset subject thereto and all property acquired upon foreclosure or deed
in lieu of foreclosure of any Trust Asset and (ii) the purchase by the Master
Servicer or the Company from the Trust Fund (or from the Special Purpose Entity,
if applicable) for such series of all remaining Trust Assets and all property
acquired in respect of such Trust Assets.
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.
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Any resignation or removal of the Owner Trustee and appointment of a successor
Owner Trustee will not become effective until acceptance of the appointment by
the successor Owner Trustee.
The Indenture Trustee
The Indenture Trustee under the Indenture will be named in the related
Prospectus Supplement. The commercial bank or trust company serving as Indenture
Trustee may have normal banking relationships with the Company and/or its
affiliates, including Residential Funding.
The Indenture Trustee may resign at any time, in which event the
Company, the Owner Trustee or the Administrator will be obligated to appoint a
successor indenture trustee as set forth in the Indenture. The Company, the
Owner Trustee or the Administrator as set forth in the Indenture may also remove
the Indenture Trustee if the Indenture Trustee ceases to be eligible to continue
as such under the Indenture or if the Indenture Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Company, the Owner Trustee or the
Administrator will be obligated to appoint a successor Indenture Trustee. If so
specified in the Indenture, the Indenture Trustee may also be removed at any
time by the holders of a majority principal balance of the Notes. Any
resignation or removal of the Indenture Trustee and appointment of a successor
Indenture Trustee will not become effective until acceptance of the appointment
by the successor Indenture Trustee.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a Note will depend on the price paid by the
holder for such Note, the Interest Rate on any such Note entitled to payments of
interest (which Interest Rate may vary if so specified in the related Prospectus
Supplement) and the rate and timing of principal payments (including payments in
excess of required installments, prepayments or terminations, liquidations and
repurchases) on the Trust Assets and the rate and timing of Draws (if
applicable) and the allocation thereof to reduce the principal balance of such
Note (or notional amount thereof, if applicable).
The amount of interest payments on a Trust Asset made monthly to
holders of a class of Notes entitled to payments of interest will be calculated
on the basis of such class's specified percentage of each such payment of
interest (or accrual in the case of Accrual Notes) and will be expressed as a
fixed, adjustable or variable Interest Rate payable on the outstanding principal
balance or notional amount of such Note, or any combination of such Interest
Rates, calculated as described herein and in the related Prospectus Supplement.
See "Description of the Notes--Payments." Holders of Strip Notes or a class of
Notes having a Interest Rate that varies based on the weighted average Mortgage
Rate of the underlying Trust Assets will be affected by disproportionate
prepayments and repurchases of Trust Assets having higher Net Mortgage Rates or
rates applicable to the Strip Notes, as applicable.
The effective yield to maturity to each holder of Notes entitled to
payments of interest will be below that otherwise produced by the applicable
Interest Rate and purchase price of such Note to the extent that interest
accrues on each Trust Asset during the calendar month or a
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period preceding a Payment Date instead of through the day immediately preceding
such Payment Date.
A class of Notes may be entitled to payments of interest at a variable
or adjustable Interest Rate, or any combination of such Interest Rates, as
specified in the related Prospectus Supplement. A variable Interest Rate may be
calculated based on the weighted average of the Mortgage Rates (net of Servicing
Fees and any Excess Spread or Excluded Spread) of the related Trust Assets (the
"Net Mortgage Rate") or certain balances thereof for the month preceding the
Payment Date, by reference to an index or otherwise. The aggregate payments of
interest on a class of Notes, and the yield to maturity thereon, will be
affected by the rate of payment of principal on the Notes (or the rate of
reduction in the notional amount of Notes entitled to payments of interest
only). The yield on the Notes will also be affected by liquidations of Trust
Assets following Mortgagor defaults and by purchases of Trust Assets in the
event of certain breaches of representations made in respect of such Trust
Assets. See "Trust Asset Program--Representations Relating to Trust Assets" and
"Description of the Notes--Assignment of Trust Assets" above. In addition, if
the index used to determine the Interest Rate for the Notes is different than
the Index applicable to the Mortgage Rates, the yield on the Notes will be
sensitive to changes in the index related to the Interest Rate and the yield on
the Notes may be reduced by application of a cap on the Interest Rate based on
the weighted average of the Net Mortgage Rates or such other formulas as may be
set forth in the related Prospectus Supplement.
In general, if a Note is purchased at a premium over its face amount
and payments of principal on such Note occur at a rate faster than anticipated
at the time of purchase, the purchaser's actual yield to maturity will be lower
than that assumed at the time of purchase. Conversely, if a Note is purchased at
a discount from its face amount and payments of principal on such Note occur at
a rate slower than that assumed at the time of purchase, the purchaser's actual
yield to maturity will be lower than that originally anticipated. If Strip Notes
are issued evidencing a right to payments of interest only or disproportionate
payments of interest, a faster than expected rate of principal payments on the
Trust Assets (net of Draws, if applicable) will negatively affect the total
return to investors in any such Notes. The yield on a class of Strip Notes that
is entitled to receive payments of interest only will nevertheless be affected
by any losses on the related Trust Assets because of the effect on the timing
and amount of payments. In certain circumstances, rapid principal payments on
the Trust Assets (net of Draws, if applicable) may result in the failure of such
holders to recoup their original investment. If Strip Notes are issued
evidencing a right to payments of principal only or disproportionate payments of
principal, a slower than expected rate of principal payments on the Trust Assets
(net of Draws, if applicable) could negatively affect the anticipated yield on
such Strip Notes. In addition, the total return to investors of Notes evidencing
a right to payments of interest at a rate that is based on the weighted average
Net Mortgage Rate of the Trust Assets from time to time will be adversely
affected by principal payments on Trust Assets with Mortgage Rates higher than
the weighted average Mortgage Rate on the Trust Assets. In general, mortgage
loans with higher Mortgage Rates or Gross Margins are likely to prepay at a
faster rate than mortgage loans with lower Mortgage Rates or Gross Margins. In
addition, the yield to maturity on certain other types of classes of Notes,
including Accrual Notes, Notes with 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 Trust Assets (net of Draws if applicable) than
other classes of Notes.
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The outstanding principal balances of manufactured housing contracts,
home equity loans and home improvement contracts are, in general, much smaller
than traditional first lien mortgage loan balances, and the original terms to
maturity of such contracts are generally shorter than those of traditional first
lien mortgage loans. As a result, changes in interest rates will not affect the
monthly payments on manufactured housing contracts and home improvement
contracts to the same degree that changes in mortgage interest rates will affect
the monthly payments on such mortgage loans. Consequently, the effect of changes
in prevailing interest rates on the prepayment rates on manufactured housing
contracts and home improvement contracts may not be similar to the effects of
such changes on mortgage loan prepayment rates, or such effects may be similar
to the effects of such changes on mortgage loan prepayment rates, but to a
smaller degree.
The timing of changes in the rate of principal payments on a Note may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments experienced over time is consistent with an
investor's expectation. In general, the earlier a payment of principal on a
Note, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments occurring at a
rate higher (or lower) than the rate anticipated by the investor during the
period immediately following the issuance of a series of Notes would not be
fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
The rate and timing of defaults on the Trust Assets will also affect
the rate and timing of principal payments on the Trust Assets and thus the yield
on the related Notes. For a general discussion of the risk of defaults on the
Trust Assets, see "Risk Factors" herein. There can be no assurance as to the
rate of losses or delinquencies on any of the Trust Assets, however, such losses
and delinquencies may be expected to be higher than those of traditional first
lien mortgage loans. To the extent that any losses are incurred on any of the
Trust Assets that are not covered by the applicable credit enhancement, holders
of Notes of the series evidencing interests in the related Pool (or certain
classes thereof) will bear all risk of such losses resulting from default by
Mortgagors. See "Risk Factors--Limitations, Reduction and Substitution of Credit
Enhancement" herein. Even where the applicable credit enhancement covers all
losses incurred on the Trust Assets, the effect of losses may be to increase
prepayment experience on the Trust Assets, thus reducing average weighted life
and affecting yield to maturity.
With respect to certain Trust Assets, the Mortgage Rate at origination
may be below the rate that would result from the sum of the then-applicable
Index and Gross Margin. Under the applicable underwriting standards, Mortgagors
are generally qualified based on an assumed payment which reflects a rate
significantly lower than the maximum rate. The repayment of any such Trust Asset
may thus be dependent on the ability of the mortgagor to make larger interest
payments following the adjustment of the Mortgage Rate.
As discussed under "Risk Factors--Special Features of Certain Trust
Assets Secured by Junior Liens on Mortgaged Properties--Revolving Credit Loan
Characteristics," the Revolving Credit Loans are not expected to significantly
amortize prior to maturity. As a result, a borrower will generally be required
to pay a substantial principal amount at the maturity of a Revolving Credit
Loan. Such Revolving Credit Loans pose a greater risk of default than
fully-amortizing Revolving Credit Loans, because the Mortgagor's ability to make
such a substantial payment at
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maturity will generally depend on the Mortgagor's ability to obtain refinancing
of such Revolving Credit Loans or to sell the Mortgaged Property prior to the
maturity of the Revolving Credit Loan. The ability to obtain refinancing will
depend on a number of factors prevailing at the time refinancing or sale is
required, including, without limitation, the Mortgagor's personal economic
circumstances, the Mortgagor's equity in the related Mortgaged Property, real
estate values, prevailing market interest rates, tax laws and national and
regional economic conditions. For a general discussion of factors that may
affect a Mortgagor's personal economic circumstances, see "Risk Factors--Special
Features of Certain Trust Assets Secured by Junior Liens on Mortgaged
Properties--Mortgagor Credit" herein. Unless otherwise specified in the related
Prospectus Supplement, neither the Company, Residential Funding, GMAC Mortgage
nor any of their affiliates will be obligated to refinance or repurchase any
Trust Asset or to sell any Mortgaged Property.
For any Revolving Credit Loans, Home Equity Loans and any Contracts
secured by junior mortgages, any inability of the Mortgagor to pay off the
balance thereof may also affect the ability of the Mortgagor to obtain
refinancing at any time of any related senior mortgage loan, thereby preventing
a potential improvement in the Mortgagor's circumstances. Furthermore, if so
specified in the related Prospectus Supplement, under the Servicing Agreement
the Master Servicer may be restricted or prohibited from consenting to any
refinancing of any related senior mortgage loan, which in turn could adversely
affect the Mortgagor's circumstances or result in a prepayment or default under
the corresponding junior Revolving Credit Loan, Home Equity Loan or Contract, as
applicable.
In addition to the Mortgagor's personal economic circumstances, a
number of factors, including homeowner mobility, job transfers, changes in the
Mortgagor's housing needs, the Mortgagor's net equity in the Mortgaged Property,
changes in the value of the Mortgaged Property, national and regional economic
conditions, enforceability of due-on-sale clauses, prevailing market interest
rates, servicing decisions, solicitations and the availability of mortgage
funds, seasonal purchasing and payment habits of borrowers or changes in the
deductibility for federal income tax purposes of interest payments on home
equity loans, may affect the rate and timing of principal payments on the Trust
Assets or Draws on the Revolving Credit Loans. For a discussion of certain
factors that may affect national and regional economic conditions, see "Risk
Factors--Special Features of Certain Trust Assets Secured by Junior Liens on
Mortgaged Properties--Mortgagor Credit" herein. There can be no assurance as to
the rate of principal payments or Draws on the Revolving Credit Loans. The Trust
Assets generally may be prepaid in full or in part without penalty. The Company
has no significant experience with respect to the rate of principal prepayments
on home improvement contracts or manufactured housing contracts, but generally
expects that prepayments on home improvement contracts will be higher than
certain other Trust Assets due to the possibility of increased property value
resulting from the home improvement and greater refinance options. The Company
generally expects that prepayments on manufactured housing contracts will be
lower than on other Trust Assets because manufactured housing contracts may have
less refinance options. The rate of principal payments and the rate of Draws (if
applicable) may fluctuate substantially from time to time. Generally, home
equity loans are not viewed by mortgagors as permanent financing. Due to the
unpredictable nature of both principal payments and Draws, the rates of
principal payments net of Draws for such loans may be much more volatile than
for typical first lien mortgage loans.
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The yield to maturity of the Notes of any series, or the rate and
timing of principal payments or Draws (if applicable) on the related Trust
Assets, may also be affected by a wide variety of specific terms and conditions
applicable to the respective programs under which the Trust Assets were
originated. For example, the Revolving Credit Loans may provide for future Draws
to be made only in specified minimum amounts, or alternatively may permit Draws
to be made by check or through a credit card in any amount. A pool of Revolving
Credit Loans subject to the latter provisions may be likely to remain
outstanding longer with a higher aggregate principal balance than a pool of
Revolving Credit Loans with the former provisions, because of the relative ease
of making new Draws. Furthermore, the Trust Assets may provide for interest rate
changes on a daily or monthly basis, or may have Gross Margins that may vary
under certain circumstances over the term of the loan. In extremely high market
interest rate scenarios, Notes backed by Trust Assets with adjustable rates
subject to substantially higher maximum rates than typically apply to adjustable
rate first mortgage loans may experience rates of default and liquidation
substantially higher than those that have been experienced on other adjustable
rate mortgage loan pools.
The yield to maturity of the Notes of any series, or the rate and
timing of principal payments on the Trust Assets or Draws on the related
Revolving Credit Loans and corresponding payments on the Notes, will also be
affected by the specific terms and conditions applicable to the Notes. For
example, if the index used to determine the Interest Rates for a series of Notes
is different from the Index applicable to the Mortgage Rates of the underlying
Trust Assets, the yield on the Notes may be reduced by application of a cap on
the Interest Rates based on the weighted average of the Mortgage Rates.
Depending on applicable cash flow allocation provisions, changes in the
relationship between the two indexes may also affect the timing of certain
principal payments on the Notes, or may affect the amount of any
Overcollateralization (or the amount on deposit in any Reserve Fund) which could
in turn accelerate the payment of principal on the Notes if so provided in the
Prospectus Supplement. For any series of Notes backed by Revolving Credit Loans,
provisions governing whether future Draws on the Revolving Credit Loans will be
included in the Trust Fund will have a significant effect on the rate and timing
of principal payments on the Notes. The yield to maturity of the Notes of any
series, or the rate and timing of principal payments on the Trust Assets may
also be affected by the risks associated with certain Trust Assets. See "Risk
Factors--Risks Associated with Certain Trust Assets" herein and "Risk Factors"
in the related Prospectus Supplement.
As a result of the payment terms of the Revolving Credit Loans or of
the Note provisions relating to future Draws, there may be no principal payments
on such Notes in any given month. In addition, it is possible that the aggregate
Draws on Revolving Credit Loans included in a Pool may exceed the aggregate
payments with respect to principal on such Revolving Credit Loans for the
related period. If specified in the related Prospectus Supplement, a series of
Notes may provide for a period during which all or a portion of the principal
collections on the Revolving Credit Loans are reinvested in Additional Balances
or are accumulated in a trust account pending commencement of an amortization
period with respect to the Notes.
Unless otherwise specified in the related Prospectus Supplement,
Revolving Credit Loans generally will and Home Equity Loans and, as applicable,
Contracts may contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of such Trust Asset upon sale or certain transfers by
the Mortgagor of the underlying Mortgaged Property. Unless the related
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Prospectus Supplement indicates otherwise, the Master Servicer will generally
enforce any due-on-sale clause to the extent it has knowledge of the conveyance
or proposed conveyance of the underlying Mortgaged Property and it is entitled
to do so under applicable law; provided, however, that the Master Servicer will
not take any action in relation to the enforcement of any due-on-sale provision
that would adversely affect or jeopardize coverage under any applicable
insurance policy. Adjustable Rate Home Equity Loans and, as applicable,
Contracts may be assumable under certain conditions if the proposed transferee
of the related Mortgaged Property establishes its ability to repay such Trust
Asset and, in the reasonable judgment of the Master Servicer or the related
Subservicer, the security for such Trust Asset would not be impaired by the
assumption. The extent to which Trust Assets are assumed by purchasers of the
Mortgaged Properties rather than prepaid by the related Mortgagors in connection
with the sales of the Mortgaged Properties will affect the weighted average life
of the related series of Notes. See "Servicing of Trust Assets--Collection and
Other Servicing Procedures" and "Certain Legal Aspects of the Trust Assets and
Related Matters--Enforceability of Certain Provisions" for a description of
certain provisions of the Servicing Agreement and certain legal developments
that may affect the prepayment experience on the Trust Assets.
In addition, certain Private Securities included in a Pool may be
backed by underlying Trust Assets having differing interest rates. Accordingly,
the rate at which principal payments are received on the related Notes will, to
a certain extent, depend on the interest rates on such underlying Trust Assets.
At the request of the Mortgagor, the Master Servicer or a Subservicer
may allow the refinancing of a Trust Asset in any Trust Fund by accepting
prepayments thereon and permitting a new loan. In the event of such a
refinancing, the new loan would not be included in the related Trust Fund and,
therefore, such refinancing would have the same effect as a prepayment in full
of the related Trust Asset. A Subservicer or the Master Servicer may, from time
to time, implement programs designed to encourage refinancing. Such programs may
include, without limitation, modifications of existing loans, general or
targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. In addition,
the Master Servicer or any Subservicers may encourage the refinancing of Trust
Assets, including defaulted Trust Assets, that would permit creditworthy
borrowers to assume the outstanding indebtedness of such Trust Assets.
If the applicable Agreement for a series of Notes provides for a
Funding Account or other means of funding the transfer of additional Trust
Assets to the related Trust, as described under "Description of the
Notes--Funding Account" herein, and the Trust is unable to acquire such
additional Trust Assets within any applicable time limit, the amounts set aside
for such purpose may be applied as principal payments on one or more classes of
Notes of such series. In addition, if the Trust Fund for a series of Notes
includes Additional Balances and the rate at which such Additional Balances are
generated decreases, the rate and timing of principal payments on the Notes will
be affected and the weighted average life of the Notes will vary accordingly.
The rate at which Additional Balances are generated may be affected by a variety
of factors. See "Risk Factors--Yield and Prepayment Considerations."
Although the Mortgage Rates on Revolving Credit Loans will and certain
Trust Assets may be subject to periodic adjustments, such adjustments generally
(i) will not increase such
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Mortgage Rates over a fixed maximum rate during the life of any Trust Asset and
(ii) will be based on an Index (which may not rise and fall consistently with
prevailing market interest rates) plus the related Gross Margin (which may vary
under certain circumstances, and which may be different from margins being used
at the time for newly originated adjustable rate mortgage loans). As a result,
the Mortgage Rates on the Trust Assets in any Pool at any time may not equal the
prevailing rates for similar, newly originated adjustable rate home equity
mortgage loans, lines of credit, home improvement loans or manufactured housing
contracts and accordingly the rate of principal payments and Draws (if
applicable) may be lower or higher that would otherwise be anticipated. In
certain rate environments, the prevailing rates on fixed-rate mortgage loans may
be sufficiently low in relation to the then-current Mortgage Rates on Trust
Assets that the rate of prepayment may increase as a result of refinancings.
There can be no certainty as to the rate of principal payments on the Trust
Assets or Draws on the Revolving Credit Loans during any period or over the life
of any series of Notes.
With respect to any index used in determining the Interest Rates for a
series of Notes or Mortgage Rates of the underlying Trust Assets, a number of
factors affect the performance of such index and may cause such index to move in
a manner different from other indices. To the extent that such index may reflect
changes in the general level of interest rates less quickly than other indices,
in a period of rising interest rates, increases in the yield to Noteholders due
to such rising interest rates may occur later than that which would be produced
by other indices, and in a period of declining rates, such index may remain
higher than other market interest rates which may result in a higher level
prepayments of the Trust Assets, which adjust in accordance with such index,
than of mortgage loans which adjust in accordance with other indices.
Under certain circumstances, the Master Servicer, the Company or, if
specified in the related Prospectus Supplement, another person may have the
option to purchase the Trust Assets in a Trust Fund, thus resulting in the early
retirement of the related Notes. See "The Agreements--Termination; Redemption of
Notes."
CERTAIN LEGAL ASPECTS OF THE TRUST ASSETS
AND RELATED MATTERS
The following discussion contains summaries of certain legal aspects of
the Trust Assets that are general in nature. Because such legal aspects are
governed in part by state law (which laws may differ from state to state), the
summaries do not purport to be complete, to reflect the laws of any particular
state or to encompass the laws of all states in which the Trust Assets may be
situated. These legal aspects are in addition to the requirements of any
applicable FHA Regulations described in "Description of FHA Insurance" herein
and in the related Prospectus Supplement with respect to the Contracts partially
insured by FHA pursuant to Title I. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Revolving Credit Loans, Home Equity Loans, Home Improvement Contracts and
Manufactured Housing Contracts.
General; Trust Assets Secured by Mortgages on Mortgaged Property
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The Revolving Credit Loans and Home Equity Loans will and, if
applicable, Contracts (in each case other than Cooperative Loans) may be secured
by either deeds of trust, mortgages or deeds to secure debt, depending upon the
prevailing practice in the state in which the related Mortgaged Property is
located, and may have first, second or third priority. Mortgages and deeds to
secure debt are herein referred to as "mortgages." Manufactured Housing
Contracts evidence both the obligation of the obligor to repay the loan
evidenced thereby and grant a security interest in the related Manufactured
Homes to secure repayment of such loan. However, as Manufactured Homes have
become larger and often have been attached to their sites without any apparent
intention by the borrowers to move them, courts in many states have held that
Manufactured Homes may, under certain circumstances become subject to real
estate title and recording laws. See "-- Manufactured Housing Contracts" below.
In some states, a mortgage or deed of trust creates a lien upon the real
property encumbered by the mortgage or deed of trust. However, in other states,
the mortgage or deed of trust conveys legal title to the property respectively,
to the mortgagee or to a trustee for the benefit of the mortgagee subject to a
condition subsequent (i.e., the payment of the indebtedness secured thereby).
The lien created by the mortgage or deed of trust is not prior to the lien for
real estate taxes and assessments and other charges imposed under governmental
police powers. Priority between mortgages depends on their terms or on the terms
of separate subordination or inter-creditor agreements, the knowledge of the
parties in some cases and generally on the order of recordation of the mortgage
in the appropriate recording office. There are two parties to a mortgage, the
mortgagor, who is the borrower and homeowner, and the mortgagee, who is the
lender. Under the mortgage instrument, the mortgagor delivers to the mortgagee a
note or bond and the mortgage. In the case of a land trust, there are three
parties because title to the property is held by a land trustee under a land
trust agreement of which the borrower is the beneficiary; at origination of a
mortgage loan, the borrower executes a separate undertaking to make payments on
the mortgage note. Although a deed of trust is similar to a mortgage, a deed of
trust has three parties: the trustor who is the borrower-homeowner; the
beneficiary who is the lender; and a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the property, irrevocably until the
debt is paid, in trust, generally with a power of sale, to the trustee to secure
payment of the obligation. The trustee's authority under a deed of trust, the
grantee's authority under a deed to secure debt and the mortgagee's authority
under a mortgage are governed by the law of the state in which the real property
is located, the express provisions of the deed of trust or mortgage, and, in
certain deed of trust transactions, the directions of the beneficiary.
Cooperative Loans
If specified in the Prospectus Supplement relating to a series of
Notes, the Revolving Credit Loans, Home Equity Loans and Contracts may include
Cooperative Loans. Each debt instrument (a "Cooperative Note") evidencing a
Cooperative Loan will be secured by a security interest in shares issued by the
related corporation (a "Cooperative") that owns the related apartment building,
which is a corporation entitled to be treated as a housing cooperative under
federal tax law, and in the related proprietary lease or occupancy agreement
granting exclusive rights to occupy a specific dwelling unit in the
Cooperative's building. The security agreement will create a lien upon the
shares of the Cooperative, the priority of which will depend on, among other
things, the terms of the particular security agreement as well as the order of
recordation and/or filing of the agreement (or financing statements related
thereto) in the appropriate recording office.
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Unless otherwise specified in the related Prospectus Supplement, all
Cooperative buildings relating to the Cooperative Loans are located in the State
of New York. Generally, each Cooperative owns in fee or has a leasehold interest
in all the real property and owns in fee or leases the building and all separate
dwelling units therein. The Cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is an underlying
mortgage (or mortgages) on the Cooperative's building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the Cooperative, as mortgagor or lessor, as the case may be, is also
responsible for fulfilling such mortgage or rental obligations. An underlying
mortgage loan is ordinarily obtained by the Cooperative in connection with
either the construction or purchase of the Cooperative's building or the
obtaining of capital by the Cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that Cooperative is the
landlord is generally subordinate to the interest of the holder of an underlying
mortgage and to the interest of the holder of a land lease. If the Cooperative
is unable to meet the payment obligations (i) arising under an underlying
mortgage, the mortgagee holding an underlying mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements or (ii) arising under its land lease, the holder of the landlord's
interest under the land lease could terminate it and all subordinate proprietary
leases and occupancy agreements. In addition, an underlying mortgage on a
Cooperative may provide financing in the form of a mortgage that does not fully
amortize, with a significant portion of principal being due in one final payment
at maturity. The inability of the Cooperative to refinance a mortgage and its
consequent inability to make such final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land,
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
a foreclosure by the holder of an underlying mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the mortgagee who financed the purchase by an individual
tenant-stockholder of shares of the Cooperative or, in the case of the Revolving
Credit Loans and the Home Equity Loans, the collateral securing the Cooperative
Loans.
Each Cooperative is owned by shareholders (referred to as
tenant-stockholders) who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. Generally, a tenant-stockholder
of a Cooperative must make a monthly payment to the Cooperative pursuant to the
proprietary lease, which payment represents such tenant-stockholder's pro rata
share of the Cooperative's payments for its underlying mortgage, real property
taxes, maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights may be financed
through a Cooperative Loan evidenced by a Cooperative Note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related shares of the related Cooperative.
The mortgagee generally takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the mortgagee's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the Cooperative Note, dispose of the collateral at a public or
private sale or
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otherwise proceed against the collateral or tenant-stockholder as an individual
as provided in the security agreement covering the assignment of the proprietary
lease or occupancy agreement and the pledge of Cooperative shares. See
"--Foreclosure on Shares of Cooperatives" below.
Tax Aspects of Cooperative Ownership
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of
the Code of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation representing
his proportionate share of certain interest expenses and certain real estate
taxes allowable as a deduction under Section 216(a) of the Code to the
corporation under Sections 163 and 164 of the Code. In order for a corporation
to qualify under Section 216(b)(1) of the Code for its taxable year in which
such items are allowable as a deduction to the corporation, such section
requires, among other things, that at least 80% of the gross income of the
corporation be derived from its tenant-stockholders. By virtue of this
requirement, the status of a corporation for purposes of Section 216(b)(1) of
the Code must be determined on a year-to-year basis. Consequently, there can be
no assurance that Cooperatives relating to the Cooperative Loans will qualify
under such section for any particular year. In the event that such a Cooperative
fails to qualify for one or more years, the value of the collateral securing any
related Cooperative Loans could be significantly impaired because no deduction
would be allowable to tenant-stockholders under Section 216(a) of the Code with
respect to those years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that such a failure would be permitted to continue over
a period of years appears remote.
Manufactured Housing Contracts
Except as set forth below, under the laws of most states, manufactured
housing constitutes personal property and is subject to the motor vehicle
registration laws of the state or other jurisdiction in which the unit is
located. In the few states in which certificates of title are not required for
manufactured homes, security interests are perfected by the filing of a
financing statement under Article 9 of the UCC, which has been adopted by all
states. Such financing statements are effective for five years and must be
renewed prior to the end of each five year period. The certificate of title laws
adopted by the majority of states provide that ownership of motor vehicles and
manufactured housing shall be evidenced by a certificate of title issued by the
motor vehicles department (or a similar entity) of such state. In the states
that have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law.
The Master Servicer will be required under the related agreement to
effect such notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any Manufactured Home is registered. In the event the Master
Servicer fails, due to clerical errors or otherwise, to effect such notation or
delivery, or files the security interest under the wrong law (for example, under
a motor
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vehicle title statute rather than under the UCC, in a few states), the Indenture
Trustee may not have a first priority perfected security interest in the
Manufactured Home securing a Manufactured Housing Contract. As Manufactured
Homes have become larger and often have been attached to their sites without any
apparent intention by the borrowers to move them, courts in many states have
held that Manufactured Homes may, under certain circumstances, become subject to
real estate title and recording laws. As a result, a security interest in a
Manufactured Home could be rendered subordinate to the interests of other
parties claiming an interest in the Manufactured Home under applicable state
real estate law. In order to perfect a security interest in a Manufactured Home
under real estate laws, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the home is located. These filings must
be made in the real estate records office of the county where the home is
located. Generally, Manufactured Housing Contracts will contain provisions
prohibiting the obligor from permanently attaching the Manufactured Home to its
site. So long as the obligor does not violate this agreement, a security
interest in the Manufactured Home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to its site, other parties could
obtain an interest in the Manufactured Home that is prior to the security
interest originally retained by the seller and transferred to the Depositor.
The Depositor will assign or cause to be assigned a security interest
in the Manufactured Homes to the Indenture Trustee, on behalf of the
Securityholders. Unless otherwise specified in the related Prospectus
Supplement, neither the Depositor, the Master Servicer nor the Indenture Trustee
will amend the certificates of title to identify the Indenture Trustee, on
behalf of the Securityholders, as the new secured party and, accordingly, the
Depositor or the Seller will continue to be named as the secured party on the
certificates of title relating to the Manufactured Homes. In most states, such
assignment is an effective conveyance of such security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the Depositor's rights as the secured party. However,
in some states there exists a risk that, in the absence of an amendment to the
certificate of title, such assignment of the security interest might not be
effective against creditors of the Depositor or Seller.
In the absence of fraud, forgery, permanent affixation of the
Manufactured Home to its site, or administrative error by state recording
officials, the notation of the lien of the Depositor on the certificate of title
or delivery of the required documents and fees would be sufficient to protect
the Indenture Trustee against the rights of subsequent purchasers of a
Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the Depositor
has failed to perfect or cause to be perfected the security interest assigned to
the Trust Fund, such security interest would be subordinate to, among others,
subsequent purchasers for value of such Manufactured Home and holders of
perfected security interests in such Manufactured Home. There also exists a risk
in not identifying the Indenture Trustee, on behalf of the Securityholders, as
the new secured party on the certificate of title that, through fraud or
negligence, the security interest of the Indenture Trustee could be released.
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In the event that the owner of a Manufactured Home moves such house to
a state other than the state in which such Manufactured Home initially is
registered, under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in the new state.
If the owner were to relocate a Manufactured Home to another state and
re-register the Manufactured Home in such state, and if the Depositor did not
take steps to re-perfect its security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Depositor must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states that provide for notation of lien, the
Depositor would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the
Depositor would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states that do not require a
certificate of title for registration of a Manufactured Home, re-registration
could defeat perfection. Similarly, when an obligor under a manufactured housing
conditional sales contract sells a Manufactured Home, the obligee must surrender
possession of the certificate of title or it will receive notice as a result of
its lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related manufactured housing conditional sales contract
before release of the lien. Under each related agreement, the Master Servicer
will be obligated to take such steps, at the Master Servicer's expense, as are
necessary to maintain perfection of security interests in the Manufactured
Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a prior perfected security interest
therein. The Depositor will obtain the representation of the Seller that it has
no knowledge of any such liens with respect to any Manufactured Home securing a
Manufactured Housing Contract. However, such liens could arise at any time
during the term of a Manufactured Housing Contract. No notice will be given to
the Indenture Trustee or Noteholders in the event such a lien arises.
Foreclosure on Revolving Credit Loans, Home Equity Loans and Certain Contracts
Although a deed of trust may also be foreclosed by judicial action,
foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In addition to any notice requirements
contained in a deed of trust, in some states, prior to a sale the trustee must
record a notice of default and send a copy to the borrower/trustor and to any
person who has recorded a request for a copy of notice of default and notice of
sale. In addition, in some states, prior to such sale, the trustee must provide
notice to any other individual having an interest of record in the real
property, including any junior lienholders. If the deed of trust is not
reinstated within a specified period, a notice of sale must be posted in a
public place and, in most states, published for a specific period of time in one
or more newspapers in a specified manner prior to the date of trustee's sale. In
addition, some states' laws require that a copy of the notice of sale be posted
on the property and sent to all parties having an interest of record in the real
property.
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In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
Foreclosure of a mortgage generally is accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. If the mortgagee's right to foreclose is contested, the legal
proceedings necessary to resolve the issue can be time consuming.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is
generally a public sale. However, because of the difficulty a potential
third-party buyer at the sale might have in determining the exact status of
title, and because the physical condition of the property may have deteriorated
during the foreclosure proceedings, it is uncommon for a third party to purchase
the property at a foreclosure sale. Rather, it is common for the lender to
purchase the property from the trustee or referee for a credit bid less than or
equal to the unpaid principal amount of note plus the accrued and unpaid
interest and the expense of foreclosure, in which case the mortgagor's debt will
be extinguished unless the lender purchases the property for a lesser amount in
order to preserve its right against a borrower to seek a deficiency judgment and
such remedy is available under state law and the related loan documents. In the
same states, there is a statutory minimum purchase price which the lender may
offer for the property and generally, state law controls the amount of
foreclosure costs and expenses, including attorneys' fees, which may be
recovered by a lender. Thereafter, subject to the right of the borrower in some
states to remain in possession during the redemption period, the lender will
assume the burdens of ownership, including obtaining hazard insurance, paying
taxes and making such repairs at its own expense as are necessary to render the
property suitable for sale. Generally, the lender will obtain the services of a
real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property and,
in some states, the lender may be entitled to a deficiency judgment. Any loss
may be reduced by the receipt of any mortgage insurance proceeds or other forms
of credit enhancement for a series of Notes. See "Description of Credit
Enhancement."
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure by a junior
mortgagee triggers the enforcement of a "due-on-sale" clause in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees to avoid foreclosure. Accordingly,
with respect to those Trust Assets which are junior mortgage loans, if the
lender purchases the property, the lender's title will be subject to all senior
liens and claims and certain governmental
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liens. The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds are
generally payable to the mortgagor or trustor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceedings.
See "Risk Factors--Special Features of Certain Trust Assets Secured by Junior
Liens on Mortgaged Properties" and "Servicing of Trust Assets--Realization Upon
Defaulted Loans" herein.
Foreclosure on Shares of Cooperatives
The Cooperative shares owned by the tenant-stockholder, together with
the rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged, may
be cancelled by the Cooperative for failure by the tenant-stockholder to pay its
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the Cooperative's building incurred by such tenant-stockholder.
Generally, obligations and charges arising under a proprietary lease or
occupancy agreement which are owed to the Cooperative are made liens upon the
shares to which the proprietary lease or occupancy agreement relates. In
addition, the proprietary lease or occupancy agreement generally permits the
Cooperative to terminate such lease or agreement in the event the borrower
defaults in the performance of covenants thereunder. Typically, the lender and
the Cooperative enter into a recognition agreement which, together with any
lender protection provisions contained in the proprietary lease or occupancy
agreement, establishes the rights and obligations of both parties in the event
of a default by the tenant-stockholder on its obligations under the proprietary
lease or occupancy agreement. A default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under such proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the amount realized upon a sale of
the collateral below the outstanding principal balance of the Cooperative Loan
and accrued and unpaid interest thereon.
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
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realizing upon its collateral for a Cooperative Loan, the lender must obtain the
approval or consent of the board of directors of the Cooperative as required by
the proprietary lease before transferring the Cooperative shares or assigning
the proprietary lease. Such approval or consent is usually based on the
prospective purchaser's income and net worth, among other factors, and may
significantly reduce the number of potential purchasers, which could limit the
ability of the lender to sell and realize upon the value of the collateral.
Generally, the lender is not limited in any rights it may have to dispossess the
tenant-stockholder.
Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
In New York, foreclosure on the Cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the New York
Uniform Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the sale and the sale
price. Generally, a sale conducted according to the usual practice of banks
selling similar collateral in the same area will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "--Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
Repossession with Respect to Manufactured Housing Contracts
Repossession of manufactured housing is governed by state law. A few
states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account current)
before repossession can commence. So long as a manufactured home has not become
so attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in the
event of a default by the obligor will generally be governed by the UCC (except
in Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing units. While the UCC as adopted by the
various states may vary in certain small particulars, the general repossession
procedure established by the UCC is as follows:
(i) Except in those states where the debtor must receive
notice of the right to cure a default, repossession can commence
immediately upon default without prior
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notice. Repossession may be effected either through self-help
(peaceable retaking without court order), voluntary repossession or
through judicial process (repossession pursuant to court-issued writ of
replevin). The self-help and/or voluntary repossession methods are more
commonly employed, and are accomplished simply by retaking possession
of the manufactured home. In cases in which the debtor objects or
raises a defense to repossession, a court order must be obtained from
the appropriate state court, and the manufactured home must then be
repossessed in accordance with that order. Whether the method employed
is self-help, voluntary repossession or judicial repossession, the
repossession can be accomplished either by an actual physical removal
of the manufactured home to a secure location for refurbishment and
resale or by removing the occupants and their belongings from the
manufactured home and maintaining possession of the manufactured home
on the location where the occupants were residing. Various factors may
affect whether the manufactured home is physically removed or left on
location, such as the nature and term of any lease of the site on which
it is located and the condition of the unit. In many cases, leaving the
manufactured home on location is preferable, in the event that the home
is already constructed, in order to avoid the cost of removing the
structure. However, in cases where the home is not moved, expenses for
site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation for the
subsequent sale of the manufactured home can commence. Such disposition
may be by public or private sale provided the method, manner, time,
place and terms of the sale are commercially reasonable.
(iii) Sale proceeds will be applied first to repossession
expenses (including expenses incurred in repossessing, storing,
refurbishing and selling costs) and then to satisfaction of the
indebtedness. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the
full amount of the indebtedness, the remainder may be sought from the
debtor in the form of a deficiency judgment in those states that do not
prohibit or limit such judgments. The deficiency judgment is a personal
judgment against the debtor for the deficiency. Occasionally, after
resale of a manufactured home and payment of all expenses and
indebtedness, there is a surplus of funds. In such event, the UCC
requires the party suing for the deficiency judgment to remit the
surplus to the debtor. Because the defaulting owner of a manufactured
home generally has very little capital or income available following
repossession, a deficiency judgment is generally not sought or, if
obtained, will be settled at a significant discount in light of the
defaulting owner's limited financial condition.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors or other parties are
given a statutory period (generally ranging from six months to two years) in
which to redeem the property from the foreclosure sale. In some states,
redemption may occur only upon payment of the entire principal balance of the
loan, accrued interest and expenses of foreclosure. In other states, redemption
may be authorized if the former borrower pays only a portion of the sums due. In
some states, the right to redeem is an equitable right. The equity of
redemption, which is a non-statutory right that
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must be exercised prior to a foreclosure sale, should be distinguished from
statutory rights of redemption. The effect of a statutory right of redemption is
to diminish the ability of the lender to sell the foreclosed property. The
rights of redemption would defeat the title of any purchaser subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired.
Notice of Sale; Redemption Rights with Respect to Manufactured Homes
While state laws do not usually require notice to be given to debtors
prior to repossession, many states require delivery of a notice of default and
notice of the debtor's right to cure defaults before repossession. The law in
most states also requires that the debtor be given notice of sale prior to the
resale of the home so that the owner may redeem at or before resale.
In addition, the sale must comply with the requirements of the UCC.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states (including California), statutes limit the right of the
beneficiary or mortgagee to obtain a deficiency judgment against the borrower
following foreclosure. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. In the case of a Revolving Credit Loan, Home Equity Loan and a Contract
secured by a property owned by a trust where the Mortgage Note is executed on
behalf of the trust, a deficiency judgment against the trust following
foreclosure or sale under a deed of trust, even if obtainable under applicable
law, may be of little value to the mortgagee or beneficiary if there are no
trust assets against which such deficiency judgment may be executed. Some state
statutes require the beneficiary or mortgagee to exhaust the security afforded
under a deed of trust or mortgage by foreclosure in an attempt to satisfy the
full debt before bringing a personal action against the borrower. In certain
other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting such security; however, in
some of these states, the lender, following judgment on such personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect of the
election requirement, in those states permitting such election, is that lenders
will usually proceed against the security first rather than bringing a personal
action against the borrower.
Finally, in certain other states, statutory provisions limit any
deficiency judgment against the borrower following a foreclosure to the excess
of the outstanding debt over the fair market value of the property at the time
of the public sale. The purpose of these statutes is generally to prevent a
beneficiary or mortgagee from obtaining a large deficiency judgment against the
former borrower as a result of low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
Shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Article 9 to prohibit or limit a deficiency award in certain
circumstances, including circumstances where the
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disposition of the collateral (which, in the case of a Cooperative Loan, would
be the shares of the Cooperative and the related proprietary lease or occupancy
agreement) was not conducted in a commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon its
collateral and/or enforce a deficiency judgment. For example, under the federal
bankruptcy law, all actions against the debtor, the debtor's property and any
co-debtor are automatically stayed upon the filing of a bankruptcy petition.
Moreover, a court having federal bankruptcy jurisdiction may permit a debtor
through its Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary
default in respect of a mortgage loan on such debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule, even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by permitting the borrower to pay over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property which is not the principal
residence of the debtor may be modified. These courts have allowed modifications
that include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule, forgiving all or a portion of the
debt and reducing the lender's security interest to the value of the residence,
thus leaving the lender a general unsecured creditor for the difference between
the value of the residence and the outstanding balance of the loan. Generally,
however, the terms of a mortgage loan secured only by a mortgage on real
property that is the debtor's principal residence may not be modified pursuant
to a plan confirmed pursuant to Chapter 13 except with respect to mortgage
payment arrearages, which may be cured within a reasonable time period. Courts
with federal bankruptcy jurisdiction similarly may be able to modify the terms
of a Cooperative Loan.
Certain tax liens arising under the Code may, in certain circumstances,
have priority over the lien of a mortgage or deed of trust. This may have the
effect of delaying or interfering with the enforcement of rights with respect to
a defaulted Revolving Credit Loan, Home Equity Loan or a Contract. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
The Revolving Credit Loans, Home Equity Loans and Contracts may be
subject to special rules, disclosure requirements and other provisions that were
added to the federal Truth-in-Lending Act by the Home Ownership and Equity
Protection Act of 1994 (such Revolving Credit Loans, Home Equity Loans and
Contracts, "High Cost Loans"), if such Trust Assets were originated on or after
October 1, 1995, are not loans made to finance the purchase of the
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mortgaged property and have interest rates or origination costs in excess of
certain prescribed levels. Purchasers or assignees of any High Cost Loan,
including any Trust Fund, could be liable for all claims and subject to all
defenses arising under such provisions that the borrower could assert against
the originator thereof. Remedies available to the borrower include monetary
penalties, as well as recision rights if the appropriate disclosures were not
given as required.
Environmental Legislation
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and under state law in certain states,
a secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility. What constitutes sufficient participation in the management of a
property securing a loan or the business of a borrower to render the exemption
unavailable to a lender has been a matter of interpretation by the courts.
CERCLA has been interpreted to impose liability on a secured party, even absent
foreclosure, where the party participated in the financial management of the
borrower's business to a degree indicating a capacity to influence waste
disposal decisions. However, court interpretations of the secured creditor
exemption have been inconsistent. In addition, when lenders foreclose and
thereupon become owners of collateral property, courts are inconsistent as to
whether such ownership renders the secured creditor exemption unavailable. Other
federal and state laws in certain circumstances may impose liability on a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property on which
contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. Such cleanup costs may be substantial. It is possible that
such cleanup costs could become a liability of a Trust Fund and reduce the
amounts otherwise payable to the holders of the related series of Notes.
Moreover, certain federal statutes and certain states by statute impose a lien
for any cleanup costs incurred by such state on the property that is the subject
of such cleanup costs (an "Environmental Lien"). All subsequent liens on such
property generally are subordinated to such an Environmental Lien and, in some
states, even prior recorded liens are subordinated to Environmental Liens. In
the latter states, the security interest of the trustee in a related parcel of
real property that is subject to such an Environmental Lien could be adversely
affected.
Traditionally, many residential mortgage lenders have not taken steps
to evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the Company has not
made and will not make such evaluations prior to the origination of the
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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.
Consumer Protection Laws with Respect to Manufactured Housing Contracts
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act,
Regulation "B", the Fair Credit Reporting Act and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions. In some cases, this liability may affect an assignee's ability
to enforce the related contract. In addition, certain of the Contracts may be
subject to special rules, disclosure requirements and other provisions that are
applicable to High Cost Loans discussed above.
Manufactured housing contracts often contain provisions requiring the
obligor to pay late charges if payments are not timely made. In certain cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Unless otherwise provided in the related Prospectus Supplement,
under the related agreement, late charges will be retained by the Master
Servicer as additional servicing compensation and any inability to collect these
amounts will not affect payments to Noteholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission (the "FTC Rule") has the effect of subjecting a seller (and certain
related creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses that the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder.
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Most of the Manufactured Housing Contracts in a Trust Fund will be
subject to the requirements of the FTC Rule. Accordingly, the Indenture Trustee,
as holder of the Manufactured Housing Contracts, will be subject to any claims
or defenses that the purchaser of the related Manufactured Home may assert
against the seller of the Manufactured Home, subject to a maximum liability
equal to the amounts paid by the obligor on the Manufactured Housing Contract.
If an obligor is successful in asserting any such claim or defense, and if the
Seller had or should have had knowledge of such claim or defense, the Master
Servicer will have the right to require the Seller to repurchase the
Manufactured Housing Contract because of a breach of its Seller's representation
and warranty that no claims or defenses exist that would affect the obligor's
obligation to make the required payments under the Manufactured Housing
Contract. The Seller would then have the right to require the originating dealer
to repurchase the Manufactured Housing Contract from it and might also have the
right to recover from the dealer any losses suffered by the Seller with respect
to which the dealer would have been primarily liable to the obligor.
Enforceability of Certain Provisions
The Revolving Credit Loans, Home Equity Loans and, as applicable,
Contracts generally contain due-on-sale clauses. These clauses permit the
mortgagee to accelerate the maturity of the loan if the borrower sells,
transfers or conveys the property without the prior consent of the mortgagee.
The enforceability of these clauses has been the subject of legislation or
litigation in many states, and in some cases the enforceability of these clauses
has been limited or denied. However, the Garn-St Germain Depository Institutions
Act of 1982 (the "Garn-St Germain Act"), subject to certain exceptions, preempts
state law that prohibits the enforcement of due-on-sale clauses and permits
lenders to enforce these clauses in accordance with their terms. The Garn-St
Germain Act does "encourage" lenders to permit assumption of loans at the
original rate of interest or at some other rate less than the average of the
original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of a prepayment penalty upon the acceleration of a loan pursuant
to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, which may have an impact upon the
average life of the related Trust Assets and the number of Trust Assets which
may be outstanding until maturity.
Forms of notes and mortgages used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In addition to
limitations imposed by FHA Regulations with respect to Contracts partially
insured by the FHA pursuant to Title I, in certain states, there are or may be
specific limitations upon the late charges that a lender may collect from a
borrower for delinquent payments. Certain
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states also limit the amounts that a lender may collect from a borrower as an
additional charge if the loan is prepaid.
In foreclosure actions, courts have imposed general equitable
principles. These equitable principles are generally designed to relieve the
borrower from the legal effect of its defaults under the loan documents.
Examples of judicial remedies that have been fashioned include judicial
requirements that the lender undertake affirmative and expensive actions to
determine the causes for the borrower's default and the likelihood that the
borrower will be able to reinstate the loan. In some cases, courts have required
that lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial disability. In other cases,
courts have limited the right of the lender to foreclose if the default under
the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second mortgage or
deed of trust affecting the property. Finally, some courts have been faced with
the issue of whether or not federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
deeds of trust or mortgages receive notices in addition to the statutorily
prescribed minimum. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust or under a mortgage having a power of sale, does not involve
sufficient state action to afford constitutional protections to the borrower.
Transfer of Manufactured Homes
Generally, Manufactured Housing Contracts contain provisions
prohibiting the sale or transfer of the related manufactured homes without the
consent of the obligee on the contract and permitting the acceleration of the
maturity of such contracts by the obligee on the contract upon any such sale or
transfer to which consent has not been given. Unless otherwise provided in the
related Prospectus Supplement, the Master Servicer will, to the extent it has
knowledge of such conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of the related Manufactured
Housing Contracts through enforcement of due-on-sale clauses, subject to
applicable state law. In certain cases, the transfer may be made by a delinquent
obligor in order to avoid a repossession proceeding with respect to a
Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the related due-on-sale clause. The Garn-St Germain Act preempts, subject to
certain exceptions and conditions, state laws prohibiting enforcement of
due-on-sale clauses applicable to the Manufactured Homes. Consequently, in some
cases the Master Servicer may be prohibited from enforcing a due-on-sale clause
in respect of certain Manufactured Homes.
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The Home Improvement Contracts
General
The Home Improvement Contracts, other than those Home Improvement
Contracts that are unsecured or secured by mortgages on real estate (such Home
Improvement Contracts are hereinafter referred to in this section as
"contracts") generally are "chattel paper" or constitute "purchase money
security interests" each as defined in the UCC. Pursuant to the UCC, the sale of
chattel paper is treated in a manner similar to perfection of a security
interest in chattel paper. Under the related agreement, the Depositor will
transfer physical possession of the contracts to the Indenture Trustee or a
designated custodian or may retain possession of the contracts as custodian for
the Indenture Trustee. In addition, the Depositor will make an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the Indenture Trustee's ownership of the contracts. Unless otherwise
specified in the related Prospectus Supplement, the contracts will not be
stamped or otherwise marked to reflect their assignment from the Depositor to
the Indenture Trustee. Therefore, if through negligence, fraud or otherwise, a
subsequent purchaser were able to take physical possession of the contracts
without notice of such assignment, the Indenture Trustee's interest in the
contracts could be defeated.
Security Interests in Home Improvements
The contracts that are secured by the Home Improvements financed
thereby grant to the originator of such contracts a purchase money security
interest in such Home Improvements to secure all or part of the purchase price
of such Home Improvements and related services. A financing statement generally
is not required to be filed to perfect a purchase money security interest in
consumer goods. Such purchase money security interests are assignable. In
general, a purchase money security interest grants to the holder a security
interest that has priority over a conflicting security interest in the same
collateral and the proceeds of such collateral. However, to the extent that the
collateral subject to a purchase money security interest becomes a fixture, in
order for the related purchase money security interest to take priority over a
conflicting interest in the fixture, the holder's interest in such Home
Improvement must generally be perfected by a timely fixture filing. In general,
under the UCC, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home Improvement
Contracts that finance lumber, bricks, other types of ordinary building material
or other goods that are deemed to lose such characterization, upon incorporation
of such materials into the related property, will not be secured by a purchase
money security interest in the Home Improvement being financed.
Enforcement of Security Interest in Home Improvements
So long as the Home Improvement has not become subject to the real
estate law, a creditor can repossess a Home Improvement securing a contract by
voluntary surrender, "self-help" repossession that is "peaceful" (i.e., without
breach of the peace) or, in the absence of voluntary surrender and the ability
to repossess without breach of the peace, judicial process. The holder of a
contract must give the debtor a number of days' notice, which varies from 10 to
30 days or more depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states restrict
repossession sales, including requiring
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prior notice to the debtor and commercial reasonableness in effecting such a
sale. The law in most states also requires that the debtor be given notice of
any sale prior to resale of the related property so that the debtor may redeem
it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equity principles, may limit or delay
the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Consumer Protection Laws
The FTC Rule is intended to defeat the ability of the transferor of a
consumer credit contract that is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
that the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Indenture Trustee against such obligor. Numerous other
federal and state consumer protections laws impose requirements applicable to
the origination and lending pursuant to the contracts, including the Truth in
Lending Act, the Federal Trade Commission Act, the Fair Credit Billing Act, the
Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt
Collection Practices Act and the Uniform Consumer Credit Code. In the case of
some of these laws, the failure to comply with their provisions may affect the
enforceability of the related contract.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 ("Title V") provides that, subject to the following
conditions, state usury limitations shall not apply to any contract that is
secured by a first lien on certain kinds of consumer goods. The contracts would
be covered if they satisfy certain conditions, among other things, governing the
terms of any prepayments, late charges and deferral fees and requiring a 30-day
notice period prior to instituting any action leading to repossession of the
related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing.
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The contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading to
repossession of or foreclosure with respect to the related unit. Title V
authorized any state to reimpose limitations on interest rates and finance
charges by adopting before April 1, 1983 a law or constitutional provision which
expressly rejects application of the federal law. Fifteen states adopted such a
law prior to the April 1, 1983 deadline. In addition, even where Title V was not
so rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on loans covered by Title V. In any state in
which application of Title V was expressly rejected or a provision limiting
discount points or other charges has been adopted, no contract that imposes
finance charges or provides for discount points or charges in excess of
permitted levels has been included in the Trust Fund.
Installment Contracts
The Trust Assets may also consist of installment sales contracts. Under
an installment contract ("Installment Contract") the seller (hereinafter
referred to in this section as the "lender") retains legal title to the property
and enters into an agreement with the purchaser (hereinafter referred to in this
section as the "borrower") for the payment of the purchase price, plus interest,
over the term of such contract. Only after full performance by the borrower of
the Installment Contract is the lender obligated to convey title to the property
to the purchaser. As with mortgage or deed of trust financing, during the
effective period of the Installment Contract, the borrower is generally
responsible for the maintaining the property in good condition and for paying
real estate taxes, assessments and hazard insurance premiums associated with the
property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated and the
buyer's equitable interest in the property is forfeited. The lender in such a
situation is not required to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the Installment Contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an Installment Contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under Installment Contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the Installment Contract may be reinstated upon full payment of the defaulted
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an Installment Contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, the lender's procedures for obtaining possession and clear title
under an Installment Contract in a given state are simpler and
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less time consuming and costly than are the procedures for foreclosing and
obtaining clear title to a property subject to one or more liens.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 ("Title V"), provides that state usury limitations shall not
apply to certain types of residential first mortgage loans, including
cooperative loans originated by certain lenders after March 31, 1980. A similar
federal statute was in effect with respect to mortgage loans made during the
first three months of 1980. The Office of Thrift Supervision is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized any state to impose interest
rate limits by adopting, before April 1, 1983, a law or constitutional provision
which expressly rejects application of the federal law. In addition, even where
Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered by
Title V. Certain states have taken action to reimpose interest rate limits or to
limit discount points or other charges.
Usury limits apply to junior mortgage loans in many states. Any
applicable usury limits in effect at origination will be reflected in the
maximum Mortgage Rates for the Trust Assets, as set forth in the related
Prospectus Supplement.
Unless otherwise set forth in the related Prospectus Supplement, each
Seller of a Revolving Credit Loan, Home Equity Loan and a Contract will have
represented that such Revolving Credit Loan, Home Equity Loan or Contract was
originated in compliance with then applicable state laws, including usury laws,
in all material respects. However, the Mortgage Rates on the Revolving Credit
Loans and the Home Equity Loans will be subject to applicable usury laws as in
effect from time to time.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage
loans and adjustable rate cooperative loans, and early ownership mortgage loans,
originated by non-federally chartered lenders have historically been subjected
to a variety of restrictions. Such restrictions differed from state to state,
resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act ("Title VIII").
Title VIII provides that, notwithstanding any state law to the contrary, (i)
state-chartered banks may originate alternative mortgage instruments in
accordance with regulations promulgated by the Comptroller of the Currency with
respect to the origination of alternative mortgage instruments by national
banks, (ii) state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration with 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
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respect to origination of alternative mortgage instruments by federal savings
and loan associations. Title VIII also provides that any state may reject
applicability of the provisions of Title VIII by adopting, prior to October 15,
1985, a law or constitutional provision expressly rejecting the applicability of
such provisions. Certain states have taken such action.
Formaldehyde Litigation with Respect to Manufactured Housing Contracts
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts and related
persons in the distribution process. The Depositor is aware of a limited number
of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under "--Consumer
Protection Laws" and "Consumer Protection Laws with Respect to Manufactured
Housing Contracts", the holder of any Contract secured by a Manufactured Home
with respect to which a formaldehyde claim has been successfully asserted may be
liable to the obligor for the amount paid by the obligor on the related Contract
and may be unable to collect amounts still due under the Contract. The
successful assertion of such claim constitutes a breach of a representation or
warranty of the Seller, and the related Trust Fund would suffer a loss only to
the extent that (i) the Seller breached its obligation to repurchase the
Contract in the event an obligor is successful in asserting such a claim, and
(ii) the Seller, the Depositor or the Indenture Trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the Noteholders
against the manufacturer or other persons who were directly liable to the
plaintiff for the damages. Typical products liability insurance policies held by
manufacturers and component suppliers of Manufactured Homes may not cover
liabilities arising from formaldehyde in manufactured housing, with the result
that recoveries from such manufacturers, suppliers or other persons may be
limited to their corporate assets without the benefit of insurance.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Revolving Credit Loan, Home Equity Loan and
certain Contracts (including a Mortgagor who was in reserve status and is called
to active duty after origination of the Revolving Credit Loan, Home Equity Loan
and certain Contracts) may not be charged interest (including fees and charges)
above an annual rate of 6% during the period of such Mortgagor's active duty
status, unless a court orders otherwise upon application of the lender. The
Relief Act applies to Mortgagors who are members of the Air Force, Army,
Marines, Navy, National Guard, Reserves, Coast Guard, and officers of the U.S.
Public Health Service assigned to duty with the military. Because the Relief Act
applies to Mortgagors who enter military service (including reservists who are
called to active duty) after origination of the related Revolving Credit Loan,
Home Equity Loan and related Contract, no information can be provided as to the
number of loans that may be affected by the Relief Act. Application of the
Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Master Servicer to collect full amounts of interest on certain of
the Revolving Credit Loans, Home Equity Loans and
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Contracts. Any shortfall in interest collections resulting from the application
of the Relief Act or similar legislation or regulations, which would not be
recoverable from the related Revolving Credit Loans, Home Equity Loans and
Contracts, would result in a reduction of the amounts payable to the holders of
the related Notes, and may not be covered by the applicable form of credit
enhancement provided in connection with the related series of Notes. In
addition, the Relief Act imposes limitations that would impair the ability of
the Master Servicer to foreclose on an affected Revolving Credit Loan, Home
Equity Loan or Contract during the Mortgagor's period of active duty status,
and, under certain circumstances, during an additional three month period
thereafter. Thus, in the event that the Relief Act or similar legislation or
regulations applies to any Revolving Credit Loan, Home Equity Loan and Contract
which goes into default, there may be delays in payment and losses on the
related Notes in connection therewith. Any other interest shortfalls, deferrals
or forgiveness of payments on the Revolving Credit Loans, Home Equity Loans and
Contracts resulting from similar legislation or regulations may result in delays
in payments or losses to Noteholders of the related series.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
Junior Mortgages; Rights of Senior Mortgagees
The Revolving Credit Loans, Home Equity Loans, certain Contracts or
certain Private Securities included in the Trust Fund for a series will be
secured by mortgages or deeds of trust which generally will be junior to other
mortgages or deeds of trust held by other lenders or institutional investors.
The rights of the Trust Fund (and therefore the Noteholders), as mortgagee under
a junior mortgage, are subordinate to those of the mortgagee under the senior
mortgage, including the prior rights of the senior mortgagee to receive hazard
insurance and condemnation proceeds and to cause the property securing the
Revolving Credit Loan, Home Equity Loan or Contract to be sold upon default of
the mortgagor, which may extinguish the junior mortgagee's lien unless the
junior mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, in certain cases, either reinitiates or satisfies the defaulted
senior loan or loans. A junior mortgagee may satisfy a defaulted senior loan in
full or, in some states, may cure such default and bring the senior loan current
thereby reinstating the senior loan, in either event usually adding the amounts
expended to the balance due on the junior loan.
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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.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of certain anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Notes offered hereunder. This discussion has been prepared with the advice
of Thacher Proffitt & Wood and Orrick, Herrington & Sutcliffe LLP, counsel to
the Company. This discussion is directed solely to Noteholders that hold the
Notes as capital assets within the meaning of Section 1221 of the Code and does
not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinion referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively. Taxpayers and preparers of tax returns should be aware that
under applicable Treasury regulations a provider of advice on specific issues of
law is not considered an income tax return preparer unless the advice (i) is
given with respect to events that have occurred at the time the advice is
rendered and is not given with respect to the consequences of contemplated
actions, and (ii) is directly relevant to the determination of an entry on a tax
return. Accordingly, taxpayers should consult their tax advisors and tax return
preparers regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. In addition to the federal
income tax consequences described herein, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of the Notes. See "State and Other Tax Consequences." Noteholders
are advised to consult their tax advisors concerning the federal, state, local
or other tax consequences to them of the purchase, ownership and disposition of
the Notes offered hereunder.
Upon the issuance of the Notes, Thacher Proffitt & Wood or Orrick,
Herrington & Sutcliffe LLP ("Tax Counsel"), counsel to the Company, will deliver
its opinion generally to the effect that, for federal income tax purposes,
assuming compliance with all provisions of the Indenture, Trust Agreement and
certain related documents, (i) the Notes will be treated as indebtedness and
(ii) the Issuer, as created pursuant to the terms and conditions of the Trust
Agreement, will not be characterized as an association (or publicly traded
partnership within the meaning of Code section 7704) taxable as a corporation or
as a taxable mortgage pool within the meaning of Code section 7701(i). The
following discussion is based in part upon the rules governing original issue
discount that are set forth in Code sections 1271-1273 and 1275 and in the
Treasury regulations issued thereunder (the "OID Regulations"). The OID
Regulations do not adequately address certain issues relevant to, and in some
instances provide that they are not applicable to, securities such as the Notes.
For purposes of this tax discussion, references to a "Noteholder" or a "holder"
are to the beneficial owner of a Note.
Status as Real Property Loans
(i) Notes held by a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Code section 7701(a)(19)(C)(v); and (ii) Notes held by a real estate
investment trust will not constitute "real
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estate assets" within the meaning of Code section 856(c)(5)(A) and interest on
Notes will not be considered "interest on obligations secured by mortgages on
real property" within the meaning of Code section 856(c)(3)(B).
Original Issue Discount
The Notes are not expected to be considered issued with original issue
discount since the principal amount of the Notes will not exceed their issue
price by more than a de minimis amount. The stated interest thereon will be
taxable to a Noteholder as ordinary interest income when received or accrued in
accordance with such Noteholder's method of tax accounting. Under the OID
Regulations, a holder of a Note issued with a de minimis amount of original
issue discount must include such discount in income, on a pro rata basis, as
principal payments are made on the Note.
The original issue discount, if any, on a Note would be the excess of
its stated redemption price at maturity over its issue price. The issue price of
a particular class of Notes will be the first cash price at which a substantial
amount of Notes of that class is sold (excluding sales to bond houses, brokers
and underwriters) on the date of their initial issuance (the "Closing Date").
Under the OID Regulations, the stated redemption price of a Note is equal to the
total of all payments to be made on such Note other than "qualified stated
interest." "Qualified stated interest" includes interest that is unconditionally
payable at least annually at a single fixed rate, or in the case of a variable
rate debt instrument, at a "qualified floating rate," an "objective rate," a
combination of a single fixed rate and one or more "qualified floating rates" or
one "qualified inverse floating rate," or a combination of "qualified floating
rates" that generally does not operate in a manner that accelerates or defers
interest payments on such Note.
In the case of Notes bearing adjustable interest rates, the
determination of the total amount of original issue discount and the timing of
the inclusion thereof will vary according to the characteristics of such Notes.
In general terms original issue discount is accrued by treating the interest
rate of the Notes as fixed and making adjustments to reflect actual interest
rate adjustments.
Certain classes of the Notes may provide for the first interest payment
with respect to such Notes to be made more than one month after the date of
issuance, a period which is longer than the subsequent monthly intervals between
interest payments. Assuming the "accrual period" (as defined below) for original
issue discount is each monthly period that ends on a Distribution Date, in some
cases, as a consequence of this "long first accrual period," some or all
interest payments may be required to be included in the stated redemption price
of the Note and accounted for as original issue discount.
In addition, if the accrued interest to be paid on the first
Distribution Date is computed with respect to a period that begins prior to the
Closing Date, a portion of the purchase price paid for a Note will reflect such
accrued interest. In such cases, information returns to the Noteholders and the
IRS will be based on the position that the portion of the purchase price paid
for the interest accrued with respect to periods prior to the Closing Date is
treated as part of the overall purchase price of such Note (and not as a
separate asset the purchase price of which is recovered entirely out of interest
received on the next Distribution Date) and that portion of the
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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 Noteholder to elect to
accrue de minimis original issue discount into income currently based on a
constant yield method. See "--Market Discount" for a description of such
election under the OID Regulations.
If original issue discount on a Note is in excess of a de minimis
amount, the holder of such Certificate must include in ordinary gross income the
sum of the "daily portions" of original issue discount for each day during its
taxable year on which it held such Note, including the purchase date but
excluding the disposition date. In the case of an original holder of a Note, the
daily portions of original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to the day prior to each Distribution Date and begins on the first day following
the immediately preceding accrual period (or in the case of the first such
period, begins on the Closing Date), a calculation will be made of the portion
of the original issue discount that accrued during such accrual period. The
portion of original issue discount that accrues in any accrual period will equal
the excess, if any, of (i) the sum of (A) the present value, as of the end of
the accrual period, of all of the distributions remaining to be made on the
Note, if any, in future periods and (B) the distributions made on such Note
during the accrual period of amounts included in the stated redemption price,
over (ii) the adjusted issue price of such Note at the beginning of the accrual
period. The present value of the remaining distributions referred to in the
preceding sentence will be calculated using a discount rate equal to the
original yield to maturity of the Notes, and possibly assuming that
distributions on the Note will be received in future periods based on the Trust
Assets being prepaid at a rate equal to a prepayment assumption. For these
purposes, the original yield to maturity of the Note would be calculated based
on its issue price and possibly assuming that
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distributions on the Note will be made in all accrual periods based on the Trust
Assets being prepaid at a rate equal to a prepayment assumption. The adjusted
issue price of a Note at the beginning of any accrual period will equal the
issue price of such Note, increased by the aggregate amount of original issue
discount that accrued with respect to such Note in prior accrual periods, and
reduced by the amount of any distributions made on such Note in prior accrual
periods of amounts included in its stated redemption price. The original issue
discount accruing during any accrual period, computed as described above, will
be allocated ratably to each day during the accrual period to determine the
daily portion of original issue discount for such day.
A subsequent purchaser of a Note that purchases such Note at a price
(excluding any portion of such price attributable to accrued qualified stated
interest) less than its remaining stated redemption price will also be required
to include in gross income the daily portions of any original issue discount
with respect to such Note. However, each such daily portion will be reduced, if
such cost is in excess of its "adjusted issue price," in proportion to the ratio
such excess bears to the aggregate original issue discount remaining to be
accrued on 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
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principal amount of such Note multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, possibly taking into account a prepayment assumption. If market
discount is treated as de minimis under this rule, it appears that the actual
discount would be treated in a manner similar to original issue discount of a de
minimis amount. See "--Original Issue Discount" above. Such treatment would
result in discount being included in income at a slower rate than discount would
be required to be included in income using the method described above.
Code section 1276(b)(3) specifically authorizes the Treasury Department
to issue regulations providing for the method for accruing market discount on
debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the legislative history to Code section 1276 Committee Report
(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.
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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 Trust Assets.
However, it appears that a noncorporate holder that does not acquire a Note in
connection with a trade or business will not be entitled to deduct a loss under
Section 166 of the Code until such holder's Note becomes wholly worthless (i.e.,
until its outstanding principal balance has been reduced to zero) and that the
loss will be characterized as a short-term capital loss.
Each holder of a Note will be required to accrue interest and original
issue discount with respect to such Note, without giving effect to any
reductions in distributions attributable to defaults or delinquencies on the
Trust Assets until it can be established that any such reduction ultimately will
not be recoverable. As a result, the amount of taxable income reported in any
period by the holder of a Note could exceed the amount of economic income
actually realized by the holder in such period. Although the holder of a Note
eventually will recognize a loss or reduction in income attributable to
previously accrued and included income that, as the result of a realized loss,
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
Sales of Notes
If a Note is sold, the selling Noteholder will recognize gain or loss
equal to the difference between the amount realized on the sale and its adjusted
basis in the Note. The adjusted basis of a Note generally will equal the cost of
such Note to such Noteholder, increased by the amount of any original issue
discount or market discount previously reported by such Noteholder with respect
to such Note and reduced by any amortized premium and any principal payment
received by such Noteholder. Except as provided in the following three
paragraphs, any such gain or loss will be capital gain or loss, provided such
Note is held as a capital asset (generally, property
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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.
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Tax Treatment of Foreign Investors
Interest paid on a Note to a nonresident alien individual, foreign
partnership or foreign corporation that has no connection with the United States
other than holding Notes ("Nonresidents") will normally qualify as portfolio
interest (except where (i) the recipient is a holder, directly or by
attribution, of 10% or more of the capital or profits interest in the Issuer, or
(ii) the recipient is a controlled foreign corporation to which the Issuer is a
related person) and will be exempt from federal income tax. Upon receipt of
appropriate ownership statements, the Issuer normally will be relieved of
obligations to withhold tax from such interest payments. These provisions
supersede the generally applicable provisions of United States law that would
otherwise require the issuer to withhold at a 30% rate (unless such rate were
reduced or eliminated by an applicable tax treaty) on, among other things,
interest and other fixed or determinable, annual or periodic income paid to
Nonresidents. For these purposes a Noteholder may be considered to be related to
the Issuer by holding a Certificate or by having common ownership with any other
holder of a Certificate or any affiliate thereof.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences", potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the Notes offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their tax advisors
with respect to the various tax consequences of investments in the Notes offered
hereunder.
ERISA CONSIDERATIONS
ERISA imposes certain fiduciary responsibility requirements and
prohibited transaction restrictions on employee pension and welfare benefit
plans subject to ERISA ("ERISA Plans"). Section 4975 of the Code imposes similar
prohibited transaction restrictions on tax-qualified retirement plans described
in Section 401(a) of the Code ("Qualified Retirement Plans") and on individual
retirement accounts and annuities ("IRAs") described in Section 408 of the Code
(collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA), and, if no election has been made under Section
410(d) of the Code, church plans (as defined in Section 3(33) of ERISA), are not
subject to the ERISA requirements discussed herein. Accordingly, assets of such
plans may be invested in Notes without regard to the ERISA considerations
described below, subject to the provisions of applicable federal, state and
local law. Any such plan that is a Qualified Retirement Plan and exempt from
taxation under Sections 401(a) and 501(a) of the Code, however, is subject to
the prohibited transaction rules set forth in Section 503 of the Code.
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In addition to imposing general fiduciary responsibility requirements,
including those of investment prudence and diversification and the requirement
that a Plan's investment be made in accordance with the documents governing the
Plan, Section 406 of ERISA and Section 4975 of the Code prohibit a broad range
of transactions involving assets of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code, collectively, "Parties in Interest") who
have certain specified relationships to the Plans, unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to a penalty (or an
excise tax) imposed pursuant to Section 502(i) of ERISA or Section 4975 of the
Code, unless a statutory or administrative exemption is available.
Plan Asset Regulations
An investment of the assets of a Plan in Notes may cause the underlying
Trust Assets and other assets included in the Trust Fund to be deemed "Plan
Assets" of such Plan. The U.S. Department of Labor (the "DOL") has promulgated
regulations at 29 C.F.R. Section 2510.3-101 (the "DOL Regulations") defining the
term "Plan Assets" for purposes of applying the general fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA and
Section 4975 of the Code. Under the DOL Regulations, generally, when a Plan
acquires an "equity interest" in another entity (such as the Trust Fund), the
underlying assets of that entity may be considered to be Plan Assets unless
certain exceptions apply. Exceptions contained in the DOL Regulations provide
that a Plan's assets will not include an undivided interest in each asset of an
entity in which it makes an equity investment if: (1) the entity is an operating
company; or (2) the equity investment made by the Plan is either a
"publicly-offered security" that is "widely held" (both as defined in the DOL
Regulations) or a security issued by an investment company registered under the
Investment Company Act of 1940, as amended; or (3) Benefit Plan Investors do not
own 25% or more in value of any class of equity interests issued by the entity.
For this purpose, the term "Benefit Plan Investors" include Plans, as well as
any "employee benefit plan" (as defined in Section 3(3) or ERISA) which is not
subject to Title I of ERISA, such as governmental plans (as defined in Section
3(32) of ERISA), church plans (as defined in Section 3(33) of ERISA) which have
not made an election under Section 410(d) of the Code, foreign plans and any
entity whose underlying assets include Plan Assets by reason of a Plan's
investment in the entity. The DOL Regulations provide that the term "equity
interest" means any interest in an entity other than an instrument which is
treated as indebtedness under applicable local law and which has no "substantial
equity features." Because of the factual nature of certain of the rules
governing the applicability of the above-described exceptions under the DOL
Regulations, Plans or persons investing Plan Assets should not acquire any Note
which may be deemed in the respective Prospectus Supplement to have "substantial
equity features" in reliance upon the availability of any such exception. For
purposes of this section "ERISA Considerations," the term "Plan Assets" or
"assets of a Plan" has the meaning specified in the DOL Regulations and includes
an undivided interest in the underlying assets of certain entities in which a
Plan invests.
The prohibited transaction provisions of Section 406 of ERISA and
Section 4975 of the Code may apply to a Trust Fund and cause the Company, the
Master Servicer, any Subservicer, any Administrator, the Indenture Trustee, the
Owner Trustee, the obligor under any credit enhancement mechanism or certain
affiliates thereof to be considered or become Parties in
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Interest with respect to an investing Plan (or of a Plan holding an interest in
an investing entity). If so, the acquisition or holding of Notes by or on behalf
of the investing Plan could also give rise to a prohibited transaction under
ERISA and Section 4975 of the Code, unless a statutory or administrative
exemption is available. Notes acquired by a Plan may be assets of that Plan.
Under the DOL Regulations, the Trust Fund, including the Trust Assets and the
other assets held in the Trust Fund, may also be deemed to be assets of each
Plan that acquires Notes. Special caution should be exercised before Plan Assets
are used to acquire a Note in such circumstances, especially if, with respect to
such assets, the Company, the Master Servicer, any Subservicer, any
Administrator, the Indenture Trustee, the Owner Trustee, the obligor under any
credit enhancement mechanism or an affiliate thereof either (i) has investment
discretion with respect to the investment of Plan Assets or (ii) has authority
or responsibility to give (or regularly gives) investment advice with respect to
Plan Assets for a fee pursuant to an agreement or understanding that such advice
will serve as a primary basis for investment decisions with respect to such Plan
Assets.
Any person who has discretionary authority or control with respect to
the management or disposition of Plan Assets and any person who provides
investment advice with respect to such Plan Assets for a fee (in the manner
described above) is a fiduciary of the investing Plan. If the Trust Assets or
other assets in the Trust Fund were to constitute Plan Assets, then any party
exercising management or discretionary control with respect to those Plan Assets
may be deemed to be a Plan "fiduciary," and thus subject to the fiduciary
responsibility requirements of ERISA and the prohibited transaction provisions
of ERISA and Section 4975 of the Code with respect to any investing Plan.
Therefore, if the Trust Assets and other assets included in the Trust Fund were
to constitute Plan Assets, then the acquisition or holding of Notes by or on
behalf of a Plan or with Plan Assets, as well as the operation of the Trust
Fund, may constitute or involve a prohibited transaction under ERISA and Section
4975 of the Code, unless a statutory or administrative exemption is available.
Prohibited Transaction Exemptions
A Plan fiduciary or other Plan Asset investor should consider the
availability of certain class exemptions granted by the DOL, which provide
relief from certain of the prohibited transaction provisions of ERISA and the
related excise tax provisions of the Code, including Prohibited Transaction
Class Exemption ("PTCE") 95-60, regarding transactions by insurance company
general accounts. The respective Prospectus Supplement may contain additional
information regarding the application of PTCE 95-60 or other DOL class
exemptions with respect to the Notes offered thereby.
Insurance Company General Accounts
In addition to any exemption that may be available under PTCE 95-60 for
the purchase and holding of the Notes by an insurance company general account,
the Small Business Job Protection Act of 1996 added a new Section 401(c) to
ERISA, which provides certain exemptive relief from the provisions of Part 4 of
Title I of ERISA and Section 4975 of the Code, including the prohibited
transaction restrictions imposed by ERISA and the related excise taxes imposed
by the Code, for transactions involving an insurance company general account.
Pursuant to Section 401(c) of ERISA, the DOL is required to issue final
regulations ("401(c) Regulations")
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no later than December 31, 1997 which are to provide guidance for the purpose of
determining, in cases where insurance policies supported by an insurer's general
account are issued to or for the benefit of a Plan on or before December 31,
1998, which general account assets constitute Plan Assets. Section 401(c) of
ERISA generally provides that, until the date which is 18 months after the
401(c) Regulations become final, no person shall be subject to liability under
Part 4 of Title I of ERISA and Section 4975 of the Code on the basis of a claim
that the assets of an insurance company general account constitute Plan Assets,
unless (i) as otherwise provided by the Secretary of Labor in the 401(c)
Regulations to prevent avoidance of the regulations or (ii) an action is brought
by the Secretary of Labor for certain breaches of fiduciary duty which would
also constitute a violation of federal or state criminal law. Any assets of an
insurance company general account which support insurance policies issued to a
Plan after December 31, 1998 or issued to Plans on or before December 31, 1998
for which the insurance company does not comply with the 401(c) Regulations may
be treated as Plan Assets. In addition, because Section 401(c) does not relate
to insurance company separate accounts, separate account assets are still
treated as Plan Assets of any Plan invested in such separate account. Insurance
companies contemplating the investment of general account assets in the Notes
should consult with their legal counsel with respect to the applicability of
Section 401(c) of ERISA, including the general account's ability to continue to
hold the Notes after the date which is 18 months after the date the 401(c)
Regulations become final.
Representation from Plans Investing in Notes with "Substantial Equity Features"
If the related Prospectus Supplement provides that any of the Notes
being issued have "substantial equity features" within the meaning of the DOL
Regulations, transfers of such Notes to a Plan, to a trustee or other person
acting on behalf of any Plan, or to any other person using the assets of any
Plan to effect such acquisition will not be registered by the Indenture Trustee
unless the transferee provides the Company, the Indenture Trustee and the Master
Servicer with an opinion of counsel satisfactory to the Company, the Indenture
Trustee and the Master Servicer, which opinion will not be at the expense of the
Company, the Indenture Trustee or the Master Servicer, that the purchase of such
Notes by or on behalf of such Plan is permissible under applicable law and will
not subject the Company, the Indenture Trustee or the Master Servicer to any
obligation in addition to those undertaken in the Trust Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that (x) the purchase of Notes by or
on behalf of such Plan is permissible under applicable law, will not constitute
or result in any non-exempt prohibited transaction under ERISA or Section 4975
of the Code and will not subject the Company, the Indenture Trustee or the
Master Servicer to any obligation in addition to those undertaken in the Trust
Agreement, and (y) the following statements in at least one of (i) or (ii) is
correct: (i) the transferee is an insurance company and (a) the source of funds
used to purchase such Notes is an "insurance company general account" (as such
term is defined in PTCE 95-60), (b) the conditions set forth in PTCE 95-60 have
been satisfied and (c) there is no Plan with respect to which the amount of such
general account's reserves and liabilities for contracts held by or on behalf of
such Plan and all other Plans maintained by the same employer (or any
"affiliate" thereof, as defined in PTCE 95-60) or by the same employee
organization exceed 10% of the total of all reserves and liabilities of such
general account (as determined under PTCE 95-60) as of the date of the
acquisition of such Notes; or (ii) the transferee is an insurance company and
(a) the source of
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funds used to purchase such Notes is an insurance company general account, (b)
the requirements of Sections 401(c) of ERISA and the DOL Regulations to be
promulgated thereunder have been satisfied and will continue to be satisfied and
(c) the insurance company represents that it understands that the operation of
the general account after December 31, 1998 may affect its ability to continue
to hold the Notes after the date which is 18 months after the 401(c) Regulations
become final and unless an individual exemption, a class exemption issued by the
DOL or an exception under 401(c) of ERISA is then available for the continued
holding of Notes, if the assets of the general account constitute Plan Assets,
it will dispose of the Notes prior to the date which is 18 months after the
401(c) Regulations become final.
Tax Exempt Investors
A Plan that is exempt from federal income taxation pursuant to Section
501 of the Code (a "Tax-Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code.
Consultation with Counsel
There can be no assurance that any DOL exemption will apply with
respect to any particular Plan that acquires the Notes or, even if all the
conditions specified therein were satisfied, that the exemption would apply to
transactions involving the Trust Fund. Prospective Plan investors should consult
with their legal advisors concerning the impact of ERISA and Section 4975 of the
Code and the potential consequences to their specific circumstances prior to
making an investment in the Notes.
Before purchasing a Note in reliance on any DOL exemption or Section
401(c) of ERISA, a fiduciary of a Plan or other Plan Asset investor should
itself confirm that all of the specific and general conditions set forth in such
exemption or Section 401(c) of ERISA would be satisfied. In addition to making
its own determination as to the availability of the exemptive relief provided in
such exemption, a Plan fiduciary should consider its general fiduciary
obligations under ERISA in determining whether to purchase a Note on behalf of a
Plan.
LEGAL INVESTMENT MATTERS
Each class of Notes offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. Unless otherwise specified in
the related Prospectus Supplement, each Class of Notes will evidence an interest
in Trust Assets primarily secured by second or more junior liens, and therefore
will not constitute "mortgage related securities" for purposes of SMMEA.
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their legal advisors to determine whether and to
what extent the Notes constitute legal investments for them.
All depository institutions considering an investment in the Notes
should review the Federal Financial Institutions Examination Council's
Supervisory Policy Statement on the
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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 Trust Assets underlying the Notes
or will be used by the Company for general corporate purposes. The Company
expects that it will make additional sales of securities similar to the Notes
from time to time, but the timing and amount of any such additional offerings
will be dependent upon a number of factors, including the volume of mortgage
loans purchased by the Company, prevailing interest rates, availability of funds
and general market conditions.
METHODS OF DISTRIBUTION
The Notes offered hereby and by the related Prospectus Supplements will
be offered in series through one or more of the methods described below. The
Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the net proceeds to the
Company from such sale.
The Company intends that Notes will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular series of
Notes may be made through a combination of two or more of these methods. Such
methods are as follows:
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1. by negotiated firm commitment or best efforts underwriting and public
re- offering by underwriters;
2. by placements by the Company with institutional investors through
dealers; and
3. by direct placements by the Company with institutional investors.
In addition, if specified in the related Prospectus Supplement, a
series of Notes may be offered in whole or in part to the Seller of the related
Trust Assets (and other assets, if applicable) that would comprise the Pool in
respect of such Notes.
If underwriters are used in a sale of any Notes (other than in
connection with an underwriting on a best efforts basis), such Notes will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at fixed
public offering prices or at varying prices to be determined at the time of sale
or at the time of commitment therefor. Such underwriters may be broker-dealers
affiliated with the Company whose identities and relationships to the Company
will be as set forth in the related Prospectus Supplement. The managing
underwriter or underwriters with respect to the offer and sale of a particular
series of Notes will be set forth on the cover of the Prospectus Supplement
relating to such series and the members of the underwriting syndicate, if any,
will be named in such Prospectus Supplement.
In connection with the sale of the Notes, underwriters may receive
compensation from the Company or from purchasers of the Notes in the form of
discounts, concessions or commissions. Underwriters and dealers participating in
the distribution of the Notes may be deemed to be underwriters in connection
with such Notes, and any discounts or commissions received by them from the
Company and any profit on the resale of Notes by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933, as
amended.
It is anticipated that the underwriting agreement pertaining to the
sale of any series of Notes will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Notes if any are purchased
(other than in connection with an underwriting on a best efforts basis) and
that, in limited circumstances, the Company will indemnify the several
underwriters and the underwriters will indemnify the Company against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended, or will contribute to distribution required to be made in respect
thereof.
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
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"underwriters" within the meaning of the Securities Act of 1933, as amended, in
connection with reoffers and sales by them of Notes. Holders of Notes should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
Certain legal matters, including certain federal income tax matters,
will be passed upon for the Company by Thacher Proffitt & Wood, New York, New
York, or by Orrick, Herrington & Sutcliffe LLP, New York, New York, as specified
in the Prospectus Supplement.
FINANCIAL INFORMATION
The Company has determined that its financial statements are not
material to the offering made hereby. The Notes do not represent an interest in
or an obligation of the Company. The Company's only obligations with respect to
a series of Notes will be to repurchase Trust Assets upon any breach of certain
limited representations and warranties made by the Company, or as otherwise
provided in the applicable Prospectus Supplement.
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Page
INDEX OF PRINCIPAL DEFINITIONS
Page
401(c) Regulations......................................110
Account Balance .......................................26
Accrual Notes ........................................8
Additional Balance.......................................26
Additional Charges.......................................27
Administrator ........................................7
Affiliated Sellers.......................................23
Agreements .......................................67
Audit Guide .......................................66
Bankruptcy Loss .......................................52
Beneficial Owner .......................................39
Book-Entry Notes .......................................39
CEDEL .......................................39
CEDEL Participants.......................................40
CERCLA .......................................90
Certificates ........................................7
Clearance Cooperative....................................40
Closing Date ......................................102
CLTV .......................................24
Code .......................................13
Commission ........................................3
Committee Report ......................................105
Contracts ........................................1
Cooperative .......................................79
Cooperative Loans .......................................22
Cooperative Note .......................................79
Cooperative Notes .......................................22
Credit Enhancer .......................................53
Credit Line Agreements...................................25
Credit Utilization Rate..................................25
Crime Control Act .......................................99
Custodial Account .......................................44
Custodian .......................................42
Defaulted Loan Loss......................................52
Deleted Loan .......................................35
Depositaries .......................................39
Designated Seller ...................................23, 36
Designated Seller Transaction............................23
Determination Date.......................................48
Disqualified Persons....................................109
DOL ......................................109
DOL Regulations ......................................109
Draw .......................................26
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Page
Draw Period .........................26
DTC .........................39
DTC Participants .........................39
Eligible Account .........................45
Eligible Substitute Loan...................35
Environmental Lien.........................90
ERISA .........................13
ERISA Plans ........................108
Euroclear .........................39
Euroclear Operator.........................40
Euroclear Participants.....................40
Event of Default .........................69
Excess Interest .........................55
Excess Spread ......................., 44
Exchange Act ..........................3
Excluded Spread ......................., 44
Extraordinary Losses.......................52
FDIC .........................33
FHA ..........................1
FHA Claims Administration Agreement........17
FHA Claims Administrator...................17
FHA Insurance Amount.......................59
FHA Regulations .........................57
FHA Reserve .........................58
Finance Charge .........................26
Financial Guaranty Insurance Policy........53
Fraud Loss .........................52
FTC Rule .........................91
Funding Account .........................49
Garn-St Germain Act........................92
GMAC Mortgage ..........................1
Gross Margin .........................26
Guide .........................29
High Cost Loans .........................89
Holder-in-Due-Course.......................91
Home Equity Loans ..........................1
Home Equity Program........................29
Home Improvement Contracts..................1
Home Improvements ..........................1
HUD .........................58
Indenture ..........................1
Indenture Trustee ..........................7
Index .........................26
Indirect Participants......................39
Installment Contract.......................96
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Page
Insurance Proceeds................................................45
Insurer ................................................53
Interest Rate .................................................8
IRAs ...............................................108
Issuer .................................................7
Junior Ratio ................................................24
Letter of Credit ................................................54
Letter of Credit Bank.............................................54
Liquidated Loan ................................................64
Liquidation Proceeds..............................................44
Manufactured Homes................................................28
Manufactured Housing Contracts.....................................1
Master Commitments................................................29
Mortgage Notes ................................................22
Mortgage Rate ................................................26
Mortgaged Properties...............................................9
Mortgagor ................................................15
National Housing Act...............................................9
Net Mortgage Rate ................................................73
Nonresidents ...............................................108
Note Registrar ................................................38
Noteholder ................................................38
Notes .................................................1
OID Regulations ...............................................101
Overcollateralization.............................................55
Owner Trustee .................................................7
Ownership Interest................................................23
Participants ................................................39
Parties in Interest..............................................109
Paying Agent ................................................47
Payment Account ................................................45
Payment Date ................................................10
Percentage Interest...............................................47
Permitted Investments.............................................45
Plan Assets ...............................................109
Plans ...............................................109
Pool .................................................1
Private Securities................................................10
PTCE ...............................................110
Purchase Price ................................................35
Qualified Insurer ................................................56
Qualified Retirement Plans.......................................108
Rating Agency ................................................12
Realized Loss ................................................53
Record Date ................................................47
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Page
Registration Statement..............................................3
Relief Act .................................................98
REO Loan .................................................64
Reserve Fund .................................................55
Residential Funding.................................................7
Revolving Credit Loans..............................................1
RICO .................................................99
Securities ..................................................1
Securityholders .................................................43
Sellers .................................................23
Senior/Subordinate Series..........................................38
Servicing Advances.................................................46
Servicing Agreement................................................60
Servicing Default .................................................68
Single Note .................................................50
SMMEA .................................................12
Special Hazard Loss................................................52
Special Purpose Entity.............................................23
Spread Account .................................................55
Stated Principal Balance...........................................53
Strip Note ..................................................8
Subordinate Securities..............................................9
Subservicers .................................................25
Subservicing Account...............................................44
Subservicing Agreement.............................................36
Tax Counsel ................................................101
Tax-Exempt Investor...............................................112
Tax-Favored Plans ................................................108
Terms and Conditions...............................................41
Title I ..................................................9
Title I Contracts ..................................................1
Title I Lenders .................................................57
Title I Loans .................................................57
Title V .............................................95, 97
Title VIII .................................................97
Transfer Report .................................................59
Trust Agreement ..................................................1
Trust Assets ..................................................1
Trust Fund ...............................................1, 7
UBTI ................................................112
UCC .................................................86
Unaffiliated Sellers...............................................23
Unsecured Contract.................................................19
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