REGISTRATION NO. 33-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 Group, Inc.
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, please check the following box. [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
<CAPTION>
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate Amount of
Title of Securities Being to be Registered Price Offering Registration
Registered (2) Per Unit (1) Price (1) Fee (2)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Home Equity Loan $2,000,000,000 100% $2,000,000,000 $606,061
Pass-Through Certificates and
Home Equity Loan-Backed
Notes (Issuable in Series)
- -----------------------------------------------------------------------------------------
</TABLE>
[NY01B:322231.1] 16069-00377 05/28/97 12:40pm
<PAGE>
(1) $826,896,987.57 aggregate principal amount of Home Equity Loan
Pass-Through Certificates and Home Equity Loan-Backed Notes registered
by the Registrant under Registration Statement No. 33-80419 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
and Home Equity Loan-Backed Securities 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
$2,826,896,987.57.
(2) Estimated solely for the purpose of calculating the registration fee.
-----------------------------
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.
Pursuant to Rule 429 of the Securities Act of 1933, the prospectuses
which are part of this Registration Statement are combined prospectuses and
include all the information currently required in the prospectus relating to the
securities covered by Registration Statement No. 33-80419 previously filed by
the Registrant. This Registration Statement which relates to $2,826,896,987.57
aggregate principal amount of Home Equity Loan Pass-Through Certificates and
Home Equity Loan-Backed Notes, constitutes Post-Effective Amendment No.
1 to Registration Statement 33-80419.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement includes (i) a basic prospectus relating to Home
Equity Loan Pass-Through Certificates, (ii) an illustrative form of prospectus
supplement for use in an offering of Home Equity Loan Pass-Through Certificates
with underlying collateral consisting of open-end home equity lines of credit
("Version I-A"), (iii) an illustrative form of prospectus supplement for use in
an offering of Home Equity Loan Pass-Through Certificates with underlying
collateral consisting of closed-end home equity loans ("Version I-B"), (iv) a
basic prospectus relating to Home Equity Loan-Backed Notes and (v) an
illustrative form of prospectus supplement for use in an offering of Home Equity
Loan-Backed Notes with underlying collateral consisting of open-end home equity
lines of credit ("Version I-C").
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<PAGE>
EXHIBIT 24.1
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Christopher J. Nordeen as his true and
lawful attorney-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities (including his capacity as director and/or officer of Residential
Funding Mortgage Securities II, Inc.), to sign any Registration Statement on
Form S-3 and any or all amendments thereto (including post-effective amendments)
of Residential Funding Mortgage Securities II, Inc. under the Securities Act of
1933, as amended, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully and to all intents and purposes as he might or
could do in person, hereby ratifying and confirming that said attorney-in-fact
and agent, or his substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
SIGNATURE
TITLE
DATE
/s/ Dennis W. Sheehan
Director
May 29, 1997
Dennis W. Sheehan
/s/ Bruce J. Paradis
Director
May 29, 1997
Bruce J. Paradis
/s/ Davee L. Olson
Davee L. Olson
Director, Treasurer and
Chief Financial Officer
(Principal Financial
Officer)
May 29, 1997
/s/ Christopher J. Nordeen
Christopher J. Nordeen
President and Chief
Executive Officer
(Principal Executive
Officer)
May 29, 1997
/s/ Jack R. Katzmark
Jack R. Katzmark
Comptroller (Principal
Accounting Officer)
May 29, 1997
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<PAGE>
EXHIBIT 5.1
May 29, 1997
Residential Funding Mortgage Securities II, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Residential Funding Mortgage Securities II, Inc.
Home Equity Loan Pass-Through Certificates
Registration Statement on Form S-3
Ladies and Gentlemen:
We are counsel to Residential Funding Mortgage Securities II,
Inc., a Delaware corporation (the "Registrant"), in connection with the
registration under the Securities Act of 1933, as amended (the "Act"), of Home
Equity Loan Pass-Through Certificates (the "Certificates"), and the related
preparation and filing of a Registration Statement on Form S-3 (the
"Registration Statement"). The Certificates are issuable in series under
separate pooling and servicing agreements (each such agreement, a "Pooling and
Servicing Agreement"), among the Registrant, Residential Funding Corporation as
master servicer and a trustee to be identified in the prospectus supplement for
such series of Certificates. Each Pooling and Servicing Agreement will be
substantially in the respective form filed as an Exhibit to the Registration
Statement.
In connection with rendering this opinion letter, we have
examined the forms of the Pooling and Servicing Agreement contained as Exhibits
in the Registration Statement, the
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<PAGE>
Residential Funding Mortgage Securities II, Inc.
May 29, 1997 Page 2.
Registration Statement and such other documents as we have deemed necessary. As
to matters of fact, we have examined and relied upon representations or
certifications of officers of the Registrant or public officials. In rendering
this opinion letter, except for the matters that are specifically addressed in
the opinions expressed below, we have assumed (i) the authenticity of all
documents submitted to us as originals and the conformity to the originals of
all documents submitted to us as copies, (ii) the necessary entity formation and
continuing existence in the jurisdiction of formation, and the necessary
licensing and qualification in all jurisdictions, of all parties to all
documents, (iii) the authorization, execution, delivery and enforceability of
such documents, and the necessary entity power with respect thereto and (iv)
that there is not and will not be any other agreement that modifies or
supplements the agreements expressed in the documents to which this opinion
letter relates and that renders any of the opinions expressed herein
inconsistent with such documents as so modified or supplemented.
Our opinions set forth below are subject to the qualification
that enforceability of each of the respective obligations of the parties under
any agreement is subject to (i) general principles of equity, regardless of
whether such enforceability is considered in a proceeding in equity or at law,
(ii) the effect of certain laws, regulations and judicial or other decisions
upon the availability and enforceability of certain provisions, covenants or
remedies, including the remedies of specific performance and self-help and
provisions imposing penalties and forfeitures, (iii) bankruptcy, insolvency,
liquidation, receivership, moratorium, reorganization or other similar laws
affecting the rights of creditors and (iv) public policy considerations
underlying the securities laws, to the extent that such public policy
considerations limit the enforceability of the provisions of any agreement which
purport or are construed to provide indemnification with respect to securities
law violations. However, the non-enforceability of any such remedies will not,
taken as a whole, materially interfere with the practical realization of the
benefits of the rights and remedies included in any such agreement, except for
the consequences of any judicial, administrative, procedural or other delay
which may be imposed by, relate to or arise from applicable laws, equitable
principles and interpretations thereof.
In rendering this opinion letter, we to not express any
opinion concerning any law other than the law of the State of New York and the
corporate law of the State of Delaware. We do not express any opinion with
respect to the securities laws of any jurisdiction or any other matter not
specifically addressed below.
Based upon and subject to the foregoing, it is our opinion
that:
1. Upon the authorization, execution and delivery thereof by the parties
thereto, each Pooling and Servicing Agreement will be the legal and valid
obligation of the Registrant, enforceable against the Registrant in accordance
with its terms.
2. Upon the authorization, execution and delivery of a Pooling and
Servicing Agreement for a series of Certificates by the parties thereto, the
execution and authorization of the Certificates of such series in accordance
with the provisions of that Pooling and Servicing
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<PAGE>
Residential Funding Mortgage Securities II, Inc.
May 29, 1997 Page 3.
Agreement and the sale and delivery of such Certificates as contemplated in the
Registration Statement and the prospectus and prospectus supplement delivered in
connection therewith, such Certificates will be legally and validly issued and
outstanding, fully paid and non-assessable and entitled to the benefits of that
Pooling and Servicing Agreement.
3. The description of federal income tax consequences
appearing under the heading "Certain Federal Income Tax Consequences" in the
prospectus relating to the Certificates contained in the Registration Statement,
while not purporting to discuss all possible federal income tax consequences of
an investment in the Certificates, is accurate with respect to those tax
consequences which are discussed.
We hereby consent to the filing of this opinion letter as an
Exhibit to the Registration Statement, and to the use of our name in the
prospectus and prospectus supplement relating to the Certificates included in
the Registration Statement under the heading "Legal Matters", and in the
prospectus relating to the Certificates included in the Registration Statement
under the heading "Certain Federal Income Tax Consequences", without admitting
that we are "experts" within the meaning of the Act and the rules and
regulations thereunder with respect to any part of the Registration Statement,
including this Exhibit.
Very truly yours,
THACHER PROFFITT & WOOD
By
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<PAGE>
EXHIBIT 5.2
May 29, 1997
Residential Funding Mortgage Securities II, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Residential Funding Mortgage Securities II, Inc.
Home Equity Loan-Backed Notes
Registration Statement on Form S-3
Ladies and Gentlemen:
We are counsel to Residential Funding Mortgage Securities II,
Inc., a Delaware corporation (the "Registrant"), in connection with the
registration under the Securities Act of 1933, as amended (the "Act"), of Home
Equity Loan-Backed Notes (the "Notes"), and the related preparation and filing
of a Registration Statement on Form S-3 (the "Registration Statement"). The
Notes are issuable in series under separate indentures (each such agreement, an
"Indenture"), between an issuer (each, an "Issuer") and an indenture trustee,
each to be identified in the prospectus supplement for such series of Notes.
Each Indenture will be substantially in the respective form filed as an Exhibit
to the Registration Statement.
In connection with rendering this opinion letter, we have
examined the form of the Indenture contained as an Exhibit in the Registration
Statement, the Registration Statement and such other documents as we have deemed
necessary. As to matters of fact, we have examined and relied upon
representations or certifications of officers of the Registrant or public
[NY01B:329195.3] 16069-00377 05/28/97 12:49pm
<PAGE>
Residential Funding Mortgage Securities II, Inc.
May 29, 1997 Page 2.
officials. In rendering this opinion letter, except for the matters that are
specifically addressed in the opinions expressed below, we have assumed (i) the
authenticity of all documents submitted to us as originals and the conformity to
the originals of all documents submitted to us as copies, (ii) the necessary
entity formation and continuing existence in the jurisdiction of formation, and
the necessary licensing and qualification in all jurisdictions, of all parties
to all documents, (iii) the authorization, execution, delivery and
enforceability of such documents, and the necessary power with respect thereto,
and (iv) that there is not and will not be any other agreement that modifies or
supplements the agreements expressed in the documents to which this opinion
letter relates and that renders any of the opinions expressed herein
inconsistent with such documents as so modified or supplemented.
Our opinions set forth below are subject to the qualification
that enforceability of each of the respective obligations of the parties under
any agreement is subject to (i) general principles of equity, regardless of
whether such enforceability is considered in a proceeding in equity or at law,
(ii) the effect of certain laws, regulations and judicial or other decisions
upon the availability and enforceability of certain provisions, covenants or
remedies, including the remedies of specific performance and self-help and
provisions imposing penalties and forfeitures, (iii) bankruptcy, insolvency,
liquidation, receivership, moratorium, reorganization or other similar laws
affecting the rights of creditors and (iv) public policy considerations
underlying the securities laws, to the extent that such public policy
considerations limit the enforceability of the provisions of any agreement which
purport or are construed to provide indemnification with respect to securities
law violations. However, the non-enforceability of any such remedies will not,
taken as a whole, materially interfere with the practical realization of the
benefits of the rights and remedies included in any such agreement, except for
the consequences of any judicial, administrative, procedural or other delay
which may be imposed by, relate to or arise from applicable laws, equitable
principles and interpretations thereof.
In rendering this opinion letter, we to not express any
opinion concerning any law other than the law of the State of New York and the
corporate law of the State of Delaware. We do not express any opinion with
respect to the securities laws of any jurisdiction or any other matter not
specifically addressed below.
Based upon and subject to the foregoing, it is our opinion
that:
1. Upon the authorization, execution and delivery thereof by
the parties thereto, each Indenture will be the legal and valid obligation of
the applicable Issuer, enforceable against such Issuer in accordance with its
terms.
2. Upon the authorization, execution and delivery of an Indenture for a
series of Notes by the parties thereto, the execution and authentication of the
Notes of such series in accordance with the provisions of that Indenture and the
sale and delivery of such Notes as
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<PAGE>
Residential Funding Mortgage Securities II, Inc.
May 29, 1997 Page 3.
contemplated in the Registration Statement and the prospectus and prospectus
supplement delivered in connection therewith, such Notes will be legally and
validly issued and outstanding, fully paid and non-assessable, the binding
obligations of the applicable issuer and entitled to the benefits of that
Indenture.
3. The description of federal income tax consequences
appearing under the heading "Certain Federal Income Tax Consequences" in the
prospectus relating to the Notes contained in the Registration Statement, while
not purporting to discuss all possible federal income tax consequences of an
investment in the Notes, is accurate with respect to those tax consequences
which are discussed.
We hereby consent to the filing of this opinion letter as an
Exhibit to the Registration Statement, and to the use of our name in the
prospectus and prospectus supplement relating to the Notes included in the
Registration Statement under the heading "Legal Matters", and in the prospectus
relating to the Notes included in the Registration Statement under the heading
"Certain Federal Income Tax Consequences", without admitting that we are
"experts" within the meaning of the Act and the rules and regulations thereunder
with respect to any part of the Registration Statement, including this Exhibit.
Very truly yours,
THACHER PROFFITT & WOOD
By
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<PAGE>
EXHIBIT 5.3
May 29, 1997
Residential Funding Mortgage Securities II, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
S-3, to be filed by Residential Funding Mortgage Securities II, Inc., a Delaware
corporation (the "Registrant"), with the Securities and Exchange Commission on
May 29, 1997 (the "Registration Statement"), in connection with the registration
under the Securities Act of 1933, as amended (the "Act"), of Asset-Backed Notes
(the "Notes") and Home Equity Loan Pass-Through Certificates (the
"Certificates," and together with the Notes, the "Securities"). The Securities
are issuable in series (each, a "Series") under a separate Trust (each, a
"Trust"). The Securities of each Trust will be issued pursuant to documentation
more particularly described in the prospectus and the prospectus supplement
relating to such Series, forms of which have been included as part of the
Registration Statement (the "Issuing Documentation"). The Securities of each
Series are to be sold as set forth in the Registration Statement, any amendment
thereto, and the prospectus and prospectus supplement relating to such Series.
We have examined such instruments, documents and records as we deemed
relevant and necessary as a basis of our opinion hereinafter expressed. In such
examination, we have assumed the following: (a) the authenticity of original
documents and the genuineness of all signatures; (b) the conformity to the
originals of all documents submitted to us as copies; and (c) the truth,
accuracy and completeness of the information, representations and warranties
contained in the records, documents, instruments and certificates we have
reviewed.
Based on such examination, we are of the opinion that when the issuance
of each Series of Securities has been duly authorized by appropriate corporate
action and the Securities of such Series have been duly executed, authenticated
and delivered in accordance with the Issuing Documentation relating to such
Series and sold, the Securities will be legally issued, fully paid and
non-assessable and binding obligations of the Trust and the holders of
<PAGE>
Residential Funding Mortgage Securities II, Inc.
May 29, 1997
Page 2
the Securities will be entitled to the benefits of the related Issuing
Documentation except as enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance,
moratorium, or other laws relating to or affecting the rights of creditors
generally and general principles of equity, including without limitation,
concepts of materiality, reasonableness, good faith and fair dealing, and the
possible unavailability of specific performance or injunctive relief, regardless
of whether such enforceability is considered in a proceeding in equity or at
law.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever appearing in the
Registration Statement and each prospectus contained therein. In giving such
consent, we do not consider that we are "experts," within the meaning of the
term as used in the Act or the rules and regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, including
this opinion as an exhibit or otherwise.
Very truly yours,
/s/Orrick, Herrington & Sutcliffe LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP
<PAGE>
EXHIBIT 8.3
May 29, 1997
Residential Funding Mortgage Securities II, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Ladies and Gentlemen:
We have advised Residential Funding Mortgage Securities II, Inc. (the
"Registrant") with respect to certain federal income tax aspects of the issuance
by the Registrant of its Home Equity Loan Pass-Through Certificates (the
"Certificates") and Asset-Backed Notes (the "Notes," and together with the
Certificates, the "Securities"), each issuable in series (each, a "Series").
Such advice conforms to the description of selected federal income tax
consequences to holders of the Securities that appears under the heading
"Certain Federal Income Tax Consequences" in each of the prospectuses relating
to such Securities (each, a "Prospectus") forming a part of the Registration
Statement on Form S-3 as prepared for filing by the Registrant with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Act"), on May 29, 1997 (the "Registration Statement"). Such description
does not purport to discuss all possible income tax ramifications of the
proposed issuance, but with respect to those tax consequences which are
discussed, in our opinion the description is accurate in all material respects.
This opinion is based on the facts and circumstances set forth in each
Prospectus and in the other documents reviewed by us. Our opinion as to the
matters set forth herein could change with respect to a particular Series of
Securities as a result of changes in facts and circumstances, changes in the
terms of the documents reviewed by us, or changes in the law subsequent to the
date hereof. As the Registration Statement contemplates Series of Securities
with numerous different characteristics, the particular characteristics of each
Series of Securities must be considered in determining the applicability of this
opinion to a particular Series of Securities.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever appearing in the
Registration Statement and each Prospectus contained therein. In giving such
consent, we do not consider that we are "experts," within the meaning of the
term as used in the Act or the rules and regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, (including
this opinion) as an exhibit or otherwise.
Very truly yours,
/s/Orrick, Herrington & Sutcliffe LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP
<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.....$ 606,060.61(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....................................$ 4,626,060.61
=================
(1) $690,004.83 was the aggregate amount of the filing fees paid by the
Registrant under Registration Statement No. 33-80419 and 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 $1,296,065.44 and $5,316,065.44,
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
[NY01B:329317.1] 16069-00377 05/28/97 12:39pm
<PAGE>
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 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
[NY01B:329317.1] 16069-00377 05/28/97 12:39pm
-2-
<PAGE>
Servicing Agreements and related Securities other than such expenses related to
particular Mortgage Loans.
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
[NY01B:329317.1] 16069-00377 05/28/97 12:39pm
-3-
<PAGE>
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 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).
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<PAGE>
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.
10.1Form of Mortgage Loan Purchase Agreement.*
23.1Consent of Thacher Proffitt & Wood relating to the
Home Equity Loan Pass-Through Certificates (included
as part of Exhibit 5.1).
23.2Consent of Thacher Proffitt & Wood relating to the
Home Equity Loan-Backed Notes (included as part of
Exhibit 5.2).
23.3Consent 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).
24.1Power of Attorney.
* Incorporated by reference from the 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
[NY01B:329317.1] 16069-00377 05/28/97 12:39pm
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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
Securities Act of 1933, as amended, 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,
Residential Funding Mortgage Securities II, Inc. certifies that it has
reasonable grounds to believe that it meets all of the requirements for filing
on Form S-3, 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 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on May 29, 1997.
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
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
* Director May 29, 1997
- -----------------------------------
Dennis W. Sheehan
* Director May 29, 1997
- -----------------------------------
Bruce J. Paradis
* Director, Treasurer and May 29, 1997
- -----------------------------------
Davee L. Olson Chief Financial Officer
(Principal Financial
Officer)
* President and Chief Executive May 29, 1997
- -----------------------------------
Christopher J. Nordeen Officer (Principal Executive
Officer)
* Controller (Principal May 29, 1997
- -----------------------------------
Jack R. Katzmark Accounting Officer)
*By:/s/ Christopher J. Nordeen
Christopher J. Nordeen
Attorney-in-fact pursuant to a power of attorney filed with the Registration
Statement.
<PAGE>
CERTIFICATION PURSUANT TO INSTRUCTION 3
Pursuant to the requirements of the Securities Act of 1933,
Residential Funding Mortgage Securities II, Inc. 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.
RESIDENTIAL FUNDING MORTGAGE
SECURITIES II, INC.
By: /s/ Christopher J. Nordeen
Christopher J. Nordeen
President
<PAGE>
EXHIBIT INDEX
Location of Exhibit
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).
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. 33-80419).
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<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 May 29, 1997)
Home Equity Loan Pass-Through Certificates
Residential Funding Mortgage Securities II, Inc.
Depositor
The Home Equity Loan Pass-Through Certificates (the "Certificates") offered
hereby may be sold from time to time in series, as described in the related
Prospectus Supplement. Each series of Certificates will represent in the
aggregate the entire beneficial ownership interest, excluding any interest
retained by Residential Funding Mortgage Securities II, Inc. (the "Company") or
any other entity specified in the related Prospectus Supplement, in a trust fund
consisting primarily of a segregated pool of one- to four-family, first or
junior lien home equity mortgage loans (the "Mortgage Loans"), including home
equity revolving lines of credit ("Revolving Credit Loans") or loans where the
principal amount is advanced in full at origination ("Closed-End Loans"), or
certain balances thereof or interests therein (which may include Mortgage
Securities, as defined herein), acquired by the Company from one or more
affiliated or unaffiliated institutions. See "The Mortgage Pools." See "Index of
Principal Definitions" for the meanings of capitalized terms and acronyms.
The Mortgage Loans and certain other assets described herein under "The Mortgage
Pools" and in the related Prospectus Supplement will be held in trust
(collectively, a "Trust Fund") for the benefit of the holders of the related
series of Certificates and the Excess Spread, if any, pursuant to a Pooling and
Servicing Agreement as described herein under "The Mortgage Pools." Each
Mortgage Pool will consist of one or more types of Mortgage Loans described
under "The Mortgage Pools." Information regarding each class of Certificates of
a series, and the general characteristics of the Mortgage Loans to be evidenced
by such Certificates, will be set forth in the related Prospectus Supplement.
Each series of Certificates will include one or more classes. Each class of
Certificates 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 the
Certificates or other interests in the related Trust Fund, to receive a
specified portion of payments of principal or interest (or both) on the Mortgage
Loans in the related Trust Fund in the manner described herein and in the
related Prospectus Supplement. See "Description of the
Certificates--Distributions." A series may include one or more classes of
Certificates entitled to principal distributions, with disproportionate, nominal
or no interest distributions, or to interest distributions, with
disproportionate, nominal or no principal distributions. A series may include
two or more classes of Certificates which differ as to the timing, sequential
order, priority of payment, pass-through rate or amount of distributions of
principal or interest or both.
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Certificates 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), surety
bond 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 Certificates entitled to a
portion of principal payments on the Mortgage Loans in the Mortgage Pool 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 or terminations, liquidations and repurchases) on the Mortgage Loans
and other assets in the Trust Fund and the rate and timing of Draws in the case
of Revolving Credit Loans. A rate of principal payment lower or higher than that
anticipated may affect the yield on each class of Certificates 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
Certificates, see "Risk Factors," which begins on page __.
One or more separate elections may be made to treat a Trust Fund as a "real
estate mortgage investment conduit" (a "REMIC") for federal income tax purposes.
The Prospectus Supplement for a series of Certificates will specify which class
or classes of the related series of Certificates will be considered to be
regular interests in the related REMIC and which class of Certificates or other
interests will be designated as the residual interest in the related REMIC, if
applicable. See "Certain Federal Income Tax Consequences."
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
CERTIFICATES. THE CERTIFICATES 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 CERTIFICATES NOR THE UNDERLYING MORTGAGE
LOANS OR MORTGAGE SECURITIES WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, RESIDENTIAL FUNDING, GMAC MORTGAGE
OR ANY OF THEIR AFFILIATES, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE
RELATED PROSPECTUS SUPPLEMENT. NONE OF SUCH ENTITIES WILL HAVE ANY OBLIGATIONS
IN RESPECT OF THE CERTIFICATES, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE
RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES 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.
<PAGE>
Offers of the Certificates 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 Certificates prior to the
offering thereof. There can be no assurance that a secondary market for any of
the Certificates will develop or, if it does develop, that it will continue. The
Certificates will not be listed on any securities exchange.
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of securities offered hereby unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is _____________, 1997.
<PAGE>
-3-
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 Certificates (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, at prescribed rates 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 CERTIFICATEHOLDERS
Monthly reports that contain information concerning the Trust Fund for
a series of Certificates will be sent by the Master Servicer or the Trustee, to
each holder of record of the Certificates of the related series. See
"Description of the Certificates--Reports to Certificateholders." Any reports
forwarded to holders will contain financial information that has not been
examined nor reported upon by an independent certified public accountant. The
Company will file with the Commission such periodic reports with respect to the
Trust Fund for a series of Certificates 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 Certificates 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 Certificates, that relate specifically
to such related series of Certificates. 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 Certificates, 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 Certificates, 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 600, Minneapolis,
Minnesota 55437, or by telephone at (612) 832-7000.
<PAGE>
-4-
No dealer, salesman, or any other person has been authorized to give
any information, or to make any representations, other than those contained in
this Prospectus or the related Prospectus Supplement and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any dealer, salesman, or any other person. Neither the
delivery of this Prospectus or the related Prospectus Supplement nor any sale
made hereunder or thereunder shall under any circumstances create an implication
that there has been no change in the information herein or therein since the
date hereof. This Prospectus and the related Prospectus Supplement are not an
offer to sell or a solicitation of an offer to buy any security in any
jurisdiction in which it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
ADDITIONAL INFORMATION................................................... 3
REPORTS TO CERTIFICATEHOLDERS............................................ 3
INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE................................................................ 3
SUMMARY OF PROSPECTUS.................................................... 5
RISK FACTORS............................................................. 14
Special Features of the Mortgage Loans.......................... 14
Limitations, Reduction and Substitution of
Credit Enhancement.............................................. 17
Yield and Prepayment Considerations............................. 18
Limited Liquidity............................................... 19
Limited Obligations............................................. 19
THE MORTGAGE POOLS....................................................... 20
General......................................................... 20
Closed-End Loans................................................ 25
Revolving Credit Loans.......................................... 27
ALLOCATION OF REVOLVING CREDIT LOAN
BALANCES................................................................. 29
MORTGAGE LOAN PROGRAM.................................................... 30
Underwriting Standards.......................................... 30
Qualifications of Sellers....................................... 34
Representations Relating to Mortgage Loans...................... 35
Subservicing.................................................... 39
DESCRIPTION OF THE CERTIFICATES.......................................... 41
General......................................................... 41
Form of Certificates............................................ 42
Assignment of Trust Fund Assets................................. 45
Review of Mortgage Loans........................................ 46
Excess Spread................................................... 47
Payments on Mortgage Loans; Deposits to
Certificate Account............................................. 48
Withdrawals from the Custodial Account.......................... 50
Distributions................................................... 51
Principal and Interest on the Certificates...................... 52
Advances on Closed-End Loans.................................... 53
Funding Account................................................. 54
Reports to Certificateholders................................... 55
Collection and Other Servicing Procedures....................... 57
Realization Upon Defaulted Mortgage Loans....................... 58
Hazard Insurance; Claims Thereunder............................. 60
DESCRIPTION OF CREDIT ENHANCEMENT........................................ 61
Financial Guaranty Insurance Policy............................. 63
Letter of Credit................................................ 64
Special Hazard Insurance Policies............................... 64
Bankruptcy Bonds................................................ 64
Subordination................................................... 65
Overcollateralization........................................... 66
Reserve Funds................................................... 67
Maintenance of Credit Enhancement............................... 68
Reduction or Substitution of Credit
Enhancement..................................................... 69
PURCHASE OBLIGATIONS..................................................... 69
THE COMPANY.............................................................. 70
RESIDENTIAL FUNDING CORPORATION.......................................... 70
THE POOLING AND SERVICING AGREEMENT...................................... 71
Servicing and Administration.................................... 71
Evidence as to Compliance....................................... 72
Certain Matters Regarding the Master Servicer
and the Company................................................. 72
Events of Default............................................... 74
Rights Upon Event of Default.................................... 74
Amendment....................................................... 75
Termination; Retirement of Certificates......................... 76
The Trustee..................................................... 77
YIELD AND PREPAYMENT CONSIDERATIONS...................................... 77
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
AND RELATED MATTERS...................................................... 84
General......................................................... 85
Cooperative Loans............................................... 85
Tax Aspects of Cooperative Ownership............................ 87
Foreclosure on Mortgage Loans................................... 87
Foreclosure on Shares of Cooperatives........................... 89
Rights of Redemption............................................ 90
Anti-Deficiency Legislation and Other
Limitations on Lenders.......................................... 91
Environmental Legislation....................................... 93
Enforceability of Certain Provisions............................ 94
Applicability of Usury Laws..................................... 95
Alternative Mortgage Instruments................................ 96
Soldiers' and Sailors' Civil Relief Act of 1940
............................................................... 96
Junior Mortgages; Rights of Senior
Mortgagees...................................................... 97
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES............................................................. 99
General......................................................... 99
REMICS..........................................................100
STATE AND OTHER TAX CONSEQUENCES.........................................121
ERISA CONSIDERATIONS.....................................................121
Plan Asset Regulations..........................................122
Prohibited Transaction Exemptions...............................123
Tax Exempt Investors............................................128
Consultation with Counsel.......................................128
LEGAL INVESTMENT MATTERS.................................................128
USE OF PROCEEDS..........................................................129
METHODS OF DISTRIBUTION..................................................129
LEGAL MATTERS............................................................131
FINANCIAL INFORMATION....................................................131
INDEX OF PRINCIPAL DEFINITIONS...........................................132
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 Certificates contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of such series. Capitalized terms used in this summary that are not
otherwise defined shall have the meanings ascribed thereto in this Prospectus.
An index indicating where certain terms used herein are defined appears at the
end of this Prospectus.
Securities Offered......Home Equity Loan Pass-Through Certificates.
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 "The
Pooling and Servicing Agreement--Certain Mat-
ters Regarding the Master Servicer and the Com-
pany."
Certificate Administrator.. An entity may be named as the Certificate
Administrator in the
related Prospectus
Supplement if required
in addition to or in
lieu of the Master
Servicer or Servicer for
a series of
Certificates.
Trustee.................... The trustee (the "Trustee") for each series of
Certificates will be specified in the related
Prospectus Supplement.
The Certificates........... Each series of Certificates will represent in the
aggregate the entire beneficial ownership interest,
excluding any interest retained by the Company
or any other entity specified in the related
Prospectus Supplement, in a pool (the "Mortgage
Pool") of certain Mortgage Loans or interests
therein (which may include Mortgage Securities
as defined herein), and certain other assets as
described below. Each series of Certificates will
be issued pursuant to a pooling and servicing
agreement among the Company, the Trustee and
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<PAGE>
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the Master Servicer
(each, a "Pooling and
Servicing Agreement").
As specified in the
related Prospectus
Supplement, each series
of Certificates, or
class of Certificates 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
distributions of
interest based on a
specified interest rate
or rates (each, a
"Pass-Through Rate").
Each series or class of
Certificates may have a
different Pass-Through
Rate, which may be a
fixed, variable or
adjustable Pass-Through
Rate, or any combination
of two or more of such
Pass-Through Rates. The
related Prospectus
Supplement will specify
the Pass-Through Rate or
Rates for each series or
class of Certificates,
or the initial
Pass-Through Rate or
Rates and the method for
determining subsequent
changes to the
Pass-Through Rate or
Rates.
.............. A series may include one or more classes of
Certificates (each, a "Strip Certificate") entitled
to (i) principal distributions, with dispropor-
tionate, nominal or no interest distributions, or
(ii) interest distributions, with disproportionate,
nominal or no principal distributions. In
addition, a series may include classes of Certifi-
cates that differ as to
timing, sequential
order, priority of
payment, Pass-Through
Rate or amount of
distributions of
principal or interest or
both, or as to which
distributions of
principal or interest or
both on any class may be
made upon the occurrence
of specified events, in
accordance with a
schedule or formula, or
on the basis of
collections from
designated portions of
the Mortgage Pool. In
addition, a series may
include one or more
classes of Certificates
("Accrual Certificates")
as to which certain
accrued interest will
not be distributed but
rather will be added to
the principal balance
thereof in the manner
described in the related
Prospectus Supplement.
One or more classes of
Certificates in a series
may be entitled to
receive principal
payments pursuant to an
amortization schedule
under the
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circumstances described in the related Prospectus
Supplement.
..................... If so specified in the related Prospectus
Supplement, a series of Certificates may include
one or more classes of Certificates (collectively,
the "Senior Certificates") which are senior to
one or more classes of Certificates (collectively,
the "Subordinate Certificates") in respect of
certain distributions of principal and interest and
allocations of losses on Mortgage Loans. See
"Description of Credit Enhancement
--Subordination." If so specified in the related
Prospectus Supplement, a series of Certificates
may include one or more classes of Certificates
(collectively, the "Mezzanine Certificates")
which are Subordinate Certificates but which are
senior to other classes of Subordinate Certificates
in respect of such distributions or losses. In
addition, certain classes of Senior Certificates
may be senior to other classes of Senior
Certificates in respect of such distributions or
losses. The Certificates 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
Certificates."
..................... Neither the Certificates nor the underlying
Mortgage Loans or Mortgage Securities will be
guaranteed or insured by any governmental
agency or instrumentality or by the Company,
Residential Funding, GMAC Mortgage or any of
their affiliates, except as expressly set forth
herein or in the related Prospectus Supplement.
See "Risk Factors--Limited Obligations."
The Mortgage Pools... As specified in the related Prospectus
Supplement, each Trust Fund will consist
primarily of Revolving Credit Loans or certain
balances thereof or interests therein, or Closed-
End Loans or interests therein, secured by first or
junior liens on one- to four-family residential
properties located in any one of the 50 states, the
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District of Columbia or
the Commonwealth of
Puerto Rico (the
"Mortgaged Properties").
All Mortgage Loans will
have been purchased by
the Company, either
directly or through
Residential Funding,
from mortgage loan
originators or sellers
who, as specified in the
related Prospectus
Supplement, may or may
not be affiliated with
the Company including
GMAC Mortgage
Corporation, Residential
Money Centers, Inc. and
HomeComings Financial
Network, Inc. (each
affiliates of the
Company). See "Mortgage
Loan Program." For a
description of the types
of Mortgage Loans that
may be included in the
Mortgage Pools, see "The
Mortgage Pools--The
Closed-End Loans."
................With respect to any series of Certificates backed
by Revolving Credit Loans, the related Trust
Fund may include the entire balance of such loans
including Draws made after the Cut-off Date, or
may include only the Trust Balances (as defined
herein) thereof which generally will exclude
Draws made after the Cut-off Date and may
exclude Draws made prior to the Cut-off Date.
See "Allocation of Revolving Credit Loan
Balances" herein.
................If specified in the related Prospectus Supplement,
a Trust Fund may include mortgage pass-through
certificates or other instruments evidencing
interests in or secured by Mortgage Loans
("Mortgage Securities"), as described herein.
See "The Mortgage Pools--General" herein.
Interest Distributions....Except as otherwise specified herein or in the
related Prospectus Supplement, interest on each
class of Certificates of each series, other than
Strip Certificates or Accrual Certificates (prior to
the time when accrued interest becomes payable
thereon), will be remitted at the applicable
Pass-Through Rate on the outstanding principal
balance of such class, on the day specified as a
distribution date for such series or class in the
related Prospectus Supplement (each, a
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"Distribution Date"). If
the Prospectus
Supplement so specifies,
interest distributions
on any class of
Certificates may be
reduced on account of
negative amortization on
the Mortgage Loans, with
the Deferred Interest
(as defined herein)
allocable to such class
added to the principal
balance thereof, which
Deferred Interest will
thereafter bear interest
at the applicable
Pass-Through Rate.
Distributions, if any,
with respect to interest
on Strip Certificates
will be made on each
Distribution Date as
described herein and in
the related Prospectus
Supplement. See
"Description of the
Certificates--Distributions."
Strip Certificates that
are entitled to
distributions of
principal only will not
receive distributions in
respect of interest.
Interest that has
accrued but is not yet
payable on any Accrual
Certificates will be
added to the principal
balance of such class on
the related Distribution
Date, and will
thereafter bear interest
at the applicable
Pass-Through Rate.
Distributions of
interest with respect to
any series of
Certificates (or
accruals thereof in the
case of Accrual
Certificates), or with
respect to one or more
classes included
therein, may be reduced
to the extent of
interest shortfalls not
covered by principal and
interest advances or the
applicable form of
credit support,
including shortfalls
("Prepayment Interest
Shortfalls") in
collections of a full
month's interest in
connection with
prepayments on
Closed-End Loans which
are Actuarial Mortgage
Loans (as defined
herein). See "Yield and
Prepayment
Considerations" and
"Description of the
Certificates."
Principal Distributions..Except as otherwise specified in the related
Prospectus Supplement, principal distributions on
the Certificates of each series will be payable on
each Distribution Date, commencing with the
Distribution Date in the month following the
month in which the Cut-off Date occurs, to the
holders of the Certificates of such series, or of the
class or classes of Certificates then entitled there-
to, on a pro rata basis among all such Certificates
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<PAGE>
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or among the
Certificates 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
Certificates with no
principal balance will
not receive
distributions in respect
of principal.
Distributions of
principal with respect
to any class of
Certificates may be
reduced to the extent of
certain delinquencies
not covered by principal
advances or losses not
covered by the
applicable form of
credit enhancement. For
a series of Certificates
backed by Revolving
Credit Loans, as a
result of the payment
terms of the Mortgage
Loans or of the
Certificate provisions
relating to future
Draws, there may be no
principal distributions
on such Certificates in
any given month. See
"The Mortgage Pools,"
"Yield and Prepayment
Considerations" and
"Description of the
Certificates."
Funding Account....... If so specified in the related Prospectus
Supplement, a portion of the proceeds of the sale
of one or more classes of Certificates of a series
or a portion of collections on the Mortgage Loans
in respect of principal may be deposited in a
segregated account to be applied to acquire
additional Mortgage Loans from the Sellers,
subject to the limitations set forth herein under
"Description of the Certificates-Funding
Account." The times and requirements for the
acquisition of such Mortgage Loans will be set
forth in the related Pooling and Servicing
Agreement or other agreement with the Sellers.
Monies on deposit in the Funding Account and
not applied to acquire such additional Mortgage
Loans within the time set forth in the related
Pooling and Servicing 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 Mortgage Loans supporting a series
of Certificates will have unique characteristics that
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<PAGE>
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will affect the yield to
maturity and the rate of
payment of principal on
such Certificates. 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 Certificates may include any one or any
combination of a Letter of Credit, Financial
Guaranty Insurance Policy, special hazard
insurance policy, bankruptcy bond, Reserve
Fund, surety bond or other type of credit support
to provide full or partial coverage for certain
defaults and losses relating to the Mortgage
Loans. Credit support also may be provided in
the form of subordination of one or more classes
of Certificates in a series under which certain
losses are first allocated to any Subordinate
Certificates 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 Certificates (or certain
classes thereof). To the extent not set forth
herein, the amount and types of coverage, the
identification of any entity providing the
coverage, the terms of any subordination and
related information will be set forth in the
Prospectus Supplement relating to a series of
Certificates. See "Description of Credit
Enhancement."
Advances on
Closed-End Loans.....If so specified in the related Prospectus
Supplement, the Master Servicer will be obligated
(pursuant to the terms of the related Mortgage
Securities, if applicable) to make certain principal
and interest advances with respect to delinquent
scheduled payments on the Closed-End Loans,
but only to the extent that the Master Servicer
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believes that such
amounts will be
recoverable by it. Any
such advance made by the
Master Servicer with
respect to a Mortgage
Loan is recoverable by
it as provided herein
under "Description of
the
Certificates--Advances
on Closed-End Loans"
either from recoveries
on the specific Mortgage
Loan or, with respect to
any such advance
subsequently determined
to be nonrecoverable,
out of funds otherwise
distributable to the
holders of the related
series of Certificates.
Optional Termination... The Master Servicer, the Company or, if
specified in the related Prospectus Supplement,
the holder of the residual interest in a REMIC,
may at its option either (i) effect early retirement
of a series of Certificates through the purchase of
the assets in the related Trust Fund or (ii)
purchase, in whole but not in part, the
Certificates specified in the related Prospectus
Supplement; in each case under the circumstances
and in the manner set forth herein under "The
Pooling and Servicing Agreement--Termination;
Retirement of Certificates" and in the related
Prospectus Supplement.
Rating...................... At the date of issuance, as to each series, each
class of Certificates 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 Certificates offered
hereby will not constitute "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"). See "Legal Investment
Matters."
ERISA Considerations........ A fiduciary of an employee benefit plan and
certain other plans and arrangements, including
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<PAGE>
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individual retirement
accounts and annuities,
Keogh plans, 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 Certificate with Plan
Assets (as defined
herein), should review
with its legal counsel
whether the purchase or
holding of Certificates
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.......... Certificates of each series offered hereby will
constitute "regular interests" or "residual
interests" in a Trust Fund, or a portion thereof,
treated as a REMIC under Sections 860A through
860G of the Code, unless otherwise specified in
the related Prospectus Supplement. See "Certain
Federal Income Tax Consequences" herein and in
the related Prospectus Supplement.
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<PAGE>
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Certificates:
Special Features of the Mortgage Loans
Adequacy of Mortgage Collateral
Although all of the Mortgage Loans will be secured by liens on
Mortgaged Properties, such collateral may not provide assurance of repayment of
the Mortgage Loan comparable to that provided under many first lien lending
programs, and the Mortgage Loans (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 Mortgage Loans are interests in Revolving Credit Loans or
Closed-End Loans which 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 Mortgage Loans secured by junior mortgages only
to the extent that the claims of such senior mortgages have been satisfied in
full, including any related foreclosure costs. For Mortgage Loans secured by
junior liens that have low Junior Ratios (as defined herein), foreclosure costs
may be substantial relative to the outstanding balance of the Mortgage Loan upon
default, and therefore the amount of any liquidation proceeds distributable to
Certificateholders may be smaller as a percentage of the outstanding balance of
the Mortgage Loan than would be the case in a typical pool of first lien
residential loans. In addition, the holder of a Revolving Credit Loan or
Closed-End 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 the Mortgage
Loan in the aggregate, the Trust Fund, as the holder of the junior lien, and,
accordingly, Holders of one or more classes of the Certificates 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 Mortgage Loans and
Related Matters."
No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in value (including as a result
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<PAGE>
-14-
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 Mortgage Loans secured by junior liens that have high
Combined Loan-to-Value Ratios 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 Mortgage Loan at any time may be
lower than indicated in the Prospectus Supplement as a result of any reductions
in the Stated Principal Balance thereof. In addition, the actual Combined
Loan-to-Value Ratio for a Mortgage Loan at any time may be higher than indicated
in the Prospectus Supplement if such Mortgage Loan is subject to negative
amortization or the value of the Mortgaged Property declines after the date of
origination. In such circumstances, repayment of the Mortgage Loan would be
dependent solely on the credit of the borrower under the Mortgage Loan (the
"Mortgagor"), and the ability to obtain repayment of the Mortgage Loan may be
generally similar to that which would be experienced if the Mortgage Loan were
an unsecured consumer loan. Moreover, while in most jurisdictions a mortgagee
would be permitted to elect to either foreclose or sue to collect the debt
evidenced by the Mortgage Note, in some jurisdictions that prohibit suits to
collect the debt until the mortgagee has sought to foreclose against the
security, the mortgagee may be forced to foreclose first and obtain a deficiency
judgment. In addition, in some jurisdictions, where the mortgagee has chosen to
sue on the debt in lieu of foreclosure, the mortgagee will be barred from
foreclosing against the security. See "--Anti-Deficiency Legislation and other
Limitations on Lenders."
Mortgagor Credit
As a result of the foregoing considerations, for certain types of
Mortgage Loans, 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 Mortgage Loans, future changes in the Mortgagor's
economic circumstances will have a significant effect on the likelihood of
repayment. This is particularly so with respect to Revolving Credit Loans, since
additional Draws may be made by the Mortgagor in the future up to the applicable
Credit Limit. Although 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. For a series of
Certificates backed by the Trust Balances of Revolving Credit Loans, even though
the Trust Balance of a Revolving Credit Loan will not increase as a result of
Draws after the Certificates are issued, the foregoing considerations are
relevant because such Trust Balance will share pro rata in any losses incurred
on such Revolving Credit Loan unless otherwise specified in the related
Prospectus Supplement.
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<PAGE>
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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, on Closed-End Loans having adjustable
rates or other similar debt of the Mortgagor. In addition, for any Revolving
Credit Loans or Closed-End Loans secured by junior mortgages, changes in the
payment terms of any related senior mortgage loan may adversely affect the
Mortgagor's ability to pay principal and interest on such senior mortgage loan.
For example, such changes may result if the senior mortgage loan is an
adjustable rate loan and the interest rate thereon increases, which may occur
with or without an increase in prevailing market interest rates if the increase
is due to the phasing out of a reduced initial rate. Specific information about
such senior mortgage loans, other than the amount thereof at origination of the
corresponding Mortgage Loan, generally will not be available and will not be
included in the related Prospectus Supplement.
General economic conditions, both on a national and regional basis,
will also have an impact on the ability of Mortgagors to repay their Mortgage
Loans. Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency than will be
experienced on mortgage loans generally. For example, a region's economic
condition and housing market may be directly, or indirectly, adversely affected
by natural disasters or civil disturbances such as earthquakes, hurricanes,
floods, eruptions or riots. The economic impact of any of these types of events
may also be felt in areas beyond the region immediately affected by the disaster
or disturbance. The Mortgage Loans underlying a series of Certificates may be
concentrated in these regions, and such concentration may present risk
considerations in addition to those generally present for similar
mortgage-backed securities without such concentration. Any change in the
deductibility for federal income tax purposes of interest payments on home
equity loans may also have an impact on the ability of Mortgagors to repay the
Mortgage Loans.
Mortgage Loan Characteristics
Certain of the types of Mortgage Loans that may be included in the
Mortgage Pools may involve additional uncertainties not present in traditional
types of mortgage loans, or in home equity loans originated under other
programs.
For example, certain of the Closed-End Loans may provide for escalating
or variable payments by the Mortgagor, as to which the Mortgagor is generally
qualified on the basis of the initial payment amount, or may be ARM Loans with
an initial Mortgage Rate less than the sum of the then-applicable Index and
Gross Margin, as to which the Mortgagor generally will be qualified on the basis
of the Mortgage Rate in effect at origination. In some instances, Mortgagors may
find it difficult to make their loan payments as their monthly payments increase
and thus, the likelihood of default will increase. An even greater likelihood of
default may exist as monthly payments increase with a Mortgage Loan secured by a
second lien if monthly payments are also increasing on the related first lien
ARM Loan. Some of the Closed-End Loans may be Balloon Loans, and the ability of
the Mortgagor to pay the related Balloon Amount may
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<PAGE>
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depend on the Mortgagor's ability to refinance the Mortgage Loan or to sell the
related Mortgaged Property. In addition, in the case of Closed-End Loans that
are subject to negative amortization, due to the addition to the principal
balance of Deferred Interest, the principal balances of such Mortgage Loans
could be increased to an amount equal to or in excess of the value of the
underlying Mortgaged Properties, thereby increasing the likelihood of default.
With respect to Revolving Credit Loans, except for certain programs
under which the Draw Period is less than the full term thereof, required minimum
monthly payments 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 Mortgage 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 Revolving Credit Loans are generally qualified
based on an assumed payment which reflects either the initial interest rate or a
rate significantly lower than the maximum rate. An increase in the interest rate
over the Mortgage Rate applicable at the time the Revolving Credit Loan was
originated may have an adverse effect on the Mortgagor's ability to pay the
required monthly payment. In addition, an increase in prevailing market interest
rates may reduce the borrower's ability to obtain refinancing and to pay the
balance of a Revolving Credit Loan at its maturity.
To the extent that any losses are incurred on any of the Mortgage Loans
that are not covered by the applicable credit enhancement, holders of
Certificates of the series evidencing interests in the related Mortgage Pool (or
certain classes thereof) will bear all risk of such losses resulting from
default by Mortgagors.
Limitations, Reduction and Substitution of Credit Enhancement
With respect to each series of Certificates, credit enhancement may be
provided to cover delinquencies and losses on the underlying Mortgage Loans,
subject to any applicable limitations. Credit enhancement will be provided in
one or more of the forms referred to herein, including, but not limited to:
subordination of other classes of Certificates of the same series;
Overcollateralization; a Financial Guaranty Insurance Policy; a Letter of
Credit; a Special Hazard Insurance Policy; a Bankruptcy Bond; a Reserve Fund; a
Surety Bond; or any combination thereof. See "Description of Credit Enhancement"
herein.
As to any series of Certificates, 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
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whole or in part by cash flows on the underlying Mortgage Loans (as may be the
case for a Reserve Fund or Overcollateralization, for example), the amount of
coverage provided thereby may be adversely affected under a variety of scenarios
by factors such as the prepayment and draw experience of the Mortgage Loans,
changes in the Mortgage Rates or Gross Margins applicable to the Mortgage Loans
pursuant to the terms thereof, and changes in the relationship between the
Mortgage Rates on the Mortgage Loans and the Pass-Through Rates on the
Certificates (which changes may result, in part, from changes in the
relationship between different indexes respectively used to determine the
Mortgage Rates and the Pass-Through 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 Certificates (or certain classes thereof).
The Master Servicer will generally be permitted to reduce, terminate or
substitute all or a portion of the credit enhancement for any series of
Certificates, if the applicable Rating Agency, as set forth in the related
Prospectus Supplement, indicates that the then-current rating thereof will not
be adversely affected. The rating of any series of Certificates 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 Mortgage Loans in
excess of the levels contemplated by such Rating Agency at the time of its
initial rating analysis. None of the Company, the Master Servicer, GMAC Mortgage
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 Certificates. See "Description of Credit Enhancement--Reduction or
Substitution of Credit Enhancement."
Yield and Prepayment Considerations
The yield to maturity of the Certificates 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 Mortgage Loans, the rate and timing of Draws in the case of
Revolving Credit Loans, and the price paid by Certificateholders. Such yield may
be adversely affected by a higher or lower than anticipated rate of principal
payments (or Draws if applicable) on the related Mortgage Loans. The yield to
maturity on any Strip Certificates will be extremely sensitive to the rate and
timing of principal payments (or Draws if applicable) on the related Mortgage
Loans. In addition, the yield to maturity on certain other types of classes of
Certificates, including Accrual Certificates, Certificates with a Pass-Through
Rate which fluctuates inversely with an index or certain other classes in a
series including more than one class of Certificates, may be relatively more
sensitive to the rate and timing of principal payments (or Draws if applicable)
on the related Mortgage Loans than other classes of Certificates. Principal
payments (or Draws if applicable) 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. The yield to maturity of the
Certificates of each series will also be affected by the rate and timing of
defaults on the related Mortgage Loans. See "Risk Factors--Special Features of
the Mortgage Loans" above.
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The yield to maturity of the Certificates of any series, or the rate
and timing of principal payments (or Draws if applicable) on the related
Mortgage Loans, may be affected by a wide variety of specific terms and
conditions applicable to the respective programs under which the Mortgage Loans
were originated. For example, Revolving Credit Loans may provide for future
Draws to be made only in specified minimum amounts, or alternatively may permit
Draws to be made by check or through a credit card in any amount. A pool of
Revolving Credit Loans subject to the latter provisions may be likely to remain
outstanding longer with a higher aggregate principal balance than a pool of
Revolving Credit Loans with the former provisions, because of the relative ease
of making new Draws. Furthermore, Revolving Credit Loans may provide for
interest rate changes on a daily or monthly basis, or may have Gross Margins
that may vary under certain circumstances over the term of the loan. In
extremely high market interest rate scenarios, Certificates backed by Revolving
Credit Loans with adjustable rates subject to substantially higher maximum rates
than typically apply to adjustable rate first mortgage loans may experience
rates of default and liquidation substantially higher than those that have been
experienced on other adjustable rate mortgage loan pools.
For any series of Certificates 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 distributions on the Certificates. For a series of Certificates
backed by the Trust Balances of Revolving Credit Loans, the specific provisions
applicable to the allocation of payments, Draws and losses on the Revolving
Credit Loans between the Trust Balances and the Excluded Balances thereof will
also have a significant effect on the rate and timing of principal distributions
on the Certificates.
Limited Liquidity
There can be no assurance that a secondary market for the Certificates
of any series will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment or that it will continue for the
life of the Certificates of any series. Although the Prospectus Supplement for
any series of Certificates may indicate that an underwriter specified therein
intends to establish a secondary market in such Certificates, no underwriter
will be obligated to do so.
The Certificates will not be listed on any securities exchange.
Limited Obligations
The Certificates will not represent an interest in or obligation of the
Company, Residential Funding, GMAC Mortgage or any of their affiliates. The only
obligations of the foregoing entities with respect to the Certificates, the
Mortgage Loans or any Mortgage Securities will be the obligations (if any) of
Residential Funding pursuant to certain limited representations and warranties
made with respect to the Mortgage Loans, the obligation of Residential Funding
(or such other entity specified in the related Prospectus Supplement) to advance
funds to Mortgagors in respect of Draws on Revolving Credit Loans (if
applicable), the servicing obligations of Residential Funding as Master Servicer
(if applicable) under the related Pooling and Servicing Agreement (including its
limited obligation to make certain Advances, if applicable, in the event
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of delinquencies on the Mortgage Loans, but only to the extent deemed
recoverable) and pursuant to the terms of any Mortgage Securities, and, if and
to the extent expressly described in the related Prospectus Supplement, certain
limited obligations of Residential Funding in connection with an agreement to
purchase or act as remarketing agent with respect to a Convertible Mortgage Loan
upon conversion to a fixed rate. If any affiliate of the Company has originated
any Mortgage Loan, such affiliate will only have an obligation with respect to
such Mortgage Loan to the same extent as a Seller, as described herein. Neither
the Certificates nor the underlying Mortgage Loans or Mortgage Securities will
be guaranteed or insured by any governmental agency or instrumentality, or by
the Company, Residential Funding, GMAC Mortgage or any of their affiliates,
except as expressly set forth herein or in the related Prospectus Supplement.
Proceeds of the assets included in the related Trust Fund (including the
Mortgage Loans or Mortgage Securities and any form of credit enhancement) will
be the sole source of payments on the Certificates, 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 Certificates.
THE MORTGAGE POOLS
General
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist primarily of Mortgage Loans, or certain balances
thereof, excluding any interest retained by the Company or any other entity
specified in the Prospectus Supplement, evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages or deeds of trust or other similar
security instruments creating first or junior liens on one- to four-family
residential properties, or interests in such Mortgage Loans (which may include
Mortgage Securities). The Mortgage Loans will either be (i) Closed-End Loans or
(ii) Revolving Credit Loans. The Mortgaged Properties will consist primarily of
owner-occupied attached or detached one-family dwelling units, two- to
four-family dwelling units, condominiums, townhouses, row houses, individual
units in planned-unit developments and certain other dwelling units, and the
fee, leasehold or other interests in the underlying real property. The Mortgaged
Properties may include vacation, second and non-owner-occupied homes. If
specified in the related Prospectus Supplement relating to a series of
Certificates, a Mortgage Pool may contain cooperative apartment loans
("Cooperative Loans") evidenced by promissory notes ("Cooperative Notes")
secured by security interests in shares issued by Cooperatives and in the
related proprietary leases or occupancy agreements granting exclusive rights to
occupy specific dwelling units in the related buildings. As used herein, unless
the context indicates otherwise, "Mortgage Loans" includes Cooperative Loans,
"Mortgaged Properties" includes shares in the related Cooperative and the
related proprietary leases or occupancy agreements securing Cooperative Notes,
"Mortgage Notes" includes Cooperative Notes and "Mortgages" includes a security
agreement with respect to a Cooperative Note. In connection with a series of
Certificates backed by Revolving Credit Loans, if the related Prospectus
Supplement indicates that the Mortgage Pool consists of certain balances of such
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Revolving Credit Loans, then the term "Mortgage Loans" as used herein refers
only to such balances where the context so requires.
Each Mortgage Loan will be selected by the Company for inclusion in a
Mortgage Pool from among those purchased by the Company, either directly or
through its affiliates, including Residential Funding, GMAC Mortgage
Corporation, Residential Money Centers, Inc. and HomeComings Financial Network,
Inc. ("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 "Mortgage Loan Program." If a
Mortgage Pool is composed of Mortgage Loans acquired by the Company directly
from Sellers other than Residential Funding, the related Prospectus Supplement
will specify the extent of Mortgage Loans so acquired. The characteristics of
the Mortgage Loans are as described in the related Prospectus Supplement. Other
mortgage loans available for purchase by the Company may have characteristics
which would make them eligible for inclusion in a Mortgage Pool but were not
selected for inclusion in such Mortgage Pool.
Under certain circumstances, the Mortgage Loans will be delivered
either directly or indirectly to the Company by one or more Sellers identified
in the related Prospectus Supplement, concurrently with the issuance of the
related series of Certificates (a "Designated Seller Transaction"). Such
Certificates may be sold in whole or in part to any such Seller in exchange for
the related Mortgage Loans, or may be offered under any of the other methods
described herein under "Methods of Distribution." The related Prospectus
Supplement for a Mortgage Pool composed of Mortgage Loans acquired by the
Company pursuant to a Designated Seller Transaction will generally include
information, provided by the related Seller (the "Designated Seller"), about the
Designated Seller, the Mortgage Loans and the underwriting standards applicable
to the Mortgage Loans. None of the Company, Residential Funding, GMAC Mortgage
or any of their affiliates will make any representation or warranty with respect
to such Mortgage Loans, or any representation as to the accuracy or completeness
of such information provided by the Seller.
Any Seller (including any Designated Seller) or Residential Funding may
retain or acquire any Excluded Balances with respect to any related Revolving
Credit Loans, or any loan secured by a mortgage senior or subordinate to any
Mortgage Loan included in any Mortgage Pool.
If specified in the related Prospectus Supplement, the Trust Fund
underlying a series of Certificates may include Mortgage Securities. The
Mortgage Securities may have been issued previously by the Company or an
affiliate thereof, a financial institution or other entity engaged generally in
the business of mortgage lending or a limited purpose corporation organized for
the purpose of, among other things, acquiring and depositing mortgage loans into
such trusts, and selling beneficial interests in such trusts. Except as
otherwise set forth in the related Prospectus Supplement, such Mortgage
Securities will be generally similar to Certificates offered hereunder. As to
any such series of Certificates, the related Prospectus Supplement will include
a description of such Mortgage Securities and any related credit enhancement,
and the Mortgage Loans
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underlying such Mortgage Securities will be described together with any other
Mortgage Loans included in the Mortgage Pool relating to such series. As to any
such series of Certificates, as used herein the term "Mortgage Pool" includes
the Mortgage Loans underlying such Mortgage Securities. Notwithstanding any
other reference herein to the Master Servicer, with respect to a series of
Certificates as to which the Trust Fund includes Mortgage Securities, the entity
that services and administers such Mortgage Securities on behalf of the holders
of such Certificates may be referred to as the "Manager," if so specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, Residential Funding initially will act as Manager with
respect to such Mortgage Securities as well as the related Certificates, and
references herein to advances to be made and other actions to be taken by the
Master Servicer in connection with the Mortgage Loans may include such advances
made and other actions taken pursuant to the terms of such Mortgage Securities.
The Prospectus Supplement for each series of Certificates will contain
information as to the type of Mortgage Loans which will be included in the
related Mortgage Pool. Each Prospectus Supplement applicable to a series of
Certificates 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 Mortgage Loans, (ii) the type of
property securing the Mortgage Loans and related lien priority, (iii) the
original or modified terms to maturity of the Mortgage Loans, (iv) the range of
principal balances of the Closed-End Loans at origination or modification, (v)
the earliest origination or modification date and latest maturity date of the
Mortgage Loans, (vi) the Loan-to-Value Ratios or Combined Loan-to-Value Ratios
of the Mortgage Loans, as applicable, (vii) the Mortgage Rate or range of
Mortgage Rates borne by the Mortgage Loans, (viii) if the Mortgage Loans are ARM
Loans or Revolving Credit Loans, the applicable Index, the range of Gross
Margins, the weighted average Gross Margin, the frequency of adjustments and
maximum loan rate, (ix) the geographical distribution of the Mortgaged
Properties, (x) the percent of ARM Loans, (xi) if the Mortgage Loans are
Revolving Credit Loans, the aggregate Credit Limits of the related Credit Line
Agreements and (xii) 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 Certificates and will be filed, together with
the related Pooling and Servicing Agreement, with the Commission within fifteen
days after the initial issuance of such Certificates. The composition and
characteristics of a Mortgage Pool containing 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 Mortgage
Pool. In the event that Mortgage Loans are added to or deleted from the Trust
Fund after the date of the related Prospectus Supplement other than as a result
of any such Draws, such addition or deletion will be noted in the Current Report
on Form 8-K.
With respect to each Mortgage 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 Mortgage 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 Mortgage
Loan and (y) if applicable
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under the corresponding program, the sales price of each Mortgaged Property.
With respect to each Mortgage 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 Mortgage Loan to the sum of
(i) the greater of the Cut-off Date Principal Balance or the Credit Limit, if
applicable, of such Mortgage Loan and (ii) the principal balance of any related
senior mortgage loan at origination of such Mortgage Loan. The "Credit
Utilization Rate" is determined by dividing the Cut-off Date Principal Balance
of a Revolving Credit Loan by the Credit Limit of the related Credit Line
Agreement.
The Company will cause the Mortgage Loans or Trust Balances thereof
constituting each Mortgage Pool (or Mortgage Securities evidencing interests
therein) to be assigned to the Trustee named in the related Prospectus
Supplement, for the benefit of the holders of all of the Certificates of a
series. The Master Servicer named in the related Prospectus Supplement will
service the Mortgage Loans, either directly or through other mortgage servicing
institutions ("Subservicers"), pursuant to a Pooling and Servicing Agreement and
will receive a fee for such services. See "Mortgage Loan Program" and
"Description of the Certificates." With respect to those Mortgage Loans serviced
by the Master Servicer through a Subservicer, the Master Servicer will remain
liable for its servicing obligations under the related Pooling and Servicing
Agreement as if the Master Servicer alone were servicing such Mortgage Loans. In
addition to or in lieu of the Master Servicer for a series of Certificates, the
related Prospectus Supplement may identify a certificate administrator (the
"Certificate Administrator") for the Trust Fund. The Certificate 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 Certificate Administrator to the extent
applicable.
The Company's assignment of the Mortgage Loans or the Trust Balances to
the Trustee will be without recourse. See "Description of the
Certificates--Assignment of Trust Fund Assets." The Master Servicer's
obligations with respect to the Mortgage Loans will consist principally of its
contractual servicing obligations under the related Pooling and 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 "Mortgage Loan Program--Representations
Relating to Mortgage Loans," and "--Subservicing" and "Description of the
Certificates--Assignment of Trust Fund Assets," and its obligation to make
certain Advances, if applicable, in the event of delinquencies in payments on or
with respect to the Mortgage Loans in amounts described herein under
"Description of the Certificates--Advances on Closed-End Loans") or pursuant to
the terms of any Mortgage Securities. With respect to Revolving Credit Loans,
Residential Funding (or such other entity specified in the related Prospectus
Supplement) will be obligated to advance funds to Mortgagors in respect of Draws
made after the related Cut-off Date. The obligation of the Master Servicer to
make principal and interest advances on the Closed-End Loans in certain
circumstances will be limited to amounts which the Master Servicer believes
ultimately would be reimbursable out of the proceeds of liquidation of the
Mortgage Loans or any applicable form of credit support. See "Description of the
Certificates--Advances on Closed-End Loans."
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The proceeds of the Mortgage Loans may be used by the borrower to
purchase or improve the related Mortgaged Properties, may be retained by the
related Mortgagors or may be used for purposes unrelated to such Mortgaged
Properties.
A Mortgaged Property securing a Mortgage Loan may be subject to the
senior liens of one or more conventional mortgage loans at the time of
origination and may be subject to one or more junior liens at the time of
origination or thereafter. A mortgage loan secured by any such junior lien or
senior lien will likely not be included in the related Mortgage Pool, and the
Company, an affiliate of the Company or an Unaffiliated Seller may have an
interest in such mortgage loan. Since the Mortgage Loans are primarily Revolving
Credit Loans and Closed-End Loans secured by junior liens, such loans generally
will not be required by the Company to be covered by a primary mortgage guaranty
insurance policy insuring against default on such Mortgage Loan.
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Closed-End Loans
Unless otherwise specified below or in the related Prospectus
Supplement, all of the Closed-End Loans in a Mortgage Pool will (i) be secured
by Mortgaged Properties located in any of the 50 states, the District of
Columbia or the Commonwealth of Puerto Rico and (ii) be of only one type of the
following types of mortgage loans described or referred to in paragraphs
numbered (1) through (5):
(1) Fixed-rate, fully-amortizing Closed-End Loans providing
for level monthly payments of principal and interest and terms to
maturity of generally 5, 10 or 15 years at origination or modification
as specified in the related Prospectus Supplement;
(2) Fully-amortizing adjustable-rate Closed-End Loans ("ARM
Loans") having an original or modified term to maturity of not more
than 30 years with a related interest rate (a "Mortgage Rate") which
generally adjusts initially after a specified period subsequent to the
initial payment date, and thereafter at either one-month, six-month,
one-year or other intervals (with corresponding adjustments in the
amount of monthly payments) over the term of the mortgage loan to equal
the sum of a fixed percentage set forth in the related Mortgage Note
(the "Gross Margin") and an index*. The related Prospectus Supplement
will set forth the relevant index and the highest, lowest and weighted
average Gross Margin with respect to the ARM Loans in the related
Mortgage Pool. The related Prospectus Supplement will also indicate any
periodic or lifetime limitations on changes in any per annum Mortgage
Rate at the time of any adjustment. If specified in the related
Prospectus Supplement, an ARM Loan may include a provision that allows
the Mortgagor to convert the adjustable Mortgage Rate to a fixed rate
at specified times during the term of such ARM Loan;
(3) Negatively-amortizing adjustable-rate Closed-End Loans
having original or modified terms to maturity of not more than 30 years
with Mortgage Rates which generally adjust initially on the payment
date referred to in the related Prospectus Supplement, and thereafter
monthly on each payment date to equal the sum of the Gross Margin and
the index. The scheduled monthly payment will be adjusted as and when
- --------
* The index (the "Index") for a particular Mortgage 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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described in the related Prospectus Supplement to an amount that would
fully amortize the mortgage loan over its remaining term on a level
debt service basis; provided that increases in the scheduled monthly
payment may be subject to certain limitations as specified in the
related Prospectus Supplement. If an adjustment to the Mortgage Rate on
a mortgage loan causes the amount of interest accrued thereon in any
month to exceed the scheduled monthly payment on such mortgage loan,
the resulting amount of interest that has accrued but is not then
payable ("Deferred Interest") will be added to the principal balance of
such mortgage loan;
(4) Balloon mortgage loans ("Balloon Loans"), which are
fixed-rate Closed-End Loans having original or modified terms to
maturity of generally 15 years as described in the related Prospectus
Supplement, with level monthly payments of principal and interest based
on a 30-year amortization schedule. The amount of the monthly payment
will remain constant until the maturity date, upon which date the full
outstanding principal balance on such Balloon Loan will be due and
payable (such amount, the "Balloon Amount"); or
(5) Similar Mortgage Loans with other payment characteristics as described
in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, a portion of the
Closed-End Loans underlying a series of Certificates may provide for payments
that are allocated to principal and interest according to the daily simple
interest method (a "Simple Interest Mortgage Loan"). Other Closed-End Loans may
provide for payments in monthly installments including interest equal to
one-twelfth of the applicable Mortgage Rate times the unpaid principal balance,
with any remainder of such payment applied to principal (an "Actuarial Mortgage
Loan").
A Simple Interest Mortgage Loan provides the amortization of the amount
financed under the Mortgage Loan over a series of equal monthly payments
(except, in the case of a Balloon Loan, the final payment). Each monthly payment
consists of an installment of interest which is calculated on the basis of the
outstanding principal balance of the Mortgage Loan multiplied by the stated
Mortgage Rate and further multiplied by a fraction, the numerator of which is
the number of days in the period elapsed since the preceding payment of interest
was made and the denominator of which is the number of days in the annual period
for which interest accrues on such Mortgage Loan. As payments are received under
a Simple Interest Mortgage Loan, the amount received is applied first to
interest accrued to the date of payment and then the remaining amount is applied
to pay any unpaid fees and then to reduce the unpaid principal balance.
Accordingly, if a borrower pays a fixed monthly installment on a Simple Interest
Mortgage Loan before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a fixed monthly
installment after its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be greater
than it would have been had the payment been made
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as scheduled, and the remaining portion, if any, of the payment applied to
reduce the unpaid principal balance will be correspondingly less. If each
scheduled payment under a Simple Interest Mortgage Loan is made on or prior to
its scheduled due date, the principal balance of the Mortgage Loan will amortize
in the manner described above. However, if the borrower consistently makes
scheduled payments after the scheduled due date, the Mortgage Loan will amortize
more slowly than scheduled. If a Simple Interest Mortgage Loan is prepaid, the
borrower is required to pay interest only to the date of prepayment. Such
variable allocations among principal and interest of a Simple Interest Mortgage
Loan may effect the distributions of principal and interest on the Certificates,
as specified in the related Prospectus Supplement.
If provided for in the related Prospectus Supplement, a Mortgage Pool
may contain ARM Loans which allow the Mortgagors to convert the adjustable rates
on such Mortgage Loans to a fixed rate at some point during the life of such
Mortgage Loans (each such Mortgage Loan, a "Convertible Mortgage Loan"),
generally, not later than six to ten years subsequent to the date of
origination, depending upon the length of the initial adjustment period. If
specified in the related Prospectus Supplement, upon any conversion, the Company
will repurchase or Residential Funding, the applicable Designated Seller or a
third party will purchase the converted Mortgage Loan as and to the extent set
forth in the related Prospectus Supplement. Alternatively, if specified in the
related Prospectus Supplement, the Company or Residential Funding (or another
party specified therein) may agree to act as remarketing agent with respect to
such converted Mortgage Loans and, in such capacity, to use its best efforts to
arrange for the sale of converted Mortgage Loans under specified conditions.
Upon the failure of any party so obligated to purchase any such converted
Mortgage Loan, the inability of any remarketing agent to arrange for the sale of
the converted Mortgage Loan and the unwillingness of such remarketing agent to
exercise any election to purchase the converted Mortgage Loan for its own
account, the related Mortgage Pool will thereafter include both fixed rate and
adjustable rate Mortgage Loans. If so specified in the related Prospectus
Supplement, the inclusion of a converted Mortgage Loan in a Mortgage Pool may
adversely affect the holders of the Certificates by restricting the ability of
the related Pass-Through Rate or Rates to adjust to the extent intended by the
adjustable Pass-Through Rate.
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 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) the Gross Margin
specified in the related Mortgage Note (which may vary under circumstances if so
specified in the related Prospectus Supplement), subject to the Maximum Rate set
forth in the Mortgage Note and the maximum rate permitted by applicable law.
Notwithstanding the forgoing, if so specified in the related Prospectus
Supplement, a Mortgage Loan may have an introductory rate that is lower than the
rate that would be in effect if the
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applicable Index and Gross Margin were used to determine the Mortgage Rate and
as a result of such introductory rate, interest distributions on the
Certificates may initially be lower than expected. See "Risk Factors--Special
Features of the Mortgage Loans--Mortgage 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
Mortgage 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, with respect to
each Revolving Credit Loan, 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 be the greater of (i) 1% of the outstanding principal
balance of the Mortgage Loan, (ii) the accrued interest or (iii) $100. The
Mortgagor for each Mortgage 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 with respect to any Revolving Credit Loan 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 provided in the related
Prospectus Supplement, Draws made after the related Cut-off Date will be
excluded from the Mortgage Pool.
Unless otherwise specified in the related Prospectus Supplement, with
respect to each Revolving Credit Loan, (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 Mortgage Loan for such billing cycle
at the related Mortgage Rate, (b) the Account Balance (the "Account Balance") on
any day generally will be the aggregate of the unpaid principal of the Revolving
Credit Loan outstanding at the beginning of such day, plus all related Draws
funded on such day and outstanding at the beginning of such day, plus the sum of
any unpaid Finance Charges and any unpaid fees, insurance premiums and other
charges (collectively, "Additional Charges") that are due on such Mortgage 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 Mortgage 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.
The Mortgaged Property securing each Revolving Credit Loan will be
subject to the lien created by the related mortgage (the "Mortgage") in respect
of the outstanding principal balance of each related Draw or portion thereof
that is not included in the related Mortgage Pool, whether
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made on or prior to the related Cut-off Date or thereafter. Such lien will be
the same rank as the lien created by such Mortgage in respect of such Revolving
Credit Loan, and monthly payments, collections and other recoveries under the
Credit Line Agreement related to such Revolving Credit Loan will be allocated as
described in the related Prospectus Supplement among such Revolving Credit Loan
and the outstanding principal balance of each Draw or portion thereof excluded
from the Mortgage Pool. The Company, an affiliate of the Company or an
Unaffiliated Seller may have an interest in any Draw or portion thereof excluded
from the Mortgage Pool.
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, but with respect to each Revolving Credit Loan, the related Mortgagor
will have the right during the related Draw Period to make a Draw in the amount
of any prepayment theretofore made with respect to such Mortgage Loan. The
Mortgage Note or Mortgage related to each Revolving Credit Loan generally will
contain a customary "due-on-sale" clause.
As to each Mortgage 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 Mortgage
Loan, generally such suspension or reduction will not affect the payment terms
for previously drawn balances. In the event of default under a Mortgage Loan, at
the discretion of the Master Servicer, the Mortgage 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.
ALLOCATION OF REVOLVING CREDIT LOAN BALANCES
With respect to any series of Certificates backed by Revolving Credit
Loans, the related Trust Fund may include either (i) the entire principal
balance of each Revolving Credit Loan outstanding at any time, including
balances attributable to Draws made after the related Cut-off Date, or (ii) only
a specified portion (the "Trust Balance") of the total principal balance of each
Revolving Credit Loan outstanding at any time, which except as otherwise
indicated in the related Prospectus Supplement will consist of the principal
balance thereof as of the Cut-off Date minus the portion of all payments and
losses thereafter that are allocated to the Trust Balance, and will not include
any portion of the principal balance attributable to Draws made after the
Cut-off Date.
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In the latter case, that portion of the principal balance of any
Revolving Credit Loan not included in the Trust Balance at any time is referred
to as the "Excluded Balance," which will include balances attributable to Draws
after the Cut-off Date and may include, if so specified in the related
Prospectus Supplement, a portion of the principal balance outstanding as of the
Cut-off Date (such as any such portion included in a different Trust Fund). The
related Prospectus Supplement will set forth the specific provisions by which
payments and losses on any such Revolving Credit Loan will be allocated as
between the Trust Balance and any Excluded Balance. Generally, except as
otherwise so specified, such provisions (i) may provide that principal payments
made by the Mortgagor will be allocated as between the Trust Balance and any
Excluded Balance either (a) on a pro rata basis, (b) first to the Trust Balance
until reduced to zero, then to the Excluded Balance, or (c) in accordance with
other specified priorities, and (ii) will provide that interest payments, as
well as liquidation proceeds or similar proceeds following a default and any
Realized Losses, will be allocated as between the Trust Balance and any Excluded
Balance on a pro rata basis.
Even where a Trust Fund initially includes the entire principal balance
of the Revolving Credit Loans, the Pooling and Servicing Agreement may provide
that after a specified date or upon the occurrence of specified events, the
Trust Fund may not include balances attributable to additional Draws made
thereafter. The related Prospectus Supplement will describe such provisions as
well as the allocation provisions that would be applicable thereto.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Company, either
directly or indirectly through Residential Funding from Sellers. The Mortgage
Loans will generally have been originated in accordance with the Company's
underwriting standards or alternative underwriting criteria as described below
under "Underwriting Standards" or as described in the related Prospectus
Supplement.
Underwriting Standards
General Standards
The Company's underwriting standards with respect to certain Mortgage
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 Mortgage
Loans may be underwritten by Residential Funding or by a designated third party.
In certain circumstances, however, the Mortgage Loans may be underwritten only
by the Seller with little or no review performed by Residential Funding. See
"Underwriting Standards--Guide Standards" and "Qualifications of
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Sellers." Residential Funding or a designated third party may perform only
sample quality assurance reviews to determine whether the Mortgage Loans in any
Mortgage Pool were underwritten in accordance with applicable standards.
With respect to the Company's underwriting standards, as well as any
other underwriting standards that may be applicable to any Mortgage 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 Mortgage Loan will be considered to be
originated in accordance with a given set of underwriting standards if, based on
an overall qualitative evaluation, the loan is in substantial compliance with
such underwriting standards. For example, a Mortgage Loan may be considered to
comply with a set of underwriting standards, even if one or more specific
criteria included in such underwriting standards were not satisfied, if other
factors compensated for the criteria that were not satisfied or if the Revolving
Mortgage Loan is considered to be in substantial compliance with the
underwriting standards.
In addition, the Company purchases Mortgage Loans which do not conform
to the underwriting standards set forth in the Guide. Certain of the Mortgage
Loans will be purchased in negotiated transactions, and such negotiated
transactions may be governed by agreements ("Master Commitments") relating to
ongoing purchases of Mortgage Loans by Residential Funding, from Sellers who
will represent that the Mortgage 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 Mortgage Loans in any delivery of such Mortgage Loans
from the related Seller for conformity with the applicable underwriting
standards. Certain other Mortgage Loans will be purchased from Sellers who will
represent that the Mortgage 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 Mortgage Loan for conformity with the applicable underwriting standards will
vary depending on any one of a number of factors, including (i) factors relating
to the experience and status of the Seller, and (ii) factors relating to the
specific Mortgage 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 Mortgage 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 Mortgage Loans
underlying Mortgage Securities may
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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 Mortgage Loans included in
any Mortgage Pool, the related Prospectus Supplement generally will not
distinguish among the various underwriting standards applicable to the Mortgage
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 Mortgage Loan was originated in conformity with the
applicable underwriting standards in all material respects, or that the quality
or performance of Mortgage 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 Mortgage Loans, and
will be described in the related Prospectus Supplement.
The Company, either directly or indirectly through Residential Funding,
will also purchase Mortgage Loans from its affiliates, including GMAC Mortgage
Corporation, Residential Money Centers, Inc. 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 Mortgage 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 Mortgage 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 set
forth in the Guide for full documentation loan programs. Initially, a
prospective borrower (other than a trust if the trust is the borrower) is
required to fill out a detailed application providing pertinent credit
information. As part of the application, the borrower is required to provide a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with merchants and
lenders and any record of bankruptcy. Under the Home Equity Program, the
borrower generally must show, among other things, a minimum of one year credit
history reported on the credit report and that no mortgage delinquencies (thirty
days or greater) in the past 12 months existed. Borrowers who have less than a
12 month 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
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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 Mortgage 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 Mortgage 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 Mortgage Loans. See "Risk Factors--Special Features of the Mortgage
Loans--Adequacy of Mortgage Collateral" and "Description of the
Certificates--Realization Upon Defaulted Mortgage 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 Mortgage Loan; provided, that depending on the principal
amount or 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 Mortgage
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 Mortgage Loan is originated concurrently with or not more than 12
months after the origination of a first mortgage loan. In all other cases, the
value used is generally the appraised value as so determined.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet the borrower's monthly obligations
on the proposed mortgage loan and other expenses related to the home (such as
property taxes and hazard insurance) and other financial obligations (including
debt service on any related mortgage loan secured by a senior lien on the
related Mortgaged Property). With respect to a Revolving Credit Loan, 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 an ARM Loan, a Revolving Credit Loan and certain other types
of loans 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.
Similarly, the amount of the monthly payment on graduated payment Mortgage Loans
will increase periodically. If the borrowers' incomes do not increase in an
amount commensurate with the increases in monthly payments, the likelihood of
default will increase. In addition, in the case of ARM Loans that are
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subject to negative amortization, due to the addition of Deferred Interest the
principal balances of such mortgage loans are more likely to equal or exceed the
value of the underlying mortgaged properties, thereby increasing the likelihood
of defaults and losses. Unless otherwise specified in the related Prospectus
Supplement, Revolving Credit Loans will not provide for negative amortization.
With respect to Balloon Loans and Revolving Credit Loans, 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
Mortgage Loan. For example, under Residential Funding's EasyDocs 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
and the Combined Loan-to-Value Ratio may not exceed 75%. 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 Mortgage 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 Mortgage Loan. The required yields for fixed-rate Closed-End Loans and
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, 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 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
Certificates, 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. Such Seller may make no representations and warranties
with respect to Mortgage Loans sold by it. The FDIC (either in its corporate
capacity or as receiver for a depository institution) may also be a Seller of
the Mortgage Loans, in which event neither the FDIC nor the related depository
institution may make representations and warranties with respect to the Mortgage
Loans 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 Mortgage Loan 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
Mortgage Loan due to a breach of representation and warranty, neither the
Company, Residential Funding nor any other entity will have assumed the
representations and warranties, and any related losses will be borne by the
Certificateholders or by the credit enhancement, if any.
Representations Relating to Mortgage Loans
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 Mortgage Loans sold by such Seller. However, except in the case
of a Designated Seller Transaction or as otherwise provided in the related
Prospectus Supplement, the representations and warranties of the Seller will not
be assigned to the Trustee for the benefit of the holders of the related series
of
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Certificates, and therefore a breach of the representations and warranties of
the Seller generally will not be enforceable on behalf of the Trust Fund.
In the case of a Mortgage Pool consisting of Mortgage Loans purchased
by the Company from Sellers through Residential Funding, Residential Funding,
except in the case of a Designated Seller Transaction or as to Mortgage Loans
underlying any Mortgage Securities or unless otherwise specified in the related
Prospectus Supplement, will have made certain limited representations and
warranties regarding the Mortgage Loans to the Company at the time (just prior
to the initial issuance of the related series of Certificates) 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 Mortgage Loans is true and correct in all material
respects; (ii) Residential Funding was the sole holder and owner of the Mortgage
Loan free and clear of any and all liens and security interests; (iii) each
Mortgage Loan complied in all material respects with all applicable local, state
and federal laws; (iv) except as otherwise indicated in the related Prospectus
Supplement, no Mortgage Loan is one month or more delinquent in payment of
principal and interest; and (v) there is no delinquent tax or, to the best of
the Residential Funding's knowledge, assessment lien against any Mortgaged
Property. In the event of a breach of a representation or warranty made by
Residential Funding that materially adversely affects the interests of the
Certificateholders in a Mortgage Loan, Residential Funding will be obligated to
repurchase or substitute for such Mortgage Loan as described below. In addition,
Residential Funding will be obligated to repurchase or substitute for any
Mortgage Loan as to which it is discovered that the related Mortgage is not a
valid lien on the related Mortgaged Property having at least the priority set
forth with respect to such Mortgage Loan in the listing of related Mortgage
Loans, subject only to (a) liens of real property taxes and assessments not yet
due and payable, (b) covenants, conditions and restrictions, rights of way,
easements and other matters of public record as of the date of recording of such
Mortgage and certain other permissible title exceptions, (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 Mortgage Loan as to which the Company delivers to the
Trustee or the custodian an affidavit certifying that the original Mortgage Note
has been lost or destroyed, if such Mortgage Loan subsequently is in default and
the enforcement thereof or of the related Mortgage is materially adversely
affected by the absence of the original Mortgage Note, Residential Funding will
be obligated to repurchase or substitute for such Mortgage Loan, in the manner
described below. However, Residential Funding will not be required to repurchase
or substitute for any Mortgage Loan as described above if the circumstances
giving rise to such requirement also constitute fraud in the origination of the
related Mortgage Loan. Furthermore, because the listing of the related Mortgage
Loans generally contains information with respect to the Mortgage Loans as of
the Cut-off Date, prepayments and, in certain limited circumstances,
modifications to the interest rate and principal and interest payments may have
been made with respect to one or more of the related Mortgage Loans between the
Cut-off Date and the Closing Date. Residential Funding will not be required to
purchase or substitute for any Mortgage Loan as a result of such prepayment or
modification.
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In a Designated Seller Transaction, unless otherwise specified in the
related Prospectus Supplement, the Designated Seller will have made certain
representations and warranties regarding the Mortgage Loans to the Company
generally similar to those made in the preceding paragraph by Residential
Funding.
The Company will assign to the Trustee for the benefit of the holders
of the related series of Certificates all of its right, title and interest in
each agreement by which it purchased a Mortgage Loan from Residential Funding or
a Designated Seller, insofar as such agreement relates to the representations
and warranties made by a Designated Seller or Residential Funding, as the case
may be, in respect of such Mortgage Loan and any remedies provided for with
respect to any breach of such representations and warranties. If a Designated
Seller or Residential Funding, as the case may be, cannot cure a breach of any
representation or warranty made by it in respect of a Mortgage Loan which
materially and adversely affects the interests of the Certificateholders in such
Mortgage Loan, within 90 days after notice from the Master Servicer, such
Designated Seller or Residential Funding, as the case may be, will be obligated
to purchase such Mortgage Loan at a price (the "Purchase Price") set forth in
the related Pooling and Servicing 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 Mortgage Loan required to be purchased by Residential Funding as
provided above, rather than purchase the Mortgage Loan, Residential Funding may,
at its sole option, remove such Mortgage Loan (a "Deleted Mortgage Loan") from
the Trust Fund and cause the Company to substitute in its place another Mortgage
Loan of like kind (a "Qualified Substitute Mortgage Loan"); however, such
substitution must be effected within 120 days of the date of the initial
issuance of the Certificates with respect to a Trust Fund treated as a grantor
trust for federal income tax purposes. With respect to a Trust Fund for which a
REMIC election is to be made, except as otherwise provided in the Prospectus
Supplement relating to a series of Certificates, such substitution of a
defective Mortgage Loan must be effected within two years of the date of the
initial issuance of the Certificates, and may not be made if such substitution
would cause the Trust Fund to not qualify as a REMIC or result in a prohibited
transaction tax under the Code. Except as otherwise provided in the related
Prospectus Supplement, any Qualified Substitute Mortgage Loan generally will, on
the date of substitution, (i) have an outstanding principal balance, after
deduction of the principal portion of the monthly payment due in the month of
substitution, not in excess of the outstanding principal balance of the Deleted
Mortgage Loan (the amount of any shortfall to be deposited in a custodial
account (the "Custodial Account") in the month of substitution for distribution
to the Certificateholders), (ii) have a Mortgage Rate and a Net Mortgage Rate
not less than (and not more than one percentage point greater than) the Mortgage
Rate and Net Mortgage Rate, respectively, of the Deleted Mortgage Loan as of the
date of substitution, (iii) have a Combined Loan-to-Value Ratio at the time of
substitution no higher than that of the Deleted Mortgage Loan at the time of
substitution, (iv) have a remaining term to maturity not greater than
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(and not more than one year less than) that of the Deleted Mortgage Loan, and
(v) comply with all of the representations and warranties set forth in the
related Pooling and Servicing Agreement as of the date of substitution. The
related Pooling and Servicing Agreement may include additional requirements
relating to ARM Loans, Revolving Credit Loans or other specific types of
Mortgage Loans, 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 Mortgage
Loan that it is obligated to repurchase in connection with a breach of a
representation and warranty.
The Master Servicer will be required under the applicable Pooling and
Servicing Agreement to use its best reasonable efforts to enforce this purchase
or substitution obligation for the benefit of the Trustee and the
Certificateholders, using practices it would employ in its good faith business
judgment and which are normal and usual in its general mortgage servicing
activities; 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 Mortgage Loans, the Master Servicer, employing the standards
set forth in the preceding sentence, may negotiate and enter into one or more
settlement agreements with such Designated Seller that may provide for, among
other things, the purchase of only a portion of the affected Mortgage Loans or
coverage of certain loss amounts. Any such settlement could lead to losses on
the Mortgage Loans which would be borne by the related credit enhancement
supporting the related series of Certificates, and to the extent not available,
by the Certificateholders 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 Mortgage Loan. If the Designated Seller fails to
repurchase and no breach of either the Company's or Residential Funding's
representations has occurred, the Designated Seller's purchase obligation will
not become an obligation of the Company or Residential Funding. Unless otherwise
specified in the related Prospectus Supplement, the foregoing obligations will
constitute the sole remedies available to Certificateholders or the Trustee for
a breach of any representation by a Designated Seller or by Residential Funding
in its capacity as a seller of Mortgage Loans to the Company, or for any other
event giving rise to such obligations as described above.
Neither the Company nor the Master Servicer will be obligated to
purchase a Mortgage Loan if a Designated Seller defaults on its obligation to do
so, and no assurance can be given that
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the Designated Sellers will carry out such obligations with respect to Mortgage
Loans. Such a default by a Designated Seller is not a default by the Company or
by the Master Servicer. Any Mortgage Loan not so purchased or substituted for
shall remain in the related Trust Fund and any losses related thereto shall be
allocated to the related credit enhancement, and to the extent not available, to
the related Certificates.
Notwithstanding the foregoing, with respect to any Designated Seller
that requests Residential Funding's consent to the transfer of subservicing
rights relating to any Mortgage Loans to a successor servicer, Residential
Funding may release such Designated Seller from liability under its
representations and warranties described above, upon the assumption of such
successor servicer of the Designated Seller's liability for such representations
and warranties as of the date they were made. In that event, Residential
Funding's rights under the instrument by which such successor servicer assumes
the Designated Seller's liability will be assigned to the Trustee, and such
successor servicer shall be deemed to be the "Designated Seller" for purposes of
the foregoing provisions.
Subservicing
The servicing for each Mortgage Loan will generally either be retained
by the Seller (or its designee approved by the Master Servicer) as Subservicer,
or will be released by the Seller to the Master Servicer and will be
subsequently transferred to a Subservicer approved by the Master Servicer, and
in either case will thereafter be serviced by the Subservicer pursuant to an
agreement between the Master Servicer and the Subservicer (a "Subservicing
Agreement"). The Master Servicer may, but is not obligated to, assign such
subservicing to designated subservicers which will be qualified Sellers and
which may include GMAC Mortgage Corporation or its affiliates. While such
Subservicing Agreement will be a contract solely between the Master Servicer and
the Subservicer, the Pooling and Servicing Agreement pursuant to which a series
of Certificates is issued will provide that, if for any reason the Master
Servicer for such series of Certificates is no longer the master servicer of the
related Mortgage Loans, the Trustee or any successor Master Servicer must
recognize the Subservicer's rights and obligations under such Subservicing
Agreement.
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 Mortgage Loan, if applicable; processing of assumptions or substitutions
(although, unless otherwise specified in the related Prospectus Supplement, the
Master Servicer is generally required to exercise due-on-sale clauses to the
extent such exercise is permitted by law and would not adversely affect
insurance coverage); attempting to cure delinquencies; supervising foreclosures;
inspection and management of Mortgaged Properties under certain circumstances;
and maintaining accounting records relating to the Mortgage Loans. The
Subservicer may be required to make advances to the holder of any related first
mortgage loan to avoid or cure any delinquencies to the extent that doing so
would be prudent and necessary to
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protect the interests of the Certificateholders. A Subservicer also may be
obligated to make advances to the Master Servicer in respect of delinquent
installments of principal and interest (net of any subservicing or other
compensation) on Closed-End Loans, as described under "Description of the
Certificates--Advances on Closed-End Loans," and 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 Mortgage Loans. Unless otherwise specified in the related Prospectus
Supplement, a Subservicer may transfer its servicing obligations to another
entity that has been approved for participation in Residential Funding's loan
purchase programs, but only with the approval of the Master Servicer.
As compensation for its servicing duties, the Subservicer will be
entitled to a monthly servicing fee (to the extent the related Mortgage Loan
payment has been collected) in a minimum amount set forth in the related
Prospectus Supplement. The Subservicer or Master Servicer may also be entitled
to collect and retain, as part of its servicing compensation, all or a portion
of any late charges, if any, provided in the Mortgage Note or related
instruments and in the case of the Master Servicer, any penalties enforced
against a Subservicer. The remaining portion of such late charges will be
remitted to the Master Servicer. The Subservicer will be reimbursed by the
Master Servicer for certain expenditures which it makes, generally to the same
extent that the Master Servicer would be reimbursed under the applicable Pooling
and Servicing Agreement. See "The Pooling and Servicing Agreement--Servicing and
Administration."
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 Mortgage Loan
pursuant to the terms of the Subservicing Agreement for the entire term of such
Mortgage Loan, unless the Subservicing Agreement is earlier terminated by the
Master Servicer or unless servicing is released to the Master Servicer. Subject
to applicable law, the Master Servicer may have the right to terminate a
Subservicing Agreement immediately upon the giving of notice upon certain stated
events, including the violation of such Subservicing Agreement by the
Subservicer, or up to ninety days' notice to the Subservicer without cause upon
payment of certain amounts set forth in the Subservicing Agreement. Upon
termination of a Subservicing Agreement, the Master Servicer may act as servicer
of the related Mortgage Loans or enter into one or more new Subservicing
Agreements. The Master Servicer may agree with a Subservicer to amend a
Subservicing Agreement. Any amendments to a Subservicing Agreement or to a new
Subservicing Agreement may contain provisions different from those described
above which are in effect in the original Subservicing Agreements. However, the
Pooling and Servicing Agreement for each Trust Fund
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will provide that any such amendment or new agreement may not be inconsistent
with or violate such Pooling and Servicing Agreement in a manner which would
materially and adversely affect the interests of the Certificateholders.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued in series. Each series of Certificates
(or, in certain instances, two or more series of Certificates) will be issued
pursuant to a Pooling and Servicing Agreement, similar to one of the forms filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
Each Pooling and Servicing Agreement will be filed with the Commission as an
exhibit to a Form 8-K. The following summaries (together with additional
summaries under "The Pooling and Servicing Agreement" 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 Certificates common to each Pooling and
Servicing Agreement.
Unless otherwise specified in the Prospectus Supplement with respect to
a series, Certificates of each series covered by a particular Pooling and
Servicing Agreement will evidence specified beneficial ownership interests in a
separate Trust Fund created pursuant to such Pooling and Servicing Agreement. A
Trust Fund will consist of, to the extent provided in the Pooling and Servicing
Agreement: (i) such Mortgage Loans (and the related mortgage documents) or
interests therein (including any Mortgage Securities) underlying a particular
series of Certificates as from time to time are subject to the Pooling and
Servicing Agreement, exclusive of, if specified in the related Prospectus
Supplement, any Excluded Spread or other interest retained by the Company or any
of its affiliates with respect to each such Mortgage Loan; (ii) such assets
including, without limitation, all payments and collections in respect of the
Mortgage Loans or Mortgage Securities due after the related Cut-off Date, as
from time to time are identified as deposited in respect thereof in the
Custodial Account and in the related Certificate Account; (iii) property
acquired by foreclosure of such Mortgage Loans or deed in lieu of foreclosure;
(iv) hazard insurance policies and certain proceeds thereof; and (v) any
combination, as and to the extent specified in the related Prospectus
Supplement, of a Letter of Credit, Purchase Obligation, Special Hazard Insurance
Policy, Bankruptcy Bond, Financial Guaranty Insurance Policy, Surety Bond or
other type of credit enhancement as described under "Description of Credit
Enhancement." To the extent that any Trust Fund includes certificates of
interest or participations in Mortgage Loans, the related Prospectus Supplement
will describe the material terms and conditions of such certificates or
participations.
Each series of Certificates may consist of any one or a combination of
the following: (i) a single class of Certificates; (ii) two or more classes of
Certificates, one or more classes of which may be Senior Certificates that are
senior in right of payment to any class or classes of Mezzanine Certificates and
to any other class or classes of Subordinate Certificates, and as to which
certain
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classes of Senior Certificates may be senior to other classes of Senior
Certificates, as described in the respective Prospectus Supplement (any such
series, a "Senior/Subordinate Series"); (iii) one or more classes of Strip
Certificates which will be entitled to (a) principal distributions, with
disproportionate, nominal or no interest distributions or (b) interest
distributions, with disproportionate, nominal or no principal distributions;
(iv) two or more classes of Certificates which differ as to the timing,
sequential order, rate, pass-through rate or amount of distributions of
principal or interest or both, or as to which distributions of principal or
interest or both on any class may be made upon the occurrence of specified
events, in accordance with a schedule or formula (including "planned
amortization classes" and "targeted amortization classes" and "very accurately
defined maturity classes"), or on the basis of collections from designated
portions of the Mortgage Pool, which series may include one or more classes of
Accrual Certificates with respect to which certain accrued interest will not be
distributed but rather will be added to the principal balance thereof on each
Distribution Date for the period described in the related Prospectus Supplement;
or (v) similar classes of Certificates with other payment characteristics, as
described in the related Prospectus Supplement. Credit support for each series
of Certificates will be provided by a Financial Guaranty Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond, Letter of Credit, Reserve
Fund, Surety Bond, by the subordination of one or more classes of Certificates,
Overcollateralization or other credit enhancement as described under
"Description of Credit Enhancement," or by any combination of the foregoing.
Form of Certificates
As specified in the related Prospectus Supplement, the Certificates of
each series will be issued either as physical certificates or in book-entry
form. If issued as physical certificates, the Certificates will be in fully
registered form only in the denominations specified in the related Prospectus
Supplement, and will be transferrable and exchangeable at the corporate trust
office of the person appointed under the related Pooling and Servicing Agreement
to register the Certificates (the "Certificate Registrar"). No service charge
will be made for any registration of exchange or transfer of Certificates, but
the Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. The term "Certificateholder" as used herein refers to the
entity whose name appears on the records of the Certificate 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
Certificates 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 Certificates so issued
("Book-Entry Certificates"), the record holder of such Certificates 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
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"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 Certificate (each such person, a
"Beneficial Owner") will be entitled to receive a Certificate 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 Trustee elects in its sole discretion to discontinue the registration
of such Certificates through DTC. Prior to any such event, Beneficial Owners
will not be recognized by the Trustee or the Master Servicer as holders of the
related Certificates for purposes of the Pooling and Servicing Agreement, and
Beneficial Owners will be able to exercise their rights as owners of such
Certificates only indirectly through DTC, Participants and Indirect
Participants. Any Beneficial Owner that desires to purchase, sell or otherwise
transfer any interest in Book-Entry Certificates may do so only through DTC,
either directly if 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
Certificates will be required to be made in minimum denominations specified in
the related Prospectus Supplement. The ability of a Beneficial Owner to pledge
Book-Entry Certificates to persons or entities that are not Participants in the
DTC system, or to otherwise act with respect to such Certificates, may be
limited because of the lack of physical certificates evidencing such
Certificates and because DTC may act only on behalf of Participants.
Because of time zone differences, the securities account of a CEDEL or
Euroclear participant as a result of a transaction with a DTC Participant (other
than a depositary holding on behalf of CEDEL or Euroclear) will be credited
during subsequent securities settlement processing day (which must be a business
day for CEDEL or Euroclear, as the case may be) immediately following the DTC
settlement date. Such credits or any transactions in such securities settled
during such processing will be reported to the relevant Euroclear Participant or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant to a DTC Participant (other than the depositary for CEDEL or
Euroclear) will be received with value on the DTC settlement date, but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC.
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Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant Depositaries; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC. CEDEL
Participants and Euroclear Participants may not deliver instructions directly to
the Depositaries.
CEDEL, as a professional depository, holds securities for its
participating organizations ("CEDEL Participants") and facilitates the clearance
and settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. As a professional
depository, CEDEL is subject to regulation by the Luxembourg Monetary Institute.
Euroclear was created to hold securities for participants of Euroclear
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty
Trust Company of New York (the "Euroclear Operator"), under contract with
Euroclear Clearance Systems S.C., a Belgian co-operative corporation (the
"Clearance Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Clearance
Cooperative. The Clearance Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. The Euroclear Operator is the Belgian branch
of a New York banking corporation which is a member bank of the Federal Reserve
System. As such, it is regulated and examined by the Board of Governors of the
Federal Reserve System and the New York State Banking Department, as well as the
Belgian Banking Commission. Securities clearance accounts and cash accounts with
the Euroclear Operator are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System and
applicable Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts.
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Distributions in respect of the Book-Entry Certificates will be
forwarded by the 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 Certificates. Under DTC's procedures,
DTC will take actions permitted to be taken by holders of any class of
Book-Entry Certificates under the Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account the Book-Entry
Certificates are credited and whose aggregate holdings represent no less than
any minimum amount of Percentage Interests or voting rights required therefor.
DTC may take conflicting actions with respect to any action of
Certificateholders of any class to the extent that Participants authorize such
actions. None of the Master Servicer, the Company, the Trustee or any of their
respective affiliates will have any liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in the
Book-Entry Certificates, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Assignment of Trust Fund Assets
At the time of issuance of a series of Certificates, the Company will
cause the Mortgage Loans (or Trust Balances thereof, if applicable) or Mortgage
Securities and any other assets being included in the related Trust Fund to be
assigned without recourse to the Trustee or its nominee (which may be the
Custodian) together with, if specified in the related Prospectus Supplement, all
principal and interest received on or with respect to such Mortgage Loans (or
Trust Balances thereof, if applicable) or Mortgage Securities after the Cut-off
Date (other than principal and interest due on or before the Cut-off Date and
any Excluded Spread). The Trustee will, concurrently with such assignment,
deliver a series of Certificates to the Company in exchange for the Mortgage
Loans (or Trust Balances thereof, if applicable) or Mortgage Securities. Each
Mortgage Loan, Trust Balance or Mortgage Security will be identified in a
schedule appearing as an exhibit to the related Pooling and Servicing Agreement.
Such schedule will include, among other things, information as to the principal
balance of each Mortgage Loan as of the Cut-off Date, as well as information
respecting the Mortgage Rate, the currently scheduled monthly payment of
principal and interest, the maturity of the Mortgage Note and the Combined
Loan-to-Value Ratio at origination or modification.
In addition, except as provided below with respect to certain series of
Certificates backed by Trust Balances of Revolving Credit Loans, the Company
will, as to each Mortgage Loan other than Mortgage Loans underlying any Mortgage
Securities, deliver to the Trustee (or to the Custodian) the legal documents
relating to such Mortgage Loan that are in possession of the Company, which may
include: (i) the Mortgage Note (and any modification or amendment thereto)
endorsed without recourse either in blank or to the order of the Trustee (or its
nominee); (ii) the Mortgage (except for any Mortgage not returned from the
public recording office) with evidence of recording indicated thereon or, in the
case of a Cooperative Loan, the respective security agreements and any
applicable UCC financing statements; (iii) an assignment in recordable form of
the Mortgage (or, with respect to a Cooperative Loan, an assignment of the
respective security agreements, any applicable UCC financing statements,
recognition agreements,
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relevant stock certificates, related blank stock powers and the related
proprietary leases or occupancy agreements); and (iv) if applicable, any riders
or modifications to such Mortgage Note and Mortgage, together with certain other
documents at such times as set forth in the related Pooling and Servicing
Agreement. 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 Mortgage Loans were purchased.
In the event that, with respect to any Mortgage Loan (except as
provided below), the Company cannot deliver the Mortgage or any assignment with
evidence of recording thereon concurrently with the execution and delivery of
the related Pooling and Servicing Agreement because of a delay caused by the
public recording office, the Company will deliver or cause to be delivered to
the Trustee or the Custodian a true and correct photocopy of such Mortgage or
assignment. The Company will deliver or cause to be delivered to the Trustee or
the Custodian such Mortgage or assignment with evidence of recording indicated
thereon after receipt thereof from the public recording office or from the
related Subservicer.
Assignments of the Mortgage Loans to the Trustee will be recorded in
the appropriate public recording office, except in states where, in the opinion
of counsel acceptable to the Trustee, such recording is not required to protect
the Trustee's interests in the Mortgage Loan against the claim of any subsequent
transferee or any successor to or creditor of the Company or the originator of
such Mortgage Loan, or except as otherwise specified in the related Prospectus
Supplement.
Notwithstanding the preceding three paragraphs, with respect to any
series of Certificates backed by Trust Balances of Revolving Credit Loans, the
foregoing documents generally will have been delivered to an entity specified in
the related Prospectus Supplement which may be the Trustee, a Custodian or
another entity appointed by the Trustee, and such entity shall hold such
documents as or on behalf of the Trustee for the benefit of the
Certificateholders, with respect to the Trust Balances thereof, and on behalf of
any other applicable entity with respect to any Excluded Balance thereof, as
their respective interests may appear.
Review of Mortgage Loans
The 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 Mortgage Loans as the agent of the Trustee
(except as provided below). The identity of such Custodian, if any, will be set
forth in the related Prospectus Supplement.
The Trustee or the Custodian will hold such documents in trust for the
benefit of the Certificateholders and, generally will review such documents
within 45 days after receipt thereof. If any such document is found to be
defective in any material respect, the Trustee or such Custodian shall notify
the Master Servicer and the Company, and if so specified in the related
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Prospectus Supplement, the Master Servicer, the Servicer or the 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 60 days (or within such other 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, not later than 90 days after
such notice (or within such other period specified in the related Prospectus
Supplement), either repurchase the related Mortgage Loan or any property
acquired in respect thereof from the Trustee, or if permitted substitute for
such Mortgage Loan a new Mortgage Loan in accordance with the standards set
forth herein. The Master Servicer will be obligated to enforce this obligation
of Residential Funding or the Designated Seller to the extent described above
under "Mortgage Loan Program--Representations Relating to Mortgage Loans," but
such obligation is subject to the provisions described below under
"--Realization Upon Defaulted Mortgage Loans." There can be no assurance that
the applicable Designated Seller will fulfill its obligation to purchase any
Mortgage Loan as described above. Unless otherwise specified in the related
Prospectus Supplement, neither Residential Funding, the Master Servicer nor the
Company will be obligated to purchase or substitute for such Mortgage Loan if
the Designated Seller defaults on its obligation to do so. Unless otherwise
specified in the related Prospectus Supplement, the obligation to repurchase or
substitute for a Mortgage Loan constitutes the sole remedy available to the
Certificateholders or the Trustee for a material defect in a constituent
document. Any Mortgage Loan not so purchased or substituted for shall remain in
the related Trust Fund.
Notwithstanding the foregoing, with respect to the Trust Balance of a
Revolving Credit Loan, such review of the related documents need not be
performed if a similar review has previously been performed by the entity
holding such documents with respect to an Excluded Balance and such review
covered all documentation with respect to any Trust Balance.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Pooling and Servicing Agreement. Upon a breach of any
such representation of the Master Servicer which materially adversely affects
the interests of the Certificateholders in a Mortgage Loan, the Master Servicer
will be obligated either to cure the breach in all material respects or to
purchase the Mortgage Loan at its Purchase Price (less unreimbursed advances, if
applicable, made by the Master Servicer with respect to such Mortgage Loan) or,
unless otherwise specified in the related Prospectus Supplement, to substitute
for such Mortgage Loan a Qualified Substitute Mortgage Loan in accordance with
the provisions for such substitution described above under "Mortgage Loan
Program--Representations Relating to Mortgage Loans." Unless otherwise specified
in the related Prospectus Supplement, this purchase obligation will constitute
the sole remedy available to Certificateholders or the Trustee for such a breach
of representation by the Master Servicer. Any Mortgage Loan not so purchased or
substituted for shall remain in the related Trust Fund.
Excess Spread and Excluded Spread
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The Company, the Master Servicer or any of their affiliates, or such
other entity as may be specified in the related Prospectus Supplement may retain
or be paid a portion of interest due with respect to the related Mortgage Loans
or Mortgage Securities. 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 Mortgage Loans or Mortgage
Securities. Any such payment in respect of the Mortgage Loans or Mortgage
Securities 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 Mortgage Loans or Mortgage
Securities will be allocated between the owners of any Excess Spread or Excluded
Spread and the Certificateholders entitled to payments of interest as provided
in the applicable Pooling and Servicing Agreement.
Payments on Mortgage Loans; Deposits to Certificate Account
Each Subservicer servicing a Mortgage Loan pursuant to a Subservicing
Agreement will establish and maintain an account (the "Subservicing Account")
which generally meets the requirements set forth in the Guide from time to time
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 Mortgage Loans, less its servicing or other compensation. As
specified in the Subservicing Agreement, the Subservicer must remit or cause to
be remitted to the Master Servicer all funds held in the Subservicing Account
with respect to Mortgage Loans that are required to be so remitted on a periodic
basis not less frequently than monthly. If so specified in the related
Prospectus Supplement, the Subservicer may also be required to advance on the
scheduled date of remittance any monthly installment of principal and interest
(or interest only, with respect to Simple Interest Mortgage Loans), less its
servicing or other compensation, on any Mortgage Loan for which payment was not
received from the Mortgagor.
The Master Servicer will deposit or will cause to be deposited into 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 Pooling and Servicing Agreement, which
(except as otherwise provided therein) generally will include the following:
(i) payments on account of principal of the Mortgage Loans or on the
Mortgage Securities comprising a Trust Fund;
(ii) payments on account of interest on the Mortgage Loans or
on the Mortgage Securities comprising such Trust Fund, net of the
portion of each payment thereof retained by the Subservicer, if any, as
its servicing or other compensation;
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(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 Mortgage Loan, by foreclosure or
otherwise ("Liquidation Proceeds"), including all proceeds of any
Special Hazard Insurance Policy, Bankruptcy Bond, hazard or other
insurance policy or guaranty covering any Mortgage Loan in such
Mortgage Pool (together with any payments under any Letter of Credit,
"Insurance Proceeds") or proceeds from any alternative arrangements
established in lieu of any such insurance and described in the
applicable Prospectus Supplement, other than proceeds to be applied to
the restoration of the related property or released to the Mortgagor in
accordance with the Master Servicer's normal servicing procedures;
(iv) proceeds of any Mortgage Loan in such Trust Fund
purchased (or, in the case of a substitution, certain amounts
representing a principal adjustment) by the Master Servicer, the
Company, Residential Funding, any Subservicer or Seller or any other
person pursuant to the terms of the Pooling and Servicing Agreement.
See "Mortgage Loan Program--Representations Relating to Mortgage
Loans," and "Description of the Certificates--Assignment of Trust Fund
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 Certificate Account to
the Custodial Account.
In addition to the Custodial Account, the Master Servicer will
establish and maintain, in the name of the Trustee for the benefit of the
holders of each series of Certificates, an account for the disbursement of
payments on the Mortgage Loans evidenced by each series of Certificates (the
"Certificate Account"). Both the Custodial Account and the Certificate 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 Certificates of the related series not less than a specified
level comparable to the rating category of such Certificates, (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
Certificateholders 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 Certificate Account, a trust account or
accounts maintained with the 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
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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 Pooling and Servicing Agreement
("Permitted Investments").
Unless otherwise set forth in the related Prospectus Supplement, not
later than the business day preceding each Distribution Date, the Master
Servicer will withdraw from the Custodial Account and deposit into the
applicable Certificate Account, in immediately available funds, the amount to be
distributed therefrom to Certificateholders on such Distribution Date. The
Master Servicer or the Trustee will also deposit or cause to be deposited into
the Certificate Account: (i) the amount of any Advances on Closed-End Loans, if
applicable, made by the Master Servicer as described herein under "--Advances on
Closed-End Loans," (ii) any payments under any Letter of Credit, Financial
Guaranty Insurance Policy and any amounts required to be transferred to the
Certificate 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 Mortgage Loans
as described under "Description of the Certificates--Hazard Insurance; Claims
Thereunder" below, (iv) any distributions received on any Mortgage Securities
included in the Trust Fund and (v) any other amounts as set forth in the related
Pooling and Servicing Agreement.
The portion of any payment received by the Master Servicer in respect
of a Mortgage Loan 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 Certificate Account for the related
series of Certificates and will be distributed as provided in the related
Pooling and Servicing Agreement.
Funds on deposit in the Custodial Account may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next Distribution Date, and funds on deposit in the related Certificate Account
may be invested in Permitted Investments maturing, in general, no later than the
Distribution Date. 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 Certificate 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
Pooling and Servicing Agreement, which (except as otherwise provided therein)
generally will include the following:
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(i) to make deposits to the Certificate Account in the amounts
and in the manner provided in the Pooling and Servicing Agreement and
described above under "--Payments on Mortgage Loans; Deposits to
Certificate Account;"
(ii) to reimburse itself or any Subservicer for Advances, if
applicable, or 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 Mortgage Loan with respect to which such
Advances or 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 Mortgage Loan;
(iv) to pay to itself as additional servicing compensation any
investment income on funds deposited in the Custodial Account, any
amounts remitted by Subservicers as interest in respect of partial
prepayments on the Mortgage Loans, and, if so provided in the Pooling
and Servicing Agreement, any profits realized upon disposition of a
Mortgaged Property acquired by deed in lieu of foreclosure or
repossession or otherwise allowed under the Pooling and Servicing
Agreement;
(v) to pay to itself, a Subservicer, Residential Funding, the
Company or the Seller all amounts received with respect to each
Mortgage Loan purchased, repurchased or removed pursuant to the terms
of the Pooling and Servicing Agreement and not required to be
distributed as of the date on which the related Purchase Price is
determined;
(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 Mortgage Loan (including any Mortgage Loan as to which
title to the underlying Mortgaged Property was acquired);
(vii) to reimburse itself or any Subservicer for any Advance,
if applicable, previously made which the Master Servicer has determined
to not be ultimately recoverable from Liquidation Proceeds, Insurance
Proceeds or otherwise (a "Nonrecoverable Advance"), subject to any
limitations set forth in the Pooling and Servicing Agreement as
described in the related Prospectus Supplement;
(viii) 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) or against which it or the Company is indemnified
pursuant to the Pooling and Servicing Agreement;
(ix) to withdraw any amount deposited in the Custodial Account that was not
required to be deposited therein;
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(x) to pay to itself or any Subservicer for the funding of any Draws made
on the Mortgage Loans, if applicable; and
(xi) to make deposits to the Funding Account in the amounts and in the
manner provided in the Pooling and Servicing Agreement, if applicable.
Distributions
Distributions of principal and interest (or, where applicable, of
principal only or interest only) on each class of Certificates entitled thereto
will be made on each Distribution Date either by the Trustee, the Master
Servicer acting on behalf of the Trustee or a paying agent appointed by the
Trustee (the "Paying Agent"). Unless otherwise specified in the related
Prospectus Supplement, such distributions will be made to the persons who are
registered as the holders of such Certificates at the close of business on the
last business day of the preceding month (the "Record Date"). Distributions will
be made in immediately available funds (by wire transfer or otherwise) to the
account of a Certificateholder at a bank or other entity having appropriate
facilities therefor, if such Certificateholder has so notified the Trustee, the
Master Servicer or the Paying Agent, as the case may be, and the applicable
Pooling and Servicing Agreement provides for such form of payment, or by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register. The final distribution in retirement of the Certificates
will be made only upon presentation and surrender of the Certificates at the
office or agency of the Trustee specified in the notice to Certificateholders.
Distributions will be made to each Certificateholder in accordance with such
holder's Percentage Interest in a particular class. The ("Percentage Interest")
represented by a Certificate of a particular class will be equal to the
percentage obtained by dividing the initial principal balance or notional amount
of such Certificate by the aggregate initial amount or notional balance of all
the Certificates of such class.
Principal and Interest on the Certificates
The method of determining, and the amount of, distributions of
principal and interest (or, where applicable, of principal only or interest
only) on a particular series of Certificates will be described in the related
Prospectus Supplement. Distributions of interest on each class of Certificates
will be made prior to distributions of principal thereon. Each class of
Certificates (other than certain classes of Strip Certificates) may have a
different Pass-Through Rate, which may be a fixed, variable or adjustable
Pass-Through Rate, or any combination of two or more such Pass-Through Rates.
The related Prospectus Supplement will specify the Pass-Through Rate or Rates
for each class, or the initial Pass-Through Rate or Rates and the method for
determining the Pass-Through Rate or Rates. Unless otherwise specified in the
related Prospectus Supplement, interest on the Certificates will be calculated
on the basis of a 360-day year consisting of twelve 30-day months.
On each Distribution Date for a series of Certificates, the Trustee or
the Master Servicer on behalf of the Trustee will distribute or cause the Paying
Agent to distribute, as the case may be, to each holder of record on the Record
Date of a class of Certificates, an amount equal to the
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Percentage Interest represented by the Certificate held by such holder
multiplied by such class's Distribution Amount. The "Distribution Amount" for a
class of Certificates for any Distribution Date will be the portion, if any, of
the Principal Distribution Amount (as defined in the related Prospectus
Supplement) allocable to such class for such Distribution Date, plus, if such
class is entitled to payments of interest on such Distribution Date, one month's
interest at the applicable Pass-Through Rate on the principal balance or
notional amount of such class specified in the applicable Prospectus Supplement,
less certain interest shortfalls, which generally will include (i) any Deferred
Interest added to the principal balance of the Mortgage Loans and/or the
outstanding balance of one or more classes of Certificates on the related Due
Date, (ii) any other interest shortfalls (including, without limitation,
shortfalls resulting from application of the Relief Act or similar legislation
or regulations as in effect from time to time) allocable to Certificateholders
which are not covered by advances or the applicable credit enhancement and (iii)
if so specified in the related Prospectus Supplement, Prepayment Interest
Shortfalls (as defined herein) in collections of interest on Closed-End Loans
resulting from Mortgagor prepayments during the month preceding the month of
distribution, in each case in such amount that is allocated to such class on the
basis set forth in the Prospectus Supplement.
In the case of a series of Certificates which includes two or more
classes of Certificates, the timing, sequential order, priority of payment or
amount of distributions in respect of principal, and any schedule or formula or
other provisions applicable to the determination thereof (including
distributions among multiple classes of Senior Certificates or Subordinate
Certificates) shall be as set forth in the related Prospectus Supplement.
Distributions in respect of principal of any class of Certificates will be made
on a pro rata basis among all of the Certificates of such class unless otherwise
set forth in the related Prospectus Supplement. In addition, unless otherwise
specified in the related Prospectus Supplement, distributions of principal on
the Certificates will be limited to monthly principal payments on the Mortgage
Loans, any Excess Interest, if applicable, applied as principal distributions on
the Certificates and any amount distributed as a payment of principal under the
related form of Credit Enhancement. To the extent the Trust Fund contains
Balloon Loans that require no monthly payments and non-amortizing Mortgage Loans
that require only small principal payments in proportion to the principal
balance of such Mortgage Loan, the amount of principal distributions on the
Certificates generally will be less than the amount that would otherwise be
distributable on a similar pool of conventional loans.
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 passed through to
Certificateholders on the succeeding Distribution Date. Prior to the close of
business on the business day succeeding each Determination Date, the Master
Servicer will furnish a statement to the Trustee (the information in such
statement to be made available to Certificateholders by the Master Servicer on
request) setting forth, among other things, the amount to be distributed on the
next succeeding Distribution Date.
Advances on Closed-End Loans
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Unless otherwise specified in the related Prospectus Supplement, in
connection with Closed-End Loans, the Master Servicer will agree to advance
(either out of its own funds, funds advanced to it by Subservicers or funds
being held in the Custodial Account for future distribution), for the benefit of
the Certificateholders, on or before each Distribution Date, an amount equal to
the aggregate of all scheduled payments of principal (except with respect to
Simple Interest Mortgage Loans and other than any Balloon Amount in the case of
a Balloon Loan) and interest at the applicable Pass-Through Rate or Net Mortgage
Rate, as the case may be (an "Advance"), which were delinquent as of the close
of business on the business day preceding the Determination Date on the Mortgage
Loans in the related Mortgage Pool, but only to the extent that such Advances
would, in the judgment of the Master Servicer, be recoverable out of late
payments by the Mortgagors, Liquidation Proceeds, Insurance Proceeds or
otherwise. Advances will not be made in connection with Revolving Credit Loans,
except as otherwise provided in the related Prospectus Supplement. As specified
in the related Prospectus Supplement with respect to any series of Certificates
as to which the Trust Fund includes Mortgage Securities, the Master Servicer's
advancing obligations will be pursuant to the terms of such Mortgage Securities,
as may be supplemented by the terms of the applicable Pooling and Servicing
Agreement, and may differ from the provisions relating to Advances described
herein. Unless specified in the related Prospectus Supplement, the Master
Servicer will not make any advance with respect to principal on any Simple
Interest Mortgage Loan.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to related Certificateholders. Such advances do not
represent an obligation of the Master Servicer to guarantee or insure against
losses. If Advances have been made by the Master Servicer from cash being held
for future distribution to Certificateholders, such funds will be required to be
replaced on or before any future Distribution Date to the extent that funds in
the Certificate Account on such Distribution Date would be less than payments
required to be made to Certificateholders. Any Advance will be reimbursable to
the Master Servicer out of recoveries on the related Mortgage Loans for which
such amounts were advanced (e.g., late payments made by the related Mortgagor,
any related Liquidation Proceeds and Insurance Proceeds, proceeds of any
applicable form of credit enhancement or proceeds of any Mortgage Loan purchased
by the Company, Residential Funding, a Subservicer or a Seller under the
circumstances described above). Such Advances will also be reimbursable from
cash otherwise distributable to Certificateholders (including the holders of
Senior Certificates, if applicable) to the extent that the Master Servicer shall
determine that any such Advances previously made are not ultimately recoverable
as described above. With respect to any Senior/Subordinate Series, so long as
the related Subordinate Certificates remain outstanding and subject to certain
limitations with respect to Special Hazard Losses, Fraud Losses, Bankruptcy
Losses and Extraordinary Losses, such Advances may also be reimbursable out of
amounts otherwise distributable to holders of the Subordinate Certificates, if
any. The Master Servicer generally will also be obligated to make Servicing
Advances, to the extent recoverable out of Liquidation Proceeds or otherwise, in
respect of certain taxes and insurance premiums not paid by Mortgagors on a
timely basis. Funds so advanced will be reimbursable to the Master Servicer to
the extent permitted by the Pooling and Servicing Agreement. The Master
Servicer's obligation to make Advances may be supported by another entity, the
Trustee, a Financial Guaranty Insurance Policy, a letter of credit or other
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method as may be described in the related Pooling and Servicing Agreement. In
the event that the short-term or long-term obligations of the provider of such
support are downgraded by a Rating Agency rating the related Certificates or if
any collateral supporting such obligation is not performing or is removed
pursuant to the terms of any agreement described in the related Prospectus
Supplement, the Certificates may also be downgraded.
Funding Account
If so specified in the related Prospectus Supplement, a Pooling and
Servicing Agreement or other agreement may provide for the transfer by the
Sellers of additional Mortgage Loans to the related Trust after the Closing Date
for the related Certificates. Such additional Mortgage Loans will be required to
conform to the requirements set forth in the related Pooling and Servicing
Agreement or other agreement providing for such transfer. 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
Certificates of the related series or a portion of collections on the Mortgage
Loans in respect of principal will be deposited in such account to be released
as additional Mortgage Loans are transferred. Unless otherwise specified in the
related Prospectus Supplement, a Funding Account will be required to be
maintained as an Eligible Account, all amounts 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 Certificates.
Unless otherwise specified in the related Prospectus Supplement, the related
Pooling and Servicing Agreement or other agreement providing for the transfer of
additional Mortgage Loans will provide that all such transfers must be made
within 9 months (as to amounts representing proceeds of the sale of the
Certificates) or 12 months (as to amounts representing principal collections on
the Mortgage Loans) after the Closing Date, and that amounts set aside to fund
such transfers (whether in a Funding Account or otherwise) and not so applied
within the required period of time will be deemed to be principal prepayments
and applied in the manner set forth in such Prospectus Supplement.
Reports to Certificateholders
On each Distribution Date, the Master Servicer will forward or cause to
be forwarded to each Certificateholder of record a statement or statements with
respect to the related Trust Fund setting forth the information described in the
related Pooling and Servicing Agreement. Except as otherwise provided in the
related Pooling and Servicing Agreement, such information generally will include
the following, as applicable:
(i) the amount, if any, of such distribution allocable to principal;
(ii) the amount, if any, of such distribution allocable to interest, and
the amount, if any, of any shortfall in the amount of interest and principal;
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(iii) the aggregate unpaid principal balance of the Mortgage
Loans or, if applicable, the Trust Balances thereof after giving effect
to the distribution of principal on such Distribution Date;
(iv) the outstanding principal balance or notional amount of
each class of Certificates after giving effect to the distribution of
principal on such Distribution Date;
(v) based on the most recent reports furnished by
Subservicers, the number of Mortgage Loans in the related Mortgage 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 Mortgage Loans or, if applicable, the Trust Balances thereof;
(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 Distribution Date;
(viii) the percentage of the outstanding principal balance of
the Senior Certificates, if applicable, after giving effect to the
distributions on such Distribution Date;
(ix) 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;
(x) if applicable, the Special Hazard Amount, Fraud Loss
Amount and Bankruptcy Amount as of the close of business on the
applicable Distribution Date and a description of any change in the
calculation of such amounts;
(xi) in the case of Certificates benefiting from alternative
credit enhancement arrangements described in a Prospectus Supplement,
the amount of coverage under such alternative arrangements as of the
close of business on the applicable Determination Date; and
(xii) with respect to any series of Certificates as to which
the Trust Fund includes Mortgage Securities, certain additional
information as required under the related Pooling and Servicing
Agreement.
Each amount set forth pursuant to clause (i) or (ii) above will be
expressed as a dollar amount per Single Certificate. As to a particular class of
Certificates, a "Single Certificate" generally will evidence a Percentage
Interest obtained by dividing $1,000 by the initial principal balance or
notional balance of all the Certificates of such class, except as otherwise
provided in the related Pooling and Servicing Agreement. In addition to the
information described above, reports to Certificateholders will contain such
other information as is set forth in the applicable
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Pooling and Servicing Agreement, which may include, without limitation,
information as to Advances, reimbursements to Subservicers and the Master
Servicer and losses borne by the related Trust Fund.
In addition, to the extent described in the Pooling and Servicing
Agreement, within a reasonable period of time after the end of each calendar
year, the Master Servicer will furnish a report to each person that was a holder
of record of any class of Certificates 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 Certificates during a portion
of such calendar year, for the applicable portion of such year.
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
Mortgage Loans and will, consistent with the related Pooling and Servicing
Agreement and any applicable insurance policy 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
Mortgage Loans. Consistent with the foregoing, the Master Servicer may in its
discretion waive any prepayment charge in connection with the prepayment of a
Mortgage Loan or extend the Due Dates for payments due on a Mortgage Note,
provided that the insurance coverage for such Mortgage Loan or any coverage
provided by any alternative credit enhancement will not be adversely affected
thereby. With respect to any series of Certificates as to which the Trust Fund
includes Mortgage Securities, the Master Servicer's servicing and administration
obligations will be pursuant to the terms of such Mortgage Securities.
Under its Subservicing Agreement, a Subservicer is granted certain
discretion to extend relief to Mortgagors whose payments become delinquent. A
Subservicer may grant a period of temporary indulgence (generally up to three
months) to a Mortgagor or may enter into a liquidating plan providing for
repayment by the Mortgagor of delinquent amounts within six months from the date
of execution of the plan, in each case without the prior approval of the Master
Servicer. Other types of forbearance generally require Master Servicer approval.
Neither indulgence nor forbearance with respect to a Mortgage Loan will affect
the Pass-Through Rate or Rates used in calculating distributions to
Certificateholders. See "--Distributions."
In certain instances in which a Mortgage Loan is in default (or if
default is reasonably foreseeable), and if determined by the Master Servicer to
be in the best interests of the related Certificateholders, the Master Servicer
may permit certain modifications of the Mortgage Loan or make forbearances of
the Mortgage Loan rather than proceeding with foreclosure. In making such
determination, the estimated Realized Loss that might result if such Mortgage
Loan 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 Mortgage Loan. Any such modified Mortgage Loan may remain in the related
Trust Fund, and the reduction in collections resulting
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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 Certificates.
In connection with any significant partial prepayment of a Mortgage
Loan, the Master Servicer, to the extent not inconsistent with the terms of the
Mortgage Note and local law and practice, may permit the Mortgage Loan to be
re-amortized such that the monthly payment is recalculated as an amount that
will fully amortize the remaining principal amount thereof by the original
maturity date based on the original Mortgage Rate, provided that such
re-amortization shall not be permitted if it would constitute a modification of
the Mortgage Loan for federal income tax purposes.
In any case in which property subject to a Mortgage Loan (other than an
ARM Loan described below) 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 Mortgage Loan under any due-on-sale clause
applicable thereto, but only if the exercise of such rights is permitted by
applicable law and only to the extent it would not adversely affect or
jeopardize coverage under any applicable credit enhancement arrangements. If the
Master Servicer or Subservicer is prevented from enforcing such due-on-sale
clause under applicable law or if the Master Servicer or Subservicer determines
that it is reasonably likely that a legal action would be instituted by the
related Mortgagor to avoid enforcement of such due-on-sale clause, the Master
Servicer or Subservicer will enter into an assumption and modification agreement
with the person to whom such property has been or is about to be conveyed,
pursuant to which such person becomes liable under the Mortgage Note subject to
certain specified conditions. The original Mortgagor may be released from
liability on a Mortgage Loan if the Master Servicer or Subservicer shall have
determined in good faith that such release will not adversely affect the
collectability of the Mortgage Loan. An ARM Loan may be assumed if such ARM Loan
is by its terms assumable and if, in the reasonable judgment of the Master
Servicer or the Subservicer, the proposed transferee of the related Mortgaged
Property establishes its ability to repay the loan and the security for such ARM
Loan would not be impaired by the assumption. If a Mortgagor transfers the
Mortgaged Property subject to an ARM Loan without consent, such ARM Loan may be
declared due and payable. Any fee collected by the Master Servicer 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 Mortgage Loans 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 Mortgage Loan,
that such approval will not adversely affect the security for, and the timely
and full collectability of, the related Mortgage Loan. 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.
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Realization Upon Defaulted Mortgage Loans
With respect to a Mortgage Loan in default, the Master Servicer or the
related Subservicer will decide whether to foreclose upon the Mortgaged Property
or write off the principal balance of the Mortgage Loan, or the Trust Balance
thereof, as a bad debt. In connection with such decision, the Master Servicer or
the related Subservicer will, following usual practices in connection with
senior and junior mortgage servicing activities, estimate the proceeds expected
to be received and the expenses expected to be incurred in connection with such
foreclosure to determine whether a foreclosure proceeding is appropriate. To the
extent that a Mortgage Loan is a junior Mortgage Loan, following any default
thereon, unless foreclosure proceeds for such Mortgage Loan are expected to at
least satisfy the related senior mortgage loan in full and to pay foreclosure
costs, it is likely that such Mortgage Loan will be written off as bad debt with
no foreclosure proceeding. See "Risk Factors--Special Features of the Mortgage
Loans" herein. In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
will be issued to the Trustee or to its nominee on behalf of Certificateholders
and, if applicable, the holders of any Excluded Balances. Notwithstanding any
such acquisition of title and cancellation of the related Mortgage Loan, such
Mortgage Loan (an "REO Mortgage Loan") will be considered for most purposes to
be an outstanding Mortgage Loan or an outstanding Trust Balance of the related
Revolving Credit Loan, held in the Trust Fund until such time as the Mortgaged
Property is sold and all recoverable Liquidation Proceeds and Insurance Proceeds
have been received with respect to such defaulted Mortgage Loan (a "Liquidated
Mortgage Loan"). For purposes of calculations of amounts distributable to
Certificateholders in respect of an REO Mortgage Loan, the amortization schedule
in effect at the time of any such acquisition of title (before any adjustment
thereto by reason of any bankruptcy or any similar proceeding or any moratorium
or similar waiver or grace period) will be deemed to have continued in effect
(and, in the case of an ARM Loan, such amortization schedule will be deemed to
have adjusted in accordance with any interest rate changes occurring on any
adjustment date therefor) so long as such REO Mortgage Loan is considered to
remain in the Trust Fund. If a REMIC election has been made, any Mortgaged
Property so acquired by the Trust Fund must be disposed of in accordance with
applicable federal income tax regulations and consistent with the status of the
Trust Fund as a REMIC. To the extent provided in the related Pooling and
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 to the extent provided in the
related Pooling and Servicing Agreement, for making payments to
Certificateholders.
With respect to a Mortgage Loan in default, the Master Servicer may
pursue foreclosure (or similar remedies) subject to any senior loan positions
and certain other restrictions pertaining to junior loans as described under
"Certain Legal Aspects of Mortgage Loans and Related Matters--Foreclosure on
Mortgage Loans" concurrently with pursuing any remedy for a breach of a
representation and warranty. However, the Master Servicer is not required to
continue to pursue both such remedies if it determines that one such remedy is
more likely to result in a greater recovery. Upon the first to occur of final
liquidation and a repurchase or substitution
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pursuant to a breach of a representation and warranty, such Mortgage Loan will
be removed from the related Trust Fund. The Master Servicer may elect to treat a
defaulted Mortgage Loan as having been finally liquidated if substantially all
amounts expected to be received in connection therewith have been received. Any
additional liquidation expenses relating to such Mortgage Loan thereafter
incurred will be reimbursable to the Master Servicer (or any Subservicer) from
any amounts otherwise distributable to the related Certificateholders, or may be
offset by any subsequent recovery related to such Mortgage Loan. Alternatively,
for purposes of determining the amount of related Liquidation Proceeds to be
distributed to Certificateholders, the amount of any Realized Loss or the amount
required to be drawn under any applicable form of credit enhancement, the Master
Servicer 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 Mortgage Loan. Upon foreclosure of
a Revolving Credit Loan, the related Liquidation Proceeds will be allocated
among the Trust Balances and Excluded Balances as described in the Prospectus
Supplement.
With respect to certain series of Certificates, 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 Mortgage Loan or
REO Mortgage Loan will be removed from the Trust Fund prior to the final
liquidation thereof in which case any estimated loss may be covered by any
applicable form of credit enhancement or other insurance or the
Certificateholders may bear such loss. If a defaulted Mortgage Loan or REO
Mortgage 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 Certificateholders
will bear such loss. However, if a gain results from the final liquidation of an
REO Mortgage Loan which is not required by law to be remitted to the related
Mortgagor, the Master Servicer will be entitled to retain such gain as
additional servicing compensation unless the related Prospectus Supplement
provides otherwise. For a description of the Master Servicer's obligations to
maintain and make claims under applicable forms of credit enhancement and
insurance relating to the Mortgage Loans, see "Description of Credit
Enhancement" and "Description of the Certificates--Hazard Insurance; Claims
Thereunder."
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 Pooling and Servicing Agreement. The Master Servicer may be
subject to certain restrictions under the Pooling and Servicing Agreement with
respect to the refinancing of a lien senior to a Mortgage Loan on the related
Mortgaged Property.
Hazard Insurance; Claims Thereunder
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan (other than a Cooperative Loan) will be required to be covered by
a hazard insurance policy (as described below). The following summary, as well
as other pertinent information included elsewhere in this Prospectus, do not
describe all terms of a hazard insurance policy but will reflect all material
terms thereof relevant to an investment in the Certificates. Such insurance is
subject
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to underwriting and approval of individual Mortgage Loans by the respective
insurers. The descriptions of any insurance policies described in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to such
forms of policies.
Unless otherwise specified in the related Prospectus Supplement, the
Pooling and 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) 100% of the
insurable value of the improvements (guaranteed replacement) or (ii) the sum of
the outstanding balance of such Mortgage Loan plus the outstanding balance on
any mortgage loan senior to such Mortgage Loan. 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 Certificate Account. The Pooling and
Servicing Agreement provides that the Master Servicer may satisfy its obligation
to cause hazard policies to be maintained by maintaining a blanket policy
insuring against losses on the Mortgage Loans. If such blanket policy contains a
deductible clause, the Master Servicer will deposit in the Custodial Account or
the applicable Certificate 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 Mortgage Loan, fire
insurance with extended coverage in an amount which is at least equal to the
amount necessary to avoid the application of any co-insurance clause contained
in the related hazard insurance policy.
Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the Mortgage Loans may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss. See "Description of Credit Enhancement--Special Hazard Insurance Policies"
for a description of the limited protection afforded by any Special Hazard
Insurance Policy against losses occasioned by hazards which are otherwise
uninsured against (including losses caused by the application of the
co-insurance clause described in the preceding paragraph).
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DESCRIPTION OF CREDIT ENHANCEMENT
Credit support with respect to each series of Certificates may be
comprised of one or more of the components described below. Each component may
have a dollar limit and will generally provide coverage with respect to Realized
Losses 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 Mortgage Loss"); (ii) of a type generally covered
by a Special Hazard Insurance Policy (any such loss, a "Special Hazard Loss");
(iii) attributable to certain actions which may be taken by a bankruptcy court
in connection with a Mortgage Loan, including a reduction by a bankruptcy court
of the principal balance of or the Mortgage Rate on a Mortgage Loan or an
extension of its maturity (any such loss, a "Bankruptcy Loss"); and (iv)
incurred on defaulted Mortgage Loans as to which there was fraud in the
origination of such Mortgage Loans (any such loss, a "Fraud Loss").
Unless otherwise specified in the related Prospectus Supplement, credit
support will not provide protection against all risks of loss and will not
guarantee repayment of the entire outstanding principal balance of the
Certificates and interest thereon. If losses occur which exceed the amount
covered by credit support or which are not covered by the credit support,
Certificateholders will bear their allocable share of deficiencies. In
particular, Defaulted Mortgage Losses, Special Hazard Losses, Bankruptcy Losses
and Fraud Losses in excess of the amount of coverage provided therefor and
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
Certificates is exhausted, the Certificateholders will bear all further risks of
loss not otherwise insured against.
As set forth below and in the related Prospectus Supplement, (i)
coverage with respect to Defaulted Mortgage Losses may be provided by one or
more Letters of Credit, (ii) coverage with respect to Special Hazard Losses may
be provided by one or more Letters of Credit or a Special Hazard Insurance
Policies (any instrument, to the extent providing such coverage, a "Special
Hazard Instrument"), (iii) coverage with respect to Bankruptcy Losses may be
provided by one or more Letters of Credit or a Bankruptcy Bonds and (iv)
coverage with respect to Fraud Losses may be provided by one or more Letters of
Credit or mortgage repurchase bonds. In addition, if so specified in the
applicable Prospectus Supplement, in lieu of or in addition to any or all of the
foregoing arrangements, credit enhancement may be in the form of (i) a Reserve
Fund to cover such losses, (ii) subordination of one or more classes of
Subordinate Certificates to provide credit support to one or more classes of
Senior Certificates or (iii) Overcollateralization, Letters of Credit, surety
bonds, Financial Guaranty Insurance Policies or other types of insurance
policies, certain other secured or unsecured corporate guarantees or in such
other form as may be described in the related Prospectus Supplement, or in the
form of a combination of two or more of the foregoing. The credit support may be
provided by an assignment of the right to receive certain cash amounts, a
deposit of cash into a Reserve Fund or other pledged assets, or by banks,
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insurance companies, guarantees or any combination thereof identified in the
related Prospectus Supplement.
With respect to any defaulted Mortgage Loan that is finally liquidated,
the amount of loss realized, if any (as described in the related Pooling and
Servicing Agreement, a "Realized Loss"), will equal the portion of the Stated
Principal Balance remaining after application of all amounts recovered (net of
amounts reimbursable to the Master Servicer for related Advances, if applicable,
and expenses allocable to the Trust Fund) towards interest and principal owing
on the Mortgage Loan. With respect to a Mortgage Loan the principal balance of
which has been reduced in connection with bankruptcy proceedings, the amount of
such reduction will be treated as a Realized Loss. The "Stated Principal
Balance" of any Mortgage Loan as of any date of determination is equal to the
principal balance thereof as of the Cut-off Date, after application of all
scheduled principal payments due on or before the Cut-off Date whether received
or not, reduced by all amounts allocable to principal that are distributed to
Certificateholders on or before the date of determination, and as further
reduced to the extent that any Realized Loss thereon has been allocated to any
Certificates on or before such date.
For any series of Certificates backed by Trust Balances of Revolving
Credit Loans, the credit enhancement provided with respect to such Certificates
will cover any portion of any Realized Losses allocated to such Trust Balances,
subject to any limitations described herein and in the related Prospectus
Supplement. See "Allocation of Revolving Credit Loan Balances" herein.
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"). The Pooling and Servicing Agreement or
other documents may 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 Certificates. 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
Certificates.
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 Certificates. The issuer of the
Financial Guaranty Insurance Policy (the "Insurer") will be
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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 Certificates that an amount equal to
the full amount of distributions due to such holders will be received by the
Trustee or its agent on behalf of such holders for distribution on each
Distribution 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 Mortgage Loan and will not guarantee any specific rate of principal
prepayments. Unless otherwise specified in the related Prospectus Supplement,
the Insurer will be subrogated to the rights of each holder to the extent the
Insurer makes payments under the Financial Guaranty Insurance Policy.
Letter of Credit
If any component of credit enhancement as to any series of Certificates
is to be provided by a letter of credit (the "Letter of Credit"), a bank (the
"Letter of Credit Bank") will deliver to the Trustee an irrevocable Letter of
Credit. The Letter of Credit may provide direct coverage with respect to the
Mortgage Loans. The Letter of Credit Bank, the amount available under the Letter
of Credit with respect to each component of credit enhancement, the expiration
date of the Letter of Credit, and a more detailed description of the Letter of
Credit will be specified in the related Prospectus Supplement. On or before each
Distribution Date, the Letter of Credit Bank will be required to make certain
payments after notification from the Trustee, to be deposited in the related
Certificate Account with respect to the coverage provided thereby. The Letter of
Credit may also provide for the payment of Advances.
Special Hazard Insurance Policies
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained by the Company for a Trust Fund will be issued by
the insurer named in the related Prospectus Supplement. Each Special Hazard
Insurance Policy generally will, subject to limitations described in the related
Prospectus Supplement, if any, will protect the related Certificateholders from
Special Hazard Losses which are (i) losses due to direct physical damage to a
Mortgaged Property other than any loss of a type covered by a hazard insurance
policy or a flood insurance policy, if applicable, and (ii) losses from partial
damage caused by reason of the application of the co-insurance clauses contained
in hazard insurance policies. See "Description of the Certificates--Hazard
Insurance; Claims Thereunder." A Special Hazard Insurance Policy will not cover
losses occasioned by war, civil insurrection, certain governmental actions,
errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, chemical contamination or waste by the
Mortgagor. Aggregate claims under a Special Hazard Insurance Policy will be
limited to the amount set forth in the related Pooling and Servicing Agreement
and will be subject to reduction as set forth in such related Pooling and
Servicing
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Agreement. A Special Hazard Insurance Policy will provide that no claim may be
paid unless hazard and, if applicable, flood insurance on the property securing
the Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid by the Master Servicer.
To the extent set forth in the related Prospectus Supplement, coverage
in respect of Special Hazard Losses for a series of Certificates may be
provided, in whole or in part, by a type of special hazard coverage other than a
Special Hazard Insurance Policy or by means of a representation of the Company
or Residential Funding.
Bankruptcy Bonds
In the event of a personal bankruptcy of a Mortgagor, a bankruptcy
court may establish the value of the Mortgaged Property of such Mortgagor at an
amount less than the then outstanding principal balance of the first and junior
loans secured by such Mortgaged Property (such difference, a "Deficient
Valuation"). The amount of the secured debt could then be reduced to such value,
and, thus, the holder of such first and junior loans would become unsecured
creditors to the extent the outstanding principal balance of such loans exceeds
the value assigned to the Mortgaged Property by the bankruptcy court. In
addition, certain other modifications of the terms of a Mortgage Loan can result
from a bankruptcy proceeding, including a reduction in the amount of the Monthly
Payment on the related Mortgage Loan (a "Debt Service Reduction;" Debt Service
Reductions and Deficient Valuations, collectively referred to herein as
"Bankruptcy Losses"). See "Certain Legal Aspects of Mortgage Loans and Related
Matters--Anti-Deficiency Legislation and Other Limitations on Lenders." Any
Bankruptcy Bond to provide coverage for Bankruptcy Losses resulting from
proceedings under the federal Bankruptcy Code obtained by the Company for a
Trust Fund will be issued by an insurer named in the related Prospectus
Supplement. The level of coverage under each Bankruptcy Bond will be set forth
in the related Prospectus Supplement.
Subordination
A Senior/Subordinate Series of Certificates will consist of one or more
classes of Senior Certificates and one or more classes of Subordinate
Certificates, as set forth in the related Prospectus Supplement. With respect to
any Senior/Subordinate Series, the total amount available for distribution on
each Distribution Date, as well as the method for allocating such amount among
the various classes of Certificates included in such series, will be described
in the related Prospectus Supplement. Generally, with respect to any such series
the amount available for distribution will be allocated first to interest on the
Senior Certificates of such series, and then to principal of the Senior
Certificates up to the amounts described in the related Prospectus Supplement,
prior to allocation of any amounts to the Subordinate Certificates of such
series.
Realized Losses will be allocated to the Subordinate Certificates 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
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Senior Certificates. If such series includes more than one class of Senior
Certificates, such additional Realized Losses will be allocated either on a pro
rata basis among all of the Senior Certificates in proportion to their
respective outstanding principal balances or as otherwise provided in the
related Prospectus Supplement. 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 Certificates 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
Certificates. Generally, any allocation of a Realized Loss to a Certificate will
be made by reducing the outstanding principal balance thereof as of the
Distribution Date following the calendar month in which such Realized Loss was
incurred. At any given time, the percentage of the outstanding principal
balances of all of the Certificates evidenced by the Senior Certificates is the
"Senior Percentage," determined in the manner set forth in the related
Prospectus Supplement.
As set forth above, the rights of holders of the various classes of
Certificates of any series to receive distributions of principal and interest is
determined by the aggregate outstanding principal balance of each such class
(or, if applicable, the related notional amount). The outstanding principal
balance of any Certificate will be reduced by all amounts previously distributed
on such Certificate in respect of principal and by any Realized Losses allocated
thereto. If there are no Realized Losses or prepayments of principal on any of
the Mortgage Loans, the respective rights of the holders of Certificates of any
series to future distributions generally would not change. However, to the
extent set forth in the related Prospectus Supplement, holders of Senior
Certificates may be entitled to receive a disproportionately larger amount of
prepayments received during certain specified periods, which will have the
effect (absent offsetting losses) of accelerating the amortization of the Senior
Certificates and increasing the respective percentage ownership interest
evidenced by the Subordinate Certificates in the related Trust Fund (with a
corresponding decrease in the Senior Percentage), thereby preserving the
availability of the subordination provided by the Subordinate Certificates. In
addition, as set forth above, certain Realized Losses generally will be
allocated first to Subordinate Certificates by reduction of the outstanding
principal balance thereof, which will have the effect of increasing the
respective ownership interest evidenced by the Senior Certificates in the
related Trust Fund.
If so provided in the Pooling and Servicing Agreement, the Master
Servicer may be permitted, under certain circumstances, to purchase any Mortgage
Loan (or the Trust Balance thereof, if applicable) that is three or more months
delinquent in payments of principal and interest, at the Purchase Price. Such
Purchase Price will be advanced by the Master Servicer to the Trust Fund,
subject to the right of the Master Servicer to reimbursement from the Trust Fund
for any Realized Losses subsequently incurred. Any Realized Loss so incurred in
connection with any such Mortgage Loan (or the Trust Balance thereof, if
applicable) will be allocated among the then outstanding Certificateholders of
the related series in the same manner as Realized Losses on Mortgage Loans that
have not been so purchased.
To the extent provided in the related Prospectus Supplement, certain
amounts otherwise payable on any Distribution Date to holders of Subordinate
Certificates may be deposited into a
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Reserve Fund. Amounts held in any Reserve Fund may be applied as described
under "Description of Credit Enhancement--Reserve Funds" in the related
Prospectus Supplement.
With respect to any Senior/Subordinate Series, the terms and provisions
of the subordination may vary from those described above. Any such variation and
any additional credit enhancement will be described in the related Prospectus
Supplement.
Overcollateralization
If so specified in the related Prospectus Supplement, interest
collections on the Mortgage Loans, or the Trust Balances of the related
Revolving Credit Loans, as applicable, may exceed interest distributions on the
Certificates for the related Distribution Date (such excess referred to as
"Excess Interest"). Such Excess Interest may be deposited into a Reserve Fund or
applied as a distribution of principal on the Certificates. To the extent Excess
Interest is applied as principal distributions on the Certificates, the effect
will be to reduce the principal balance of the Certificates relative to the
outstanding balance of the Mortgage Loans, thereby creating
"Overcollateralization" and additional protection to the Certificateholders, 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 Pooling and Servicing 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 Certificates,
from the Excess Spread, Excluded Spread or otherwise. A Reserve Fund for a
series of Certificates which is funded over time by depositing therein a portion
of the interest payment on each Mortgage Loan may be referred to as a "Spread
Account" in the related Prospectus Supplement and Pooling and Servicing
Agreement. To the extent that the funding of the Reserve Fund is dependent on
amounts otherwise payable on related Certificates, Excess Spread, Excluded
Spread or other cash flows attributable to the related Mortgage Loans or on
reinvestment income, the Reserve Fund may provide less coverage than initially
expected if the cash flows or reinvestment income on which such funding is
dependent are lower than anticipated. With respect to any series of Certificates
as to which credit enhancement includes a Letter of Credit, if so specified in
the related Prospectus Supplement, under certain circumstances the remaining
amount of the Letter of Credit may be drawn by the Trustee and deposited in a
Reserve Fund.
Amounts in a Reserve Fund may be distributed to Certificateholders, or
applied to reimburse the Master Servicer 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
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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 Certificates 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 Distribution 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 Certificates.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee will have a perfected security interest for the benefit of the
Certificateholders in the assets in the Reserve Fund. 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 Certificateholders. Such delays could adversely
affect the yield to investors on the related Certificates.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of 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 Certificates,
the Master Servicer 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 Pooling and Servicing Agreement, unless
coverage thereunder has been exhausted through payment of claims or otherwise,
or substitution therefor is made as described below under "--Reduction or
Substitution of Credit Enhancement." The Master Servicer, on behalf of itself,
the Trustee and Certificateholders, will provide the Trustee information
required for the 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, Special Hazard Insurance Policy or Bankruptcy Bond, as
applicable, 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
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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 Certificates
associated with any reduction or withdrawal in rating by an applicable Rating
Agency shall be borne by the Certificateholders.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
Special Hazard Insurance Policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any Letter of Credit, 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 Certificateholders on liquidation of the
Mortgage Loan after reimbursement of the Master Servicer for its expenses and
(ii) that such expenses will be recoverable by it through Liquidation Proceeds
or Insurance Proceeds. If recovery under any Letter of Credit or other credit
enhancement is not available because the Master Servicer has been unable to make
the above determinations, has made such determinations incorrectly or recovery
is not available for any other reason, the Master Servicer is nevertheless
obligated to follow such normal practices and procedures (subject to the
preceding sentence) as it deems necessary or advisable to realize upon the
defaulted Mortgage Loan and in the event such determination has been incorrectly
made, is entitled to reimbursement of its expenses in connection with such
restoration.
Reduction or Substitution of Credit Enhancement
The amount of credit support provided with respect to any series of
Certificates 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 Pooling
and Servicing 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 Certificateholders, upon the
written assurance from each applicable Rating Agency that the then-current
rating of the related series of Certificates will not be adversely affected
thereby. Furthermore, 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 Certificates 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 Certificates. 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 Certificates is maintained. Where the credit support is in the
form of a Reserve Fund, a permitted reduction in the amount of credit
enhancement will result in a release of all or a portion of the assets in the
Reserve Fund to the Company, the Master Servicer or such other
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person that is entitled thereto. Any assets so released and any amount by which
the credit enhancement is reduced will not be available for distributions in
future periods.
PURCHASE OBLIGATIONS
Certain types of Mortgage Loans and certain classes of Certificates of
any series, as specified in the related Prospectus Supplement, may be subject to
a purchase obligation (a "Purchase Obligation") that would become applicable on
one or more specified dates, or upon the occurrence of one or more specified
events, or on demand made by or on behalf of the applicable Certificateholders.
A Purchase Obligation may be in the form of a conditional or unconditional
purchase commitment, liquidity facility, maturity guaranty, put option or demand
feature. The terms and conditions of each Purchase Obligation, including the
purchase price, timing and payment procedure, will be described in the related
Prospectus Supplement. A Purchase Obligation with respect to Mortgage Loans may
apply to that Mortgage Loans or to the related Certificates. Each Purchase
Obligation may be a secured or unsecured obligation of the provider thereof,
which may include a bank or other financial institution or an insurance company.
Each Purchase Obligation will be evidenced by an instrument delivered to the
Trustee for the benefit of the applicable Certificateholders of the related
series. Each Purchase Obligation with respect to Mortgage Loans will be payable
solely to the Trustee for the benefit of the Certificateholders of the related
series. Other Purchase Obligations may be payable to the Trustee or directly to
the holders of the Certificates to which such obligations relate.
THE COMPANY
The Company is an indirect wholly-owned subsidiary of GMAC Mortgage,
which is a wholly-owned subsidiary of General Motors Acceptance Corporation. The
Company was incorporated in the State of Delaware on May 5, 1995. The Company
was organized for the purpose of acquiring first or junior lien home equity
mortgage loans and mortgage securities and issuing securities backed by such
mortgage loans and mortgage securities. The Company anticipates that it will in
many cases have acquired Mortgage Loans indirectly through Residential Funding,
which is also an indirect wholly-owned subsidiary of GMAC Mortgage. The Company
does not have, nor is it expected in the future to have, any significant assets.
The Certificates do not represent an interest in or an obligation of
the Company. The Company's only obligations with respect to a series of
Certificates 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 600, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000.
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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 Manager
for a series of Certificates.
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
600, Minneapolis, Minnesota 55437. Its telephone number is (612) 832-7000.
Residential Funding conducts operations from its headquarters in Minneapolis and
from offices located in California, Colorado, Connecticut, Florida, Georgia,
Maryland, New York, North Carolina, Rhode Island and Texas. At March 31, 1997,
Residential Funding was master servicing a first lien loan portfolio of
approximately $34.8 billion and a second lien loan portfolio of approximately
$1.8 billion.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Certificates--General,"
each series of Certificates will be issued pursuant to a Pooling and Servicing
Agreement. The following summaries describe certain additional provisions common
to each Pooling and Servicing Agreement and are qualified entirely by reference
to the actual terms of the Pooling and Servicing Agreement for a series of
Certificates.
Servicing and Administration
The principal servicing compensation to be paid to the Master Servicer
in respect of its master servicing activities for each series of Certificates
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 Mortgage Loan which is over and above
the interest rate specified at the time the Company or Residential Funding, as
the case may be, committed to purchase the Mortgage Loan. See "Mortgage Loan
Program--Subservicing." Subservicers will be required to pay to the Master
Servicer an amount equal to one month's interest (net of its servicing or other
compensation) on the amount of any partial Principal Prepayment. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will retain such amounts to the extent collected from Subservicers. In addition,
the Master Servicer or a Subservicer will retain all prepayment charges,
assumption fees and late
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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 Certificate Account (unless otherwise specified in the related
Prospectus Supplement) or in a Subservicing Account, as the case may be. In
addition, certain reasonable 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 Pooling and
Servicing Agreement, the 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 Pooling and
Servicing Agreement, including, without limitation, payment of any fee or other
amount payable in respect of certain credit enhancement arrangements, payment of
the fees and disbursements of the Trustee, any custodian appointed by the
Trustee, the Certificate Registrar and any Paying Agent, and payment of expenses
incurred in enforcing the obligations of Subservicers and 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 Mortgage Loans and in connection with the
restoration of Mortgaged Properties, such right of reimbursement being prior to
the rights of Certificateholders to receive any related Liquidation Proceeds
(including Insurance Proceeds).
Evidence as to Compliance
Each Pooling and Servicing Agreement will provide for delivery (on or
before a specified date in each year) to the 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 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 Pooling and Servicing Agreement.
Each Pooling and 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 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 Pooling and 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
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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 Certificateholders without charge upon written request to the
Master Servicer, at the address indicated in the monthly statement to
Certificateholders.
Certain Matters Regarding the Master Servicer and the Company
The Pooling and Servicing Agreement for each series of Certificates
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 Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the Pooling and Servicing Agreement.
Each Pooling and 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 Certificateholders for any action taken
or for refraining from the taking of any action in good faith pursuant to the
Pooling and 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
Pooling and 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 and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Pooling and Servicing Agreement or the related
series of Certificates, 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 Pooling and 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 Pooling and 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 Pooling
and Servicing Agreement and the rights and duties of the parties thereto and the
interests of the Certificateholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
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expenses, costs and liabilities of the Trust Fund and the Master Servicer or the
Company, as the case may be, will be entitled to be reimbursed therefor out of
funds otherwise distributable to Certificateholders.
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 Pooling
and Servicing Agreement, provided that such person meets the requirements set
forth in the Pooling and 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 Pooling and Servicing Agreement to
any person reasonably satisfactory to the Company and the Trustee and meeting
the requirements set forth in the related Pooling and Servicing Agreement. In
the case of any such assignment, the Master Servicer will be released from its
obligations under such Pooling and Servicing Agreement, exclusive of liabilities
and obligations incurred by it prior to the time of such assignment.
Events of Default
Events of Default under the Pooling and Servicing Agreement in respect
of a series of Certificates, 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 Certificate Account or,
if the Master Servicer is the Paying Agent, to distribute to the holders of any
class of Certificates 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 Trustee or the Company, or to the Master
Servicer, the Company and the Trustee by the holders of Certificates of such
class evidencing not less than 25% of the aggregate Percentage Interests
constituting such class; (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 Pooling and Servicing Agreement with respect to such series of Certificates
which continues unremedied for 30 days (15 days in the case of a failure to pay
the premium for any insurance policy which is required to be maintained under
the Pooling and Servicing Agreement) after the giving of written notice of such
failure to the Master Servicer by the Trustee or the Company, or to the Master
Servicer, the Company and the Trustee by the holders of any class of
Certificates of such series evidencing not less than 25% of the aggregate
Percentage Interests constituting such class; (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 Event of Default as set forth in the Pooling and Servicing
Agreement. A default pursuant to the terms of any Mortgage Securities included
in any Trust Fund will not constitute an Event of Default under the related
Pooling and Servicing Agreement.
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Rights Upon Event of Default
So long as an Event of Default remains unremedied, either the Company
or the Trustee may (except as otherwise provided for in the related Pooling and
Servicing Agreement with respect to the Credit Enhancer, if applicable), and, at
the direction of the holders of Certificates evidencing not less than 51% of the
aggregate voting rights in the related Trust Fund, the Trustee shall (except as
otherwise provided for in the related Pooling and Servicing Agreement with
respect to the Credit Enhancer), by written notification to the Master Servicer
and to the Company or the Trustee, as applicable, terminate all of the rights
and obligations of the Master Servicer under the Pooling and Servicing Agreement
(other than any right of the Master Servicer as Certificateholder and other than
the right to receive servicing compensation, expenses for servicing the Mortgage
Loans during any period prior to the date of such termination and such other
reimbursements, of amounts the Master Servicer is entitled to withdraw from the
Custodial Account) covering such Trust Fund and in and to the Mortgage Loans and
the proceeds thereof, whereupon the Trustee will succeed to all
responsibilities, duties and liabilities of the Master Servicer under such
Pooling and Servicing Agreement (other than the obligation to purchase Mortgage
Loans under certain circumstances) and will be entitled to similar compensation
arrangements. In the event that the Trustee would be obligated to succeed the
Master Servicer but is unwilling so to act, it may appoint (or if it is unable
so to act, it shall appoint) or petition a court of competent jurisdiction for
the appointment of 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
Pooling and Servicing Agreement (unless otherwise set forth in the Pooling and
Servicing Agreement). Pending such appointment, the Trustee is obligated to act
in such capacity. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial Master Servicer under the Pooling and Servicing Agreement.
No Certificateholder will have any right under a Pooling and Servicing
Agreement to institute any proceeding with respect to such Pooling and Servicing
Agreement unless (a) such holder previously has given to the Trustee written
notice of default and the continuance thereof, (b) the holders of Certificates
of any class evidencing not less than 25% of the aggregate Percentage Interests
constituting such class (i) have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and (ii) have
offered to the Trustee reasonable indemnity and (c) the Trustee has neglected or
refused to institute any such proceeding for 60 days after receipt of such
request and indemnity (except as otherwise provided for in the related Pooling
and Servicing Agreement with respect to the Credit Enhancer). However, the
Trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the Pooling and Servicing Agreement or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of Certificates covered by such Pooling and
Servicing Agreement, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
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Amendment
Each Pooling and Servicing Agreement may be amended by the Company, the
Master Servicer and the Trustee, without the consent of the related
Certificateholders, (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 Certificate Account or to change the name in which
the Custodial Account is maintained (except that (a) deposits to the Certificate
Account may not occur later than the related Distribution Date, (b) such change
may not adversely affect in any material respect the interests of any
Certificateholder, as evidenced by an opinion of counsel, and (c) such change
may not adversely affect the then-current rating of any rated classes of
Certificates, as evidenced by a letter from each applicable Rating Agency) as
specified in the related Prospectus Supplement; (iv) if a REMIC election has
been made with respect to the related Trust Fund, to modify, eliminate or add to
any of its provisions (a) to the extent necessary to maintain the qualification
of the Trust Fund as a REMIC or to avoid or minimize the risk of imposition of
any tax on the related Trust Fund, provided that the Trustee has received an
opinion of counsel to the effect that (1) such action is necessary or desirable
to maintain such qualification or to avoid or minimize such risk, and (2) such
action will not adversely affect in any material respect the interests of any
related Certificateholder or (b) to restrict the transfer of the REMIC Residual
Certificates, provided that the Company has determined that such change would
not adversely affect the applicable ratings of any classes of the Certificates,
as evidenced by a letter from each applicable Rating Agency as specified in the
related Prospectus Supplement, and that any such amendment will not give rise to
any tax with respect to the transfer of the REMIC Residual Certificates to a
non-permitted transferee; or (v) to make any other provisions with respect to
matters or questions arising under such Pooling and Servicing 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
Certificateholder.
The Pooling and Servicing Agreement may also be amended by the Company,
the Master Servicer and the Trustee (except as otherwise provided for in the
related Pooling and Servicing Agreement with respect to the Credit Enhancer)
with the consent of the holders of Certificates of each class affected thereby
evidencing, in each case, not less than 66% of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Pooling and
Servicing Agreement or of modifying in any manner the rights of the related
Certificateholders, except that no such amendment may (i) reduce in any manner
the amount of, or delay the timing of, payments received on Mortgage Loans which
are required to be distributed on a Certificate of any class without the consent
of the holder of such Certificate, (ii) impair the right of any
Certificateholder to institute suit for the enforcement of the provisions of the
Pooling and Servicing Agreement or (iii) reduce the percentage of Certificates
of any class the holders of which are required to consent to any such amendment
unless the holders of all Certificates of such class have consented to the
change in such percentage.
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Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Fund, the Trustee will not be entitled to consent
to any amendment to a Pooling and Servicing Agreement without having first
received an opinion of counsel to the effect that such amendment or the exercise
of any power granted to the Master Servicer, the Company or the Trustee in
accordance with such amendment will not result in the imposition of a tax on the
related Trust Fund or cause such Trust Fund to fail to qualify as a REMIC.
Termination; Retirement of Certificates
The obligations created by the Pooling and Servicing Agreement for each
series of Certificates (other than certain limited payment and notice
obligations of the Trustee and the Company, respectively) will terminate upon
the payment to the related Certificateholders of all amounts held in the
Certificate Account or by the Master Servicer and required to be paid to such
Certificateholders following the earlier of (i) the final payment or other
liquidation or disposition (or any advance with respect thereto) of the last
Mortgage Loan subject thereto and all property acquired upon foreclosure or deed
in lieu of foreclosure of any Mortgage Loan and (ii) the purchase by the Master
Servicer or the Company or, if specified in the related Prospectus Supplement,
by the holder of the REMIC Residual Certificates (see "Certain Federal Income
Tax Consequences" below) from the Trust Fund for such series of all remaining
Mortgage Loans and all property acquired in respect of such Mortgage Loans. In
addition to the foregoing, the Master Servicer or the Company may have the
option to purchase, in whole but not in part, the Certificates specified in the
related Prospectus Supplement in the manner set forth in the related Prospectus
Supplement. Upon the purchase of such Certificates or at any time thereafter, at
the option of the Master Servicer or the Company, the Mortgage Loans may be
sold, thereby effecting a retirement of the Certificates and the termination of
the Trust Fund, or the Certificates so purchased may be held or resold by the
Master Servicer or the Company. Written notice of termination of the Pooling and
Servicing Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency appointed by the Trustee which will be
specified in the notice of termination. If the Certificateholders are permitted
to terminate the trust under the applicable Pooling and Servicing Agreement, a
penalty may be imposed upon the Certificateholders based upon the fee that would
be foregone by the Master Servicer because of such termination.
Any such purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a series of Certificates shall be made at the option
of the Master Servicer, the Company or, if applicable, the holder of the REMIC
Residual Certificates at the price specified in the related Prospectus
Supplement. The exercise of such right will effect early retirement of the
Certificates of that series, but the right of any such entity to purchase the
Mortgage Loans and related property will be subject to the criteria, and will be
at the price set forth in the related Prospectus Supplement. Such early
termination may adversely affect the yield to holders of certain classes of such
Certificates. If a REMIC election has been made, the termination of the related
Trust Fund will be effected in a manner consistent with applicable federal
income tax regulations and its status as a REMIC.
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The Trustee
The Trustee under each Pooling and Servicing Agreement will be named in
the related Prospectus Supplement. The commercial bank or trust company serving
as Trustee may have normal banking relationships with the Company and/or its
affiliates, including Residential Funding.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement or if the Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Company will be obligated to appoint a
successor Trustee. The Trustee may also be removed at any time by the holders of
Certificates evidencing not less than 51% of the aggregate voting rights in the
related Trust Fund. Any resignation or removal of the Trustee and appointment of
a successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a Certificate will depend on the price paid by
the holder for such Certificate, the Pass-Through Rate on any such Certificate
entitled to payments of interest (which Pass-Through Rate may vary if so
specified in the related Prospectus Supplement) and the rate and timing of
principal payments (including payments in excess of required installments,
prepayments or terminations, liquidations and repurchases) on the Mortgage Loans
and the rate and timing of Draws in the case of Revolving Credit Loans and the
allocation thereof to reduce the principal balance of such Certificate (or
notional amount thereof, if applicable).
The amount of interest payments on a Mortgage Loan distributed (or
accrued in the case of Deferred Interest or Accrual Certificates) monthly to
holders of a class of Certificates 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 Certificates) and will be
expressed as a fixed, adjustable or variable Pass-Through Rate payable on the
outstanding principal balance or notional amount of such Certificate, or any
combination of such Pass-Through Rates, calculated as described herein and in
the related Prospectus Supplement. See "Description of the
Certificates--Distributions." Holders of Strip Certificates or a class of
Certificates having a Pass-Through Rate that varies based on the weighted
average Mortgage Rate of the underlying Mortgage Loans will be affected by
disproportionate prepayments and repurchases of Mortgage Loans having higher Net
Mortgage Rates or rates applicable to the Strip Certificates, as applicable.
The effective yield to maturity to each holder of Certificates entitled
to payments of interest will be below that otherwise produced by the applicable
Pass-Through Rate and purchase price of such Certificate to the extent that
interest accrues on each Mortgage Loan during the
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calendar month or a period preceding a Distribution Date instead of through the
day immediately preceding such Distribution Date.
A class of Certificates may be entitled to payments of interest at a
variable or adjustable Pass-Through Rate, or any combination of such
Pass-Through Rates, as specified in the related Prospectus Supplement. A
variable Pass-Through 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 Mortgage Loans (the "Net Mortgage Rate") or certain
balances thereof for the month preceding the Distribution Date, by reference to
an index or otherwise. The aggregate payments of interest on a class of
Certificates, and the yield to maturity thereon, will be affected by the rate of
payment of principal on the Certificates (or the rate of reduction in the
notional amount of Certificates entitled to payments of interest only) and, in
the case of Certificates evidencing interests in ARM Loans, by changes in the
Net Mortgage Rates on the ARM Loans. The yield on the Certificates will also be
affected by liquidations of Mortgage Loans following Mortgagor defaults and by
purchases of Mortgage Loans in the event of certain breaches of representations
made in respect of such Mortgage Loans, or conversions of ARM Loans to a fixed
interest rate. See "Mortgage Loan Program--Representations Relating to Mortgage
Loans" and "Description of the Certificates--Assignment of Trust Fund Assets"
above. In addition, if the index used to determine the Pass-Through Rate for the
Certificates is different than the Index applicable to the Mortgage Rates, the
yield on the Certificates will be sensitive to changes in the index related to
the Pass-Through Rate and the yield on the Certificates may be reduced by
application of a cap on the Pass-Through 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 Certificate is purchased at a premium over its face
amount and distributions of principal on such Certificate 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 Certificate is purchased at a discount from its face amount and distributions
of principal on such Certificate 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 Certificates 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 Mortgage Loans (net of Draws if
applicable) will negatively affect the total return to investors in any such
Certificates. The yield on a class of Strip Certificates that is entitled to
receive payments of interest only will nevertheless be affected by any losses on
the related Mortgage Loans because of the effect on the timing and amount of
payments. In certain circumstances, rapid principal payments on the Mortgage
Loans (net of Draws if applicable) may result in the failure of such holders to
recoup their original investment. If Strip Certificates 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 Mortgage Loans (net of
Draws if applicable) could negatively affect the anticipated yield on such Strip
Certificates. In addition, the total return to investors of Certificates
evidencing a right to distributions of interest at a rate that is based on the
weighted average Net Mortgage Rate of the Mortgage Loans from time to time will
be adversely affected by principal payments on Mortgage Loans with Mortgage
Rates higher than the weighted average Mortgage
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Rate on the Mortgage Loans. In general, mortgage loans with higher Mortgage
Rates or Gross Margins are likely to prepay at a faster rate than mortgage loans
with lower Mortgage Rates or Gross Margins. In addition, the yield to maturity
on certain other types of classes of Certificates, including Accrual
Certificates, Certificates with a Pass-Through 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 Certificates, may be relatively more sensitive to the
rate of principal payments on the related Mortgage Loans (net of Draws if
applicable) than other classes of Certificates.
The timing of changes in the rate of principal distributions on a
Certificate may significantly affect an investor's actual yield to maturity,
even if the average rate of principal distributions experienced over time is
consistent with an investor's expectation. In general, the earlier a
distribution of principal on a Certificate, 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 distributions occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of a series of Certificates would not be fully offset by a subsequent like
reduction (or increase) in the rate of principal distributions.
Unless otherwise specified in the related Prospectus Supplement,
prepayments in full or final liquidations of Closed-End Loans will reduce the
amount of interest distributed in the following month to holders of Certificates
entitled to distribution of interest because the resulting Prepayment Interest
Shortfall will not be covered by Compensating Interest. See "Description of the
Certificates--Principal and Interest on the Certificates." Unless otherwise
specified in the related Prospectus Supplement, a partial prepayment of
principal of a Closed-End Loan is applied so as to reduce the outstanding
principal balance thereof as of the first day of the month in which such partial
prepayment is received. As a result, the effect of a partial prepayment on a
Closed-End Loan generally will be to reduce the amount of interest distributed
to holders of Certificates in the month following the receipt of such partial
prepayment by an amount equal to one month's interest at the applicable
Pass-Through Rate or Net Mortgage Rate, as the case may be, on the prepaid
amount. See "Description of the Certificates--Payment on Mortgage Loans;
Deposits to Certificate Account." Neither full nor partial principal prepayments
on Closed-End Loans will be distributed until the Distribution Date in the month
following receipt.
The rate and timing of defaults on the Mortgage Loans will also affect
the rate and timing of principal payments on the Mortgage Loans and thus the
yield on the related Certificates. For a general discussion of the risk of
defaults on the Mortgage Loans, see "Risk Factors--Special Features of the
Mortgage Loans" herein. There can be no assurance as to the rate of losses or
delinquencies on any of the Mortgage Loans, however, such losses and
delinquencies may be expected to be higher than those of traditional first lien
mortgage loans. To the extent that any losses are incurred on any of the
Mortgage Loans that are not covered by the applicable credit enhancement,
holders of Certificates of the series evidencing interests in the related
Mortgage Pool (or certain classes thereof) will bear all risk of such losses
resulting from default by Mortgagors. See "Risk Factors--Limitations, Reduction
and Substitution of Credit Enhancement" herein. Even where the applicable credit
enhancement covers all losses incurred on the Mortgage
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Loans, the effect of losses may be to increase prepayment experience on the
Mortgage Loans, thus reducing average weighted life and affecting yield to
maturity.
With respect to certain Mortgage Loans (including ARM Loans and
Revolving Credit Loans), the Mortgage Rate at origination may be below the rate
that would result from the sum of the then-applicable Index and Gross Margin.
Under the applicable underwriting standards, Mortgagors under Closed-End Loans
generally will be qualified on the basis of the Mortgage Rate in effect at
origination, and Mortgagors under Revolving Credit Loans are generally qualified
based on an assumed payment which reflects a rate significantly lower than the
maximum rate. The repayment of any such Mortgage Loan may thus be dependent on
the ability of the mortgagor to make larger interest payments following the
adjustment of the Mortgage Rate.
With respect to certain Closed-End Loans that permit negative
amortization, during a period of rising interest rates as well as immediately
after origination, that portion of the interest currently accruing thereon but
not currently payable will become Deferred Interest which will be added to the
principal balance thereof and will bear interest at the applicable Mortgage
Rate. The addition of any such Deferred Interest to the principal balance of any
related class of Certificates will lengthen the weighted average life thereof
and may adversely affect yield to holders thereof. Unless otherwise specified in
the related Prospectus Supplement, Revolving Credit Loans will not be subject to
negative amortization.
As discussed under "Risk Factors-Special Features of the Mortgage
Loans-Mortgage Loan Characteristics" with respect to Revolving Credit Loans,
except for certain programs under which the Draw Period is less than the full
term thereof, required minimum monthly payments 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
amounts of such Mortgage Loans prior to maturity, which amounts 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. Alternatively, a pool of Closed-End Loans may include Balloon Loans
which require a single payment at maturity. Such Mortgage Loans pose a greater
risk of default than fully-amortizing Mortgage Loans, because the Mortgagor's
ability to make such a substantial payment at maturity will generally depend on
the Mortgagor's ability to obtain refinancing of such Mortgage Loans or to sell
the Mortgaged Property prior to the maturity of the Balloon Loan. The ability to
obtain refinancing will depend on a number of factors prevailing at the time
refinancing or sale is required, including, without limitation, the Mortgagor's
personal economic circumstances, the Mortgagor's equity in the related Mortgaged
Property, real estate values, prevailing market interest rates, tax laws and
national and regional economic conditions. For a general discussion of factors
that may affect a Mortgagor's personal economic circumstances, see "Risk
Factors--Special Features of the Mortgage Loans--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 Mortgage Loan or to sell any Mortgaged
Property.
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For any Mortgage Loans secured by junior mortgages, any inability of
the Mortgagor to pay off the balance thereof may also affect the ability of the
Mortgagor to obtain refinancing at any time of any related senior mortgage loan,
thereby preventing a potential improvement in the Mortgagor's circumstances.
Furthermore, if so specified in the related Prospectus Supplement, under the
applicable Pooling and Servicing Agreement the Master Servicer may be restricted
or prohibited from consenting to any refinancing of any related senior mortgage
loan, which in turn could adversely affect the Mortgagor's circumstances or
result in a prepayment or default under the corresponding junior Mortgage Loan.
In addition to the Mortgagor's personal economic circumstances, a
number of factors, including homeowner mobility, job transfers, changes in the
Mortgagor's housing needs, the Mortgagor's net equity in the Mortgaged Property,
changes in the value of the Mortgaged Property, national and regional economic
conditions, enforceability of due-on-sale clauses, prevailing market interest
rates, servicing decisions, solicitations and the availability of mortgage
funds, seasonal purchasing and payment habits of borrowers or changes in the
deductibility for federal income tax purposes of interest payments on home
equity loans, may affect the rate and timing of principal payments or Draws (if
applicable) on the Mortgage Loans. For a discussion of certain factors that may
affect national and regional economic conditions, see "Risk Factors--Special
Features of the Mortgage Loans--Mortgagor Credit" herein. There can be no
assurance as to the rate of principal payments on the Mortgage Loans, and there
can be no assurance of the rate of Draws on Revolving Credit Loans. The rate of
principal payments and the rate of Draws (if applicable) may fluctuate
substantially from time to time. Generally, home equity loans are not viewed by
mortgagors as permanent financing. Accordingly, Closed-End Loans may experience
a higher rate of prepayment than typical first lien mortgage loans. On the other
hand, for Revolving Credit Loans, due to the unpredictable nature of both
principal payments and Draws, the rates of principal payments net of Draws for
such loans may be much more volatile than for typical first lien mortgage loans.
The yield to maturity of the Certificates of any series, or the rate
and timing of principal payments or Draws (if applicable) on the related
Mortgage Loans, may also be affected by a wide variety of specific terms and
conditions applicable to the respective programs under which the Mortgage Loans
were originated. For example, Revolving Credit Loans may provide for future
Draws to be made only in specified minimum amounts, or alternatively may permit
Draws to be made by check or through a credit card in any amount. A pool of
Revolving Credit Loans subject to the latter provisions may be likely to remain
outstanding longer with a higher aggregate principal balance than a pool of
Revolving Credit Loans with the former provisions, because of the relative ease
of making new Draws. Furthermore, Revolving Credit Loans may provide for
interest rate changes on a daily or monthly basis, or may have Gross Margins
that may vary under certain circumstances over the term of the loan. In
extremely high market interest rate scenarios, Certificates backed by Revolving
Credit Loans with adjustable rates subject to substantially higher maximum rates
than typically apply to adjustable rate first mortgage loans may experience
rates of default and liquidation substantially higher than those that have been
experienced on other adjustable rate mortgage loan pools.
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The yield to maturity of the Certificates of any series, or the rate
and timing of principal payments (or Draws if applicable) on the related
Mortgage Loans and corresponding distributions on the Certificates, will also be
affected by the specific terms and conditions applicable to the Certificates.
For example, if the index used to determine the Pass-Through Rates for a series
of Certificates is different from the Index applicable to the Mortgage Rates of
the underlying Mortgage Loans, the yield on the Certificates may be reduced by
application of a cap on the Pass-Through 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 distributions on the Certificates, or may affect the amount
of any Overcollateralization (or the amount on deposit in any Reserve Fund)
which could in turn accelerate the distribution of principal on the Certificates
if so provided in the Prospectus Supplement. For any series of Certificates
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 distributions on the
Certificates. For a series of Certificates backed by the Trust Balances of
Revolving Credit Loans, the specific provisions applicable to the allocation of
payments, Draws and losses on the Revolving Credit Loans between the Trust
Balances and the Excluded Balances thereof will also have a significant effect
on the rate and timing of principal distributions on the Certificates. See
"Allocation of Revolving Credit Loan Balances" herein.
For a series of Certificates backed by Revolving Credit Loans, as a
result of the payment terms of the Mortgage Loans or of the Certificate
provisions relating to future Draws, there may be no principal distributions on
such Certificates in any given month. In addition, it is possible that the
aggregate Draws on Revolving Credit Loans included in a Mortgage Pool may exceed
the aggregate payments with respect to principal on such Revolving Credit Loans
for the related period.
Unless otherwise specified in the related Prospectus Supplement, all
Revolving Credit Loans and all Closed-End Loans (other than ARM Loans) will
contain due-on-sale provisions permitting the mortgagee to accelerate the
maturity of the Mortgage Loan upon sale or certain transfers by the Mortgagor of
the underlying Mortgaged Property. Unless the related Prospectus Supplement
indicates otherwise, the Master Servicer will generally enforce any due-on-sale
clause to the extent it has knowledge of the conveyance or proposed conveyance
of the underlying Mortgaged Property and it is entitled to do so under
applicable law, provided, however, that the Master Servicer will not take any
action in relation to the enforcement of any due-on-sale provision which would
adversely affect or jeopardize coverage under any applicable insurance policy.
An ARM Loan is generally assumable under certain conditions if the proposed
transferee of the related Mortgaged Property establishes its ability to repay
the Mortgage Loan and, in the reasonable judgment of the Master Servicer or the
related Subservicer, the security for the ARM Loan would not be impaired by the
assumption. The extent to which ARM Loans are assumed by purchasers of the
Mortgaged Properties rather than prepaid by the related Mortgagors in connection
with the sales of the Mortgaged Properties will affect the weighted average life
of the related series of Certificates. See "Description of the
Certificates--Collection and Other Servicing Procedures" and "Certain Legal
Aspects of the Mortgage Loans and Related
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Matters--Enforceability of Certain Provisions" for a description of certain
provisions of the Pooling and Servicing Agreement and certain legal developments
that may affect the prepayment experience on the Mortgage Loans.
In addition, certain Mortgage Securities included in a Mortgage Pool
may be backed by underlying Mortgage Loans having differing interest rates.
Accordingly, the rate at which principal payments are received on the related
Certificates will, to a certain extent, depend on the interest rates on such
underlying Mortgage Loans.
At the request of the Mortgagor, the Master Servicer or a Subservicer
may allow the refinancing of a Mortgage Loan in any Trust Fund by accepting
prepayments thereon and permitting a new loan secured by a mortgage on the same
property. In the event of such a refinancing, the new loan would not be included
in the related Trust Fund and, therefore, such refinancing would have the same
effect as a prepayment in full of the related Mortgage Loan. A Subservicer or
the Master Servicer may, from time to time, implement programs designed to
encourage refinancing. Such programs may include, without limitation,
modifications of existing loans, general or targeted solicitations, the offering
of pre-approved applications, reduced origination fees or closing costs, or
other financial incentives. In addition, the Master Servicer or any Subservicers
may encourage the refinancing of Mortgage Loans, including defaulted Mortgage
Loans, that would permit creditworthy borrowers to assume the outstanding
indebtedness of such Mortgage Loans.
If the Pooling and Servicing Agreement for a series of Certificates
provides for a Funding Account or other means of funding the transfer of
additional Mortgage Loans to the related Trust, as described under "Description
of the Certificates; Funding Account" herein, and the Trust is unable to acquire
such additional Mortgage Loans within any applicable time limit, the amounts set
aside for such purpose may be applied as principal distributions on one or more
classes of Certificates of such series.
Although the Mortgage Rates on Revolving Credit Loans and ARM Loans
will be subject to periodic adjustments, such adjustments generally (i) as to
ARM Loans will not increase or decrease such Mortgage Rates by more than a fixed
percentage amount on each adjustment date, (ii) will not increase such Mortgage
Rates over a fixed maximum rate during the life of any Revolving Credit Loan or
ARM Loan and (iii) will be based on an Index (which may not rise and fall
consistently with prevailing market interest rates) plus the related Gross
Margin (which may vary under certain circumstances, and which may be different
from margins being used at the time for newly originated adjustable rate
mortgage loans). As a result, the Mortgage Rates on the Revolving Credit Loans
or ARM Loans in any Mortgage Pool at any time may not equal the prevailing rates
for similar, newly originated adjustable rate home equity mortgage loans or
lines of credit, and accordingly the rate of principal payments (and Draws 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 Revolving
Credit Loans or ARM Loans that the rate of prepayment may increase as a result
of refinancings. There can be no certainty as to the rate of principal payments
(or Draws
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if applicable) on the Mortgage Loans during any period or over the life of any
series of Certificates.
With respect to any index used in determining the Pass-Through Rates
for a series of Certificates or Mortgage Rates of the underlying Mortgage Loans,
a number of factors affect the performance of such index and may cause such
index to move in a manner different from other indices. To the extent that such
index may reflect changes in the general level of interest rates less quickly
than other indices, in a period of rising interest rates, increases in the yield
to Certificateholders 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 Mortgage Loans, which adjust in
accordance with such index, than of mortgage loans which adjust in accordance
with other indices.
Under certain circumstances, the Master Servicer, the Company or, if
specified in the related Prospectus Supplement, the holders of the REMIC
Residual Certificates may have the option to purchase the Mortgage Loans in a
Trust Fund, thus resulting in the early retirement of the related Certificates.
See "The Pooling and Servicing Agreement--Termination; Retirement of
Certificates."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
AND RELATED MATTERS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by state law (which laws may differ from state to state), the
summaries do not purport to be complete, to reflect the laws of any particular
state or to encompass the laws of all states in which the Mortgaged Properties
may be situated. The summaries are qualified in their entirety by reference to
the applicable federal and state laws governing the Mortgage Loans.
General
The Mortgage Loans (other than Cooperative Loans) will 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". 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
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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
Certificates, the Mortgage Loans may include Cooperative Loans. Each debt
instrument (a "Cooperative Note") evidencing a Cooperative Loan will be secured
by a security interest in shares issued by the related corporation (a
"Cooperative") that owns the related apartment building, which is a corporation
entitled to be treated as a housing cooperative under federal tax law, and in
the related proprietary lease or occupancy agreement granting exclusive rights
to occupy a specific dwelling unit in the Cooperative's building. The security
agreement will create a lien upon the shares of the Cooperative, the priority of
which will depend on, among other things, the terms of the particular security
agreement as well as the order of recordation and/or filing of the agreement (or
financing statements related thereto) in the appropriate recording office.
Unless otherwise specified in the related Prospectus Supplement, all
Cooperative buildings relating to the Cooperative Loans are located in the State
of New York. Generally, each Cooperative owns in fee or has a leasehold interest
in all the real property and owns in fee or leases the building and all separate
dwelling units therein. The Cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is an underlying
mortgage (or mortgages) on the Cooperative's building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the Cooperative, as mortgagor or 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
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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 Mortgage Loans, the collateral
securing the Cooperative Loans.
Each Cooperative is owned by shareholders (referred to as
tenant-stockholders) who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. 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 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)
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of the Code for its taxable year in which such items are allowable as a
deduction to the corporation, such section requires, among other things, that at
least 80% of the gross income of the corporation be derived from its
tenant-stockholders. By virtue of this requirement, the status of a corporation
for purposes of Section 216(b)(1) of the Code must be determined on a
year-to-year basis. Consequently, there can be no assurance that Cooperatives
relating to the Cooperative Loans will qualify under such section for any
particular year. In the event that such a Cooperative fails to qualify for one
or more years, the value of the collateral securing any related Cooperative
Loans could be significantly impaired because no deduction would be allowable to
tenant-stockholders under Section 216(a) of the Code with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that such a failure would be permitted to continue over
a period of years appears remote.
Foreclosure on Mortgage Loans
Although a deed of trust may also be foreclosed by judicial action,
foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In addition to any notice requirements
contained in a deed of trust, in some states, prior to a sale the trustee must
record a notice of default and send a copy to the borrower/trustor and to any
person who has recorded a request for a copy of notice of default and notice of
sale. In addition, in some states, prior to such sale, the trustee must provide
notice to any other individual having an interest of record in the real
property, including any junior lienholders. If the deed of trust is not
reinstated within a specified period, a notice of sale must be posted in a
public place and, in most states, published for a specific period of time in one
or more newspapers in a specified manner prior to the date of trustee's sale. In
addition, some states' laws require that a copy of the notice of sale be posted
on the property and sent to all parties having an interest of record in the real
property.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
Foreclosure of a mortgage generally is accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. If the mortgagee's right to foreclose is contested, the legal
proceedings necessary to resolve the issue can be time-consuming.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is
generally a public sale. However, because of the difficulty a potential
third-party buyer at the sale might have in determining the exact status of
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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 Certificates. 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 Mortgage Loans which are junior mortgage loans, if the
lender purchases the property, the lender's title will be subject to all senior
liens and claims and certain governmental liens. The proceeds received by the
referee or trustee from the sale are applied first to the costs, fees and
expenses of sale and then in satisfaction of the indebtedness secured by the
mortgage or deed of trust under which the sale was conducted. Any remaining
proceeds are generally payable to the holders of junior mortgages or deeds of
trust and other liens and claims in order of their priority, whether or not the
borrower is in default. Any additional proceeds are generally payable to the
mortgagor or trustor. The payment of the proceeds to the holders of junior
mortgages may occur in the foreclosure action of the senior mortgagee or may
require the institution of separate legal proceedings. See "Risk
Factors--Special Features of the Mortgage Loans" and "Description of the
Certificates--Realization Upon Defaulted Mortgage Loans" herein.
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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 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.
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Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
In New York, foreclosure on the Cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the New York
Uniform Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the sale and the sale
price. Generally, a sale conducted according to the usual practice of banks
selling similar collateral in the same area will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "--Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors or other parties are
given a statutory period (generally ranging from six months to two years) in
which to redeem the property from the foreclosure sale. In some states,
redemption may occur only upon payment of the entire principal balance of the
loan, accrued interest and expenses of foreclosure. In other states, redemption
may be authorized if the former borrower pays only a portion of the sums due. In
some states, the right to redeem is an equitable right. The equity of
redemption, which is a non-statutory right that must be exercised prior to a
foreclosure sale, should be distinguished from statutory rights of redemption.
The effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The rights of redemption would defeat
the title of any purchaser subsequent to foreclosure or sale under a deed of
trust. Consequently, the practical effect of the redemption right is to force
the lender to maintain the property and pay the expenses of ownership until the
redemption period has expired.
Anti-Deficiency Legislation and Other Limitations on Lenders
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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 Mortgage Loan secured by a property owned by a trust
where the Mortgage Note is executed on behalf of the trust, a deficiency
judgment against the trust following foreclosure or sale under a deed of trust,
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 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
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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 Mortgage Loan. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the mortgage loans.
Certain of the Mortgage Loans may be subject to special rules,
disclosure requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Homeownership and Equity Protection Act of 1994
(such Mortgage Loans, "High Cost Loans"), if such Mortgage Loans were originated
on or after October 1, 1995, are not mortgage loans made to finance the purchase
of the mortgaged property and have interest rates or origination costs in excess
of 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
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hazardous substances regardless of whether they have contaminated the property.
CERCLA imposes strict, as well as joint and several, liability on several
classes of potentially responsible parties, including current owners and
operators of the property who did not cause or contribute to the contamination.
Furthermore, liability under CERCLA is not limited to the original or
unamortized principal balance of a loan or to the value of the property securing
a loan. Lenders may be held liable under CERCLA as owners or operators unless
they qualify for the secured creditor exemption to CERCLA. This exemption
exempts from the definition of owners and operators those who, without
participating in the management of a facility, hold indicia of ownership
primarily to protect a security interest in the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 (the "Conservation Act") amended, among other things, the provisions of
CERCLA with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the mortgaged property. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of substantially all of the operational functions of the
mortgaged property. The Conservation Act also provides that a lender will
continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
Other federal and state laws in 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 distributable to the holders of the related series
of Certificates. 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
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Company has not made and will not make such evaluations prior to the origination
of the Secured Contracts. Neither the Company nor any replacement Servicer will
be required by any Agreement to undertake any such evaluations prior to
foreclosure or accepting a deed-in-lieu of foreclosure. The Company does not
make any representations or warranties or assume any liability with respect to
the absence or effect of contaminants on any related real property or any
casualty resulting from the presence or effect of contaminants. However, the
Company will not be obligated to foreclose on related real property or accept a
deed-in-lieu of foreclosure if it knows or reasonably believes that there are
material contaminated conditions on such property. A failure so to foreclose may
reduce the amounts otherwise available to Certificateholders of the related
series.
Enforceability of Certain Provisions
The Mortgage Loans 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 Mortgage Loans and the number of Mortgage Loans 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 certain states, there are or may be
specific limitations upon the late charges which a lender may collect from a
borrower for delinquent payments. Certain states also limit the amounts that a
lender may collect from a borrower as an additional charge if the loan is
prepaid.
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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.
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 Revolving Credit Loans and ARM Loans, as set forth in
the related Prospectus Supplement.
Unless otherwise set forth in the related Prospectus Supplement, each
Seller of a Mortgage Loan will have represented that such Mortgage Loan was
originated in compliance with then applicable state laws, including usury laws,
in all material respects. However, the Mortgage Rates on the Mortgage Loans will
be subject to applicable usury laws as in effect from time to time.
Alternative Mortgage Instruments
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Alternative mortgage instruments, including adjustable rate mortgage
loans and adjustable rate cooperative loans, and early ownership mortgage loans,
originated by non-federally chartered lenders have historically been subjected
to a variety of restrictions. Such restrictions differed from state to state,
resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act ("Title VIII").
Title VIII provides that, notwithstanding any state law to the contrary, (i)
state-chartered banks may originate alternative mortgage instruments in
accordance with regulations promulgated by the Comptroller of the Currency with
respect to the origination of alternative mortgage instruments by national
banks, (ii) state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions and (iii) all other non-federally chartered
housing creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII also
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
Mortgagors who are members of the Air Force, Army, Marines, Navy, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to Mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Master Servicer to collect full amounts of interest on certain of
the Mortgage Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related Mortgage Loans, would result in a reduction
of the amounts distributable to the holders of the related Certificates, and
would not be covered by Advances and may not be covered by the applicable form
of credit enhancement provided in connection with the related series of
Certificates. In addition, the Relief Act imposes limitations that would impair
the ability of the Master Servicer to foreclose on an affected Mortgage Loan
during the Mortgagor's period of active duty status, and, under certain
circumstances, during an additional
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three month period thereafter. Thus, in the event that the Relief Act or similar
legislation or regulations applies to any Mortgage Loan which goes into default,
there may be delays in payment and losses on the related Certificates in
connection therewith. Any other interest shortfalls, deferrals or forgiveness of
payments on the Mortgage Loans resulting from similar legislation or regulations
may result in delays in payments or losses to Certificateholders 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 Mortgage Loans or Mortgage Securities included in the Trust Fund
for a series will be secured by mortgages or deeds of trust which are Revolving
Credit Loans or Closed-End Loans which may 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 Certificateholders), as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee under the senior mortgage,
including the prior rights of the senior mortgagee to receive hazard insurance
and condemnation proceeds and to cause the property securing the Mortgage Loan
to be sold upon default of the mortgagor, which may extinguish the junior
mortgagee's lien unless the junior mortgagee asserts its subordinate interest in
the property in foreclosure litigation and, in certain cases, either reinitiates
or satisfies the defaulted senior loan or loans. A junior mortgagee may satisfy
a defaulted senior loan in full or, in some states, may cure such default and
bring the senior loan current thereby reinstating the senior loan, in either
event usually adding the amounts expended to the balance due on the junior loan.
In most states, absent a provision in the mortgage or deed of trust, no notice
of default is required to be given to a junior mortgagee. Where applicable law
or the terms of the senior mortgage or deed of trust do not require notice of
default to the junior mortgagee, the lack of any such notice may prevent the
junior mortgagee from exercising any right to reinstate the loan which
applicable law may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard
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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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Negative Amortization Loans
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980 ("DIDMC") and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The holding was limited to the effect of DIDMC on state laws regarding
the compounding of interest and the court did not address the applicability of
the Alternative Mortgage Transaction Parity Act of 1982, which authorizes a
lender to make residential mortgage loans that provide for negative
amortization. The First Circuit's decision is binding authority only on Federal
District Courts in Maine, New Hampshire, Massachusetts, Rhode Island and Puerto
Rico.
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 Certificates 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 Certificateholders
that hold the Certificates 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 (including those filed by any REMIC or other issuer) should be aware
that under applicable Treasury regulations a provider of advice on specific
issues of law is not considered an income tax return preparer unless the advice
(i) is given with respect to events that have occurred at the time the advice is
rendered and is not given with respect to the consequences of contemplated
actions, and (ii) is directly relevant to the determination of an entry on a tax
return. Accordingly, taxpayers should consult their tax advisors and tax return
preparers regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed 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 Certificates. See "State and Other Tax Consequences."
Certificateholders are advised to consult their tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder.
Unless otherwise specified in the related Prospectus Supplement, as to
each series of Certificates, the Master Servicer will cause an election to be
made to have the related Trust Fund
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treated as a REMIC under Sections 860A through 860G (the "REMIC Provisions") of
the Code. If a REMIC election (or elections) will be made for the related Trust
Fund, the related Prospectus Supplement for each series of Certificates will
identify all "regular interests" and "residual interests" in the REMIC. If a
REMIC election will not be made for a Trust Fund, the federal income
consequences of the purchase, ownership and disposition of the related
Certificates will be set forth in the related Prospectus Supplement. For
purposes of this tax discussion, references to a "Certificateholder" or a
"holder" are to the beneficial owner of a Certificate.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271-1273 and 1275 of the
Code and in the Treasury regulations issued thereunder (the "OID Regulations"),
and in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations, which are effective
with respect to debt instruments issued on or after April 4, 1994, do not
adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
REMICS
Classification of REMICS
Upon the issuance of each series of REMIC Certificates, either Thacher
Proffitt & Wood or Orrick, Herrington & Sutcliffe LLP, counsel to the Company,
will deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the related Trust
Fund (or each applicable portion thereof) will qualify as a REMIC and the REMIC
Certificates offered with respect thereto will be considered to evidence
ownership of "regular interests" ("REMIC Regular Certificates") or "residual
interests" ("REMIC Residual Certificates") in that REMIC within the meaning of
the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for such status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year and thereafter. In that event, such entity may be taxable as a
separate corporation under Treasury regulations, and the related REMIC
Certificates may not be accorded the status or given the tax treatment described
below. Although the Code authorizes the Treasury Department to issue regulations
providing relief in the event of an inadvertent termination of REMIC status, no
such regulations have been issued. Any such relief, moreover, may be accompanied
by sanctions, such as the imposition of a corporate tax on all or a portion of
the Trust Fund's income for the period in which the requirements for such status
are not satisfied. The Pooling and Servicing Agreement with respect to each
REMIC will include provisions designed to maintain the Trust Fund's status as a
REMIC under the REMIC Provisions. It is not anticipated that the status of any
Trust Fund as a REMIC will be terminated.
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Characterization of Investments in REMIC Certificates
In general, the REMIC Certificates will be "real estate assets" within
the meaning of Section 856(c)(5)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
underlying such Certificates would be so treated. Moreover, if 95% or more of
the assets of the REMIC qualify for any of the foregoing treatments at all times
during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and income
allocated to the class of REMIC Residual Certificates will be interest described
in Section 856(c)(3)(B) of the Code to the extent that such Certificates are
treated as "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code. In addition, the REMIC Regular Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code if transferred
to another REMIC on its startup day in exchange for regular or residual
interests therein. The determination as to the percentage of the REMIC's assets
that constitute assets described in the foregoing sections of the Code will be
made with respect to each calendar quarter based on the average adjusted basis
of each category of the assets held by the REMIC during such calendar quarter.
The Master Servicer will report those determinations to Certificateholders in
the manner and at the times required by applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale, and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. In
addition, in some instances Mortgage Loans may not be treated entirely as assets
described in the foregoing sections. The REMIC Regulations do provide, however,
that payments on Mortgage Loans held pending distribution are considered part of
the Mortgage Loans for purposes of Section 856(c)(5)(A) of the Code.
Furthermore, foreclosure property will qualify as "real estate assets" under
Section 856(c)(5)(A) of the Code.
Tiered REMIC Structures
For certain series of REMIC Certificates, two or more separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs ("Tiered REMICs") for federal income tax purposes. Upon the issuance of
any such series of REMIC Certificates, Thacher Proffitt & Wood or Orrick,
Herrington & Sutcliffe LLP, counsel to the Company, will deliver their opinion
generally to the effect that, assuming compliance with all provisions of the
related Pooling and Servicing Agreement, the Tiered REMICs will each qualify as
a REMIC and the REMIC Certificates issued by the Tiered REMICs, respectively,
will be considered to evidence
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ownership of REMIC Regular Certificates or REMIC Residual Certificates in the
related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will
be "real estate assets" within the meaning of Section 856(c)(5)(A) of the Code,
and "loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code, and whether the income on such Certificates is interest described
in Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of REMIC Regular Certificates
General
Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with the method described below, in advance of the receipt of the
cash attributable to such income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to REMIC Regular Certificates and certain
other debt instruments issued with original issue discount. Regulations have not
been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report (the "Committee Report") accompanying the Tax
Reform Act of 1986, indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption used by the Master Servicer in reporting
original issue discount for each series of REMIC Regular Certificates (the
"Prepayment Assumption") will be consistent with this standard and will be
disclosed in the related Prospectus Supplement. However, neither the Company nor
the Master Servicer will make any representation that the Mortgage Loans will in
fact prepay at a rate conforming to the Prepayment Assumption or at any other
rate.
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The original issue discount, if any, on a REMIC Regular Certificate
will be the excess of its stated redemption price at maturity over its issue
price. The issue price of a particular class of REMIC Regular Certificates will
be the first cash price at which a substantial amount of REMIC Regular
Certificates of that class is sold (excluding sales to bond houses, brokers and
underwriters). If less than a substantial amount of a particular class of REMIC
Regular Certificates is sold for cash on or prior to the date of their initial
issuance (the "Closing Date"), the issue price for such class will be treated as
the fair market value of such class on the Closing Date. Under the OID
Regulations, the stated redemption price of a REMIC Regular Certificate is equal
to the total of all payments to be made on such Certificate other than
"qualified stated interest." "Qualified stated interest" includes interest that
is unconditionally payable at least annually at a single fixed rate, or in the
case of a variable rate debt instrument, at a "qualified floating rate," an
"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate," or a
combination of "qualified floating rates" that generally does not operate in a
manner that accelerates or defers interest payments on such REMIC Regular
Certificate. It is possible that the Internal Revenue Service (the "IRS") will
take the position that no portion of interest on a subordinated Certificate (or,
perhaps, any Certificate) is qualified stated interest on the grounds that such
interest is not unconditionally payable.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determina-
tion of the total amount of original issue discount and the timing of the
inclusion thereof will vary according to the characteristics of such REMIC
Regular Certificates. In general terms, original issue discount is accrued by
treating the interest rate of the Certificates as fixed and making adjustments
to reflect actual interest rate adjustments.
Certain classes of the REMIC Regular Certificates may provide for the
first interest payment with respect to such Certificates to be made more than
one month after the date of issuance, a period which is longer than the
subsequent monthly intervals between interest payments. Assuming the "accrual
period" (as defined below) for original issue discount is each monthly period
that ends on a Distribution Date, in some cases, as a consequence of this "long
first accrual period," some or all interest payments may be required to be
included in the stated redemption price of the REMIC Regular Certificate and
accounted for as original issue discount. Because interest on REMIC Regular
Certificates must in any event be accounted for under an accrual method,
applying this analysis would result in only a slight difference in the timing of
the inclusion in income of the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first
Distribution Date is computed with respect to a period that begins prior to the
Closing Date, a portion of the purchase price paid for a REMIC Regular
Certificate will reflect such accrued interest. In such cases, information
returns to the Certificateholders and the IRS will be based on the position that
the portion of the purchase price paid for the interest accrued with respect to
periods prior to the Closing Date is treated as part of the overall purchase
price of such REMIC Regular Certificate (and not as a separate asset the
purchase price of which is recovered entirely out of interest received on the
next Distribution Date) and that portion of the interest paid on the first
Distribution Date in excess of
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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 REMIC Regular Certificate. 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 Certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC Regular Certificate will be considered to be
de minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average maturity. For this
purpose, the weighted average maturity of the REMIC Regular Certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such REMIC Regular Certificate, 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 (presumably taking into
account the Prepayment Assumption) by (ii) a fraction, the numerator of which is
the amount of the payment, and the denominator of which is the stated redemption
price at maturity of such REMIC Regular Certificate. Under the OID Regulations,
original issue discount of only a de minimis amount (other than de minimis
original issue discount attributable to a so-called "teaser" interest rate or an
initial interest holiday) will be included in income as each payment of stated
principal is made, based on the product of the total amount of 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 REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "Taxation
of Owners of REMIC Regular Certificates--Market Discount" for a description of
such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess
of a de minimis amount, the holder of 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 REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to a Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original issue
discount that accrues in any accrual period will equal the excess, if any, of
(i) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the REMIC Regular Certificate,
if any, in future periods and (B) the distributions made on such REMIC Regular
Certificate during the accrual period of amounts included in the stated
redemption price,
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over (ii) the adjusted issue price of such REMIC Regular Certificate at the
beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that distributions on the REMIC Regular Certificate will be received in
future periods based on the Mortgage Loans being prepaid at a rate equal to the
Prepayment Assumption and (ii) using a discount rate equal to the original yield
to maturity of the Certificate. For these purposes, the original yield to
maturity of the Certificate will be calculated based on its issue price and
assuming that distributions on the Certificate will be made in all accrual
periods based on the Mortgage Loans being prepaid at a rate equal to the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such
Certificate, increased by the aggregate amount of original issue discount that
accrued with respect to such Certificate in prior accrual periods, and reduced
by the amount of any distributions made on such REMIC Regular Certificate in
prior accrual periods of amounts included in its stated redemption price. The
original issue discount accruing during any accrual period, computed as
described above, will be allocated ratably to each day during the accrual period
to determine the daily portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such Certificate 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 Certificate. 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 REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate 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 Certificate 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 Certificateholder that purchases a REMIC Regular Certificate at a
market discount, that is, in the case of a REMIC Regular Certificate issued
without original issue discount, at a purchase price less than its remaining
stated principal amount, or in the case of a REMIC Regular Certificate issued
with original issue discount, at a purchase price less than its adjusted issue
price will recognize income upon receipt of each distribution representing
stated redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent. A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest, discount
(including de minimis market or
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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 REMIC Regular
Certificate with market discount, the Certificateholder would be deemed to have
made an election to include market discount in income currently with respect to
all other debt instruments having market discount that such Certificateholder
acquires during the taxable year of the election or thereafter, and possibly
previously acquired instruments. Similarly, a Certificateholder that made this
election for a Certificate that is acquired at a premium would be deemed to have
made an election to amortize bond premium with respect to all debt instruments
having amortizable bond premium that such Certificateholder owns or acquires.
See "Taxation of Owners of REMIC Regular Certificates--Premium." Each of these
elections to accrue interest, discount and premium with respect to a Certificate
on a constant yield method or as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate
will be considered to be de minimis for purposes of Section 1276 of the Code if
such market discount is less than 0.25% of the remaining stated redemption price
of such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." Such treatment would result in discount
being included in income at a slower rate than discount would be required to be
included in income using the method described above.
Code Section 1276(b)(3) specifically authorizes the Treasury Department
to issue regulations providing for the method for accruing market discount on
debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is to be used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
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To the extent that REMIC Regular Certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium
A REMIC Regular Certificate purchased at a cost (excluding any portion
of such cost attributable to accrued qualified stated interest) greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of such a REMIC Regular Certificate may elect under Section
171 of the Code to amortize such premium under the constant yield method over
the life of the Certificate. If such an election is made, it will apply to all
debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related REMIC Regular Certificate, rather than as a
separate interest deduction. The OID Regulations also permit Certificateholders
to elect to include all interest, discount and premium in income based on a
constant yield method, further treating the Certificateholder as having made the
election to amortize premium generally. See "Taxation of Owners of REMIC Regular
Certificates--Market Discount." The Committee Report states that the same rules
that apply to accrual of market discount (which rules will require use of a
Prepayment Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether such Certificates have original issue
discount) will also apply in amortizing bond premium under Section 171 of the
Code.
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Realized Losses
Under Code Section 166 both corporate holders of the REMIC Regular
Certificates and noncorporate holders of the REMIC Regular Certificates that
acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their Certificates become wholly or partially worthless as the
result of one or more realized losses on the Mortgage Loans. However, it appears
that a noncorporate holder that does not acquire a REMIC Regular Certificate in
connection with a trade or business will not be entitled to deduct a loss under
Section 166 of the Code until such holder's Certificate 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 REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates 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
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that, as the result of a realized
loss, ultimately will not be realized, the law is unclear with respect to the
timing and character of such loss or reduction in income.
Taxation of Owners of REMIC Residual Certificates
General
As residual interests, the REMIC Residual Certificates will be subject
to tax rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Mortgage Loans or as debt instruments issued by the
REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts will then be allocated among the REMIC
Residual Certificateholders in proportion to their respective ownership
interests on such day. Any amount included in the gross income or allowed as a
loss of any REMIC Residual Certificateholder by virtue of this allocation will
be treated as ordinary income or loss. The taxable income of the REMIC will be
determined under the rules described below in "Taxable Income of the REMIC" and
will be taxable to the REMIC Residual Certificateholders without regard to the
timing or
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amount of cash distributions by the REMIC. Ordinary income derived from REMIC
Residual Certificates will be "portfolio income" for purposes of the taxation of
taxpayers subject to limitations under Section 469 of the Code on the
deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such
Certificate from a prior holder of such Certificate also will be required to
report on its federal income tax return amounts representing its daily portion
of the taxable income (or net loss) of the REMIC for each day that it holds such
REMIC Residual Certificate. These daily portions generally will equal the
amounts of taxable income or net loss determined as described above. The
Committee Report indicates that certain modifications of the general rules may
be made, by regulations, legislation or otherwise, to reduce (or increase) the
income or loss of a holder of a REMIC Residual Certificateholder that purchased
such REMIC Residual Certificate from a prior holder of such Certificate at a
price greater than (or less than) the adjusted basis (as defined below) such
REMIC Residual Certificate would have had in the hands of an original holder of
such Certificate. The REMIC Regulations, however, do not provide for any such
modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required
to report (or the tax liability associated with such income) may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC Residual Certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be offset, subject to the rules relating to "excess
inclusions," residual interests without "significant value" and "noneconomic"
residual interests discussed below. The fact that the tax liability associated
with the income allocated to REMIC Residual Certificateholders may exceed the
cash distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders' after-tax rate of return.
Taxable Income of the REMIC
The taxable income of the REMIC will equal the income from the Mortgage
Loans and other assets of the REMIC plus any cancellation of indebtedness income
due to the allocation of realized losses to REMIC Regular Certificates, less the
deductions allowed to the REMIC for interest (including original issue discount
and reduced by the amortization of any premium received on issuance) on the
REMIC Regular Certificates (and any other class of REMIC
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Certificates constituting "regular interests" in the REMIC not offered hereby),
amortization of any premium on the Mortgage Loans, bad debt deductions with
respect to the Mortgage Loans and, except as described below, for servicing,
administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to their fair market value
immediately after their transfer to the REMIC. For this purpose, the Master
Servicer intends to treat the fair market value of the Mortgage Loans as being
equal to the aggregate issue prices of the REMIC Regular Certificates and REMIC
Residual Certificates. Such aggregate basis will be allocated among the Mortgage
Loans collectively and the other assets of the REMIC in proportion to their
respective fair market values. The issue price of any REMIC Certificates offered
hereby will be determined in the manner described above under "-Taxation of
Owners of REMIC Regular Certificates-Original Issue Discount." Accordingly, if
one or more classes of REMIC Certificates are retained initially rather than
sold, the Master Servicer may be required to estimate the fair market value of
such interests in order to determine the basis of the REMIC in the Mortgage
Loans and other property held by the REMIC.
Subject to the possible application of the de minimis rules, the method
of accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method of accruing original issue discount income for REMIC Regular
Certificateholders (that is, under the constant yield method taking into account
the Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such discount in income currently, as it accrues, on a
constant interest basis. See "-Taxation of Owners of REMIC Regular Certificates"
above, which describes a method of accruing discount income that is analogous to
that required to be used by a REMIC as to Mortgage Loans with market discount
that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to amortize any premium on the Mortgage
Loans. Premium on any Mortgage Loan to which such election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption.
A REMIC will be allowed deductions for interest (including original
issue discount) on the REMIC Regular Certificates (including any other class of
REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby) equal to the deductions that would be allowed if the REMIC Regular
Certificates (including any other class of REMIC Certificates constituting
"regular interests" in the REMIC not offered hereby) were indebtedness of the
REMIC. Original issue discount will be considered to accrue for this purpose as
described above under "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount," except that
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the de minimis rule and the adjustments for subsequent holders of REMIC Regular
Certificates (including any other class of Certificates constituting "regular
interests" in the REMIC not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess
of the stated redemption price of such class (such excess, "Issue Premium"), the
REMIC will have an additional item of income in an amount equal to the portion
of the Issue Premium that is considered to be amortized or repaid in that year.
Although the matter is not entirely certain, it is likely that Issue Premium
would be amortized under a constant yield method in a manner analogous to the
method of accruing original issue discount described above under "--Taxation of
Owners of REMIC Regular Certificates--Original Issue Discount."
As a general rule, the taxable income of the REMIC is required to be
determined in the same manner as if the REMIC were an individual having the
calendar year as its taxable year and using the accrual method of accounting.
However, no item of income, gain, loss or deduction allocable to a prohibited
transaction will be taken into account. See "-Prohibited Transactions and Other
Possible REMIC Taxes" below. Further, the limitation on miscellaneous itemized
deductions imposed on individuals by Section 67 of the Code (which allows such
deductions only to the extent they exceed in the aggregate two percent of the
taxpayer's adjusted gross income) will not be applied at the REMIC level so that
the REMIC will be allowed deductions for servicing, administrative and other
non-interest expenses in determining its taxable income. All such expenses will
be allocated as a separate item to the holders of REMIC Certificates, subject to
the limitation of Section 67 of the Code and the rules relating to the
alternative minimum tax. See "-Possible Pass-Through of Miscellaneous Itemized
Deductions." If the deductions allowed to the REMIC exceed its gross income for
a calendar quarter, such excess will be the net loss for the REMIC for that
calendar quarter.
Basis Rules, Net Losses and Distributions
The adjusted basis of a REMIC Residual Certificate will be equal to the
amount paid for such REMIC Residual Certificate, increased by amounts included
in the income of the REMIC Residual Certificateholder and decreased (but not
below zero) by distributions made, and by net losses allocated, to such REMIC
Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent such net loss exceeds such
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of such calendar quarter (determined without regard
to such net loss). Any loss that is not currently deductible by reason of this
limitation may be carried forward indefinitely to future calendar quarters and,
subject to the same limitation, may be used only to offset income from the REMIC
Residual Certificate. The ability of REMIC Residual Certificateholders to deduct
net losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
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Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the Trust Fund. However, such basis increases may not occur until the
end of the calendar quarter, or perhaps the end of the calendar year, with
respect to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a Residual Certificateholder may not
amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of its share of any net
losses of the REMIC or upon the sale of its REMIC Residual Certificate. See
"-Sales of REMIC Certificates." For a discussion of possible modifications of
these rules that may require adjustments to income of a holder of a REMIC
Residual Certificate other than an original holder in order to reflect any
difference between the cost of such REMIC Residual Certificate to such holder
and the adjusted basis such REMIC Residual Certificate would have had in the
hands of the original holder, see "-Taxation of Owners of REMIC Residual
Certificates-General."
Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Certificate
will be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the sum
of the daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not
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below zero) by any distributions made with respect to such REMIC Residual
Certificate before the beginning of such quarter. The issue price of a REMIC
Residual Certificate is the initial offering price to the public (excluding bond
houses, brokers and underwriters) at which a substantial amount of the REMIC
Residual Certificates were sold. If less than a substantial amount of REMIC
Residual Certificates is sold for cash on or prior to the Closing Date, the
issue price for such REMIC Residual Certificates will be treated as the fair
market value of such REMIC Residual Certificates on the Closing Date. The
"long-term Federal rate" is an average of current yields on Treasury securities
with a remaining term of greater than nine years, computed and published monthly
by the IRS. Although it has not done so, the Treasury has authority to issue
regulations that would treat the entire amount of income accruing on a REMIC
Residual Certificate as an excess inclusion if the REMIC Residual Certificates
are considered not to have "significant value."
For REMIC Residual Certificateholders, an excess inclusion (i) will not
be permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "-Foreign Investors
in REMIC Certificates," below. Furthermore, for purposes of the alternative
minimum tax, (i) excess inclusions will not be permitted to be offset by the
alternative tax net operating loss deduction and (ii) alternative minimum
taxable income may not be less than the taxpayer's excess inclusions; provided,
however, that for purposes of (ii), alternative minimum taxable income is
determined without regard to the special rule that taxable income cannot be less
than excess inclusions. The latter rule has the effect of preventing
nonrefundable tax credits from reducing the taxpayer's income tax to an amount
lower than the alternative minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on such "noneconomic" REMIC Residual Certificate. The REMIC Regulations
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provide that a REMIC Residual Certificate is noneconomic unless, based on the
Prepayment Assumption and on any required or permitted clean up calls, or
required qualified liquidation provided for in the REMIC's organizational
documents, (1) the present value of the expected future distributions
(discounted using the "applicable Federal rate" for obligations whose term ends
on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) on the REMIC Residual Certificate equals at
least the present value of the expected tax on the anticipated excess
inclusions, and (2) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC Residual Certificate at or after
the time the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. Accordingly, all transfers of REMIC
Residual Certificates that may constitute noneconomic residual interests will be
subject to certain restrictions under the terms of the related Pooling and
Servicing Agreement that are intended to reduce the possibility of any such
transfer being disregarded. Such restrictions will require each party to a
transfer to provide an affidavit that no purpose of such transfer is to impede
the assessment or collection of tax, including certain representations as to the
financial condition of the prospective transferee, as to which the transferor
also is required to make a reasonable investigation to determine such
transferee's historic payment of its debts and ability to continue to pay its
debts as they come due in the future. Prior to purchasing a REMIC Residual
Certificate, prospective purchasers should consider the possibility that a
purported transfer of such REMIC Residual Certificate by such a purchaser to
another purchaser at some future date may be disregarded in accordance with the
above-described rules which would result in the retention of tax liability by
such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Company will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
Mark-to-Market Rules
On December 24, 1996, the IRS released final regulations (the
"Mark-to-Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Mark-to-Market Regulations provide that for purposes of this mark-to-market
requirement, a REMIC Residual Certificate issued after January 4, 1995 is not
treated as a security and thus may not be marked to market. Prospective
purchasers of a REMIC Residual Certificate should consult their tax advisors
regarding the possible application of the mark-to-market requirement to REMIC
Residual Certificates.
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Possible Pass-Through of Miscellaneous Itemized Deductions
Fees and expenses of a REMIC generally will be allocated to the holders
of the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of such fees and expenses should be allocated to
the holders of the related REMIC Regular Certificates. Unless otherwise stated
in the related Prospectus Supplement, such fees and expenses will be allocated
to holders of the related REMIC Residual Certificates in their entirety and not
to the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular
Certificates the holders of which receive an allocation of fees and expenses in
accordance with the preceding discussion, if any holder thereof is an
individual, estate or trust, or a "pass-through entity" beneficially owned by
one or more individuals, estates or trusts, (i) an amount equal to such
individual's, estate's or trust's share of such fees and expenses will be added
to the gross income of such holder and (ii) such individual's, estate's or
trust's share of such fees and expenses will be treated as a miscellaneous
itemized deduction allowable subject to the limitation of Section 67 of the
Code, which permits such deductions only to the extent they exceed in the
aggregate two percent of a taxpayer's adjusted gross income. In addition,
Section 68 of the Code provides that the amount of itemized deductions otherwise
allowable for an individual whose adjusted gross income exceeds a specified
amount will be reduced by the lesser of (i) 3% of the excess of the individual's
adjusted gross income over such amount or (ii) 80% of the amount of itemized
deductions otherwise allowable for the taxable year. The amount of additional
taxable income reportable by REMIC Certificateholders that are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Furthermore, in determining the alternative minimum taxable income of such a
holder of a REMIC Certificate that is an individual, estate or trust, or a
"pass-through entity" beneficially owned by one or more individuals, estates or
trusts, no deduction will be allowed for such holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of such fees and other deductions will be
included in such holder's gross income. Accordingly, such REMIC Certificates may
not be appropriate investments for individuals, estates, or trusts, or
pass-through entities beneficially owned by one or more individuals, estates or
trusts. Such prospective investors should consult with their tax advisors prior
to making an investment in such Certificates.
Sales of REMIC Certificates
If a REMIC Certificate is sold, the selling Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Certificate. The adjusted basis of
a REMIC Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under
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"-Taxation of Owners of REMIC Residual Certificates-Basis Rules, Net Losses and
Distributions." Except as described below, any such gain or loss generally will
be capital gain or loss. 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 from the sale of a REMIC Regular Certificate that might otherwise
be capital gain will be treated as ordinary income to the extent such gain does
not exceed the excess, if any, of (i) the amount that would have been includible
in the seller's income with respect to such REMIC Regular Certificate had income
accrued thereon at a rate equal to 110% of the "applicable Federal rate"
(generally, a rate based on an average of current yields on Treasury securities
having a maturity comparable to that of the Certificate, which rate is computed
and published monthly by the IRS), determined as of the date of purchase of such
REMIC Regular Certificate, over (ii) the amount of ordinary income actually
includible in the seller's income prior to such sale. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
such REMIC Regular Certificate at a market discount will be taxable as ordinary
income to the extent of any accrued and previously unrecognized market discount
that accrued during the period the Certificate was held. See "-Taxation of
Owners of REMIC Regular Certificates-Market Discount."
REMIC Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from
the sale of a REMIC Certificate by a bank or thrift institution to which such
section applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in Certificates or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in 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 limitation on the deduction of interest on indebtedness incurred
to purchase or carry property held for investment to a taxpayer's net investment
income.
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Except as may be provided in Treasury regulations yet to be issued, if
the seller of a REMIC Residual Certificate reacquires the Certificate, any other
residual interest in a REMIC or any similar interest in a "taxable mortgage
pool" (as defined in Section 7701(i) of the Code) within six months of the date
of such sale, the sale will be subject to the "wash sale" rules of Section 1091
of the Code. In that event, any loss realized by the REMIC Residual
Certificateholder on the sale will not be deductible, but instead will be added
to such REMIC Residual Certificateholder's adjusted basis in the newly-acquired
asset.
Prohibited Transactions and Other Possible REMIC Taxes
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions" (a "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions a prohibited transaction means
the disposition of a Mortgage Loan, the receipt of income from a source other
than a Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that any REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on
which the REMIC issues all of its interests could result in the imposition of a
tax on the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to such tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is
not anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to
the extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer or Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement and in respect of
compliance with applicable laws and regulations. Any such tax not borne by the
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Master Servicer or the Trustee will be payable out of the related Trust Fund
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the Certificate, which rate is computed and published
monthly by the IRS) of the total anticipated excess inclusions with respect to
such REMIC Residual Certificate for periods after the transfer and (ii) the
highest marginal federal income tax rate applicable to corporations. The
anticipated excess inclusions must be determined as of the date that the REMIC
Residual Certificate is transferred and must be based on events that have
occurred up to the time of such transfer, the Prepayment Assumption and any
required or permitted clean up calls or required liquidation provided for in the
REMIC's organizational documents. Such a tax generally would be imposed on the
transferor of the REMIC Residual Certificate, except that where such transfer is
through an agent for a disqualified organization, the tax would instead be
imposed on such agent. However, a transferor of a REMIC Residual Certificate
would in no event be liable for such tax with respect to a transfer if the
transferee furnishes to the transferor an affidavit that the transferee is not a
disqualified organization and, as of the time of the transfer, the transferor
does not have actual knowledge that such affidavit is false. Moreover, an entity
will not qualify as a REMIC unless there are reasonable arrangements designed to
ensure that (i) residual interests in such entity are not held by disqualified
organizations and (ii) information necessary for the application of the tax
described herein will be made available. Restrictions on the transfer of REMIC
Residual Certificates and certain other provisions that are intended to meet
this requirement will be included in the Pooling and Servicing Agreement, and
will be discussed more fully in any Prospectus Supplement relating to the
offering of any REMIC Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization.
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For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
Termination
A REMIC will terminate immediately after the Distribution Date
following receipt by the REMIC of the final payment in respect of the Mortgage
Loans or upon a sale of the REMIC's assets following the adoption by the REMIC
of a plan of complete liquidation. The last distribution on a REMIC Regular
Certificate will be treated as a payment in retirement of a debt instrument. In
the case of a REMIC Residual Certificate, if the last distribution on such REMIC
Residual Certificate is less than the REMIC Residual Certificateholder's
adjusted basis in such Certificate, such REMIC Residual Certificateholder should
be treated as realizing a loss equal to the amount of such difference. Such loss
may be subject to the "wash sale" rules of Section 1091 of the Code. See
"--Sales of REMIC Certificates." The character of any such loss as ordinary or
capital is uncertain.
Reporting and Other Administrative Matters
Solely for purposes of the administrative provisions of the Code, the
REMIC will be treated as a partnership and Residual Certificateholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Master Servicer will file REMIC federal income tax returns on
behalf of the related REMIC, will be designated as and will act as the "tax
matters person" with respect to the REMIC in all respects, and generally will
hold at least a nominal amount of REMIC Residual Certificates.
As the tax matters person, the Master Servicer will, subject to certain
notice requirements and various restrictions and limitations, generally have the
authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders will generally be required to
report such REMIC items consistently with their treatment on the related REMIC's
tax return and may in some circumstances be bound by a settlement agreement
between the Master Servicer, as tax matters person, and the IRS concerning any
such REMIC item. Adjustments made to the REMIC tax return may require a REMIC
Residual Certificateholder to make corresponding adjustments on its return, and
an audit of the REMIC's tax return, or the adjustments resulting from such an
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audit, could result in an audit of a REMIC Residual Certificateholder's return.
No REMIC will be registered as a tax shelter pursuant to Section 6111 of the
Code because it is not anticipated that any REMIC will have a net loss for any
of the first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
to the related REMIC, in a manner to be provided in Treasury regulations, the
name and address of such person and other information.
Reporting of interest income, including any original issue discount,
with respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent to individual holders of REMIC Regular
Interests and the IRS; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and certain other non-individuals will
be provided interest and original issue discount income information and the
information set forth in the following paragraph upon request in accordance with
the requirements of the applicable regulations. The information must be provided
by the later of 30 days after the end of the quarter for which the information
was requested, or two weeks after the receipt of the request. The REMIC must
also comply with rules requiring a REMIC Regular Certificate issued with
original issue discount to disclose on its face certain information including
the amount of original issue discount and the issue date, and requiring such
information to be reported to the IRS. Reporting with respect to the REMIC
Residual Certificates, including income, excess inclusions, investment expenses
and relevant information regarding qualification of the REMIC's assets will be
made as required under the Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method requires information relating to the holder's purchase
price that the Master Servicer will not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "Taxation of Owners of REMIC Regular
Certificates--Market Discount."
The responsibility for complying with the foregoing reporting rules
will be borne by the Master Servicer. Certificateholders may request any
information with respect to the returns described in Section 1.6049-7(e)(2) of
the Treasury regulations. Such request should be directed to the Master Servicer
at Residential Funding Corporation, 8400 Normandale Lake Boulevard, Suite 600,
Minneapolis, Minnesota 55437.
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Backup Withholding With Respect to REMIC Certificates
Payments of interest and principal, as well as payments of proceeds
from the sale of REMIC Certificates, may be subject to the "backup withholding
tax" under Section 3406 of the 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.
Foreign Investors in REMIC Certificates
A REMIC Regular Certificateholder that is not a "United States person"
(as defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not be subject to United States federal
income or withholding tax in respect of a distribution on a REMIC Regular
Certificate, provided that the holder complies to the extent necessary with
certain identification requirements (including delivery of a statement, signed
by the Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). For these purposes, "United States person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in, or under the laws of, the United States or
any political subdivision thereof, or an estate whose income is subject to
United States federal income tax regardless of its source, or a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the Trust. It is possible that
the IRS may assert that the foregoing tax exemption should not apply with
respect to a REMIC Regular Certificate held by a REMIC Residual
Certificateholder that owns directly or indirectly a 10% or greater interest in
the REMIC Residual Certificates. If the holder does not qualify for exemption,
distributions of interest, including distributions in respect of accrued
original issue discount, to such holder may be subject to a tax rate of 30%,
subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on such
United States shareholder's allocable portion of the interest income received by
such controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be
included in the estate of a non-resident alien individual and would not be
subject to United States estate taxes. However, Certificateholders who are
non-resident alien individuals should consult their tax advisors concerning this
question.
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Unless otherwise stated in the related Prospectus Supplement, transfers
of REMIC Residual Certificates to investors that are not United States Persons
will be prohibited under the related Pooling and Servicing Agreement.
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 Certificates offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their tax advisors
with respect to the various tax consequences of investments in the certificates
offered hereunder.
ERISA CONSIDERATIONS
Sections 404 and 406 of ERISA impose certain fiduciary and prohibited
transaction restrictions on employee pension and welfare benefit plans subject
to ERISA ("ERISA Plans") and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans, bank
collective investment funds and insurance company general and separate accounts
in which such ERISA Plans are invested. Section 4975 of the Code imposes
essentially the same prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code and on Individual
Retirement Accounts 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 Certificates without regard to the ERISA considerations
described below, subject to the provisions of applicable federal and state law.
Any such plan that is qualified and exempt from taxation under Sections 401(a)
and 501(a) of the Code, however, is subject to the prohibited transaction rules
set forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those
of investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving 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
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excise tax) imposed pursuant to Section 502(i) of ERISA or Section 4975 of the
Code, unless a statutory or administrative exemption is available with respect
to any such transaction.
Plan Asset Regulations
An investment of the assets of a Plan in Certificates may cause the
underlying Mortgage Loans, Mortgage Securities or any other assets included in a
Trust Fund to be deemed plan assets ("Plan Assets" as defined below) of such
Plan. The U.S. Department of Labor (the "DOL") has promulgated regulations at 29
C.F.R. ss.2510.3-101 (the "DOL Regulations") concerning whether or not a Plan's
assets would be deemed to include an interest in the underlying assets of an
entity (such as a Trust Fund) for purposes of applying the general fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code, when a Plan acquires an "equity interest" (such as a
Certificate) in such entity. 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 securities issued by the entity.
For this purpose, "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) and 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. Because of the factual nature of certain of the rules set forth in
the DOL Regulations, Plan Assets either may be deemed to include an interest in
the assets of an entity (such as a Trust Fund) or may be deemed merely to
include its interest in the instrument evidencing such equity interest (such as
a Certificate). Therefore, neither Plans nor such entities should acquire or
hold Certificates in reliance upon the availability of any exception under the
DOL Regulations. For purposes of this section "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, the Trustee, the obligor under any credit
enhancement mechanism or certain affiliates thereof to be considered or become
Parties in Interest with respect to an investing Plan (or of a Plan holding an
interest in such an entity). If so, the acquisition or holding of Certificates
by or on behalf of the investing Plan could also give rise to a prohibited
transaction under ERISA and the Code, unless some statutory or administrative
exemption is available. Certificates acquired by a Plan would be assets of that
Plan. Under the DOL Regulations, a Trust Fund, including the Mortgage Loans,
Mortgage Securities or any other assets held in such Trust Fund, may also be
deemed to be assets of each Plan that acquires Certificates. Special caution
should be exercised before Plan Assets are used to acquire a Certificate in such
circumstances, especially if, with respect to such
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assets, the Company, the Master Servicer, any Subservicer, the Trustee, the
obligor under any credit enhancement mechanism or an affiliate thereof either
(i) has investment discretion with respect to the investment of 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 Mortgage Loans,
the Mortgage Securities or any other assets in a 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 requirements of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to any investing
Plan. In addition, if the Mortgage Loans, Mortgage Securities or any other
assets in a Trust Fund were to constitute Plan Assets, then the acquisition or
holding of Certificates by or on behalf of a Plan or with Plan Assets, as well
as the operation of such Trust Fund, may constitute or involve a prohibited
transaction under ERISA and the Code.
Prohibited Transaction Exemptions
The DOL issued an individual exemption, Prohibited Transaction
Exemption 94-29, (59 Fed. Reg. 14,674, March 29, 1994 (the "Exemption")), to
Residential Funding and certain of its affiliates, which generally exempts from
the application of certain of the prohibited transaction provisions of Section
406 of ERISA, and the excise taxes imposed on such prohibited transactions
pursuant to Section 4975(a) and (b) of the Code, certain transactions, among
others, relating to the servicing and operation of mortgage pools and the
purchase, sale and holding of pass-through certificates issued by such a trust
as to which (i) the Company or any of its affiliates is the sponsor, and any
entity which has received from the DOL an individual prohibited transaction
exemption which is similar to the Exemption is the sole underwriter, or manager
or co-manager of the underwriting syndicate or a seller or placement agent, or
(ii) the Company or an affiliate is the underwriter, provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
section, the term "Underwriter" shall include (a) the Company and certain of its
affiliates, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with the
Company and certain of its affiliates, (c) any member of the underwriting
syndicate or selling group of which a person described in (a) or (b) is a
manager or co-manager with respect to a class of Certificates, or (d) any entity
which has received an exemption from the DOL relating to Certificates which is
similar to the Exemption.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by a Plan or with Plan Assets must be on terms that are at least as favorable to
the Plan as they would be in an arm's-length transaction with an unrelated
party. Second, the Exemption only applies to Certificates evidencing rights and
interests
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that are not subordinated to the rights and interests evidenced by the other
Certificates of the same trust. Third, the Certificates at the time of
acquisition by a Plan or with Plan Assets must be rated in one of the three
highest generic rating categories by Standard & Poor's Ratings Services, Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors
Service, L.P. (collectively, the "Exemption Rating Agencies"). Fourth, the
Trustee cannot be an affiliate of any member of the "Restricted Group" which
consists of any Underwriter, the Company, the Master Servicer, any Subservicer
and any mortgagor with respect to assets of a Trust Fund constituting more than
5% of the aggregate unamortized principal balance of the assets in the related
Trust Fund as of the date of initial issuance of the Certificates. Fifth, the
sum of all payments made to and retained by the Underwriters must represent not
more than reasonable compensation for underwriting the Certificates; the sum of
all payments made to and retained by the Company pursuant to the assignment of
the assets to the related Trust Fund must represent not more than the fair
market value of such obligations; and the sum of all payments made to and
retained by the Master Servicer and any Subservicer must represent not more than
reasonable compensation for such person's services under the related Pooling and
Servicing Agreement and reimbursement of such person's reasonable expenses in
connection therewith. Sixth, the Exemption states that the investing Plan or
Plan-Asset Investor must be an accredited investor as defined in Rule 501(a)(1)
of Regulation D of the Commission under the Securities Act of 1933, as amended.
The Exemption also requires that each Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) certificates evidencing
interests in such other investment pools must have been rated in one of the
three highest categories of one of the Exemption Rating Agencies for at least
one year prior to the acquisition of Certificates by or on behalf of a Plan or
with Plan Assets; and (iii) certificates in such other investment pools must
have been purchased by investors other than Plans for at least one year prior to
any acquisition of Certificates by or on behalf of a Plan or with Plan Assets.
A fiduciary or other investor of Plan Assets contemplating purchasing a
Certificate must make its own determination that the general conditions set
forth above will be satisfied with respect to such Certificate.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA, as well as the excise taxes imposed by Sections 4975(a) and (b)
of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code, in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of
Certificates by a Plan or with Plan Assets. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E) and 406(a)(2) of ERISA for the
acquisition or holding of a Certificate by an Excluded Plan or with Plan Assets
of an Excluded Plan by any person who has discretionary authority or renders
investment advice with respect to Plan Assets of such Excluded Plan. For
purposes of the Certificates, an "Excluded Plan" is a Plan sponsored by any
member of the Restricted Group.
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If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA, as well as the excise taxes imposed by Section
4975(a) and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code, in
connection with (1) the direct or indirect sale, exchange or transfer of
Certificates in the initial issuance of Certificates between the Company or an
Underwriter and a Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of the relevant Plan
Assets in the Certificates is (a) a mortgagor with respect to 5% or less of the
fair market value of the assets of a Trust Fund or (b) an affiliate of such a
person (provided that, with respect to the acquisition of certificates in
connection with the initial issuance of the certificates, certain quantitative
restrictions set forth in the Exemption are met), (2) the direct or indirect
acquisition or disposition in the secondary market of Certificates by a Plan or
with Plan Assets and (3) the holding of Certificates by a Plan or with Plan
Assets.
Additionally, if certain specific conditions of the Exemption are
satisfied, the Exemption may provide an exemption from the restrictions imposed
by Sections 406(a), 406(b) and 407(a) of ERISA, as well as the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code,
for transactions in connection with the servicing, management and operation of
the Mortgage Pools. Unless otherwise set forth in the related Prospectus
Supplement, the Company expects that the specific conditions of the Exemption
required for this purpose will be satisfied with respect to the Certificates so
that the Exemption would provide an exemption from the restrictions imposed by
Sections 406(a) and (b) of ERISA, as well as the excise taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code,
for transactions in connection with the servicing, management and operation of
the Mortgage Pools, provided that the general conditions of the Exemption are
satisfied.
The Exemption also may provide an exemption from the restrictions
imposed by Sections 406(a) and 407(a) of ERISA, as well as the taxes imposed by
Section 4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through
(D) of the Code, if such restrictions are deemed to otherwise apply merely
because a person is deemed to be a Party In Interest with respect to an
investing Plan (or the investing entity holding Plan Assets) by virtue of
providing services to the Plan (or by virtue of having certain specified
relationships to such a person) solely as a result of the Plan's ownership of
Certificates.
In addition to the Exemption, a fiduciary or other Plan Asset investor
should consider the availability of certain class exemptions granted by the DOL
("Class Exemptions"), 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") 83-1, regarding
transactions involving mortgage pool investment trusts; PTCE 95-60, regarding
transactions by insurance company general accounts, PTCE 90-1, regarding
investments by insurance company pooled separate accounts; PTCE 91-38, regarding
investments by bank collective investment funds; PTCE 84-14, regarding
transactions effected by a "qualified professional asset manager"; and PTCE
96-23, regarding transactions effected by an "in-house asset manager." In
particular, in connection with a contemplated purchase of Certificates
representing a beneficial ownership interest in a pool of single-family
residential first or second
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mortgage loans, such fiduciary or other Plan investor should consider the
availability of the Exemption or PTCE 83-1. There can be no assurance that any
of the Class Exemptions will apply with respect to any particular Plan's or Plan
investor's investment in Certificates or, even if a Class Exemption were deemed
to apply, that such Class Exemption would apply to all transactions that may
occur in connection with or as a result of such an investment. The respective
Prospectus Supplement with respect to a series of Certificates may contain
additional information regarding the application of the Exemption, PTCE 83-1 or
any other Class Exemption, with respect to the Certificates 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 Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides 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 Section 4975 of the Code, for transactions involving an
insurance company general account. Pursuant to Section 401(c) of ERISA, the DOL
is required to issue final regulations ("401(c) Regulations") no later than
December 31, 1997 which are to provide guidance for the purpose of determining,
in cases where insurance policies supported by an insurer's general account are
issued to or for the benefit of a Plan on or before December 31, 1998, which
general account assets constitute Plan Assets. Section 401(c) of ERISA generally
provides that, until the date which is 18 months after the 401(c) Regulations
become final, no person shall be subject to liability under Part 4 of Title I of
ERISA and Section 4975 of the Code on the basis of a claim that the assets of an
insurance company general account constitute Plan Assets, unless (i) as
otherwise provided by the Secretary of Labor in the 401(c) Regulations to
prevent avoidance of the regulations or (ii) an action is brought by the
Secretary of Labor for certain breaches of fiduciary duty which would also
constitute a violation of federal or state criminal law. Any assets of an
insurance company general account which support insurance policies issued to a
Plan after December 31, 1998 or issued to Plans on or before December 31, 1998
for which the insurance company does not comply with the 401(c) Regulations may
be treated as Plan Assets. In addition, because Section 401(c) does not relate
to insurance company separate accounts, separate account assets are still
treated as Plan Assets of any Plan invested in such separate account. Insurance
companies contemplating the investment of general account assets in the
Certificates should consult with their legal counsel with respect to the
applicability of PTCE 95-60 and Section 401(c) of ERISA, including the general
account's ability to continue to hold the Certificates after the date which is
18 months after the date the 401(c) Regulations become final.
Representation from Investing Plans
It is not clear whether Certificates backed by Revolving Credit Loans
with respect to which certain Trust Balances of Revolving Credit Loans are
included in the related Trust Fund would constitute "certificates" for purposes
of the Exemption. In promulgating the Exemption, the DOL did not have under
consideration interests in mortgage pools of the exact nature described in this
[NY01B:322949.7] 16069-00377 05/27/97 2:24pm
<PAGE>
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paragraph and accordingly, unless otherwise provided in the related Prospectus
Supplement, Certificates representing interests as described in this paragraph
should not be purchased by or on behalf of a Plan or with Plan Assets based
solely upon the Exemption. In addition, the exemptive relief afforded by the
Exemption will not apply to the purchase, sale or holding of any class of
Subordinate Certificates and may not apply to any Certificates where the related
Trust Fund contains a Funding Account during the period in which additional
Mortgage Loans are permitted to be transferred to such Trust Fund.
To the extent Certificates are backed by Revolving Credit Loans or are
Subordinate Certificates or the related Trust Fund contains a Funding Account,
except as otherwise specified in the respective Prospectus Supplement, transfers
of such Certificates to a Plan, to a trustee or other person acting on behalf of
any Plan, or to any other person using the Plan Assets to effect such
acquisition will not be registered by the Trustee unless the transferee provides
the Company, the Trustee and the Master Servicer with an opinion of counsel
satisfactory to the Company, the Trustee and the Master Servicer, which opinion
will not be at the expense of the Company, the Trustee or the Master Servicer
that the purchase of such Certificates 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 Trustee and the Master Servicer to any
obligation in addition to those undertaken in the Pooling and Servicing
Agreement. In lieu of such opinion of counsel, the transferee may provide a
certification of facts substantially to the effect that the purchase of
Certificates by or on behalf of such Plan is permissible under applicable law,
will not constitute or result in a non-exempt prohibited transaction under ERISA
or Section 4975 of the Code, will not subject the Company, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the Pooling
and Servicing Agreement, and the following conditions are met: (a) the source of
funds used to purchase such Certificates is an "insurance company general
account" (as such term is defined in PTCE 95-60) and (b) the conditions set
forth in Section I and Section III of PTCE 95-60 have been satisfied as of the
date of the acquisition of such Certificates.
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. All "excess
inclusions" of a REMIC allocated to a REMIC Residual Certificate held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to federal
income tax. See "Certain Federal Income Tax Consequences--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions."
[NY01B:322949.7] 16069-00377 05/27/97 2:24pm
<PAGE>
-129-
Consultation with Counsel
There can be no assurance that the Exemption or any other DOL exemption
will apply with respect to any particular Plan that acquires the Certificates
or, even if all the conditions specified therein were satisfied, that the
exemption would apply to transactions involving a Trust Fund. Prospective Plan
investors should consult with their legal counsel concerning the impact of ERISA
and the Code and the potential consequences to their specific circumstances
prior to making an investment in the Certificates.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm that (a) all the specific and general conditions set forth in the
Exemption or in one of the Class Exemptions would be satisfied and (b) in the
case of a Certificate purchased under the Exemption, the Certificate constitutes
a "certificate" for purposes of the Exemption. In addition to making its own
determination as to the availability of the exemptive relief provided in the
Exemption or in any of the Class Exemptions, the Plan fiduciary should consider
its general fiduciary obligations under ERISA in determining whether to purchase
a Certificate on behalf of a Plan.
LEGAL INVESTMENT MATTERS
Each class of Certificates 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 Certificates will evidence an
interest in Mortgage Loans primarily secured by second or more junior liens, and
therefore will not constitute "mortgage related securities" for purposes of
SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their legal advisors to determine whether and to
what extent the Certificates constitute legal investments for them.
All depository institutions considering an investment in the
Certificates should review the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on the Selection of Securities Dealers
and Unsuitable Investment Practices (to the extent adopted by their respective
regulators), setting forth, in relevant part, certain investment practices
deemed to be unsuitable for an institution's investment portfolio, as well as
guidelines for investing in certain
types of mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
[NY01B:322949.7] 16069-00377 05/27/97 2:24pm
<PAGE>
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There may be other restrictions on the ability of certain investors
either to purchase certain classes of Certificates or to purchase any class of
Certificates 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 Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Certificates. Accordingly,
all investors whose investment activities are subject to legal investment laws
and regulations, regulatory capital requirements or review by regulatory
authorities should consult with their legal advisors in determining whether and
to what extent the Certificates of any class constitute legal investments or are
subject to investment, capital or other restrictions.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of
Certificates will be applied by the Company to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the Mortgage Loans
or Mortgage Securities underlying the Certificates 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 Certificates 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 Certificates offered hereby and by the related Prospectus
Supplements will be offered in series through one or more of the methods
described below. The Prospectus Supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the Company from such sale.
The Company intends that Certificates will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of Certificates may be made through a combination of two or more of these
methods. Such methods are as follows:
1. by negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
2. by placements by the Company with institutional investors through
dealers; and
3. by direct placements by the Company with institutional investors.
[NY01B:322949.7] 16069-00377 05/27/97 2:24pm
<PAGE>
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In addition, if specified in the related Prospectus Supplement, a
series of Certificates may be offered in whole or in part to the Seller of the
related Mortgage Loans (and other assets, if applicable) that would comprise the
Mortgage Pool in respect of such Certificates.
If underwriters are used in a sale of any Certificates (other than in
connection with an underwriting on a best efforts basis), such Certificates will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. 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 Certificates 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 Certificates, underwriters may
receive compensation from the Company or from purchasers of the Certificates in
the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Company and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the
sale of any series of Certificates will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Certificates 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 payments required to be made in respect
thereof.
The Prospectus Supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Company and
purchasers of Certificates of such series.
The Company anticipates that the Certificates offered hereby will be
sold primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Certificates, including dealers, may, depending on the
facts and circumstances of such purchases, be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended, in connection with
reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
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<PAGE>
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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 Certificates do not represent an
interest in or an obligation of the Company. The Company's only obligations with
respect to a series of Certificates will be to repurchase Mortgage Loans or
Mortgage Securities upon any breach of certain limited representations and
warranties made by the Company, or as otherwise provided in the applicable
Prospectus Supplement.
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<PAGE>
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INDEX OF PRINCIPAL DEFINITIONS
age
401(c) Regulations.....................................................126
Account Balance ......................................................28
Accrual Certificates.....................................................6
Actuarial Mortgage Loan.................................................26
Additional Balance......................................................28
Additional Charges......................................................28
Advance ......................................................53
Affiliated Sellers......................................................21
ARM Loans ......................................................25
Audit Guide ......................................................72
Balloon Amount ......................................................26
Balloon Loans ......................................................26
Bankruptcy Loss ......................................................61
Bankruptcy Losses ......................................................65
Beneficial Owner ......................................................43
Book-Entry Certificates.................................................42
CEDEL ......................................................42
CEDEL Participants......................................................44
CERCLA ......................................................93
Certificate Account.....................................................49
Certificate Administrator...............................................23
Certificate Registrar...................................................42
Certificateholder ......................................................42
Certificates .......................................................1
Class Exemptions .....................................................126
Clearance Cooperative...................................................44
Closed-End Loans .......................................................1
Closing Date .....................................................103
CLTV ......................................................22
Code ......................................................13
Combined Loan-to-Value Ratio............................................22
Commission .......................................................3
Committee Report .....................................................102
Company .......................................................1
Conservation Act ......................................................93
Contributions Tax .....................................................117
Convertible Mortgage Loan...............................................27
Cooperative ......................................................85
Cooperative Loans ......................................................20
Cooperative Note ......................................................85
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<PAGE>
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Cooperative Notes ......................................................20
Credit Enhancer ......................................................63
Credit Line Agreements..................................................27
Credit Utilization Rate.................................................23
Crime Control Act ......................................................97
Custodial Account ......................................................37
Custodian ......................................................46
Debt Service Reduction..................................................65
Defaulted Mortgage Loss.................................................61
Deferred Interest ......................................................26
Deficient Valuation.....................................................64
Deleted Mortgage Loan...................................................37
Depositaries ......................................................42
Designated Seller ......................................................21
Designated Seller Transaction...........................................21
Determination Date......................................................53
DIDMC ......................................................99
Disqualified Persons...................................................122
Distribution Amount.....................................................52
Distribution Date .......................................................8
DOL .....................................................122
DOL Regulations .....................................................122
Draw ......................................................28
Draw Period ......................................................28
DTC ......................................................42
DTC Participants ......................................................42
Eligible Account ......................................................49
Environmental Lien......................................................93
ERISA ......................................................13
ERISA Plans .....................................................121
Euroclear ......................................................42
Euroclear Operator......................................................44
Euroclear Participants..................................................44
Excess Interest ......................................................66
Excess Spread ......................................................47
Exchange Act .......................................................3
Excluded Balance ......................................................29
Excluded Plan .....................................................125
Excluded Spread ......................................................47
Exemption .....................................................123
Exemption Rating Agencies..............................................124
Extraordinary Losses....................................................62
FDIC ......................................................34
Finance Charge ......................................................28
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<PAGE>
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Financial Guaranty Insurance Policy.....................................63
Fraud Loss ......................................................62
Funding Account ......................................................55
Garn-St Germain Act.....................................................94
Gross Margin ......................................................25
Guide ......................................................30
High Cost Loans ......................................................92
Home Equity Program.....................................................30
Index ......................................................25
Indirect Participants...................................................43
Insurance Proceeds......................................................48
Insurer ......................................................63
Issue Premium .....................................................110
Junior Ratio ......................................................23
Letter of Credit ......................................................64
Letter of Credit Bank...................................................64
Liquidated Mortgage Loan................................................59
Liquidation Proceeds....................................................48
Manager ......................................................22
Mark-to-Market Regulations.............................................114
Master Commitments......................................................31
Mezzanine Certificates...................................................7
Mortgage ......................................................28
Mortgage Loans .......................................................1
Mortgage Note ......................................................20
Mortgage Rate ......................................................25
Mortgage Securities......................................................8
Mortgaged Properties.....................................................8
Mortgagor ......................................................15
Net Mortgage Rate ......................................................78
Nonrecoverable Advance..................................................51
OID Regulations .....................................................100
Overcollateralization...................................................67
Participants ......................................................42
Parties in Interest....................................................122
Pass-Through Rate .......................................................6
Paying Agent ......................................................51
Percentage Interest.....................................................52
Permitted Investments...................................................49
Plan Assets .....................................................123
Plans .....................................................122
Pooling and Servicing Agreement..........................................6
Prepayment Assumption..................................................102
Prepayment Interest Shortfall............................................9
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<PAGE>
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Principal Balance ......................................................28
Prohibited Transactions Tax............................................116
PTCE 83-1 .....................................................126
Purchase Price ......................................................37
Qualified Insurer ......................................................68
Qualified Substitute Mortgage Loan......................................37
Rating Agency ......................................................12
Realized Loss ......................................................62
Record Date ......................................................52
Registration Statement...................................................3
Relief Act ......................................................96
REMIC .......................................................1
REMIC Provisions .....................................................100
REMIC Regular Certificates.............................................100
REMIC Regulations .....................................................100
REMIC Residual Certificates............................................100
REO Mortgage Loan ......................................................59
Reserve Fund ......................................................67
Residential Funding......................................................5
Revolving Credit Loans...................................................1
RICO ......................................................97
Risk Factors ......................................................14
Sellers ......................................................21
Senior Certificates......................................................7
Senior Percentage ......................................................65
Senior/Subordinate Series...............................................41
Servicing Advances......................................................50
Simple Interest Mortgage Loan...........................................26
Single Certificate......................................................56
SMMEA ......................................................12
Special Hazard Instrument...............................................62
Special Hazard Insurance Policy.........................................64
Special Hazard Loss.....................................................61
Spread Account ......................................................67
Stated Principal Balance................................................62
Strip Certificates.......................................................6
Subordinate Certificates.................................................7
Subservicers ......................................................23
Subservicing Account....................................................48
Subservicing Agreement..................................................39
Tax Favored Plans .....................................................121
Tax-Exempt Investor....................................................128
Terms and Conditions....................................................44
Tiered REMICs .....................................................101
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<PAGE>
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Title V ......................................................95
Title VIII ......................................................96
Trust Balance ......................................................29
Trust Fund .......................................................1
Trustee .......................................................5
UBTI .....................................................128
UCC ......................................................90
Unaffiliated Sellers....................................................21
[NY01B:322949.7] 16069-00377 05/27/97 2:24pm
<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 May 29, 1997)
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
<PAGE>
ANY OBLIGATIONS IN RESPECT OF THE NOTES, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR
IN THE RELATED PROSPECTUS SUPPLEMENT.
THESE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Offers of the Notes may be made through one or more different methods, including
offerings through underwriters, as described under "Methods of Distribution" and
in the related Prospectus Supplement.
There will be no secondary market for any series of Notes prior to the offering
thereof. There can be no assurance that a secondary market for any of the Notes
will develop or, if it does develop, that it will continue. The Notes will not
be listed on any securities exchange.
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of Notes offered hereby unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is ________ __, 1997.
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Notes (the "Registration Statement"). The Company
is also subject to certain of the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, accordingly, will
file reports thereunder with the Commission. The Registration Statement and the
exhibits thereto, and reports and other information filed by the Company
pursuant to the Exchange Act can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at certain of its Regional Offices located as follows: Midwest
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and Northeast Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048 and electronically through the Commission's
Electronic Data Gathering, Analysis and Retrieval System at the Commission's Web
Site (http://www.sec.gov).
REPORTS TO NOTEHOLDERS
Monthly reports that contain information concerning the Trust Fund for
a series of Notes will be sent by the Master Servicer or the Indenture Trustee
to each holder of record of the Notes of the related series. See "Description of
the Notes--Reports to Noteholders." Any reports forwarded to holders will
contain financial information that has not been examined nor reported upon by an
independent 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 600, Minneapolis, Minnesota 55437, or by
telephone at (612) 832-7000.
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3
<PAGE>
No dealer, salesman, or any other person has been authorized to give
any information, or to make any representations, other than those contained in
this Prospectus or the related Prospectus Supplement and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any dealer, salesman, or any other person. Neither the
delivery of this Prospectus or the related Prospectus Supplement nor any sale
made hereunder or thereunder shall under any circumstances create an implication
that there has been no change in the information herein or therein since the
date hereof. This Prospectus and the related Prospectus Supplement are not an
offer to sell or a solicitation of an offer to buy any security in any
jurisdiction in which it is unlawful to make such offer or solicitation.
[NY01B:321766.6] 16069-00377 05/27/97 8:13pm
4
<PAGE>
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............................................ 22
THE POOLS............................................................... 22
General ...................................................... 22
Revolving Credit Loans......................................... 26
The Home Equity Loans and the
Contracts............................................. 28
TRUST ASSET PROGRAM..................................................... 29
Underwriting Standards Applicable to
the Revolving Credit Loans............................ 29
Qualifications of Sellers...................................... 33
Representations Relating to Trust Assets....................... 34
Subservicing................................................... 37
DESCRIPTION OF THE NOTES................................................ 38
General ...................................................... 38
Form of Notes.................................................. 38
Assignment of the Trust Assets................................. 41
Review of Trust Assets......................................... 42
Excess Spread and Excluded Spread.............................. 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
PURCHASE OBLIGATIONS.................................................... 57
DESCRIPTION OF FHA INSURANCE UNDER
TITLE I........................................................ 58
THE COMPANY............................................................. 60
RESIDENTIAL FUNDING CORPORATION......................................... 61
SERVICING OF TRUST ASSETS............................................... 61
Subservicing................................................... 61
Collection and Other Servicing
Procedures............................................ 62
Realization Upon Defaulted Loans............................... 64
Servicing Compensation and Payment of
Expenses.............................................. 65
Evidence as to Compliance...................................... 66
Certain Matters Regarding the Master
Servicer and the Company.............................. 67
THE AGREEMENTS.......................................................... 68
Events of Default; Rights Upon Event of
Default............................................... 68
Amendment...................................................... 71
Termination; Redemption of Notes............................... 71
The Owner Trustee.............................................. 72
The Indenture Trustee.......................................... 72
YIELD AND PREPAYMENT CONSIDERATIONS..................................... 73
CERTAIN LEGAL ASPECTS OF THE TRUST
ASSETS
AND RELATED MATTERS..................................................... 79
General; Trust Assets Secured by
Mortgages on Mortgaged
Property.............................................. 79
Cooperative Loans.............................................. 80
Tax Aspects of Cooperative Ownership........................... 81
Manufactured Housing Contracts................................. 82
Foreclosure on Revolving Credit Loans,
Home Equity Loans and
Certain Contracts..................................... 84
Foreclosure on Shares of Cooperatives.......................... 85
Repossession with Respect to
Manufactured Housing
Contracts............................................. 87
Rights of Redemption........................................... 88
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............................................. 92
Enforceability of Certain Provisions........................... 93
Transfer of Manufactured Homes................................. 94
The Home Improvement Contracts................................. 94
Applicability of Usury Laws.................................... 97
Alternative Mortgage Instruments............................... 98
Formaldehyde Litigation with Respect to
Manufactured Housing
Contracts............................................. 98
Soldiers' and Sailors' Civil Relief Act of
1940.................................................. 99
Forfeitures in Drug and RICO
Proceedings...........................................100
Junior Mortgages; Rights of Senior
Mortgagees............................................100
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES...................................................101
General ......................................................101
STATE AND OTHER TAX CONSEQUENCES........................................108
ERISA CONSIDERATIONS....................................................109
Plan Asset Regulations..................................................109
Prohibited Transaction Exemptions..............................111
Insurance Company General Accounts.............................111
Representation from Plans Investing in
Notes with "Substantial Equity
Features".............................................112
Tax Exempt Investors...........................................112
Consultation with Counsel......................................112
LEGAL INVESTMENT MATTERS................................................113
USE OF PROCEEDS.........................................................113
METHODS OF DISTRIBUTION.................................................114
LEGAL MATTERS...........................................................115
FINANCIAL INFORMATION...................................................115
INDEX OF PRINCIPAL DEFINITIONS..........................................116
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5
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each series of Notes contained in the Prospectus
Supplement to be prepared and delivered in connection with the offering of such
series. Capitalized terms used in this summary that are not otherwise defined
shall have the meanings ascribed thereto in this Prospectus. An index indicating
where certain terms used herein are defined appears at the end of this
Prospectus.
Securities Offered................................Asset-Backed Notes.
Company ...........Residential Funding Mortgage Securities II, Inc., the
depositor. See "The Company."
Master Servicer..... The entity identified as Master Servicer in the related
Prospectus Supplement, which may be Residential
Funding Corporation, an affiliate of the Company
("Residential Funding"). See "Residential Funding
Corporation" and "Servicing of the Trust
Assets--Certain Matters Regarding the Master Servicer
and the Company."
Administrator....... An entity may be named as the Administrator in the
related Prospectus Supplement
if required in addition to or
in lieu of the Master Servicer
or Servicer for a series of
Notes (the "Administrator").
Indenture Trustee... The Indenture Trustee for each series of Notes will be
specified in the related Prospectus Supplement (the
"Indenture Trustee").
Owner Trustee....... The Owner Trustee for each related Trust Fund will be
specified in the related Prospectus Supplement (the
"Owner Trustee").
The Notes...........Each series of Notes will be secured by a Pool of Trust
Assets as described herein (exclusive of any portion of
interest payments (the Excess Spread or Excluded
Spread as defined herein) relating to each Trust Asset
retained by the Company or any of its affiliates), and
certain other assets as described below. The Trust Fund
(sometimes referred to herein as the "Issuer") will be
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<PAGE>
created pursuant to a Trust
Agreement between the Company
and the Owner Trustee. The
ownership of the Trust Fund
will be evidenced by
certificates (the
"Certificates") issued under
the Trust Agreement, which are
not offered hereby. Each
series of Notes will represent
indebtedness of the related
Trust Fund and will be issued
pursuant to an Indenture
between the Trust Fund and the
Indenture Trustee.
.........................................As specified in the related
Prospectus Supplement, each
series of Notes, or class of
Notes in the case of a series
consisting of two or more
classes, may have a stated
principal balance, no stated
principal balance or a
notional amount and may be
entitled to payments of
interest based on a specified
interest rate or rates (each,
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
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<PAGE>
the circumstances described in the related Prospectus
Supplement.
.........Each series of Notes will be senior in right of payment
to the related Certificates. If so provided in the related
Prospectus Supplement, a series of Notes may include
one or more classes of Notes which are senior to one or
more other classes of notes (collectively, together with
the related Certificates, the "Subordinate Securities") in
respect of certain payments of principal and interest and
allocations of losses on the Trust Assets. See
"Description of Credit Enhancement--Subordination."
The Notes will be issued in fully-registered certificated
or book-entry form in the authorized denominations
specified in the related Prospectus Supplement. See
"Description of the Notes."
.........Neither the Notes nor the underlying Trust Assets will
be guaranteed or insured by any governmental agency
or instrumentality or the Company, Residential
Funding, GMAC Mortgage or any of their affiliates,
except as 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
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<PAGE>
Corporation, Residential Money Centers, Inc. and
HomeComings Financial Network, Inc. (each affiliates
of the Company). See "Trust Asset Program." For a
description of the types of Trust Assets that may be
included in the Pools, see "The Pools."
........If specified in the related Prospectus Supplement, a
Trust Fund may include pass-through certificates or
other instruments evidencing interests in or secured by
Revolving Credit Loans, Home Equity Loans, Home
Improvement Contracts and Manufactured Housing
Contracts, or certain balances of any of the foregoing
("Private Securities") and certain interests in the
foregoing, as described herein. See "The
Pools--General" herein.
Interest PaymentsExcept 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."
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<PAGE>
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.
........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
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<PAGE>
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 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."
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<PAGE>
Optional
Redemption.............The
Master Servicer, the Company
or a person specified in the
related Prospectus Supplement,
may at its option either (i)
effect early redemption of any
series of Notes through the
purchase of the Pool in the
related Trust Fund or (ii)
purchase, in whole but not in
part, the Notes of any series;
in each case under the
circumstances and in the
manner set forth herein under
"The Agreements--Termination;
Redemption of Notes" and in
the related Prospectus
Supplement.
Rating ...........At the date of issuance, as to each series, each class of
Notes offered hereby will be rated at the request of the
Company in one of the four highest rating categories by
one or more nationally recognized statistical rating
agencies (each, a "Rating Agency"). See "Ratings" in the
related Prospectus Supplement.
Legal Investment....Unless otherwise specified in the related Prospectus
Supplement, the Notes offered hereby will not constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984,
as amended ("SMMEA"). See "Legal Investment
Matters."
ERISA Considerations....A fiduciary of an employee benefit plan and certain
other plans and arrangements, including individual
retirement accounts and annuities, Keogh plans, 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.
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<PAGE>
Certain Federal Income Tax
Consequences......................................In the opinion of Tax Counsel
(as defined herein), for
federal income tax purposes,
the Notes will be
characterized as indebtedness
and the Issuer, as created
pursuant to the terms and
conditions of the Trust
Agreement, will not be
characterized as an
association (or publicly
traded partnership) taxable as
a corporation or as a taxable
mortgage pool within the
meaning of section 7701(i) of
the Code.
...........For further information regarding certain federal
income tax consequences of an investment in the Notes
see "Certain Federal Income Tax Consequences" and
"State and Other Tax Consequences" herein and
"Certain Federal Income Tax Consequences" in the
Prospectus Supplement.
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Notes:
Special Features of Certain Trust Assets that are Secured by Junior Liens on
Mortgaged Properties
General
Although the Revolving Credit Loans, Home Equity Loans and, if
applicable, Contracts may be secured by liens on Mortgaged Properties, such
collateral may not provide assurance of repayment of such Trust Assets
comparable to that provided under many first lien lending programs, and such
Trust Assets (especially those with high Combined Loan-to-Value Ratios (as
defined herein)) may have risk of repayment characteristics more similar to
unsecured consumer loans.
Since the Revolving Credit Loans, Home Equity Loans and, if applicable,
Contracts may be subordinate to the rights of the mortgagee under the related
senior mortgage or mortgages, the proceeds from any foreclosure, liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of such Trust Assets secured by junior mortgages only to the
extent that the claims of such senior mortgages have been satisfied in full,
including any related foreclosure costs. With respect to a Contract partially
insured by the FHA pursuant to Title I, however, an FHA claim may be payable
subject to certain limitations, as described in the related Prospectus
Supplement and herein. With respect to the Trust Assets secured by junior liens
that have low Junior Ratios (as defined herein), foreclosure costs may be
substantial relative to the outstanding balance of such Trust Assets upon
default, and therefore the amount of any liquidation proceeds payable to
Noteholders may be smaller as a percentage of the outstanding balance of such
Trust Assets than would be the case in a typical pool of first lien residential
loans. In addition, the holder of a loan secured by a junior mortgage may not
foreclose on the Mortgaged Property unless it forecloses subject to the senior
mortgages, in which case it must either pay the entire amount due on the senior
mortgages to the senior mortgagees at or prior to the foreclosure sale or
undertake the obligation to make payments on the senior mortgages in the event
the mortgagor is in default thereunder. The Trust Fund will not have any source
of funds to satisfy the senior mortgages or make payments due to the senior
mortgagees, although the Master Servicer or Subservicer may, at its option,
advance such amounts to the extent deemed recoverable and prudent, but will not
be obligated to do so. In the event that such proceeds from a foreclosure or
similar sale of the related Mortgaged Property are insufficient to satisfy all
senior liens and such Trust Asset in the aggregate, the Trust Fund, as the
holder of the junior lien, and, accordingly, Holders of one or more classes of
the Notes are likely to (i) incur losses in jurisdictions in which a deficiency
judgment against the borrower is not available or in the Master Servicer's
discretion, seeking such judgment is not advisable, and (ii) incur losses if any
deficiency judgment obtained is not realized upon. See "Certain Legal Aspects of
the Trust Assets and Related Matters."
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<PAGE>
No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Trust Assets. If the residential real estate market should experience an
overall decline in value (including as a result of the general economic factors
discussed below under "--Mortgagor Credit"), any such decline could extinguish
the value of the interest of a junior mortgagee in the Mortgaged Property before
having any adverse effect on the interest of the related senior mortgagees.
With respect to Trust Assets secured by junior liens that have high
Combined Loan-to-Value Ratios 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. This is particularly so with respect to
Revolving Credit Loans, since additional Draws may be made by the Mortgagor in
the future up to the applicable Credit Limit. 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.
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<PAGE>
Future changes in a Mortgagor's economic circumstances may result from
a variety of unforeseeable personal factors, including loss of employment,
reduction in income, illness and divorce. Any increase in prevailing market
interest rates may adversely affect a Mortgagor by increasing debt service on
any floating rate Revolving Credit Loans, Home Equity Loans, Contracts or other
similar debt of the Mortgagor. In addition, for any Trust Assets secured by
junior mortgages, changes in the payment terms of any related senior mortgage
loan may adversely affect the Mortgagor's ability to pay principal and interest
on such senior mortgage loan. For example, such changes may result if the senior
mortgage loan is an adjustable rate loan and the interest rate thereon
increases, which may occur with or without an increase in prevailing market
interest rates if the increase is due to the phasing out of a reduced initial
rate. Specific information about such senior mortgage loans, other than the
amount thereof at origination of the corresponding Trust Asset, generally will
not be available and will not be included in the related Prospectus Supplement.
General economic conditions, both on a national and regional basis,
will also have an impact on the ability of Mortgagors to repay their Revolving
Credit Loans, Home Equity Loans or Contracts. Certain geographic regions of the
United States from time to time will experience weaker regional economic
conditions and housing markets, and, consequently, will experience higher rates
of loss and delinquency than will be experienced on mortgage loans generally.
For example, a region's economic condition and housing market may be directly,
or indirectly, adversely affected by natural disasters or civil disturbances
such as earthquakes, hurricanes, floods, eruptions or riots. The economic impact
of any of these types of events may also be felt in areas beyond the region
immediately affected by the disaster or disturbance. The Trust Assets underlying
a series of Notes may be concentrated in these regions, and such concentration
may present risk considerations in addition to those generally present for
similar mortgage-backed securities without such concentration. Any change in the
deductibility for federal income tax purposes of interest payments on home
equity loans may also have an impact on the ability of Mortgagors to repay such
Trust Assets.
Revolving Credit Loan Characteristics
Certain of the types of Revolving Credit Loans that may be included in
the Pools may involve additional uncertainties not present in traditional types
of mortgage loans, or in home equity or home improvement loans originated under
other programs.
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,
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<PAGE>
Revolving Credit Loans generally have adjustable rates that are subject to much
higher maximum rates than typically apply to adjustable rate first mortgage
loans, and which may be as high as applicable usury limitations. Mortgagors
under such Revolving Credit Loans are generally qualified based on an assumed
payment which reflects either the initial interest rate or a rate significantly
lower than the maximum rate. An increase in the interest rate over the Mortgage
Rate applicable at the time the Revolving Credit Loan was originated may have an
adverse effect on the Mortgagor's ability to pay the required monthly payment.
In addition, an increase in prevailing market interest rates may reduce the
borrower's ability to obtain refinancing and to pay the balance of a Revolving
Credit Loan at its maturity.
To the extent that any losses are incurred on any of the Revolving
Credit Loans that are not covered by the applicable credit enhancement, holders
of Notes of the series secured by the related Pool (or certain classes thereof)
will bear all risk of such losses resulting from default by Mortgagors.
Limitations on FHA Insurance for Title I Contracts
The related Prospectus Supplement will specify the number and
percentage of Contracts, if any, included in the related Trust Fund that are
partially insured by the FHA pursuant to Title I. Since the FHA Insurance Amount
(as defined herein) for the Title I Contracts is limited as described herein and
in the related Prospectus Supplement, and since the adequacy of such FHA
Insurance Amount is dependent upon future events, including reductions for the
payment of FHA claims, no assurance can be given that the FHA Insurance Amount
is or will be adequate to cover 90% of all potential losses on the Title I
Contracts included in the related Trust Fund. If the FHA Insurance Amount for
the Title I Contracts is reduced to zero, such contracts will be uninsured from
and after the date of such reduction. Under Title I, until a claim for insurance
reimbursement is submitted to the FHA, the FHA does not review or approve for
qualification for insurance the individual Title I Contract insured thereunder
(as is typically the case with other federal loan insurance programs).
Consequently, the FHA has not acknowledged that any of the Title I Contracts are
eligible for FHA insurance, nor has the FHA reviewed or approved the
underwriting and qualification by the originating lenders of any individual
Title I Contracts. See "Description of FHA Insurance Under Title I."
The availability of FHA insurance reimbursement following a default on
a Title I Contract is subject to a number of conditions, including strict
compliance by the originating lender of such loan, the Seller, the FHA Claims
Administrator (as defined herein), the servicer and any subservicer with the FHA
Regulations (as defined herein) in originating and servicing such Title I
Contract, and limits on the aggregate insurance coverage available in the FHA
Reserve (as defined herein). For example, the FHA Regulations provide that,
prior to originating a Title I Contract, a lender must exercise prudence and
diligence in determining whether the borrower and any co-maker or co-signer is
solvent and an acceptable credit risk with a reasonable ability to make payments
on the loan. Although the related Seller will represent and warrant that the
Title I Contracts have been originated and serviced in compliance with all FHA
Regulations, these regulations are susceptible to
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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 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
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The Manufactured Housing Contracts will be secured by security
interests in Manufactured Homes that are not considered to be real property
because such homes are not permanently affixed to real estate. Perfection of
security interests in such Manufactured Homes and enforcement of rights to
realize upon the value of such Manufactured Homes as collateral for such
Manufactured Housing Contracts are subject to a number of Federal and state
laws, including the UCC as adopted in each state and each state's certificate of
title statutes. The steps necessary to perfect the security interest in a
Manufactured Home will vary from state to state. Because of the expense and
administrative inconvenience involved, unless otherwise specified in the related
Prospectus Supplement, the certificate of title to Manufactured Homes will not
be amended to change the lienholder specified therein to the applicable Owner
Trustee and will not deliver any certificate of title to such Owner Trustee or
note thereon. Consequently, in some states, in the absence of such an amendment,
the assignment to such Owner Trustee of the security interest in the
Manufactured Home may not be effective or such security interest may not be
perfected and, in the absence of such notation or delivery to such Owner
Trustee, the assignment of the security interest in the Manufactured Home may
not be effective against creditors of the lienholder or a trustee in bankruptcy
of the lienholder. In addition, if the owner of a Manufactured Home were to
relocate such Manufactured Home to another state or if a Manufactured Home
becomes permanently attached to its site, other parties could obtain an interest
in the Manufactured Home which may be prior to the original security interest.
See "Certain Legal Aspects of the Trust Assets and Related Matters--Manufactured
Housing Contracts." If any related Credit Enhancement is exhausted and such
Manufactured Housing Contract is in default, then recovery of outstanding
principal and unpaid interest due on such Contract generally is dependent on
repossession and resale of the Manufactured Home securing such Manufactured
Housing Contract. Manufactured Homes, unlike Mortgaged Properties, generally
depreciate in value and may have a limited market for resale. Therefore, the
amount recoverable upon repossession and resale may not be sufficient to pay
amounts due on the defaulted Contract. Certain other factors may limit the
ability of the Master Servicer to realize upon a Manufactured Home or may limit
the amount realized to less than the amount due.
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
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not demonstrate the same degree of concern over performance of its obligations
under such Unsecured Contract as a borrower whose obligations were secured by a
single family residence owned by such borrower.
Consumer Protection Laws Related to Contracts
Numerous federal and state consumer protection laws impose requirements
on lending under retail installment sales contracts and installment loan
agreements such as the Contracts, and the failure by the lender or seller of
goods to comply with such requirements could cause assignees of such agreements
to be partially liable for amounts due under such agreements and claims by such
assignees may be subject to set-off or rescission as a result of such lender's
or seller's noncompliance. See "Certain Legal Aspects of the Trust Assets and
Related Matters--Consumer Protection Laws with Respect to Manufactured Housing
Contracts" and "--The Home Improvement Contracts--Consumer Protection Laws."
These laws would apply to an Indenture Trustee as an assignee of Contracts. Each
Seller will warrant that each Contract complies with all requirements of law
and, with respect to any Manufactured Housing Contract secured only by the
related Manufactured Home, will make certain warranties relating to the
validity, subsistence, perfection and priority of the security interest in each
Manufactured Home securing such Contract.
Limitations, Reduction and Substitution of Credit Enhancement
With respect to each series of Notes, credit enhancement may be
provided to cover delinquencies and losses on the underlying Trust Assets,
subject to any applicable limitations. Credit enhancement will be provided in
one or more of the forms referred to herein, including, but not limited to:
subordination of Subordinate Securities of the same series;
Overcollateralization; a Financial Guaranty Insurance Policy; a Letter of
Credit; a Reserve Fund or any combination thereof. If so specified in the
related Prospectus Supplement, the Contracts may be partially insured by the FHA
pursuant to Title I. See "Description of Credit Enhancement" herein.
As to any series of Notes, the amount of coverage under the applicable
credit enhancement may be limited in amount, and if limited may be subject to
periodic reduction in accordance with a schedule or formula. Furthermore, such
credit enhancement may provide only very limited coverage as to certain types of
losses or risks, and may provide no coverage as to certain other types of losses
or risks. For any type of credit enhancement which is generated in whole or in
part by cash flows on the underlying Trust Assets (as may be the case for a
Reserve Fund or Overcollateralization, for example), the amount of coverage
provided thereby may be adversely affected under a variety of scenarios by
factors such as the prepayment and draw experience of the Trust Assets, changes
in the Mortgage Rates or Gross Margins applicable to the Trust Assets pursuant
to the terms thereof, and changes in the relationship between the Mortgage Rates
on the Trust Assets and the Interest Rates on the Notes (which changes may
result, in part, from changes in the relationship between different indexes
respectively used to determine the Mortgage Rates and the Interest Rates). In
the event losses exceed the amount of coverage provided by any credit
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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 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
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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 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.
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THE POOLS
General
Unless otherwise specified in the related Prospectus Supplement, each
Pool will consist primarily of (i) Revolving Credit Loans; (ii) Home Equity
Loans; (iii) Home Improvement Contracts; (iv) Manufactured Housing Contracts;
(v) certain balances of any of the foregoing and/or (vi) certain interests in
the foregoing (which may include Private Securities) excluding any interest
retained by the Company or any other entity specified in the Prospectus
Supplement. The Revolving Credit Loans, Home Equity Loans and, if applicable,
Contracts will be evidenced by promissory notes (the "Mortgage Notes") secured
by mortgages or deeds of trust or other similar security instruments creating
first or junior liens on one- to four-family residential properties. All or a
portion of the Contracts underlying a series of Notes may be partially insured
by the FHA pursuant to Title I. The Mortgaged Properties will consist primarily
of owner-occupied attached or detached one-family dwelling units, two- to
four-family dwelling units, condominiums, townhouses, row houses, individual
units in planned-unit developments, Manufactured Homes which may be permanently
affixed to the real property on which they are located and certain other
dwelling units, and the fee, leasehold or other interests in the underlying real
property. The Mortgaged Properties may include vacation, second and
non-owner-occupied homes. If specified in the related Prospectus Supplement
relating to a series of Notes, a Pool may contain cooperative apartment loans
("Cooperative Loans") evidenced by promissory notes ("Cooperative Notes")
secured by security interests in shares issued by Cooperatives and in the
related proprietary leases or occupancy agreements granting exclusive rights to
occupy specific dwelling units in the related buildings. As used herein, unless
the context indicates otherwise, "Revolving Credit Loans," "Home Equity Loans"
and, if applicable, "Contracts" include Cooperative Loans, "Mortgaged
Properties" includes shares in the related Cooperative and the related
proprietary leases or occupancy agreements securing Cooperative Notes, "Mortgage
Notes" includes Cooperative Notes and "Mortgages" includes a security agreement
with respect to a Cooperative Note.
Each Trust Asset will be selected by the Company for inclusion in a
Pool from among those purchased by the Company, either directly or through its
affiliates, including Residential Funding, GMAC Mortgage Corporation,
Residential Money Centers, Inc. and HomeComings Financial Network, Inc.
("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
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loans available for purchase by the Company may have characteristics which would
make them eligible for inclusion in a Pool but were not selected for inclusion
in such Pool.
Under certain circumstances, the Trust Assets will be delivered either
directly or indirectly to the Company by one or more Sellers identified in the
related Prospectus Supplement, concurrently with the issuance of the related
series of Notes (a "Designated Seller Transaction"). Such Notes may be sold in
whole or in part to any such Seller in exchange for the related Trust Assets, or
may be offered under any of the other methods described herein under "Methods of
Distribution." The related Prospectus Supplement for a Pool composed of Trust
Assets acquired by the Company pursuant to a Designated Seller Transaction will
generally include information, provided by the related Seller (the "Designated
Seller"), about the Designated Seller, the Trust Assets and the underwriting
standards applicable to the Trust Assets. None of the Company, Residential
Funding, GMAC Mortgage or any of their affiliates will make any representation
or warranty with respect to such Trust Assets, or any representation as to the
accuracy or completeness of such information provided by the Seller.
If specified in the related Prospectus Supplement, the Trust Fund
securing a series of Notes may include Private Securities. The Private
Securities may have been issued previously by the Company or an affiliate
thereof, a financial institution or other entity engaged generally in the
business of mortgage lending or a limited purpose corporation organized for the
purpose of, among other things, acquiring and depositing mortgage loans into
such trusts, and selling beneficial interests in such trusts. As to any such
series of Notes, the related Prospectus Supplement will include a description of
such Private Securities and any related credit enhancement, and the assets
underlying such Private Securities will be described together with any other
Trust Assets included in the Pool relating to such series.
In addition, with respect to any series of Notes secured by Private
Securities, such Private Securities may consist of an ownership interest (an
"Ownership Interest") in a structuring entity formed by the Company for the
limited purpose of holding the Trust Assets relating to such series of Notes (a
"Special Purpose Entity"). A Special Purpose Entity may be organized in the form
of a trust, limited partnership or limited liability company, and will be
structured in a manner that will insulate the holders of Notes from liabilities
of the Special Purpose Entity. The provisions governing such Special Purpose
Entity generally will restrict the Special Purpose Entity from engaging in or
conducting any business other than the holding of Trust Assets and any related
assets and the issuance of ownership interests in such Trust Assets and certain
activities incidental thereto. Any such Ownership Interest will evidence an
ownership interest in the related Trust Assets as well as the right to receive
specified cash flows derived from such Trust Assets, as described in the related
Prospectus Supplement. The obligations of the Depositor in respect of any such
Ownership Interest will generally be limited to certain representations and
warranties with respect to the Trust Assets, as described herein. Credit support
of any of the types described herein under "Description of Credit Enhancement"
may be provided for the benefit of any such Ownership Interest, if so specified
in the related Prospectus Supplement. As to any such series of Notes, the term
"Pool" includes the Trust Assets underlying such Private Securities.
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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 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
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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 Cutoff
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 (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
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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
- --------
* 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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outstanding at the beginning of such day, plus all related Draws funded on 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
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to other mortgages on the same Mortgaged Property, or (ii) purchase money
security interests in the Home Improvements financed thereby. The Contracts will
be conventional contracts or contracts partially insured by the FHA pursuant to
Title I. Unless otherwise specified in the related Prospectus Supplement, the
Home Equity Loans and the Contracts will be fully amortizing and may have fixed
interest rates or adjustable interest rates and may provide for other payment
characteristics as described below and in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Home Improvements securing the Home Improvement Contracts include, but are not
limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels. The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or lot
(or cooperative interest therein) on which to place such home or the purchase of
both a manufactured home 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
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Applicable to the Revolving Credit Loans" or as described in the related
Prospectus Supplement. The Home Equity Loans and the Contracts generally will
have been originated in accordance with the underwriting standards described in
the related Prospectus
Supplement.
Underwriting Standards Applicable to the Revolving Credit Loans
General Standards
The Company's underwriting standards with respect to the Revolving
Credit Loans will generally conform to those published in Residential Funding's
Seller Guide (together with Residential Funding's Servicer Guide, the "Guide,"
as modified from time to time), including the provisions of the Guide applicable
to the Company's Home Equity Program (the "Home Equity Program"). The
underwriting standards as set forth in the Guide are continuously revised based
on opportunities and prevailing conditions in the residential mortgage market,
the consumer lending market and the market for mortgage securities. The
Revolving Credit Loans may be underwritten by Residential Funding or by a
designated third party. In certain circumstances, however, the Revolving Credit
Loans may be underwritten only by the Seller with little or no review performed
by Residential Funding. See "Underwriting Standards Applicable to the Revolving
Credit Loans--Guide Standards" and "Qualifications of Sellers." Residential
Funding or a designated third party may perform only sample quality assurance
reviews to determine whether the Revolving Credit Loans in any Pool were
underwritten in accordance with applicable standards.
With respect to the Company's underwriting standards, as well as any
other underwriting standards that may be applicable to any Revolving Credit
Loans, such underwriting standards generally include a set of specific criteria
pursuant to which the underwriting evaluation is made. However, the application
of such underwriting standards does not imply that each specific criterion was
satisfied individually. Rather, a Revolving Credit Loan will be considered to be
originated in accordance with a given set of underwriting standards if, based on
an overall qualitative evaluation, the loan is in substantial compliance with
such underwriting standards. For example, a Revolving Credit Loan may be
considered to comply with a set of underwriting standards, even if one or more
specific criteria included in such underwriting standards were not satisfied, if
other factors compensated for the criteria that were not satisfied or if the
Revolving Credit Loan is considered to be in substantial compliance with the
underwriting standards.
In addition, the Company purchases Revolving Credit Loans which do not
conform to the underwriting standards set forth in the Guide. Certain of the
Revolving Credit Loans will be purchased in negotiated transactions, and such
negotiated transactions may be governed by agreements ("Master Commitments")
relating to ongoing purchases of Revolving Credit Loans by Residential Funding,
from Sellers who will represent that the Revolving Credit Loans have been
originated in accordance with underwriting standards agreed to by 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
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delivery of such Revolving Credit Loans from the related Seller for conformity
with the applicable underwriting standards. Certain other Revolving Credit Loans
will be purchased from Sellers who will represent that the Revolving Credit
Loans were originated pursuant to underwriting standards acceptable to
Residential Funding.
The level of review, if any, by Residential Funding or the Company of
any Revolving Credit Loan for conformity with the applicable underwriting
standards will vary depending on a number of factors, including (i) factors
relating to the experience and status of the Seller, and (ii) factors relating
to the specific Revolving Credit Loan, including the principal amount or Credit
Limit, the Combined Loan-to-Value Ratio, the loan type or loan program, and the
applicable credit score of the related Mortgagor used in connection with the
origination of the Revolving Credit Loan (as determined based on a credit
scoring model acceptable to the Company). Generally, such credit scoring models
provide a means for evaluating the information about a prospective borrower that
is available from a credit reporting agency. The underwriting criteria
applicable to any program under which the Mortgage Loans may be originated may
provide that qualification for the loan, the level of review of the loan's
documentation, or the availability of certain loan features (such as maximum
loan amount, maximum Loan-to-Value Ratio, property type and use, and
documentation level) may depend on the mortgagor's credit score.
The underwriting standards utilized in negotiated transactions and
Master Commitments and the underwriting standards applicable to Revolving Credit
Loans underlying Private Securities may vary substantially from the underwriting
standards set forth in the Guide. Such underwriting standards are generally
intended to provide an underwriter with information to evaluate the borrower's
repayment ability and the value of the Mortgaged Property as collateral. Due to
the variety of underwriting standards and review procedures that may be
applicable to the Revolving Credit Loans included in any Pool, the related
Prospectus Supplement generally will not distinguish among the various
underwriting standards applicable to the Revolving Credit Loans nor describe any
review for compliance with applicable underwriting standards performed by the
Company or Residential Funding. Moreover, there can be no assurance that every
Revolving Credit Loan was originated in conformity with the applicable
underwriting standards in all material respects, or that the quality or
performance of Revolving Credit Loans underwritten pursuant to varying standards
as described above will be equivalent under all circumstances. In the case of a
Designated Seller Transaction, the applicable underwriting standards will be
those of the Designated Seller or of the originator of the Revolving Credit
Loans, and will be described in the related Prospectus Supplement.
The Company, either directly or indirectly through Residential Funding,
will also purchase Revolving Credit Loans from its affiliates, including GMAC
Mortgage Corporation, Residential Money Centers, Inc. 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
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appraisals may not have been required. With respect to Revolving Credit Loans
made under any employee loan program maintained by Residential Funding, or its
affiliates, in certain limited circumstances preferential interest rates may be
allowed. Neither the Company nor Residential Funding will review any affiliate's
mortgage loans for conformity with the underwriting standards set forth in the
Guide.
Guide Standards
The following is a brief description of the underwriting standards
under the Home Equity Program set forth in the Guide for full documentation loan
programs. Initially, a prospective borrower (other than a trust if the trust is
the borrower) is required to fill out a detailed application providing pertinent
credit information. As part of the application, the borrower is required to
provide a statement of income and expenses, as well as an authorization to apply
for a credit report which summarizes the borrower's credit history with
merchants and lenders and any record of bankruptcy. Under the Home Equity
Program, the borrower generally must show, among other things, a minimum of one
year credit history reported on the credit report and that no mortgage
delinquencies (thirty days or greater) in the past 12 months existed. Borrowers
who have less than a 12 month 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
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than two years prior to the date of origination of the mortgage loan and the
related appraiser certifies that the value of the related mortgaged property has
not declined since the date of the original appraisal or if a field review or
statistical property valuation is obtained. Title searches are undertaken in
most cases, and title insurance is required on all Revolving Credit Loans with
Credit Limits in excess of $100,000.
Under the Home Equity Program, the CLTV is generally calculated by
reference to the lower of the appraised value as so determined or the sales
price, if the Revolving Credit Loan is originated concurrently with or not more
than 12 months after the origination of a first mortgage loan. In all other
cases, the value used is generally the appraised value as so determined.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet the borrower's monthly obligations
on the proposed mortgage loan and other expenses related to the home (such as
property taxes and hazard insurance) and other financial obligations (including
debt service on any related mortgage loan secured by a senior lien on the
related Mortgaged Property). Unless otherwise provided in the related Prospectus
Supplement, for qualification purposes the monthly payment will be assumed to be
an amount equal to 1.00% times the applicable Credit Limit. The Mortgage Rate in
effect from the origination date of a Revolving Credit Loan to the first
adjustment date generally will be lower, and may be significantly lower, than
the sum of the then applicable Index and Gross Margin. Unless otherwise
specified in the related Prospectus Supplement, the Revolving Credit Loans will
not provide for negative amortization. Payment of the full outstanding principal
balance at maturity may depend on the borrower's ability to obtain refinancing
or to sell the Mortgaged Property prior to the maturity of the mortgage loan,
and there can be no assurance that such refinancing will be available to the
borrower or that such a sale will be possible.
The underwriting standards set forth in the Guide may be varied in
appropriate cases, including in "limited" or "reduced loan documentation"
mortgage loan programs. Limited documentation programs generally permit fewer
supporting documents to be obtained or waive income, asset and employment
documentation requirements, and limited documentation programs generally
compensate for increased credit risk by placing greater emphasis on either the
review of the property to be financed or the borrower's ability to repay the
Revolving Credit Loan. For example, under Residential Funding's Easy Docs
limited mortgage loan documentation program, certain submission requirements
regarding income verification and debt-to-income ratios are removed, but the
Seller is still required to perform a thorough credit underwriting of the
mortgage loan. Generally, in order to be eligible for a reduced loan
documentation program, a Mortgagor must have a good credit history, and other
compensating factors (such as a relatively low Combined Loan-to-Value Ratio, or
other favorable underwriting factors) must be present and the borrower's
eligibility for such program may be determined by use of a credit scoring model.
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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.
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. 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
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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.
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
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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 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,
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payable in respect of master servicing compensation or subservicing
compensation, as applicable, and if applicable, the Excluded Spread (as defined
herein)).
Unless otherwise specified in the related Prospectus Supplement, as to
any such Trust Asset required to be purchased by Residential Funding as provided
above, rather than purchase the Trust Asset, Residential Funding may, at its
sole option, remove such Trust Asset (a "Deleted Loan") from the Trust Fund (or
from the assets underlying any Private Securities, if applicable) and cause the
Company to substitute in its place another Trust Asset of like kind (an
"Eligible Substitute Loan"). The related Prospectus Supplement will set forth
the condition of any Eligible Substitute Loan. The related Agreement may include
additional requirements or additional provisions relating to meeting the
foregoing requirements on an aggregate basis where a number of substitutions
occur contemporaneously. Unless otherwise specified in the related Prospectus
Supplement, a Designated Seller will have no option to substitute for a Trust
Asset that it is obligated to repurchase in connection with a breach of a
representation and warranty.
The Master Servicer will be required under the Servicing Agreement to
use its best reasonable efforts to enforce this purchase or substitution
obligation for the benefit of the Indenture Trustee and the Noteholders, using
practices it would employ in its good faith business judgment and which are
normal and usual in its general mortgage servicing activities; provided,
however, that this purchase or substitution obligation will not become an
obligation of the Master Servicer in the event the Designated Seller or
Residential Funding, as the case may be, fails to honor such obligation. The
Master Servicer will be entitled to reimbursement for any costs and expenses
incurred in pursuing such a purchase or substitution obligation, including but
not limited to any costs or expenses associated with litigation. In instances
where a Designated Seller is unable, or disputes its obligation, to purchase
affected Trust Assets, the Master Servicer, employing the standards set forth in
the preceding sentence, may negotiate and enter into one or more settlement
agreements with such Designated Seller that may provide for, among other things,
the purchase of only a portion of the affected Trust Assets or coverage of
certain loss amounts. Any such settlement could lead to losses on the Trust
Assets which would be borne by the Credit Enhancement supporting the related
series of Notes, and to the extent not available, by the Noteholders of such
series. Furthermore, if applicable, the Master Servicer may pursue foreclosure
(or similar remedies) concurrently with pursuing any remedy for a breach of a
representation and warranty. However, the Master Servicer is not required to
continue to pursue both such remedies if it determines that one such remedy is
more likely to result in a greater recovery. In accordance with the above
described practices, the Master Servicer will not be required to enforce any
purchase of a Designated Seller arising from any misrepresentation by the
Designated Seller, if the Master Servicer determines in the reasonable exercise
of its business judgment that the matters related to such misrepresentation did
not directly cause or are not likely to directly cause a loss on the related
Trust Asset. If the Designated Seller fails to repurchase and no breach of
either the Company's or Residential Funding's representations has occurred, the
Designated Seller's purchase obligation will not become an obligation of the
Company or Residential Funding. Unless otherwise specified in the related
Prospectus Supplement, the foregoing obligations will constitute the sole
remedies available to
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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
Corporation or its affiliates. While such Subservicing Agreement will be a
contract solely between the Master Servicer and the Subservicer, the Servicing
Agreement applicable to any series of Notes will provide that, if for any reason
the Master Servicer for such series of Notes is no longer the master servicer of
the related Trust Assets, any successor Master Servicer must recognize the
Subservicer's rights and obligations under such Subservicing Agreement. For
further information relating to subservicing see "Servicing of Trust
Assets-Subservicing" herein.
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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
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Notes, but the Indenture Trustee may require payment of a sum sufficient to
cover any tax or other governmental charge. The term "Noteholder" as used herein
refers to the entity whose name appears on the records of the Note Registrar
(or, if applicable, a transfer agent) as the registered holder thereof, except
as otherwise indicated in the related Prospectus Supplement.
If issued in book-entry form certain classes of a series of Notes will
be initially issued through the book-entry facilities of The Depository Trust
Company ("DTC"), or Cedel Bank, societe anonyme ("CEDEL") or the Euroclear
System ("Euroclear") (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems, or
through such other depository or facility as may be specified in the related
Prospectus Supplement. As to any such class of Notes so issued ("Book-Entry
Notes"), the record holder of such Notes will be DTC's nominee. CEDEL and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries (the "Depositaries"), which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, which holds securities for its participating organizations
("DTC Participants," and together with the CEDEL and Euroclear participating
organizations "Participants") and facilitates the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in the accounts of Participants. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Other institutions that are not Participants but
clear through or maintain a custodial relationship with Participants (such
institutions, "Indirect Participants") have indirect access to DTC's clearance
system.
Unless otherwise specified in the related Prospectus Supplement, no
person acquiring an interest in any Book-Entry Notes (each such person, a
"Beneficial Owner") will be entitled to receive a Note representing such
interest in registered, certificated form, unless either (i) DTC ceases to act
as depository in respect thereof and a successor depository is not obtained or
(ii) the Indenture Trustee elects in its sole discretion to discontinue the
registration of such Notes through DTC. Prior to any such event, Beneficial
Owners will not be recognized by the Indenture Trustee or the Master Servicer as
holders of the related Notes for purposes of the related Agreement, and
Beneficial Owners will be able to exercise their rights as owners of such Notes
only indirectly through DTC, Participants and Indirect Participants. Any
Beneficial Owner that desires to purchase, sell or otherwise transfer any
interest in Book-Entry Notes may do so only through DTC, either directly if such
Beneficial Owner is a Participant or indirectly through Participants and, if
applicable, Indirect Participants. Pursuant to the procedures of DTC, transfers
of the beneficial ownership of any Book-Entry Notes will be required to be made
in minimum denominations specified in the related Prospectus Supplement. The
ability of a Beneficial Owner to pledge Book-Entry Notes to persons or entities
that are not Participants in the DTC system, or to otherwise act with
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respect to such Notes, may be limited because of the lack of physical
certificates evidencing such Notes and because DTC may act only on behalf of
Participants.
Because of time zone differences, the securities account of a CEDEL or
Euroclear participant as a result of a transaction with a DTC Participant (other
than a depositary holding on behalf of CEDEL or Euroclear) will be credited
during subsequent securities settlement processing day (which must be a business
day for CEDEL or Euroclear, as the case may be) immediately following the DTC
settlement date. Such credits or any transactions in such securities settled
during such processing will be reported to the relevant Euroclear Participant or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant to a DTC Participant (other than the depositary for CEDEL or
Euroclear) will be received with value on the DTC settlement date, but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant Depositaries; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC. CEDEL
Participants and Euroclear Participants may not deliver instructions directly to
the Depositaries.
CEDEL, 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
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securities and cash. Euroclear is operated by the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian co-operative
corporation (the "Clearance Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Clearance Cooperative. The Clearance Cooperative establishes policy for
Euroclear on behalf of Euroclear Participants. The Euroclear Operator is the
Belgian branch of a New York banking corporation which is a member bank of the
Federal Reserve System. As such, it is regulated and examined by the Board of
Governors of the Federal Reserve System and the New York State Banking
Department, as well as the Belgian Banking Commission. Securities clearance
accounts and cash accounts with the Euroclear Operator are governed by the Terms
and Conditions Governing Use of Euroclear and the related Operating Procedures
of the Euroclear System and applicable Belgian law (collectively, the "Terms and
Conditions"). The Terms and Conditions govern transfers of securities and cash
within Euroclear, withdrawals of securities and cash from Euroclear, and
receipts of payments with respect to securities in Euroclear. All securities in
Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts.
Payments in respect of the Book-Entry Notes will be forwarded by the
Indenture Trustee to DTC, and DTC will be responsible for forwarding such
payments to Participants, each of which will be responsible for disbursing such
payments to the Beneficial Owners it represents or, if applicable, to Indirect
Participants. Accordingly, 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
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identified in a schedule appearing as an exhibit to the related Agreement. Such
schedule will include, among other things, information as to the principal
balance of each Trust Asset as of the Cut-off Date, as well as information
respecting the Mortgage Rate, the currently scheduled monthly payment of
principal and interest, the maturity of the Mortgage Note and the Combined
Loan-to-Value Ratio at origination or modification.
The Company will, as to each Trust Asset other than Trust Assets
underlying any Private Securities, deliver to an entity specified in the related
Prospectus Supplement (which may be the Indenture Trustee, a Custodian or
another entity appointed by the Indenture Trustee) the legal documents relating
to such Trust Assets that are in possession of the Company, which may include,
as applicable, depending upon whether such Trust Asset is secured by a lien on
Mortgaged Property: (i) the Mortgage Note (and any modification or amendment
thereto) endorsed without recourse either in blank or to the order of the Owner
Trustee or the Indenture Trustee (or a nominee thereof); (ii) the Mortgage
(except for any Mortgage not returned from the public recording office) with
evidence of recording indicated thereon or, in the case of a Cooperative Loan,
the respective security agreements and any applicable UCC financing statements;
(iii) an assignment in recordable form of the Mortgage (or, with respect to a
Cooperative Loan, an assignment of the respective security agreements, any
applicable UCC financing statements, recognition agreements, relevant stock
certificates, related blank stock powers and the related proprietary leases or
occupancy agreements); (iv) if applicable, any riders or modifications to such
Mortgage Note and Mortgage, together with certain other documents at such times
as set forth in the related Agreement; and (v) the original Contract and copies
of documents and instruments related to each Contract and, other than in the
case of unsecured Contracts, the security interest in the property securing such
Contract. Such assignments may be blanket assignments covering Mortgages secured
by Mortgaged Properties located in the same county, if permitted by law. If so
specified in the related Prospectus Supplement, the Company may not be required
to deliver one or more of such documents if such documents are missing from the
files of the party from whom such Revolving Credit Loans, Home Equity Loans and
certain Contracts were purchased.
In the event that, with respect to any Revolving Credit Loan, Home
Equity Loan or Contract secured by a lien on Mortgaged Property, the Company
cannot deliver the Mortgage or any assignment with evidence of recording thereon
concurrently with the execution and delivery of the related Trust Agreement
because of a delay caused by the public recording office, the Company will
deliver or cause to be delivered to the Indenture Trustee, the Custodian or
another entity appointed by the Indenture Trustee a true and correct photocopy
of such Mortgage or assignment. The Company will deliver or cause to be
delivered to the Indenture Trustee or the Custodian such Mortgage or assignment
with evidence of recording indicated thereon after receipt thereof from the
public recording office or from the related Subservicer.
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
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Owner Trustee's interests in such Revolving Credit Loans, Home Equity Loans and
Contracts against the claim of any subsequent transferee or any successor to or
creditor of the Company or the originator of such Revolving Credit Loans, Home
Equity Loans or Contracts, or except as otherwise specified in the related
Prospectus Supplement.
Under certain circumstances, as to any series of Notes, the Company may
have the option to repurchase Trust Assets from the Trust Fund for cash, or in
exchange for other Trust Assets or Permitted Investments. Alternatively, for any
series of Notes secured by Private Securities, the Company may have the right to
so repurchase Revolving Credit Loans, Home Equity Loans and/or Contracts from
the entity that issued such Private Securities. All provisions relating to such
optional repurchase provisions will be described in the related Prospectus
Supplement.
Review of Trust Assets
The Indenture Trustee will be authorized to appoint one or more
custodians (each, a "Custodian") pursuant to a custodial agreement to maintain
possession of and review documents relating to the Trust Assets as the agent of
the Indenture Trustee or, following payment in full of the Notes and discharge
of the Indenture, the Owner Trustee. The identity of such Custodian, if any,
will be set forth in the related Prospectus Supplement.
The Indenture Trustee or the Custodian will hold such documents in
trust for the benefit of the holders of the Securities (the "Securityholders")
and, generally will review such documents within such period specified in the
related Prospectus Supplement. If any such document is found to be defective in
any material respect, the Indenture Trustee or such Custodian shall notify the
Master Servicer and the Company, and if so specified in the related Prospectus
Supplement, the Master Servicer, the Servicer or the Indenture Trustee shall
notify Residential Funding or the Designated Seller. If Residential Funding or,
in a Designated Seller Transaction, the Designated Seller cannot cure such
defect within such period specified in the related Prospectus Supplement after
notice of the defect is given to Residential Funding (or, if applicable, the
Designated Seller), Residential Funding (or, if applicable, the Designated
Seller) is required to, within such period specified in the related Prospectus
Supplement, either repurchase the related Trust Asset or any property acquired
in respect thereof from the Indenture Trustee, or if permitted substitute for
such Trust Asset a new Trust Asset in accordance with the standards set forth
herein. The Master Servicer will be obligated to enforce this obligation of
Residential Funding or the Designated Seller to the extent described above under
"Trust Asset Program--Representations Relating to Trust Assets," but such
obligation is subject to the provisions described below under "Servicing of
Trust Assets--Realization Upon Defaulted Loans." There can be no assurance that
the applicable Designated Seller will fulfill its obligation to purchase any
Trust Asset as described above. Unless otherwise specified in the related
Prospectus Supplement, neither Residential Funding, the Master Servicer nor the
Company will be obligated to purchase or substitute for such Trust Asset if the
Designated Seller defaults on its obligation to do so. Unless otherwise
specified in the related Prospectus Supplement, the obligation to repurchase or
substitute for a Trust Asset constitutes the sole remedy available to the
Noteholders or the
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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 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
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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 Cutoff Date (other than payments due on or before the
Cut-off Date), as specifically set forth in the related Agreement, which (except
as otherwise provided therein) generally will include the following:
(i) payments on account of principal on the Trust Assets comprising a Trust
Fund;
(ii) payments on account of interest on the Trust Assets
comprising such Trust Fund, net of the portion of each payment thereof
retained by the Subservicer, if any, as its servicing or other
compensation;
(iii) amounts (net of unreimbursed liquidation expenses and
insured expenses incurred, and unreimbursed Servicing Advances, if any,
made by the related Subservicer) received and retained in connection
with the liquidation of any defaulted Trust Asset, by foreclosure or
otherwise ("Liquidation Proceeds"), including all proceeds of any
hazard or other insurance policy or guaranty covering any Trust Asset
in such Pool including proceeds from FHA insurance (with respect to any
Contract partially insured by the FHA pursuant to Title I included in
the Pool)) (together with any payments under any Letter of Credit,
"Insurance Proceeds") or proceeds from any alternative arrangements
established in lieu of any such insurance and described in the
applicable Prospectus Supplement, other than proceeds to be applied to
the restoration of the related property or released to the Mortgagor in
accordance with the Master Servicer's normal servicing procedures;
(iv) proceeds of any Trust Asset in such Trust Fund purchased
(or, in the case of a substitution, certain amounts representing a
principal adjustment) by the Master Servicer, the Company, Residential
Funding, 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.
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In addition to the Custodial Account, the Master Servicer will
establish and maintain, in the name of the Indenture Trustee for the benefit of
the holders of each series of Notes, an account for the disbursement of payments
on the Trust Assets evidenced by each series of Notes (the "Payment Account").
Both the Custodial Account and the Payment Account must be either (i) maintained
with a depository institution whose debt obligations at the time of any deposit
therein are rated by any Rating Agency that rated any Notes of the related
series not less than a specified level comparable to the rating category of such
Notes, (ii) an account or accounts the deposits in which are fully insured to
the limits established by the FDIC, provided that any deposits not so insured
shall be otherwise maintained such that, as evidenced by an opinion of counsel,
the Noteholders have a claim with respect to the funds in such accounts or a
perfected first priority security interest in any collateral securing such funds
that is superior to the claims of any other depositors or creditors of the
depository institution with which such accounts are maintained, (iii) in the
case of the Custodial Account, a trust account or accounts maintained in either
the corporate trust department or the corporate asset services department of a
financial institution which has debt obligations that meet certain rating
criteria, (iv) in the case of the Payment Account, a trust account or accounts
maintained with the Indenture Trustee, or (v) such other account or accounts
acceptable to any applicable Rating Agency (an "Eligible Account"). The
collateral that is eligible to secure amounts in an Eligible Account is limited
to certain permitted investments, which are generally limited to United States
government securities and other investments that are rated, at the time of
acquisition, in one of the categories permitted by the related Agreement
("Permitted Investments").
On the day set forth in the related Prospectus Supplement, the Master
Servicer will withdraw from the Custodial Account and deposit into the
applicable Payment Account, in immediately available funds, the amount to be
paid therefrom to Noteholders on such Payment Date, except as otherwise provided
in the related Prospectus Supplement. The Master Servicer or the Indenture
Trustee will also deposit or cause to be deposited into the Payment Account (i)
any payments under any Letter of Credit, Financial Guaranty Insurance Policy and
any amounts required to be transferred to the Payment Account from a Reserve
Fund, as described under "Credit Enhancement" below or (iii) any amounts
required to be paid by the Master Servicer out of its own funds due to the
operation of a deductible clause in any blanket policy maintained by the Master
Servicer to cover hazard losses on the Trust Assets as described under
"Description of the Notes--Hazard Insurance; Claims Thereunder" below, any
payments received on any Private Securities included in the Trust Fund and any
other amounts as set forth in the related Agreement.
The portion of any payment received by the Master Servicer in respect
of a Trust Asset that is allocable to Excess Spread or Excluded Spread, as
applicable, will generally be deposited into the Custodial Account, but any
Excluded Spread will not be deposited in the Payment Account for the related
series of Notes and will be paid as provided in the related Agreement.
Funds on deposit in the Custodial Account may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next Payment Date, and
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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 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);
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(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 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
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The method of determining, and the amount of, payments of principal and
interest (or, where applicable, of principal only or interest only) on a
particular series of Notes will be described in the related Prospectus
Supplement. Payments of interest on each class of Notes will be made prior to
payments of principal thereon. Each class of Notes (other than certain classes
of Strip Notes) may have a different Interest Rate, which may be a fixed,
variable or adjustable Interest Rate, or any combination of two or more such
Interest Rates. The related Prospectus Supplement will specify the Interest Rate
or Rates for each class, or the initial Interest Rate or Rates and the method
for determining the Interest Rate or Rates. Unless otherwise specified in the
related Prospectus Supplement, interest on the Notes will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
On each Payment Date for a series of Notes, the Indenture Trustee or
the Master Servicer on behalf of the Indenture Trustee will pay or cause the
Paying Agent to pay, as the case may be, principal and interest to each holder
of record on the Record Date of a class of Notes. Unless otherwise specified in
the related Prospectus Supplement, payments to Noteholders of all classes within
a series in respect of interest will have the same priority.
In the case of a series of Notes which includes two or more classes of
Notes, the timing, sequential order, priority of payment or amount of payments
in respect of principal, and any schedule or formula or other provisions
applicable to the determination thereof shall be as set forth in the related
Prospectus Supplement. Payments in respect of principal of any class of Notes
will be made on a pro rata basis among all of the Notes of such class unless
otherwise set forth in the related Prospectus Supplement. In addition, unless
otherwise specified in the related Prospectus Supplement, payments of principal
on the Notes will be limited to monthly principal payments on the Trust Assets,
any Excess Interest, if applicable, applied as principal payments on the Notes
and any amount paid as a payment of principal under the related form of Credit
Enhancement. If so specified in the related Prospectus Supplement, a series of
Notes may provide for a period during which all or a portion of the principal
collections on the Trust Assets otherwise available for payment to the Notes are
reinvested in Additional Balances or additional Trust Assets or accumulated in a
trust account pending the commencement of an amortization period specified in
the related Prospectus Supplement or the occurrence of certain events specified
in the related Prospectus Supplement.
On the day specified in the related Prospectus Supplement as the
determination date (the "Determination Date"), the Master Servicer will
determine the amounts of principal and interest which will be paid to
Noteholders on the succeeding Payment Date. Prior to the close of business on
the business day succeeding each Determination Date, the Master Servicer will
furnish a statement to the Indenture Trustee setting forth, among other things,
the amount to be paid on the next succeeding Payment Date.
Funding Account
If so specified in the related Prospectus Supplement, the Trust
Agreement or other agreement may provide for the transfer by the Sellers of
additional Trust Assets to the
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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.
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Hazard Insurance; Claims Thereunder
Unless otherwise specified in the related Prospectus Supplement, each
Revolving Credit Loan, Home Equity Loan and Contract that is secured by a lien
on a Mortgaged Property (in each case, other than a Cooperative Loan) will be
required to be covered by a hazard insurance policy (as described below). See
"Risk Factors--Risks Associated with Certain Trust Assets--No Hazard Insurance
for Title I Contracts." The following summary, as well as other pertinent
information included elsewhere in this Prospectus, do not describe all terms of
a hazard insurance policy but will reflect all material terms thereof relevant
to an investment in the Notes. Such insurance is subject to underwriting and
approval of individual Trust Assets by the respective insurers. The descriptions
of any insurance policies described in this Prospectus or any Prospectus
Supplement and the coverage thereunder do not purport to be complete and are
qualified in their entirety by reference to such forms of policies.
Unless otherwise specified in the related Prospectus Supplement, the
Servicing Agreement will require the Master Servicer to cause to be maintained
for each Mortgaged Property a hazard insurance policy providing for no less than
the coverage of the standard form of fire insurance policy with extended
coverage customary in the state in which the property is located. Such coverage
generally will be in an amount equal to the lesser of (i) the maximum insurable
value of the Mortgaged Property or (ii) the outstanding balance of the related
Revolving Credit Loan, Home Equity Loan or Contract plus the outstanding balance
on any mortgage loan senior to such Revolving Credit Loan, Home Equity Loan or
Contract except that, if generally available, such coverage must not be less
than the minimum amount required under the terms thereof to fully compensate for
any damage or loss on a replacement cost basis. The ability of the Master
Servicer to ensure that hazard insurance proceeds are appropriately applied may
be dependent on its being named as an additional insured under any hazard
insurance policy or upon the extent to which information in this regard is
furnished to the Master Servicer by Mortgagors or Subservicers.
As set forth above, all amounts collected by the Master Servicer under
any hazard policy (except for amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures) will be deposited initially in
the Custodial Account and ultimately in the Payment Account. The Master Servicer
may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy insuring against losses on such Trust Assets. If
such blanket policy contains a deductible clause, the Master Servicer will
deposit in the Custodial Account or the applicable Payment Account all amounts
which would have been deposited therein but for such clause.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer shall also cause to be maintained on property acquired upon
foreclosure, or deed in lieu of foreclosure, of any applicable Trust Asset, fire
insurance with extended coverage in an amount which is at least equal to the
amount necessary to avoid the application of any co-
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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
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enhancement for any series of Notes is exhausted or unavailable for any reason,
the Noteholders will bear all further risks of loss not otherwise insured
against.
With respect to any defaulted Trust Asset that is finally liquidated,
the amount of loss realized, if any (as described in the related Agreement, a
"Realized Loss"), will equal the portion of the Stated Principal Balance
remaining after application of all amounts recovered (net of expenses allocable
to the Trust Fund) towards interest and principal owing on the Trust Asset. With
respect to a Trust Asset the principal balance of which has been reduced in
connection with bankruptcy proceedings, the amount of such reduction will be
treated as a Realized Loss. The "Stated Principal Balance" of any Trust Asset as
of any date of determination is equal to the principal balance thereof as of the
Cut-off Date, after application of all scheduled principal payments due on or
before the Cut-off Date whether received or not, reduced by all amounts
allocable to principal that are paid to Noteholders on or before the date of
determination, and as further reduced to the extent that any Realized Loss
thereon has been allocated to any Notes on or before such date.
Each Prospectus Supplement will include a description of (a) the amount
payable under the credit enhancement arrangement, if any, provided with respect
to a series, (b) any conditions to payment thereunder 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
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on each Payment Date. The specific terms of any Financial Guaranty Insurance
Policy will be set forth in the related Prospectus Supplement. A Financial
Guaranty Insurance Policy may have limitations and generally will not insure the
obligation of the Sellers or the Master Servicer to purchase or substitute for a
defective Trust Asset and will not guarantee any specific rate of principal
prepayments. Unless otherwise specified in the related Prospectus Supplement,
the Insurer will be subrogated to the rights of each holder to the extent the
Insurer makes payments under the Financial Guaranty Insurance Policy.
Letter of Credit
If any component of credit enhancement as to any series of Notes is to
be provided by a letter of credit (the "Letter of Credit"), a bank (the "Letter
of Credit Bank") will deliver to the Indenture Trustee an irrevocable Letter of
Credit. The Letter of Credit may provide direct coverage with respect to the
Trust Assets. The Letter of Credit Bank, the amount available under the Letter
of Credit with respect to each component of credit enhancement, the expiration
date of the Letter of Credit, and a more detailed description of the Letter of
Credit will be specified in the related Prospectus Supplement. On or before each
Payment Date, the Letter of Credit Bank will be required to make certain
payments after notification from the Indenture Trustee, to be deposited in the
related Payment Account with respect to the coverage provided thereby.
Subordination
With respect to each series of Notes, the related Certificates will be
subordinate thereto as described in the Prospectus Supplement. A
Senior/Subordinate Series of Notes will consist of one or more classes of Notes
and one or more classes of Subordinate Securities, as set forth in the related
Prospectus Supplement. With respect to any Senior/Subordinate Series, the total
amount available for payment on each Payment Date, as well as the method for
allocating such amount among the various classes of Notes included in such
series, will be described in the related Prospectus Supplement. Generally, with
respect to any such series the amount available for payment will be allocated
first to interest on the Notes of such series, and then to principal of the
Notes up to the amounts described in the related Prospectus Supplement, prior to
allocation of any amounts to the Subordinate Securities of such series.
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
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among all outstanding classes of Notes. Generally, any allocation of a Realized
Loss to a Note will be made by reducing the outstanding principal balance
thereof as of the Payment Date following the calendar month in which such
Realized Loss was incurred.
To the extent provided in the related Prospectus Supplement, certain
amounts otherwise payable on any Payment Date to holders of Subordinate
Securities may be deposited into a Reserve Fund. Amounts held in any Reserve
Fund may be applied as described under "Description of Credit
Enhancement--Reserve Funds" in the related Prospectus Supplement.
With respect to any Senior/Subordinate Series, the terms and provisions
of the subordination may vary from those described above. Any such variation and
any additional credit enhancement will be described in the related Prospectus
Supplement.
Overcollateralization
If so specified in the related Prospectus Supplement, interest
collections on the Trust Assets may exceed interest payments on the Securities
for the related Payment Date (such excess referred to as "Excess Interest").
Such Excess Interest may be deposited into a Reserve Fund or applied as a
payment of principal on the Notes. To the extent Excess Interest is applied as
principal payments on the Notes, the effect will be to reduce the principal
balance of the Notes relative to the outstanding balance of the Trust Assets,
thereby creating "Overcollateralization" and additional protection to the
Noteholders, as specified in the related Prospectus Supplement.
Reserve Funds
If so specified in the related Prospectus Supplement, the Company will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash or Permitted Investments in specified amounts, or any other
instrument satisfactory to the Rating Agency or Agencies, which will be applied
and maintained in the manner and under the conditions specified in the related
Prospectus Supplement and related Agreement. In the alternative or in addition
to such deposit, to the extent described in the related Prospectus Supplement, a
Reserve Fund may be funded through application of all or a portion of amounts
otherwise payable on any related Securities, from the Excess Spread, Excluded
Spread or otherwise. A Reserve Fund for a series of Notes which is funded over
time by depositing therein a portion of the interest payment on each Trust Asset
may be referred to as a "Spread Account" in the related Prospectus Supplement
and related Agreement. To the extent that the funding of the Reserve Fund is
dependent on amounts otherwise payable on related Subordinate Securities, Excess
Spread, Excluded Spread or other cash flows attributable to the related Trust
Assets or on reinvestment income, the Reserve Fund may provide less coverage
than initially expected if the cash flows or reinvestment income on which such
funding is dependent are lower than anticipated. With respect to any series of
Notes as to which credit enhancement includes a Letter of Credit, if so
specified in the related Prospectus
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Supplement, under certain circumstances the remaining amount of the Letter of
Credit may be drawn by the Indenture Trustee and deposited in a Reserve Fund.
Amounts in a Reserve Fund may be paid to Noteholders, or applied to
reimburse the Master Servicer for outstanding advances, or may be used for other
purposes, in the manner and to the extent specified in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement, any
such Reserve Fund will not be deemed to be part of the related Trust Fund. A
Reserve Fund may provide coverage to more than one series of Notes if set forth
in the related Prospectus Supplement. If so specified in the related Prospectus
Supplement, Reserve Funds may be established to provide limited protection
against only certain types of losses and shortfalls. Following each Payment Date
amounts in a Reserve Fund in excess of any amount required to be maintained
therein may be released from the Reserve Fund under the conditions and to the
extent specified in the related Prospectus Supplement and will not be available
for further application to the Notes.
Unless otherwise specified in the related Prospectus Supplement, the
Indenture Trustee will have a perfected security interest for the benefit of the
Noteholders in the assets in the Reserve Fund. However, to the extent that the
Company, any affiliate thereof or any other entity has an interest in any
Reserve Fund, in the event of the bankruptcy, receivership or insolvency of such
entity, there could be delays in withdrawals from the Reserve Fund and the
corresponding payments to the Noteholders. Such delays could adversely affect
the yield to investors on the related Notes.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
Master Servicer or any other person named in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited to the
related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to the Master Servicer or another service provider as additional
compensation.
Maintenance of Credit Enhancement
If credit enhancement has been obtained for a series of Notes, the
Indenture Trustee or Master Servicer (as set forth in the related Agreement)
will be obligated to exercise its best reasonable efforts to keep or cause to be
kept such credit enhancement in full force and effect throughout the term of the
applicable Agreements, unless coverage thereunder has been exhausted through
payment of claims or otherwise, or substitution therefor is made as described
below under "--Reduction or Substitution of Credit Enhancement." The Master
Servicer, on behalf of itself, the Indenture Trustee and Noteholders, will
provide the Indenture Trustee information required for the Indenture Trustee to
draw any applicable credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will agree to pay the premiums for each Financial Guaranty
Insurance Policy on a timely
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basis. In the event the related insurer ceases to be a "Qualified Insurer"
because it ceases to be qualified under applicable law to transact such
insurance business or coverage is terminated for any reason other than
exhaustion of such coverage, the Master Servicer will use its best reasonable
efforts to obtain from another Qualified Insurer a comparable replacement
insurance policy or bond with a total coverage equal to the then outstanding
coverage of such policy or bond. If the cost of the replacement policy is
greater than the cost of such policy or bond, the coverage of the replacement
policy or bond will, unless otherwise agreed to by the Company, be reduced to a
level such that its premium rate does not exceed the premium rate on the
original insurance policy. Any losses in market value of the Notes associated
with any reduction or withdrawal in rating by an applicable Rating Agency shall
be borne by the Noteholders.
For Trust Assets secured by a lien on Mortgaged Property, if any
property securing such a defaulted Trust Asset is damaged and proceeds, if any,
from the related hazard insurance policy are insufficient to restore the damaged
property to a condition sufficient to permit recovery under any Letter of
Credit, the Master Servicer is not required to expend its own funds to restore
the damaged property unless it determines (i) that such restoration will
increase the proceeds to one or more classes of Noteholders on liquidation of
such Trust Asset after reimbursement of the Master Servicer for its expenses and
(ii) that such expenses will be recoverable by it through Liquidation Proceeds
or Insurance Proceeds. If recovery under any Letter of Credit or other credit
enhancement is not available because the Master Servicer has been unable to make
the above determinations, has made such determinations incorrectly or recovery
is not available for any other reason, the Master Servicer is nevertheless
obligated to follow such normal practices and procedures (subject to the
preceding sentence) as it deems necessary or advisable to realize upon the
defaulted Trust Asset and in the event such determination has been incorrectly
made, is entitled to reimbursement of its expenses in connection with such
restoration.
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
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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.
PURCHASE OBLIGATIONS
Certain types of Trust Assets and certain classes of Notes of any
series, as specified in the related Prospectus Supplement, may be subject to a
purchase obligation (a "Purchase Obligation") that would become applicable on
one or more specified dates, or upon the occurrence of one or more specified
events, or on demand made by or on behalf of the applicable Noteholders. A
Purchase Obligation may be in the form of a conditional or unconditional
purchase commitment, liquidity facility, maturity guaranty, put option or demand
feature. The terms and conditions of each Purchase Obligation, including the
purchase price, timing and payment procedure, will be described in the related
Prospectus Supplement. A Purchase Obligation with respect to Trust Assets may
apply to those Trust Assets or to the related Notes. Each Purchase Obligation
may be a secured or unsecured obligation of the provider thereof, which may
include a bank or other financial institution or an insurance company. Each
Purchase Obligation will be evidenced by an instrument delivered to the Trustee
for the benefit of the applicable Noteholders of the related series. Each
Purchase Obligation with respect to Trust Assets will be payable solely to the
Trustee for the benefit of the Noteholders of the related series. Other Purchase
Obligations may be payable to the Trustee or directly to the holders of the
Notes to which such obligations relate.
DESCRIPTION OF FHA INSURANCE UNDER TITLE I
Certain of the Contracts contained in a Trust Fund may be loans insured
under the Title I Program (the "Title I Loans") as described below and in the
related Prospectus Supplement. The regulations, rules and procedures promulgated
by the FHA under the Title I (the "FHA Regulations") contain the requirements
under which lenders approved for participation in the Title I Program (the
"Title I Lenders") may obtain insurance against a portion of losses incurred
with respect to eligible loans that have been originated and serviced in
accordance with FHA Regulations, subject to the amount of insurance coverage
available in such Title I Lender's FHA Reserve, as described below and in the
related Prospectus Supplement, and subject to the terms and conditions
established under the National Housing Act and FHA Regulations. While FHA
Regulations permit the Secretary of the Department of Housing and Urban
Development ("HUD"), subject to statutory limitations, to waive a Title I
Lender's noncompliance with FHA Regulations if enforcement would impose an
injustice on the lender (provided the Title I Lender has acted in good faith, is
in substantial compliance with FHA Regulations and has credited the borrower for
any excess charges), in general, an insurance claim against the FHA will be
denied if the Title I Loan to which it
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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 certain adjustments
permitted or required by FHA Regulations. The balance of such FHA
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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
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specified in the related Prospectus Supplement will seek to obtain payment by or
a judgment against the borrower, and may resubmit the claim to FHA following
such a judgment.
THE COMPANY
The Company is an indirect wholly-owned subsidiary of GMAC Mortgage,
which is a wholly-owned subsidiary of General Motors Acceptance Corporation. The
Company was incorporated in the State of Delaware on May 5, 1995. The Company
was organized for the purpose of acquiring first or junior lien home equity
mortgage loans, home improvement contracts, manufactured housing contracts and
mortgage securities and issuing securities backed by such mortgage loans,
contracts and mortgage securities. The Company anticipates that it will in many
cases have acquired Trust Assets indirectly through Residential Funding, which
is also an indirect wholly-owned subsidiary of GMAC Mortgage. The Company does
not have, nor is it expected in the future to have, any significant assets.
The Notes do not represent an interest in or an obligation of the
Company. The Company's only obligations with respect to a series of Notes will
be pursuant to certain limited representations and warranties made by the
Company or as otherwise provided in the related Prospectus Supplement.
The Company maintains its principal office at 8400 Normandale Lake
Boulevard, Suite 600, 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
600, Minneapolis, Minnesota 55437. Its telephone number is (612) 832-7000.
Residential Funding conducts operations from its headquarters in Minneapolis and
from offices located in California, Colorado, Connecticut, Florida, Georgia,
Maryland, New York, North Carolina, Rhode Island and Texas. At March 31, 1997,
Residential Funding was master servicing a first lien loan portfolio of
approximately $34.8 billion and a second lien loan portfolio of approximately
$1.8 billion.
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SERVICING OF TRUST ASSETS
The Master Servicer will be required to service and administer the
Trust Assets in a manner generally consistent with the terms of the servicing
agreement entered into by the Master Servicer with the Company, an affiliate of
the Company or other applicable entity (each, a "Servicing Agreement") and the
Guide with respect to the Revolving Credit Loans or with respect to a Designated
Seller Transaction, as specified in the related Prospectus Supplement.
As to any series of Notes secured by Private Securities, the applicable
procedures for servicing of the related Revolving Credit Loans, Home Equity
Loans, Home Improvement Contracts and Manufactured Housing Contracts will be
described in the related Prospectus Supplement.
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
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a fidelity bond and an errors and omissions policy with respect to its officers,
employees and other persons acting on its behalf or on behalf of the Master
Servicer.
Each Subservicer will be required to service each Trust Asset pursuant
to the terms of the Subservicing Agreement for the entire term of such Trust
Asset, unless the Subservicing Agreement is earlier terminated by the Master
Servicer or unless servicing is released to the Master Servicer. Subject to
applicable law, the Master Servicer may have the right to terminate a
Subservicing Agreement immediately upon the giving of notice upon certain stated
events, including the violation of such Subservicing Agreement by the
Subservicer, or up to ninety days' notice to the Subservicer without cause upon
payment of certain amounts set forth in the Subservicing Agreement. Upon
termination of a Subservicing Agreement, the Master Servicer may act as servicer
of the related Trust Assets or enter into one or more new Subservicing
Agreements. The Master Servicer may agree with a Subservicer to amend a
Subservicing Agreement. Any amendments to a Subservicing Agreement or to a new
Subservicing Agreement may contain provisions different from those described
above which are in effect in the original Subservicing Agreements.
Collection and Other Servicing Procedures
The Master Servicer, directly or through Subservicers, as the case may
be, will make reasonable efforts to collect all payments called for under the
Trust Assets and will, consistent with the related Servicing Agreement and any
applicable insurance policy, FHA insurance or other credit enhancement, follow
such collection procedures which shall be normal and usual in its general
mortgage servicing activities with respect to mortgage loans comparable to the
Trust Assets. Consistent with the foregoing, the Master Servicer may in its
discretion waive any prepayment charge in connection with the prepayment of a
Trust Asset or extend the Due Dates for payments due on a Trust Asset, provided
that the insurance coverage for such Trust Asset or any coverage provided by any
alternative credit enhancement will not be adversely affected thereby. With
respect to any series of Notes as to which the Trust Fund includes Private
Securities, the Master Servicer's servicing and administration obligations will
be pursuant to the terms of such Private Securities.
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
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or make forbearances on the Trust Asset rather than proceeding with foreclosure
or repossession (if applicable). In making such determination, the estimated
Realized Loss that might result if such Trust Asset were liquidated would be
taken into account. Such modifications may have the effect of reducing the
Mortgage Rate or extending the final maturity date of the Trust Asset. Any such
modified Trust Asset may remain in the related Trust Fund, and the reduction in
collections resulting from such modification may result in reduced distributions
of interest (or other amounts) on, or may extend the final maturity of, one or
more classes of the related Notes.
In any case in which property subject to a Trust Asset is being
conveyed by the Mortgagor, the Master Servicer, directly or through a
Subservicer, shall in general be obligated, to the extent it has knowledge of
such conveyance, to exercise its rights to accelerate the maturity of such Trust
Asset under any due-on-sale clause applicable thereto, but only if the exercise
of such rights is permitted by applicable law and only to the extent it would
not adversely affect or jeopardize coverage under any applicable credit
enhancement arrangements. If the Master Servicer or Subservicer is prevented
from enforcing such due-on-sale clause under applicable law or if the Master
Servicer or Subservicer determines that it is reasonably likely that a legal
action would be instituted by the related Mortgagor to avoid enforcement of such
due-on-sale clause, the Master Servicer or Subservicer will enter into an
assumption and modification agreement with the person to whom such property has
been or is about to be conveyed, pursuant to which such person will become
liable under the Mortgage Note subject to certain specified conditions. The
original Mortgagor may be released from liability on a Trust Asset if the Master
Servicer or Subservicer shall have determined in good faith that such release
will not adversely affect the ability to make full and timely collections on the
related Trust Asset. Any fee collected by the Master Servicer or Subservicer for
entering into an assumption or substitution of liability agreement will be
retained by the Master Servicer or Subservicer as additional servicing
compensation unless otherwise set forth in the related Prospectus Supplement.
See "Certain Legal Aspects of Trust Assets and Related Matters--Enforceability
of Certain Provisions" herein. In connection with any such assumption, the
Mortgage Rate borne by the related Mortgage Note may not be altered.
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. The Master Servicer or the related Subservicer may approve such
a request if it has determined, exercising its good faith business judgment in
the same manner as it would if it were the owner of the related Trust Asset,
that such approval will not adversely affect the security for, and the timely
and full collectability of, the related Trust Asset. Any fee collected by the
Master Servicer or the Subservicer for processing such request will be retained
by the Master Servicer or Subservicer as additional servicing compensation.
The Master Servicer is required to maintain a fidelity bond and errors
and omissions policy with respect to its officers and employees and other
persons acting on behalf of the Master Servicer in connection with its
activities under the Servicing Agreement. The Master Servicer may be subject to
certain restrictions under the Servicing Agreement with respect
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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 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
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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 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
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extent collected from Subservicers. The Master Servicer or a Subservicer will
retain all prepayment charges, assumption fees and late payment charges, to the
extent collected from Mortgagors, and any benefit which may accrue as a result
of the investment of funds in the Custodial Account or the applicable Payment
Account (unless otherwise specified in the related Prospectus Supplement) or in
a Subservicing Account, as the case may be. In addition, certain duties of the
Master Servicer may be performed by an affiliate of the Master Servicer who will
be entitled to reasonable compensation therefor from the Trust Fund.
The Master Servicer (or, if specified in the related Agreement, the
Indenture Trustee on behalf of the applicable Trust Fund) will pay or cause to
be paid certain ongoing expenses associated with each Trust Fund and incurred by
it in connection with its responsibilities under the Servicing Agreement,
including, without limitation, payment of any fee or other amount payable in
respect of certain credit enhancement arrangements, payment of any FHA insurance
premiums, if applicable, payment of the fees and disbursements of the Indenture
Trustee, the Owner Trustee, any custodian, the Note Registrar and any Paying
Agent, and payment of expenses incurred in enforcing the obligations of
Subservicers and Designated Sellers. The Master Servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of Subservicers
and Designated Sellers under certain limited circumstances. In addition, as
indicated in the preceding section, the Master Servicer will be entitled to
reimbursements for certain expenses incurred by it in connection with Liquidated
Loans and in connection with the restoration of Mortgaged Properties, such right
of reimbursement being prior to the rights of Noteholders to receive any related
Liquidation Proceeds (including Insurance Proceeds).
Evidence as to Compliance
Each Servicing Agreement will provide for delivery (on or before a
specified date in each year) to the Indenture Trustee of an annual statement
signed by an officer of the Master Servicer to the effect that the Master
Servicer has fulfilled in all material respects the minimum servicing standards
set forth in the audit guide for audits of non-supervised mortgagees approved by
the Department of Housing and Urban Development for use by independent public
accountants, the Uniform Single Attestation Program for Mortgage Bankers or the
Audit Program for Mortgages serviced for Federal Home Loan Mortgage Corporation
(each, an "Audit Guide") throughout the preceding year or, if there has been a
material default in the fulfillment of any such obligation, such statement shall
specify each such known default and the nature and status thereof. Such
statement may be provided as a single form making the required statements as to
more than one Servicing Agreement.
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 Cutoff 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
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(including the related Servicing Agreement) was conducted substantially in
compliance with the minimum servicing standards set forth in the related Audit
Guide (to the extent that procedures in such Audit Guide are applicable to the
servicing obligations set forth in such agreements) except for such significant
exceptions or errors in records that shall be reported in such statement. In
rendering its statement such firm may rely, as to the matters relating to the
direct servicing of mortgage loans by Subservicers, upon comparable statements
for examinations conducted substantially in compliance with the related Audit
Guide described above (rendered within one year of such statement) of firms of
independent public accountants with respect to those Subservicers which also
have been the subject of such an examination.
Copies of the annual statement of an officer of the Master Servicer may
be obtained by Noteholders without charge upon written request to the Master
Servicer, at the address indicated in the monthly statement to Noteholders.
Certain Matters Regarding the Master Servicer and the Company
The Servicing Agreement for each series of Notes will provide that the
Master Servicer may not resign from its obligations and duties thereunder except
upon a determination that performance of such duties is no longer permissible
under applicable law or except in connection with a permitted transfer of
servicing. No such resignation will become effective until the Indenture Trustee
or a successor servicer has assumed the Master Servicer's obligations and duties
under the Servicing Agreement.
Each Servicing Agreement will also provide that, except as set forth
below, neither the Master Servicer, the Company nor any director, officer,
employee or agent of the Master Servicer or the Company will be under any
liability to the Trust Fund or the Noteholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the Servicing
Agreement, or for errors in judgment; provided, however, that neither the Master
Servicer, the Company nor any such person will be protected against any
liability which would otherwise be imposed by reason of willful misfeasance, bad
faith or gross negligence in the performance of duties or by reason of reckless
disregard of obligations and duties thereunder. Each Servicing Agreement will
further provide that the Master Servicer, the Company and any director, officer,
employee or agent of the Master Servicer or the Company is entitled to
indemnification by the Trust Fund (or the Special Purpose Entity, if applicable)
and will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Servicing Agreement or the
related series of Notes, other than any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. In addition, each Servicing Agreement will provide that the
Master Servicer and the Company will not be under any obligation to appear in,
prosecute or defend any legal or administrative action that is not incidental to
its respective duties under the Servicing Agreement and which in its opinion may
involve it in any expense or liability. The Master Servicer or the Company may,
however, in its discretion undertake any such action which it may deem necessary
or desirable with respect to the
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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.
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)
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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.
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
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if the Credit Enhancer defaults in the performance of its obligations, if
applicable); or (v) any other Event of Default provided with respect to Notes of
that series.
If an Event of Default with respect to the Notes of any series at the
time outstanding occurs and is continuing, either the Indenture Trustee, the
Credit Enhancer (if applicable) or the holders of a majority of the then
aggregate outstanding amount of the Notes of such series may declare the
principal amount (or, if the Notes of that series are Accrual Notes, such
portion of the principal amount as may be specified in the terms of that series,
as provided in the related Prospectus Supplement) of all the Notes of such
series to be due and payable immediately. Such declaration may, under certain
circumstances, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the related Notes.
If, following an Event of Default with respect to any series of Notes,
the Notes of such series have been declared to be due and payable, the Indenture
Trustee (with the consent of the Credit Enhancer, if applicable) may, in its
discretion, notwithstanding such acceleration, elect to maintain possession of
the collateral securing the Notes of such series and to continue to apply
payments on such collateral as if there had been no declaration of acceleration
if such collateral continues to provide sufficient funds for the payment of
principal of and interest on the Notes of such series as they would have become
due if there had not been such a declaration. In addition, the Indenture Trustee
may not sell or otherwise liquidate the collateral securing the Notes of a
series following an Event of Default, unless (a) the holders of 100% of the then
aggregate outstanding amount of the Notes of such series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding Notes of
such series (and to reimburse the Credit Enhancer, if applicable) at the date of
such sale or (c) the Indenture Trustee determines that such collateral would not
be sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such Notes had not been declared due and
payable, and the Indenture Trustee obtains the consent of the holders of 66 2/3%
of the then aggregate outstanding amount of the Notes of such series (and the
Credit Enhancer, if applicable).
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default, the Indenture provides that the Indenture
Trustee will have a prior lien on the proceeds of any such liquidation for
unpaid fees and expenses. As a result, upon the occurrence of such an Event of
Default, the amount available for payments to the Noteholders would be less than
would otherwise be the case. However, the Indenture Trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the Noteholders after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount that is unamortized.
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No Securityholder generally will have any right under a Trust Agreement
or Indenture to institute any proceeding with respect to such Agreement unless
(a) such holder previously has given to the Indenture Trustee written notice of
default and the continuance thereof, (b) the holders of Securities of any class
evidencing not less than 25% of the aggregate Percentage Interests constituting
such class (i) have made written request upon the Indenture Trustee to institute
such proceeding in its own name as Indenture Trustee thereunder and (ii) have
offered to the Indenture Trustee reasonable indemnity, (c) the Indenture Trustee
has neglected or refused to institute any such proceeding for 60 days after
receipt of such request and indemnity and (d) no direction inconsistent with
such written request has been given to the Indenture Trustee during such 60 day
period by the Holders of a majority of the Security Balances of such class
(except as otherwise provided for in the related Agreement with respect to the
Credit Enhancer). However, the Indenture Trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the applicable Agreement or
to institute, conduct or defend any litigation thereunder or in relation thereto
at the request, order or direction of any of the holders of Securities covered
by such Agreement, unless such Securityholders have offered to the Indenture
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
Amendment
Unless otherwise stated in the related Prospectus Supplement, each
Agreement may be amended by the parties thereto (except as otherwise provided
for in the related Agreement with respect to the Credit Enhancer) without the
consent of the related Noteholders, (i) to cure any ambiguity; (ii) to correct
or supplement any provision therein which may be inconsistent with any other
provision therein or to correct any error; (iii) to change the timing and/or
nature of deposits in the Custodial Account or the Payment Account or to change
the name in which the Custodial Account is maintained (except that (a) deposits
to the Payment Account may not occur later than the related Payment Date, (b)
such change may not adversely affect in any material respect the interests of
any Securityholder, as evidenced by an opinion of counsel, and (c) such change
may not adversely affect the then-current rating of any rated Securities, as
evidenced by a letter from each applicable Rating Agency) as specified in the
related Prospectus Supplement; or (iv) to make any other provisions with respect
to matters or questions arising under such Agreement which are not materially
inconsistent with the provisions thereof, so long as such action will not
adversely affect in any material respect the interests of any Securityholder.
Unless otherwise stated in the related Prospectus Supplement, each
Agreement may also be amended by the parties thereto (except as otherwise
provided for in the related Agreement with respect to the Credit Enhancer) with
the consent of the holders of Securities of each class affected thereby
evidencing, in each case, not less than 66% of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Agreement or
of modifying in any manner the rights of the related Securityholders, except
that no such amendment may (i) reduce in any manner the amount of, or delay the
timing of, payments received on Trust Assets which are required to be paid on a
Security of any class without the
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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.
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
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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 period preceding a
Payment Date instead of through the day immediately preceding such Payment Date.
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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
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Notes, may be relatively more sensitive to the rate of principal payments on the
related Trust Assets (net of Draws if applicable) than other classes of Notes.
The outstanding principal balances of manufactured housing contracts,
home equity loans and home improvement contracts are, in general, much smaller
than traditional first lien mortgage loan balances, and the original terms to
maturity of such contracts are generally shorter than those of traditional first
lien mortgage loans. As a result, changes in interest rates will not affect the
monthly payments on manufactured housing contracts and home improvement
contracts to the same degree that changes in mortgage interest rates will affect
the monthly payments on such mortgage loans. Consequently, the effect of changes
in prevailing interest rates on the prepayment rates on manufactured housing
contracts and home improvement contracts may not be similar to the effects of
such changes on mortgage loan prepayment rates, or such effects may be similar
to the effects of such changes on mortgage loan prepayment rates, but to a
smaller degree.
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.
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As discussed under "Risk Factors--Special Features of Certain Trust
Assets Secured by Junior Liens on Mortgaged Properties--Revolving Credit Loan
Characteristics," the Revolving Credit Loans are not expected to significantly
amortize prior to maturity. As a result, a borrower will generally be required
to pay a substantial principal amount at the maturity of a Revolving Credit
Loan. Such Revolving Credit Loans pose a greater risk of default than
fully-amortizing Revolving Credit Loans, because the Mortgagor's ability to make
such a substantial payment at maturity will generally depend on the Mortgagor's
ability to obtain refinancing of such Revolving Credit Loans or to sell the
Mortgaged Property prior to the maturity of the Revolving Credit Loan. The
ability to obtain refinancing will depend on a number of factors prevailing at
the time refinancing or sale is required, including, without limitation, the
Mortgagor's personal economic circumstances, the Mortgagor's equity in the
related Mortgaged Property, real estate values, prevailing market interest
rates, tax laws and national and regional economic conditions. For a general
discussion of factors that may affect a Mortgagor's personal economic
circumstances, see "Risk Factors--Special Features of Certain Trust Assets
Secured by Junior Liens on Mortgaged Properties--Mortgagor Credit" herein.
Unless otherwise specified in the related Prospectus Supplement, neither the
Company, Residential Funding, GMAC Mortgage nor any of their affiliates will be
obligated to refinance or repurchase any Trust Asset or to sell any Mortgaged
Property.
For any Revolving Credit Loans, Home Equity Loans and any Contracts
secured by junior mortgages, any inability of the Mortgagor to pay off the
balance thereof may also affect the ability of the Mortgagor to obtain
refinancing at any time of any related senior mortgage loan, thereby preventing
a potential improvement in the Mortgagor's circumstances. Furthermore, if so
specified in the related Prospectus Supplement, under the Servicing Agreement
the Master Servicer may be restricted or prohibited from consenting to any
refinancing of any related senior mortgage loan, which in turn could adversely
affect the Mortgagor's circumstances or result in a prepayment or default under
the corresponding junior Revolving Credit Loan, Home Equity Loan or Contract, as
applicable.
In addition to the Mortgagor's personal economic circumstances, a
number of factors, including homeowner mobility, job transfers, changes in the
Mortgagor's housing needs, the Mortgagor's net equity in the Mortgaged Property,
changes in the value of the Mortgaged Property, national and regional economic
conditions, 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
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prepayments on home improvement contracts will be higher than certain other
Trust Assets due to the possibility of increased property value resulting from
the home improvement and greater refinance options. The Company generally
expects that prepayments on manufactured housing contracts will be lower than on
other Trust Assets because manufactured housing contracts may have less
refinance options. The rate of principal payments and the rate of Draws (if
applicable) may fluctuate substantially from time to time. Generally, home
equity loans are not viewed by mortgagors as permanent financing. Due to the
unpredictable nature of both principal payments and Draws, the rates of
principal payments net of Draws for such loans may be much more volatile than
for typical first lien mortgage loans.
The yield to maturity of the Notes of any series, or the rate and
timing of principal payments or Draws (if applicable) on the related Trust
Assets, may also be affected by a wide variety of specific terms and conditions
applicable to the respective programs under which the Trust Assets were
originated. For example, the Revolving Credit Loans may provide for future Draws
to be made only in specified minimum amounts, or alternatively may permit Draws
to be made by check or through a credit card in any amount. A pool of Revolving
Credit Loans subject to the latter provisions may be likely to remain
outstanding longer with a higher aggregate principal balance than a pool of
Revolving Credit Loans with the former provisions, because of the relative ease
of making new Draws. Furthermore, the Trust Assets may provide for interest rate
changes on a daily or monthly basis, or may have Gross Margins that may vary
under certain circumstances over the term of the loan. In extremely high market
interest rate scenarios, Notes backed by Trust Assets with adjustable rates
subject to substantially higher maximum rates than typically apply to adjustable
rate first mortgage loans may experience rates of default and liquidation
substantially higher than those that have been experienced on other adjustable
rate mortgage loan pools.
The yield to maturity of the Notes of any series, or the rate and
timing of principal payments on the Trust Assets or Draws on the related
Revolving Credit Loans and corresponding payments on the Notes, will also be
affected by the specific terms and conditions applicable to the Notes. For
example, if the index used to determine the Interest Rates for a series of Notes
is different from the Index applicable to the Mortgage Rates of the underlying
Trust Assets, the yield on the Notes may be reduced by application of a cap on
the Interest Rates based on the weighted average of the Mortgage Rates.
Depending on applicable cash flow allocation provisions, changes in the
relationship between the two indexes may also affect the timing of certain
principal payments on the Notes, or may affect the amount of any
Overcollateralization (or the amount on deposit in any Reserve Fund) which could
in turn accelerate the payment of principal on the Notes if so provided in the
Prospectus Supplement. For any series of Notes backed by Revolving Credit Loans,
provisions governing whether future Draws on the Revolving Credit Loans will be
included in the Trust Fund will have a significant effect on the rate and timing
of principal payments on the Notes. The yield to maturity of the Notes of any
series, or the rate and timing of principal payments on the Trust Assets may
also be affected by the risks associated with certain Trust Assets. See "Risk
Factors--Risks Associated with Certain Trust Assets" herein and "Risk Factors"
in the related Prospectus Supplement.
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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
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
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costs, or other financial incentives. In addition, the Master Servicer or any
Subservicers may encourage the refinancing of Trust Assets, including defaulted
Trust Assets, that would permit creditworthy borrowers to assume the outstanding
indebtedness of such Trust Assets.
If the applicable Agreement for a series of Notes provides for a
Funding Account or other means of funding the transfer of additional Trust
Assets to the related Trust, as described under "Description of the
Notes--Funding Account" herein, and the Trust is unable to acquire such
additional Trust Assets within any applicable time limit, the amounts set aside
for such purpose may be applied as principal payments on one or more classes of
Notes of such series. In addition, if the Trust Fund for a series of Notes
includes Additional Balances and the rate at which such Additional Balances are
generated decreases, the rate and timing of principal payments on the Notes will
be affected and the weighted average life of the Notes will vary accordingly.
The rate at which Additional Balances are generated may be affected by a variety
of factors. See "Risk Factors--Yield and Prepayment Considerations."
Although the Mortgage Rates on Revolving Credit Loans will and certain
Trust Assets may be subject to periodic adjustments, such adjustments generally
(i) will not increase such Mortgage Rates over a fixed maximum rate during the
life of any Trust Asset and (ii) will be based on an Index (which may not rise
and fall consistently with prevailing market interest rates) plus the related
Gross Margin (which may vary under certain circumstances, and which may be
different from margins being used at the time for newly originated adjustable
rate mortgage loans). As a result, the Mortgage Rates on the Trust Assets in any
Pool at any time may not equal the prevailing rates for similar, newly
originated adjustable rate home equity mortgage loans, lines of credit, 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.
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Under certain circumstances, the Master Servicer, the Company or, if
specified in the related Prospectus Supplement, another person may have the
option to purchase the Trust Assets in a Trust Fund, thus resulting in the early
retirement of the related Notes. See "The Agreements--Termination; Redemption of
Notes."
CERTAIN LEGAL ASPECTS OF THE TRUST ASSETS
AND RELATED MATTERS
The following discussion contains summaries of certain legal aspects of
the Trust Assets that are general in nature. Because such legal aspects are
governed in part by state law (which laws may differ from state to state), the
summaries do not purport to be complete, to reflect the laws of any particular
state or to encompass the laws of all states in which the Trust Assets may be
situated. These legal aspects are in addition to the requirements of any
applicable FHA Regulations described in "Description of FHA Insurance" herein
and in the related Prospectus Supplement with respect to the Contracts partially
insured by FHA pursuant to Title I. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Revolving Credit Loans, Home Equity Loans, Home Improvement Contracts and
Manufactured Housing Contracts.
General; Trust Assets Secured by Mortgages on Mortgaged Property
The Revolving Credit Loans and Home Equity Loans will and, if
applicable, Contracts (in each case other than Cooperative Loans) may be secured
by either deeds of trust, mortgages or deeds to secure debt, depending upon the
prevailing practice in the state in which the related Mortgaged Property is
located, and may have first, second or third priority. Mortgages and deeds to
secure debt are herein referred to as "mortgages." Manufactured Housing
Contracts evidence both the obligation of the obligor to repay the loan
evidenced thereby and grant a security interest in the related Manufactured
Homes to secure repayment of such loan. However, as Manufactured Homes have
become larger and often have been attached to their sites without any apparent
intention by the borrowers to move them, courts in many states have held that
Manufactured Homes may, under certain circumstances become subject to real
estate title and recording laws. See "-- Manufactured Housing Contracts" below.
In some states, a mortgage or deed of trust creates a lien upon the real
property encumbered by the mortgage or deed of trust. However, in other states,
the mortgage or deed of trust conveys legal title to the property respectively,
to the mortgagee or to a trustee for the benefit of the mortgagee subject to a
condition subsequent (i.e., the payment of the indebtedness secured thereby).
The lien created by the mortgage or deed of trust is not prior to the lien for
real estate taxes and assessments and other charges imposed under governmental
police powers. Priority between mortgages depends on their terms or on the terms
of separate subordination or inter-creditor agreements, the knowledge of the
parties in some cases and generally on the order of recordation of the mortgage
in the appropriate recording office. There are two parties to a mortgage, the
mortgagor, who is the borrower and homeowner, and the mortgagee, who is the
lender. Under the mortgage instrument, the mortgagor delivers to the mortgagee a
note or bond and the mortgage. In the
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case of a land trust, there are three parties because title to the property is
held by a land trustee under a land trust agreement of which the borrower is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. Although a deed of trust is
similar to a mortgage, a deed of trust has three parties: the trustor who is the
borrower-homeowner; the beneficiary who is the lender; and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. The trustee's authority under a
deed of trust, the grantee's authority under a deed to secure debt and the
mortgagee's authority under a mortgage are governed by the law of the state in
which the real property is located, the express provisions of the deed of trust
or mortgage, and, in certain deed of trust transactions, the directions of the
beneficiary.
Cooperative Loans
If specified in the Prospectus Supplement relating to a series of
Notes, the Revolving Credit Loans, Home Equity Loans and Contracts may include
Cooperative Loans. Each debt instrument (a "Cooperative Note") evidencing a
Cooperative Loan will be secured by a security interest in shares issued by the
related corporation (a "Cooperative") that owns the related apartment building,
which is a corporation entitled to be treated as a housing cooperative under
federal tax law, and in the related proprietary lease or occupancy agreement
granting exclusive rights to occupy a specific dwelling unit in the
Cooperative's building. The security agreement will create a lien upon the
shares of the Cooperative, the priority of which will depend on, among other
things, the terms of the particular security agreement as well as the order of
recordation and/or filing of the agreement (or financing statements related
thereto) in the appropriate recording office.
Unless otherwise specified in the related Prospectus Supplement, all
Cooperative buildings relating to the Cooperative Loans are located in the State
of New York. Generally, each Cooperative owns in fee or has a leasehold interest
in all the real property and owns in fee or leases the building and all separate
dwelling units therein. The Cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is an underlying
mortgage (or mortgages) on the Cooperative's building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the Cooperative, as mortgagor or lessor, as the case may be, is also
responsible for fulfilling such mortgage or rental obligations. An underlying
mortgage loan is ordinarily obtained by the Cooperative in connection with
either the construction or purchase of the Cooperative's building or the
obtaining of capital by the Cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that Cooperative is the
landlord is generally subordinate to the interest of the holder of an underlying
mortgage and to the interest of the holder of a land lease. If the Cooperative
is unable to meet the payment obligations (i) arising under an underlying
mortgage, the mortgagee holding an underlying mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements or (ii) arising under its land lease, the holder of the landlord's
interest under the
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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 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
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allowable as a deduction to the corporation, such section requires, among other
things, that at least 80% of the gross income of the corporation be derived from
its tenant-stockholders. By virtue of this requirement, the status of a
corporation for purposes of Section 216(b)(1) of the Code must be determined on
a year-to-year basis. Consequently, there can be no assurance that Cooperatives
relating to the Cooperative Loans will qualify under such section for any
particular year. In the event that such a Cooperative fails to qualify for one
or more years, the value of the collateral securing any related Cooperative
Loans could be significantly impaired because no deduction would be allowable to
tenant-stockholders under Section 216(a) of the Code with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that such a failure would be permitted to continue over
a period of years appears remote.
Manufactured Housing Contracts
Except as set forth below, under the laws of most states, manufactured
housing constitutes personal property and is subject to the motor vehicle
registration laws of the state or other jurisdiction in which the unit is
located. In the few states in which certificates of title are not required for
manufactured homes, security interests are perfected by the filing of a
financing statement under Article 9 of the UCC, which has been adopted by all
states. Such financing statements are effective for five years and must be
renewed prior to the end of each five year period. The certificate of title laws
adopted by the majority of states provide that ownership of motor vehicles and
manufactured housing shall be evidenced by a certificate of title issued by the
motor vehicles department (or a similar entity) of such state. In the states
that have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law.
The Master Servicer will be required under the related agreement to
effect such notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any Manufactured Home is registered. In the event the Master
Servicer fails, due to clerical errors or otherwise, to effect such notation or
delivery, or files the security interest under the wrong law (for example, under
a motor vehicle title statute rather than under the UCC, in a few states), the
Indenture Trustee may not have a first priority perfected security interest in
the Manufactured Home securing a Manufactured 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
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filing" under the provisions of the UCC or a real estate mortgage under the real
estate laws of the state where the home is located. These filings must be made
in the real estate records office of the county where the home is located.
Generally, Manufactured Housing Contracts will contain provisions prohibiting
the obligor from permanently attaching the Manufactured Home to its site. So
long as the obligor does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the Manufactured Home. If, however, a Manufactured
Home is permanently attached to its site, other parties could obtain an interest
in the Manufactured Home that is prior to the security interest originally
retained by the seller and transferred to the Depositor.
The Depositor will assign or cause to be assigned a security interest
in the Manufactured Homes to the Indenture Trustee, on behalf of the
Securityholders. Unless otherwise specified in the related Prospectus
Supplement, neither the Depositor, the Master Servicer nor the Indenture Trustee
will amend the certificates of title to identify the Indenture Trustee, on
behalf of the Securityholders, as the new secured party and, accordingly, the
Depositor or the Seller will continue to be named as the secured party on the
certificates of title relating to the Manufactured Homes. In most states, such
assignment is an effective conveyance of such security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the Depositor's rights as the secured party. However,
in some states there exists a risk that, in the absence of an amendment to the
certificate of title, such assignment of the security interest might not be
effective against creditors of the Depositor or Seller.
In the absence of fraud, forgery, permanent affixation of the
Manufactured Home to its site, or administrative error by state recording
officials, the notation of the lien of the Depositor on the certificate of title
or delivery of the required documents and fees would be sufficient to protect
the Indenture Trustee against the rights of subsequent purchasers of a
Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the Depositor
has failed to perfect or cause to be perfected the security interest assigned to
the Trust Fund, such security interest would be subordinate to, among others,
subsequent purchasers for value of such Manufactured Home and holders of
perfected security interests in such Manufactured Home. There also exists a risk
in not identifying the Indenture Trustee, on behalf of the Securityholders, as
the new secured party on the certificate of title that, through fraud or
negligence, the security interest of the Indenture Trustee could be released.
In the event that the owner of a Manufactured Home moves such house to
a state other than the state in which such Manufactured Home initially is
registered, under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in the new state.
If the owner were to relocate a Manufactured Home to another state and
re-register the Manufactured Home in such state, and if the Depositor did not
take steps to re-perfect its security interest in such state, the security
interest in the
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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.
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
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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
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claims and certain governmental liens. The proceeds received by the referee or
trustee from the sale are applied first to the costs, fees and expenses of sale
and then in satisfaction of the indebtedness secured by the mortgage or deed of
trust under which the sale was conducted. Any remaining proceeds are generally
payable to the holders of junior mortgages or deeds of trust and other liens and
claims in order of their priority, whether or not the borrower is in default.
Any additional proceeds are generally payable to the mortgagor or trustor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee or may require the institution of
separate legal proceedings. See "Risk Factors--Special Features of Certain Trust
Assets Secured by Junior Liens on Mortgaged Properties" and "Servicing of Trust
Assets--Realization Upon Defaulted Loans" herein.
Foreclosure on Shares of Cooperatives
The Cooperative shares owned by the tenant-stockholder, together with
the rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged, may
be cancelled by the Cooperative for failure by the tenant-stockholder to pay its
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the Cooperative's building incurred by such tenant-stockholder.
Generally, obligations and charges arising under a proprietary lease or
occupancy agreement which are owed to the Cooperative are made liens upon the
shares to which the proprietary lease or occupancy agreement relates. In
addition, the proprietary lease or occupancy agreement generally permits the
Cooperative to terminate such lease or agreement in the event the borrower
defaults in the performance of covenants thereunder. Typically, the lender and
the Cooperative enter into a recognition agreement which, together with any
lender protection provisions contained in the proprietary lease or occupancy
agreement, establishes the rights and obligations of both parties in the event
of a default by the tenant-stockholder on its obligations under the proprietary
lease or occupancy agreement. A default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under such proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the amount realized upon
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a sale of the collateral below the outstanding principal balance of the
Cooperative Loan and accrued and unpaid interest thereon.
Recognition agreements also generally provide that in the event the
lender succeeds to the tenant-shareholder's shares and proprietary lease or
occupancy agreement as the result of realizing upon its collateral for a
Cooperative Loan, the lender must obtain the approval or consent of the board of
directors of the Cooperative as required by the proprietary lease before
transferring the Cooperative shares or assigning the proprietary lease. Such
approval or consent is usually based on the prospective purchaser's income and
net worth, among other factors, and may significantly reduce the number of
potential purchasers, which could limit the ability of the lender to sell and
realize upon the value of the collateral. Generally, the lender is not limited
in any rights it may have to dispossess the tenant-stockholder.
Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
In New York, foreclosure on the Cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the New York
Uniform Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the sale and the sale
price. Generally, a sale conducted according to the usual practice of banks
selling similar collateral in the same area will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "--Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
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
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home in the event of a default by the obligor will generally be governed by the
UCC (except in Louisiana). Article 9 of the UCC provides the statutory framework
for the repossession of manufactured housing units. While the UCC as adopted by
the various states may vary in certain small particulars, the general
repossession procedure established by the UCC is as follows:
(i) Except in those states where the debtor must receive
notice of the right to cure a default, repossession can commence
immediately upon default without prior notice. Repossession may be
effected either through self-help (peaceable retaking without court
order), voluntary repossession or through judicial process
(repossession pursuant to court-issued writ of replevin). The self-help
and/or voluntary repossession methods are more commonly employed, and
are accomplished simply by retaking possession of the manufactured
home. In cases in which the debtor objects or raises a defense to
repossession, a court order must be obtained from the appropriate state
court, and the manufactured home must then be repossessed in accordance
with that order. Whether the method employed is self-help, voluntary
repossession or judicial repossession, the repossession can be
accomplished either by an actual physical removal of the manufactured
home to a secure location for refurbishment and resale or by removing
the occupants and their belongings from the manufactured home and
maintaining possession of the manufactured home on the location where
the occupants were residing. Various factors may affect whether the
manufactured home is physically removed or left on location, such as
the nature and term of any lease of the site on which it is 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
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obtained, will be settled at a significant discount in light of the
defaulting owner's limited financial condition.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors or other parties are
given a statutory period (generally ranging from six months to two years) in
which to redeem the property from the foreclosure sale. In some states,
redemption may occur only upon payment of the entire principal balance of the
loan, accrued interest and expenses of foreclosure. In other states, redemption
may be authorized if the former borrower pays only a portion of the sums due. In
some states, the right to redeem is an equitable right. The equity of
redemption, which is a non-statutory right that must be exercised prior to a
foreclosure sale, should be distinguished from statutory rights of redemption.
The effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The rights of redemption would defeat
the title of any purchaser subsequent to foreclosure or sale under a deed of
trust. Consequently, the practical effect of the redemption right is to force
the lender to maintain the property and pay the expenses of ownership until the
redemption period has expired.
Notice of Sale; Redemption Rights with Respect to Manufactured Homes
While state laws do not usually require notice to be given to debtors
prior to repossession, many states require delivery of a notice of default and
notice of the debtor's right to cure defaults before repossession. The law in
most states also requires that the debtor be given notice of sale prior to the
resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states (including California), statutes limit the right of the
beneficiary or mortgagee to obtain a deficiency judgment against the borrower
following foreclosure. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. In the case of a Revolving Credit Loan, Home Equity Loan and a Contract
secured by a property owned by a trust where the Mortgage Note is executed on
behalf of the trust, a deficiency judgment against the trust following
foreclosure or sale under a deed of trust, even if obtainable under applicable
law, may be of little value to the mortgagee or beneficiary if there are no
trust assets against which such deficiency judgment may be executed. Some state
statutes require the beneficiary or mortgagee to exhaust the security afforded
under a deed of trust or mortgage by foreclosure in an attempt to satisfy the
full debt before bringing a personal action against the 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
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security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, in those states permitting
such election, is that lenders will usually proceed against the security first
rather than bringing a personal action against the borrower.
Finally, in certain other states, statutory provisions limit any
deficiency judgment against the borrower following a foreclosure to the excess
of the outstanding debt over the fair market value of the property at the time
of the public sale. The purpose of these statutes is generally to prevent a
beneficiary or mortgagee from obtaining a large deficiency judgment against the
former borrower as a result of low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
Shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Article 9 to prohibit or limit a deficiency award in certain
circumstances, including circumstances where the disposition of the collateral
(which, in the case of a Cooperative Loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement) was not
conducted in a commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon its
collateral and/or enforce a deficiency judgment. For example, under the federal
bankruptcy law, all actions against the debtor, the debtor's property and any
co-debtor are automatically stayed upon the filing of a bankruptcy petition.
Moreover, a court having federal bankruptcy jurisdiction may permit a debtor
through its Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary
default in respect of a mortgage loan on such debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule, even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by permitting the borrower to pay over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property which is not the principal
residence of the debtor may be modified. These courts have allowed modifications
that include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule, forgiving all or a portion of the
debt and reducing the lender's security interest to the value of the residence,
thus leaving the lender a general unsecured creditor for the difference between
the value of the residence and the outstanding balance of the loan. Generally,
however, the terms of a mortgage loan secured only by a mortgage on real
property that is the debtor's principal residence may not be modified pursuant
to a plan confirmed pursuant to Chapter 13 except with respect to mortgage
payment arrearages, which may be cured within a reasonable time
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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 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.
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The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 (the "Conservation Act") amended, among other things, the provisions of
CERCLA with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the mortgaged property. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of substantially all of the operational functions of the
mortgaged property. The Conservation Act also provides that a lender will
continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
Other federal and state laws in certain circumstances may impose
liability on a secured party which takes a deed-in-lieu of foreclosure,
purchases a mortgaged property at a foreclosure sale, or operates a mortgaged
property on which contaminants other than CERCLA hazardous substances are
present, including petroleum, agricultural chemicals, hazardous wastes,
asbestos, radon, and lead-based paint. Such cleanup costs may be substantial. It
is possible that such cleanup costs could become a liability of a Trust Fund and
reduce the amounts otherwise payable to the holders of the related series of
Notes. Moreover, certain federal statutes and certain states by statute impose a
lien for any cleanup costs incurred by such state on the property that is the
subject of such cleanup costs (an "Environmental Lien"). All subsequent liens on
such property generally are subordinated to such an Environmental Lien and, in
some states, even prior recorded liens are subordinated to Environmental Liens.
In the latter states, the security interest of the trustee in a related parcel
of real property that is subject to such an Environmental Lien could be
adversely affected.
Traditionally, many residential mortgage lenders have not taken steps
to evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the Company has not
made and will not make such evaluations prior to the origination of the Secured
Contracts. Neither the Company nor any replacement Servicer will be required by
any Agreement to undertake any such evaluations prior to foreclosure or
accepting a deed-in-lieu of foreclosure. The Company does not make any
representations or warranties or assume any liability with respect to the
absence or effect of contaminants on any related real property or any casualty
resulting from the presence or effect of contaminants. However, the Company will
not be obligated to foreclose on related real property or accept a deed-in-lieu
of foreclosure if it knows or reasonably believes that
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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.
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
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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 states also limit the amounts that a
lender may collect from a borrower as an additional charge if the loan is
prepaid.
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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.
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
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Contracts are hereinafter referred to in this section as "contracts") generally
are "chattel paper" or constitute "purchase money security interests" each as
defined in the UCC. Pursuant to the UCC, the sale of chattel paper is treated in
a manner similar to perfection of a security interest in chattel paper. Under
the related agreement, the Depositor will transfer physical possession of the
contracts to the Indenture Trustee or a designated custodian or may retain
possession of the contracts as custodian for the Indenture Trustee. In addition,
the Depositor will make an appropriate filing of a UCC-1 financing statement in
the appropriate states to give notice of the Indenture Trustee's ownership of
the contracts. Unless otherwise specified in the related Prospectus Supplement,
the contracts will not be stamped or otherwise marked to reflect their
assignment from the Depositor to the Indenture Trustee. Therefore, if through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
Indenture Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements
The contracts that are secured by the Home Improvements financed
thereby grant to the originator of such contracts a purchase money security
interest in such Home Improvements to secure all or part of the purchase price
of such Home Improvements and related services. A financing statement generally
is not required to be filed to perfect a purchase money security interest in
consumer goods. Such purchase money security interests are assignable. In
general, a purchase money security interest grants to the holder a security
interest that has priority over a conflicting security interest in the same
collateral and the proceeds of such collateral. However, to the extent that the
collateral subject to a purchase money security interest becomes a fixture, in
order for the related purchase money security interest to take priority over a
conflicting interest in the fixture, the holder's interest in such Home
Improvement must generally be perfected by a timely fixture filing. In general,
under the UCC, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home Improvement
Contracts that finance lumber, bricks, other types of ordinary building material
or other goods that are deemed to lose such characterization, upon incorporation
of such materials into the related property, will not be secured by a purchase
money security interest in the Home Improvement being financed.
Enforcement of Security Interest in Home Improvements
So long as the Home Improvement has not become subject to the real
estate law, a creditor can repossess a Home Improvement securing a contract by
voluntary surrender, "self-help" repossession that is "peaceful" (i.e., without
breach of the peace) or, in the absence of voluntary surrender and the ability
to repossess without breach of the peace, judicial process. The holder of a
contract must give the debtor a number of days' notice, which varies from 10 to
30 days or more depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states restrict
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states also
requires that the debtor be given notice of
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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.
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Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no contract that imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
Installment Contracts
The Trust Assets may also consist of installment sales contracts. Under
an installment contract ("Installment Contract") the seller (hereinafter
referred to in this section as the "lender") retains legal title to the property
and enters into an agreement with the purchaser (hereinafter referred to in this
section as the "borrower") for the payment of the purchase price, plus interest,
over the term of such contract. Only after full performance by the borrower of
the Installment Contract is the lender obligated to convey title to the property
to the purchaser. As with mortgage or deed of trust financing, during the
effective period of the Installment Contract, the borrower is generally
responsible for 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
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states, courts in equity may permit a borrower with significant investment in
the property under an Installment Contract for the sale of real estate to share
in the proceeds of sale of the property after the indebtedness is repaid or may
otherwise refuse to enforce the forfeiture clause. Nevertheless, the lender's
procedures for obtaining possession and clear title under an Installment
Contract in a given state are simpler and less time consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
Applicability of Usury Laws
Title V 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
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instruments by national banks, (ii) state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions and (iii) all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII also provides that any state may reject applicability of the provisions of
Title VIII by adopting, prior to October 15, 1985, a law or constitutional
provision expressly rejecting the applicability of such provisions. Certain
states have taken such action.
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
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Mortgagor who was in reserve status and is called to active duty after
origination of the Revolving Credit Loan, Home Equity Loan and certain
Contracts) may not be charged interest (including fees and charges) above an
annual rate of 6% during the period of such Mortgagor's active duty status,
unless a court orders otherwise upon application of the lender. The Relief Act
applies to Mortgagors who are members of the Air Force, Army, Marines, Navy,
National Guard, Reserves, Coast Guard, and officers of the U.S. Public Health
Service assigned to duty with the military. Because the Relief Act applies to
Mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related Revolving Credit Loan, Home Equity
Loan and related Contract, no information can be provided as to the number of
loans that may be affected by the Relief Act. Application of the Relief Act
would adversely affect, for an indeterminate period of time, the ability of the
Master Servicer to collect full amounts of interest on certain of the Revolving
Credit Loans, Home Equity Loans and Contracts. Any shortfall in interest
collections resulting from the application of the Relief Act or similar
legislation or regulations, which would not be recoverable from the related
Revolving Credit Loans, Home Equity Loans and Contracts, would result in a
reduction of the amounts payable to the holders of the related Notes, and may
not be covered by the applicable form of credit enhancement provided in
connection with the related series of Notes. In addition, the Relief Act imposes
limitations that would impair the ability of the Master Servicer to foreclose on
an affected Revolving Credit Loan, Home Equity Loan or Contract during the
Mortgagor's period of active duty status, and, under certain 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.
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Junior Mortgages; Rights of Senior Mortgagees
The Revolving Credit Loans, Home Equity Loans, certain Contracts or
certain Private Securities included in the Trust Fund for a series will be
secured by mortgages or deeds of trust which generally will be junior to other
mortgages or deeds of trust held by other lenders or institutional investors.
The rights of the Trust Fund (and therefore the Noteholders), as mortgagee under
a junior mortgage, are subordinate to those of the mortgagee under the senior
mortgage, including the prior rights of the senior mortgagee to receive hazard
insurance and condemnation proceeds and to cause the property securing the
Revolving Credit Loan, Home Equity Loan or Contract to be sold upon default of
the mortgagor, which may extinguish the junior mortgagee's lien unless the
junior mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, in certain cases, either reinitiates or satisfies the defaulted
senior loan or loans. A junior mortgagee may satisfy a defaulted senior loan in
full or, in some states, may cure such default and bring the senior loan current
thereby reinstating the senior loan, in either event usually adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee. Where applicable law or the terms of the senior
mortgage or deed of trust do not require notice of default to the junior
mortgagee, the lack of any such notice may prevent the junior mortgagee from
exercising any right to reinstate the loan which applicable law may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply such proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in such order as
the mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property is
taken by condemnation, the mortgagee or beneficiary under underlying senior
mortgages will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of junior mortgages in the order
of their priority. Another provision sometimes found in the form of the mortgage
or deed of trust used by institutional lenders obligates the mortgagor to pay
before delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are prior to the mortgage
or deed of trust, to provide and maintain fire insurance on the property, to
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.
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The form of credit line trust deed or mortgage used by most
institutional lenders which make Revolving Credit Loans typically contains a
"future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. The priority of the lien securing any
advance made under the clause may depend in most states on whether the deed of
trust or mortgage is designated as a credit line deed of trust or mortgage. If
the beneficiary or lender advances additional amounts, the advance is entitled
to receive the same priority as amounts initially advanced under the trust deed
or mortgage, notwithstanding the fact that there may be junior trust deeds or
mortgages and other liens which intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and notwithstanding
that the beneficiary or lender had actual knowledge of such intervening junior
trust deeds or mortgages and other liens at the time of the advance. In most
states, the trust deed or mortgage lien securing mortgage loans of the type
which includes Revolving Credit Loans applies retroactively to the date of the
original recording of the trust deed or mortgage, provided that the total amount
of advances under the Credit Limit does not exceed the maximum specified
principal amount of the recorded trust deed or mortgage, except as to advances
made after receipt by the lender of a written notice of lien from a judgment
lien creditor of the trustor.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of certain anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Notes offered hereunder. This discussion has been prepared with the advice
of Thacher Proffitt & Wood and Orrick, Herrington & Sutcliffe LLP, counsel to
the Company. This discussion is directed solely to Noteholders that hold the
Notes as capital assets within the meaning of Section 1221 of the Code and does
not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which may be subject
to special rules (such as banks, insurance companies, foreign investors,
tax-exempt organizations, dealers in securities or currencies, mutual funds,
real estate investment trusts, natural persons, cash method taxpayers, S
corporations, estates and trusts, investors that hold the Notes as part of a
hedge, straddle or, an integrated or conversion transaction, or holders whose
"functional currency" is not the United States dollar. Also, it does not address
alternative minimum tax consequences or the indirect effects on the holders of
equity interests in a Noteholder). 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
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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 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
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issuance (the "Closing Date"). If less than a substantial amount of a particular
class of Notes is sold for cash on or prior to the Closing Date, the issue price
of such class will be treated as the fair market value of such class on the
Closing Date. Under the OID Regulations, the stated redemption price of a Note
is equal to the total of all payments to be made on such Note other than
"qualified stated interest." "Qualified stated interest" includes interest that
is unconditionally payable at least annually at a single fixed rate, or in the
case of a variable rate debt instrument, at a "qualified floating rate," an
"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate," or a
combination of "qualified floating rates" that generally does not operate in a
manner that accelerates or defers interest payments on such Note.
In the case of Notes bearing adjustable interest rates, the
determination of the total amount of original issue discount and the timing of
the inclusion thereof will vary according to the characteristics of such Notes.
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 payments.
Certain classes of the Notes may provide for the first interest payment
with respect to such Notes to be made more than one month after the date of
issuance, a period which is longer than the subsequent monthly intervals between
interest payments. Assuming the "accrual period" (as defined below) for original
issue discount is each monthly period that ends on a Distribution Date, in some
cases, as a consequence of this "long first accrual period," some or all
interest payments may be required to be included in the stated redemption price
of the Note and accounted for as original issue discount.
In addition, if the accrued interest to be paid on the first
Distribution Date is computed with respect to a period that begins prior to the
Closing Date, a portion of the purchase price paid for a Note will reflect such
accrued interest. In such cases, information returns to the Noteholders and the
IRS will be based on the position that the portion of the purchase price paid
for the interest accrued with respect to periods prior to the Closing Date is
treated as part of the overall purchase price of such Note (and not as a
separate asset the purchase price of which is recovered entirely out of interest
received on the next Distribution Date) and that portion of the interest paid on
the first Distribution Date in excess of interest accrued for a number of days
corresponding to 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
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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 Note must include in ordinary gross income the sum of
the "daily portions" of original issue discount for each day during its taxable
year on which it held such Note, including the purchase date but excluding the
disposition date. In the case of an original holder of a Note, the daily
portions of original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to a Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original issue
discount that accrues in any accrual period will equal the excess, if any, of
(i) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the Note, if any, in future
periods and (B) the distributions made on such Note during the accrual period of
amounts included in the stated redemption price, over (ii) the adjusted issue
price of such Note at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated using a discount rate equal to the original yield to maturity of the
Notes, and possibly assuming that distributions on the Note will be received in
future periods based on the Trust Assets being prepaid at a rate equal to a
prepayment assumption. For these purposes, the original yield to maturity of the
Note would be calculated based on its issue price and possibly assuming that
distributions on the Note will be made in all accrual periods based on the Trust
Assets being prepaid at a rate equal to a prepayment assumption. The adjusted
issue price of a Note at the beginning of any accrual period will equal the
issue price of such Note, increased by the aggregate amount of original issue
discount that accrued with respect to such Note in prior accrual periods, and
reduced by the amount of any distributions made on such Note in prior accrual
periods of amounts included in its stated redemption price. The original issue
discount accruing during any accrual period, computed as described above, will
be allocated ratably to each day during the accrual period to determine the
daily portion of original issue discount for such day. Although the Issuer will
calculate original
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issue discount, if any, based on its determination of the accrual periods, a
Noteholder may, subject to certain restrictions, elect other accrual periods.
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
(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 plus (ii) the daily portions of original issue discount for all days
during such accrual period prior to such day less (iii) any principal payments
made during such accrual period with respect to such Note.
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 would be irrevocable.
However, market discount with respect to a Note will be considered to
be de minimis for purposes Code section 1276 if such market discount is less
than 0.25% of the remaining principal amount of such Note multiplied by the
number of complete years to maturity remaining after the date of its purchase.
In interpreting a similar rule with respect to original issue discount on
obligations payable in installments, the OID Regulations refer to the
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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.
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 the Code section 1276 (the
"Committee Report") apply. The Committee Report indicates that in each accrual
period market discount on Notes should accrue, at the Noteholder's option: (i)
on the basis of a constant yield method, or (ii) in the case of a Note issued
without original issue discount, in an amount that bears the same ratio to the
total remaining market discount as the stated interest paid in the accrual
period bears to the total amount of stated interest remaining to be paid on the
Notes as of the beginning of the accrual period. Moreover, any prepayment
assumption used in calculating the accrual of original issue discount is also
used in calculating the accrual of market discount. Because the regulations
referred to in this paragraph have not been issued, it is not possible to
predict what effect such regulations might have on the tax treatment of a Note
purchased at a discount in the secondary market. Further, it is uncertain
whether a prepayment assumption would be required to be used for the Notes if
they were issued with original issue discount.
To the extent that Notes provide for monthly or other periodic
distributions throughout their term, the effect of these rules may be to require
market discount to be includible in income at a rate that is not significantly
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
such an election is made, it will apply to all debt instruments having
amortizable bond premium that the holder owns or subsequently acquires. The OID
Regulations also permit Noteholders to elect to include all interest, discount
and premium in income based on a constant yield method. See "--Market Discount"
above. The Committee Report states that the same rules that apply to accrual of
market discount (which rules may require use of a prepayment assumption in
accruing market discount with respect to Notes without regard to whether such
Notes have original issue discount) would also apply in amortizing bond premium
under Code section 171.
Realized Losses
Under Code section 166 both corporate and noncorporate holders of the
Notes that acquire such Notes in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their Notes become wholly or partially worthless as the result of
one or more realized losses on the Trust Assets. However, it appears that a
noncorporate holder that does not acquire a Note in connection with a trade or
business will not be entitled to deduct a loss under Section 166 of the Code
until such holder's Note becomes wholly worthless (i.e., until its outstanding
principal balance has been reduced to zero) and that the loss will be
characterized as a short-term capital loss.
Each holder of a Note will be required to accrue interest and original
issue discount with respect to such Note, without giving effect to any
reductions in distributions attributable to defaults or delinquencies on the
Trust Assets until it can be established that any such reduction ultimately will
not be recoverable. As a result, the amount of taxable income reported in any
period by the holder of a Note could exceed the amount of economic income
actually realized by the holder in such period. Although the holder of a Note
eventually will recognize a loss or reduction in income attributable to
previously accrued and included income that, as the result of a realized loss,
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
Sales of Notes
If a Note is sold, the selling Noteholder will recognize gain or loss
equal to the difference between the amount realized on the sale and its adjusted
basis in the Note. The adjusted basis of a Note generally will equal the cost of
such Note to such Noteholder, increased by the amount of any original issue
discount or market discount previously reported by such Noteholder with respect
to such Note and reduced by any amortized
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premium and any principal payment received by such Noteholder. Except as
provided in the following three paragraphs, any such gain or loss will be
capital gain or loss, provided such Note is held as a capital asset (generally,
property held for investment) within the meaning of Code section 1221.
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."
Backup Withholding
Payments of interest and principal, as well as payments of proceeds
from the sale of Notes, may be subject to the "backup withholding tax" under
Section 3406 of the Code at a rate of 31% if recipients of such payments fail to
furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient of payments that is
required to supply information but that does not do so in the proper manner.
The Issuer will report to the Holders and to the IRS for each calendar
year the amount of any "reportable payments" during such year and the amount of
tax withheld, if any, with respect to payments on the Notes.
Tax Treatment of Foreign Investors
Interest paid on a Note to a nonresident alien individual, foreign
partnership or foreign corporation that has no connection with the United States
other than holding Notes ("Nonresidents") will normally qualify as portfolio
interest (except, in general, 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
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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
Sections 404 and 406 of ERISA impose certain fiduciary and prohibited
transaction restrictions on employee pension and welfare benefit plans subject
to ERISA ("ERISA Plans") and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans, bank
collective investment funds and insurance company general and separate accounts
in which such ERISA Plans are invested. Section 4975 of the Code imposes
essentially the same prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code and on Individual
Retirement Accounts 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 and state law.
Any such plan that is qualified and exempt from taxation under Sections 401(a)
and 501(a) of the Code, however, is subject to the prohibited transaction rules
set forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those
of investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving 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 with respect to any such transaction.
Plan Asset Regulations
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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 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
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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 a 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 a 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 such 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; PTCE 84-14, regarding transactions effected by a "qualified
professional asset manager"; PTCE 90-1, regarding transactions by insurance
company pooled separate accounts; PTCE 91-38, regarding investments by bank
collective investment funds; and PTCE 96-23, regarding transactions effected by
an "in-house asset manager." 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 Section 4975 of the Code, for transactions involving an insurance company
general account. Pursuant to Section 401(c) of ERISA, the DOL is required to
issue final regulations ("401(c) Regulations") no later than December 31, 1997
which are to provide guidance for the purpose of determining, in cases where
insurance policies supported by an insurer's general account are issued to or
for the benefit of a Plan
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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 PTCE 95-60 and 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 of facts
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 are correct: (i) the transferee is an insurance
company, (ii) the source of funds used to purchase such Notes is an "insurance
company general account" (as such term is defined in PTCE 95-60) and (iii) the
conditions set forth in Section I of PTCE 95-60 have been satisfied as of the
date of the acquisition of such Notes.
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
[NY01B:321766.6] 16069-00377 05/27/97 8:13pm
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<PAGE>
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 counsel concerning the impact of ERISA and Section 4975 of the
Code and the potential consequences to their specific circumstances prior to
making an investment in the Notes.
Before purchasing a Note in reliance on any DOL exemption or Section
401(c) of ERISA, a fiduciary of a Plan or other Plan Asset investor should
itself confirm that all of the specific and general conditions set forth in such
exemption or Section 401(c) of ERISA would be satisfied. In addition to making
its own determination as to the availability of the exemptive relief provided in
such exemption, a Plan fiduciary should consider its general fiduciary
obligations under ERISA in determining whether to purchase a Note on behalf of a
Plan.
LEGAL INVESTMENT MATTERS
Each class of Notes offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. Unless otherwise specified in
the related Prospectus Supplement, each class of Notes will evidence an interest
in Trust Assets primarily secured by second or more junior liens, and therefore
will not constitute "mortgage related securities" for purposes of SMMEA.
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their legal advisors to determine whether and to
what extent the Notes constitute legal investments for them.
All depository institutions considering an investment in the Notes
should review the Federal Financial Institutions Examination Council's
Supervisory Policy Statement on the Selection of Securities Dealers and
Unsuitable Investment Practices (to the extent adopted by their respective
regulators), setting forth, in relevant part, certain investment practices
deemed to be unsuitable for an institution's investment portfolio, as well as
guidelines for
investing in certain types of mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying".
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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:
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.
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<PAGE>
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 "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.
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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.....................................................111
Account Balance ......................................................27
Accrual Notes .......................................................8
Additional Balance......................................................26
Additional Charges......................................................27
Administrator .......................................................7
Affiliated Sellers......................................................23
Agreements ......................................................68
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 .....................................................103
CLTV ......................................................24
Code ......................................................13
Commission .......................................................3
Committee Report .....................................................106
Conservation Act ......................................................91
Contracts .......................................................1
Cooperative ......................................................80
Cooperative Loans ......................................................22
Cooperative Note ......................................................80
Cooperative Notes ......................................................22
Credit Enhancer ......................................................53
Credit Line Agreements..................................................26
Credit Utilization Rate.................................................25
Crime Control Act .....................................................100
Custodial Account ......................................................44
Custodian ......................................................42
Defaulted Loan Loss.....................................................52
Deleted Loan ......................................................35
Depositaries ......................................................39
Designated Seller ......................................................23
Designated Seller Transaction...........................................23
Determination Date......................................................48
Disqualified Persons...................................................109
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Page
DOL ......................................................109
DOL Regulations ......................................................109
Draw .......................................................26
Draw Period .......................................................26
DTC .......................................................39
DTC Participants .......................................................39
Eligible Account .......................................................45
Eligible Substitute Loan.................................................35
Environmental Lien.......................................................91
ERISA .......................................................13
ERISA Plans ......................................................109
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......................................18
FHA Claims Administrator.................................................18
FHA Insurance Amount.....................................................59
FHA Regulations .......................................................58
FHA Reserve .......................................................59
Finance Charge .......................................................27
Financial Guaranty Insurance Policy......................................53
Fraud Loss .......................................................52
FTC Rule .......................................................92
Funding Account .......................................................49
Garn-St Germain Act......................................................93
GMAC Mortgage ........................................................1
Gross Margin .......................................................26
Guide .......................................................29
High Cost Loans .......................................................90
Holder-in-Due-Course.....................................................92
Home Equity Loans ........................................................1
Home Equity Program......................................................29
Home Improvement Contracts................................................1
Home Improvements ........................................................1
HUD .......................................................58
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Page
Indenture ........................................................1
Indenture Trustee ........................................................7
Index .......................................................26
Indirect Participants....................................................39
Installment Contract.....................................................96
Insurance Proceeds.......................................................45
Insurer .......................................................53
Interest Rate ........................................................8
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.......................................................30
Mortgage .......................................................27
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 ......................................................102
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
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Page
PTCE .....................................................111
Purchase Price ......................................................35
Qualified Insurer ......................................................56
Rating Agency ......................................................12
Realized Loss ......................................................53
Record Date ......................................................47
Registration Statement...................................................3
Relief Act ......................................................99
REO Loan ......................................................64
Reserve Fund ......................................................55
Residential Funding......................................................7
Revolving Credit Loans...................................................1
RICO .....................................................100
Securities .......................................................1
Securityholders ......................................................43
Sellers ......................................................23
Senior/Subordinate Series...............................................38
Servicing Advances......................................................46
Servicing Agreement.....................................................61
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..................................................37
Tax Counsel .....................................................102
Tax-Exempt Investor....................................................112
Terms and Conditions....................................................41
Title I .......................................................9
Title I Contracts .......................................................1
Title I Lenders ......................................................58
Title I Loans ......................................................58
Title V ......................................................96
Title VIII ......................................................98
Transfer Report ......................................................59
Trust Agreement .......................................................1
Trust Assets .......................................................1
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Page
Trust Fund .......................................................1
UBTI .....................................................112
UCC ......................................................86
Unaffiliated Sellers....................................................23
Unsecured Contract......................................................19
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Subject to Completion Dated May 29, 1997
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 supplement shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
Prospectus Supplement Version I-A
(To Prospectus dated ________________, 199__)
$-------------
Residential Funding Mortgage Securities II, Inc.
Depositor
Residential Funding Corporation
Master Servicer
Home Equity Loan Pass-Through Certificates, Series 199__-___
$___________ Class A Certificates
--------------------------
The Series 199__-___ Home Equity Pass-Through Certificates will include
the following three classes (the "Certificates"): (i) Class A Certificates (the
"Senior Certificates"), (ii) Class R Certificates (the "Residual Certificates")
and (iii) the Class B Certificates. Only the Senior Certificates are offered
hereby. See "Index of Principal Definitions" in the Prospectus for meanings of
capitalized terms and acronyms not otherwise defined herein.
It is a condition of the issuance of the Senior Certificates that they
be rated "_____" by _______________________________ ("_______________________")
and "_____" by _______________________ ("_____________________").
(Continued on following page)
--------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND AND PROCEEDS FROM THE POLICY (AS
DESCRIBED HEREIN) ARE THE SOLE SOURCE OF PAYMENTS ON THE SENIOR CERTIFICATES.
THE SENIOR CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
COMPANY, THE MASTER SERVICER, GMAC MORTGAGE CORPORATION OR ANY OF THEIR
AFFILIATES. NEITHER THE SENIOR CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE COMPANY,
THE MASTER SERVICER, GMAC MORTGAGE CORPORATION OR ANY OF THEIR AFFILIATES.
- --------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
- --------------------------
For a discussion of significant matters affecting investments in the
Certificates, see "Risk Factors," which begins on page S-15.
There is currently no secondary market for the Senior Certificates.
___________________________ (the "Underwriter") intends to make a secondary
market in the Senior Certificates, but is not obligated to do so. There can be
no assurance that a secondary market for the Senior Certificates will develop
or, if it does develop, that it will continue. The Senior Certificates will not
be listed on any securities exchange.
The Senior Certificates will be purchased from the Company by the
Underwriter and will be offered by the Underwriter from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The proceeds to the Company from the sale of the
Senior Certificates, before deducting expenses payable to the Company, will be
equal to approximately _____% of the initial aggregate principal balance of the
Senior Certificates plus accrued interest thereon from _____________________
(the "Cut-off Date"). The Senior Certificates are offered by the Underwriter,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriter and subject to certain other conditions. The Underwriter reserves
the right to withdraw, cancel or modify such offer and to reject any order in
whole or in part. It is expected that the delivery of the Senior Certificates
will be made [only in book-entry form through the Same Day Funds Settlement
System of The Depository Trust Company [as discussed herein] [at the offices of
_____________________] against payment therefor in immediately available funds.]
--------------------------
[NAME OF UNDERWRITER]
_____________________, 199__
<PAGE>
(Continued from previous page)
The Senior Certificates in the aggregate will evidence an initial
undivided interest of approximately _____% in a trust fund (the "Trust Fund")
consisting primarily of the respective Trust Balances (as defined herein) of a
pool of home equity revolving lines of credit secured by [first or] second deeds
of trust or mortgages on residential properties that are primarily one- to
four-family properties (the "Mortgage Loans") to be deposited by Residential
Funding Mortgage Securities II, Inc. (the "Company") into the Trust Fund for the
benefit of the Certificateholders. In addition, the Certificates will have the
benefit of an irrevocable and unconditional financial guaranty insurance policy
(the "Policy") issued by __________________________ (the "Insurer") covering
principal payments on the Senior Certificates plus accrued and unpaid interest
due on such Certificates as described under "Description of the
Certificates--the Policy" herein. The Senior Certificates will not constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended.
[The Class A Certificates (the "Book-Entry Certificates") will be
represented initially by certificates registered in the name of Cede & Co., as
nominee of The Depository Trust Company ("DTC") in the United States, or
Centrale de Livraison de Valeurs Mobilieres, societe anonyme ("CEDEL") or the
Euroclear System ("Euroclear"), in Europe. The interests of beneficial owners of
the Book-Entry Certificates will be represented by book entries on the records
of participating members of DTC. Definitive certificates will be available for
the Book-Entry Certificates only under the limited circumstances described
herein. See "Description of the Certificates--Book-Entry Registration of Certain
of the Senior Certificates" herein.]
A "real estate mortgage investment conduit" ("REMIC") election will be
made in connection with the Trust Fund for federal income tax purposes. The
Class A Certificates will represent ownership of "regular interests" in the
REMIC and the Residual Certificates will constitute the sole class of "residual
interests" in the REMIC. See "Certain Federal Income Tax Consequences" herein
and in the Prospectus.
Distributions on the Senior Certificates will be made on the _______
day of each month or, if such day is not a business day, then on the next
business day, commencing on ________________________ (each, a "Distribution
Date"). As described herein, interest distributions on the Senior Certificates
on each Distribution Date will be based on the Certificate Principal Balance
thereof and the floating interest rate as described herein. Distributions in
respect of principal of the Senior Certificates will be made as described herein
under "Description of the Certificates--Principal Distributions on the Senior
Certificates." The rights of the holders of the Class B Certificates and Class R
Certificates to receive distributions with respect to the Mortgage Loans will be
subordinate to the rights of the holders of the Senior Certificates to the
extent described herein under "Description of the Certificates--Allocation of
Losses; Overcollateralization and Subordination" and in the Prospectus.
The yield to maturity on the Senior Certificates will depend on the
rate and timing of principal payments (including payments in excess of required
installments, prepayments or terminations, liquidations and repurchases) and the
Loan Rates on the Mortgage Loans [and the rate and timing of Draws]. The
Mortgage Loans generally may be prepaid in full or in part at any time without
penalty. See "Description of the Certificates--the Policy" herein. See
"Summary--Special Prepayment Considerations," "--Special Yield Considerations"
and "Certain Yield and Prepayment Considerations" herein and "Yield
Considerations" in the Prospectus.
--------------------------
THE SENIOR CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF
A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE COMPANY AND ARE BEING OFFERED
PURSUANT TO ITS PROSPECTUS DATED ______________________, OF WHICH THIS
PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS
SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS
OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO
READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE SENIOR
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
--------------------------
UNTIL __________________________, ALL DEALERS EFFECTING TRANSACTIONS IN THE
SENIOR CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT
RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
--------------------------
[IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET, SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.]
S-2
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<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus. See "Index of Principal Definitions" in the
Prospectus.
Title of Securities..Home Equity Loan Pass-Through Certificates, Series
199__-___.
Company..............Residential Funding Mortgage Securities II, Inc. (the
"Company"), a corporation organized under the laws
of the State of Delaware, an affiliate of Residential
Funding Corporation ("Residential Funding"), which
is an indirect wholly-owned subsidiary of GMAC
Mortgage. See "The Company" in the Prospectus.
Master Servicer......Residential Funding Corporation (the "Master
Servicer" or "Residential Funding"), an affiliate of
the Company and an indirect wholly-owned subsidiary
of GMAC Mortgage. See "Pooling and Servicing
Agreement--The Master Servicer" herein and
"Residential Funding Corporation" in the Prospectus.
Trustee..............______________________, a [national bank] [state
bank] [trust company] organized under the laws of
_____________] (the "Trustee"). See "The Pooling
and Servicing Agreement--The Trustee" in the
Prospectus.
Cut-off Date........._________________1, 199__ (the "Cut-off Date").
Delivery Date........On or about _________________, 199__ (the
"Delivery Date").
Distribution Date....The [_____] day of each month (or, if such day is not
a business day, the next business day), beginning on
________ __, 199_, (each, a "Distribution Date").
[Denominations.......The Class A Certificates (the "Book-Entry
Certificates") will be issued, maintained and
transferred on the book-entry records of DTC (as
defined herein) [or CEDEL (as defined herein)] [or
EuroClear (as defined herein)] and its Participants (as
defined in the Prospectus). The Book-Entry
Certificates will be issued in minimum denominations
S-3
[NY01B:335758.1] 16069-00377 05/29/97 11:19am
<PAGE>
of $___________ and integral multiples of
$____________ in excess thereof.]
The Mortgage Pool.......The Certificates, in the aggregate, represent the
ownership of the Trust Balances (as defined herein) of
certain home equity revolving credit line loans (the
"Mortgage Loans"), under certain home equity
revolving credit line loan agreements (the "Credit
Line Agreements"). No Certificate represents any
interest in any additional amounts advanced under the
Credit Line Agreements after the Cut-off Date (the
"Excluded Balances"). All of the ownership interest
in (and the obligations to fund) the Additional
Balances will initially be retained by [________], but
may be sold from time to time. See "-Allocation of
Payments Between Trust Balances and Excluded
Balances" herein. The Mortgage Loans are secured
by first or second deeds of trust or mortgages on
residential properties that are primarily one- to four-
family properties (the "Mortgaged Properties"). The
Mortgage Loans were acquired by Residential
Funding pursuant to [its Home Equity Loan Program
(as defined herein)] [or] [purchased from GMAC
Mortgage Corporation of Pennsylvania]. The
aggregate Cut-off Date Trust Balance of the Mortgage
Loans is $____________ (the "Cut-off Date Pool
Balance"). The Combined Loan-to-Value Ratio (as
defined herein) for any Mortgage Loan did not exceed
____% (rounded to the nearest percentage point) as of
the Cut-off Date. The weighted average Combined
Loan-to-Value Ratio of the Mortgage Loans was
____% as of the Cut-off Date. The Junior Mortgage
Ratios (as defined herein) for the Mortgage Loans
ranged from ________% to _____%, and the
weighted average Junior Mortgage Ratio was
______%, as of the Cut-off Date. The weighted
average Credit Limit Utilization Rate (as defined
herein) was ___% as of the Cut-off Date. Interest on
each Mortgage Loan is payable monthly and
computed on the related average daily outstanding
Principal Balance for each billing cycle at a variable
rate per annum (the "Loan Rate") equal at any time
(subject to the applicable maximum rate, as described
herein under "Description of the Mortgage
Loans--Mortgage Loan Terms,") to the sum of (i) the
[prime rate] [other index] either published on the first
business day of the month of the billing cycle or
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currently in effect and (ii) a margin generally within the range of ____%
to ____%. The Loan Rate is subject to adjustment [monthly] [daily]. With respect
to each Mortgage Loan, a billing cycle is the calendar month preceding a Due
Date. Interest accrued at such rate will be due on the Due Date in the month
following the close of the billing cycle. As to each Mortgage Loan, the "Due
Date" is the ___ day of the month. [As of the Cut-off Date, the Loan Rates on
approximately ___% of the Mortgage Loans (by Principal Balance as of the Cut-off
Date) are introductory rates that are lower than the rate that would have been
in effect if the applicable [Index] and Gross Margin at the time these loans
were originated were used to determine the Loan Rate.] The Cut-off Date Trust
Balance of the Mortgage Loans ranged from $________ to $__________ and averaged
$____________. Credit Limits under the Mortgage Loans as of the Cut-off Date
ranged from $_________ to $_________ and averaged $_________. Each Mortgage Loan
was originated in the period from _______, 19__ to ________, 19__. With respect
to _____% of the Mortgage Loans (by Principal Balance as of the Cut-off Date),
the related Mortgaged Properties are located in California.
.......................For a further description of the Mortgage Loans, see
"Description of the Mortgage Pool" herein.
Trust Balance..........The "Trust Balance" for any Mortgage Loan for any
day (i.e., the portion of the outstanding principal
balance of such Mortgage Loan owned by the Trust
Fund on such day) is equal to (i) the unpaid principal
balance of the Mortgage Loan as of the Cut-off Date
(the "Cut-off Date Trust Balance"), less (ii) the
aggregate of all payments and other collections
(including any related Liquidation Proceeds and
Insurance Proceeds, but not proceeds paid under the
Policy) applied to reduce the Principal Balance of
such Mortgage Loan together with the proceeds of the
repurchase of any Mortgage Loans received during
any Collection Period, multiplied by the Trust
Percentage applicable to the Collection Period in
which such amounts were received (such amounts for
any Collection Period, "Trust Principal Collections").
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.......................The "Principal Balance" for any Mortgage Loan and
for any day is the principal balance of such Mortgage
Loan on such day. As of the Cut-off Date, the Trust
Balance and the Principal Balance will be equal and
the corresponding Trust Percentage will therefore
equal 100%. The "Excluded Balance" for any
Mortgage Loan and for any day is the excess, if any,
of the Principal Balance over the Trust Balance for
such day. The Excluded Balance for any Mortgage
Loan will be increased as a result of any Additional
Balance in respect of the related Mortgage Loan
added after the Cut-off Date. All collections on the
Mortgage Loans generally will be allocated pro rata
between the Trust Balance and the Excluded Balance
based on the portions of the Principal Balance
represented by the Trust Balance and any Excluded
Balance, respectively, as further described herein
under "Allocation of Payments between Trust
Balances and Excluded Balances". At such time as the
Trust Balance for any Mortgage Loan is reduced to
zero, such Mortgage Loan will be released from the
Trust Fund.
.......................The "Trust Percentage" for any Collection Period is
the percentage obtained by dividing the Trust Balance
as of the end of the immediately preceding Collection
Period by the Principal Balance as of the end of the
immediately preceding Collection Period.
[Collections...........All collections on the Mortgage Loans will be
allocated by the Master Servicer in accordance with
the terms of the Credit Line Agreements between
amounts collected in respect of interest and amounts
collected in respect of principal. See
______________________ herein. With respect to
any Distribution Date, the portion of interest
collections and principal collections allocable to the
Certificates (the "Trust Collections") will equal the
sum of (i) the aggregate of all amounts received and
applied as payments of interest on each Mortgage
Loan during the related Collection Period, in each
case multiplied by a fraction equal to the average
daily Trust Balance divided by the average daily
Principal Balance for the period with respect to which
such interest payment accrued except as otherwise
provided herein (such amounts for any Collection
Period, "Trust Interest Collections"), and (ii) the
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Trust Principal Collections for the related Collection
Period.
..............The "Collection Period" as to any Distribution Date,
other than the first Distribution Date, is the calendar
month preceding the month of such Distribution Date,
and as to the first Distribution Date is the period from
the Cut-off Date through ______________________.
..............On the Business Day prior to each Distribution Date,
the Master Servicer will deposit the Trust Collections
for such Distribution Date into an account (the
"Custodial Account") established and maintained by
the Trustee.
The Senior Certificates...The Senior Certificates in the aggregate evidence an
initial interest of approximately _____%, in a trust
fund (the "Trust Fund") consisting primarily of the
Trust Balances of the Mortgage Loans. The Senior
Certificates will be issued pursuant to a Pooling and
Servicing Agreement, to be dated as of the Cut-off
Date, among the Company, the Master Servicer and
the Trustee (the "Pooling and Servicing Agreement").
The Senior Certificates will have an initial principal
balance of $_________________.
.....................The Senior Certificates are subject to priorities for
payment of interest and principal as described herein.
For a description of the allocation of interest and
principal distributions among the Senior Certificates
see "Summary--Interest Distributions," and
"--Principal Distributions," "Description of the
Certificates--Interest Distributions," and "--Principal
Distributions on the Senior Certificates" herein.
.....................The Senior Certificates will be entitled to the benefit
of a financial guaranty insurance policy (the "Policy")
to be issued by ________________________ (the
"Insurer"), which will provide coverage as described
herein under "Description of the Certificates- The
Policy".
[Certificate Registration.The Book-Entry Certificates will be represented by
one or more certificates registered in the name of
Cede & Co., as nominee of The Depository Trust
Company ("DTC") or Centrale de Livraison de
Valeurs Mobilieres S.A. ("CEDEL") or the Euroclear
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System
("Euroclear"), in
Europe. No person
acquiring an
interest in the
Book-Entry
Certificates (a
"Beneficial Owner")
will be entitled to
receive a
Certificate of such
class in fully
registered,
certificated form (a
"Definitive
Certificate"),
except under the
limited
circumstances
described herein.
See "Description of
the
Certificates--Book-Entry
Registration of the
Class A
Certificates"
herein.]
Pass-Through Rate on the Senior
Certificates.......The Pass-Through Rate applicable to the Senior
Certificates for any Distribution Date will equal the
sum of (i) [LIBOR (as defined herein)] [other index
applicable to Certificates] and (ii) _____%, subject to
a maximum Pass-Through Rate equal to the average
of the Net Loan Rates on the Mortgage Loans in
effect during the second preceding Collection Period,
weighted based on the respective Trust Balances
thereof]. The Net Loan Rate for each Mortgage Loan
is equal to the Loan Rate thereon minus the Servicing
Fee (as defined herein). The Net Loan Rate with
respect to each Mortgage Loan as of the Cut-off Date
will be set forth in the Mortgage Loan Schedule
attached to the Pooling and Servicing Agreement. As
of the Cut-off Date, the weighted average Net Loan
Rate is _____% per annum.
...................[Interest on the Certificates in respect of any
Distribution Date will accrue from the preceding
Distribution Date (or in the case of the first
Distribution Date, from the Delivery Date) through
the day preceding such Distribution Date (each such
period, an "Interest Period") on the basis of [the
actual number of days in the Interest Period and a
360-day year.]
...................The Pass-Through Rate on the Senior Certificates on
the first Distribution Date will be _____% per
annum.
Interest Distributions.........
On each Distribution Date, the holders of the Senior
Certificates will be entitled to receive interest
distributions ("Accrued Certificate Interest") in an
amount equal to interest on the Certificate Principal
Balance thereof for the related Interest Period at the
then-applicable Pass-Through Rate. See "Description
of the Certificates--Interest Distributions" herein.
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Principal Distributions...
..Holders of the Senior Certificates in the aggregate
will be entitled to receive on each Distribution Date,
in the manner and priority set forth herein, to the
extent of the portion of the Available Distribution
Amount remaining after Accrued Certificate Interest
on the Senior Certificates is distributed, a distribution
allocable to principal equal to the sum of (i) 100% of
the Trust Principal Collections for the related
Collection Period, (ii) an amount equal to the then
applicable Senior Percentage of the Trust Percentage
of any Realized Losses incurred during the related
Collection Period, (iii) an amount equal to any
Carryover Senior Loss Amount (as defined herein)
from any previous Collection Period, to the extent
that such amounts were not previously distributed on
the Senior Certificates or reflected in a reduction of
either the Overcollateralization Amount or the
Certificate Principal Balance of the Class B
Certificates, and (iv) to the extent of the portion of
the Available Distribution Amount remaining after the
foregoing distributions and any amounts then payable
to the Insurer as described herein under "Description
of the Certificates" and interest distributions on the
Class B Certificates for such Distribution Date, an
additional amount equal to the Accelerated Principal
Payment Amount for such Distribution Date. For any
Distribution Date, the "Accelerated Principal Payment
Amount" is the amount required to bring the
Overcollateralization Amount up to the
Overcollateralization Target for such Distribution
Date (after giving effect to any amounts distributable
in respect of principal on the Class B Certificates on
such Distribution Date). Initially, the
Overcollateralization Target as of the time of any
determination is equal to the excess (if any) of (i)
____% of the Cut-off Date Trust Balance over (ii) the
Certificate Principal Balance of the Class B
Certificates. The Overcollateralization Target may be
increased or reduced from time to time pursuant to
the terms of the Pooling and Servicing Agreement.
If the Overcollateralization Target is reduced on any
Distribution Date, the amount of the Trust Principal
Collections distributed pursuant to clause (i) will be
reduced on such Distribution Date and each
subsequent Distribution Date to the extent the
remaining Overcollateralization Amount is in excess
of the reduced Overcollateralization Target until the
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Overcollateralization Amount equals the
Overcollateralization Target.
................. The "Overcollateralization Amount" on any
Distribution Date is
the amount, if any,
by which the
aggregate Trust
Balances of the
Mortgage Loans as of
the end of the
related Collection
Period exceeds the
aggregate
Certificate
Principal Balances
of the
Certificates.
................. See "Description of the Certificates--Principal
Distributions on the Senior Certificates" herein.
The Insurer...... . See " "
-------------------------------------- -------------
herein.
Financial Guaranty Insurance Policy..
The Insurer will issue the Policy as a means of
providing additional credit enhancement to the Senior
Certificates. Under the Policy, the Insurer will pay
the Trustee, for the benefit of the holders of each
class of Senior Certificates, on each Distribution
Date, as further described herein under "Description
of the Certificates- The Policy," an amount equal to
the sum of (a) the amount by which the Accrued
Certificate Interest on the Senior Certificates exceeds
the Available Distribution Amount on such
Distribution Date and (b) the amount (the
"Guaranteed Principal Payment Amount"), if any, by
which the aggregate Certificate Principal Balance of
the Senior Certificates exceeds the aggregate Trust
Balances of the Mortgage Loans at the end of the
related Collection Period (after giving effect to all
amounts distributable and allocable to principal on the
Senior Certificates on such Distribution Date). See
"Description of the Certificates--The Policy" herein.
Allocation of Losses; Overcollateralization
and Subordination.......... By operation of the cash flow priorities and other
subordination provisions described herein under
"Description of the Certificates- Allocation of Losses;
Overcollateralization and Subordination," the Senior
Percentage of the Trust Percentage of any Realized
Losses on the Mortgage Loans and other shortfalls in
amounts distributable on the Senior Certificates will
be allocated to or covered by: (i) first, amounts
otherwise distributable on the Class R Certificates;
(ii) second, a reduction in the then current
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<PAGE>
Overcollateralization Amount, if any; (iii) third, amounts otherwise
distributable on the Class B Certificates; (iv) fourth, a reduction in the
Certificate Principal Balance of the Class B Certificates; and (v) fifth,
amounts payable under the Policy. See "Description of the
Certificates--Allocation of Losses" herein.
............................Neither the Senior Certificates nor the Mortgage
Loans are insured or guaranteed by any governmental agency or
instrumentality or by the Company, the Master Servicer, the Trustee, GMAC
Mortgage or any affiliate thereof.
Class B Certificates and Class R
Certificates...........The Class B Certificates have an initial Certificate
Principal Balance of $_____________, evidencing an
initial Class B Percentage of approximately _____%
in the Trust Fund, and has an initial Pass-Through
Rate of _____% per annum. The Class B Certificates
and Class R Certificates are not being offered hereby.
Although holders of the Class B Certificates will not
be entitled to distributions in respect of any portion of
the Trust Principal Collections so long as the Senior
Certificates are outstanding, holders of the Class B
Certificates will be entitled to receive distributions on
each Distribution Date equal to the portion, if any, of
the Available Distribution Amount remaining after
payment of all amounts distributable as principal and
interest on the Senior Certificates, interest on the
Class B Certificates and any amounts then payable to
the Insurer as described herein (the "Remaining
Available Funds"). As a result, it is likely that the
Class B Certificates will be retired prior to the Senior
Certificates. Distributions of any Remaining
Available Funds to the Class B Certificateholders and
of any Accelerated Principal Payment Amount to the
Senior Certificateholders will generally result in an
increase in the Overcollateralization Amount. The
Class R Certificates will have no principal amount or
pass-through rate, but the holders thereof will be
entitled to distributions of Remaining Available Funds
after the Class B Certificates have been retired, and
of any portion of the Overcollateralization Amount
eligible for release from time to time, subject in all
cases to the preferential rights of the Senior
Certificateholders.
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[Servicing...........The Master Servicer will be responsible for servicing,
managing and making collections on the Mortgage
Loans. The Servicing Fees for each Mortgage Loan
are payable out of the interest payments on such
Mortgage Loan. The weighted average Servicing Fee
as of the Cut-off Date will be approximately _____%
per annum. The Servicing Fees consist of (a)
servicing compensation payable to the Master
Servicer in respect of its master servicing activities
and (b) subservicing and other related compensation
retained by the related subservicer. See "Servicing of
Mortgage Loans--Servicing Compensation and
Payment of Expenses" herein.]
[Optional Termination.....At its option, on any Distribution Date when the
aggregate Trust Balance of the Mortgage Loans is less
than ___% of the aggregate principal balance of the
Trust Loans as of the Cut-off Date, the Master
Servicer or the Company may (i) purchase from the
Trust Fund all remaining Mortgage Loans and other
assets thereof, and thereby effect early retirement of
the Certificates or (ii) purchase in whole, but not in
part, the Certificates. See "Pooling and Servicing
Agreement--Termination" herein and "The Pooling
and Servicing Agreement--Termination; Retirement
of Certificates" in the Prospectus.]
Special Yield and Prepayment
Considerations.....The yield to maturity on each class of the Senior
Certificates will depend on, among other things, the
price paid by the holder for such Certificate, the
Pass-Through Rate on any such Certificate entitled to
payments of interest and the rate and timing of
principal payments (including payments in excess of
required installments, prepayments or terminations,
liquidations and repurchases) on the Mortgage Loans
[and the rate and timing of Draws and the allocation
thereof to reduce the principal balance of such
Certificate].
...............In general, if a class of Senior Certificates is
purchased at a premium and principal distributions to
such class occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to
maturity will be lower than that assumed at the time
of purchase. Conversely, if a class of Senior
Certificates is purchased at a discount and principal
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<PAGE>
distributions to
such class occur at
a rate slower than
that assumed at the
time of purchase,
the investor's
actual yield to
maturity will be
lower than assumed
at the time of
purchase.
.................. See "Certain Yield and Prepayment Considerations,"
herein and "Yield and Prepayment Considerations" in
the Prospectus. For further information regarding the
effect of principal [pre]payments on the weighted
average life of the Class A Certificates, see the table
entitled "Percent of Initial Certificate Principal
Balance Outstanding at the Following Percentages of
[SPA] [CPR]" herein.
Certain Federal Income Tax
Consequences........An election will be made to treat the Trust Fund as a
real estate mortgage investment conduit ("REMIC")
for federal income tax purposes. Upon the issuance of
the Senior Certificates, [Thacher Proffitt & Wood]
[Orrick, Herrington & Sutcliffe], counsel to the
Company, will deliver its opinion generally to the
effect that, assuming compliance with all provisions
of the Pooling and Servicing Agreement, for federal
income tax purposes, the Trust Fund will qualify as
a REMIC under Sections 860A through 860G of the
Internal Revenue Code of 1986 (the "Code").
....................For federal income tax purposes, the Residual
Certificates will constitute the sole class of "residual
interests" in the REMIC and the Class A and Class B
Certificates will represent ownership of "regular
interests" in the REMIC and will generally be treated
as debt instruments of the REMIC.
....................For further information regarding the federal
income tax consequences of investing in the Senior Certificates, see
"Certain Federal Income Tax Consequences" herein and in the Prospectus.
Legal Investment....The Senior Certificates will not constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA"), because the
Mortgage Pool includes Mortgage Loans that are
secured by subordinate liens on the related
Mortgaged Properties. Institutions whose investment
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<PAGE>
activities are subject to legal investment laws and regulations or to
review by regulatory authorities should consult with their legal advisors
in determining whether and to what extent the Senior Certificates are
subject to restrictions on investment, capital requirements or otherwise.
See "Legal Investment Matters" herein and in the Prospectus.
Ratings..............It is a condition to the issuance of the Senior
Certificates that they be rated " " by ------------------------- (" ") and
" " by ____________________ ("____________________"). A security rating is
not a recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the assigning rating organization. A
security rating does not address the frequency of prepayments of Mortgage
Loans, or the corresponding effect on yield to investors. See "Certain
Yield and Prepayment Considerations" and "Ratings" herein and "Yield and
Prepayment Considerations" in the Prospectus.
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<PAGE>
RISK FACTORS
........................................................Prospective
Certificateholders should consider, among other things, the items discussed
under "Risk Factors" in the Prospectus and the following factors in connection
with the purchase of the Certificates: Special Features of the Mortgage Loans
........................................................Since [all] [____%] of
the Mortgage Loans are subordinate to the rights of the mortgagee under the
related senior mortgage or mortgages, the proceeds from any liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of such Mortgage Loans secured by subordinate mortgages only
to the extent that the claims of such senior mortgages have been satisfied in
full, including any related foreclosure costs. In addition, the holder of a
Mortgage Loan secured by a subordinate 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 will be required to advance such
amounts to the extent deemed recoverable]. See "Certain Legal Aspects of
Mortgage Loans and Related Matters." in the Prospectus.
........................................................With respect to Mortgage
Loans secured by second liens that have high Combined Loan-to-Value Ratios or
low Junior Mortgage Ratios, the foregoing considerations may result in
circumstances under which it would be uneconomical to foreclose on the Mortgaged
Property in the event of a default. In such circumstances, repayment of the
Mortgage Loan would be dependent solely on the credit of the borrower under the
Mortgage Loan, and the ability to obtain repayment of the Mortgage Loan may be
generally similar to that which would be experienced if the Mortgage Loan were
an unsecured consumer loan.
........................................................With respect to the
Mortgage Loans, required minimum monthly payments are equal to [the amount of
interest currently accruing thereon], and therefore are not expected to
significantly amortize the outstanding principal amount of such Mortgage 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 the Mortgage 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 Mortgage Loan or to sell the related Mortgaged Property.
........................................................To the extent that any
losses are incurred on any of the Mortgage Loans that are not covered by the
applicable credit enhancement, holders of Certificates of the series evidencing
interests in the related Mortgage Pool (or certain classes thereof) will bear
all risk of such losses resulting from default by Mortgagors.
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<PAGE>
DESCRIPTION OF THE MORTGAGE POOLS
General
The Mortgage Loans were originated pursuant to loan agreements
(the "Credit Line Agreements") and are secured by first or second mortgages or
deeds of trust, on Mortgaged Properties. The Mortgaged Properties securing the
Mortgage Loans consist primarily of residential properties that are one-to
four-family properties. [As to each Mortgage Loan, the Mortgagor represented at
the time of origination that the related Mortgaged Property would be owner
occupied.]
All percentages of the Mortgage Loans described herein are
approximate percentages determined (except as otherwise indicated) by the
Cut-off Date Trust Balance.
The Cut-off Date Trust Balance of the Mortgage Loans is
$___________________, which is equal to the aggregate Trust Balances of the
Mortgage Loans as of the close of the billing cycle preceding
_________________________ (as to the Mortgage Loans, the "Cut-off Date"). As of
the Cutoff Date, [each] Mortgage Loan(s) was not more than 59 days delinquent,
had a Cut-off Date Trust Balance of at least $_____________________, was secured
by a mortgage in a [first or] second lien position and had a Combined
Loan-to-Value Ratio as of the Cut-off Date which was not greater than [100%
(rounded to the nearest percentage point)]. With respect to the Mortgage Loans,
the average Cutoff Date Trust Balance was $__________________, the minimum
Cut-off Date Trust Balance was $__________________, the maximum Cut-off Date
Trust Balance was $________________________, the minimum Loan Rate and the
maximum Loan Rate on the Cut-off Date were __________% and __________% per
annum, respectively, and the weighted average Loan Rate on the Cut-off Date was
__________% per annum. The weighted average Credit Limit Utilization Rate of the
Mortgage Loans was ______% as of the Cut-off Date. The weighted average Combined
Loan-to-Value Ratio of the Mortgage Loans was __________% as of the Cut-off Date
and the weighted average Junior Mortgage Ratio was approximately __________%.
The latest scheduled maturity of any Mortgage Loan is
__________________________. With respect to __________% of the Mortgage Loans,
the related Mortgaged Properties are located in California.
With respect to each Mortgage Loan, the "Combined
Loan-to-Value Ratio" 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 Mortgage Loan (or, if appropriate, at the time of an
appraisal subsequent to origination), to the [lesser of (x)] the appraised value
of the related Mortgaged Property determined in the appraisal used in the
origination of such Loan (or, if appropriate, the value determined in an
appraisal obtained subsequent to origination [and (y) if applicable under the
corresponding program, the sales price of each Mortgaged Property]. The "Junior
Mortgage Ratio" will be the ratio, expressed as
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<PAGE>
a percentage, of the greater of the Cut-off Date Principal Balance or the Credit
Limit, if applicable, of such Mortgage Loan to the sum of (i) the greater of the
Cut-off Date Principal Balance or the Credit Limit, if applicable, of such
Mortgage Loan and (ii) the principal balance of any related senior mortgage loan
at origination of such Mortgage Loan. The "Credit Utilization Rate" is
determined by dividing the Cut-off Date Principal Balance of a Mortgage Loan by
the Credit Limit of the related Credit Line Agreement.
[As of the Cut-off Date the Loan Rates on approximately
__________% of the Mortgage Loans are introductory rates that are lower than the
rate that would have been in effect if the applicable [Index] and Gross Margin
at the time these loans were originated were used to determine the Loan Rate.
The Loan Rates for each of these Mortgage Loans will be fully indexed and will
be based on the applicable [Index] and Gross Margin on their first Adjustment
Date. As of the Cut-off Date, the weighted average months until these Mortgage
Loans reach their first Adjustment Date is __________ months.]
[_____% of the Mortgage Loans were acquired by Residential
Funding (in such capacity, the "Seller") from banks, savings and loan
associations, mortgage bankers, investment banking firms and other mortgage loan
originators and sellers not affiliated with the Seller (the "Program Sellers"),
under the Seller's Home Equity Loan Program (the "Home Equity Loan Program";
such loans, the "Program Loans") on a servicing released basis.] [__________% of
the Mortgage Loans were acquired by the Seller from GMAC Mortgage Corporation of
PA ("GMACMC"; such loans, the "GMACMC Loans") in ______________________.]
Mortgage Loan Terms
Interest on each Mortgage Loan is calculated according to the
daily simple interest method, and with respect to each Mortgage Loan, the
billing cycle is the calendar month preceding a Due Date.
[Each Program Loan has a Loan Rate that is subject to
adjustment on the first day (each such day, an "Adjustment Date") of each
related billing cycle to equal the sum of (a) the [prime rate for corporate
loans at United States commercial banks, as published in The Wall Street
Journal] [other index] (the "Index") on the first business day of the month in
which such billing cycle begins, and (b) a fixed percentage amount (the "Gross
Margin") specified in the related Mortgage Note, provided, however, that the
Loan Rate on each Mortgage Loan will in no event be greater than the maximum
Loan Rate (the "Maximum Loan Rate") set forth in the related Mortgage Note,
which will generally be ______% per annum subject to the maximum rate permitted
by applicable law. If, on any day, more than one [prime rate or a range of prime
rates for corporate loans at United States commercial banks] [other index] is
published in The Wall Street Journal, the [Index] on such day will be, with
respect to the Program Loans, the highest of the [prime rates] [other index]
published.]
[Each GMACMC Loan has a Loan Rate that is subject to
adjustment on each day of each related billing cycle to equal the sum of (a) the
[Index] on any business day in such billing cycle, and (b) the Gross Margin
[which is adjustable as provided in the related Mortgage Note [description of
adjustment to be inserted]], provided, however, that the Loan Rate on each
Mortgage Loan will in no event be greater than the Maximum Loan Rate as
generally set forth in the related Mortgage Note subject to the maximum rate
permitted by applicable law. If, on any day, more than one [prime rate
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<PAGE>
or a range of prime rates for corporate loans at United States commercial banks]
[other index] is published in The Wall Street Journal], the [Index] on such day
will be the highest [prime rate] [other index] published. As to each GMACMC
Loan, the Gross Margin is adjustable from time to time based on the then
outstanding balance and the Combined Loan-to-Value Ratio.]
[Each Mortgage Loan had a term to maturity from the date of
origination of not more than _______ years.] The Mortgagor for each Mortgage
Loan may draw money (each, a "Draw") under the related Credit Line Agreement at
any time [(i) during the entire term to maturity thereof, in the case of the
GMACMC Loans, or (ii) during the period specified therein, in the case of the
Program Loans] (such period as to any Mortgage Loan, the "Draw Period"). The
Draw Period may be either [_____] years or [_____] years from the date of
origination thereof. The maximum amount of each Draw with respect to any
Mortgage Loan 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.
See "Allocation of Payments between Trust Balances - Excluded Balances"
hereunder. Each Mortgage Loan may be prepaid in full or in part at any time and
without penalty, but with respect to each Mortgage Loan, the related Mortgagor
will have the right during the related Draw Period to make a Draw in the amount
of any prepayment theretofore made with respect to such Mortgage Loan. The
Mortgage Note or Mortgage related to each Mortgage Loan will contain a customary
"due-on-sale" clause.
As to each Mortgage Loan, the Mortgagor's rights to receive
Draws during the Draw Period may be suspended, or the Credit Limit may be
reduced, for cause under a number of circumstances, including, but not limited
to: a materially adverse change in the Mortgagor's financial circumstances; a
decline in the value of the Mortgaged Property significantly below its appraised
value at origination; or a non-payment default by the Mortgagor. However, with
respect to each Mortgage Loan, generally such suspension or reduction will not
affect the payment terms for previously drawn balances. In the event of default
under a Mortgage Loan, the Mortgage Loan may be terminated and declared
immediately due and payable in full. For this purpose, a default includes, but
is not limited to: the Mortgagor's failure to make any payment as required; any
action or inaction by the Mortgagor that adversely affects the Mortgaged
Property or the rights in the Mortgaged Property; or fraud or material
misrepresentation by a Mortgagor in connection with the Loan.
Mortgage Loan Characteristics
Set forth below is a description of certain additional
characteristics of the Mortgage Loans as of the Cut-off Date. Unless otherwise
specified, all principal balances of the Mortgage Loans are as of the Cut-off
Date.
PROPERTY TYPE
Percent of
Pool by
Number of Cut-off Date by Cut-off Date
Property Type Mortgage Loans Trust Balance Trust Balance
- ------------- -------------- ------------- -------------
Single Family....... $ %
Condominium.........
PUD/Townhouse.......
Total.............
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<PAGE>
OCCUPANCY TYPES
Occupancy (as Percentage of
indicated by Borrower Number Principal Balance Mortgage Pool
Primary Residence......... $ . . %
Second/Vacation...........
Non Owner-occupied........ . .
---
Total $ . %
TRUST BALANCES
Percent of Pool
Number of Cut-off Date by Cut-off Date
Range of Trust Balance Mortgage Loans Trust Balance Trust Balance
- ---------------------- -------------- ------------- -------------
$ ..$ %
$ ..
$ ..
$ ..
$ ..
$ ..
$ ..
$ ..
$ ..
$ ..
$ ..
Total......................
GEOGRAPHICAL DISTRIBUTION(1)
Percent of
Pool by
Number of Cut-off Date Cut-off Date
State Mortgage Loans Trust Balance Trust Balance
- ----- -------------- ------------- -------------
............... $ %
Total........
- ------------------
(1) Geographical location is determined by the address of the Mortgaged Property
securing the related Mortgage Loan.
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<PAGE>
COMBINED LOAN-TO-VALUE RATIOS
Percent of
Pool by
Range of Combined Number of Cut-off Date Cut-off Date
Loan-to-Value Ratios Mortgage Loans Trust Balance Trust Balance
- -------------------- -------------- ------------- -------------
........$ %
........
........
........
........
........
........
........
........
........
Total...................
- ------------------
The weighted average Combined Loan-to-Value Ratio at origination of the
Mortgage Loans secured by second liens will have been approximately _____%.
JUNIOR MORTGAGE RATIOS
Percent of
Pool by
Range of Junior Number of Cut-off Date Cut-off Date
Mortgage Ratios Mortgage Loans Trust Balance Trust Balance
- --------------- -------------- ------------- -------------
......$ %
......
......
......
......
......
......
......
......
......
Total.................
- -----------------
The weighted average Junior Mortgage Ratio as of the Cut-off Date will
have been approximately _____%.
LOAN RATES
Percent of
Pool by
Number of Cut-off Date Cut-off Date
Range of Loan Rates Mortgage Loans Trust Balance Trust Balance
- ------------------- -------------- ------------- -------------
.....$ %
.....
.....
.....
.....
.....
.....
.....
.....
Total.................
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<PAGE>
GROSS MARGINS
Percent of
Pool by
Number of Cut-off Date Cut-off Date
Range of Gross Margins(1) Mortgage Loans Trust Balance Trust Balance
- ------------------------- -------------- ------------- -------------
........$ %
........
........
........
........
........
Total...................
- ------------------
(1) As to the GMACMC Loans, the Gross Margin as of the Cut-off Date, subject to
adjustment as described herein.
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<PAGE>
CREDIT LIMIT UTILIZATION RATES
Percent of
Pool by
Range of Credit Number of Cut-off Date Cut-off Date
Limit Utilization Rates ortgage Loans Trust Balance Trust Balance
- ----------------------- ------------- ------------- -------------
........ $ %
........
........
........
........
........
........
........
........
........
........
Total...................
CREDIT LIMITS
Percent of
Number of Cut-off Date by Cut-off Date
Range of Credit Limits Mortgage Loans Trust Balance Trust Balance
- ---------------------- -------------- ------------ -------------
$ ......$ $ %
$ ......
$ ......
$ ......
$ ......
$ ......
$ ......
$ ......
$ ......
$ ......
$ ......
Total......................
INTEREST RATE CEILINGS
Percent of
Number of Cut-off Date Pool by
Mortgage Loans Trust Balance Cut-off Date
Range of Interest Rate Ceilings Trust Balance
- ------------------------------- -------------- ------------- -------------
............ $ %
............
............
............
............
Total.........................
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<PAGE>
MONTHS REMAINING TO SCHEDULED MATURITY
Percent of
Pool by
Range of Months Number of Cut-off Date Cut-off Date
Remaining to Scheduled Maturity Mortgage Loans Trust Balance Trust Balance
- ------------------------------- -------------- ------------- -------------
............ $ %
............
............
............
............
............
............
............
Total.........................
ORIGINATION YEAR
Percent of
Pool by
Number of Cut-off Date Cut-off Date
Origination Year Mortgage Loans Trust Balance Trust Balance
- ---------------- -------------- ------------- -------------
1987.......... $ %
1988..........
1989..........
1990..........
1991..........
1992..........
1993..........
1994..........
1995..........
1996..........
Total...........
LIEN PRIORITY
Percent of
Pool by
Number of Cut-off Date Cut-off Date
Lien Priority Mortgage Loans Trust Balance Trust Balance
- ------------- -------------- ------------- -------------
First Lien....... $ %
Second Lien......
Total..........
DAYS DELINQUENT AS OF CUT-OFF DATE
Percent of
Pool by
Number of Cut-off Date Cut-off Date
Days Delinquent Mortgage Loans Trust Balance Trust Balance
- --------------- -------------- ------------- -------------
Current........... $ %
30-59.............
Total...........
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<PAGE>
LOAN SOURCE
Percent of
Pool by
Number of Cut-off Date Cut-off Date
Loan Source Mortgage Loans Trust Balance Trust Balance
- ----------- -------------- ------------- -------------
...............................$ %
...............................
...............................
Total........................
Underwriting Standards
[For a description of the underwriting standards and procedures
applicable to the Program Loans originated under the Seller's Home Equity Loan
Program, see "Mortgage Loan Program - Underwriting Standards - Guide Standards"
in the Prospectus. The Program Loans included in the Mortgage Pool were
originated subject to a maximum CLTV of __% and a maximum total monthly debt to
income ratio of __%, with variations permitted in certain cases based on
compensating factors. [include additional details as appropriate]]
[Following is a brief description of the various underwriting standards and
procedures applicable to the different Mortgage Loans.]
[GMACMC Loans
The GMACMC Loans were originated by GMACMC pursuant to its home equity
credit line program (the "GMACMC Program"). The GMACMC Program was initiated in
1987, and involves origination of home equity lines through GMACMC's own
central, regional and branch offices. The underwriting criteria under the GMACMC
Program differ from those under the Goal Line Program in a number of respects.
The underwriting standards applicable to the GMACMC Loans generally do
not require the GMACMC Loans to have been fully documented. Although most of the
GMACMC Loans will have been originated under full documentation or alternative
documentation programs, certain of the GMACMC Loans will also have been
originated under limited documentation programs. Limited documentation programs
generally permit fewer supporting documents to be obtained or waive income and
employment documentation requirements, and limited documentation programs
generally compensate for increased credit risk by placing greater emphasis on
the review of the property to be financed. In accordance with GMACMC's mortgage
loan programs, a limited number of the GMACMC Loans may have been originated
pursuant to an executive employee program in which no income, asset or
employment verifications or appraisals were required.
The maximum Combined Loan-to-Value ratio at origination for a GMACMC
Loan is generally 90%, with mortgage insurance generally required on most GMACMC
Loans with Combined Loan-to-Value ratio's at origination over 80% (generally
such loans also are subject to a Gross Margin 1.00% higher than would otherwise
apply). The total debt to income ratio is generally required to be not greater
than 38% under the GMACMC Program, although variances are permitted based on
compensating factors. For this purpose, the required monthly payments on the
GMACMC Loans are
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<PAGE>
assumed to be equal to one month's interest accrued at the related initial
mortgage rates on the amounts of the related credit limits. Title insurance is
required on all GMACMC Loans with Credit Limits in excess of $100,000, or which
are in a first lien position.
As to each of the GMACMC Loans, the payment of the full outstanding
principal balance of the Mortgage Loan at maturity generally will depend on the
borrower's ability to obtain refinancing or to sell the related 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 GMACMC Program underwriting standards may be varied
in appropriate cases. There can be no assurance that every GMACMC Loan was
originated in conformity with the applicable underwriting standards in all
material respects, or that the quality or performance of the GMACMC Loans will
be equivalent under all circumstances.]
[Describe other applicable underwriting standards]
Representations and Warranties
[Each Program Seller [and GMACMC] has made or will make certain limited
representations and warranties regarding the related Mortgage Loans, as of the
date of purchase thereof by the Seller. However, such representations and
warranties will not be assigned to the Trustee for the benefit of the holders of
the related series of Certificates, and therefore a breach of such
representations and warranties will not be enforceable on behalf of the Trust
Fund. Residential Funding in its capacity as Seller will make certain limited
representations and warranties regarding the Mortgage Loans to the Company at
the time that they are sold to the Company. See "Mortgage Loan
Program--Qualifications of Sellers" and "--Representations as to the Mortgage
Loans" and "Description of the Certificates--Review of Mortgage Loans" in the
Prospectus.]
[Delinquency and Foreclosure Experience.]
[The Initial Subservicer with respect to the Program Loans will be
____________ (the "Program Loan Subservicer"), [and the Initial Subservicer with
respect to the GMACMC Loans will be GMACMC]. See "Pooling and Servicing
Agreement - Initial Subservicers" herein.]
[Because the Home Equity Loan Program was recently established, and
Program Loans were not originated thereunder prior to _________ 1994, the loss
and delinquency experience to date of such Program Loans does not provide a
sufficient basis for meaningful comparison with other home equity line of credit
programs and is therefore not included herein. Furthermore, Residential Funding
did not acquire significant amounts of other home equity lines of credit prior
to the commencement of the Home Equity Loan Program. Although the Program Loan
Subservicer has been servicing home equity lines of credit since ____, as a
result of substantial differences between the Program Loans and other home
equity lines of credit serviced by the Program Loan Subservicer with respect to
underwriting standards, loan terms and conditions, the loss and delinquency
experience of the Program Loan Subservicer does not provide a sufficient basis
for meaningful evaluation of the Program Loan Subservicer's ability to
subservice the Program Loans and is therefore not included herein. Furthermore,
because none of the Program Sellers sold to the Seller more than __% of the
Program Loans included in the Mortgage Pool (by Cut-off Date Trust Balance) and
as a result of substantial differences between the Program Loans and other home
equity lines of credit serviced by the Program Sellers, the loss and delinquency
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<PAGE>
experience of each of the Program Sellers does not provide a sufficient basis
for any meaningful evaluation of the Program Loans and is therefore not included
herein.]
[The following tables summarize the delinquency and loss experience for
all home equity loans originated or acquired and serviced by GMACMC during the
period the related home equity loans have been serviced by such Initial
Subservicer. The data presented in the following tables is for illustrative
purposes only, and there is no assurance that the delinquency and loss
experience of the Mortgage Loans will be similar to that set forth below.
The information in the tables below has not been adjusted to eliminate
the effect of the significant growth in the size of GMACMC's home equity loan
portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of such mortgage loans serviced for
each period would be higher than those shown if a group of such mortgage loans
were artificially isolated at a point in time and the information showed the
activity only in that isolated group. However, since most of such mortgage loans
in GMACMC's home equity loan portfolio will not be fully seasoned and since the
terms of most of such mortgage loans will not call for payment of principal in
full prior to maturity, the delinquency and loss information for such an
isolated group would also be distorted to some degree.
There can be no assurance that the delinquency experience set forth
below with respect to the GMACMC Loans will be representative of the results
that may be experienced with respect to the Program Loans serviced by the
Program Loan Subservicer.
GMACMC Delinquency Experience
Year Ended December 31,
- ---------------------------------------------------------------------------
199_ 199_ 199_
Number of Accounts with
Balances Managed..................
Aggregate Amount
Outstanding..........................
Loan Balance of Mortgage Loans
30-59 Days Past Due(1)...........
Loan Balance of Mortgage Loans
60-89 Days Past Due(1)...........
Loan Balance of Mortgage Loans
90+ Days Past Due(1)............
Loan Balance of Mortgage Loans
30+ Days Past Due(1)...........
Loan Balance of Mortgage Loans
30+ Days Past Due as a
Percentage of Aggregate
Amount Outstanding..............
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<PAGE>
Foreclosures and Bankruptcies....
Real Estate Owned..................
- ---------------
(1) Contractually past due excluding loans in the process of foreclosure and
loans where the borrower has filed for bankruptcy. (2) Real estate owned ("REO")
numbers for 199_ and 199_ are not available.
GMACMC Loss Experience
Year ended December 31,
- ---------------------------------------------------------------------
199 199 199
---- ---- ---
Average Amount Outstanding(1)..............................
Charge-offs(2)...............................................
Charge-offs as a Percentage of Average
Amount Outstanding...........................................
- --------------
(1) Average Amount Outstanding is computed using the beginning-of-period and the
end-of-period aggregate loan balances. (2) Charge-offs refers to writedowns on
properties prior to liquidation, as adjusted to reflect the actual liquidated
loss incurred on
a mortgaged property when finally liquidated.
(3) Annualized.
(4) GMACMC does not separately calculate gross losses and net losses.
[INSERT ADDITIONAL MORTGAGE LOANS SELLER'S PORTFOLIO DELINQUENCY AND
LOSS EXPERIENCE IF APPROPRIATE.]
[THE INSURER]
[Description of the Insurer]
ALLOCATION OF PAYMENTS BETWEEN TRUST BALANCES
AND EXCLUDED BALANCES
Pursuant to the Purchase Agreement (the "Purchase Agreement") between
Residential Funding and the Company pursuant to which the Trust Balances of the
Mortgage Loans will be transferred to the Company immediately prior to the
initial issuance of the Certificates, Residential Funding will transfer to the
Company (and therefore the Trust Fund will include) only the Trust Balance of
each Mortgage Loan outstanding at any time. The "Trust Balance" for any Mortgage
Loan for any day (i.e., the portion of the outstanding principal balance of such
Mortgage Loan owned by the Trust Fund on such day) is equal to (i) the unpaid
principal balance of the Mortgage Loan as of the Cut-off Date (the "Cut-off Date
Trust Balance"), less (ii) the aggregate of all payments and other collections
(including any related Liquidation Proceeds and Insurance Proceeds, but not
proceeds paid under the Policy) applied to reduce the Principal Balance of such
Mortgage Loan together with the proceeds of the repurchase of any
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<PAGE>
Mortgage Loans received during any Collection Period, multiplied by the Trust
Percentage applicable to the Collection Period in which such amounts were
received (such amounts for any Collection Period, "Trust Principal
Collections"). The "Trust Percentage" for any Collection Period is the
percentage obtained by dividing the Trust Balance as of the end of the
immediately preceding Collection Period by the Principal Balance as of the end
of the immediately preceding Collection Period. The Trust Balance of any
Mortgage Loan will not include any portion of the Principal Balance attributable
to Draws made after the Cut-off Date. That portion of the Principal Balance of
any Mortgage Loan not included in the Trust Balance at any time is referred to
as the "Excluded Balance," which will include balances attributable to Draws
after the Cut-off Date.
Pursuant to the Purchase Agreement:
a) all payments and other collections applied to reduce the Principal Balance
of any Mortgage Loan shall be allocated on a pro rata basis as follows: (i)
in reduction of the Trust Balance, the portion thereof included in "Trust
Principal Collections"; and (ii) in reduction of the Excluded Balance, the
remainder of such payments and collections;
b) all payments and other collections applied as interest on any Mortgage
Loan shall be allocated on a pro rata basis as follows: (i) to the Trust
Balance, the portion thereof included in "Trust Interest Collections"; and
(ii) to the Excluded Balance, the remainder of such payments and
collections; and
c) all losses realized upon any termination or
liquidation of any Mortgage Loan (including
any unrecovered expenses in connection
therewith) shall be allocated on a pro rata
basis as between the Trust Balance and the
Excluded Balance based on the respective
amounts thereof as of the end of the
immediately preceding Collection Period.
DESCRIPTION OF THE SENIOR CERTIFICATES
General
The Series 199__-___ Home Equity Loan Pass-Through Certificates will
include the following classes (the "Certificates"): (i) Class A Certificates
(the "Senior Certificates"), (ii) Class R Certificates (the "Residual
Certificates") and (iii) Class B Certificates. Only the Senior Certificates are
offered hereby.
The Certificates will evidence the entire beneficial ownership interest
in the Trust Fund. The Trust Fund will consist of: (i) the Trust Balance of the
Mortgage Loans; (ii) such assets as from time to time are identified as
deposited in respect of the Trust Percentage of the Mortgage Loans in the
Custodial Account and in the Certificate Account and belonging to the Trust
Fund; (iii) property acquired by foreclosure of the Trust Percentage of such
Mortgage Loans or deed
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<PAGE>
in lieu of foreclosure; and (iv) any applicable Hazard Insurance Policies and
all proceeds thereof. The Senior Certificates will be entitled to the benefit of
a financial guaranty insurance policy (the "Policy") to be issued by
___________________________________ (the "Insurer"). [The Policy is not part of
the Trust Fund.]
[The Class A Certificates (the "Book-Entry Certificates") will be
issued, maintained and transferred on the book-entry records of The Depository
Trust Company ("DTC") [in the United States, or CEDEL or Euroclear (in Europe)
if they are participants of such systems, or indirectly through organizations
which are participants in such systems.] [CEDEL and Euroclear will hold omnibus
positions on behalf of their Participants (as defined in the Prospectus) through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.]
The Book-Entry Certificates will be issued in minimum denominations of
$____________ and integral multiples of $_____ in excess thereof.]
[The Book-Entry Certificates will be represented by one or more
certificates registered in the name of the nominee of DTC. The Company has been
informed by DTC that DTC's nominee will be Cede & Co. ("Cede"). No person
acquiring an interest in the Book-Entry Certificates (a "Beneficial Owner") will
be entitled to receive a certificate representing such person's interest (a
"Definitive Certificate"), except as set forth below under "--Book-Entry
Registration of the Class A Certificates--Definitive Certificates." Unless and
until Definitive Certificates are issued for the Book-Entry Certificates under
the limited circumstances described herein, all references to actions by
Certificateholders with respect to the Book-Entry Certificates shall refer to
actions taken by DTC upon instructions from its Participants, and all references
herein to distributions, notices, reports and statements to Certificateholders
with respect to the Book-Entry Certificates shall refer to distributions,
notices, reports and statements to DTC or Cede, as the registered holder of the
Book-Entry Certificates, for distribution to Beneficial Owners by DTC in
accordance with DTC procedures.]
[Book-Entry Registration of the Class A Certificates
General. Beneficial Owners that are not Participants or Intermediaries
(as defined in the Prospectus) but desire to purchase, sell or otherwise
transfer ownership of, or other interests in, the related Book-Entry
Certificates may do so only through Participants and Intermediaries. In
addition, Beneficial Owners will receive all distributions of principal of and
interest on the related Book-Entry Certificates from the Paying Agent (as
defined in the Prospectus) through DTC and Participants. Accordingly, Beneficial
Owners may experience delays in their receipt of payments. Unless and until
Definitive Certificates are issued for the related Book-Entry Certificates, it
is anticipated that the only registered Certificateholder of such Book-Entry
Certificates will be Cede, as nominee of DTC. Beneficial Owners will not be
recognized by the Trustee or the Master Servicer as Certificateholders, as such
term is used in the Pooling and Servicing Agreement, and Beneficial Owners will
be permitted to receive information furnished to Certificateholders and to
exercise the rights of Certificateholders only indirectly through DTC, its
Participants and Intermediaries.
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<PAGE>
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Book-Entry Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, such Book-Entry Certificates.
Participants and Intermediaries with which Beneficial Owners have accounts with
respect to such Book-Entry Certificates similarly are required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Beneficial Owners. Accordingly, although Beneficial Owners will
not possess physical certificates evidencing their interests in the Book-Entry
Certificates, the Rules provide a mechanism by which Beneficial Owners, through
their Participants and Intermediaries, will receive distributions and will be
able to transfer their interests in the Book-Entry Certificates.
None of the Company, the Master Servicer, the Insurer or the Trustee
will have any liability for any actions taken by DTC or its nominee, including,
without limitation, actions for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Book-Entry
Certificates held by Cede, as nominee for DTC, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
Definitive Certificates. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"Description of the Certificates--Form of Certificates."
Upon the occurrence of an event described in the Prospectus in the
third paragraph under "Description of the Certificates--Form of Certificates,"
the Trustee is required to notify, through DTC, Participants who have ownership
of Book-Entry Certificates as indicated on the records of DTC of the
availability of Definitive Certificates for their Book-Entry Certificates. Upon
surrender by DTC of the definitive certificates representing the Book-Entry
Certificates and upon receipt of instructions from DTC for re-registration, the
Trustee will reissue the Book-Entry Certificates as Definitive Certificates
issued in the respective principal amounts owned by individual Beneficial
Owners, and thereafter the Trustee and the Master Servicer will recognize the
holders of such Definitive Certificates as Certificateholders under the Pooling
and Servicing Agreement.
For additional information regarding DTC, CEDEL, Euroclear and the
Book-Entry Certificates, see "Description of the Certificates--Form of
Certificates" in the Prospectus.]
Available Distribution Amount
The "Available Distribution Amount" for any Distribution Date is equal
to the sum of (i) the Trust Interest Collections received during the related
Collection Period, (ii) the Trust Principal Collections received during the
related Collection Period and (iii) any amounts distributed under the Policy
during the related Collection Period, reduced by the Servicing Fees for the
related Collection Period. The "Collection Period" as to any Distribution Date,
other than the first Distribution Date, is the calendar month preceding the
month of such Distribution Date, and as to the first Distribution Date is the
period from the Cut-off Date through ______________________. The Trust Interest
Collections for any Collection Period is the aggregate of all amounts received
and applied as payments of interest on each Mortgage Loan during the related
Collection Period, in each case multiplied by a fraction equal to the average
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<PAGE>
daily Trust Balance divided by the average daily Principal Balance for the
period with respect to which such interest payment accrued (or, for any interest
payment accrued for a period prior to the Cut-off Date, the entire amount
thereof).
Interest Distributions
On each Distribution Date, holders of each class of Senior Certificates
will be entitled to receive interest distributions (for any Distribution Date,
the "Accrued Certificate Interest") in an amount equal to interest on the
Certificate Principal Balance thereof for the related Interest Period at the
then-applicable Pass-Through Rate.
[Interest on the Certificates in respect of any Distribution Date will
accrue from the preceding Distribution Date (or in the case of the first
Distribution Date, from the Delivery Date) through the day preceding such
Distribution Date (each such period, an "Interest Period") on the basis of the
actual number of days in the Interest Period and a 360-day year.]
If on any Distribution Date the Available Distribution Amount is less
than Accrued Certificate Interest on the Senior Certificates for such
Distribution Date, and if payment were not made as required under the Policy,
the amount of any interest shortfalls will constitute unpaid Accrued Certificate
Interest and will be distributable to holders of the Certificates of such
classes entitled to such amounts on subsequent Distribution Dates, to the extent
of available funds after interest distributions as required herein. [Any such
amounts so carried forward will not bear interest.] Any interest shortfalls will
not be offset by a reduction in the servicing compensation of the Master
Servicer or otherwise.
The Pass-Through Rate on the Senior Certificates for any Distribution
Date will equal [the sum of (i) [the London Interbank offered rate for one-month
Eurodollar deposits ("LIBOR") appearing on the Telerate Screen Page 3750, as of
the second LIBOR Business Day (as defined herein) prior to the first day of such
Interest Period (or as of two LIBOR Business Days prior to the Closing Date, in
the case of the first Interest Period)][other index applicable to Certificates]
and (ii) _____%, subject to a maximum Pass-Through Rate equal to the average of
the Net Loan Rates on the Mortgage Loans in effect during the second preceding
Collection Period, weighted based on the respective Trust Balances thereof]. The
Net Loan Rate for each Mortgage Loan is equal to the Loan Rate thereon minus the
Servicing Fee.
The Accrued Certificate Interest allocable to each class of Senior
Certificates is based on the Certificate Principal Balance of such class. The
Certificate Principal Balance of any Senior Certificate as of any date of
determination is equal to the initial Certificate Principal Balance thereof,
reduced by the aggregate of (a) all amounts allocable to principal previously
distributed with respect to such Certificate and (b) any reductions in the
Certificate Principal Balance thereof deemed to have occurred in connection with
allocations of the Trust Percentage of Realized Losses in the manner described
herein.
Principal Distributions on the Senior Certificates
Holders of the Senior Certificates in the aggregate will be entitled to
receive on each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining
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<PAGE>
after the aggregate amount of Accrued Certificate Interest to be distributed to
the holders of the Senior Certificates for such Distribution Date is so
distributed, a distribution allocable to principal equal to the sum of the
following (the "Senior Principal Distribution Amount"):
(i) the Trust Principal Collections for the related Collection Period;
(ii) the then applicable Senior Percentage of the Trust Percentage of
any Realized Losses incurred during the related Collection Period;
(iii) the Carryover Senior Loss Amount from any previous Collection
Period, to the extent that such amounts were not previously distributed
on the Senior Certificates or reflected in a reduction of either the
Overcollateralization Amount or the Certificate Principal Balance of
the Class B Certificates; and
(iv) to the extent of the portion of the Available Distribution Amount
remaining after the foregoing distributions and any amounts then
payable to the Insurer as described herein and interest distributions
on the Class B Certificates for such Distribution Date, an additional
amount equal to the Accelerated Principal Payment Amount for such
Distribution Date.
For any Distribution Date, the "Accelerated Principal Payment Amount"
is the amount required to bring the Overcollateralization Amount up to the
Overcollateralization Target for such Distribution Date (after giving effect to
any amounts distributable in respect of principal on the Class B Certificates on
such Distribution Date). Initially, the Overcollateralization Target as of the
time of any determination is equal to the excess (if any) of (i) ____% of the
Cut-off Date Trust Balance over (ii) the Certificate Principal Balance of the
Class B Certificates. The Overcollateralization Target may be increased or
reduced from time to time pursuant to the terms of the Pooling and Servicing
Agreement. If the Overcollateralization Target is reduced on any Distribution
Date, the amount of the Trust Principal Collections distributed pursuant to
clause (i) of the definition of Senior Principal Distribution Amount will be
reduced on such Distribution Date and each subsequent Distribution Date to the
extent the remaining Overcollateralization Amount is in excess of the reduced
Overcollateralization Target until the Overcollateralization Amount equals the
Overcollateralization Target.
The "Overcollateralization Amount" on any Distribution Date is the
amount, if any, by which the aggregate Trust Balances of the Mortgage Loans as
of the end of the related Collection Period exceeds the aggregate Certificate
Principal Balances of the Certificates.
The "Carryover Senior Loss Amount" for any Distribution Date is equal
to all amounts determined under clause (ii) of the definition of Senior
Principal Distribution Amount for any previous Distribution Date.
The Senior Percentage, which initially will equal approximately _____%
and will in no event exceed 100%, will be adjusted for each Distribution Date to
be the percentage equal to the aggregate Certificate Principal Balance of the
Senior Certificates immediately prior to such Distribution Date divided by the
aggregate Trust Balance of all of the Mortgage Loans as of the end of the
immediately preceding Collection Period.
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<PAGE>
The Master Servicer may elect to treat the Trust Percentage of
Insurance Proceeds and Liquidation Proceeds received in any calendar month as
included in the Available Distribution Amount for the Distribution Date in the
month of receipt, but is not obligated to do so. If the Master Servicer so
elects, such amounts will be deemed to have been received (and any related
Realized Loss shall be deemed to have occurred) on the last day of the month
prior to the receipt thereof.
The Policy
[On or before the Closing Date, the Policy will be issued by the
Insurer pursuant to the provisions of the Insurance and Reimbursement Agreement
(the "Insurance Agreement") to be dated as of ________________, among the
Company, the Master Servicer and the Insurer.
The Policy will unconditionally and irrevocably guarantee principal
payments on the Securities plus accrued and unpaid interest due on the Senior
Certificates. On each Payment Date, a draw will be made on the Policy equal to
the sum of (a) the amount by which the Accrued Certificate Interest on the
Senior Certificates exceeds the Available Distribution Amount on such
Distribution Date and (b) the amount (the "Guaranteed Principal Payment
Amount"), if any, by which the aggregate Certificate Principal Balance of the
Senior Certificates exceeds the aggregate Trust Balances of the Mortgage Loans
at the end of the related Collection Period (after giving effect to all amounts
distributable and allocable to principal on the Senior Certificates on such
Distribution Date).
In the absence of payments under the Policy, Senior Certificateholders
will bear directly the credit and other risks associated with their investment
to the extent not covered by Subordination or the Overcollateralization Amount.]
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<PAGE>
Allocation of Losses; Overcollateralization and Subordination
The Policy will cover the Guaranteed Principal Payment Amount on any
Distribution Date, which could result from the Trust Percentage of all Realized
Losses not otherwise covered by Subordination or the Overcollateralization
Amount. Notwithstanding the foregoing, if payments were not made as required
under the Policy, the Trust Percentage of Realized Losses could be allocated to
the Senior Certificates based on the following priorities.
The Senior Percentage of the Trust Percentage of any Realized Losses on
the Mortgage Loans and other shortfalls in amounts distributable on the Senior
Certificates will be allocated to or covered by: first, amounts otherwise
distributable to the Class R Certificates; (ii) second, a reduction in the then
current Overcollateralization Amount, if any; (iii) third, amounts otherwise
distributable to the Class B Certificates; (iv) fourth, to the Class B
Certificates, until the Certificate Principal Balance thereof has been reduced
to zero; and (v) fifth, amounts payable under the Policy. Any allocation of the
Trust Percentage of a Realized Loss to a Certificate will be made by reducing
the Certificate Principal Balance thereof, in the case of the principal portion
of such Trust Percentage of a Realized Loss, and the Accrued Certificate
Interest thereon, in the case of the interest portion of such Trust Percentage
of a Realized Loss, by the amount so allocated as of the Distribution Date
occurring in the month following the calendar month in which such Realized Loss
was incurred. As used herein, "Subordination" refers to the provisions discussed
above for the sequential allocation of Realized Losses among the various
classes, as well as all provisions effecting such allocations including the
priorities for distribution of cash flows in the amounts described herein.]
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Principal Balance remaining, if any, plus interest thereon through the last day
of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer or the Subservicer for expenses, including attorneys' fees) towards
interest and principal owing on the Mortgage Loan. Such amount of loss realized
is referred to herein as "Realized Losses."
In order to maximize the likelihood of distribution in full of amounts
of interest and principal to be distributed to holders of the Senior
Certificates on each Distribution Date, holders of Senior Certificates have a
right to distributions of the Available Distribution Amount that is prior to the
rights of the holders of the Class B Certificates and the Class R Certificates.
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<PAGE>
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
General
The yield to maturity and the aggregate amount of distributions on the
Senior Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans, the amount and timing of Mortgagor defaults
resulting in Realized Losses and by adjustments to the Loan Rates. Such yield
may be adversely affected by a higher or lower than anticipated rate of
principal payments on the Mortgage Loans in the Trust Fund. The rate of
principal payments on such Mortgage Loans will in turn be affected by the rate
and timing of principal payments in excess of required installments, prepayments
or terminations by the Mortgagors, [Draws on the related Credit Line
Agreements,] liquidations of defaulted Mortgage Loans and purchases of Mortgage
Loans due to certain breaches of representations and warranties. The timing of
changes in the rate of principal payments, prepayments or terminations, [Draws
on the related Credit Line Agreements,] liquidations and repurchases of the
Mortgage Loans may, and the timing of Realized Losses will, significantly affect
the yield to an investor, even if the average rate of principal payments
experienced over time is consistent with an investor's expectation. Since the
rate and timing of principal payments on the Mortgage Loans will depend on
future events and on a variety of factors (as described more fully herein and in
the Prospectus under "Risk Factors" and "Yield and Prepayment Considerations"),
no assurance can be given as to such rate or the timing of principal payments on
the Senior Certificates.
The Mortgage Loans generally may be prepaid by the Mortgagors at any
time without payment of any prepayment fee or penalty. There can be no assurance
as to the rate of principal payments on the Mortgage Loans [and there can be no
assurance of the rate of Draws thereon]. Due to the unpredictable nature of both
principal payments and Draws, the rates of principal payments net of Draws for
the Mortgage Loans may be much more volatile than for typical first lien
mortgage loans. All of the Mortgage Loans contain "due-on-sale" provisions, and
the Master Servicer intends to enforce such provisions, unless such enforcement
is not permitted by applicable law. The enforcement of a "due-on-sale" provision
will have the same effect as a prepayment of the related Mortgage Loan.
[Because the Mortgage Loans do not require minimum principal payments
in any month, there may be no principal distributions on the Senior Certificates
in any month.]
The amount of interest otherwise payable to holders of the Senior
Certificates will be reduced by any interest shortfalls to the extent not
covered by distributions on the Class R Certificates, the Overcollateralization
Amount, the Class B Certificates or the Policy.
In addition, the yield to maturity of the Senior Certificates will
depend on, among other things, the price paid by the holders of the Senior
Certificates and the then applicable Pass-Through Rate. The extent to which the
yield to maturity of a Senior Certificate is sensitive to prepayments will
depend, in part, upon the degree to which it is purchased at a discount or
premium. In general, if a class of Senior Certificates is purchased at a premium
and principal distributions thereon occur at a rate faster than anticipated at
the time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a class of Senior
Certificates is purchased at a discount and principal distributions thereon
occur
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<PAGE>
at a rate slower than that assumed at the time of purchase, the investor's
actual yield to maturity will be lower than that assumed at the time of
purchase. For additional considerations relating to the yield on the
Certificates, see "Yield and Prepayment Considerations" in the Prospectus.
To the extent required minimum monthly payments are equal to or not
significantly larger than the amount of interest currently accruing thereon, the
outstanding principal amount of such Mortgage Loan prior to maturity will not
fully amortize prior to maturity. As a result, a borrower will generally be
required to pay a substantial principal amount at the maturity of such Mortgage
Loan. Such Mortgage Loans pose a greater risk of default than fully-amortizing
Mortgage Loans, because the Mortgagor's ability to make such a substantial
payment at maturity will generally depend on the Mortgagor's ability to obtain
refinancing of such Mortgage Loans or to sell the Mortgaged Property prior to
the maturity of the Mortgage Loan. The ability to obtain refinancing will depend
on a number of factors prevailing at the time refinancing or sale is required,
including, without limitation, the Mortgagor's personal economic circumstances,
the Mortgagor's equity in the related Mortgaged Property, real estate values,
prevailing market interest rates, tax laws and national and regional economic
conditions. For a general discussion of factors that may affect a Mortgagor's
personal economic circumstances, see "Risk Factors--Special Features of the
Mortgage Loans--Mortgagor Credit Risks" and "Yield and Prepayment
Considerations" in the Prospectus.
For any Mortgage Loans secured by junior mortgages, any inability of
the Mortgagor to pay off the balance thereof may also affect the ability of the
Mortgagor to obtain refinancing at any time of any related senior mortgage loan,
thereby preventing a potential improvement in the Mortgagor's circumstances.
The yield to maturity of the Certificates of any series, or the rate
and timing of principal payments [(or Draws if applicable)] on the related
Mortgage Loans and corresponding distributions on the Certificates, will also be
affected by the specific terms and conditions applicable to the Certificates.
Since the index used to determine the Pass-Through Rates for the Certificates is
different from the Index applicable to the Mortgage Rates of the underlying
Mortgage Loans, the yield on the Certificates may be reduced by application of
the cap on the Pass-Through Rates based on the weighted average of the Net Loan
Rates. Changes in the relationship between the two indexes may also affect the
timing of certain principal distributions on the Certificates and may affect the
Overcollateralization Amount. See "Yield and Prepayment Considerations" in the
Prospectus.
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor of each dollar distributed in reduction of principal of such
security (assuming no losses). The weighted average life of the Senior
Certificates will be influenced by, among other things, the rate at which
principal of the Mortgage Loans is paid. Collections on the Home Equity Loans
may vary because, among other things, borrowers may make payments during any
month as low as the interest payment or such month or as high as the entire
outstanding balance plus accrued interest thereon. Collections on the Home
Equity Loans may also vary due to seasonal purchasing and payment habits of
borrowers. No assurance can be given as to the level of prepayments that the
Home Equity Loans will experience, and it can be expected that a portion of
borrowers will not prepay their Home Equity Loans to any significant degree.
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<PAGE>
The assumed final Distribution Date with respect to each class of
Senior Certificates is ______________________, which is the Distribution Date
immediately following the latest scheduled maturity date of any Mortgage Loan.
No event of default, change in the priorities for distribution among the various
classes or other provision under the Pooling and Servicing Agreement will arise
or become applicable solely by reason of the failure to retire the entire
Certificate Principal Balance of any class of Certificates on or before its
assumed final Distribution Date.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
Constant Prepayment Rate model ("CPR"), assumes that the outstanding principal
balance of a pool of mortgage loans prepays at a specified constant annual rate
or CPR. In generating monthly cash flows, this rate is converted to an
equivalent constant monthly rate. To assume a _____% CPR or any other CPR
percentage is to assume that the stated percentage of the outstanding principal
balance of the pool is prepaid over the course of a year. No representation is
made that the Mortgage Loans will prepay at that or any other rate.
The table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics of
the Mortgage Loans that are expected to be included in the Trust Fund as
described under "Description of the Mortgage Pool" herein and the performance
thereof. The table assumes, among other things, that: (i) as of the date of
issuance of the Class A Certificates, the aggregate principal balance of the
Mortgage Loans is $_________________, and each Mortgage Loan has a Loan Rate of
_____% per annum and a Servicing Fee of ______% per annum, [an original term to
maturity of _____ months and a remaining term to stated maturity of _____
months]; (ii) none of the Unaffiliated Sellers, the Master Servicer or the
Company will repurchase any Mortgage Loan, as described under "Mortgage Loan
Program--Representations by Sellers" and "Description of the
Certificates--Assignment of the Mortgage Loans" in the Prospectus, and the
Master Servicer will not exercise any option to purchase the Mortgage Loans and
thereby cause a termination of the Trust Fund or to purchase the Senior
Certificates; (iii) there are no delinquencies or Realized Losses on the
Mortgage Loans; (iv) payments on the Certificates will be received on the _____
day of each month, commencing __________________, 199___; (v) payments on the
Mortgage Loans earn no reinvestment return; (vi) there are no additional ongoing
Trust Fund expenses payable out of the Trust Fund; (vii) the Certificates will
be purchased on __________________, 199___ and [add additional assumptions for
modeling purposes e.g., the only principal payments on the Mortgage Loans are
those represented by prepayments calculated under the prepayment assumptions].
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the table set forth below,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at a
constant level of CPR until maturity or that all of the Mortgage Loans will
prepay at the same level of CPR. Moreover, the diverse remaining terms to stated
maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the table at the various constant percentages of
CPR specified, even if the weighted average remaining term to stated maturity of
the Mortgage Loans is as assumed. Any difference between such
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<PAGE>
assumptions and the actual characteristics and performance of the Mortgage
Loans, or actual prepayment experience, will affect the percentages of initial
Certificate Principal Balances outstanding over time and the weighted average
life of the Class A Certificates. Subject to the foregoing discussion and
assumptions, the following table indicates the weighted average life of the
Class A Certificates, and sets forth the percentages of the initial Certificate
Principal Balance of the Class A Certificates that would be outstanding after
each of the dates shown at various percentages of CPR.
Percent of Initial Principal Balance Outstanding at the Following Percentages
f [SPA][CPR]
<TABLE>
Class A
------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Distribution
Date __% __% __% __% __% __% __%
- --------------------- ------------ ------------- ---------- -------------- -------------- -------------- --------------
Initial 100 100 100 100 100 100 100
Percentage.........
</TABLE>
Weighted
Average Life in
Years**............
- -----------------
(*) Indicates a number that is greater than zero but less than 0.5%.
(**) The weighted average life of a Certificate of any class is
determined by (i) multiplying the amount of each net
distribution in reduction of Certificate Principal Balance by
the number of years from the date of issuance of the
Certificate to the related Distribution Date, (ii) adding the
results, and (iii) dividing the sum by the aggregate of the
net distributions described in (i) above.
This table has been prepared based on the assumptions described in the second
paragraph preceding this table (including the assumptions regarding the
characteristics and performance of the Mortgage Loans which differ from the
actual characteristics and performance thereof) and should be read in
conjunction therewith.
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<PAGE>
POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Senior Certificates. [The Trustee will
appoint ______________________ to serve as Custodian in connection with the
Certificates.] The Senior Certificates will be transferable and exchangeable at
the corporate trust office of the Trustee, which will serve as Certificate
Registrar and Paying Agent. The Company will provide a prospective or actual
Certificateholder without charge, on written request, a copy (without exhibits)
of the Pooling and Servicing Agreement. Requests should be addressed to the
[__________] of Residential Funding Mortgage Securities II, Inc.,
[____________________]. In addition to the circumstances described in the
Prospectus, the Company may terminate the Trustee for cause under certain
circumstances. See "The Pooling and Servicing Agreement--The Trustee" in the
Prospectus.
The Master Servicer
[Residential Funding Corporation, an indirect wholly-owned subsidiary
of GMAC Mortgage and an affiliate of the Company, will act as master servicer
for the Certificates pursuant to the Pooling and Servicing Agreement. For a
general description of the Master Servicer and its activities, see "The Pooling
and Servicing Agreement" in the Prospectus.]
Servicing and Other Compensation and Payment of Expenses
The Master Servicer will be responsible for servicing the Mortgage
Loans directly or through one or more subservicers in accordance with the RFC
Home Equity Loan Program ("Home Equity Loan Program"), the Master Servicer's
policies and procedures for servicing home equity loans, and in accordance with
the terms of the Pooling and Servicing Agreement. Generally, the duties of the
Master Servicer include: (i) the aggregation of information and payments from
subservicers relating to the Mortgage Loans; (ii) the supervision of loss
mitigation efforts, foreclosure proceedings, delinquent Mortgage Loans and, if
applicable, the disposition of Mortgaged Properties; (iii) the compilation of
certain information with respect to the Mortgage Loans for the benefit of
Holders; and (iv) the preparation of tax returns and tax related information in
connection with the Mortgage Loans.
The Master Servicer will deposit all Trust Collections to the Custodial
Account. Each month on the later of (a) the ___ day of each month or if such day
is not a Business Day, the next succeeding Business Day and (b) the ___ Business
Day prior to each Distribution Date (the "Determination Date"), the Master
Servicer will calculate, and instruct the Trustee regarding the amounts to be
paid, with respect to the related Collection Period to the Certificateholders.
Billing statements are mailed monthly by the subservicers. The
statement details all debits and credits and specifies the minimum payment due
and the available credit line. Notice of changes in the applicable Loan Rate are
provided by the subservicer to the Mortgagor with such statements. All payments
are due by the __________ or _________ day of the month.
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<PAGE>
[The Master Servicer will determine whether to institute a foreclosure
proceeding on the underlying property for defaulted Mortgage Loans or write off
the principal balance of the Mortgage Loan as a bad debt. See "Risk Factors" and
"Description of the Certificates-Realization upon Defaulted Mortgage Loan" in
the Prospectus. If it is determined that a foreclosure proceeding is
appropriate, the Master Servicer may initiate foreclosure on the underlying
property if satisfactory arrangements cannot be made with the Mortgagor, if a
notice of default on a senior lien is received by the subservicer or the Master
Servicer, or if circumstances are discovered by the subservicer or the Master
Servicer which would indicate that a potential for loss exists. Foreclosure
proceedings may be terminated if the delinquency is cured. Mortgage loans to
borrowers in bankruptcy proceedings may be restructured in accordance with law
and with a view to maximizing recovery of such loans, including any
deficiencies.]
[A subservicer may not, without the prior approval of the Master
Servicer, agree to any delinquent payment arrangement that would change the
terms of the loan agreement between the Mortgagor and the originator of the
loan, including a loan repayment extension, or send any notice of acceleration
to a Mortgagor or institute any foreclosure or other legal proceeding.]
[Once foreclosure is initiated by the subservicer with the approval of
the Master Servicer, the Master Servicer uses a foreclosure tracking system to
monitor the progress of the proceedings. The system includes state specific
parameters to monitor whether proceedings are within the time frame typical for
the state in which the property is located. During the foreclosure proceeding,
the Master Servicer consults with the subservicer and then determines the amount
of the foreclosure bid and whether to liquidate the loan.]
[After foreclosure, if the home equity loan is secured by a first
mortgage lien, the Master Servicer may liquidate the Mortgaged Property and
charge-off the home equity loan balance which was not recovered by the
liquidation proceeds. If the Mortgaged Property was subject to a first lien
position, the Master Servicer will either directly manage the foreclosure sale
of the property and satisfy such lien at the time of sale or take other action
as deemed necessary to protect the holder of the Mortgage Loan's interest in the
Mortgaged Property. If in the judgment of the Master Servicer, the cost of
maintaining or purchasing the senior lien position exceeds the economic benefit
of such action, the Master Servicer will generally charge-off the entire home
equity loan, seek a money judgement against the borrower or will not pursue any
recovery.]
[Servicing and charge-off policies and collection practices may change
over time in accordance with the Master Servicer's business judgment and changes
in the Master Servicer's portfolio of real estate secured revolving credit line
loans that it services for its clients and applicable laws and regulations.]
[The Servicing Fees for each Mortgage Loan are payable out of the
interest payments on such Mortgage Loan. The Servicing Fees in respect of each
Mortgage Loan will be at least [____]% and not more than [____]% per annum of
the outstanding principal balance of each Mortgage Loan. The Servicing Fees
consist of (a) servicing compensation payable to the Master Servicer in respect
of its master servicing activities, and (b) subservicing and other related
compensation payable to the subservicer (including such compensation paid to the
Master
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<PAGE>
Servicer as the direct servicer of a Mortgage Loan for which there is no
subservicer]. The primary compensation to be paid to the Master Servicer in
respect of its servicing activities will be [____]% per annum (the "Servicing
Fee Rate") of the outstanding principal balance of each item of Mortgage Loans.
As described more fully in the Prospectus, a Subservicer is entitled to
servicing compensation in a minimum amount equal to [____]% per annum of the
outstanding principal balance of each item of Mortgage Loans serviced by it. The
Master Servicer is obligated to pay certain ongoing expenses associated with the
Trust Fund and incurred by the Master Servicer in connection with its
responsibilities under the Pooling and Servicing Agreement. See "Description of
the Certificates--Servicing and Administration of Mortgage Loans" in the
Prospectus for information regarding other possible compensation to the Master
Servicer and subservicers and for information regarding expenses payable by the
Master Servicer.]
[Initial Subservicers
[--------------------------
_______________________ is Initial Subservicer for _________________ of
the Mortgage Loans or approximately _______% of the Mortgage Loans, which have
an aggregate outstanding Principal Balance as of the Cut-off Date of
$__________________________. ___________________________ will act as Initial
Subservicer for the ____________ Loans pursuant to a subservicing agreement with
the Master Servicer.
________________________ executive offices are located at
______________________.
[--------------------------
________________________ is Initial Subservicer for _____ of the
Mortgage Loans or approximately _____% of the Mortgage Loans, which have an
aggregate outstanding Principal Balance as of the Cut-off Date of
$___________________________. __________________ will act as Initial Subservicer
for the _____________________ Loans pursuant to a subservicing agreement with
the Master Servicer.
_________________________ executive offices are located at
- ----------------------.]
Voting Rights
Certain actions specified in the Prospectus that may be taken by the
Certificateholders evidencing a specified percentage of all undivided interests
in the Trust Fund may be taken by holders of Certificates entitled in the
aggregate to such percentage of the Voting Rights. [__]% of all Voting Rights
will be allocated among all holders of the Certificates (other than the Residual
Certificates) in proportion to their then outstanding Certificate Principal
Balances, and [__]% of all Voting Rights will be allocated to the Residual
Certificates.
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<PAGE>
[Termination]
[The circumstances under which the obligations created by the Pooling
and Servicing Agreement will terminate in respect of the Senior Certificates are
described in "Pooling and Servicing Agreement--Termination; Retirement of
Certificates" in the Prospectus. The Master Servicer or the Company will have
the option on any Distribution Date on which the aggregate principal balance of
the Mortgage Loans is less than [__]% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date either (i) to purchase all remaining
Mortgage Loans and other assets in the Trust Fund, thereby effecting early
retirement of the Senior Certificates or (ii) purchase in whole, but not in
part, the Certificates. Any such purchase of Mortgage Loans and other assets of
the Trust Fund shall be made at a price equal to the sum of (a) 100% of the
unpaid principal balance of each item of Mortgage Loans (or, the fair market
value of the related underlying Mortgaged Properties with respect to defaulted
Mortgage Loans as to which title to such underlying Mortgaged Properties has
been acquired if such fair market value is less than such unpaid principal
balance) as of the Distribution Date on which the purchase proceeds are to be
distributed plus (b) accrued interest thereon at the Net Loan Rate to, but not
including, the first day of the month of repurchase. Distributions on the
Certificates in respect of any such optional termination will be paid, first, to
the Senior Certificates, second, to the Class B Certificates and third to the
Class R Certificates. The proceeds of any such distribution may not be
sufficient to distribute the full amount to each class of Certificates if the
purchase price is based in part on the fair market appraised value of any
underlying Mortgaged Property and such appraised value is less than 100% of the
unpaid principal balance of the related Mortgage Loan. Any such purchase of the
Certificates will be made at a price equal to 100% of the Certificate Principal
Balance thereof plus the sum of one month's interest thereon at the applicable
Pass-Through Rate and any previously unpaid Accrued Certificate Interest. Upon
the purchase of the Certificates or at any time thereafter, at the option of the
Master Servicer or the Company, the Mortgage Loans may be sold, thereby
effecting a retirement of the Certificates and the termination of the Trust
Fund, or the Certificates so purchased may be held or resold by the Master
Servicer or the Company.
Upon presentation and surrender of the Senior Certificates in
connection with the termination of the Trust Fund or a purchase of Certificates
under the circumstances described above, the holders of the Senior Certificates
will be entitled to receive, subject to the priorities set forth above, an
amount equal to the Certificate Principal Balance of such class plus one month's
interest thereon (or with respect to the Stripped Interests Certificates, one
month's interest on the Notional Amount) at the applicable Pass-Through Rate
plus any previously unpaid Accrued Certificate Interest.]
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Senior Certificates, [Thacher Proffitt & Wood]
[Orrick, Herrington & Sutcliffe], counsel to the Company, will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the Pooling and Servicing Agreement, for federal income tax purposes, the Trust
Fund will qualify as a REMIC under the Code.
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<PAGE>
For federal income tax purposes, the Residual Certificates will
constitute the sole class of "residual interests" in the Trust Fund and the
Class A Certificates and Class B Certificates will represent ownership of
"regular interests" in the REMIC and will generally be treated as debt
instruments of the REMIC. See "Certain Federal Income Tax Consequences--REMICS"
in the Prospectus.
For federal income tax reporting purposes, the Class A Certificates
will [not] be treated as having been issued with original issue discount. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, market discount and premium, if any, for federal income
tax purposes will be based on the assumption that subsequent to the date of any
determination the Mortgage Loans will prepay at a rate equal to __% CPR. No
representation is made that the Mortgage Loans will prepay at that rate or at
any other rate. See "Certain Federal Income Tax Consequences--REMICS--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount" in the
Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the
"OID Regulations") under sections 1271 to 1275 of the Code generally addressing
the treatment of debt instruments issued with original issue discount.
Purchasers of the Senior Certificates should be aware that Section 1272(a)(6) of
the Code and the OID Regulations do not adequately address certain issues
relevant to, or not applicable to, prepayable securities bearing a variable rate
of interest such as the Senior Certificates. In the absence of other authority,
the Master Servicer intends to be guided by certain principles of the OID
Regulations applicable to variable rate debt instruments in determining whether
such Certificates should be treated as issued with original issue discount and
in adapting the provisions of Section 1272(a)(6) of the Code to such
Certificates for the purpose of preparing reports furnished to
Certificateholders and the IRS. Because of the uncertainties concerning the
application of Section 1272(a)(6) of the Code to such Certificates and because
the rules relating to debt instruments having a variable rate of interest are
limited in their application in ways that could preclude their application to
such Certificates even in the absence of Section 1272(a)(6) of the Code, the IRS
could assert that the Class A Certificates should be treated as having been
issued with original issue discount or that such Certificates should be governed
by some other method not yet set forth in regulations. Prospective purchasers of
the Senior Certificates are advised to consult their tax advisors concerning the
tax treatment of such Certificates.
The Master Servicer believes that a reasonable application of the
principles of the OID Regulations to the Class A Certificates would be to report
all income with respect to such Certificates as original issue discount for each
period, computing such original issue discount (i) by assuming that the value of
the applicable index will remain constant for purposes of determining the
original yield to maturity of each such class of Certificates and projecting
future distributions on such Certificates, thereby treating such Certificates as
fixed rate instruments to which the original issue discount computation rules
described in the Prospectus can be applied, and (ii) by accounting for any
positive or negative variation in the actual value of the applicable index in
any period from its assumed value as a current adjustment to original issue
discount with respect to such period. See "Certain Federal Income Tax
Consequences--REMICS--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
S-43
[NY01B:335758.1] 16069-00377 05/29/97 11:19am
<PAGE>
If the rules of the OID Regulations that determine the amount and
accrual of original issue discount were applied literally to the Class A
Certificates (even though such rules are by their terms generally inapplicable
to REMIC Regular Certificates such as the Class A Certificates), it appears that
such rules would (i) require that the stated fixed interest rate initially
payable on the Class A Certificates be replaced by a hypothetical adjustable
rate that would not cause the fair market value of the Class A Certificates to
be affected, (ii) determine the amount and accrual of original issue discount by
assuming that the Class A Certificates bore interest at successive fixed rates
equal to the closing date values of the hypothetical and the actual adjustable
rates, and (iii) make such periodic adjustments to interest income and original
issue discount as are necessary to account for the actual interest paid on such
Certificates, including differences between the stated fixed interest rate and
the rate assumed to have been paid during the fixed rate period. This treatment
could cause a holder of a Class A Certificate to recognize income more rapidly
than would occur under the Master Servicer's method of reporting interest and
original issue discount, and such a holder should consult a tax advisor with
regard to the appropriate method to recognize interest and original issue
discount with respect to the Class A Certificates.
In certain circumstances the OID Regulations permit the holder of a
debt instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, the holder of a Certificate may be
able to select a method for recognizing original issue discount that differs
from that used by the Master Servicer in preparing reports to the
Certificateholders and the IRS.
The Senior Certificates will be treated as "qualifying real property
loans" under Section 593(d) of the Code, assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(5)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Senior Certificates will be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code generally to the extent that such Senior
Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of
the Code. Moreover, the Senior Certificates will be "qualified mortgages" within
the meaning of Section 860G(a)(3) of the Code. However, prospective investors in
Senior Certificates that will be generally treated as assets described in
Section 860G(a)(3) of the Code should note that, notwithstanding such treatment,
any repurchase of such a Certificate pursuant to the right of the Master
Servicer or the Company to repurchase such Senior Certificates may adversely
affect any REMIC that holds such Senior Certificates if such repurchase is made
under circumstances giving rise to a Prohibited Transaction Tax. See "Pooling
and Servicing Agreement--Termination" herein and "Certain Federal Income Tax
Consequences--REMICS--Characterization of Investments in REMIC Certificates" in
the Prospectus.
For further information regarding federal income tax consequences of
investing in the Senior Certificates, see "Certain Federal Income Tax
Consequences--REMICS" in the
Prospectus.
S-44
[NY01B:335758.1] 16069-00377 05/29/97 11:19am
<PAGE>
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code (a "Plan") or any insurance company
(whether through its general or separate accounts) or other person investing
"plan assets" of any Plan should carefully review with its legal advisors
whether the purchase or holding of Senior Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. The purchase or holding of the Senior Certificates by, on behalf of
or with "plan assets" of a Plan may qualify for exemptive relief under the
Exemption; however the Exemption contains a number of conditions including the
requirement that any such Plan must be an "accredited investor" as defined in
Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under
the Securities Act of 1933, as amended. See "ERISA Considerations" in the
Prospectus.
LEGAL INVESTMENT MATTERS
The Senior Certificates will not constitute "mortgage related
securities" for purposes of SMMEA because the Mortgage Pool includes Mortgage
Loans that are secured by subordinate liens on the related Mortgaged Properties.
Institutions whose investment activities are subject to legal investment laws
and regulations or to review by regulatory authorities should consult with their
own legal advisors in determining whether and to what extent the Senior
Certificates are subject to restrictions on investment, capital requirements or
otherwise. See "Legal Investment Matters" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement dated [_______ __, 199_], (the "Underwriting Agreement") the
Underwriter has agreed to purchase, and the Company has agreed to sell to the
Underwriter, each class of the Senior Certificates.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Senior Certificates is subject
to, among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
Company's Registration Statement shall be in effect, and that no proceedings for
such purpose shall be pending before or threatened by the Securities and
Exchange Commission.
The distribution of the Senior Certificates by the Underwriter may be
effected, from time to time, in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds to
the Company from the sale of the Senior Certificates, before deducting expenses
payable by the Company, will be [______]% of the aggregate Certificate Principal
Balance of the Senior Certificates plus accrued interest thereon from the
Cut-off Date. The Underwriter may effect such transactions by selling the Senior
Certificates to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts,
S-45
[NY01B:335758.1] 16069-00377 05/29/97 11:19am
<PAGE>
concessions or commissions from the Underwriter for whom they act as agent. In
connection with the sale of the Senior Certificates, the Underwriter may be
deemed to have received compensation from the Company in the form of
underwriting compensation. The Underwriter and any dealers that participate with
the Underwriter in the distribution of the Senior Certificates may be deemed to
be underwriters and any profit on the resale of the Senior Certificates
positioned by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter, and under limited circumstances the Underwriter will indemnify the
Company, against certain civil liabilities under the Securities Act of 1933 or
contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the Senior
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Senior
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates--Reports to Certificateholders," which will
include information as to the outstanding principal balance of the Senior
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Senior
Certificates will be available through any other source. In addition, the
Company is not aware of any source through which price information about the
Senior Certificates will be generally available on an ongoing basis. The limited
nature of such information regarding the Senior Certificates may adversely
affect the liquidity of the Senior Certificates, even if a secondary market for
the Senior Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Senior Certificates will be
passed upon for the Company by [Thacher Proffitt & Wood] [Orrick, Herrington &
Sutcliffe], New York, New York and for the Underwriter by
[______________________________]. Certain federal income tax matters will be
passed upon for the Company by [Thacher Proffitt & Wood] [Orrick, Herrington &
Sutcliffe].
RATINGS
It is a condition to the issuance of the Senior Certificates that they
be rated not lower than "[___]" and "[___]", respectively by
[____________________________ ("_______")] and "[___]" and "[___]",
respectively, by [________________________ ("_______")].
[[Standard & Poor's Rating Group] ratings on pass-through certificates
address the likelihood of the receipt by Certificateholders of payments required
under the Pooling and Servicing Agreement. [Standard & Poor's Rating Group]
ratings take into consideration the credit quality of the Mortgage Pool,
structural and legal aspects associated with the Certificates, and the extent to
which the payment stream in the Mortgage Pool is adequate to make payments
required under the Certificates. [Standard & Poor's Rating Group] rating on the
Certificates
S-46
[NY01B:335758.1] 16069-00377 05/29/97 11:19am
<PAGE>
does not, however, constitute a statement regarding frequency of prepayments on
the mortgages. See "Certain Yield and Prepayment Considerations" herein.] [The
"r" of the "AAAr" rating of the Class [__] Certificates by [Standard & Poor's
Rating Group] is attached to highlight derivative, hybrid, and certain other
obligations that [Standard & Poor's Rating Group] believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.]
[The ratings assigned by [Fitch Investors Service, L.P.] on
pass-through certificates [also] address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled. The rating process addresses the structural and legal aspects
associated with the Certificates, including the nature of the underlying
mortgage loans. The ratings assigned to pass-through certificates do not
represent any assessment of the likelihood or rate of principal prepayments. The
rating does not address the possibility that Certificateholders might suffer a
lower than anticipated yield.]
[The ratings assigned by [Moody's Investors Service, Inc.] to the
pass-through certificates [also] address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled. [Moody's Investors Service, Inc.] ratings on pass-through certificates
do not represent any assessment of the likelihood that principal prepayments
will be made by the mortgagors or the degree to which such prepayments differ
from that originally anticipated. The ratings assigned to pass-through
certificates do not represent any assessment of the likelihood or rate of
principal prepayments. The rating does not address the possibility that
Certificateholders might suffer a lower than anticipated yield or that rapid
rates of principal prepayments could result in a failure of the holders of the
Stripped Interests Certificates to fully recover their initial investment.]
[The ratings assigned by [Duff & Phelps Credit Rating Co.] to mortgage
pass-through certificates address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled under the transaction structure. [Duff & Phelps's Credit Rating Co.]
ratings reflect its analysis of the riskiness of the Mortgage Loans and its
analysis of the structure of the transaction set forth in the operative
documents. [Duff & Phelps's Credit Rating Co.] ratings do not address the effect
on the Certificates' yield attributable to prepayments or recoveries on the
underlying mortgages. Further, in the case of the Stripped Interests
Certificates, the ratings do not address whether investors will recoup their
initial investments.]
The Company has not requested a rating on the Senior Certificates by
any rating agency other than [__________] and [__________]. However, there can
be no assurance as to whether any other rating agency will rate the Senior
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Senior
Certificates by [_________] and [__________].
S-47
[NY01B:335758.1] 16069-00377 05/29/97 11:19am
<PAGE>
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. The rating of the Stripped Interests
Certificates does not address the possibility that the holders of such
Certificates may fail to fully recover their initial investment. In the event
that the rating initially assigned to the Senior Certificates is subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to the Senior
Certificates.
[NY01B:335758.1] 16069-00377 05/29/97 11:19am
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by the Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
TABLE OF CONTENTS
Prospectus Supplement Page
Summary.............................................. S-3
Risk Factors......................................... S-15
Description of the Mortgage Pools.................... S-16
The [Insurer]........................................ S-27
Description of the Senior Certificates............... S-28
Certain Yield and Prepayment Considerations.......... S-35
Pooling and Servicing Agreement...................... S-39
Certain Federal Income Tax Consequences.............. S-42
Legal Investment Matters............................. S-45
ERISA Considerations................................. S-45
Method of Distribution............................... S-45
Legal Opinions....................................... S-46
Ratings.............................................. S-46
Prospectus
[to be updated]
Summary of Prospectus................................
Risk Factors.........................................
The Trust Funds......................................
Description of the Certificates......................
Subordination........................................
Description of Credit Enhancement....................
Insurance Policies on Mortgage Loans.................
The Company..........................................
Residential Funding Corporation......................
The Pooling and Servicing Agreement..................
Yield Considerations.................................
Maturity and Prepayment Considerations...............
Certain Legal Aspects of Mortgage Loans..............
Certain Federal Income Tax Consequences..............
State and Other Tax Consequences.....................
ERISA Considerations.................................
Legal Investment Matters.............................
Use of Proceeds
Methods of Distribution..............................
Legal Matters........................................
Financial Information................................
Additional Information...............................
Index of Principal Definitions.......................
Residential Funding Mortgage
Securities II, Inc.
Home Equity Loan Pass-Through Certificates,
Series 199_-___
Class A Certificates ____% $
PROSPECTUS SUPPLEMENT
________________, 199_
[NY01B:335758.1] 16069-00377 05/29/97 11:19am
<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 supplement 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.
Subject to Completion Dated May 29, 1997
Version I-B
Prospectus Supplement
(to Prospectus dated ____________, 199__)
Residential Funding Mortgage Securities II, Inc.
Depositor
RESIDENTIAL FUNDING CORPORATION
Master Servicer
Home Equity Loan Pass-Through Certificates, Series 199_-_
$__________ ____% Class A-1 Certificates $ 0 Variable Rate (2)
$__________ ____% Class A-2 Certificates $ ____%
_________ ____% Class A-3 Certificates
$__________ 0% (1) Class A-4 Certificates $__________ ____%
Class A-5 Certificates
Class R Certificates
Class M Certificates
(1) The Class A-4 Certificates will be Principal Only Certificates and
will not be entitled to received distributions of interest.
(2) Based on the Notional Amount (as described herein under
"Description of the Offered Certificates--Interest Distributions"). The
Class A-5 Certificates will be Stripped Interests Certificates and will not
be entitled to receive distributions of principal. ----------------------
The Series [199_-_] Home Equity Loan Pass-Through Certificates (the
"Certificates") will include (i) six classes of senior certificates
(collectively, the "Senior Certificates"): Class A-1, Class A-2, Class A-3,
Class A-4 (the "Principal Only Certificates"), Class A-5 (the "Stripped
Interests Certificates") and Class R (the "Residual Certificates"); and (ii) two
classes of subordinate certificates: the Class M Certificates and the Class B
Certificates (collectively, the "Subordinate Certificates"). Only the Senior
Certificates and the Class M Certificates (collectively, the "Offered
Certificates") are being offered hereby.
(continued on following page)
----------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST IN
OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER, GMAC MORTGAGE CORPORATION
("GMAC MORTGAGE") OR ANY OF THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES
NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, THE MASTER SERVICER, GMAC MORTGAGE
OR ANY OF THEIR AFFILIATES. ----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ----------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL. ----------------------
For a discussion of significant matters affecting investments in the
Certificates, see "Risk Factors," which begins on page S- 23.
___________________________ (the "Underwriter") intends to make a secondary
market in the Offered Certificates [(other than the [Principal Only
Certificates], [Stripped Interest Certificates], Residual Certificates and Class
M Certificates)], but has no obligation to do so. There can be no assurance that
a secondary market for the Offered Certificates will develop or, if it does
develop, that it will continue. The Offered Certificates will not be listed on
any securities exchange.
The Offered Certificates will be purchased from the Company by the Underwriter
and will be offered by the Underwriter from time to time to the public, directly
or through dealers, in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. The proceeds to the Company from the sale of
the Offered Certificates will be equal to ____% of the initial aggregate
principal balance of the Offered Certificates, plus accrued interest thereon
from __________ 1, 19__ (the "Cut-off Date"), net of any expenses payable by the
Company to the Underwriter and any dealer. The Offered Certificates are offered
by the Underwriter subject to prior sale, when, as and if delivered to and
accepted by the Underwriter and subject to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify such offer and to
reject any order in whole or in part. It is expected that delivery of the
Offered Certificates will be made on or about __________, 199_ [at the office of
________________________________________] [through the facilities of The
Depository Trust Company] against payment therefor in immediately available
funds.
[The Principal Only Certificates, Stripped Interests Certificates, Residual
Certificates and Class M Certificates may be offered by the Company from time to
time to the public, either directly or through an underwriter or agent, in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale[, except that a de minimis portion of the Residual Certificate will
be held by Residential Funding and such portion is not offered hereby].
[Proceeds to the Company from the sale of the Principal Only Certificates,
Stripped Interest Certificates, Residual Certificates or Class M Certificates
will be equal to the purchase price paid by the purchaser thereof, net of any
expenses payable by the Company and any compensation payable to any underwriter
or agent.]
[Name of Underwriter]
The date of this Prospectus Supplement is _________ __, 199_.
S-1
<PAGE>
(continued from previous page)
See "Index of Principal Definitions" in the Prospectus for meanings of
capitalized terms and acronyms not otherwise defined herein.
It is a condition to the issuance of the Offered Certificates that the Senior
Certificates and the Class M Certificates be rated "___" and "___",
respectively, by ____________ and "___" and "___", respectively, by
____________. The Offered Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended.
The Senior Certificates in the aggregate and the Class M Certificates will
evidence initial undivided interests of approximately ____% and ____%,
respectively, in a trust fund (the "Trust Fund") consisting primarily of a pool
of [[fixed] [adjustable] rate [conventional] one- to four-family, first or
second lien home equity mortgage loans (the "Mortgage Loans")] to be deposited
by Residential Funding Mortgage Securities II, Inc. (the "Company") into the
Trust Fund. See "Description of the Trust Fund" herein. The rights of the
holders of the Class M Certificates and the Class B Certificates to receive
distributions with respect to the Mortgage Loans will be subordinate to the
rights of the holders of the Senior Certificates; in addition, the rights of the
holders of the Class B Certificates to receive distributions with respect to the
Mortgage Loans will be subordinate to the rights of the holders of the Class M
Certificates. See "Description of the Offered Certificates--Allocation of
Losses; Subordination" herein.
A "real estate mortgage investment conduit" (a "REMIC") election will be made in
connection with the Trust Fund for federal income tax purposes. Each class of
Offered Certificates (other than the Residual Certificates) will constitute
"regular interests" and the Residual Certificates will constitute "residual
interests" in the REMIC. See "Certain Federal Income Tax Consequences" herein
and in the Prospectus.
Distributions on the Offered Certificates will be made on the __th day of each
month (or, if such day is not a business day, the next business day), commencing
on __________, 199_. As described herein under "Description of the Offered
Certificates--Interest Distributions," interest distributions on the Offered
Certificates (other than the Principal Only Certificates) will be based on the
Certificate Principal Balance or the Notional Amount thereof and the
then-applicable Pass-Through Rate thereof, which will be variable for the
Stripped Interests Certificates and fixed for all other classes of Certificates.
Distributions in respect of principal will be allocated among the various
classes of the Offered Certificates as described herein under "Description of
the Offered Certificates--Principal Distributions on the Senior Certificates"
and "-- Principal Distributions on the Class M Certificates."
The yield to maturity on the Offered Certificates will depend on the rate of
payment of principal (including prepayments, defaults and liquidations) on the
Mortgage Loans. The yield to maturity on the Class M Certificates will be
extremely sensitive to losses due to defaults on the Mortgage Loans (and the
timing thereof), to the extent losses are not covered by the Class B
Certificates. The yield to investors on the Offered Certificates will be
adversely affected by any shortfalls in interest collected on the Mortgage Loans
due to prepayments, liquidations or as set forth under "Description of the
Offered Certificates--Interest Distributions". Shortfalls in interest collected
on the Mortgage Loans due to prepayments in full will be offset by the Master
Servicer to the extent described herein under "Description of the Offered
Certificates--Interest Distributions." The yield to investors on the Stripped
Interests Certificates will be [extremely] sensitive to the rate and timing of
principal payments (including prepayments, defaults and liquidations) on the
Mortgage Loans, which rate may fluctuate significantly over time. A rapid rate
of principal payments on the Mortgage Loans could result in the failure of
investors in the Stripped Interests Certificates to recover their initial
investments. Because amounts payable with respect to the Principal Only
Certificates are derived only from principal payments on the Mortgage Loans with
Net Mortgage Rates that are lower than ____%, the yield on the Principal Only
Certificates will be adversely affected by slower than expected payments of
principal on such Mortgage Loans. See "Summary--Special Prepayment
Considerations" and "--Special Yield Considerations," and "Certain Yield and
Prepayment Considerations" herein and "Yield Considerations" in the Prospectus.
- ----------------------
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE COMPANY PURSUANT TO ITS
PROSPECTUS DATED __________ __, 199_, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A
PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING NOT CONTAINED HEREIN AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE CONSUMMATED
UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
----------------------
UNTIL [_____ __, 199_ (90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT)],
ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS. ----------------------
[IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET, SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.]
S-2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus. See "Index of Principal Definitions" in the
Prospectus.
Title of Securities.....Mortgage Pass-Through Certificates, Series [199_-_]
(the "Certificates").
Company.................Residential Funding Mortgage Securities II, Inc., a
corporation organized under the laws of the State of
Delaware, an affiliate of Residential Funding
Corporation ("Residential Funding"), which is an
indirect wholly-owned subsidiary of GMAC
Mortgage. See "The Company" in the Prospectus.
Master Servicer.........Residential Funding Corporation (the "Master
Servicer"), an affiliate of the Company and an
indirect wholly-owned subsidiary of GMAC
Mortgage. See "Pooling and Servicing
Agreement--The Master Servicer" herein and
"Residential Funding Corporation" in the Prospectus.
Trustee................. , a [national bank] [[state bank] [trust
------------------
company] organized under the laws of __________]
(the "Trustee"). See "The Pooling and Servicing
Agreement--The Trustee" in the Prospectus.
Cut-off Date............____________ 1, 199_ (the "Cut-off Date").
Delivery Date...........On or about ____________, 19__ (the "Delivery
Date").
Distribution Date.......The [25th] day of each month (or, if such day is not
a business day, the next business day), beginning on
________ __, 199_, (each, a "Distribution Date").
The Mortgage Pool......
The Certificates, in the aggregate, will evidence the entire beneficial interest
in the Trust Fund which consists of a pool of [fixed] [adjustable] rate [fully
amortizing level monthly payment mortgage loans] [conventional] [simple interest
mortgage loans providing for substantially equal monthly payments] [balloon
loans] (the "Mortgage Loans") secured by first or second liens on one- to
four-family residential properties (the "Mortgaged Properties") and related
property with an aggregate principal balance of $__________. ____% of the
Mortgage Loans are secured by second liens, and ____% of the Mortgage Loans are
secured by first liens. The Mortgage Loans will be conveyed to the Trust Fund by
the Company pursuant to the Pooling and Servicing Agreement (as defined herein).
[The Mortgage Loans are ARM Loans (as described in the Prospectus under "The
Trust Fund--The Mortgage Loans") with Mortgage Rates based on __________ (the
"Index").] See "Description of the Mortgage Pool" herein.
The Mortgage Properties have individual principal balances at origination of at
least $__________, but not more than $__________, with an average principal
balance at origination of approximately $__________. The Mortgage Loans have
terms to maturity from the date of origination or modification of not more than
____ years, and a weighted average remaining term to maturity of approximately
____ months as of the Cut-off Date. The Mortgage Loans will bear interest at
Mortgage Rates that range from ____% to ____% per annum as of the Cut-off Date,
with a weighted average Mortgage Rate of approximately ____% per annum as of the
Cut-off Date. [Approximately ____% of the Mortgage Loans will be refinance
Mortgage Loans.] The Mortgage Loans were purchased by the Company[, through
[Residential Funding] [affiliates,]] from [____ sellers unaffiliated with the
Company] [GMAC Mortgage, an indirect parent of the Company, and its affiliates].
[[All][____%] of the Mortgage Loans were purchased by the Company indirectly
through [Residential Funding][affiliates], from [___ sellers] [_______] ([each,
a] [the] "Mortgage Loans Seller"). [INSERT OTHER CHARACTERISTICS AS APPROPRIATE]
See "Description of the Mortgage Pool" herein and "The Trust Funds" in the
Prospectus.
The Offered Certificates..
.The Senior Certificates in the aggregate and the Class M Certificates will
evidence initial undivided interests of approximately ____% and ____%,
respectively, in the Trust Fund. The Certificates will have the following
Pass-Through Rates, Certificate Principal Balances and other features as of the
Cut-off Date:
<TABLE>
<CAPTION>
Aggregate Initial
Certificate
Pass-Through Principal
Designation Type Rate Balance Features Initial Ratings
<S> <C> <C> <C> <C> <C> <C> <C>
Class A-1 Senior [____]% $[ ___________.__]Accretion Directed[___] [___] [___]
Class A-2 Senior [____]% $[ ___________.__]Accretion Directed[___] [___] [___]
Class A-3 Senior [____]% $[ ___________.__]Accrual [___] [___] [___]
Class A-4 Senior 0.00% $[ ___________.__]Principal Only [___] [___] [___]
Class A-5 Senior Variable Rate $ 0.00 Stripped Interests[___] [___] [___]
Class R Senior [____]% $[ ___________.__]Residual [___] [___] [___]
Class M Mezzanine [____]% $[ ___________.__]Mezzanine [___] [___] [___]
Class B Subordinate [____]% $[ ___________.__]Subordinate [___] [___] [___]
</TABLE>
[Certificate Registration.....
The Senior Certificates, (other than the [Principal Only, Stripped Interests and
Residual Certificates]) will be represented by one or more certificates
registered in the name of Cede & Co., as nominee of The Depository Trust Company
("DTC"). No person acquiring an interest in the Senior Certificates, (other than
the [Principal Only, Stripped Interests and Residual Certificates]) will be
entitled to receive a Certificate of such class in fully registered,
certificated form except under the limited circumstances described in the
Prospectus under "Description of the Certificates--Form of Certificates." The
[Principal Only, Stripped Interests, Residual and Class M Certificates] will be
offered in fully registered, certificated form. See "Description of the
Certificates--Form of Certificates" in the Prospectus.]
Pass-Through Rates on
the Offered Certificates....
The Pass-Through Rates on all classes of the Offered Certificates (other than
the Principal Only Certificates, which are not entitled to distributions of
interest, and the Stripped Interests Certificates) are the fixed rates set forth
above.
On each Distribution Date, the Pass-Through Rate on the Stripped Interests
Certificates will equal the weighted average of the Pool Strip Rates on each
Mortgage Loan with a Net Mortgage Rate in excess of ____% per annum. The "Pool
Strip Rate" on each Mortgage Loan is equal to the Net Mortgage Rate thereon
minus ____%. The "Net Mortgage Rate" on each Mortgage Loan is equal to the
Mortgage Rate thereon minus the rate per annum at which the related servicing
fee accrues (the "Servicing Fee Rate"). The Pool Strip Rates on the Mortgage
Loans range from ____% to ____% per annum. The initial Pass-Through Rate on the
Stripped Interests Certificates is approximately ____% per annum. The Stripped
Interests Certificates have no Certificate Principal Balance and will accrue
interest at the then-applicable Pass-Through Rate on the Notional Amount. The
"Notional Amount" of the Stripped Interests Certificates as of any date of
determination will be equal to the aggregate Certificate Principal Balance of
the Certificates of all classes as of such date.
[The Pass-Through Rate applicable to the Offered Certificates for any
Distribution Date will equal the weighted average of the Net Mortgage Rates on
the Mortgage Loans as of the Due Date in the month preceding the month in which
such Distribution Date occurs. The Net Mortgage Rate with respect to each
Mortgage Loan as of the Cut-off Date will be set forth in the Mortgage Loan
Schedule attached to the Pooling and Servicing Agreement. As of the Cut-off
Date, the weighted average Net Mortgage Rate is [______]% per annum. The Net
Mortgage Rate on each Mortgage Loan will be adjusted on each Adjustment Date to
equal the Index (rounded to the nearest multiple of [_____]%) plus a fixed
percentage per annum for each Mortgage Loan as set forth in the Mortgage Loan
Schedule attached to the Pooling and Servicing Agreement (the "Note Margin"),
subject to the Periodic Rate Cap, Maximum Net Mortgage Rate and Minimum Net
Mortgage Rate (each as defined herein) for such Mortgage Loan. The Note Margins
for the Mortgage Loans will be at least [____]% per annum but not more than
[____]% per annum as of the Cut-off Date, with an initial weighted average Note
Margin of [______]% per annum. The Net Mortgage Rate on each Converted Mortgage
Loan remaining in the Mortgage Pool will equal the Mortgage Rate thereon less
[____]% per annum.] [The Pass-Through Rate on the Offered Certificates on the
first Distribution Date will be [______]% per annum, and is expected to change
thereafter because the weighted average of the Net Mortgage Rates is expected to
change for succeeding Distribution Dates.] See "Description of the Offered
Certificates--Interest Distributions" herein.
The Class B Certificates...
The Class B Certificates have an aggregate initial Certificate Principal Balance
of approximately $__________, evidencing an initial undivided interest of
approximately ____% in the Trust Fund, and a Pass-Through Rate of ____% per
annum. The Class B Certificates are not being offered hereby. [The Company
expects that the Class B Certificates will be privately placed directly or
indirectly with one or more institutional investors.]
[Accrual Certificates..... The Accrual Certificates have an initial Certificate
Principal Balance of $___________ and a Pass-
Through Rate equal to ____% per annum.]
Interest Distributions..
Holders of each class of Offered Certificates (the "Certificateholders") (other
than the holders of the Principal Only Certificates) will be entitled to receive
distributions in an amount equal to the Accrued Certificate Interest on such
class on each Distribution Date (i) in the case of each class of Senior
Certificates, to the extent of the Available Distribution Amount (as defined
herein under "Description of the Offered Certificates--Available Distribution
Amount") for such Distribution Date except as otherwise set forth herein (in the
aggregate, the "Senior Interest Distribution Amount") and (ii) in the case of
the Class M Certificates, to the extent of the Available Distribution Amount for
such Distribution Date after (a) distributions of interest and principal to the
holders of the Senior Certificates and (b) reimbursement of certain Advances (as
defined herein) to the Master Servicer.
With respect to any Distribution Date, "Accrued Certificate Interest" will be
equal to (a) in the case of each class of Offered Certificates (other than the
Principal Only Certificates and the Stripped Interests Certificates), one
month's interest accrued on the Certificate Principal Balance of such class, at
the Pass-Through Rate on such class, and (b) in the case of the Stripped
Interests Certificates, one month's interest accrued on the Notional Amount
thereof at the Pass-Through Rate on such class for such Distribution Date; in
each case less any interest shortfalls not covered with respect to such class by
Subordination (as defined herein) or by the Master Servicer (as described
below), including any Prepayment Interest Shortfall (as defined herein), to the
extent allocated thereto for such Distribution Date. The Principal Only
Certificates are not entitled to receive any distribution of interest.
See "Description of the Offered Certificates--Interest Distributions" herein.
Principal Distributions
.................................
On each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after the Senior Interest Distribution Amount is
distributed, holders of the Principal Only Certificates will be entitled to
receive a distribution allocable to principal (the "Class A-4 Principal
Distribution Amount") that will include (i) the applicable Discount Fraction (as
defined below) of scheduled principal payments due on or, after the Credit
Support Depletion Date, received with respect to each item of Discount Mortgage
Loans (as defined below), (ii) the applicable Discount Fraction of the principal
portion of any unscheduled collections (other than those received in connection
with a Final Disposition described in clause (iii) below) on each item of
Discount Mortgage Loans, including prepayments, repurchases, Liquidation
Proceeds and Insurance Proceeds, to the extent applied as recoveries of
principal, and (iii) in connection with the Final Disposition (as defined
herein) of an item of Mortgage Loans that occurs prior to the Credit Support
Depletion Date and that did not result in any Excess Special Hazard Losses,
Excess Bankruptcy Losses, Excess Fraud Losses or Extraordinary Losses (each as
defined herein), an amount equal to the applicable Discount Fraction of the
Stated Principal Balance of such item of Discount Mortgage Loans, subject to the
limitations set forth herein. See "Description of the Offered
Certificates--Principal Distributions on the Senior Certificates" herein.
"Discount Mortgage Loans" is any Mortgage Loan with a Net Mortgage Rate
less than [____]%. With respect to each item of Discount Mortgage Loans,
the "Discount Fraction" thereof is equal to a fraction the numerator of
which is [____]% minus the Net Mortgage Rate for such Mortgage Loan and the
denominator of which is [____]%. The Mortgage Loans that do not constitute
Discount Mortgage Loans are referred to herein as the "Non-Discount
Mortgage Loans." See "Description of the Offered Certificates--General"
herein.
On each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after the Senior Interest Distribution Amount
and Class A-4 Principal Distribution Amount are distributed, holders of the
Senior Certificates (other than Principal Only Certificates and the
Stripped Interests Certificates) will be entitled to receive a distribution
allocable to principal in the manner and priority set forth herein. See
"Description of the Offered Certificates--Principal Distributions on the
Senior Certificates" herein. Distributions in respect of principal of the
Senior Certificates on any Distribution Date will be allocated to the
classes then entitled to such distributions, as described herein. See
"--Special Prepayment Considerations" and "--Special Yield Considerations"
and "Certain Yield and Prepayment Considerations" herein. The Stripped
Interests Certificates will not receive any principal distributions.
On each Distribution Date, holders of the Class M Certificates will be
entitled to receive a distribution of principal to the extent of the
portion of the Available Distribution Amount remaining after (i)
distributions in respect of interest and principal to the holders of the
Senior Certificates, (ii) reimbursements for certain Advances to the Master
Servicer, and (iii) distributions in respect of interest to the holders of
the Class M Certificates. Such principal distributions will be be made to
the Class M Certificates in the respective amounts described herein. See
"Description of the Offered Certificates--Principal Distributions on the
Class M Certificates" herein.
[Advances........ The Master Servicer is required to make advances
("Advances") in respect of delinquent payments of
principal and interest on the Mortgage Loans subject
to the limitations described herein. See "Description
of the Offered Certificates--Advances" herein.]
Allocation of Losses; Subordination....................
Subject to the limitations set forth below, Realized Losses (as defined herein)
on the Mortgage Loans will be allocated as follows: first, to the Class B
Certificates; second, to the Class M Certificates, in each case, until the
Certificate Principal Balance of each such class has been reduced to zero; and
thereafter, if any such Realized Loss is on Discount Mortgage Loans, to the
Principal Only Certificates in an amount equal to the related Discount Fraction
of the principal portion of such Realized Loss, and the remainder of such
Realized Losses and the entire amount of such Realized Losses on Non-Discount
Mortgage Loans to the remaining classes of Senior Certificates on a pro rata
basis, as described herein under "Description of the Offered
Certificates--Allocation of Losses; Subordination." The Subordination provided
to the Senior Certificates by the Class B Certificates and Class M Certificates
and the Subordination provided to the Class M Certificates by the Class B
Certificates will cover Realized Losses on the Mortgage Loans that are Defaulted
Mortgage Losses, Fraud Losses, Bankruptcy Losses and Special Hazard Losses up to
the limits set forth below. The aggregate amounts of Realized Losses which may
be allocated by means of Subordination to cover Fraud Losses, Bankruptcy Losses
and Special Hazard Losses Defaulted Mortgage Losses, are initially limited to
$[_________], $[________] and $[_________], respectively.] [All of the foregoing
amounts are subject to periodic reduction as described herein under "Description
of the Offered Certificates--Allocation of Losses; Subordination" and may be
further reduced.]
If the Certificate
Principal Balances of
the Class B Certificates
and Class M Certificates
are reduced to zero, all
additional losses
(including, without
limitation, all
Defaulted Mortgage
Losses, Special Hazard
Losses, Fraud Losses and
Bankruptcy Losses) will
be allocated among the
Senior Certificates pro
rata, as more fully
described herein. See
"Description of the
Offered
Certificates--Allocation
of Losses;
Subordination."
In addition, any Special
Hazard Losses, Fraud
Losses and Bankruptcy
Losses in excess of the
respective amounts of
coverage therefor and
any Extraordinary Losses
on any items of
Non-Discount Mortgage
Loans will be allocated
on a pro rata basis
among the Senior
Certificates (other than
the Principal Only
Certificates), Class M
Certificates and Class B
Certificates. The
principal portion of
such losses on items of
Discount Mortgage Loans
will be allocated to the
Principal Only
Certificates in an
amount equal to the
related Discount
Fraction thereof, and
the remainder of such
losses on Discount
Mortgage Loans will be
allocated among the
remaining Certificates
on a pro rata basis as
described above. See
"Description of the
Offered
Certificates--Allocation
of Losses;
Subordination" herein.
Neither the Offered
Certificates nor the
Mortgage Loans are
insured or guaranteed by
any governmental agency
or instrumentality or by
the Company, the Master
Servicer, GMAC Mortgage
or any affiliate
thereof. See "Risk
Factors--Limited
Obligations" in the
Prospectus.
[Optional Termination..
At its option, on any Distribution Date when the aggregate principal balance of
the Mortgage Loans is less than ___% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date, the Master Servicer or the Company may
(i) purchase all remaining Mortgage Loans from the Trust Fund and other assets
thereof, and thereby effect early retirement of the Certificates or (ii)
purchase in whole, but not in part, the Certificates. See "The Pooling and
Servicing Agreement--Termination" herein and "The Pooling and Servicing
Agreement--Termination; Retirement of Certificates" in the Prospectus.]
Special Prepayment
Considerations.......................................
The rate of principal payments on the Offered Certificates, collectively, will
depend on the rate and timing of principal payments (including prepayments,
defaults and liquidations) on the Mortgage Loans. As is the case with
mortgage-backed securities generally, the Offered Certificates are subject to
substantial inherent cash-flow uncertainties because any of the Mortgage Loans
may be prepaid at any time. Generally, when prevailing mortgage interest rates
are increasing, prepayment rates on mortgage loans tend to decrease, resulting
in a reduced return of principal to investors at a time when reinvestment at
such higher prevailing rates would be desirable. Conversely, when prevailing
mortgage interest rates are declining, prepayment rates on mortgage loans tend
to increase, resulting in a greater return of principal to investors at a time
when reinvestment at comparable yields may not be possible. [In addition, since
home equity loans are not generally viewed by borrowers as permanent financing,
the Mortgage Loans may experience a higher rate of prepayments than traditional
mortgage loans.] See "Certain Yield and Prepayment Considerations--General"
herein.
[Certain types of Mortgage Loans included in the Trust Fund have characteristics
that may make them more likely to default than other mortgage loans. Since a
[significant portion] of the Mortgage Loans are secured by second deeds of trust
or mortgages subordinate to the rights of the beneficiaries under the related
first deeds of trust or mortgages, a decline in real estate values would
adversely affect the position of the Trust Fund as a second beneficiary before
having such an effect on that of the related first beneficiary. A primary risk
to holders of Mortgage Loans secured by second liens is the possibility that
adequate funds will not be received in connection with a foreclosure of the
related first lien to satisfy fully both the first lien and the Mortgage Loan.
[ADDITIONAL CHARACTERISTICS OF MORTGAGE LOANS THAT MAY POSE INCREASED RISKS OF
DEFAULT TO BE INSERTED AS NECESSARY.] [Such Mortgage Loans pose a greater risk
of default and liquidation than might otherwise be expected by investors in the
Certificates. See "Risk Factors" herein.]
The multiple class
structure of the Offered
Certificates results in
the allocation of
prepayments among
certain classes as
follows [TO BE INCLUDED
AS APPROPRIATE]:
[Sequentially paying
classes: [All] classes
of the Senior
Certificates are subject
to various priorities
for payment of principal
as described herein
under "Description of
the Offered
Certificates--Principal
Distributions on the
Senior Certificates.
Distributions on classes
having an earlier
priority of payment will
be immediately affected
by the rate of
prepayment of the
Mortgage Loans early in
the life of the Mortgage
Pool. Distributions on
classes with a later
priority of payment will
not be directly affected
by the rate of
prepayment until such
time as principal is
distributable on such
classes; however, the
timing of commencement
of principal
distributions and the
weighted average lives
of such classes will be
affected by the rate of
prepayment experienced
both before and after
the commencement of
principal distributions
on such classes.]
[Planned Amortization
Class Certificates ("PAC
Certificates"):
Principal distributions
on the PAC Certificates
will be payable in
amounts determined based
on schedules as
described herein under
"Description of the
Offered
Certificates--Principal
Distributions on the
Senior Certificates,"
provided that the rate
of prepayment of the
Mortgage Loans each
month remains between
approximately ____% SPA
(as defined herein) and
____% SPA. However, as
discussed herein, actual
principal distributions
may be greater or less
than the described
amounts. If the rate of
prepayment of the
Mortgage Loans is
consistently higher than
____% SPA, then the
Companion Certificates
will be retired before
all of the PAC
Certificates are
retired, and the rate of
principal distributions
and the weighted average
lives of the remaining
PAC Certificates will
become significantly
more sensitive to
changes in the rate of
prepayment of the
Mortgage Loans and
principal distributions
thereon will be more
likely to deviate from
the described amounts.]
[Targeted Amortization
Certificates ("TAC
Certificates"):
Principal distributions
on the TAC Certificates
would be payable in
amounts determined based
on schedules as
described herein under
"Description of the
Offered
Certificates--Principal
Distributions on the
Senior Certificates," if
the rate of prepayment
of the Mortgage Loans
were to remain at a
constant level of
approximately ____% SPA.
However, as discussed
herein, actual principal
distributions are likely
to deviate from the
described amounts,
because it is unlikely
that the actual rate of
prepayment of the
Mortgage Loans each
month will remain at or
near ____% SPA. If the
Companion Certificates
are retired before all
of the TAC Certificates
are retired, the rate of
principal distributions
and the weighted average
lives of the remaining
TAC Certificates will
become significantly
more sensitive to
changes in the rate of
prepayment of the
Mortgage Loans, and
principal distributions
thereon will be more
likely to deviate from
the described amounts.]
[Companion Certificates:
Because of the
application of amounts
available for principal
distributions among the
Senior Certificates in
any given month, first
to the [PAC] [TAC]
Certificates up to the
described amounts and
then to the Companion
Certificates, the rate
of principal
distributions and the
weighted average lives
of the Companion
Certificates will be
extremely sensitive to
changes in the rate of
prepayment of the
Mortgage Loans. The
weighted average lives
of the Companion
Certificates will be
significantly more
sensitive to changes in
the rate of prepayment
than that of either the
[PAC] [TAC] Certificates
or a fractional
undivided interest in
the Mortgage Loans.]
[Accrual Certificates: A
high rate of prepayments
on the Mortgage Loans
could result in the
reduction of the
Certificate Principal
Balances of the Senior
Certificates (other than
the Accrual Certificates
and Principal Only
Certificates) to zero
(and the occurrence of
the Accretion
Termination Date)
earlier than
anticipated. The accrual
of interest on the
Accrual Certificates may
end and the reduction of
the Certificate
Principal Balance of the
Accrual Certificates may
commence earlier than
anticipated.]
[Subordination features:
As described herein
under "Description of
the Offered
Certificates--Principal
Distributions on the
Senior Certificates" and
"--Principal
Distributions on the
Class M Certificates,"
during certain periods
all or a
disproportionately large
percentage of principal
prepayments on the
Mortgage Loans will be
allocated among the
Senior Certificates, and
during certain periods
no such prepayments or,
relative to the related
Class M Percentage, a
disproportionately small
or large percentage of
such prepayments will be
distributed to the Class
M Certificates. To the
extent that no such
prepayments are
distributed on the Class
M Certificates, the
Subordination afforded
to the Senior
Certificates by the
Class M Certificates
(together with the Class
B Certificates), in the
absence of offsetting
Realized Losses
allocated thereto, will
be increased.]
See "Description of the
Offered
Certificates--Principal
Distributions on the
Senior Certificates,"
"--Principal
Distributions on the
Class M Certificates"
and "Certain Yield and
Prepayment
Considerations" herein,
and "Maturity and
Prepayment
Considerations" in the
Prospectus. For further
information regarding
the effect of principal
prepayments on the
weighted average lives
of the Offered
Certificates (other than
the Stripped Interests
Certificates), see the
table entitled
"Percentage of Initial
Certificate Balance
Outstanding at the
Following Percentages of
SPA" herein.
Special Yield Considerations............................ The yield to
maturity on each respective class of the Offered Certificates will depend
on the rate and timing of principal payments (including payments due to
prepayments, defaults and liquidations) on the Mortgage Loans and the
allocation thereof (and of any losses on the Mortgage Loans) to reduce the
Certificate Principal Balance or Notional Amount of such class, as well as
other factors such as the Pass-Through Rate (and, in the case of the
Stripped Interests Certificates, any adjustments thereto) and the purchase
price for such Certificates. The yield to investors on any class of Offered
Certificates may be adversely affected by any allocation thereto of
Prepayment Interest Shortfalls on the Mortgage Loans, which shortfalls are
expected to result from distribution of interest to the date of prepayment
only (rather than a full month's interest) in connection with prepayments
in full and the lack of any distribution of interest on the amount of any
partial prepayments. Prepayment Interest Shortfalls resulting from
principal prepayments in full in a calendar month will not adversely affect
the yield to investors in the Offered Certificates to the extent such
Prepayment Interest Shortfalls do not exceed the Servicing Fee for such
month.
In general, if a class of Offered Certificates is purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a class of Offered
Certificates is purchased at a discount and principal distributions thereon
occur at a rate slower than that assumed at the time of purchase, the investor's
actual yield to maturity will be lower than that originally anticipated.
The Senior Certificates were structured based on a number of assumptions,
including a prepayment assumption of ____% SPA and weighted average lives
corresponding thereto as set forth herein under "--Special Prepayment
Considerations." The yield assumptions for the respective classes that are to be
offered hereunder will vary as determined at the time of sale.
The multiple class structure of the Offered Certificates causes the yield
of certain classes to be particularly sensitive to changes in the rate of
prepayment of the Mortgage Loans and other factors, as follows [TO BE
INCLUDED AS APPROPRIATE]: [Principal Only
Certificates: Generally,
the amounts payable with
respect to the Principal
Only Certificates are
derived only from
principal payments on
the Discount Mortgage
Loans. As a result, the
yield on the Principal
Only Certificates will
be adversely affected by
slower than expected
payments of principal
(including prepayments,
defaults and
liquidations) on the
Discount Mortgage Loans.
Because the Discount
Mortgage Loans have
lower Net Mortgage Rates
than the Non-Discount
Mortgage Loans, and
because the Mortgage
Loans with lower Net
Mortgage Rates are
likely to have lower
Mortgage Rates, the
Discount Mortgage Loans
are generally likely to
prepay at a slower rate
than the Non-Discount
Mortgage Loans. See
"Certain Yield and
Prepayment
Considerations,"
especially "--Principal
Only Certificate and
Stripped Interests
Certificate Yield
Considerations" herein.]
[Interest strip and
inverse floater classes:
The yield to investors
on the Class [_]
Certificates will be
extremely sensitive to
the rate and timing of
principal payments on
the Mortgage Loans
(including prepayments,
defaults and
liquidations), which may
fluctuate significantly
over time. A rapid rate
of principal payments on
the Mortgage Loans could
result in the failure of
investors in the Class
[_] Certificates to
recover their initial
investments, and a
slower than anticipated
rate of principal
payments on the Mortgage
Loans could adversely
affect the yield to
investors on the Class
[_] Certificates.]
[Stripped Interests
Certificates: In
addition to the
foregoing, the yield on
the Stripped Interests
Certificates will be
materially adversely
affected to a greater
extent than the yields
on the other Senior
Certificates if the
Mortgage Loans with
higher Mortgage Rates
prepay faster than the
Mortgage Loans with
lower Mortgage Rates,
because holders of the
Stripped Interests
Certificates generally
have
rights to relatively
larger portions of
interest payments on the
Mortgage Loans with
higher Mortgage Rates
than on Mortgage Loans
with lower Mortgage
Rates.]
[Adjustable rate
(including inverse
floater) classes: The
yield on the Class [_]
Certificates will be
sensitive, and the yield
on the Class [_]
Certificates will be
extremely sensitive, to
fluctuations in the
level of the Index. The
Pass-Through Rate on the
Class [_] Certificates
will vary inversely
with, and at a multiple
of, the Index.]
[Inverse floater
companion classes: In
addition to the
foregoing, in the event
of relatively low
prevailing interest
rates (including the
Index) and relatively
high rates of principal
prepayments over an
extended period, while
investors in the
[identify inverse
floater companion
classes] may then be
experiencing a high
current yield on such
Certificates, such yield
may be realized only
over a relatively short
period, and it is
unlikely that such
investors would be able
to reinvest such
principal prepayments on
such Certificates at a
comparable yield.]
[Accrual Certificates:
Interest shortfalls
allocated to the Accrual
Certificates will reduce
the amount of Accrued
Certificate Interest
added to the Certificate
Principal Balance
thereof and, therefore,
will reduce the amount
of interest that will
accrue in the future on
such Certificates than
would otherwise be the
case absent such
shortfalls. Because
Accrual Certificates are
not entitled to receive
any distributions of
interest until the
Accretion Termination
Date, the Accrual
Certificates will likely
experience greater price
and yield volatility
than would pass-through
certificates which are
otherwise similar but
which are entitled to
current distributions of
interest.]
[Certificates with
Subordination features:
The yield to maturity on
the Class M Certificates
will be extremely
sensitive to losses due
to defaults on Mortgage
Loans (and the timing
thereof) after the
Certificate Principal
Balance of the Class B
Certificates has been
reduced to zero, because
the entire amount of
such losses will be
allocable to the Class M
Certificates, as
described herein under
"Description of the
Offered
Certificates--Allocation
of Losses;
Subordination."
Furthermore, as
described herein under
"Certain Yield and
Prepayment
Considerations," the
timing of the receipt of
principal and interest
by the Class M
Certificates may be
adversely affected by
losses on the Mortgage
Loans even if such class
does not ultimately bear
such loss.]
[Residual Certificates:
Holders of the Residual
Certificates are
entitled to receive
distributions of
principal and interest
as described herein
under "Description of
the Offered
Certificates--Interest
Distributions" and
"--Principal
Distributions on the
Senior Certificates,"
however, holders of such
Certificates may have
tax liabilities with
respect to their
Certificates during the
early years of their
term that substantially
exceed the principal and
interest payable thereon
during such periods. In
addition, such
distributions will be
reduced to the extent
that they are subject to
United States federal
income tax withholding.]
See "Certain Yield and Prepayment Considerations"
herein.
Certain Federal Income
Tax Consequences......... [An election will be made to treat the Trust Fund as
a "real estate mortgage investment conduit" (a
"REMIC") for federal income tax purposes. Upon
the issuance of the Offered Certificates, [Thacher
Proffitt & Wood] [Orrick, Herrington & Sutcliffe],
New York, New York, counsel to the Company, will
deliver its opinion generally to the effect that,
assuming compliance with all provisions of the
Pooling and Servicing Agreement, the Trust Fund will
qualify as a REMIC under Sections 860A through
860G of the Internal Revenue Code of 1986 (the
"Code").]
[For federal income tax purposes, the Residual Certificates will be the
sole class of "residual interests" in the Trust Fund and the Offered
Certificates (other than the Residual Certificates) [and the __________
Certificates] will represent ownership of "regular interests" in the Trust
Fund and will generally be treated as representing ownership of debt
instruments issued by the Trust Fund.] [Under the REMIC Regulations (as
defined herein), the Residual Certificates will not be regarded as having
"significant value" for purposes of applying the rules relating to "excess
inclusions." In addition, the Residual Certificates may constitute
"noneconomic" residual interests for purposes of the REMIC Regulations.
Transfers of the Residual Certificates will be restricted under the Pooling
and Servicing Agreement to United States persons (as defined in the
Prospectus under "Certain Federal Income Tax Consequences--REMICs--Foreign
Investors in REMIC Certificates") in a manner designed to prevent a
transfer of a noneconomic residual interest from being disregarded under
the REMIC Regulations. See "Certain Federal Income Tax
Consequences--Special Tax Considerations Applicable to Residual
Certificates" herein and "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions" and "--Noneconomic REMIC Residual
Certificates" in the Prospectus.]
[The Residual Certificateholders may be required to report an amount of
taxable income with respect to the early years of the REMIC's term that
significantly exceeds distributions on the Residual Certificates during
such years, with corresponding tax deductions or losses deferred until the
later years of the REMIC's term. Accordingly, on a present value basis, the
tax detriments occurring in the earlier years may substantially exceed the
sum of any tax benefits in the later years. As a result, the Residual
Certificateholders' after-tax rate of return may be zero or negative, even
if their pre-tax rate of return is positive.]
[See "Certain Yield and Prepayment Considerations,"
especially "--Additional Yield Considerations
Applicable Solely to the Residual Certificates" and
"Certain Federal Income Tax Consequences--Special
Tax Considerations Applicable to Residual
Certificates" herein.]
For further information regarding the federal income
tax consequences of
investing in the Offered
Certificates, see
"Certain Federal Income
Tax Consequences" herein
and in the Prospectus.
Ratings...It is a condition of the issuance of the Senior
Certificates and the Class M Certificates that they be
rated "___" and "___", respectively, by
________________________ and "___" and "___",
respectively, by _________________________. A
security rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or
withdrawal at any time by the assigning rating
organization. A security rating does not address the
frequency of prepayments of the Mortgage Loans, or
the corresponding effect on yield to investors. The
rating of the Stripped Interests Certificates does not
address the possibility that the holders thereof may
fail to fully recover their initial investment. See
"Certain Yield and Prepayment Considerations" and
"Ratings" herein and "Yield Considerations" in the
Prospectus.
Legal Investment Matters....
The Offered Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"), because the Mortgage Pool includes Mortgage Loans that
are secured by subordinate liens on the related Mortgaged Properties.
Institutions whose investment activities are subject to legal investment
laws and regulations or to review by regulatory authorities should consult
with their legal advisors in determining whether and to what extent the
Offered Certificates are subject to restrictions on investment, capital
requirements or otherwise. See "Legal Investment Matters" herein and in the
Prospectus.
S-3
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, among other things, the
items discussed under "Risk Factors" in the Prospectus and the following factors
in connection with the purchase of the Certificates:
[APPROPRIATE RISK FACTORS REGARDING MORTGAGE LOANS TO BE INSERTED
AS NECESSARY]
Risk Factors with Respect to Second Liens
Certain of the Mortgage Loans are secured by second liens, and the
related first lien may not be included in the Mortgage Pool. The primary risk to
holders of Mortgage Loans secured by second liens is the possibility that
adequate funds will not be received in connection with a foreclosure of the
related first lien to satisfy fully the first lien together with any foreclosure
costs and the Mortgage Loan. The claims of the holders of first liens will be
satisfied in full out of proceeds of the liquidation of the Mortgage Loan, if
such proceeds are sufficient, before the Trust Fund as holder of the second lien
receives any payments in respect of the Mortgage Loan. In addition, a second
mortgagee may not foreclose on the property securing a second mortgage unless it
forecloses subject to the first mortgages in which case it must either pay the
entire amount due on the first mortgage to the first mortgagee at or prior to
the foreclosure sale or undertake the obligation to make payments on the first
mortgages in the event the mortgagor is in default thereunder. The Trust Fund
will not have any source of fund to satisfy the first mortgage or make payments
due to the first mortgagee, although the Master Servicer or Subservicer will be
required to advance such amounts to the extent deemed recoverable. In the event
that such proceeds from a foreclosure or similar sale of the related Mortgaged
Property are insufficient to satisfy the first lien and the Mortgage Loan in the
aggregate, the Trust Fund, as the holder of the second lien, and, accordingly,
Certificateholders of one or more classes of the Certificates bear (i) the risk
of delay in distributions while a deficiency judgment against the Mortgagor is
obtained and (ii) the risk of loss if the deficiency judgment is not realized
upon. Moreover, deficiency judgments may not be available in certain
jurisdictions.
General
The Offered Certificates will evidence ownership interests in the Trust
Fund created by the Company, which will consist of a pool of [fixed]
[adjustable] rate [conventional] [full amortizing level monthly payment Mortgage
Loans] [simple interest Mortgage Loans providing for substantially equal
payments] [balloon] [Mortgage Loans] and certain other property. The Mortgage
Loans are secured by mortgages or deeds of trust creating first or second liens
on the related Mortgaged Properties. The Mortgage Loans will be conveyed by the
Company to the Trust Fund pursuant to a pooling and servicing agreement, dated
as of ______ __, 199_ (the "Pooling and Servicing Agreement"), by and among the
Company, the Master Servicer and the
Trustee. A copy of the Pooling and Servicing Agreement will be filed with the
Securities and Exchange Commission as an exhibit to a Current Report on Form 8-K
to be filed within 15 days after the issuance of the Certificate (the "Form
8-K").
The Mortgage Loans will be assigned to the Trustee pursuant to the
Pooling and Servicing Agreement together with all principal and interest due on
or with respect to the Mortgage Loans after the Cut-off Date. The Trustee will,
concurrently with such assignment, authenticate and deliver the Certificates.
Residential Funding Corporation will act as Master Servicer for the
Trust Fund (in such capacity, the "Master Servicer"). The Master Servicer will
service the Mortgage Loans [directly] [through one or more Sub-Servicers] [who
will provide customary servicing functions with respect to the Mortgage Loans
pursuant to the terms set forth in the [Pooling and Servicing Agreement]
[respective Sub-Servicing Agreements].
The Mortgage Loans were acquired [directly] [indirectly through
Residential Funding] by the Company [on _________ __, 199_] [from time to time]
from [NAME OF SELLER] [[___] unaffiliated Mortgage Loans Sellers].
None of the Mortgage Loans were originated prior to _______ __, 19__ or
will have a maturity date later than _______ __, ____. No Mortgage Loan will
have a remaining term to maturity as of the Cut-off Date of less than ____
months. The weighted average remaining term to maturity of the Mortgage Loans as
of the Cut-off Date will be approximately ____ months. The weighted average
original term to maturity of the Mortgage Loans as of the Cut-off Date will be
approximately ____ months. All of the Mortgage Loans have principal and interest
payable monthly [on the ______ day of each month] (the "Due Date") [on a level
debt service basis] [subject to change due to adjustment in the Mortgage Rate].
[As of the Cut-off Date, no Mortgage Loan will be one month or more delinquent
in payment of principal and interest.] Defaults on mortgage loans are expected
to occur with greater frequency in their early years. The rate of default of
mortgage loans secured by second liens may be greater than that of mortgage
loans secured by first liens on comparable properties.
[Approximately ___% of the Mortgage Loans are secured by a first lien
on the related Mortgaged Property and approximately ___% of the Mortgage Loans
are secured by a second lien on the related Mortgaged Property.]
[In connection with each Mortgage Loan that is secured by a leasehold
interest, the related Mortgage Loans Seller will have represented to the Company
that, among other things: (i) the use of leasehold estates for residential
properties is an accepted practice in the area where the related Mortgaged
Property is located; (ii) residential property in such area consisting of
leasehold estates is readily marketable; (iii) the lease is recorded and no
party is in any way in breach of any provision of such lease; (iv) the leasehold
is in full force and effect and is not subject to any prior lien or encumbrance
by which the leasehold could be terminated or subject to any charge or penalty;
and (v) the remaining term of the lease does not terminate less than ten years
after the maturity date of each such Mortgage Loans.]
[Mortgage Rate Adjustment]
[The Mortgage Rate on each Mortgage Loan will adjust semi-annually on
the Adjustment Date specified in the related Mortgage Note to a rate equal
to the sum (rounded to the nearest multiple of ___%) of the Index described
below and a fixed percentage set forth in the related Mortgage Note (the
"Note Margin"), subject to certain limitations described herein. The amount
of the monthly payment on each Mortgage Loan will be adjusted semi-annually
on the first day of the month following the month in which the Adjustment
Date occurs to equal the amount necessary to pay interest at the
then-applicable Mortgage Rate and fully amortize the outstanding principal
balance of the Mortgage Loan over its remaining term to stated maturity. As
of the Cut-off Date, ___% of the Mortgage Loans will have reached their
first Adjustment Date. The Mortgage Loans will have different Adjustment
Dates, Note Margins and limitations on the Mortgage Rate adjustments, as
described below.]
[Each Mortgage Note contains an interest rate adjustment cap (the
"Periodic Rate Cap") which limits the adjustment of the Mortgage Rate to not
more than ___% above or below the previous Mortgage Rate. The Mortgage Rate on a
Mortgage Loan may not exceed the maximum Mortgage Rate (the "Maximum Mortgage
Rate") or be less than the minimum Mortgage Rate (the "Minimum Mortgage Rate")
specified for such Mortgage Loan in the related Mortgage Note. The Minimum
Mortgage Rate for each Mortgage Loan will be equal to the Note Margin. The
Minimum Mortgage Rates will range from ___% to ___%, with a weighted average
Minimum Mortgage Rate as of the Cut-off Date of ___%. The Maximum Mortgage Rates
will range from ___% to ___%, with a weighted average Maximum Mortgage Rate as
of the Cut-off Date of ___%. No Mortgage Loan provides for payment caps on any
Adjustment Date which would result in deferred interest or negative
amortization.]
[The Index applicable to the Mortgage Loans will be a per annum rate
equal to the average of interbank offered rates for six-month U.S.
dollar-denominated deposits in the London market based on quotations of major
banks ("LIBOR") as published by Fannie Mae and as most recently available as of
the date forty-five days prior to the Adjustment Date, or, with respect to _____
Mortgage Loans, representing approximately ___% of the Mortgage Loans, the Index
shall be LIBOR as published in The Wall Street Journal and as most recently
available as of the first business day of the month immediately preceding the
month in which the Adjustment Date occurs. In the event that the Index is no
longer available, an index reasonably acceptable to the Trustee that is based on
comparable information will be selected by the Master Servicer.]
[Listed below are levels of LIBOR as published by Fannie Mae that are
or would have been applicable to mortgage loans having the following adjustment
dates for the indicated years. Such average yields may fluctuate significantly
from month to month as well as over longer periods and may not increase or
decrease in a constant pattern from period to period. There can be no assurance
that levels of LIBOR published in The Wall Street Journal for the corresponding
periods would have been at the same levels as those set forth below. The
following does not purport to be representative of future levels of LIBOR (as
published by Fannie Mae or The Wall Street Journal). No assurance can be given
as to the level of LIBOR on any Adjustment Date or during the life of any
Mortgage Loan.]
LIBOR
Adjustment Date 1993 1994 1995 1996 1997
- --------------- ---- ---- ---- ---- ----
January 1............... 4.000% 3.500% 6.562% 5.718% 5.562%
February 1.............. 3.625 3.500 7.000 5.531 5.625
March 1................. 3.375 3.375 6.687 5.281 5.687
April 1................. 3.312 4.000 6.437 5.312 5.718
May 1................... 3.375 4.250 6.500 5.531
June 1.................. 3.312 4.688 6.375 5.562
July 1.................. 3.500 5.000 6.000 5.656
August 1................ 3.500 5.250 6.000 5.812
September 1............. 3.500 5.313 5.875 5.906
October 1............... 3.437 5.313 5.906 5.843
November 1.............. 3.375 5.750 5.968 5.750
December 1.............. 3.437 5.937 5.875 5.562
[The initial Mortgage Rate in effect on a Mortgage Loan generally will
be lower, and may be significantly lower, than the sum of the Index that would
have been applicable at origination and the Note Margin. Therefore, unless the
Index declines after origination of a Mortgage Loan, the related Mortgage Rate
will generally increase on the first Adjustment Date following origination of
such Mortgage Loan subject to the Periodic Rate Cap. The repayment of the
Mortgage Loans will be dependent on the ability of the Mortgagors to make larger
monthly payments following adjustments of the Mortgage Rate. Mortgage Loans that
have the same initial Mortgage Rate may not always bear interest at the same
Mortgage Rate because such Mortgage Loans may have different Adjustment Dates
(and the Mortgage Rates therefore may reflect different Index values), Note
Margins, Maximum Mortgage Rates and Minimum Mortgage Rates. The Net Mortgage
Rate with respect to each Mortgage Loan as of the Cut-off Date will be set forth
in the Mortgage Loan Schedule attached to the Pooling and Servicing Agreement.
The Net Mortgage Rate on each Mortgage Loan will be adjusted on each Adjustment
Date to equal the Mortgage Rate minus the Servicing Fee, subject to the Maximum
Mortgage Rate, Minimum Mortgage Rate and Periodic Rate Cap for such Mortgage
Loan. The Note Margins for the Mortgage Loans will be at least ___% per annum
but not more than ___% per annum as of the Cut-off Date.] Mortgage Pool
Characteristics
[The Mortgage Pool will have the following characteristics as of the
Cut-off Date:]
[Number of Mortgage Loans..........................................____
Initial Pass-Through Rate on the Certificates (1).................____%
Range of Net Mortgage Rates (2) ..........................____% - ____%
Mortgage Rates:
Weighted Average....................................____%
Range.......................................____% - ____%
Note Margins:
Weighted Average....................................____%
Range.......................................____% - ____%
Minimum Mortgage Rates:
Weighted Average................................... ____%
Range.......................................____% - ____%
Minimum Net Mortgage Rates:
Weighted Average....................................____%
Range.......................................____% - ____%
Maximum Mortgage Rates:
Weighted Average................................... ____%
Range.......................................____% - ____%
Maximum Net Mortgage Rates:
Weighted Average....................................____%
Range....................................... ____ - ____%
Weighted Average Months to next Adjustment Date
after _________________ (3) .......................... 3]
- --------------------
(1) The Pass-Through Rate on the Certificates will be equal to the weighted
average of the Net Mortgage Rates on the Mortgage Loans.
(2) The Net Mortgage Rates are calculated as described under "Description
of the Certificates--Interest Distributions" herein, and the Net
Mortgage Rate as to each Mortgage Loan on and after its initial
Adjustment Date will be generally equal to the Mortgage Rate minus the
Servicing Fee, subject to the Periodic Rate Cap, Maximum Mortgage Rate
and Minimum Mortgage Rate.
(3) The Weighted Average Months to next Adjustment Date will be equal to
the weighted average of the number of months until the Adjustment Date
next following __________, 199__.
S-4
<PAGE>
[The following table sets forth the number, aggregate principal balance
and percentage of Mortgage Loans as of the Cut-off Date having their next
Adjustment Dates in the months and years set forth below.]
[Month and Year of Number of Aggregate Principal Percentage of
Next Adjustment Dates Mortgage Loans Balance Mortgage Loans
- --------------------- -------------- --------- --------------
January 199_............... ___ $ __________ ______%
February 199_.............. ___ __________ _______
March 199_................. ___ __________ _______
April 199_................. ___ __________ _______
________________........... ___ __________ _______
- ----------------...........
Total.... ___ $ __________ _____%]
[All percentages of the Mortgage Loans described herein are approximate
percentages (except as otherwise indicated) by aggregate principal balance as of
the Cut-off Date.]
[None of the Mortgage Loans will have been originated prior to
__________, 199_ or will have a maturity date later than ___________, ____. No
Mortgage Loan will have a remaining term to stated maturity as of the Cut-off
Date of less than ___ months. The weighted average remaining term to stated
maturity of the Mortgage Loans as of the Cut-off Date will be ___ months. The
weighted average original term to maturity of the Mortgage Loans as of the
Cut-off Date will be ___ months.]
[As of the Cut-off Date, no Mortgage Loan will be ___ month [s]
or more delinquent in payment of principal and interest.]
[The Mortgage Loans are generally assumable pursuant to the terms of
the related Mortgage Note. See "Maturity and Prepayment Considerations" in
the Prospectus.]
[No Mortgage Loan provides for deferred interest, negative
amortization or future advances.]
[Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Cut-off Date (except as otherwise indicated).
All percentages of the Mortgage Loans are approximate percentages by aggregate
principal balance as of the Cut-off Date (except as otherwise indicated). Unless
otherwise specified, all principal balances of the Mortgage Loans are as of the
Cut-off Date and are rounded to the nearest dollar.]
S-5
<PAGE>
Mortgage Rates
Percentage of
Mortgage Rates Number Principal Balance Mortgage Pool
$ . . %
. .
Total............. $ . . %
==== ====================
As of the Cut-off Date, the weighted average Mortgage Rate of the
Mortgage Loans was approximately _________% per annum.
[Net Mortgage Rates
Percentage of
Net Mortgage Rates Number Principal Balance Mortgage Pool
$ . . %
. .
Total.............. $ . . %
==== ====================
As of the Cut-off Date, the weighted average Net Mortgage Rate of the
Mortgage Loans was approximately ____% per annum.]
[[Minimum] [Maximum] Mortgage Rates
[Minimum] [Maximum] Percentage of
Mortgage Rates Number Principal Balance Mortgage Pool
$ . . %
. .
Total............ $ . . %
==== ====================
As of the Cut-off Date, the weighted average [minimum] [maximum]
Mortgage Rate of the Mortgage Loans was approximately _________% per annum.]
Original Mortgage Loan Principal Balances
Percentage of
Principal Balance Number Principal Balance Mortgage Pool
$ . $ . . %
. .
Total............ $ . . %
==== ====================
As of the Cut-off Date, the average unpaid principal balance of the
Mortgage Loans will be approximately $-------.
[Remaining Months to Maturity
Remaining Months Percentage of
to Maturity Number Principal Balance Mortgage Pool
$ . . %
. .
Total............ $ . . %
==== ====================
As of the Cut-off Date, the weighted average remaining months to
maturity of the Mortgage Loans was approximately ____ months.]
[Months Since Origination
Months Percentage of
Since Origination Number Principal Balance Mortgage Pool
$ . . %
. .
Total............ $ . . %
==== ====================
As of the Cut-off Date, the weighted average months since origination
of the Mortgage Loans was approximately ____ months.]
[Original Loan-To-Value Ratios
Percentage of
Loan-to-Value Ratio Number Principal Balance Mortgage Pool
$ . . %
. .
Total.............. $ . . %
==== ===
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans will have been approximately __.__%.]
Original Combined Loan-To-Value Ratios for Mortgage Loans Secured by Second
Liens
Percentage of
Number of Mortgage
Combined Loan-to-Value Ratio (%) Mortgage Loans Principal Balance Pool
................................. $ %
.................................
.................................
.................................
.................................
.................................
.................................
.................................
................................. .
Total....................... $ . %
==== ========== =====
The weighted average Combined Loan-to-Value Ratio at origination of the
Mortgage Loans secured by second liens will have been approximately ____%. The
Combined Loan-to-Value Ratio for each Mortgage Loan secured by a second lien is
equal to (a) the sum of the principal balance of such Mortgage Loan and any
related first mortgage loan as of the date of origination of the Mortgage Loan
divided by (b) the lesser of (i) the appraised value of the related Mortgaged
Property determined at origination of such Mortgage Loan and (ii) the sales
price of the related Mortgaged Property.
Junior Mortgage Ratios
Number of Percentage of
Junior Mortgage Ratio (%) Mortgage Loans Principal Balance Mortgage Pool
.......................... $ %
..........................
..........................
..........................
..........................
..........................
..........................
..........................
.......................... .
Total................ $ . %
==== ============= =======
The weighted average Junior Mortgage Ratio as of the Cut-off Date will
have been approximately ____%.
Geographic Distributions of Mortgaged Properties
Percentage of
State Number Principal Balance Mortgage Pool
$ . . %
. .
Total............ $ . . %
==== ===
- ---------------------------
[(1) "Other" includes states that contain less than [__]% of the Mortgage
Pool.]
[No more than _____% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area.] Mortgaged Property Types
Percentage of
Property Number Principal Balance Mortgage Pool
Single-family detached........ $ . . %
Planned Unit Developments
(detached)....................
Two- to four-family units.....
Condo Low-Rise (less than 5
stories)......................
Condo Mid-Rise (5 to 8
stories)......................
Condo High-Rise (9 stories or
more..........................
Townhouse.....................
Planned Unit Developments
(attached).................... . .
-- -
Total................ $ . . %]
==== ==
Mortgage Loan Documentation
Percentage of
Type of Program Number Principal Balance Mortgage Pool
Full Documentation...... $ . . %
Limited Documentation...
No Documentation........ . .
--- -
Total.......... $ . . %]
==== ==
Occupancy Types
Occupancy (as Percentage of
indicated by Borrower Number Principal Balance Mortgage Pool
Primary Residence......... $ . . %
Second/Vacation...........
Non Owner-occupied........ . .
--- --
Total............ $ . . %
==== ===
[If the Mortgage loans provide for simple interest include the following
paragraphs:
[Payments on the Mortgage Loans
Each Mortgage Loan requires that each monthly payment consist of an
installment of interest which is calculated according to the simple interest
method on the basis of the outstanding principal balance of the Mortgage Loan
multiplied by the Mortgage Rate and further multiplied by a fraction, the
numerator of which is the number of days in the period elapsed since the
preceding payment of interest was made and the denominator of which is the
number of days in the annual period for which interest accrues on such Mortgage
Loan. As payments are received, the amount received is applied first to interest
accrued to the date of payment and the balance is applied to reduce the unpaid
principal balance. Accordingly, if a Mortgagor pays a fixed monthly installment
before its scheduled due date, the portion of the payment allocable to interest
for the period since the preceding payment was made will be less than it would
have been had the payment been made as scheduled, and the portion of the payment
applied to reduce the unpaid principal balance will be correspondingly greater.
However, the next succeeding payment will result in an allocation of a greater
amount to interest if such payment is made on its scheduled due date.
Conversely, if a Mortgagor pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment is made on or prior to its
scheduled due date, the principal balance of the Mortgage Loan will amortize in
the manner described in the preceding paragraph. However, if the borrower
consistently makes scheduled payments after the scheduled due date the Mortgage
Loan will amortize more slowly than scheduled. Any remaining unpaid principal is
payable on the final maturity date of the Mortgage Loan.]
Representations and Warranties
[Each Program Seller [and GMACMC] has made or will make certain limited
representations and warranties regarding the related Mortgage Loans, as of the
date of purchase thereof by the Seller. However, such representations and
warranties will not be assigned to the Trustee for the benefit of the holders of
the related series of Certificates, and therefore a breach of such
representations and warranties will not be enforceable on behalf of the Trust
Fund. Residential Funding in its capacity as Seller will make certain limited
representations and
warranties regarding the Mortgage Loans to the Company at the time that they are
sold to the Company. See "Mortgage Loan Program--Qualifications of Sellers" and
"--Representations as to the Mortgage Loans" and "Description of the
Certificates--Review of Mortgage Loans" in the Prospectus.]
[Underwriting Standards]
[DESCRIBE MORTGAGE LOANS SELLER'S UNDERWRITING STANDARDS FOR
MORTGAGE LOANS IF APPROPRIATE]
[Delinquency and Foreclosure Experience.]
[INSERT MORTGAGE LOANS SELLER'S PORTFOLIO DELINQUENCY AND LOSS
EXPERIENCE IF APPROPRIATE.]
DESCRIPTION OF THE OFFERED CERTIFICATES
General
[The Offered Certificates, together with the Class B Certificates] will
evidence the entire beneficial ownership interest in the Trust Fund. The Trust
Fund will consist of (1) the Mortgage Loans; (2) such assets as from time to
time are identified as deposited in respect of the Mortgage Loans in the
Custodial Account and in the Certificate Account and belonging to the Trust
Fund; (3) property acquired by foreclosure of such Mortgage Loans [or by a deed
in lieu of foreclosure]; and (4) any applicable Primary Insurance Policies and
all proceeds thereof (collectively, the "Mortgage Loans").
The Principal Only Certificates will be entitled to payments based on
the Discount Fraction of the Discount Mortgage Loans. "Discount Mortgage Loans"
is any Mortgage Loan with a Net Mortgage Rate less than [___]%. With respect to
each item of Discount Mortgage Loans, the "Discount Fraction" is equal to a
fraction, expressed as a percentage, the numerator of which is [___]% minus the
Net Mortgage Rate for such Discount Mortgage Loans and the denominator of which
is [___]%. Approximately _____ Mortgage Loans constituting (by aggregate
principal balance as of the Cut-off Date) were Discount Mortgage Loans. The
Mortgage Loans other than the Discount Mortgage Loans are referred to herein as
the "Non-Discount Mortgage Loans."
Available Distribution Amount
The "Available Distribution Amount" for any Distribution Date is equal
to (i) the aggregate amount of scheduled payments on the Mortgage Loans due on
the related Due Date and received on or prior to the related Determination Date,
after deduction of the related
servicing fees and any subservicing fees (collectively, the "Servicing Fees"),
(ii) certain unscheduled payments, including Mortgagor prepayments on the
Mortgage Loans, Insurance Proceeds, Liquidation Proceeds and proceeds from
repurchases of and substitutions for the Mortgage Loans occurring during the
preceding calendar month and (iii) all Advances made for such Distribution Date,
in each case net of amounts reimbursable therefrom to the Master Servicer [and
any Subservicer]. In addition to the foregoing amounts, with respect to
unscheduled collections, not including Mortgagor prepayments, the Master
Servicer may elect to treat such amounts as included in the Available
Distribution Amount for the Distribution Date in the month of receipt, but is
not obligated to do so. With respect to any Distribution Date, (a) the Due Date
is the first day of the month in which such Distribution Date occurs and (b) the
Determination Date is the _____th day of the month in which such Distribution
Date occurs (or, if such day is not a business day, the next business day).
Interest Distributions
Holders of each class of Offered Certificates (other than Principal
Only Certificates) will be entitled to receive interest distributions in an
amount equal to the Accrued Certificate Interest on such class on each
Distribution Date, to the extent of the Available Distribution Amount (as
defined below) for such Distribution Date, commencing on the first Distribution
Date in the case of all classes of Senior Certificates [other than the Accrual
Certificates and commencing on the Accretion Termination Date (as defined below)
in the case of the Accrual Certificates]. Holders of the Class M Certificates
will be entitled to receive interest distributions in an amount equal to the
Accrued Certificate Interest on each Distribution Date, to the extent of the
Available Distribution Amount for such Distribution Date after distributions of
interest and principal to the Senior Certificates [and reimbursements for
certain Advances to the Master Servicer.
With respect to any Distribution Date, "Accrued Certificate Interest"
will be equal to (a) in the case of each class of Offered Certificates
(other than the Principal Only Certificates and the Stripped Interests
Certificates), one month's interest accrued on the Certificate Principal
Balance of the Certificates of such class at the Pass-Through Rate on such
class and (b) in the case of the Stripped Interests Certificates, one
month's interest accrued on the Notional Amount of the Certificates of such
class at the then-applicable Pass-Through Rate on such class. In each case
less interest shortfalls, if any, for such Distribution Date not covered by
the Subordination, including in each case (i) any Prepayment Interest
Shortfall (as defined below) to the extent not covered by the Master
Servicer, as described below, (ii) the interest portions of Realized Losses
including Special Hazard Losses in excess of the Special Hazard Amount
("Excess Special Hazard Losses"), Fraud Losses in excess of the Fraud
Amount ("Excess Fraud Losses"), Bankruptcy Losses in excess of the
Bankruptcy Amount ("Excess Bankruptcy Losses") and losses occasioned by
war, civil insurrection, certain governmental actions, nuclear reaction and
certain other risks ("Extraordinary Losses") not covered by the
Subordination, (iii) the interest portion of any Advances that were made
with respect to delinquencies that were ultimately determined to be Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses and (iv) any interest shortfalls not covered by
Subordination, including interest shortfalls relating to the Relief Act or
similar legislation or regulations, all allocated among all the
Certificates in proportion to the respective amounts of Accrued Certificate
Interest for such Distribution Date on each such class. In the case the
Class M Certificates, Accrued Certificate Interest will be further reduced
by the allocation of the interest portion of certain losses thereto, if
any, as described below under "--Allocation of Losses; Subordination."
Accrued Certificate Interest is calculated on the basis of a 360-day year
consisting of twelve 30- day months. The distributions of interest on any
Distribution Date for all classes of Certificates will reflect interest
accrued, and receipts with respect thereto, on the Mortgage Loans for the
preceding calendar month, as may be reduced by any Prepayment Interest
Shortfall and other shortfalls in the collections of interest as described
below.
[The Accretion Termination Date for the Accrual Certificates is the
earlier to occur of (i) the Distribution Date on which the Certificate Principal
Balances of the Class A-1 and Class A-2 have been reduced to zero and (ii) the
Credit Support Depletion Date (as defined herein). On each Distribution Date
preceding the Accretion Termination Date, an amount equal to the amount of
Accrued Certificate Interest on the Accrual Certificates for such date will be
added to the Certificate Principal Balance thereof, and such amount will be
distributed to the holders of the then outstanding Senior Certificates (other
than the Principal Only Certificates) in reduction of the Certificate Principal
Balances thereof, as described herein. On each Distribution Date on or after the
Accretion Termination Date, the entire amount of Accrued Certificate Interest on
the Accrual Certificates for such date will be payable to the holders of the
Accrual Certificates, to the extent not required to fully retire the remaining
Senior Certificates on the Accretion Termination Date; provided, however, that
if the Accretion Termination Date is the Credit Support Depletion Date, the
entire amount of Accrued Certificate Interest on the Accrual Certificates for
such Distribution Date will be payable to the holders of the Accrual
Certificates.]
The "Prepayment Interest Shortfall" for any Distribution Date is equal
to the aggregate shortfall, if any, in collections of interest (adjusted to the
related Net Mortgage Rates), resulting from Mortgagor prepayments on the
Mortgage Loans during the preceding calendar month. Such shortfalls will result
because interest on prepayments in full is distributed only to the date of
prepayment, and because no interest is distributed on prepayments in part, as
such prepayments are applied to reduce the outstanding principal balance of the
related Mortgage Loans as of the Due Date in the month of prepayment. [With
respect to any Distribution Date, any Prepayment Interest Shortfalls resulting
from prepayments in full for such Distribution Date will be offset by the Master
Servicer, but only to the extent such Prepayment Interest Shortfalls do not
exceed an amount equal to [one-twelfth of ____% of the Stated Principal Balance
of the Mortgage Loans immediately preceding such Distribution Date]. Prepayment
Interest Shortfalls will be offset by the Master Servicer first, by a reduction
in the Servicing Fee and second, by a reduction in other servicing compensation
of the Master Servicer.
If on any Distribution Date the Available Distribution Amount is less
than Accrued Certificate Interest on the Senior Certificates for such
Distribution Date, the shortfall will be allocated among the holders of all
classes of Senior Certificates (other than the Principal Only Certificates) in
proportion to the respective amounts of Accrued Certificate Interest for such
Distribution Date on each such class. In addition, the amount of any interest
shortfalls that are covered by Subordination (specifically, interest shortfalls
not described in clauses (i) through (iv) in the third preceding paragraph) will
be unpaid Accrued Certificate Interest and will be distributable to holders of
the Certificates of such classes entitled to such amounts on subsequent
Distribution Dates, to the extent of available funds after interest
distributions as required herein. Such shortfalls could occur, for example, if
delinquencies on the Mortgage Loans were exceptionally high and were
concentrated in a particular month and Advances by the Master Servicer did not
cover the shortfall. Any such amounts so carried forward will not bear interest.
[Prior to the Accretion Termination Date, interest shortfalls to be
allocated to the Accrual Certificates will be so allocated by reducing the
amount that is added to the Certificate Principal Balance of the Accrual
Certificates in respect of Accrued Certificate Interest on such Distribution
Date. This reduction will correspondingly reduce the amount distributed in
respect of principal on the applicable Distribution Date to the holders of the
Senior Certificates (other than the Principal Only Certificates) and will cause
the Certificate Principal Balances of the outstanding Senior Certificates (other
than the Principal Only Certificates) to be reduced to zero later than would
otherwise be the case.]
The Pass-Through Rates on each class of Offered Certificates, other
than the Principal Only Certificates (which are not entitled to distributions of
interest) and the Stripped Interests Certificates, are fixed and are set forth
on the cover hereof. The Pass-Through Rate on the Stripped Interests
Certificates on each Distribution Date will equal the weighted average, as of
the Due Date in the month preceding the month in which such Distribution Date
occurs, of the Pool Strip Rates on each Mortgage Loan with a Net Mortgage Rate
in excess of [___]% per annum. The "Pool Strip Rate" on each Mortgage Loan is
equal to the Net Mortgage Rate thereon minus [___]%. The "Net Mortgage Rate" on
each Mortgage Loan is equal to the Mortgage Rate thereon minus the Servicing Fee
Rate. The Pool Strip Rates on the Mortgage Loans range from [___]% to [___]% per
annum. The initial Pass-Through Rate on the Stripped Interests Certificates is
approximately [___]% per annum.
[The Pass-Through Rate on each class of the Offered Certificates for
any Distribution Date will equal the weighted average of the Net Mortgage Rates
on the outstanding Mortgage Loans for the month preceding such Distribution
Date, determined as of the close of business on the Due Date occurring in such
month (or, with respect to the first Distribution Date, as of the Cut-off Date).
The Net Mortgage Rate with respect to each Mortgage Loan as of the Cut-off Date
will be set forth in the Mortgage Loan Schedule attached to the Pooling and
Servicing Agreement. As of the Cut-off Date, the weighted average Net Mortgage
Rate will be [______]% per annum. Accordingly, the initial Pass-Through Rate on
the Offered Certificates will be [______]% per annum.]
[On each Adjustment Date applicable to each Mortgage Loan, the Net
Mortgage Rate on each Mortgage Loan will be adjusted to a rate equal to the
Mortgage Rate minus the Servicing Fee, subject to the Maximum Mortgage Rate and
Minimum Mortgage Rate for such Mortgage Loan; provided that the Net Mortgage
Rate on any Mortgage Loan on any Adjustment Date may
not increase or decrease by more than [____]% (the "Periodic Rate Cap"). The
Note Margins for the Mortgage Loans will be at least [_____]% per annum but not
more than [_____]% per annum as of the Cut-off Date, with an initial weighted
average Note Margin of [______]% per annum.]
The Accrued Certificate Interest allocable to each class of Offered
Certificates is based on the Certificate Principal Balance thereof or, in the
case of the Stripped Interests Certificates, on the Notional Amount. The
Certificate Principal Balance of any Offered Certificate, as of any date of
determination is equal to the initial Certificate Principal Balance thereof,
reduced by the aggregate of (a) all amounts allocable to principal previously
distributed with respect to such Certificate and (b) any reductions in the
Certificate Principal Balance thereof deemed to have occurred in connection with
allocations of Realized Losses in the manner described herein under
"--Allocation of Losses; Subordination"; provided that, after the Certificate
Principal Balance of the Class B Certificates has been reduced to zero, the
Certificate Principal Balance of the Class M Certificates shall equal the
excess, if any, of (a) the then aggregate Stated Principal Balance (as defined
herein) of all of the Mortgage Loans over (b) the then aggregate Certificate
Principal Balance of all classes of Senior Certificates then outstanding. The
"Notional Amount" of the Stripped Interests Certificates as of any date of
determination is equal to the aggregate Certificate Principal Balance of the
Certificates of all classes as of such date. Reference to the Notional Amount of
a Stripped Interests Certificate is solely for convenience in certain
calculations and does not represent the right to receive any distributions
allocable to principal.
Principal Distributions on the Senior Certificates
Except as otherwise provided below, holders of the Senior Certificates
(other than the Stripped Interests, which are not entitled to receive any
principal distributions, and the Principal Only Certificates) will be entitled
to receive on each Distribution Date, to the extent of the portion of the
Available Distribution Amount remaining after the Senior Interest Distribution
Amount is distributed to such holders and the Class A-4 Principal Distribution
Amount (as described below) is so distributed, a distribution allocable to
principal in the following amount:
(i) the product of (a) the then-applicable Senior Percentage and (b)
the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly
payments on the Mortgage Loans (other than the related Discount
Fraction of the principal portion of such payments, with respect
to each item of Discount Mortgage Loans due on the related Due
Date, whether or not received on or prior to the related
Determination Date, less the principal portion of Debt Service
Reductions (as defined below) which, together with other
Bankruptcy Losses, are in excess of the Bankruptcy Amount;
(2) the principal portion of all proceeds of the
repurchase of a Mortgage Loan (or, in the case of a
substitution, certain amounts representing a principal
adjustment) (other than the related Discount Fraction of the
principal portion of such proceeds, with respect to each item of
Discount Mortgage Loans) as required by the Pooling and
Servicing Agreement during the preceding calendar month;
(3) the principal portion of all other unscheduled
collections received during the preceding calendar month (other
than full and partial Principal Prepayments made by the
respective Mortgagors and any amounts received in connection
with a Final Disposition (as defined below) of a Mortgage Loan
described in clause (ii) below), to the extent applied as
recoveries of principal (other than the related Discount
Fraction of the principal portion of such proceeds, with respect
to each item of Discount Mortgage Loans);
(ii) in connection with the Final Disposition of a Mortgage Loan
(a) that occurred in the preceding calendar month and (b) that did not
result in any Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary Losses, an amount equal to the
lesser of (1) the then-applicable Senior Percentage of the Stated
Principal Balance of such Mortgage Loan (other than the related
Discount Fraction of the principal portion of such proceeds, with
respect to each item of Discount Mortgage Loans) and (2) the
then-applicable Senior Accelerated Distribution Percentage (as defined
below) of the related collections, including Insurance Proceeds and
Liquidation Proceeds, to the extent applied as recoveries of principal
(other than the related Discount Fraction of the principal portion of
such proceeds, with respect to each item of Discount Mortgage Loans);
(iii) the then-applicable Senior Accelerated Distribution
Percentage of the aggregate of all full and partial Principal
Prepayments made by the respective Mortgagors (other than the related
Discount Fraction of the principal portion of such proceeds, with
respect to each item of Discount Mortgage Loans) during the preceding
calendar month;
(iv) any Excess Subordinate Principal Amount (as defined below) for
such Distribution Date;
[(v) if such Distribution Date is on or prior to the Accretion
Termination Date, the Accrued Certificate Interest on the Accrual
Certificates for such Distribution Date, to the extent added to the
Certificate Principal Balance thereof; and]
(vi) any amounts allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i) through (iii) and
(v) above) that remain undistributed
to the extent that any such amounts are not attributable to Realized
Losses which are allocated to the Subordinate Certificates.
With respect to any Distribution Date, "Senior Principal Distribution
Amount" is equal to the lesser of (a) the Available Distribution Amount
remaining after the Senior Interest Distribution Amount and the Class A-4
Principal Distribution Amount are distributed and (b) the sum of the
amounts described in clauses (i) through (vi) of the immediately preceding
paragraph. With respect to any Distribution Date on which the Certificate
Principal Balance of the most subordinate class or classes of Certificates
then outstanding is to be reduced to zero and on which Realized Losses are
to be allocated to such class or classes, the "Excess Subordinate Principal
Amount" is equal to the amount, if any, by which (1) the amount that would
otherwise be distributable in respect of principal on such class or classes
of Certificates on such Distribution Date is greater than (2) the excess,
if any, of the aggregate of the Certificate Principal Balance of such class
or classes of Certificates immediately prior to such Distribution Date over
the aggregate amount of Realized Losses to be allocated to such class or
classes of Certificates on such Distribution Date.
Holders of the Principal Only Certificates will be entitled to receive
on each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after the Senior Interest Distribution Amount is
distributed, a distribution allocable to principal equal to the Class A-4
Principal Distribution Amount. The Class A-4 Principal Distribution Amount is
equal to the aggregate of:
(i) the related Discount Fraction of the principal portion of the
scheduled monthly payment on each item of Discount Mortgage Loans due
on the related Due Date, whether or not received on or prior to the
related Determination Date, less the Discount Fraction of the principal
portion of any related Debt Service Reductions (as defined below) which
together with other Bankruptcy Losses are in excess of the Bankruptcy
Amount;
(ii) the related Discount Fraction of the principal portion of all
unscheduled collections on each item of Discount Mortgage Loans
received during the preceding calendar month (other than amounts
received in connection with a Final Disposition of an item of Discount
Mortgage Loans described in clause (iii) below), including full and
partial Principal Prepayments, repurchases of Discount Mortgage Loans
(or, in the case of a substitution, certain amounts representing a
principal adjustment) as required by the Pooling and Servicing
Agreement, Liquidation Proceeds and Insurance Proceeds, to the extent
applied as recoveries of principal;
(iii) in connection with the Final Disposition of an item of
Discount Mortgage Loans that did not result in any Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses, an amount equal to the applicable Discount
Fraction of the Stated Principal Balance of such Discount Mortgage
Loans immediately prior to such Distribution Date net of the principal
portion of any related Realized Loss allocated to the Principal Only
Certificates on such Distribution Date; and
(iv) any amounts, allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i) through (iii)
above), that remain undistributed.
A "Final Disposition" of a defaulted Mortgage Loan is deemed to have
occurred upon a determination by the Master Servicer that it has received
all Insurance Proceeds, Liquidation Proceeds and other payments or cash
recoveries which the Master Servicer reasonably and in good faith expects
to be finally recoverable with respect to such Mortgage Loan.
The "Stated Principal Balance" of a Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts allocable to
principal that have been distributed to Certificateholders with respect to such
Mortgage Loan on or before such date, and as further reduced to the extent that
any Realized Loss thereon has been allocated to one or more classes of
Certificates on or before the date of determination.
The "Senior Percentage," which initially will equal approximately
[____]% and will in no event exceed 100%, will be adjusted for each Distribution
Date to be the percentage equal to the aggregate Certificate Principal Balance
of the Senior Certificates (other than the Principal Only Certificates)
immediately prior to such Distribution Date divided by the aggregate Stated
Principal Balance of the aggregate amount of all the Mortgage Loans (other than
the Discount Fraction of the Discount Mortgage Loans) immediately prior to such
Distribution Date. The "Subordinate Percentage" as of any date of determination
is equal to 100% minus the Senior Percentage as of such date. The initial Senior
Percentage is less than the initial percentage interest in the Trust Fund
evidenced by the Senior Certificates (including the Principal Only Certificates)
in the aggregate, because the Senior Percentage is calculated without regard to
either the Certificate Principal Balance of the Principal Only Certificates or
the Discount Fraction of the Stated Principal Balance of each item of Discount
Mortgage Loans.
The Senior Accelerated Distribution Percentage for any Distribution
Date occurring prior to [__________ __, ____] Distribution Date will equal 100%.
Thereafter, the Senior Accelerated Distribution Percentage will be subject to
gradual reduction as described in the following paragraph. This disproportionate
allocation of certain unscheduled payments in respect of principal will have the
effect of accelerating the amortization of the Senior Certificates while, in the
absence of Realized Losses allocated to the Subordinate Certificates, increasing
the proportionate interest in the Trust Fund evidenced by the Subordinate
Certificates. Increasing the proportionate interest of the Subordinate
Certificates relative to that of the Senior Certificates is intended to preserve
the availability of the Subordination provided by the Subordinate Certificates.
The "Senior Accelerated Distribution Percentage" for any Distribution
Date occurring after the [__________ __, ____] Distribution Date will be as
follows: for any Distribution Date falling in the [__________] year after the
Delivery Date, the Senior Percentage for such Distribution Date plus [__]% of
the Subordinate Percentage (as defined below) for such Distribution Date; for
any Distribution Date falling in the [__________] year after the Delivery Date,
the Senior Percentage for such Distribution Date plus __% of the Subordinate
Percentage for such Distribution Date; for any Distribution Date falling in the
[__________] year after the Delivery Date, the Senior Percentage for such
Distribution Date plus __% of the Subordinate
Percentage for such Distribution Date; for any Distribution Date falling in the
[__________] year after the Delivery Date, the Senior Percentage for such
Distribution Date plus __% of the Subordinate Percentage for such Distribution
Date; and for any Distribution Date after the [__________] year after the
Delivery Date, the Senior Percentage for such Distribution Date (unless on any
such Distribution Date the Senior Percentage exceeds the initial Senior
Percentage, in which case the Senior Accelerated Distribution Percentage for
such Distribution Date will once again equal 100%). Any scheduled reduction to
the Senior Accelerated Distribution Percentage described above shall not be made
as of any Distribution Date unless either (a)(i) the outstanding principal
balance of Mortgage Loans delinquent [____] days or more averaged over the last
[____] months, as a percentage of the aggregate outstanding principal balance of
all Mortgage Loans averaged over the last [____] months, does not exceed [____]%
and (ii) Realized Losses on the Mortgage Loans to date for such Distribution
Date if occurring during the [____], [____], [____], [____] or [____] year (or
any year thereafter) after the Delivery Date are less than [___]%, [___]%,
[___]%, [___]% or [___]%, respectively, of the sum of the initial Certificate
Principal Balances of the Subordinate Certificates or (b)(i) the outstanding
principal balance of Mortgage Loans delinquent [___] days or more averaged over
the last [___] months, as a percentage of the aggregate outstanding principal
balance of all Mortgage Loans averaged over the last [___] months, does not
exceed [___]% and (ii) Realized Losses on the Mortgage Loans to date are less
than [___]% of the sum of the initial Certificate Principal Balances of the
Subordinate Certificates. Notwithstanding the foregoing, upon reduction of the
Certificate Principal Balances of the Senior Certificates (other than the
Principal Only Certificates) to zero, the Senior Accelerated Distribution
Percentage will equal 0%.
Distributions of principal on the Senior Certificates (other than the
Stripped Interests Certificates) on each Distribution Date will be made (after
distribution of the Senior Interest Distribution Amount as described herein
under "--Interest Distributions"), as follows:
(i) Prior to the occurrence of the Credit Support Depletion Date (as
defined below):
(a) the Class A-4 Principal Distribution Amount shall
be distributed to the Principal Only Certificates, in
reduction of the Certificate Principal Balance thereof, until
such Certificate Principal Balance is reduced to zero;
(b) the Senior Principal Distribution Amount shall be
distributed to the Residual Certificates, in reduction of the
Certificate Principal Balance thereof, until such Certificate
Principal Balance is reduced to zero; and
(c) the balance of the Senior Principal Distribution
Amount remaining after the distributions described in clauses
(i) and (ii) above shall be distributed in reduction of the
Certificate Principal Balances of the classes set forth below
as follows:
(1) first, [____.___]% and [___.______]% of such amount, concurrently,
to the Class A-1 Certificates and Class A-2 Certificates, respectively,
until the Certificate Principal Balances thereof are reduced to zero; and
(2) second, to the Class A-3 Certificates
until the Certificate Principal Balance thereof is
reduced to zero.
(ii) On or after the occurrence of the Credit Support
Depletion Date, all priorities relating to distributions as described
above in respect of principal among the various classes of Senior
Certificates (other than the Principal Only Certificates) will be
disregarded, an amount equal to the Discount Fraction of the principal
portion of scheduled payments and unscheduled collections received or
advanced in respect of Discount Mortgage Loans will be distributed to
the Principal Only Certificates, and the Senior Principal Distribution
Amount will be distributed to all classes of Senior Certificates (other
than the Principal Only Certificates) pro rata in accordance with their
respective outstanding Certificate Principal Balances and the Senior
Interest Distribution Amount will be distributed as described under
"--Interest Distributions."
(iii) If the Certificate Principal Balances of the Senior
Certificates (other than the Principal Only Certificates) have been
reduced to zero prior to the occurrence of the Credit Support Depletion
Date, the Senior Certificates (other than the Principal Only
Certificates) will be entitled to no further distributions of principal
thereon and the Available Distribution Amount will be paid solely to
the holders of the Principal Only Certificates, the Stripped Interests
Certificates and the Subordinate Certificates, in each case as
described herein.
The "Credit Support Depletion Date" is the first Distribution Date on
which the Senior Percentage equals 100%.
[The following table sets forth for each Distribution Date the
applicable Planned Principal Balances and Targeted Principal Balances for each
class of PAC and TAC Certificates and for the PAC and TAC Principal Components.
There is no assurance that sufficient funds will be available on any
Distribution Date to reduce the Certificate Principal Balances of the PAC and
TAC Certificates and the amounts of the PAC and TAC Principal Components to
their corresponding Planned Principal Balances or Targeted Principal Balances,
as applicable, for such Distribution Date, or that distributions on such PAC and
TAC Certificates and PAC and TAC Principal Components will not be made in excess
of such amounts for such Distribution Date.
S-6
<PAGE>
<TABLE>
<CAPTION>
Planned Principal Balances and Targeted Principal Balances
Planned Principal Balances Targeted Principal Balances
------------------------------------------------------------ --------------------------------
<S> <C> <C> <C> <C>
Class [__] Class [___]
PAC Principal TAC Principal
Distribution Date Class [__] Component Component Class [ ]
</TABLE>
Initial Balance................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 199_].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__].................
[___ 25, 20__ and thereafter]..
S-7
<PAGE>
The Planned Principal Balances and Targeted Principal Balances for each
Distribution Date set forth in the table above were calculated based on certain
assumptions, including the assumption that prepayments on the Mortgage Loans
occur each month at a constant level between approximately [__]% SPA and
approximately [___]% SPA, in the case of the Planned Principal Balances and that
prepayments on the Mortgage Loans occur at a constant level of approximately
[___]% SPA in the case of the Targeted Principal Balances. The actual
characteristics and performance of the Mortgage Loans will differ from the
assumptions used in determining the Planned Principal Balances and Targeted
Principal Balances. The Planned Principal Balances and Targeted Principal
Balances set forth in the table above are final and binding regardless of any
error or alleged error in making such calculations.
There can be no assurance that funds available for distributions of
principal on the PAC and TAC Certificates and the PAC and TAC Principal
Components will be sufficient to cover, or will not be in excess of, the related
PAC Principal Amount and TAC Principal Amount for any Distribution Date.
Distributions in reduction of the Certificate Principal Balance of any class of
PAC or TAC Certificates or in reduction of the amount of the PAC or TAC
Principal Components may commence significantly earlier (other than as to any
class or Component for which the above table reflects a distribution on the
first Distribution Date) or later than the first Distribution Date for such
class or Component shown in the above table. Distributions on any of the PAC and
TAC Certificates and the PAC and TAC Principal Components may end significantly
earlier or later than the last Distribution Date for such class or Component
shown in the above table. See "Prepayment and Yield Considerations" herein for a
further discussion of the assumptions used to produce the above table and the
effect of prepayments on the Mortgage Loans on the rate of payments of principal
and on the weighted average lives of such Certificates.]
The Master Servicer may elect to treat Insurance Proceeds, Liquidation
Proceeds and other unscheduled collections (not including prepayments by the
Mortgagors) received in any calendar month as included in the Available
Distribution Amount and the Senior Principal Distribution Amount for the
Distribution Date in the month of receipt, but is not obligated to do so. If the
Master Servicer so elects, such amounts will be deemed to have been received
(and any related Realized Loss shall be deemed to have occurred) on the last day
of the month prior to the receipt thereof.
Principal Distributions on the Class M Certificates
Holders of each class of the Class M Certificates will be entitled to
receive on each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after (A) the sum of the Senior Interest
Distribution Amount and the Senior Principal Distribution Amount is distributed
to holders of the Senior Certificates, (B) reimbursement is made to the Master
Servicer for certain Advances remaining unreimbursed following the final
liquidation of the related Mortgage Loan to the extent described below under
"--Advances," (C) the aggregate amount of Accrued Certificate Interest and
principal required to be distributed to
holders of Class M Certificates and (D) the aggregate amount of Accrued
Certificate Interest required to be distributed on such class of Class M
Certificates on such Distribution Date is distributed to such Class M
Certificates, a distribution allocable to principal in the following amounts:
(i) the product of (a) the then-applicable Class M Percentage and (b)
the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments
on the Mortgage Loans due on the related Due Date, whether or
not received on or prior to the related Determination Date,
less the principal portion of Debt Service Reductions together
with other Excess Bankruptcy Losses;
(2) the principal portion of all proceeds of the repurchase
of a Mortgage Loan (or, in the case of a substitution, certain
amounts representing a principal adjustment) as required by
the Pooling and Servicing Agreement during the preceding
calendar month; and
(3) the principal portion of all other unscheduled
collections received during the preceding calendar month
(other than full and partial Principal Prepayments made by the
respective Mortgagors and any amounts received in connection
with a Final Disposition of a Mortgage Loan described in
clause (ii) below), to the extent applied as recoveries of
principal;
(ii) such Class M Certificate's pro rata share, based on the
Certificate Principal Balance of the Class M Certificate relative to
the aggregate Certificate Principal Balance of the Class M and Class B
Certificates then outstanding, of all amounts received in connection
with the Final Disposition of a Mortgage Loan (other than the related
Discount Fraction of such amounts with respect to any item of Discount
Mortgage Loans) (1) that occurred during the preceding calendar month
and (2) that did not result in any Excess Special Hazard Losses, Excess
Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses, to the
extent applied as recoveries of principal and to the extent not
otherwise payable to the Senior Certificates;
(iii) the portion of full and partial Principal Prepayments
(other than the Discount Fraction of such Principal Prepayments with
respect to any item of Discount Mortgage Loans) made by the respective
Mortgagors during the preceding calendar month allocable to the Class M
Certificates, as described below;
(iv) an amount equal to the Excess Subordinate Principal Amount; and
(v) any amounts allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i), (ii) and (iii)
above) that remain undistributed to the extent that any such amounts
are not attributable to Realized Losses which were allocated to the
Class B Certificates. As to the Class M Certificates, on any
Distribution Date, any Accrued Certificate Interest
thereon remaining unpaid from any previous Distribution Date will be
distributable to the extent of available funds. Notwithstanding the foregoing,
if the Certificate Principal Balances of the Class B Certificates have been
reduced to zero, on any Distribution Date, with respect to the Class M
Certificates outstanding on such Distribution Date, Accrued Certificate Interest
thereon remaining unpaid from any previous Distribution Date (except in the
limited circumstances provided in the Pooling and Servicing Agreement) will not
be distributable.
From the Distribution Date occurring in [__________ ____] (or if the
Certificate Principal Balances of the Senior Certificates (other than the
Principal Only Certificates) have been reduced to zero prior to such
Distribution Date, the Distribution Date on which such reduction occurred) to,
but not including the later to occur of the Distribution Date occurring in
[__________ ____] and the Distribution Date on which the Class B Percentage
first equals or exceeds [____]% (approximately twice the sum of the initial
Class B Percentages) before giving effect to distributions on such Distribution
Date, the Class M Certificates (if outstanding) will be entitled to receive 100%
of any Principal Prepayments not otherwise distributable to the Senior
Certificates. Thereafter, all Principal Prepayments not otherwise distributable
to the Senior Certificates will be allocated to the Class M Certificates and
Class B Certificates for which certain loss levels established for such
Subordinate Certificates in the Pooling and Servicing Agreement have not been
exceeded. The related loss level on any Distribution Date would be satisfied as
to the Class B Certificates, only if the sum of the current percentage interests
in the Trust Fund evidenced by such class and each class, if any, subordinate
thereto were at least equal to the sum of the initial percentage interests
evidenced by such class and each class, if any, subordinate thereto.
As stated above under "--Principal Distributions on the Senior
Certificates," the Senior Accelerated Distribution Percentage will be 100%
during the first [___] years after the Delivery Date (unless the Certificate
Principal Balances of the Senior Certificates (other than the Principal Only
Certificates) are reduced to zero before the end of such period), and will
thereafter equal 100% whenever the Senior Percentage exceeds the initial Senior
Percentage. Furthermore, as set forth herein, the Senior Accelerated
Distribution Percentage will exceed the Senior Percentage during the [___]
through [___] years following the Delivery Date, and scheduled reductions to the
Senior Accelerated Distribution Percentage are subject to postponement based on
the loss and delinquency experience of the Mortgage Loans. Accordingly, the
Class M Certificates will not be entitled to any prepayments for at least the
first [___] years after the Delivery Date (unless the Certificate Principal
Balances of the Senior Certificates (other than the Principal Only Certificates)
are reduced to zero before the end of such period), and may receive no
prepayments or a disproportionately large or small portion of prepayments
(relative to the Class M Percentage) during certain periods thereafter. See
"--Principal Distributions on the Senior Certificates" herein. Allocation of
Losses; Subordination
The Subordination provided to the Senior Certificates by the Class B
Certificates and Class M Certificates and the Subordination provided to the
Class M Certificates by the Class B Certificates will cover Realized Losses on
the Mortgage Loans that are Defaulted Mortgage Losses, Fraud Losses, Bankruptcy
Losses (each as defined in the Prospectus) and Special Hazard Losses (as defined
herein), to the extent described herein. Any Realized Losses which do not
constitute Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses or Extraordinary Losses will be allocated first, to the Class B
Certificates; second, to the Class M Certificates, in each case until the
Certificate Principal Balance of the Class M Certificates have been reduced to
zero; and third, if any such Realized Losses are on any item of Discount
Mortgage Loans, to the Principal Only Certificates in an amount equal to the
related Discount Fraction of the principal portion of such Realized Losses, and
the remainder of such Realized Losses and the entire amount of such Realized
Losses on Non-Discount Mortgage Loans will be allocated to the remaining classes
of Senior Certificates on a pro rata basis. Any allocation of a Realized Loss
(other than a Debt Service Reduction) to a Certificate will be made by reducing
the Certificate Principal Balance thereof, in the case of the principal portion
of such Realized Loss, and the Accrued Certificate Interest thereon, in the case
of the interest portion of such Realized Loss, by the amount so allocated as of
the Distribution Date occurring in the month following the calendar month in
which such Realized Loss was incurred. In addition, any such allocation of a
Realized Loss to a Class M Certificate may also be made by operation of the
payment priority to the Senior Certificates set forth under "--Principal
Distributions on the Senior Certificates" and the Class M Certificates. As used
herein, "Debt Service Reduction" means a reduction in the amount of the monthly
payment due to certain bankruptcy proceedings, but does not include any
permanent forgiveness of principal. As used herein, "Subordination" refers to
the provisions discussed above for the sequential allocation of Realized Losses
among the various classes, as well as all provisions effecting such allocations
including the priorities for distribution of cash flows in the amounts described
herein.
Allocations of the principal portion of Debt Service Reductions to the
Class M Certificates and the Class B Certificates will result from the priority
of distributions of the Available Distribution Amount as described herein under
"--Principal Distributions on the Senior Certificates" and "--Principal
Distributions on the Class M Certificates," which distributions shall be made
first to the Senior Certificates and then to the Class M Certificates. An
allocation of the interest portion of a Realized Loss as well as the principal
portion of Debt Service Reductions will not reduce the level of Subordination,
as such term is defined herein, until an amount in respect thereof has been
actually disbursed to the Senior Certificateholders or the Class M
Certificateholders, as applicable. The holders of the Offered Certificates will
not be entitled to any additional payments with respect to Realized Losses from
amounts otherwise distributable on any classes of Certificates subordinate
thereto (except in limited circumstances in respect of any Excess Subordinate
Principal Amount and, in the case of the Principal Only Certificates, because an
amount equal to the Discount Fraction of the Stated Principal Balance of an item
of Discount Mortgage Loans will be paid to the Principal Only Certificates as
described in clause (3) of the definition of "Class A-4 Principal Distribution
Amount"). Accordingly, the Subordination provided to the Senior Certificates
(other than the Principal Only Certificates) and to the Class M Certificates by
the Class B Certificates with respect to Realized Losses allocated on any
Distribution Date will be effected primarily by increasing the Senior Percentage
or the Class M Percentage of future distributions of principal of the remaining
Mortgage Loans. Because the Discount Fraction of the Discount Mortgage Loans
will not change over time, the protection from losses provided to the Principal
Only Certificates by the Subordinate Certificates is limited to the prior right
of the Principal Only Certificates to receive distributions in respect of
principal as described herein under "--Principal Distributions on the Senior
Certificates". Furthermore, principal losses on the Mortgage Loans that are not
covered by Subordination will be allocated to the Principal Only Certificates
only to the extent they occur on any item of Discount Mortgage Loans and only to
the extent of the related Discount Fraction of such losses. Such allocation of
principal losses on the Discount Mortgage Loans may result in such losses being
allocated in an amount that is greater or less than would have been the case had
such losses been allocated in proportion to the Certificate Principal Balance of
the Principal Only Certificates. Thus, the Senior Certificates (other than the
Principal Only Certificates) will bear the entire amount of losses that are not
covered by Subordination other than the amount allocable to the Principal Only
Certificates, which losses will be allocated among all classes of Senior
Certificates other than the Principal Only Certificates on a pro rata basis in
proportion to their respective Certificate Principal Balances.
Any Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses, Extraordinary Losses or other losses of a type not covered by
the Subordination on Non-Discount Mortgage Loans will be allocated on a pro rata
basis among the Senior Certificates (other than the Principal Only
Certificates), Class M Certificates and Class B Certificates (any such Realized
Losses so allocated to the Senior Certificates (other than the Principal Only
Certificates) or Class M Certificates will be allocated without priority among
the various classes of Senior Certificates (other than the Principal Only
Certificates) or Class M Certificates). The principal portion of such losses on
Discount Mortgage Loans will be allocated to the Principal Only Certificates in
an amount equal to the related Discount Fraction thereof, and the remainder of
such losses on Discount Mortgage Loans will be allocated among the remaining
Certificates on a pro rata basis. An allocation of a Realized Loss on a "pro
rata basis" among two or more classes of Certificates means an allocation to
each such class of Certificates on the basis of its then outstanding Certificate
Principal Balance prior to giving effect to distributions to be made on such
Distribution Date in the case of an allocation of the principal portion of a
Realized Loss or based on the Accrued Certificate Interest thereon in the case
of an allocation of the interest portion of a Realized Loss.
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer
[or the Subservicer] for Advances and expenses, including attorneys' fees)
towards interest and principal owing on the Mortgage Loan. Such amount of loss
realized and any Special Hazard Losses, Fraud Losses and Bankruptcy Losses are
referred to herein as "Realized Losses."
In order to maximize the likelihood of distribution in full of the
Senior Interest Distribution Amount, the Class A-4 Principal Distribution Amount
and the Senior Principal Distribution Amount, on each Distribution Date, holders
of Senior Certificates have a right to distributions of the Available
Distribution Amount that is prior to the rights of the holders of the
Subordinate Certificates, to the extent necessary to satisfy the Senior Interest
Distribution Amount, the Class A-4 Principal Amount and the Senior Principal
Distribution Amount. Similarly, holders of the Class M Certificates have a right
to distributions of the Available Distribution Amount prior to the rights of
holders of the Class B Certificates.
The application of the Senior Accelerated Distribution Percentage (when
it exceeds the Senior Percentage) to determine the Senior Principal Distribution
Amount will accelerate the amortization of the Senior Certificates (other than
the Principal Only Certificates) relative to the actual amortization of the
Mortgage Loans. The Principal Only Certificates will not receive more than the
Discount Fraction of any unscheduled payment relating to any item of Discount
Mortgage Loans. To the extent that the Senior Certificates (other than the
Principal Only Certificates) are amortized faster than the Mortgage Loans, in
the absence of offsetting Realized Losses allocated to the Certificates, the
percentage interest evidenced by the Senior Certificates (other than the
Principal Only Certificates) in the Trust Fund will be decreased (with a
corresponding increase in the interest in the Trust Fund evidenced by the
Subordinate Certificates), thereby increasing, relative to their respective
Certificate Principal Balances, the Subordination afforded to the Senior
Certificates by the Subordinate Certificates collectively.
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses (the "Special Hazard Amount") through
Subordination shall initially be equal to $[__________]. As of any date of
determination following the Cut-off Date, the Special Hazard Amount shall equal
$[__________] less the sum of (i) any amounts allocated through Subordination in
respect of Special Hazard Losses and (ii) the Adjustment Amount. The "Adjustment
Amount" will be equal to an amount calculated pursuant to the terms of the
Pooling and Servicing Agreement. As used in this Prospectus Supplement, "Special
Hazard Losses" has the same meaning set forth in the Prospectus, except that
Special Hazard Losses will not include and the Subordination will not cover
Extraordinary Losses, and Special Hazard Losses will not exceed the lesser of
the cost of repair or replacement of the related Mortgaged Properties.
The aggregate amount of Realized Losses which may be allocated in
connection with Fraud Losses (the "Fraud Loss Amount") through Subordination
shall initially be equal to $[__________]. As of any date of determination after
the Cut-off Date, the Fraud Loss Amount shall equal (i) prior to the first
anniversary of the Cut-off Date an amount equal to [____]% of the aggregate
principal balance of all of the Mortgage Loans as of the Cut-off Date minus the
aggregate amounts allocated through Subordination with respect to Fraud Losses
up to such date of determination and (ii) from the [__________] to the
[__________] anniversary of the Cut-off
Date, an amount equal to (a) the lesser of (1) the Fraud Loss Amount as of the
most recent anniversary of the Cut-off Date and (2) [____]% of the aggregate
principal balance of all of the Mortgage Loans as of the most recent anniversary
of the Cut-off Date minus (b) the aggregate amounts allocated through
Subordination with respect to Fraud Losses since the most recent anniversary of
the Cut-off Date up to such date of determination. On and after the [__________]
anniversary of the Cut-off Date the Fraud Loss Amount shall be zero and Fraud
Losses shall not be allocated through Subordination.
The aggregate amount of Realized Losses which may be allocated in
connection with Bankruptcy Losses (the "Bankruptcy Amount") through
Subordination will initially be equal to $[__________]. As of any date of
determination on or after the [__________] anniversary of the Cut-off Date, the
Bankruptcy Amount will equal the excess, if any, of (i) the lesser of (a) the
Bankruptcy Amount as of the business day next preceding the most recent
anniversary of the Cut-off Date (the "Relevant Anniversary") and (b) an amount
calculated pursuant to the terms of the Pooling and Servicing Agreement, which
amount as calculated will provide for a reduction in the Bankruptcy Amount, over
(ii) the aggregate amount of Bankruptcy Losses allocated solely to the
Subordinate Certificates through Subordination since the Relevant Anniversary.
Notwithstanding the foregoing, the provisions relating to Subordination
will not be applicable in connection with a Bankruptcy Loss so long as the
Master Servicer has notified the Trustee in writing that the Master Servicer is
diligently pursuing any remedies that may exist in connection with the
representations and warranties made regarding the related Mortgage Loan and
either (i) the related Mortgage Loan is not in default with regard to payments
due thereunder or (ii) delinquent payments of principal and interest under the
related Mortgage Loan and any premiums on any applicable Primary Hazard
Insurance Policy and any related escrow payments in respect of such Mortgage
Loan are being advanced on a current basis by the Master Servicer or a
Subservicer.
[The Special Hazard Amount, Fraud Amount and Bankruptcy Amount are
subject to further reduction with consent of the Rating Agencies.]
[Advances]
[Prior to each Distribution Date, the Master Servicer is required to
make Advances (out of its own funds[, advances made by a Subservicer] or funds
held in the Custodial Account (as described in the Prospectus) for future
distribution or withdrawal) with respect to any payments of principal and
interest (net of the related Servicing Fees) which were due on the Mortgage
Loans on the immediately preceding Due Date and delinquent on the business day
next preceding the related Determination Date.] [to be revised for Simple
Interest Mortgage Loans]
[Such Advances are required to be made only to the extent they are
deemed by the Master Servicer to be recoverable from related late collections,
Insurance Proceeds, Liquidation Proceeds or amounts otherwise payable to the
holders of the Subordinate Certificates. The purpose of making such Advances is
to maintain a regular cash flow to the Certificateholders,
rather than to guarantee or insure against losses. The Master Servicer will not
be required to make any Advances with respect to reductions in the amount of the
monthly payments on the Mortgage Loans due to Debt Service Reductions or the
application of the Relief Act or similar legislation or regulation. Any failure
by the Master Servicer to make an Advance as required under the Pooling and
Servicing Agreement will constitute an Event of Default thereunder, in which
case the Trustee, as successor Master Servicer, will be obligated to make any
such Advance, in accordance with the terms of the Pooling and Servicing
Agreement.]
[All Advances will be reimbursable to the Master Servicer on a first
priority basis from either (a) late collections, Insurance Proceeds and
Liquidation Proceeds from the Mortgage Loans as to which such unreimbursed
Advance was made or (b) as to any Advance that remains unreimbursed following
the final liquidation of the related item of Mortgage Loans, from amounts
otherwise distributable on the Subordinate Certificates; provided, however, that
only the Subordinate Percentage of such Advances are reimbursable from amounts
otherwise distributable on the Subordinate Certificates in the event that such
Advances were made with respect to delinquencies which ultimately were
determined to be Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary Losses and the Senior Percentage of such
Advances which may not be so reimbursed from amounts otherwise distributable on
the Subordinate Certificates may be reimbursed to the Master Servicer out of any
funds in the Custodial Account or Certificate Account prior to distributions on
the Senior Certificates. In the latter event, the aggregate amount otherwise
distributable on the Senior Certificates will be reduced by an amount equal to
the Senior Percentage of such Advances. In addition, if the Certificate
Principal Balance of the Subordinate Certificates has been reduced to zero, any
Advances previously made which are deemed by the Master Servicer to be
nonrecoverable from related late collections, Insurance Proceeds and Liquidation
Proceeds may be reimbursed to the Master Servicer out of any funds in the
Custodial Account or Certificate Account prior to distributions on the Senior
Certificates.]
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
General
The yields to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans and the amount and timing of Mortgagor defaults
resulting in Realized Losses. Such yields may be adversely affected by a higher
or lower than anticipated rate of principal payments on the Mortgage Loans in
the Trust Fund. The rate of principal payments on such Mortgage Loans will in
turn be affected by the amortization schedules of the Mortgage Loans, the rate
and timing of principal prepayments thereon by the Mortgagors, liquidations of
defaulted Mortgage Loans and repurchases of Mortgage Loans due to certain
breaches of representations. The timing of changes in the rate of prepayments,
liquidations and repurchases of the Mortgage Loans may, and the timing of
Realized Losses will, significantly affect the yield to an investor, even if the
average rate of principal payments experienced over time is consistent with an
investor's expectation.
Since the rate and timing of principal payments on the Mortgage Loans will
depend on future events and on a variety of factors (as described more fully
herein and in the Prospectus under "Yield Considerations" and "Maturity and
Prepayment Considerations"), no assurance can be given as to such rate or the
timing of principal payments on the Offered Certificates.
The Mortgage Loans may be prepaid by the Mortgagors at any time without
payment of any prepayment fee or penalty. The Mortgage Loans contain due-on-sale
clauses. As described under "Description of the Certificates--Principal
Distributions on the Senior Certificates" and "--Principal Distributions on the
Class M Certificates" herein, during certain periods all or a disproportionately
large percentage of principal prepayments on the Mortgage Loans will be
allocated among the Senior Certificates (other than the Principal Only
Certificates) and, during certain periods, no principal prepayments or a
disproportionately small or large portion of principal prepayments on the
Mortgage Loans relative to the Class M Percentage will be distributed on the
Class M Certificates. Prepayments, liquidations and purchases of the Mortgage
Loans will result in distributions to holders of the Offered Certificates of
principal amounts that would otherwise be distributed over the remaining terms
of the Mortgage Loans. Factors affecting prepayment (including defaults and
liquidations) of mortgage loans include changes in borrowers' housing needs, job
transfers, unemployment, borrowers' net equity in the mortgaged properties,
changes in the value of the mortgaged properties, mortgage market interest
rates, solicitations and servicing decisions. In addition, if prevailing
mortgage interest rates fell significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayments (including refinancings) would be
expected to increase. Conversely, if prevailing mortgage interest rates rose
significantly above the Mortgage Rates on the Mortgage Loans, the rate of
prepayments on the Mortgage Loans would be expected to decrease.
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. Although little data is available with respect to the rate of default on
mortgage loans secured by second liens, the rate of default of mortgage loans
secured by second liens may be greater than that of mortgage loans secured by
first liens on comparable properties. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high [Combined] Loan-to-Value Ratios, may be higher than for other
types of Mortgage Loans. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans will be affected by the general
economic condition of the region of the country in which the related Mortgaged
Properties are located. The risk of delinquencies and loss is greater and
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values. See "Yield Considerations" and "Risks Associated with
the Mortgage Loans" in the Prospectus.
After the Certificate Principal Balances of the Class B Certificates
have been reduced to zero, the yield to maturity on the class of Class M
Certificates will be extremely sensitive to losses on the Mortgage Loans (and
the timing thereof) because the entire amount of losses that are covered by
Subordination will be allocated to such Class M Certificates. Furthermore,
because principal distributions are paid to certain classes of Senior
Certificates before other classes, holders of classes having a later priority of
payment bear a greater risk of losses than holders of classes having earlier
priorities for distribution of principal.
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through
Rates on the Offered Certificates (other than the Stripped Interests
Certificates) are fixed, such rates will not change in response to changes in
market interest rates. The Pass-Through Rate on the Stripped Interests
Certificates is based on the weighted average of the Pool Strip Rates on the
Mortgage Loans and such Pool Strip Rates will not change in response to changes
in market interest rates. Accordingly, if market interest rates or market yields
for securities similar to the Offered Certificates were to rise, the market
value of the Offered Certificates may decline.
[Although the Mortgage Rates on the Mortgage Loans will adjust
annually, such increases
and decreases will be limited by the Periodic Rate Cap, the Maximum Mortgage
Rate and the Minimum Mortgage Rate, if applicable, on each Mortgage Loan, and
will be based on the Index (which may not rise and fall consistently with
prevailing mortgage rates) plus the related Note Margin (which may be different
from the prevailing margins on other mortgage loans). As a result, the Mortgage
Rates on the Mortgage Loans at any time may not equal the prevailing rates for
other adjustable-rate loans and accordingly, the rate of prepayment may be lower
or higher than would otherwise be anticipated. In addition, because all of the
Mortgage Loans have Maximum Mortgage Rates, if prevailing mortgage rates were to
increase above the Maximum Mortgage Rates, the rate of prepayment on the
Mortgage Loans may be expected to decrease, and the yield to investors may be
less than prevailing mortgage rates. In general, if prevailing mortgage rates
fall significantly below the Mortgage Rates on the Mortgage Loans, the rate of
prepayments (including refinancings) will be expected to increase. Conversely,
if prevailing mortgage rates rise significantly above the Mortgage Rates on the
Mortgage Loans, the rate of prepayment on the Mortgage Loans will be expected to
decrease.]
As described above under "Description of the Offered
Certificates--Allocation of Losses; Subordination" and "--Advances," amounts
otherwise distributable to the Class M Certificates may be made available to
protect the holders of the Senior Certificates against interruptions in
distributions due to certain Mortgagor delinquencies, to the extent not covered
by Advances. Such delinquencies may affect the yields to investors in the Class
M Certificates, and, even if subsequently cured, may affect the timing of the
receipt of distributions by the holders of the Class M Certificates.
Furthermore, the Principal Only Certificates will share in the principal portion
of Realized Losses on the Mortgage Loans only to the extent that they are
incurred with respect to Discount Mortgage Loans and only to the extent of the
related Discount Fraction; thus, after the Class B Certificates and the Class M
Certificates are retired or in the case of Excess Special Hazard Losses, Excess
Fraud Losses, Excess Bankruptcy Losses and Extraordinary Losses, the Senior
Certificates (other than the Principal Only Certificates) may be affected to a
greater extent by losses on Non-Discount Mortgage Loans than losses on Discount
Mortgage Loans. In addition, a higher than expected rate of delinquencies or
losses will also affect the rate of principal payments on the Class M
Certificates if such delinquencies or losses cause the scheduled reduction of
the Senior Accelerated Distribution Percentage to be delayed.
The amount of interest otherwise payable to holders of the Offered
Certificates will be reduced by any interest shortfalls to the extent not
covered by Subordination or by the Master Servicer as described below, including
Prepayment Interest Shortfalls and, in the case of each class of the Class M
Certificates, the interest portions of Realized Losses allocated solely to such
class of Certificates. See "Yield Considerations" in the Prospectus and
"Description of the Offered Certificates--Interest Distributions" herein for a
discussion of the effect of principal prepayments on the Mortgage Loans on the
yields to maturity of the Offered Certificates and certain possible shortfalls
in the collection of interest. [Prior to the Accretion Termination Date,
interest shortfalls allocated to the Accrual Certificates will reduce the amount
added to the Certificate Principal Balance thereof in respect of Accrued
Certificate Interest and will result in a corresponding reduction of the amount
available for distributions in respect of principal on the Senior Certificates.
Furthermore, because such interest shortfalls will result in the Certificate
Principal Balance of the Accrual Certificates being less than it would be in the
absence of such interest shortfalls, the amount of interest that will accrue in
the future on the Accrual Certificates and be available for distributions in
respect of principal on the Senior Certificates will be reduced. Accordingly,
the weighted average lives and assumed final Distribution Dates of the Senior
Certificates will be extended.]
With respect to any Distribution Date, Prepayment Interest Shortfalls
resulting from prepayments in full for such Distribution Date will be offset by
the Master Servicer to the extent such Prepayment Interest Shortfalls do not
exceed [one-twelfth of _____% of the Stated Principal Balance of the Mortgage
Loans immediately preceding such Distribution Date]. Thus, the yield to
investors in the Offered Certificates generally will not be affected by
Prepayment Interest Shortfalls allocable thereto resulting from prepayments in
full in the month preceding any Distribution Date to the extent that such
shortfalls do not exceed the amount offset by the Master Servicer.
The yield to maturity on each class of the Offered Certificates will
depend on the prices paid by the holders of the Offered Certificates and the
related Pass-Through Rate. The extent to which the yield to maturity of an
Offered Certificate is sensitive to prepayments will depend, in part, upon the
degree to which it is purchased at a discount or premium. In general, if a class
of Offered Certificates is purchased at a premium and principal distributions
thereon occur at a rate faster than anticipated at the time of purchase, the
investor's actual yield to maturity will be lower than that assumed at the time
of purchase. Conversely, if a class of Offered Certificates is purchased at a
discount and principal distributions thereon occur at a rate slower than that
assumed at the time of purchase, the investor's actual yield to maturity will be
lower than that assumed at the time of purchase. For additional considerations
relating to the yield on the Certificates, see "Yield Considerations" and
"Maturity and Prepayment Considerations" in the Prospectus.
[A number of factors affect the performance of the Index and may cause
the Index to move in a manner different from other indices. To the extent that
the 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 Offered Certificateholders 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, the Index may remain higher than other market interest rates
which may result in a higher level of prepayments of the Mortgage Loans, which
adjust in accordance with the Index, than of mortgage loans which adjust in
accordance with other indices.]
The assumed final Distribution Date with respect to each class of the
Offered Certificates is [_____ __, ____] which is the Distribution Date
[immediately] [___ months] following the
latest scheduled maturity date for any Mortgage Loan. No event of default,
change in the priorities for distribution among the various classes or other
provisions under the Pooling and Servicing Agreement will arise or become
applicable solely by reason of the failure to retire the entire Certificate
Principal Balance of any class of Certificates on or before its assumed final
Distribution Date.
"Weighted Average Life" refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor of each dollar distributed in reduction of principal of such
security (assuming no losses). The Weighted Average Life of the Offered
Certificates will be influenced by, among other things, the rate at which
principal of the Mortgage Loans is paid, which may be in the form of scheduled
amortization, prepayments or liquidations.
[Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
standard prepayment assumption ("SPA"), represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of new
mortgage loans. A prepayment assumption of 100% SPA assumes constant prepayment
rates of [___]% per annum of the then outstanding principal balance of such
mortgage loans in the first month of the life of the mortgage loans and an
additional [___]% per annum in each month thereafter until the thirtieth month.
Beginning in the thirtieth month and in each month thereafter during the life of
the mortgage loans, 100% SPA assumes a constant prepayment rate of [___]% per
annum each month. As used in the table below, "0% SPA" assumes prepayment rates
equal to 0% of SPA (no prepayments). Correspondingly, "[___]% SPA" assumes
prepayment rates equal to [___]% of SPA, and so forth. SPA does not purport to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans.]
Modeling Assumptions
The table set forth below has been prepared on the basis of certain
assumptions (the "Modeling Assumptions") as described below regarding the
weighted average characteristics of the Mortgage Loans that are expected to be
included in the Trust Fund as described under "Description of the Mortgage Pool"
herein and the performance thereof. The table assumes, among other things, that:
[(i) as of the date of issuance of the Offered Certificates, the aggregate
principal balance of the Discount Mortgage Loans is $[__________] and each item
of Discount Mortgage Loans has a Mortgage Rate of [___]% per annum, an original
term to maturity of [___] months, a remaining term to maturity of [___] months
and a related Servicing Fee Rate of approximately [___]% per annum, and the
aggregate principal balance of the Non-Discount Mortgage Loans is $[___________]
and each item of Non-Discount Mortgage Loans has a Mortgage Rate of [___]% per
annum, an original term to maturity of [___] months, a remaining term to
maturity of [___] months and a related Servicing Fee Rate of approximately
[___]% per annum; (ii) the scheduled monthly payment for each Mortgage Loan has
been based on its outstanding balance, interest rate and remaining term to
maturity, such that the Mortgage Loan will amortize in amounts sufficient for
repayment thereof over its remaining term to maturity; (iii) none of the
Mortgage Loans Sellers, the Master Servicer or the Company will repurchase any
Mortgage Loan and neither the Master Servicer nor the Company exercises any
option to
purchase the Mortgage Loans and thereby cause a termination of the Trust Fund;
(iv) there are no delinquencies or Realized Losses on the Mortgage Loans, and
principal payments on the Mortgage Loans will be timely received together with
prepayments, if any, at the respective constant percentages of SPA set forth in
the table; (v) there is no Prepayment Interest Shortfall or any other interest
shortfall in any month; (vi) payments on the Certificates will be received on
the [25th] day of each month, commencing [________ 25, 199_]; (vii) payments on
the Mortgage Loans earn no reinvestment return; (viii) there are no additional
ongoing Trust Fund expenses payable out of the Trust Fund; and (ix) the
Certificates will be purchased on [_____ __, 199_].] [Conform to pool
parameters.]
SOME OF THE FOREGOING MODELING ASSUMPTIONS REGARDING THE
CHARACTERISTICS OF THE MORTGAGE LOANS AND THE CERTIFICATES
DIFFER FROM ACTUAL CHARACTERISTICS THEREOF.
The actual characteristics and performance of the Mortgage Loans will
differ from the Modeling Assumptions used in constructing the table set forth
below, which is hypothetical in nature and is provided only to give a general
sense of how the principal cash flows might behave under varying prepayment
scenarios. For example, it is unlikely that the Mortgage Loans will prepay at a
constant level of SPA until maturity or that all of the Mortgage Loans will
prepay at the same level of SPA. Moreover, the diverse remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the table at the various constant percentages of
SPA specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Any difference between such Modeling Assumptions
and the actual characteristics and performance of the Mortgage Loans, or actual
prepayment or loss experience, will affect the percentages of initial
Certificate Principal Balances outstanding over time and the weighted average
lives of the classes of Offered Certificates.
Subject to the foregoing discussion and assumptions, the following
table indicates the Weighted Average Life of each class of Offered Certificates
(other than the Stripped Interests Certificates [and Residual Certificates]) and
sets forth the percentages of the initial Certificate Principal Balance of each
such class of Offered Certificates that would be outstanding after each of the
dates shown at various percentages of SPA.
S-8
<PAGE>
Percent of Initial Certificate Principal Balance Outstanding at the
Following Percentages of SPA
<TABLE>
<S> <C> <C> <C>
<C>
Distribution Date Class A-1 Class A-2
Class A-3 Class A-4 Class M
- -----------------
---------------------
0%[ ]%[ ]%[ ]%[ ]% 0% [ ][ ][ ][ ]%
0%[ [% ][ ][ ]% 0%[ ][ ][ ][ ]% 0%[ ][ [% ][ ]%
---------------------- -- ----------------- ------------------ ------------------- ------------------
Initial Percentage
</TABLE>
Weighted Average
Life Years**
* Indicates a number that is greater than zero but less than 0.5%.
** [The Weighted Average Life of a Certificate of any class is determined by
(i) multiplying the amount of each distribution in reduction of
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding
the results, and (iii) dividing the sum by the initial Certificate
Principal Balance of the Certificate.]
This table has been prepared based on the Modeling Assumptions (including the
assumptions regarding the characteristics and performance of the Mortgage Loans,
which differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
S-9
<PAGE>
Principal Only Certificate and Stripped Interests Certificate Yield
Considerations
The amounts payable with respect to the Principal Only Certificates
derive only from principal payments on the Discount Mortgage Loans. As a result,
the yield on the Principal Only Certificates will be adversely affected by
slower than expected payments of principal (including prepayments, defaults and
liquidations) on the Discount Mortgage Loans.
The yield to maturity on the Stripped Interests Certificates will be
extremely sensitive to both the timing of receipt of principal prepayments and
the overall rate of principal prepayments and defaults on the Mortgage Loans,
which rate may fluctuate significantly over time. Investors in the Stripped
Interests Certificates should fully consider the risk that a rapid rate of
principal prepayments on the Mortgage Loans could result in the failure of such
investors to fully recover their investments.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Principal Only Certificates and Stripped Interests Certificates
to various constant rates of prepayment on the Mortgage Loans by projecting the
monthly aggregate payments on the Principal Only Certificates and Stripped
Interests Certificates and computing the corresponding pre-tax yields to
maturity on a corporate bond equivalent basis, based on the assumptions
described in clauses (i) through (ix) of the Modeling Assumptions, including the
assumptions regarding the characteristics and performance of the Mortgage Loans,
which differ from the actual characteristics and performance thereof and
assuming the aggregate purchase prices set forth below and assuming further the
Pass-Through Rate and Notional Amount of the Stripped Interests Certificates are
as set forth herein. Any differences between the Modeling Assumptions and the
actual characteristics and performance of the Mortgage Loans and of the
Certificates may result in yields being different from those shown in such
tables. Discrepancies between assumed and actual characteristics and performance
underscore the hypothetical nature of the tables, which are provided only to
give a general sense of the sensitivity of yields in varying prepayment
scenarios.
Pre-Tax Yield to Maturity of the Principal Only
Certificates at the Following Percentages of SPA
Assumed Purchase Price 0% [ ]% [ ]% [ ]% [ ]% [ ]%
- ---------------------- ----- ------- ------- ------- ------- -------
$[------------] [----]% [----]% [----]% [----]% [----]% [----]%
Pre-Tax Yield to Maturity of the Stripped Interests
Certificates at the Following Percentages of SPA
Assumed Purchase Price 0% [ ]% [ ]% [ ]% [ ]% [ ]%
- ---------------------- ----- ------- ------- ------- ------- -------
$[------------] [----]%[----]% [----]% [----]% [----]% [----]%
Each pre-tax yield to maturity set forth in the preceding tables was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Principal Only Certificates or
Stripped Interests Certificates, as applicable, would cause the discounted
present value of such assumed stream of cash flows to equal the assumed purchase
price listed in the related table. Accrued interest is included in the assumed
purchase price of the Stripped Interests Certificates and is used in computing
the corporate bond equivalent yields shown in the table relating to the Stripped
Interests Certificates. These yields do not take into account the different
interest rates at which investors may be able to reinvest funds received by them
as distributions on the Principal Only Certificates and Stripped Interests
Certificates, and thus do not reflect the return on any investment in such
Certificates when any reinvestment rates other than the discount rates are
considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yields to maturity on the
Principal Only Certificates and Stripped Interests Certificates are likely to
differ from those shown in the tables, even if all of the Mortgage Loans prepay
at the indicated constant percentages of SPA over any given time period or over
the entire life of the Certificates. A lower than anticipated rate of principal
prepayments on the Discount Mortgage Loans will have a material adverse effect
on the yield to maturity of the Principal Only Certificates. The rate and timing
of principal prepayments on the Discount Mortgage Loans may differ from the rate
and timing of principal prepayments on the Mortgage Pool. In addition, because
the Discount Mortgage Loans have Net Mortgage Rates that are lower than the Net
Mortgage Rates of the Non-Discount Mortgage Loans, and because Mortgage Loans
with lower Net Mortgage Rates are likely to have lower Mortgage Rates, the
Discount Mortgage Loans is generally likely to prepay under most circumstances
at a lower rate than the Non-Discount Mortgage Loans. In addition, holders of
the Stripped Interests Certificates generally have rights to relatively larger
portions of interest payments on Mortgage Loans with higher Mortgage Rates;
thus, the yield on the Stripped Interests Certificates will be materially
adversely affected to a greater extent than on the other Offered Certificates if
the Mortgage Loans with higher Mortgage Rates prepay faster than the Mortgage
Loans with lower Mortgage Rates. Because Mortgage Loans having higher Pool Strip
Rates generally have higher Mortgage Rates, such Mortgage Loans are generally
more likely to be prepaid under most circumstances than are Mortgage Loans
having lower Pool Strip Rates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yields on the Principal Only Certificates and
Stripped Interests Certificates will conform to the
yields described herein. Moreover, the various remaining terms to maturity of
the Mortgage Loans could produce slower or faster principal distributions than
indicated in the preceding tables at the various constant percentages of SPA
specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Investors are urged to make their investment
decisions based on their determinations as to anticipated rates of prepayment
under a variety of scenarios. Investors in the Stripped Interests Certificates
should fully consider the risk that a rapid rate of prepayments on the Mortgage
Loans could result in the failure of such investors to fully recover their
investments.
For additional considerations relating to the yields on the
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
Additional Yield Considerations Applicable Solely to the Residual Certificates
The Residual Certificateholders' after-tax rate of return on their
Residual Certificates will reflect their pre-tax rate of return, reduced by the
taxes required to be paid with respect to the Residual Certificates. Holders of
Residual Certificates may have tax liabilities with respect to their Residual
Certificates during the early years of the REMIC's term that substantially
exceed any distributions payable thereon during any such period. In addition,
holders of Residual Certificates may have tax liabilities with respect to their
Residual Certificates the present value of which substantially exceeds the
present value of distributions payable thereon and of any tax benefits that may
arise with respect thereto. Accordingly, the after-tax rate of return on the
Residual Certificates may be negative or may otherwise be significantly
adversely affected. The timing and amount of taxable income attributable to the
Residual Certificates will depend on, among other things, the timing and amounts
of prepayments and losses experienced with respect to the Mortgage Pool.
The Residual Certificateholders should consult their tax advisors as to
the effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Residual Certificates on after-tax rates of
return on the Residual Certificates. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Senior Certificates. [The Trustee
will appoint ______________________ to serve as Custodian in connection
with the Certificates.] The Senior Certificates will be transferable and
exchangeable at the corporate trust office of the Trustee, which will serve
as Certificate Registrar and Paying Agent. The Company will provide a
prospective or actual Certificateholder without charge, on written request,
a copy (without exhibits) of the Pooling and Servicing Agreement. Requests
should be addressed to the [__________] of Residential Funding Mortgage
Securities II, Inc., [____________________]. In addition to the
circumstances described in the Prospectus, the Company may terminate the
Trustee for cause under certain circumstances. See "The Pooling and
Servicing Agreement--The Trustee" in the Prospectus.
The Master Servicer
Residential Funding Corporation, an indirect wholly-owned subsidiary of
GMAC Mortgage and an affiliate of the Company, will act as master servicer for
the Certificates pursuant to the Pooling and Servicing Agreement. For a general
description of the Master Servicer and its activities, see "The Pooling and
Servicing Agreement" in the Prospectus.]
Servicing and Other Compensation and Payment of Expenses
The Servicing Fees for each Mortgage Loan are payable out of the
interest payments on such Mortgage Loan. The Servicing Fees in respect of each
Mortgage Loan will be at least [____]% and not more than [____]% per annum of
the outstanding principal balance of each Mortgage Loan. The Servicing Fees
consist of (a) servicing compensation payable to the Master Servicer in respect
of its master servicing activities, and (b) subservicing and other related
compensation payable to the subservicer (including such compensation paid to the
Master Servicer as the direct servicer of a Mortgage Loan for which there is no
subservicer]. The primary compensation to be paid to the Master Servicer in
respect of its servicing activities will be [____]% per annum (the "Servicing
Fee Rate") of the outstanding principal balance of each item of Mortgage Loans.
As described more fully in the Prospectus, a Subservicer is entitled to
servicing compensation in a minimum amount equal to [____]% per annum of the
outstanding principal balance of each item of Mortgage Loans serviced by it. The
Master Servicer is obligated to pay certain ongoing expenses associated with the
Trust Fund and incurred by the Master Servicer in connection with its
responsibilities under the Pooling and Servicing Agreement. See "Description of
the Certificates--Servicing and Administration of Mortgage Loans" in the
Prospectus for information regarding other possible compensation to the Master
Servicer and subservicers and for information regarding expenses payable by the
Master Servicer.
Voting Rights
Certain actions specified in the Prospectus that may be taken by the
Certificateholders evidencing a specified percentage of all undivided interests
in the Trust Fund may be taken by holders of Certificates entitled in the
aggregate to such percentage of the Voting Rights. [__]% of all Voting Rights
will be allocated among all holders of the Certificates (other than the Stripped
Interests Certificates and Residual Certificates) in proportion to their then
outstanding Certificate Principal Balances, and [_]% and [_]% of all Voting
Rights will be allocated among holders of the Stripped Interests Certificates
and the Residual Certificates, in proportion to the percentage interests
evidenced by their respective Certificates.
[Termination]
[The circumstances under which the obligations created by the Pooling
and Servicing Agreement will terminate in respect of the Offered Certificates
are described in "Pooling and Servicing Agreement--Termination; Retirement of
Certificates" in the Prospectus. The Master Servicer or the Company will have
the option on any Distribution Date on which the aggregate principal balance of
the Mortgage Loans is less than [__]% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date either (i) to purchase all remaining
Mortgage Loans and other assets in the Trust Fund, thereby effecting early
retirement of the Offered Certificates or (ii) purchase in whole, but not in
part, the Certificates. Any such purchase of Mortgage Loans and other assets of
the Trust Fund shall be made at a price equal to the sum of (a) 100% of the
unpaid principal balance of each item of Mortgage Loans (or, the fair market
value of the related underlying Mortgaged Properties with respect to defaulted
Mortgage Loans as to which title to such underlying Mortgaged Properties has
been acquired if such fair market value is less than such unpaid principal
balance) (net of any unreimbursed Advance attributable to principal) as of the
Distribution Date on which the purchase proceeds are to be distributed plus (b)
accrued interest thereon at the Net Mortgage Rate to, but not including, the
first day of the month of repurchase. Distributions on the Certificates in
respect of any such optional termination will be paid, first, to the Senior
Certificates and the Class M Certificates, pro rata, based on their respective
Certificate Principal Balances, second, to the Class B Certificates. The
proceeds of any such distribution may not be sufficient to distribute the full
amount to each class of Certificates if the purchase price is based in part on
the fair market appraised value of any underlying Mortgaged Property and such
appraised value is less than 100% of the unpaid principal balance of the related
Mortgage Loan. Any such purchase of the Certificates will be made at a price
equal to 100% of the Certificate Principal Balance thereof plus the sum of one
month's interest thereon at the applicable Pass-Through Rate and any previously
unpaid Accrued Certificate Interest. Upon the purchase of the Certificates or at
any time thereafter, at the option of the Master Servicer or the Company, the
Mortgage Loans may be sold, thereby effecting a retirement of the Certificates
and the termination of the Trust Fund, or the Certificates so purchased may be
held or resold by the Master Servicer or the Company.
Upon presentation and surrender of the Offered Certificates in
connection with the termination of the Trust Fund or a purchase of Certificates
under the circumstances described above, the holders of the Offered Certificates
will be entitled to receive, subject to the priorities set forth above, an
amount equal to the Certificate Principal Balance of such class plus one month's
interest thereon (or with respect to the Stripped Interests Certificates, one
month's interest on the Notional Amount) at the applicable Pass-Through Rate
plus any previously unpaid Accrued Certificate Interest.]
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, ______________________,
counsel to the Company, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the Pooling and Servicing
Agreement, for federal income tax purposes, the Trust Fund will qualify as
a REMIC under the Code.
For federal income tax purposes, the Residual Certificates will be the
sole class of "residual interests" in the Trust Fund and the Offered
Certificates (other than the Residual Certificates) and Class B Certificates
will represent ownership of "regular interests" in the Trust Fund and will
generally be treated as representing ownership of debt instruments of the Trust
Fund. See "Certain Federal Income Tax Consequences--REMICs" in the Prospectus.
The Certificates will not be treated as having been issued with
original issue discount for federal income tax reporting purposes. The
Certificates will, be treated as having been issued with original issue
discount for federal income tax reporting purposes. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount, market discount and premium, if any, for federal income tax
purposes will be based on the assumption that subsequent to the date of any
determination the Mortgage Loans will prepay at a rate equal to ___% SPA.
No representation is made that the Mortgage Loans will prepay at that rate
or at any other rate. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the Prospectus.
The OID Regulations suggest that original issue discount with respect
to securities such as the Stripped Interests Certificates that represent
multiple uncertificated REMIC regular interests, in which ownership interests
will be issued simultaneously to the same buyer and which are required under the
Pooling and Servicing Agreement to be transferred together, should be computed
on an aggregate method. In the absence of further guidance from the IRS,
original issue discount with respect to the uncertificated regular interests
represented by the Stripped Interests Certificates will be reported to the IRS
and the Certificateholders on an aggregate method based on a single overall
constant yield and the prepayment assumption stated above, treating all such
uncertificated regular interests as a single debt instrument as set forth in the
OID Regulations.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder (in particular, the Stripped Interests Certificateholders),
the amount of original issue discount allocable to such period would be zero and
such Certificateholder will be permitted to offset such negative amount only
against future original issue discount (if any) attributable to such
Certificates. Although the matter is not free from doubt, a Stripped Interests
Certificateholder may be permitted to deduct a loss to the extent that his or
her respective remaining basis in such Certificate exceeds the maximum amount of
future payments to which such Certificateholder is entitled, assuming no further
prepayments of the Mortgage Loans. Any such loss might be treated as a capital
loss.
Although they are unclear on the issue, in certain circumstances the
OID Regulations appear to permit the holder of a debt instrument to recognize
original issue discount under a method that
differs from that used by the issuer. Accordingly, it is possible that the
holder of a Certificate may be able to select a method for recognizing original
issue discount that differs from that used by the Master Servicer in preparing
reports to the Certificateholders and the IRS.
Certain classes of the Offered Certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
such a class of Certificates will be treated as holding a certificate with
amortizable bond premium will depend on such Certificateholder's purchase price
and the distributions remaining to be made on such Certificate at the time of
its acquisition by such Certificateholder. Holders of such classes of
Certificates should consult their own tax advisors regarding the possibility of
making an election to amortize such premium. See "Certain Federal Income Tax
Consequences--REMICS--Taxation of Owners of REMIC Regular Certificates--Market
Discount" and "--Premium" in the Prospectus.
The Offered Certificates will be treated as "qualifying real property
loans" under Section 593(d) of the Code, assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(5)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Offered Certificates will be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code generally to the extent that such Offered
Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of
the Code. Moreover, the Offered Certificates (other than the Residual
Certificates) will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. However, prospective investors in Offered Certificates
that will be generally treated as assets described in Section 860G(a)(3) of the
Code should note that, notwithstanding such treatment, any repurchase of such a
Certificate pursuant to the right of the Master Servicer or the Company to
repurchase such Offered Certificates may adversely affect any REMIC that holds
such Offered Certificates if such repurchase is made under circumstances giving
rise to a Prohibited Transaction Tax. See "The Pooling and Servicing
Agreement--Termination" herein and "Certain Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Certificates" in
the Prospectus.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
Special Tax Considerations Applicable to Residual Certificates
The IRS has issued regulations under the provisions of the Code related
to REMICs (the "REMIC Regulations") that significantly affect holders of
Residual Certificates. The REMIC Regulations impose restrictions on the transfer
or acquisition of certain residual interests, including the Residual
Certificates. In addition, the REMIC Regulations contain restrictions that apply
to: (i) thrift institutions holding residual interests lacking "significant
value" and (ii) the transfer of "noneconomic" residual interests to United
States persons. Pursuant to the Pooling and Servicing Agreement, the Residual
Certificates may not be transferred to non-United States persons.
The REMIC Regulations provide for the determination of whether a residual
interest has "significant value" for purposes of applying the rules
relating to "excess inclusions" with respect to residual interests. Based
on the REMIC Regulations, the Residual Certificates do not have significant
value and, accordingly, thrift institutions and their affiliates will be
prevented from using their unrelated losses or loss carryovers to offset
any excess inclusions with respect to the Residual Certificates, which will
be in an amount equal to all or virtually all of the taxable income
includible by holders of the Residual Certificates. See "Certain Federal
Income Tax Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, unless "no significant purpose of the
transfer was to impede the assessment or collection of tax." Based on the REMIC
Regulations, the Residual Certificates may constitute noneconomic residual
interests during some or all of their terms for purposes of the REMIC
Regulations and, accordingly, unless no significant purpose of a transfer is to
impede the assessment or collection of tax, transfers of the Residual
Certificates may be disregarded and purported transferors may remain liable for
any taxes due with respect to the income on the Residual Certificates. All
transfers of the Residual Certificates will be subject to certain restrictions
under the terms of the Pooling and Servicing Agreement that are intended to
reduce the possibility of any such transfer being disregarded to the extent that
the Residual Certificates constitute noneconomic residual interests. See
"Certain Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Residual Certificates--Noneconomic REMIC Residual Certificates" in the
Prospectus.
The Residual Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the Trust Fund's
term that significantly exceeds the amount of cash distributions received by
such Residual Certificateholders from the Trust Fund with respect to such
periods. Furthermore, the tax on such income may exceed the cash distributions
with respect to such periods. Consequently, Residual Certificateholders should
have other sources of funds sufficient to pay any federal income taxes due in
the earlier years of the Trust Funds' term as a result of their ownership of the
Residual Certificates. In addition, the required inclusion of this amount of
taxable income during the Trust Fund's earlier accrual periods and the deferral
of corresponding tax losses or deductions until later accrual periods or until
the ultimate sale or disposition of a Residual Certificate (or possibly later
under the "wash sale" rules of Section 1091 of the Code) may cause the Residual
Certificateholders' after-tax rate of return to be zero or negative even if the
Residual Certificateholders' pre-tax rate of return is positive. That is, on a
present value basis, the Residual Certificateholders' resulting tax liabilities
could substantially exceed the sum of any tax benefits and the amount of any
cash distributions on such Residual Certificates over their life.
[[Residential Funding [insert] will be designated as the "tax matters
person" with respect to the Trust Fund as defined in the REMIC Provisions (as
defined in the Prospectus), and in connection therewith will be required to hold
not less than 0.01% of the Residual Certificates.]
Purchasers of the Residual Certificates are strongly advised to consult
their own tax advisors as to the economic and tax consequences of investment in
such Residual Certificates.
For further information regarding the federal income tax consequences
of investing in the Residual Certificates, see "Certain Yield and Prepayment
Considerations--Additional Yield Considerations Applicable Solely to the
Residual Certificates" herein and "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
[FOR TRUSTS TREATED AS GRANTOR TRUSTS]
[Upon the issuance of the Offered Certificates [Thacher Proffitt &
Wood] [Orrick, Herrington & Sutcliffe], counsel to the Company will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the Pooling and Servicing Agreement, for federal income tax purposes the Trust
Fund will be classified as a grantor trust under subpart E, part I of subchapter
J of the Code and not as a partnership or as an association taxable as a
corporation. Accordingly, each holder of a Certificate generally will be treated
as the owner of an interest in the Mortgage Loans included in the Trust Fund.
For purposes of the following discussion, the [Class ____ and Class
____] Certificates, a Grantor Trust, which represent an undivided equitable
ownership interest in the principal of the Mortgage Loans, together with
interest thereon at the Applicable Pass-Through Rate, will be referred to as a
"Grantor Trust Fractional Interest Certificate." The [Class ___ and Class ___]
Certificates, which represent ownership of all or a portion of the difference
between interest paid on the Mortgage Loans (net of Servicing Fees and any
Spread) and interest paid to the holders of Grantor Trust Fractional Interest
Certificates will be referred to as a "Grantor Trust Strip Certificate." A
Grantor Trust Strip Certificate may also evidence a nominal ownership interest
in the principal of the Mortgage Loans.
Characterization of Investments in Grantor Trust Certificates
Grantor Trust Fractional Interest Certificates. In the case of Grantor
Trust Fractional Interest Certificates[, subject to the discussion below with
respect to Buy-Down Loans], counsel to the Company will deliver an opinion upon
issuance of the offered certificates that, in general, Grantor Trust Fractional
Interest Certificates will represent interests in (i) "qualifying real property
loans" within the meaning of Section 593(d) of the Code; (ii) "loans . . .
secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code; (iii) "obligation[s] (including any participation
or certificate of beneficial ownership therein) which . . . [are] principally
secured by an interest in real property" within the meaning of Section
860G(a)(3)(A) of the Code; and (iv) "real estate assets" within the meaning of
Section 856(c)(5)(A) of the Code. In addition, counsel to the Company will
deliver an opinion that interest on Grantor Trust Fractional Interest
Certificates will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Section
856(c)(3)(B) of the Code.
[The Mortgage Loans includes Buy-Down Loans. The characterization of an
investment in Buy-Down Loans will depend upon the precise terms of the related
Buy-Down Agreement, but to the extent that such Buy-Down Loans are secured by a
bank account or other personal property, they may not be treated in their
entirety as assets described in the foregoing sections of the Code. No directly
applicable precedents exist with respect to the federal income tax treatment or
the characterization of investments in Buy-Down Loans. Accordingly, holders of
Grantor Trust Fractional Interest Certificates should consult their tax advisors
with respect to the characterization of investments in Grantor Trust Fractional
Interest Certificates.].
Grantor Trust Strip Certificates. Even if Grantor Trust Strip
Certificates evidence an interest in a Grantor Trust Fund consisting of Mortgage
Loans that are "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code, "qualifying real property
loans" within the meaning of Section 593(d) of the Code, and "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and the interest
on which is "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Code, it is unclear whether
the Grantor Trust Strip Certificates, and the income therefrom, will be so
characterized. The policies underlying such sections (namely, to encourage or
require investments in mortgage loans by thrift institutions and real estate
investment trusts), however, may suggest that such characterization is
appropriate. Counsel to the Company will not deliver any opinion on these
questions. Prospective purchasers to which such characterization of an
investment in Grantor Trust Strip Certificates is material should consult their
tax advisors regarding whether the Grantor Trust Strip Certificates, and the
income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including
any participation or certificate of beneficial ownership therein) which . . .
[are] principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
Taxation of Owners of Grantor Trust Fractional Interest Certificates
Holders of a Grantor Trust Fractional Interest Certificates generally
will be required to report on their federal income tax returns their shares of
the entire income from the Mortgage Loans (including amounts used to pay
reasonable servicing fees and other expenses) and will be entitled to deduct
their shares of any such reasonable servicing fees and other expenses. Because
of stripped interests, market or original issue discount, or premium, the amount
includible in income on account of a Grantor Trust Fractional Interest
Certificate may differ significantly from the amount distributable thereon
representing interest on the Mortgage Loans. Under Section 67 of the Code, an
individual, estate or trust holding a Grantor Trust Fractional Interest
Certificate directly or through certain pass-through entities will be allowed a
deduction for such reasonable servicing fees and expenses only to the extent
that the aggregate of such holder's miscellaneous itemized deductions exceeds
two percent of such holder's adjusted gross income. In addition, Section 68 of
the Code provides that the amount of itemized deductions otherwise allowable for
an individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (i) 3% of the excess of the individual's adjusted gross
income over such amount or (ii) 80% of the amount
of itemized deductions otherwise allowable for the taxable year. The amount of
additional taxable income reportable by holders of Grantor Trust Fractional
Interest Certificates who are subject to the limitations of either Section 67 or
Section 68 of the Code may be substantial. In addition, Certificateholders
(other than corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holder's alternative
minimum taxable income. [If multiple classes of Grantor Trust Certificates]
[Although it is not entirely clear, it appears that such fees and expenses
should be allocated among the classes of Grantor Trust Certificates using a
method that recognizes that each such class benefits from the related services.
In the absence of statutory or administrative clarification as to the method to
be used, it currently is intended to base information returns or reports to the
Internal Revenue Service (the "IRS") and Certificateholders on a method that
allocates such expenses among classes of Grantor Trust Certificates with respect
to each period based on the distributions made to each such class during that
period.]
[The IRS has ruled that an unreasonably high servicing fee retained by
a seller or servicer will be treated as a retained ownership interest in
mortgages that constitutes a stripped coupon. For purposes of determining what
constitutes reasonable servicing fees for various types of mortgages the IRS has
established certain "safe harbors." The servicing fees paid with respect to the
Mortgage Loans are higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing compensation. [Information regarding servicing
fees paid to the Master Servicer, the Certificate Administrator, any Servicer,
any Sub-Servicer or their respective affiliates necessary to determine whether
the preceding "safe harbor" rules apply].
[If Certificates subject to the "stripped bond" rules of Section 1286
of the Code.] [Each Grantor Trust Fractional Interest Certificate will be
treated as having been issued with "original issue discount" within the meaning
of Section 1273(a) of the Code, subject, however, to the discussion below
regarding the treatment of certain stripped bonds as market discount bonds and
the discussion regarding de minimis market discount. See "Market Discount"
below. Under the stripped bond rules, the holder of a Grantor Trust Fractional
Interest Certificate (whether a cash or accrual method taxpayer) will be
required to report interest income from its Grantor Trust Fractional Interest
Certificate for each month in an amount equal to the income that accrues on such
Certificate in that month calculated under a constant yield method, in
accordance with the rules of the Code relating to original issue discount.
Application of Strip Bond Rules. The original issue discount on a
Grantor Trust Fractional Interest Certificate will be the excess of such
Certificate's stated redemption price over its issue price. The issue price of a
Grantor Trust Fractional Interest Certificate as to any purchaser will be equal
to the price paid by such purchaser for the Grantor Trust Fractional Interest
Certificate. The stated redemption price of a Grantor Trust Fractional Interest
Certificate will be the sum of all payments to be made on such Certificate, as
well as such Certificate's share of reasonable servicing fees and other
expenses[, other than payments of fixed interest payable periodically (not less
than annually)]. In general, the amount of such income that accrues in any month
would equal the product of such holder's adjusted basis in such Grantor Trust
Fractional Interest Certificate at the beginning of such month (see "Sales of
Grantor Trust Certificates") and the yield of such Grantor Trust Fractional
Interest Certificate to such holder. Such yield would be computed at the rate
(assuming compounding based on the regular interval between payment dates) that,
if used to discount the holder's share of future payments on the Mortgage Loans,
would cause the present value of those future payments to equal the price at
which the holder purchased such Certificate.
In computing yield under the stripped bond rules, a Certificateholder's share of
future payments on the Mortgage Loans will not include any payments made in
respect of any ownership interest in the Mortgage Loans retained by the Company,
the Master Servicer, the Certificate Administrator, any Servicer, any
Sub-Servicer or their respective affiliates, but will include such
Certificateholder's share of any reasonable servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions to the Grantor Trust
Fractional Interest Certificates. It is unclear whether those provisions would
be applicable to the Grantor Trust Fractional Interest Certificates or whether
use of a prepayment assumption may be required or permitted in the absence of
such regulations. It is also uncertain, if a prepayment assumption is used,
whether the assumed prepayment rate would be determined based on conditions at
the time of the first sale of the Grantor Trust Fractional Interest Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Fractional Interest Certificate by that holder. Certificateholders
are advised to consult their tax advisors concerning reporting original issue
discount in general and, in particular, whether a prepayment assumption should
be used in reporting original issue discount with respect to Grantor Trust
Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired
at a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption would not ordinarily have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a prepayment assumption would
increase or decrease such yield, and thus accelerate or decelerate,
respectively, the reporting of income.
If a prepayment assumption is not used, then when an item of Mortgage
Loans prepays in full, the holder of a Grantor Trust Fractional Interest
Certificate acquired at a discount or a premium generally will recognize
ordinary income or loss equal to the difference between the portion of the
prepaid principal amount of the item of Mortgage Loans that is allocable to such
Certificate and the portion of the adjusted basis of such Certificate that is
allocable to such Certificateholder's interest in the Mortgage Loans. If a
prepayment assumption is used, it appears that no separate item of income or
loss should be recognized upon a prepayment. Instead, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "Certain Federal Income Tax Consequences --Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount" in the Prospectus. It is
unclear what other adjustments would be required to reflect differences between
an assumed prepayment rate and the actual rate of prepayments.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Company, the Master Servicer nor the Certificate Administrator will
make any representation that the Mortgage Loans will in fact prepay at a rate
conforming to such Prepayment Assumption or any other rate and
Certificateholders should bear in mind that the use of a representative initial
offering price will mean that such information returns or reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders of each series who bought at that price.
Under Treasury regulation Section 1.1286-1T, certain stripped bonds are
to be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). [Specify if interest payable on a Grantor Trust Fractional Interest
Certificate is more than one percentage point lower than the gross interest rate
payable on the Mortgage Loans disclose that fact.] If the original issue
discount or market discount on a Grantor Trust Fractional Interest Certificate
determined under the stripped bond rules is less than 0.25% of the stated
redemption price multiplied by the weighted average maturity of the Mortgage
Loans, then such original issue discount or market discount will be considered
to be de minimis. Original issue discount or market discount of only a de
minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "If Stripped Bond Rules Do Not
Apply" and "Market Discount."]
[If Stripped Bond Rules Do Not Apply. Subject to the discussion below
on original issue discount, [if the stripped bond rules do not apply to a
Grantor Trust Fractional Interest Certificate,] the Certificateholder will be
required to report its share of the interest income on the Mortgage Loans in
accordance with such Certificateholder's normal method of accounting. The
original issue discount rules will apply to a Grantor Trust Fractional Interest
Certificate to the extent it evidences an interest in Mortgage Loans issued with
original issue discount.
The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and
its issue price. Under the OID Regulations, the stated redemption price is
equal to the total of all payments to be made on such Mortgage Loans other
than "qualified stated interest." "Qualified stated interest" includes
interest that is unconditionally payable at least annually at a single
fixed rate, or 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 Mortgage Loans. In general,
the issue price of a Mortgage Loan will be the amount received by the
borrower from the lender under the terms of the Mortgage Loan, less any
"points" paid by the borrower, and the stated redemption price of a
Mortgage Loan will equal its principal amount, unless the Mortgage Loan
provides for an initial below-market rate of interest or the acceleration
or the deferral of interest payments.
[Describe the manner in which such rules will be applied with respect
to those Mortgage Loans by the Trustee in preparing information returns to the
Certificateholders and the IRS.]
Notwithstanding the general definition of original issue discount,
original issue discount will be considered to be de minimis if such original
issue discount is less than 0.25% of the stated redemption price multiplied by
the weighted average maturity of the Mortgage Loans. For this purpose, the
weighted average maturity of the Mortgage Loans will be computed as the sum of
the amounts determined, as to each payment included in the stated redemption
price of such Mortgage Loans, 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 by (ii) a fraction, the numerator of which is the amount of
the payment and the denominator of which is the stated redemption price of the
Mortgage Loans. 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" rate or 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 each such payment and the denominator of which is the
outstanding stated principal amount of the Mortgage Loans. The OID Regulations
also permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "Market
Discount" below.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to the Mortgage Loans will be required to
be accrued and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. Section 1272(a)(6) of the Code, however, may
require that a prepayment assumption be used in computing yield with respect to
all mortgage-backed securities. Certificateholders are advised to consult their
tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. [Describe manner by which the original issue discount
rules will apply to Mortgage Loans in such series.]
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans will also be required to include in gross
income such Certificate's daily portions of any original issue discount with
respect to such
Mortgage Loans. However, each such daily portion will be reduced, if the cost of
such Grantor Trust Fractional Interest Certificate to such purchaser is in
excess of such Certificate's allocable portion of the aggregate "adjusted issue
prices" of the Mortgage Loans, approximately in proportion to the ratio such
excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on the Mortgage Loans. The adjusted issue
price of an item of Mortgage Loans 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 item of Mortgage Loans at the beginning of the accrual period
that includes such day and (ii) the daily portions of original issue discount
for all days during such accrual period prior to such day. The adjusted issue
price of an item of Mortgage Loans at the beginning of any accrual period will
equal the issue price of such Mortgage Loans, increased by the aggregate amount
of original issue discount with respect to such Mortgage Loans that accrued in
prior accrual periods, and reduced by the amount of any payments made on such
Mortgage Loans in prior accrual periods of amounts included in its stated
redemption price.
The Master Servicer will provide to any holder of a Grantor Trust
Fractional Interest Certificate such information as such holder may reasonably
request from time to time with respect to original issue discount accruing on
Grantor Trust Fractional Interest Certificates. Such requests may be directed to
[Residential Funding] [principal executive office]. [See "Residential Funding
Corporation" in the Prospectus.] See "Grantor Trust Reporting" below.]
Market Discount. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in Mortgage Loans is considered to have been purchased at a "market
discount," that is, in the case of Mortgage Loans issued without original issue
discount, at a purchase price less than its remaining stated redemption price
(as defined above), or in the case of Mortgage Loans issued with original issue
discount, at a purchase price less than its adjusted issue price (as defined
above). If market discount is in excess of a de minimis amount (as described
below), the holder generally will be required to include in income in each month
the amount of such discount that has accrued (under the rules described in the
next paragraph) through such month that has not previously been included in
income, but limited, in the case of the portion of such discount that is
allocable to any Mortgage Loans, to the payment of stated redemption price on
such Mortgage Loans that is received by (or, in the case of accrual basis
Certificateholders, due to) the Trust Fund in that month. A Certificateholder
may elect to include market discount in income currently as it accrues (under a
constant yield method based on the yield of the Certificate to such holder)
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
Certificateholder during or after the first taxable year to which such election
applies. In addition, the OID Regulations would permit a Certificateholder to
elect to accrue all interest, discount (including de minimis market or original
issue discount) and premium in income as interest, based on a constant yield
method. If such an election were made with respect to Mortgage Loans with market
discount, the Certificateholder would be deemed to have made an election to
include market discount in income currently with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election and thereafter, and possibly previously
acquired instruments. Similarly, a Certificateholder that made this election for
a
Certificate 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 Certificateholder owns or acquires. See "Certain Federal
Income Tax Consequences--Taxation of Owners of REMIC Regular
Certificates--Premium" in the Prospectus. Each of these elections to accrue
interest, discount and premium with respect to a Certificate on a constant yield
method or as interest is irrevocable.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until such time as regulations are issued by the Treasury
Department, certain rules described in the Conference Committee Report (the
"Committee Report") accompanying the Tax Reform Act of 1986 will apply. Under
those rules, in each accrual period market discount on the Mortgage Loans should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of Mortgage Loans 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
stated interest remaining to be paid on the Mortgage Loans as of the beginning
of the accrual period, or (iii) in the case of Mortgage Loans issued with
original issue discount, in an amount that bears the same ratio to the total
remaining market discount as the original issue discount accrued in the accrual
period bears to the total original issue discount remaining at the beginning of
the accrual period. The prepayment assumption, if any, used in calculating the
accrual of original issue discount is to be used in calculating the accrual of
market discount. The effect of using a prepayment assumption could be to
accelerate the reporting of such discount income. 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
Mortgage Loans purchased at a discount in the secondary market.
Since the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans generally will be
considered to be de minimis if it is not greater than or equal to 0.25% of the
stated redemption price of the Mortgage Loans multiplied by the number of
complete years to maturity remaining after the date of its purchase. In
interpreting a similar rule with respect to original issue discount on
obligations payable in installments, the OID Regulations refer to the weighted
average maturity of obligations, and it is likely that the same rule will be
applied with respect to market discount, presumably taking into account the
prepayment assumption used, if any. The effect of using a prepayment assumption
could be to accelerate the reporting of such discount income. If market discount
is treated as de minimis under the foregoing rule, it appears that actual
discount would be treated [in a manner similar to original issue discount of a
de minimis amount. See "If Stripped Bond Rules Do Not Apply."]
Further, under the rules described in "Certain Federal Income Tax
Consequences -- Taxation of Owners of REMIC Regular Certificates--Market
Discount" in the Prospectus, any discount that
is not original issue discount and exceeds a de minimis amount may require the
deferral of interest expense deductions attributable to accrued market discount
not yet includible in income, unless an election has been made to report market
discount currently as it accrues.
Premium. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize such premium using a constant yield method. Amortizable
premium is treated as an offset to interest income on the related Mortgage Loans
rather than as a separate interest deduction. Premium allocable to Mortgage
Loans for which an amortization election is not made should be allocated among
the payments on the Mortgage Loans representing stated redemption price and be
allowed as an ordinary deduction as such payments are made (or, for a
Certificateholder using the accrual method of accounting, when such payments are
due).
It is unclear whether a prepayment assumption should be used in
computing amortization of premium allowable under Section 171 of the Code. If
premium is not subject to amortization using a prepayment assumption and an item
of Mortgage Loans prepays in full, the holder of a Grantor Trust Fractional
Interest Certificate acquired at a premium should recognize a loss, equal to the
difference between the portion of the prepaid principal amount of the Mortgage
Loans that is allocable to the Certificate and the portion of the adjusted basis
of the Certificate that is allocable to the Mortgage Loans. If a prepayment
assumption is used to amortize such premium, it appears that such a loss would
be unavailable. Instead, if a prepayment assumption is used, a prepayment should
be treated as a partial payment of the stated redemption price of the Grantor
Trust Fractional Interest Certificate and accounted for under a method similar
to that described for taking account of original issue discount on REMIC Regular
Certificates. See "Certain Federal Income Tax Consequences -- Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount" in the Prospectus. It is
unclear what other adjustments would be required to reflect differences between
an assumed prepayment rate and the actual rate of prepayments.
Taxation of Owners of Grantor Trust Strip Certificates
The "stripped coupon" rules of Section 1286 of the Code will apply to
the Grantor Trust Strip Certificates. Except as described above in "Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules
Apply," no regulations or published rulings under Section 1286 of the Code have
been issued and some uncertainty exists as to how it will be applied to
securities such as the Grantor Trust Strip Certificates. Accordingly, holders of
Grantor Trust Strip Certificates should consult their tax advisors concerning
the method to be used in reporting income or loss with respect to such
Certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "Possible Application of Proposed Contingent Payment Rules"
below, and assumes that the holder of a Grantor Trust Strip Certificate will not
own any Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue
discount will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate to such holder. Such yield would be calculated
based on the price paid for that Grantor Trust Strip Certificate by its holder
and the payments remaining to be made thereon at the time of the purchase, plus
an allocable portion of the servicing fees and expenses to be paid with respect
to the Mortgage Loans. See "Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a
prepayment assumption be used in computing the accrual of original issue
discount with respect to certain categories of debt instruments, and that
adjustments be made in the amount and rate of accrual of such discount when
prepayments do not conform to such prepayment assumption. Regulations could be
adopted applying those provisions to the Grantor Trust Strip Certificates. It is
unclear whether those provisions would be applicable to the Grantor Trust Strip
Certificates or whether use of a prepayment assumption may be required or
permitted in the absence of such regulations. It is also uncertain, if a
prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Strip Certificate or, with respect to any subsequent holder, at the time
of purchase of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Company, the Master Servicer nor the
Certificate Administrator will make any representation that the Mortgage Loans
will in fact prepay at a rate conforming to the Prepayment Assumption or at any
other rate and Certificateholders should bear in mind that the use of a
representative initial offering price will mean that such information returns or
reports, even if otherwise accepted as accurate by the IRS, will in any event be
accurate only as to the initial Certificateholders of each series who bought at
that price. Prospective purchasers of the Grantor Trust Strip Certificates
should consult their tax advisors regarding the use of the Prepayment
Assumption.
It is unclear under what circumstances, if any, the prepayment of an
item of Mortgage Loans will give rise to a loss to the holder of a Grantor Trust
Strip Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor
Trust Strip Certificate is treated as an interest in discrete Mortgage Loans, or
if the Prepayment Assumption is not used, then when an item of Mortgage Loans is
prepaid, the holder of a Grantor Trust Strip Certificate should be able to
recognize a loss equal to the portion of the adjusted issue price of the Grantor
Trust Strip Certificate that is allocable to such Mortgage Loans.
Possible Application of Proposed Contingent Payment Rules
The coupon stripping rules' general treatment of stripped coupons is to
regard them as newly issued debt instruments in the hands of each purchaser. To
the extent that payments on the Grantor Trust Strip Certificates would cease if
the Mortgage Loans were prepaid in full, the Grantor Trust Strip Certificates
could be considered to be debt instruments providing for contingent payments.
Under the OID Regulations, debt instruments providing for contingent payments
are not subject to the same rules as debt instruments providing for
noncontingent payments, but no final regulations have been promulgated with
respect to contingent payment debt instruments. Proposed regulations were
promulgated in 1986 regarding contingent payment debt instruments, but have not
been made final and are likely to be substantially revised before being made
final. Moreover, like the OID Regulations, such proposed regulations do not
specifically address securities, such as the Grantor Trust Strip Certificates,
that are subject to the stripped bond rules of Section 1286 of the Code.
If the contingent payment rules under the regulations proposed in 1986
were to apply, the holder of a Grantor Trust Strip Certificate would be required
to include as interest income in each month a portion of the periodic payment
(the "Accrued Periodic Payment") due on the Grantor Trust Strip Certificate.
That portion (the "Periodic Income Amount") would equal the product of (i) the
adjusted issue price of the Grantor Trust Strip Certificate at the beginning of
the period and (ii) a specified yield (as further described below). The excess
of the Accrued Periodic Payment over the Periodic Income Amount first would
reduce the adjusted issue price of the Grantor Trust Strip Certificate and, to
that extent, would be treated as a return of capital and not as interest income;
after the adjusted issue price had been reduced to zero, the entire Accrued
Periodic Payment would be treated as interest income.
The specified yield referred to in clause (ii) above would equal the
"applicable federal rate" (expressed as a monthly rate) in effect at the time of
purchase of the Grantor Trust Strip Certificate by that holder, which rate is
computed monthly by the IRS. It is unclear whether a prepayment assumption
should be made in determining which Treasury securities (short-term, mid-term or
long-term) should be used to determine the "applicable federal rate" for this
purpose.
Income accrual with respect to a Grantor Trust Strip Certificate will
generally be slower if the foregoing contingent payment rules apply than if they
do not. However, as noted above, there is substantial doubt that the contingent
payment rules of the proposed regulations in their current form will be
permitted to be applied to instruments such as the Grantor Trust Strip
Certificates and revised contingent payment regulations are expected to be
proposed. Certificateholders should consult their tax advisors concerning the
possible application of the contingent payment rules to the Grantor Trust Strip
Certificates.]
Sales of Grantor Trust Certificates
Except as described below, any gain or loss recognized on the sale of a
Grantor Trust Certificate generally will be capital gain or loss, and will be
equal to the difference between the amount realized on the sale of a Grantor
Trust Certificate and its adjusted basis. The adjusted basis of a Grantor Trust
Certificate generally will equal its cost, increased by any income (including
original issue discount and market discount income) recognized by the seller and
reduced (but not below zero) by any previously reported losses, amortized
premium and distributions with respect to such Grantor Trust Certificate. The
Code currently provides for a top marginal tax rate applicable to ordinary
income of individuals of 39.6% while maintaining a maximum marginal rate for the
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 or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in certain circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income, as will gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Code. Furthermore, a portion of
any gain that might otherwise be capital gain may be treated as ordinary income
to the extent that the Grantor Trust Certificate is held as part of a
"conversion transaction" within the meaning of Section 1258 of the Code. A
conversion transaction generally is one in which the taxpayer has taken two or
more positions in Certificates or similar property that reduce or eliminate
market risk, if substantially all of the taxpayer's return is attributable to
the time value of the taxpayer's net investment in such transaction. The amount
of gain 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 that taxable year, for
purposes of the limitation on the deduction of interest on indebtedness incurred
to purchase or carry property held for investment to a taxpayer's net investment
income.
Grantor Trust Reporting
The Trustee will furnish to each holder of a Grantor Trust Certificate
with each distribution a statement setting forth the amount of such distribution
allocable to principal on the underlying Mortgage Loans and to interest thereon
at the related Pass-Through Rate. In addition, within a reasonable time after
the end of each calendar year, based on information provided by the Master
Servicer or the Certificate Administrator, as applicable, the Trustee will
furnish to each Certificateholder during such year such customary factual
information as the Trustee deems necessary or desirable to enable holders of
Grantor Trust Certificates to prepare their tax returns
and will furnish comparable information to the IRS as and when required by law
to do so. Because the rules for accruing discount and amortizing premium with
respect to the Grantor Trust Certificates are uncertain in various respects,
there is no assurance the IRS will agree with the Trustee's information reports
of such items of income and expense. Moreover, such information reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders who bought their Certificates at the
representative initial offering price used in preparing such reports.
Backup Withholding
In general, the rules described in "Certain Federal Income Tax
Consequences -- Backup Withholding with Respect to REMIC Certificates" in the
Prospectus will also apply to Grantor Trust Certificates.
Foreign Investors
In general, the discussion with respect to REMIC Regular Certificates
in "Certain Federal Income Tax Consequences -- Foreign Investors in REMIC
Certificates" in the Prospectus applies to Grantor Trust Certificates.
To the extent that interest on a Grantor Trust Certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Code from United States
withholding tax, and the Grantor Trust Certificate is not held in connection
with a Certificateholder's trade or business in the United States, such Grantor
Trust Certificate will not be subject to United States estate taxes in the
estate of a non-resident alien individual.]
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code (a "Plan") or any insurance company
(whether through its general or separate accounts) or other person investing
"plan assets" of any Plan should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. It is not clear whether the exemptive relief afforded by the
Exemption, as described under "ERISA Considerations--Prohibited Transaction
Exemptions" in the Prospectus, will apply to the purchase, sale or holding of
the Residual Certificates. The purchase or holding of the Senior Certificates
(other than the Residual Certificates) by, on behalf of or with "plan assets" of
a Plan may qualify for exemptive relief under the Exemption; however the
Exemption contains a number of conditions including the requirement that any
such Plan must be an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Securities and Exchange Commission under the Securities Act
of 1933, as amended. In addition, because the Class M Certificates will not
qualify, and because it is not clear that the Residual Certificates will
qualify, for exemptive relief under the Exemption or PTE 83-1, purchases
of such Certificates by, on behalf of or with "plan assets" of any Plan will not
be registered unless the transferee provides an opinion of counsel satisfactory
to the Master Servicer, the Company and the Trustee that the purchase of any
such Certificate by, or on behalf of or with "plan assets" of any Plan is
permissible under applicable law, will not result in any non-exempt prohibited
transaction under ERISA or Section 4975 of the Code and will not subject the
Master Servicer, the Company or the Trustee to any obligation in addition to
those undertaken in the Pooling and Servicing Agreement. See "ERISA
Considerations" in the Prospectus.
LEGAL INVESTMENT MATTERS
The Offered Certificates will not constitute "mortgage related
securities" for purposes of SMMEA because the Mortgage Pool includes Mortgage
Loans that are secured by subordinate liens on the related Mortgaged Properties.
Institutions whose investment activities are subject to legal investment laws
and regulations or to review by regulatory authorities should consult with their
own legal advisors in determining whether and to what extent the Offered
Certificates are subject to restrictions on investment, capital requirements or
otherwise. See "Legal Investment Matters" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement dated [_______ __, 199_], (the "Underwriting Agreement") the
Underwriter has agreed to purchase, and the Company has agreed to sell to the
Underwriter, each class of the Offered Certificates [except that a de minimis
portion of the Residual Certificates will be retained by Residential Funding and
such portion is not offered hereby].
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Offered Certificates is
subject to, among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
Company's Registration Statement shall be in effect, and that no proceedings for
such purpose shall be pending before or threatened by the Securities and
Exchange Commission.
The distribution of the Offered Certificates by the Underwriter may be
effected, from time to time, in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds to
the Company from the sale of the Offered Certificates, before deducting expenses
payable by the Company, will be [______]% of the aggregate Certificate Principal
Balance of the Offered Certificates plus accrued interest thereon from the
Cut-off Date. The Underwriter may effect such transactions by selling the
Offered Certificates to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriter for whom they act as agent. In connection with the sale of
the Offered Certificates, the Underwriter may be deemed to have received
compensation from the Company in the form of underwriting compensation. The
Underwriter and any dealers that
participate with the Underwriter in the distribution of the Offered Certificates
may be deemed to be underwriters and any profit on the resale of the Offered
Certificates positioned by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933.
[The Principal Only Certificates, Stripped Interests Certificates,
Residual Certificates and Class M Certificates may be offered by the Company
from time to time to the public, either directly or through an underwriter or
agent, in negotiated transactions or otherwise at varying prices to be
determined at the time of sale[, except that a de minimis portion of the
Residual Certificate will be held by Residential Funding and such portion is not
offered hereby]. [Proceeds to the Company from the sale of the Principal Only
Certificates, Stripped Interest Certificates, Residual Certificates or Class M
Certificates will be equal to the purchase price paid by the purchaser thereof,
net of any expenses payable by the Company and any compensation payable to any
underwriter or agent.]
The Underwriting Agreement provides that the Company will indemnify the
Underwriter, and under limited circumstances the Underwriter will indemnify the
Company, against certain civil liabilities under the Securities Act of 1933 or
contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates--Reports to Certificateholders," which will
include information as to the outstanding principal balance of the Offered
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Offered
Certificates will be available through any other source. In addition, the
Company is not aware of any source through which price information about the
Offered Certificates will be generally available on an ongoing basis. The
limited nature of such information regarding the Offered Certificates may
adversely affect the liquidity of the Offered Certificates, even if a secondary
market for the Offered Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be
passed upon for the Company by [Thacher Proffitt & Wood] [Orrick, Herrington &
Sutcliffe], New York, New York and for the Underwriter by
[______________________________]. Certain federal income tax matters will be
passed upon for the Company by [Thacher Proffitt & Wood] [Orrick, Herrington &
Sutcliffe].
RATINGS
It is a condition to the issuance of the Senior Certificates and the
Class M Certificates that they be rated not lower than "[___]" and "[___]",
respectively by [____________________________ ("_______")] and "[___]" and
"[___]", respectively, by [________________________ ("_______")].
[[Standard & Poor's Rating Group] ratings on pass-through certificates
address the likelihood of the receipt by Certificateholders of payments required
under the Pooling and Servicing Agreement. [Standard & Poor's Rating Group]
ratings take into consideration the credit quality of the Mortgage Pool,
structural and legal aspects associated with the Certificates, and the extent to
which the payment stream in the Mortgage Pool is adequate to make payments
required under the
Certificates. [Standard & Poor's Rating Group] rating on the Certificates does
not, however, constitute a statement regarding frequency of prepayments on the
mortgages. See "Certain Yield and Prepayment Considerations" herein.] [The "r"
of the "AAAr" rating of the Class [__] Certificates by [Standard & Poor's Rating
Group] is attached to highlight derivative, hybrid, and certain other
obligations that [Standard & Poor's Rating Group] believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.]
[The ratings assigned by [Fitch Investors Service, L.P.] on
pass-through certificates [also] address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled. The rating process addresses the structural and legal aspects
associated with the Certificates, including the nature of the underlying
mortgage loans. The ratings assigned to pass-through certificates do not
represent any assessment of the likelihood or rate of principal prepayments. The
rating does not address the possibility that Certificateholders might suffer a
lower than anticipated yield.]
[The ratings assigned by [Moody's Investors Service, Inc.] to the
pass-through certificates [also] address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled. [Moody's Investors Service Inc.] ratings on pass-through certificates
do not represent any assessment of the likelihood that principal prepayments
will be made by the mortgagors or the degree to which such prepayments differ
from that originally anticipated. The ratings assigned to pass-through
certificates do not represent any assessment of the likelihood or rate of
principal prepayments. The rating does not address the possibility that
Certificateholders might suffer a lower than anticipated yield or that rapid
rates of principal prepayments could result in a failure of the holders of the
Stripped Interests Certificates to fully recover their initial investment.]
[The ratings assigned by [Duff & Phelps Credit Rating Co.] to mortgage
pass-through certificates address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled under the transaction structure. [Duff & Phelps's Credit Rating Co.]
ratings reflect its analysis of the riskiness of the Mortgage Loans and its
analysis of the structure of the transaction set forth in the operative
documents. [Duff & Phelps's Credit Rating Co.] ratings do not address the effect
on the Certificates' yield attributable to prepayments or recoveries on the
underlying mortgages. Further, in the case of the Stripped Interests
Certificates, the ratings do not address whether investors will recoup their
initial investments.]
The Company has not requested a rating on the Offered Certificates by
any rating agency other than [__________] and [__________]. However, there can
be no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Offered
Certificates by [_________] and
[----------].
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. The rating of the Stripped Interests
Certificates does not address the possibility that the holders of such
Certificates may fail to fully recover their initial investment. In the event
that the rating initially assigned to the Offered Certificates is subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to the Offered
Certificates.
[NY01B:335715.1] 16069-00377 05/29/97 10:13am
S-10
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by the Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
TABLE OF CONTENTS
Prospectus Supplement Page
SUMMARY...........................................................S-4
RISK FACTORS.....................................................S-23
Risk Factors with Respect to Second Liens........................S-23
DESCRIPTION OF THE MORTGAGE POOL.................................S-23
General ........................................................S-23
Mortgage Pool Characteristics....................................S-27
Payments on the Mortgage Loans...................................S-34
Representations and Warranties...................................S-34
Underwriting Standards...........................................S-35
Delinquency and Foreclosure Experience...........................S-35
DESCRIPTION OF THE OFFERED CERTIFICATES..........................S-35
General ........................................................S-35
Available Distribution Amount....................................S-35
Interest Distributions...........................................S-36
Principal Distributions on the Senior Certificates...............S-39
Principal Distributions on the Class M Certificates..............S-48
Allocation of Losses; Subordination..............................S-51
Advances ........................................................S-54
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS......................S-55
General ........................................................S-55
Modeling Assumptions.............................................S-59
Principal Only Certificate and Stripped Interests
Certificate Yield Considerations........................S-62
Additional Yield Considerations Applicable Solely
to the Residual Certificates............................S-64
POOLING AND SERVICING AGREEMENT..................................S-64
General ........................................................S-64
The Master Servicer..............................................S-65
Servicing and Other Compensation and Payment of
Expenses................................................S-65
Voting Rights....................................................S-65
Termination......................................................S-66
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.......................S-66
Special Tax Considerations Applicable to Residual
Certificates..........................................S-68
Characterization of Investments in Grantor Trust
Certificates..........................................S-70
Taxation of Owners of Grantor Trust Fractional
Interest Certificates.................................S-71
Taxation of Owners of Grantor Trust Strip
Certificates..........................................S-78
Possible Application of Proposed Contingent
Payment Rules.........................................S-80
Sales of Grantor Trust Certificates............................S-81
Grantor Trust Reporting........................................S-81
Backup Withholding.............................................S-82
Foreign Investors..............................................S-82
ERISA CONSIDERATIONS...........................................S-82
LEGAL INVESTMENT MATTERS.......................................S-83
METHOD OF DISTRIBUTION.........................................S-83
LEGAL OPINIONS.................................................S-84
RATINGS........................................................S-84
Residential Funding Mortgage
Securities II, Inc.
Home Equity Loan Pass-Through Certificates,
Series 199_-___
Class A-1 Certificates ____% $
Class A-2 Certificates ____% $
Class A-4 Certificates 0% $
Class A-5 Certificates Variable Rate$
Class M Certificates ____% $
PROSPECTUS SUPPLEMENT
________________, 199_
[NY01B:335715.1] 16069-00377 05/29/97 10:13am
i
<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 prospectus supplement and the prospectus to which it relates
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.
VERSION I-C
SUBJECT TO COMPLETION DATED MAY 29, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ____________, 19__)
$----------------
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
DEPOSITOR
HOME EQUITY LOAN TRUST 19__-___
RESIDENTIAL FUNDING CORPORATION
MASTER SERVICER
HOME EQUITY LOAN-BACKED TERM NOTES, SERIES 19__-___
The Home Equity Loan Trust 19__ (the "Issuer") will be formed pursuant
to a Trust Agreement to be dated as of _________________, 19__ between
Residential Funding Mortgage Securities II, Inc. (the "Depositor") and
__________________________, the Owner Trustee. The Issuer will issue $__________
aggregate principal amount of Home Equity Loan-Backed Term Notes, Series
19__-____ (the "Term Notes"). The Term Notes will be issued pursuant to an
Indenture to be dated as of _________________, 19__, between the Issuer and
___________________, the Indenture Trustee. Pursuant to the Indenture, the
Issuer will also issue an aggregate amount [up to the Maximum Variable Funding
Balance (as defined herein)] of Home Equity Loan-Backed Variable Funding Notes,
Series 19__-____ (the "Variable Funding Notes"). The Issuer will also issue
$___________ aggregate principal amount of Home Equity Loan Trust Certificates,
Series 19__-____ (the "Certificates"). The Term Notes and the Variable Funding
Notes are collectively referred to herein as the "Notes" and the Notes and the
Certificates are collectively referred to herein as the "Securities". Only the
Term Notes are offered hereby.
The Term Notes will be secured by the Class A Ownership Interest in a
special purpose limited liability company (the "199_-_ LLC") created pursuant to
an operating agreement (the "Operating Agreement") among the Depositor and
affiliated entities. The Class A Ownership Interest represents [an undivided
ownership interest] in, and the right to receive certain collections with
respect to, certain adjustable rate home equity revolving credit line loans made
or to be made in the future (the "Revolving Credit Loans") secured primarily by
first or second deeds of trust or mortgages on residential properties that are
primarily one- to four-family properties. In addition, the Notes will have the
benefit of an irrevocable and unconditional financial guaranty insurance policy
(the "Policy") issued by _______________ (the "Insurer") as described under "The
Policy" herein.
Payments of principal and interest on the Term Notes will be made on
the _______ day of each month or, if such day is not a business day, then on the
next business day, commencing on ____________, 19__ (each, a "Payment Date"). As
described herein, interest will accrue on the Term Notes at a floating rate (the
"Note Rate") equal to [LIBOR (as defined herein)] plus _____% per annum subject
to certain limitations as described herein. See "Description of the
Securities--Interest on the Notes" herein.
[NY01B:335705.1] 16069-00377 05/29/97 10:07am
<PAGE>
It is a condition of the issuance of the Term Notes that they be rated
"___" by ___________________ and "____" by ___________________.
The yield to maturity on the Term Notes will depend on the rate and
timing of principal payments (including payments in excess of required
installments, prepayments or terminations, liquidations and repurchases) on the
Revolving Credit Loans and the rate and timing of Draws. See "Certain Yield and
Prepayment Considerations" herein and "Yield and Prepayment Considerations" in
the Prospectus.
There is currently no secondary market for the Term Notes.
____________________ (the "Underwriter") intends to make a secondary market in
the Term Notes, but is not obligated to do so. There can be no assurance that a
secondary market for the Term Notes will develop or, if it does develop, that it
will continue. The Term Notes will not be listed on any securities exchange.
THE TERM NOTES REPRESENT OBLIGATIONS OF THE ISSUER ONLY AND DO NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR, THE 199_-_ LLC, THE
MASTER SERVICER, GMAC MORTGAGE CORPORATION OR ANY OF THEIR AFFILIATES. NONE OF
THE TERM NOTES, THE CLASS A OWNERSHIP INTEREST OR THE UNDERLYING REVOLVING
CREDIT LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE COMPANY, THE MASTER SERVICER, GMAC MORTGAGE
CORPORATION OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===========================================================================
Price to Underwriting Proceeds to
Public Discount the Depositor (1)
- ---------------------------------------------------------------------------
Per Term Note.......... _______% _____% _____%
- ---------------------------------------------------------------------------
Total.................. $________ $________ $________
===========================================================================
(1) Before deducting expenses, estimated to be $__________.
The Term Notes are offered by the Underwriter subject to prior sale,
when, as and if delivered to and accepted by the Underwriter and subject to
certain other conditions. The Underwriter reserves the right to withdraw, cancel
or modify such offer and to reject any order in whole or in part. It is expected
that delivery of the Term Notes will be made on or about ____________, 19__ [in
book-entry form through the Same Day Funds Settlement System of The Depository
Trust Company as discussed herein,] [at the office of __________________,
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<PAGE>
_______________, _________________] against payment therefor in immediately
available funds. [Name of Underwriter]
[Date of Prospectus Supplement]
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<PAGE>
THE SECURITIES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF
A SEPARATE SERIES OF SECURITIES BEING OFFERED PURSUANT TO THE COMPANY'S
PROSPECTUS DATED ____________, 19__, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A
PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE SECURITIES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL __________, 19__, ALL DEALERS EFFECTING TRANSACTIONS IN THE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET, SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
Issuer...........The Term Notes will be issued by Home Equity Loan Trust
Series 19__-___, a Delaware business trust established
pursuant to the Trust Agreement, dated as of ________ 1,
19__ between the Depositor and the Owner Trustee. The
assets of the Issuer will consist of the Class A Ownership
Interest and certain related assets.
The Term Notes...$____________ Home Equity Loan-Backed Term Notes,
Series 19__-__. Only the Term Notes are offered hereby.
The Term Notes will be issued pursuant to an Indenture,
dated as of ________ 1, 19__ between the Issuer and
___________________, as Indenture Trustee.
Depositor........Residential Funding Mortgage Securities II, Inc., (the
"Depositor" or the "Company"). See "The Company" in the
Prospectus.
Master Servicer..Residential Funding Corporation (the "Master Servicer" or
"Residential Funding"). See "Residential Funding
Corporation" in the Prospectus.
Owner Trustee.... , .
------------------ ------------
Indenture Trustee , .
------------------ ------------
Delivery Date....On or about ____________, 19__.
Payment Date.....The [______] day of each month (or, if such day is not a
business day, the next business day), beginning on
___________________, 199___, (each, a "Payment Date").
[Denominations and
Registration........The Term Notes (the "Book-Entry Securities") will be
issued, maintained and transferred on the book-entry records
of DTC and its Participants (as defined in the Prospectus).
The Term Notes will be offered in registered form, in
minimum denominations of $______ and integral multiples
of $_____ in excess thereof. The Book-Entry Securities will
be represented by one or more Term Note certificates
registered in the name of Cede & Co., as nominee of DTC.
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<PAGE>
No Beneficial Owner will be entitled
to receive a Term Note in fully
registered, certificated form (a
"Definitive Note"), except under the
limited circumstances described
herein. See "Description of the
Securities--Book Entry Securities"
herein.]
......................... [Cedel or Euroclear description if necessary]
The Mortgage Pool.
.The Mortgage Pool will consist of a pool of Revolving Credit Loans,
originated pursuant to Credit Line Agreements and secured by Mortgaged
Properties. The Mortgage Pool will include the unpaid principal balance of
the Revolving Credit Loans as of the close of the latest billing cycle
therefor ending prior to ________ 1, 19__ in the case of the Initial
Revolving Credit Loans, or prior to the date upon which each Subsequent
Revolving Credit Loan is conveyed to the Issuer (in each case, the "Cut-off
Date Principal Balance" and, such date, the "Cut-off Date") plus any
additions thereto as a result of new advances of money made pursuant to the
applicable Credit Line Agreement (the "Additional Balances" or "Draws").
With respect to any date, the "Pool Balance" will be equal to the aggregate
of the Principal Balances of all Revolving Credit Loans as of such date.
The "Principal Balance" of a Revolving Credit Loan (other than a Liquidated
Loan) on any day is equal to its Cut-off Date Principal Balance, plus (i)
any Additional Balances in respect of such Revolving Credit Loan conveyed
to the Issuer, minus (ii) all collections credited against the Principal
Balance of such Revolving Credit Loan in accordance with the related Credit
Line Agreement prior to such day. The Principal Balance of a Liquidated
Loan after the final recovery of related Liquidation Proceeds shall be
zero.
...................The Revolving Credit Loans were acquired by Residential
Funding pursuant to its Home Equity Loan Program (as defined herein).
Initially, the aggregate Cut-off Date Balance of the Revolving Credit Loans
is $____________. The Combined Loan-to-Value Ratio (as defined herein) for
any Revolving Credit Loan did not exceed ____% as of the Cut- off Date. The
weighted average Combined Loan-to-Value Ratio of the Revolving Credit Loans
was ____% as of the Cut-off Date. The Junior Mortgage Ratios (as defined
herein) for the Revolving Credit Loans ranged from ________% to _____%, and
the weighted average Junior Mortgage Ratio was ______%, as of the Cut-off
Date. The weighted average Credit Limit Utilization Rate (as defined S-6
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<PAGE>
herein) was ___% as of the Cut-off Date. Interest on each Revolving Credit
Loan is payable monthly and computed on the related average daily
outstanding Principal Balance for each billing cycle at a variable rate per
annum (the "Loan Rate") equal at any time (subject to the applicable
maximum rate, as described herein under "Description of the Mortgage
Pools--Revolving Credit Loan Terms,") to the sum of (i) the prime rate
published on the first business day of the month of the billing cycle and
(ii) a margin generally within the range of ____% to ____%. The Loan Rate
is subject to adjustment monthly. [As of the Cut-off Date, the Loan Rates
on approximately ___% of the Revolving Credit Loans (by Principal Balance
as of the Cut-off Date) are introductory rates that are lower than the rate
that would have been in effect if the applicable Index and Gross Margin at
the time these loans were originated were used to determine the Loan Rate.]
The Cut-off Date Trust Balance of the Revolving Credit Loans ranged from
$________ to $__________ and averaged $____________. Credit Limits under
the Revolving Credit Loans as of the Cut-off Date ranged from $_________ to
$_________ and averaged $_________. Each Revolving Credit Loan was
originated in the period from _______, 19__ to ________, 19__. With respect
to _____% of the Revolving Credit Loans (by Principal Balance as of the
Cutoff Date), the related Mortgaged Properties are located in California.
........................................ For a further description of the
Revolving Credit Loans, see "Description of the Mortgage Pool" herein.
199_-_ LLC.............................. As described herein, the Mortgage
Pool will be conveyed to and held by the 199_-_ Trust LLC (the "199_-_
LLC"), a limited liability company under __________ law. Pursuant to the
199_-_ LLC's Operating Agreement, the 199_-_ LLC will consist of two
classes of ownership interests (the "Class A Ownership Interest" and the
"Class B Membership Interest"). The Class A Ownership Interest will
represent [an undivided ownership interest in] the Mortgage Pool, and will
be entitled to receive certain payments with respect to the Mortgage Pool
as described below under "P&I Collections."
Interest Payments ..
.Interest on the Notes will be paid monthly on each Payment Date,
commencing in 19__, at the Note Rate for the related Interest Period (as
defined below). The Note Rate for an Interest Period will be equal to LIBOR
plus ___% as
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<PAGE>
described herein under "Description of
the Securities--Interest on the
Notes." Interest on the Notes in
respect of any Payment Date will
accrue from the preceding Payment Date
(or in the case of the first Payment
Date, from the date of initial
issuance of the Notes (the "Closing
Date") through the day preceding such
Payment Date (each such period, an
"Interest Period")) on the basis of
the actual number of days in the
Interest Period and a 360-day year.
Principal Payments .
.................... On each Payment Date after the Funding Period, other
than the Payment Date in ___________, principal payments will be due and
payable on the Notes in an aggregate amount equal to the applicable
Security Percentage of either (i) Net Principal Collections (as defined
herein) for such Payment Date, so long as no Amortization Event has
occurred and such Payment Date is during the Revolving Period or (ii)
Principal Collections for such Payment Date, if an Amortization Event has
occurred or if such Payment Date is after the end of the Revolving Period.
In addition, on any Payment Date, to the extent of funds available
therefor, Securityholders will also be entitled to receive principal
payments generally equal to the applicable Security Percentage of (i)
Liquidation Loss Amounts (as defined herein), as and to the extent
described herein, and (ii) the amount, if any, necessary to bring the
Outstanding Reserve Amount up to the Reserve Amount Target, to the extent
that such amount was paid as a principal distribution on the Class A
Ownership Interest. In no event will principal payments on the Notes on any
Payment Date exceed the Security Balance thereof on such date. On the
Payment Date in __________, principal will be due and payable on the Notes
in an amount equal to the Security Balance for each such Security on such
Payment Date.
........................................ With respect to any Payment Date
and Security, the "Security Percentage" is the percentage equivalent of a
fraction the numerator of which is the Security Balance of such Security
immediately prior to such Payment Date and the denominator of which is the
aggregate of the Security Balances of all Securities (the "Aggregate
Security Balance") immediately prior to such date.
........................................ The "Security Balance" of any
Security on any day is, with respect to the Term Notes and the
Certificates, the respective initial balance thereof as of the Closing
Date, and with respect to the Variable Funding Notes, the aggregate amount
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<PAGE>
of Variable Funding Notes issued as of
such day, in each case reduced by all
payments of principal thereon as of
such day.
........................................ Notwithstanding the foregoing
provisions, as further described herein, if the Insurer fails to make any
payment required under the Policy in accordance with its terms,
distributions on the Certificates will be subordinate to the payment of
interest and principal on the Notes.
P&I Collections......................... All collections on the Revolving
Credit Loans will be allocated by the Master Servicer in accordance with
the terms of the Credit Line Agreements between amounts collected in
respect of interest and amounts collected in respect of principal. See
"Description of the Servicing Agreement--P&I Collections" herein, which
describes the calculation of the Interest Collections and the Principal
Collections on the Revolving Credit Loans for the Collection Period related
to each Payment Date. These amounts are calculated exclusive of the pro
rata portion of collections attributable to Additional Balances not
conveyed to the 199__-__ LLC following an Amortization Event.
........................................ With respect to any Payment Date,
the portion of Principal Collections and Interest Collections that are
distributable pursuant to the Servicing Agreement (together, the "P&I
Collections") will equal (a) Interest Collections for such Payment Date and
(b) either (1) at any time during the Revolving Period, so long as an
Amortization Event has not occurred, the excess, if any, of Principal
Collections for such Payment Date over the aggregate amount of Additional
Balances created during the related Collection Period and conveyed to the
199_-_ LLC, or (2) at any time after the end of the Revolving Period, or if
an Amortization Event has occurred, Principal Collections for such Payment
Date. During the Funding Period, Net Principal Collections will be
deposited to the Funding Account.
........................................ Upon the occurrence of an
Amortization Event or after the end of the Revolving Period, Principal
Collections for a Collection Period will no longer be applied to acquire
Additional Balances during such Collection Period. On any Payment Date
after the end of the Revolving Period, the acquisition of all Additional
Balances will be reflected by an increase in the Security Balance of the
Variable Funding Notes [up to the Maximum Variable Funding Balance] at
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<PAGE>
such time, and all Principal Collections will be paid to the Securities.
Upon the occurrence of an Amortization Event, no new Additional Balances
will be acquired by the 199_-_ LLC. The Revolving Period is the period
commencing on the Closing Date and ending on _________. See "Description of
the Securities--Allocation of P&I Collections" for a description of
"Amortization Events."
[Funding Period......................... On each Payment Date during the
Funding Period, Net Principal Collections for such Payment Date will
be deposited in the Funding Account. During the Funding Period,
amounts on deposit in the Funding Account in respect of Net Principal
Collections will be used to purchase Subsequent Revolving Credit
Loans.
........................................ The Funding Period is the period
commencing on the Closing Date and ending on the earlier of (x) the
business day immediately prior to the Payment Date in ______________ and
(y) the occurrence of an Amortization Event (as defined herein under
"Description of the Securities--Allocation of P&I Collections").]
Outstanding Reserve Amount.................................. The
distribution of the Special Capital Distribution Amount, if any, on the
Class A Ownership Interest will create the Outstanding Reserve Amount. The
Outstanding Reserve Amount, if any, will be available to absorb any
Liquidation Loss Amounts that are allocated to the Class A Ownership
Interest and not covered by Principal Collections and Interest Collections.
Any Liquidation Loss Amounts allocable to the Noteholders and not covered
by such overcollateralization will be covered by draws on the Policy to the
extent provided herein. The "Outstanding Reserve Amount" on any Payment
Date is the amount, if any, by which the sum of the Pool Balance as of the
end of the related Collection Period and the amounts, if any, on deposit in
the Funding Account in respect of Net Principal Collections on such Payment
Date exceed the Aggregate Security Balance on such day (after giving effect
to all distributions on such Payment Date).
........................................ As of the Closing Date, the
Reserve Amount Target is equal to ___% of the Cut-Off Date Pool Balance.
The Reserve Amount Target may be increased or reduced from time to time
pursuant to the terms of the Operating Agreement, with the consent of the
Rating Agencies and the Indenture Trustee. To the extent the Reserve Amount
Target is reduced on any
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<PAGE>
Payment Date, the amount of the
Principal Collections distributed on
such Payment Date will be reduced and
on each subsequent Payment Date to the
extent the remaining Outstanding
Reserve Amount is in excess of the
reduced Reserve Amount Target until
the Outstanding Reserve Amount equals
the Reserve Amount Target.
Insurer............................ . See "The Insurer" herein.
--------------
Policy.................................. On the Closing Date, the Insurer
will issue a Policy in favor of the [Owner Trustee on behalf of the
Issuer]. The Policy will unconditionally and irrevocably guarantee
principal payments on the Notes plus accrued and unpaid interest due on the
Notes. The Policy will not guarantee payments on the Certificates. On each
Payment Date, a draw will be made on the Policy to cover (a) any shortfall
in amounts available to make payments of interest on the outstanding
Security Balance of the Notes and (b) the amount, if any, [by which the
Aggregate Security Balance of the Notes exceeds the sum of the Pool Balance
at the end of the related Collection Period and the amount, if any, on
deposit in the Funding Account in respect of Net Principal Collections on
such date]. In addition, the Policy will guarantee the payment of the
outstanding Security Balance of each Note on the Payment Date in _______
(after giving effect to all other amounts distributable and allocable to
principal on such Payment Date). See "The Policy" herein and "Description
of Credit Enhancement" in the Prospectus.
The Variable Funding Notes.............. Home Equity Loan-Backed Variable
Funding Notes, Series 19__-_. The Variable Funding Notes will be issued
pursuant to the Indenture. As of the Closing Date, the Security Balance of
the Variable Funding Notes will be zero. See "Description of the
Securities--General." The Variable Funding Notes are not offered hereby.
The Certificates........................ $________ Home Equity Loan-Backed
Certificates, Series 19__-__. The Certificates will be issued pursuant to
the Trust Agreement and will represent fractional undivided interests in
the Issuer. The Certificates are not offered hereby. Interest on the
Certificates will be paid monthly on each Payment Date, at a rate equal to
LIBOR plus ___%.
Final Payment of Principal on
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the Notes...The Notes will be payable in full on . In addition, the
--------
Issuer will pay the Notes in full upon the exercise by the
[Master Servicer] of its option to purchase all Revolving
Credit Loans and all property acquired in respect of such
Revolving Credit Loans. See "The Agreements--
Termination; Redemption of Notes" in the Prospectus.
Certain Federal Income Tax Consequences........................... In the
opinion of Tax Counsel (as defined in the Prospectus), for federal income
tax purposes, The Notes will be characterized as indebtedness and the
Issuer, as created pursuant to the terms and conditions of the Trust
Agreement, will not be characterized as an association (or publicly traded
partnership) taxable as a corporation or as a taxable mortgage pool within
the meaning of section 7701(i) of the Code.
............. For further information regarding certain federal income tax
consequences of an investment in the
Notes see "Certain Federal Income Tax
Consequences" herein and "Certain
Federal Income Tax Consequences" and
"State and Other Tax Consequences" in
the Prospectus.
Legal Investment..The Senior Certificates will not constitute "mortgage
related securities" for purposes of SMMEA, because the
Mortgage Pool includes Revolving Credit Loans that are
secured by subordinate liens on the related Mortgaged
Properties. Institutions whose investment activities are
subject to legal investment laws and regulations or to review
by certain regulatory authorities may be subject to
restrictions on investment in the Term Notes. See "Legal
Investment Considerations" herein.
Rating.... It is a condition to the issuance of the Term Notes that they
be rated "____" by and "____" by (each
--------- -------------
a "Rating Agency"). A security rating is not a
recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning
rating organization. A security rating does not address the
frequency of prepayments of Revolving Credit Loans, or the
corresponding effect on yield to investors. See "Certain Yield
and Prepayment Considerations" and "Ratings" herein.
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<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, among other things, the
items discussed under "Risk Factors" in the Prospectus and the following factors
in connection with the purchase of the Certificates:
[Appropriate Risk Factors regarding Revolving Credit Loans to be inserted
as necessary.] DESCRIPTION OF THE MORTGAGE POOL
General
The Revolving Credit Loans were originated pursuant to Credit Line
Agreements and are secured by first or second mortgages or deeds of trust, on
Mortgaged Properties. The Mortgaged Properties securing the Revolving Credit
Loans consist primarily of residential properties that are one-to four-family
properties. [As to each Revolving Credit Loan, the Mortgagor represented at the
time of origination that the related Mortgaged Property would be owner
occupied.]
All percentages of the Revolving Credit Loans described herein are
approximate percentages determined (except as otherwise indicated) by the
Cut-off Date Trust Balance.
The Cut-off Date Trust Balance of the Revolving Credit Loans is
$______, which is equal to the aggregate Trust Balances of the Revolving Credit
Loans as of the close of the billing cycle preceding ___________ (as to the
Revolving Credit Loans, the "Cut-off Date"). As of the Cut-off Date, [each]
Revolving Credit Loan(s) was not more than 59 days delinquent, had a Cutoff Date
Trust Balance of at least $_______, was secured by a mortgage in a [first or]
second lien position and had a Combined Loan-to-Value Ratio as of the Cut-off
Date which was not greater than ____. With respect to the Revolving Credit
Loans, the average Cut-off Date Trust Balance was $_______, the minimum Cut-off
Date Trust Balance was $_________, the maximum Cut-off Date Trust Balance was
$________, the minimum Loan Rate and the maximum Loan Rate on the Cut-off Date
were ___% and ___% per annum, respectively, and the weighted average Loan Rate
on the Cut-off Date was ___% per annum. The weighted average Credit Limit
Utilization Rate of the Revolving Credit Loans was ___% as of the Cut-off Date.
The weighted average Combined Loan-to-Value Ratio of the Revolving Credit Loans
was ___% as of the Cut-off Date and the weighted average Junior Mortgage Ratio
was approximately ___%. The latest scheduled maturity of any Revolving Credit
Loan is ___________. With respect to ___% of the Revolving Credit Loans, the
related Mortgaged Properties are located in California.
[As of the Cut-off Date the Loan Rates on approximately ___% of the
Revolving Credit Loans are introductory rates that are lower than the rate that
would have been in effect if the applicable [Index] and Gross Margin at the time
these loans were originated were used to determine the Loan Rate. The Loan Rates
for each of these Revolving Credit Loans will be fully indexed and will be based
on the applicable [Index] and Gross Margin on their first Adjustment Date. As of
the Cut-off Date, the weighted average months until these Revolving Credit Loans
reach their first Adjustment Date is ___ months.]
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<PAGE>
[___% of the Revolving Credit Loans were acquired by Residential
Funding (in such capacity, the "Seller") from banks, savings and loan
associations, mortgage bankers, investment banking firms and other mortgage loan
originators and sellers not affiliated with the Seller (the "Program Sellers"),
under the Seller's Home Equity Loan Program (the "Home Equity Loan Program";
such loans, the "Program Loans") on a servicing released basis.] [___% of the
Revolving Credit Loans were acquired by the Seller from GMAC Mortgage
Corporation of PA ("GMACMC"; such loans, the "GMACMC Loans") in ______________.]
Revolving Credit Loan Terms
Interest on each Revolving Credit Loan is calculated according to the
daily simple interest method, and with respect to each Revolving Credit Loan,
the billing cycle is the calendar month preceding a Due Date.
[Each Program Loan has a Loan Rate that is subject to adjustment on the
first day (each such day, an "Adjustment Date") of each related billing cycle to
equal the sum of (a) the [prime rate for corporate loans at United States
commercial banks, as published in The Wall Street Journal] [other index] (the
"Index") on the first business day of the month in which such billing cycle
begins, and (b) the Gross Margin specified in the related Mortgage Note,
provided, however, that the Loan Rate on each Revolving Credit Loan will in no
event be greater than the maximum Loan Rate (the "Maximum Loan Rate") set forth
in the related Mortgage Note, which will generally be ___% per annum subject to
the maximum rate permitted by applicable law. If, on any day, more than one
[prime rate or a range of prime rates for corporate loans at United States
commercial banks] [other index] is published in The Wall Street Journal, the
[Index] on such day will be, with respect to the Program Loans, the highest of
the [prime rates] [other index] published.]
[Each GMACMC Loan has a Loan Rate that is subject to adjustment on each
day of each related billing cycle to equal the sum of (a) the [Index] on any
business day in such billing cycle, and (b) the Gross Margin [which is
adjustable as provided in the related Mortgage Note [description of adjustment
to be inserted]], provided, however, that the Loan Rate on each Revolving Credit
Loan will in no event be greater than the Maximum Loan Rate as generally set
forth in the related Mortgage Note subject to the maximum rate permitted by
applicable law. If, on any day, more than one [prime rate or a range of prime
rates for corporate loans at United States commercial banks] [other index] is
published in The Wall Street Journal], the [Index] on such day will be the
highest [prime rate] [other index] published. As to each GMACMC Loan, the Gross
Margin is adjustable from time to time based on the then outstanding balance and
the Combined Loan-to-Value Ratio.]
[Each Revolving Credit Loan had a term to maturity from the date of
origination of not more than ____ years.] The Mortgagor for each Revolving
Credit Loan may make a Draw under the related Credit Line Agreement at any time
[(i) during the entire term to maturity thereof, in the case of the GMACMC
Loans, or (ii) during the Draw Period. The Draw Period may be either [___] years
or [___] years from the date of origination thereof. The maximum amount of each
Draw with respect to any Revolving Credit Loan is equal to the excess, if any,
of the Credit Limit over the principal balance outstanding under such Mortgage
Note at the time
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of such Draw. Each Revolving Credit Loan may be prepaid in full or in part at
any time and without penalty, but with respect to each Revolving Credit Loan,
the related Mortgagor will have the right during the related Draw Period to make
a Draw in the amount of any prepayment theretofore made with respect to such
Revolving Credit Loan. The Mortgage Note or Mortgage related to each Revolving
Credit Loan will contain a customary "due-on-sale" clause.
As to each Revolving Credit Loan, the Mortgagor's rights to receive
Draws during the Draw Period may be suspended, or the Credit Limit may be
reduced, for cause under a number of circumstances, including, but not limited
to: a materially adverse change in the Mortgagor's financial circumstances; a
decline in the value of the Mortgaged Property significantly below its appraised
value at origination; or a 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, the Revolving Credit Loan may be
terminated and declared immediately due and payable in full. For this purpose, a
default includes, but is not limited to: the Mortgagor's failure to make any
payment as required; any action or inaction by the Mortgagor that adversely
affects the Mortgaged Property or the rights in the Mortgaged Property; or fraud
or material misrepresentation by a Mortgagor in connection with the Loan.
Revolving Credit Loan Characteristics
Set forth below is a description of certain additional characteristics
of the Revolving Credit Loans as of the Cut-off Date. Unless otherwise
specified, all principal balances of the Revolving Credit Loans are as of the
Cut-off Date.
PROPERTY TYPE
Percent of
Pool by
Number of Cut-off Date by Cut-off Date
Property Type Revolving Credit Loans Trust Balance Trust Balance
- ------------- ---------------------- ------------- -------------
Single Family........ $ %
Condominium..........
PUD/Townhouse........
Total..............
OCCUPANCY TYPES
Occupancy (as Percentage of
indicated by Borrower Number Principal Balance Mortgage Pool
Primary Residence.......... $ . . %
Second/Vacation............
Non Owner-occupied......... . .
--- --
Total $ . . %
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TRUST BALANCES
Percent of Pool
Number of Cut-off Date by Cut-off Date
Range of Trust Balance Revolving Credit Loans Trust Balance Trust Balance
- ---------------------- ---------------------- ------------- -------------
$ . $ %
$ .
$ .
$ .
$ .
$ .
$ .
$ .
$ .
$ .
$ .
Total..................
GEOGRAPHICAL DISTRIBUTION(1)
Percent of
Pool by
Number of Cut-off Date Cut-off Date
State Revolving Credit Loans Trust Balance Trust Balance
- ----- ---------------------- ------------- -------------
........... $ %
Total....
- ------------------
(1) Geographical location is determined by the address of the Mortgaged Property
securing the related Revolving Credit Loan.
COMBINED LOAN-TO-VALUE RATIOS
Percent of
Pool by
Range of Combined Number of Cut-off Date Cut-off Date
Loan-to-Value Ratios Revolving Credit Loans Trust BalanceTrust Balance
- -------------------- ---------------------- --------------------------
.............. $ %
..............
..............
..............
..............
..............
..............
..............
..............
..............
Total.........................
- ------------------
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JUNIOR MORTGAGE RATIOS
Percent of
Pool by
Range of Junior Number of Cut-off Date Cut-off Date
Mortgage Ratios Revolving Credit Loans Trust Balance Trust Balance
- --------------- ---------------------- ------------- -------------
.. $ %
..
..
..
..
..
..
..
..
..
Total.............
- ------------------
LOAN RATES
Percent of
Pool by
Number of Cut-off Date Cut-off Date
Range of Loan Rates Revolving Credit Loans Trust Balance Trust Balance
- ------------------- ---------------------- ------------- -------------
... $ %
...
...
...
...
...
...
...
...
Total...............
GROSS MARGINS
Percent of
Pool by
Number of Cut-off Date Cut-off Date
Range of Gross Margins(1) Revolving Credit Loans Trust Balance Trust Balance
- ------------------------- ---------------------- ------------- -------------
......... $ %
.........
.........
.........
.........
.........
Total....................
- ------------------
(1) As to the GMACMC Loans, the Gross Margin as of the Cut-off Date, subject to
adjustment as described herein.
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<PAGE>
CREDIT LIMIT UTILIZATION RATES
Percent of
Pool by
Range of Credit Number of Cut-off Date Cut-off Date
Limit Utilization Rates Revolving Credit Loans Trust Balance Trust Balance
- ----------------------- ---------------------- ------------- -------------
...... $ %
......
......
......
......
......
......
......
......
......
......
Total.................
CREDIT LIMITS
Percent of
Number of Cut-off Date by Cut-off Date
Range of Credit Limits Revolving Credit Loans Trust Balance Trust Balance
- ---------------------- ---------------------- ------------- -------------
$ . $ %
$ .
$ .
$ .
$ .
$ .
$ .
$ .
$ .
$ .
$ .
Total.................
INTEREST RATE CEILINGS
Percent of
Pool by
Range of Interest Number of Cut-off Date Cut-off Date
Rate Ceilings Revolving Credit Loans Trust Balance Trust Balance
- ------------- ---------------------- ------------- -------------
............ $ %
............
............
............
............
Total.........................
MONTHS REMAINING TO SCHEDULED MATURITY
Percent of
Pool by
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<PAGE>
Range of Months Number of Cut-off Date Cut-off Date
Remaining to Scheduled Revolving Credit Loans Trust Balance Trust Balance
Maturity----------------------- --------------- ------------- -------------
............ $ %
............
............
............
............
............
............
............
Total.........................
ORIGINATION YEAR
Percent of
Pool by
Number of Cut-off Date Cut-off Date
Origination Year Revolving Credit Loans Trust Balance Trust Balance
- ---------------- ---------------------- ------------- -------------
1987.......... $ %
1988..........
1989..........
1990..........
1991..........
1992..........
1993..........
1994.......... $ %
1995..........
1996..........
Total...........
LIEN PRIORITY
Percent of
Pool by
Number of Cut-off Date Cut-off Date
Lien Priority Revolving Credit Loans Trust Balance Trust Balance
- ------------- ---------------------- ------------- -------------
First Lien........ $ %
Second Lien.......
Total...........
DAYS DELINQUENT AS OF CUT-OFF DATE
Percent of
Pool by
Number of Cut-off Date Cut-off Date
Days Delinquent Revolving Credit Loans Trust Balance Trust Balance
- --------------- ---------------------- ------------- -------------
Current.............. $ %
30-59................
Total..............
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<PAGE>
LOAN SOURCE
Percent of
Pool by
Number of Cut-off Date Cut-off Date
Loan Source Revolving Credit Loans Trust Balance Trust Balance
- ----------- ---------------------- ------------- -------------
................. $ %
.................
.................
Total..........
Underwriting Standards
[For a description of the underwriting standards and procedures
applicable to the Program Loans originated under the Seller's Home Equity Loan
Program, see "Revolving Credit Loan Program--Underwriting Standards" in the
Prospectus. The Program Loans included in the Mortgage Pool were originated
subject to a maximum CLTV of ___% and a maximum total monthly debt to income
ratio of ___%, with variations permitted in certain cases based on compensating
factors. [include additional details as appropriate]]
[Following is a brief description of the various underwriting
standards and procedures applicable to the different Revolving Credit
Loans.]
[GMACMC Loans
The GMACMC Loans were originated by GMACMC pursuant to its home equity
credit line program (the "GMACMC Program"). The GMACMC Program was initiated in
1987, and involves origination of home equity lines through GMACMC's own
central, regional and branch offices. The underwriting criteria under the GMACMC
Program differ from those under the Goal Line Program in a number of respects.
The underwriting standards applicable to the GMACMC Loans generally do
not require the GMACMC Loans to have been fully documented. Although most of the
GMACMC Loans will have been originated under full documentation or alternative
documentation programs, certain of the GMACMC Loans will also have been
originated under limited documentation programs. Limited documentation programs
generally permit fewer supporting documents to be obtained or waive income and
employment documentation requirements, and limited documentation programs
generally compensate for increased credit risk by placing greater emphasis on
the review of the property to be financed. In accordance with GMACMC's mortgage
loan programs, a limited number of the GMACMC Loans may have been originated
pursuant to an executive employee program in which no income, asset or
employment verifications or appraisals were required.
The maximum Combined Loan-to-Value ratio at origination for a GMACMC
Loan is generally 90%, with mortgage insurance generally required on most GMACMC
Loans with Combined Loan-to-Value ratio's at origination over 80% (generally
such loans also are subject to a Gross Margin 1.00% higher than would otherwise
apply). The total debt to income ratio
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<PAGE>
is generally required to be not greater than 38% under the GMACMC Program,
although variances are permitted based on compensating factors. For this
purpose, the required monthly payments on the GMACMC Loans are assumed to be
equal to one month's interest accrued at the related initial mortgage rates on
the amounts of the related credit limits. Title insurance is required on all
GMACMC Loans with Credit Limits in excess of $100,000, or which are in a first
lien position.
As to each of the GMACMC Loans, the payment of the full outstanding
principal balance of the Revolving Credit Loan at maturity generally will depend
on the borrower's ability to obtain refinancing or to sell the related Mortgaged
Property prior to the maturity of the Revolving Credit 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 GMACMC Program underwriting standards may be varied
in appropriate cases. There can be no assurance that every GMACMC Loan was
originated in conformity with the applicable underwriting standards in all
material respects, or that the quality or performance of the GMACMC Loans will
be equivalent under all circumstances.]
[Describe other applicable underwriting standards]
Representations and Warranties
[Each Program Seller [and GMACMC] has made or will make certain limited
representations and warranties regarding the related Revolving Credit Loans, as
of the date of purchase thereof by the Seller. However, such representations and
warranties will not be assigned to the Trustee for the benefit of the holders of
the related series of Certificates, and therefore a breach of such
representations and warranties will not be enforceable on behalf of the Trust
Fund.]
SERVICING OF THE REVOLVING CREDIT LOANS
General
The Master Servicer will be responsible for servicing the Revolving
Credit Loans directly or through one or more subservicers in accordance with the
Guide and the terms of the Servicing Agreement. See "Servicing of the Revolving
Credit Loans" in the Prospectus.
Billing statements are mailed monthly by the subservicers. The
statement details all debits and credits and specifies the minimum payment due
and the available credit line. Notice of changes in the applicable Loan Rate are
provided by the subservicer to the Mortgagor with such statements. All payments
are due by the _____ or _____ day of the month.
[With respect to mortgage loans, the general policy of the Master
Servicer is to initiate foreclosure on the underlying property (i) after such
loan is 60 days or more delinquent and satisfactory arrangements cannot be made
with the Mortgagor; (ii) if a notice of default on a senior lien is received by
the subservicer or the Master Servicer, or (iii) if circumstances are discovered
by the subservicer or the Master Servicer which would indicate that a potential
for
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<PAGE>
loss exists.] For additional information regarding foreclosure procedures, see
"Servicing of Revolving Credit Loans--Realization Upon Defaulted Loans" in the
Prospectus. Servicing and charge-off policies and collection practices may
change over time in accordance with the Master Servicer's business judgment,
changes in the Master Servicer's portfolio of real estate secured revolving
credit line loans that it services for its clients and applicable laws and
regulations, and other considerations.
Initial Subservicers
[The Initial Subservicer with respect to the Program Loans will be
___________ (the "Program Loan Subservicer"), [and the Initial Subservicer with
respect to the GMACMC Loans will be GMACMC].
[Because the Home Equity Loan Program was recently established, and
Program Loans were not originated thereunder prior to ______ 1994, the loss and
delinquency experience to date of such Program Loans does not provide a
sufficient basis for meaningful comparison with other home equity line of credit
programs and is therefore not included herein. Furthermore, Residential Funding
did not acquire significant amounts of other home equity lines of credit prior
to the commencement of the Home Equity Loan Program. Although the Program Loan
Subservicer has been servicing home equity lines of credit since ______, as a
result of substantial differences between the Program Loans and other home
equity lines of credit serviced by the Program Loan Subservicer with respect to
underwriting standards, loan terms and conditions, the loss and delinquency
experience of the Program Loan Subservicer does not provide a sufficient basis
for meaningful evaluation of the Program Loan Subservicer's ability to
subservice the Program Loans and is therefore not included herein. Furthermore,
because none of the Program Sellers sold to the Seller more than ___% of the
Program Loans included in the Mortgage Pool (by Cut-off Date Trust Balance) and
as a result of substantial differences between the Program Loans and other home
equity lines of credit serviced by the Program Sellers, the loss and delinquency
experience of each of the Program Sellers does not provide a sufficient basis
for any meaningful evaluation of the Program Loans and is therefore not included
herein.]
[The following tables summarize the delinquency and loss experience for
all home equity loans originated or acquired and serviced by GMACMC during the
period the related home equity loans have been serviced by such Initial
Subservicer. The data presented in the following tables is for illustrative
purposes only, and there is no assurance that the delinquency and loss
experience of the Revolving Credit Loans will be similar to that set forth
below.
The information in the tables below has not been adjusted to eliminate
the effect of the significant growth in the size of GMACMC's home equity loan
portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of such mortgage loans serviced for
each period would be higher than those shown if a group of such mortgage loans
were artificially isolated at a point in time and the information showed the
activity only in that isolated group. However, since most of such mortgage loans
in GMACMC's home equity loan portfolio will not be fully seasoned and since the
terms of most of such
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<PAGE>
mortgage loans will not call for payment of principal in full prior to maturity,
the delinquency and loss information for such an isolated group would also be
distorted to some degree.
There can be no assurance that the delinquency experience set forth
below with respect to the GMACMC Loans will be representative of the results
that may be experienced with respect to the Program Loans serviced by the
Program Loan Subservicer.
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<PAGE>
GMACMC Delinquency Experience
Year Ended December 31,
--------------------------------------------------------------------------
199_ 199_ 199_
Number of Accounts with
Balances Managed..................
Aggregate Amount
Outstanding..........................
Loan Balance of Revolving Credit Loans
30-59 Days Past Due(1)...........
Loan Balance of Revolving Credit Loans
60-89 Days Past Due(1)...........
Loan Balance of Revolving Credit Loans
90+ Days Past Due(1)............
Loan Balance of Revolving Credit Loans
30+ Days Past Due(1)...........
Loan Balance of Revolving Credit Loans
30+ Days Past Due as a
Percentage of Aggregate
Amount Outstanding..............
Foreclosures and Bankruptcies....
Real Estate Owned..................
- ---------------
(1) Contractually past due excluding loans in the process of foreclosure and
loans where the borrower has filed for bankruptcy. (2) Real estate owned ("REO")
numbers for 199_ and 199_ are not available.
GMACMC Loss Experience
Year ended December 31,
--------------------------------------------------------------------
199 199 199
---- ---- ---
Average Amount Outstanding(1)..............................
Charge-offs(2)...............................................
Charge-offs as a Percentage of Average
Amount Outstanding...........................................
- --------------
(1) Average Amount Outstanding is computed using the beginning-of-period and the
end-of-period aggregate loan balances. (2) Charge-offs refers to writedowns on
properties prior to liquidation, as adjusted to reflect the actual liquidated
loss incurred on a mortgaged property when finally liquidated. (3) Annualized.
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<PAGE>
[INSERT ADDITIONAL REVOLVING CREDIT LOANS SELLER'S PORTFOLIO
DELINQUENCY AND LOSS EXPERIENCE IF APPROPRIATE.]
Servicing and other Compensation and Payment of Expenses
The Servicing Fees for each Revolving Credit Loan are payable out of
the interest payments on such Revolving Credit Loan. The weighted average
Servicing Fee as of Cut-Off Date will be approximately ___% per annum. The
Servicing Fees consist of (a) servicing compensation payable to the Master
Servicer in respect of its master servicing activities and (b) subservicing and
other related compensation retained by the related subservicer. The Master
Servicer is obligated to pay certain ongoing expenses associated with its
servicing activities and incurred by the Master Servicer in connection with its
responsibilities under the Servicing Agreement.
Delinquency and Loss Experience of the Initial Subservicers' Portfolios
The following tables summarize the delinquency and loss experience for
all home equity loans originated or acquired and serviced by _____________ and
____________, respectively, during the period the related home equity loans have
been serviced by such Initial Subservicer. The data presented in the following
tables is for illustrative purposes only, and there is no assurance that the
delinquency and loss experience of the Revolving Credit Loans will be similar to
that set forth below.
[Insert Delinquency and Loss Tables]
THE 199_-_ LLC
As described herein, the Mortgage Pool will be conveyed to and held by
the 199_-_ LLC, a limited liability company under __________ law. Pursuant to
the 199_-_ LLC's Operating Agreement, the 199_-_ LLC will consist of two classes
of ownership interests (the "Class A Ownership Interest" and the "Class B
Membership Interest"). The Class A Ownership Interest will represent [an
undivided ownership interest in] the Mortgage Pool, and will be entitled to
receive certain payments with respect to the Mortgage Pool as described below
under "P&I Collections."
THE ISSUER
General
The Home Equity Loan Trust 19_-_, is a business trust formed under the
laws of the State of [Delaware] pursuant to the Trust Agreement dated as of
_____ 1, 19__ between the Depositor and ________________, as the Owner Trustee
for the transactions described in this Prospectus Supplement. The Trust
Agreement constitutes the "governing instrument" under the laws of the State of
[Delaware] relating to business trusts. After its formation, the Issuer will not
engage in any activity other than (i) acquiring and holding the Class A
Ownership Interest and the other assets of the Issuer and proceeds therefrom,
(ii) issuing the Notes and the Certificates, (iii) making payments on the Notes
and the Certificates and (iv) engaging in other activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto or
connected therewith.
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<PAGE>
The assets of the Issuer will consist of the Class A Ownership Interest
and certain related assets.
The Issuer's principal offices are in ___________, Delaware, in care of
________________, as Owner Trustee, at the address listed below.
THE OWNER TRUSTEE
_______________ is the Owner Trustee under the Trust Agreement.
__________________ is a [Delaware] banking corporation and its principal
offices are located at ____________________.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Securityholders
for any action taken or for refraining from the taking of any action in good
faith pursuant to the Trust Agreement or for errors in judgment; provided,
however, that none of the Owner Trustee and any director, officer or employee
thereof will be protected against any liability which would otherwise be imposed
by reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
Trust Agreement. All persons into which the Owner Trustee may be merged or with
which it may be consolidated or any person resulting from such merger or
consolidation shall be the successor of the Owner Trustee under the Trust
Agreement.
THE INSURER
[INSERT DESCRIPTION OF INSURER AS APPROPRIATE.]
DESCRIPTION OF THE SECURITIES
General
The Notes will be issued pursuant to the Indenture dated as of
________, between the Issuer and _________, as Indenture Trustee. The
Certificates will be issued pursuant to the Trust Agreement dated as of
____________, between the Depositor and _____________, as Owner Trustee. The
following summaries describe certain provisions of the Securities, the Indenture
and the Trust Agreement. The summaries do not purport to be complete and are
subject to, and qualified in their entirety by reference to, the provisions of
the applicable agreement. Only the Term Notes are offered hereby.
The Notes will be secured by the Trust Fund pledged by the Issuer to
the Indenture Trustee pursuant to the Indenture which will consist of: (i) the
Class A Ownership Interests; (ii) collections in respect of principal of the
Revolving Credit Loans received after the applicable Cut-Off Date and
collections in respect of interest on the Revolving Credit Loans from the
Cut-Off Date relating to the Class A Ownership Interest; (iii) the amounts on
deposit in the Custodial Account allocated to the Class A Ownership Interests,
the Funding Account and the Payment Account (excluding net earnings thereon,
except with respect to the Funding Account); (iv) the Policy; (v) certain hazard
insurance policies maintained by the Mortgagors or by or on behalf of the Master
Servicer or related subservicer in respect of the Revolving Credit Loans and
(vi) an assignment of the Depositor's rights under the Purchase Agreement and an
assignment of the Issuer's rights under the Servicing Agreement.
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<PAGE>
The Term Notes will be issued in denominations of $1,000 and integral
multiples in excess thereof. See "--Book-Entry Certificates" below.
The Variable Funding Notes will be issued to the Seller. The Security
Balance of the Variable Funding Notes will be increased from time to time in
consideration for Additional Balances sold to the 199_-_ LLC under the Purchase
Agreement, to the extent Principal Collections are insufficient or unavailable
therefor. The Security Balance of the Variable Funding Notes may not exceed
$________ minus any amounts paid as principal on the Variable Funding Notes (the
"Maximum Variable Funding Balance"). Initially Variable Funding Notes will have
no Security Balance. The Maximum Variable Funding Balance will be permitted to
be increased in order for the 199_-_ LLC to acquire Additional Balances for
which Principal Collections are insufficient or unavailable therefor upon
satisfaction of the following conditions: (i) no Amortization Event has occurred
and is continuing, (ii) the Insurer consents to the issuance of a new credit
enhancement instrument, which consent shall not be unreasonably withheld, and a
new credit enhancement instrument to cover such increased amount is issued and
(iii) the Indenture Trustee shall have received Opinions of Counsel to the
effect that any new credit enhancement instrument delivered to cover such
increased amount is enforceable against the Credit Enhancer and to the effect
that any such increase will not adversely affect the tax status of the Issuer.
Book-Entry Securities
General. Beneficial Owners that are not Participants or Intermediaries
(as defined in the Prospectus) but desire to purchase, sell or otherwise
transfer ownership of, or other interests in, the related Book-Entry Securities
may do so only through Participants and Intermediaries. In addition, Beneficial
Owners will receive all payments of principal of and interest on the related
Book-Entry Securities from the Paying Agent (as defined in the Prospectus)
through DTC and Participants. Accordingly, Beneficial Owners may experience
delays in their receipt of payments. Unless and until Definitive Securities are
issued for the related Book-Entry Securities, it is anticipated that the only
registered Certificateholder of such Book-Entry Securities will be Cede, as
nominee of DTC. Beneficial Owners will not be recognized by the Trustee or the
Master Servicer as Certificateholders, as such term is used in the Pooling and
Servicing Agreement, and Beneficial Owners will be permitted to receive
information furnished to Certificateholders and to exercise the rights of
Certificateholders only indirectly through DTC, its Participants and
Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Book-Entry Securities among Participants and to receive and transmit payments
of principal of, and interest on, such Book-Entry Securities. Participants and
Intermediaries with which Beneficial Owners have accounts with respect to such
Book-Entry Securities similarly are required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not possess physical
certificates evidencing their interests in the Book-Entry Securities, the Rules
provide a mechanism by which Beneficial Owners, through their Participants and
Intermediaries, will receive payments and will be able to transfer their
interests in the Book-Entry Securities.
None of the Company, the Master Servicer, the Insurer or the Trustee
will have any liability for any actions taken by DTC or its nominee, including,
without limitation, actions for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Book-Entry
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<PAGE>
Securities held by Cede, as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Definitive Securities. Definitive Securities will be issued to Beneficial
Owners or their nominees, respectively, rather than to DTC or its nominee,
only under the limited conditions set forth in the Prospectus under
"Description of the Securities--Form of Securities."
Upon the occurrence of an event described in the Prospectus in the
third paragraph under "Description of the Securities--Form of Securities," the
Trustee is required to notify, through DTC, Participants who have ownership of
Book-Entry Securities as indicated on the records of DTC of the availability of
Definitive Securities for their Book-Entry Securities. Upon surrender by DTC of
the definitive certificates representing the Book-Entry Securities and upon
receipt of instructions from DTC for re-registration, the Trustee will reissue
the Book-Entry Securities as Definitive Securities issued in the respective
principal amounts owned by individual Beneficial Owners, and thereafter the
Trustee and the Master Servicer will recognize the holders of such Definitive
Securities as Certificateholders under the Pooling and Servicing Agreement.
For additional information regarding DTC, CEDEL, Euroclear and the
Book-Entry Securities, see "Description of the Securities--Form of Securities"
in the Prospectus.]
[CEDEL or Euroclear description if necessary]
Payments
Payments on the Notes will be made by the Indenture Trustee or the
Paying Agent on the _____ day of each month or, if such day is not a Business
Day, then the next succeeding Business Day, commencing in __________. Payments
on the Term Notes will be made to the persons in whose names such Term Notes are
registered at the close of business on the day prior to each Payment Date or, if
the Term Notes are no longer Book-Entry Securities, on the Record Date. See
"Description of the Notes--Payments" in the Prospectus. Payments will be made by
check or money order mailed (or upon the request of a Holder owning Term Notes
having denominations aggregating at least $_________, by wire transfer or
otherwise) to the address of the person entitled thereto (which, in the case of
Book-Entry Securities, will be DTC or its nominee) as it appears on the Security
Register in amounts calculated as described herein on the Determination Date.
However, the final payment in respect of the Term Notes will be made only upon
presentation and surrender thereof at the office or the agency of the Indenture
Trustee specified in the notice to Holders of such final payment. A "Business
Day" is any day other than (i) a Saturday or Sunday or (ii) a day on which
banking institutions in the State of ___________ are required or authorized by
law to be closed.
Interest on the Notes
Interest payments will be made on the Notes and the Certificates on
each Payment Date at the Note Rate and Certificate Rate, respectively, for the
related Interest Period. The "Note Rate" for an Interest Period will generally
equal the sum of [(a) LIBOR, determined as specified herein, as of the second
LIBOR Business Day prior to the first day of such Interest Period (or as of two
LIBOR Business Days prior to the Closing Date, in the case of the first Interest
Period)] plus (b) ___% per annum. The
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<PAGE>
"Certificate Rate" for an Interest Period will generally equal the sum of [(a)
LIBOR, determined as specified herein, as of the second LIBOR Business Day prior
to the first day of such Interest Period (or as of two LIBOR Business Days prior
to the Closing Date, in the case of the first Interest Period)] plus (b) the
percentage specified in the Trust Agreement. Notwithstanding the foregoing, in
no event will the Note Rate or Certificate Rate in respect of the Securities on
any Payment Date exceed a rate equal to the weighted average of the Loan Rates
(net of the applicable Servicing Fee Rate) (adjusted to an effective rate
reflecting accrued interest calculated on the basis of the actual number of days
in the Collection Period commencing in the month in which such Interest Period
commences and a year assumed to consist of 360 days).
Interest on the Securities in respect of any Payment Date will accrue
on the applicable Security Balance from the preceding Payment Date (or in the
case of the first Payment Date, from the Closing Date) through the day preceding
such Payment Date (each such period, an "Interest Period") on the basis of the
actual number of days in the Interest Period and a 360-day year. Interest
payments on the Securities will be funded from P&I Collections [and with respect
to the Notes, if necessary, from draws on the Policy.
[On each Payment Date, LIBOR shall be established by the Indenture
Trustee and as to any Interest Period, LIBOR will equal the rate for United
States dollar deposits for one month which appears on the Telerate Screen Page
3750 as of 11:00 A.M., London time, on the second LIBOR Business Day prior to
the first day of such Interest Period. "Telerate Screen Page 3750" means the
display designated as page 3750 on the Telerate Service (or such other page as
may replace page 3750 on that service for the purpose of displaying London
interbank offered rates of major banks). If such rate does not appear on such
page (or such other page as may replace that page on that service, or if such
service is no longer offered, such other service for displaying LIBOR or
comparable rates as may be selected by the Indenture Trustee after consultation
with the Master Servicer), the rate will be the Reference Bank Rate. The
"Reference Bank Rate" will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks (which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by _________) as of 11:00 A.M., London time, on the day that is
two LIBOR Business Days prior to the immediately preceding Payment Date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the Aggregate Security Balance then outstanding. The
Indenture Trustee will request the principal London office of each of the
reference banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate will be the arithmetic mean of the quotations.
If on such date fewer than two quotations are provided as requested, the rate
will be the arithmetic mean of the rates quoted by one or more major banks in
New York City, selected by the Indenture Trustee after consultation with the
Master Servicer, as of 11:00 A.M., New York City time, on such date for loans in
U.S. Dollars to leading European banks for a period of one month in amounts
approximately equal to the Aggregate Security Balance then outstanding. If no
such quotations can be obtained, the rate will be LIBOR for the prior Payment
Date. "LIBOR Business Day" means any day other than (i) a Saturday or a Sunday
or (ii) a day on which banking institutions in the State of [New York] or in the
city of London, England are required or authorized by law to be closed.]
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<PAGE>
Principal Payments on the Notes
During the Funding Period, no principal payments will be due and
payable on the Notes and distributable on the Certificates except in respect of
any Special Capital Distribution Amounts and Liquidation Loss Amounts. On each
Payment Date after the Funding Period, other than the Payment Date in _________,
principal payments except as provided below will be due and payable on the Notes
and distributable on the Certificates in an amount equal to the applicable
Security Percentage of the Principal Collection Distribution Amount (or defined
below) for such Payment Date, and in the aggregate equal to such Principal
Collection Distribution Amount, together with any Special Capital Distribution
Amounts and Liquidation Loss Amounts. On the Payment Date in ______, principal
will be due and payable on the Notes and distributable on the Certificates in
amounts equal to the Security Balance for each such Security on such Payment
Date. In no event will principal payments on the Notes or principal
distributions on the Certificates on any Payment Date exceed the Security
Balance thereof on such date.
Allocation of P&I Collections
The Master Servicer on behalf of the 199_-_ LLC will establish an
account (the "Distribution Account") into which the Master Servicer will deposit
P&I Collections for each Payment Date on the Business Day prior thereto. The
Distribution Account will be an Eligible Account. Amounts on deposit in the
Distribution Account will be invested in Eligible Investments maturing on or
before the Business Day prior to the related Payment Date.
On each Payment Date, P&I Collections will be allocated from the
Distribution Account in the following order of priority:
(i) if such Payment Date is during the Funding Period, an
amount equal to the Net Principal Collections for
such Payment Date shall be deposited in the Funding
Account;
(ii) to the Class A Ownership Interest, the sum of the following:
(a) as payment for the accrued interest due and any
overdue accrued interest at the Class A Preferred Return (as defined
herein) on the Class A Principal Balance (as defined herein) of the
Revolving Credit Loans;
(b) if such Payment Date is after the Funding Period,
an amount equal to the Principal Collection Distribution Amount,
applied to reduce the Class A Principal Amount;
(c) the Class A Principal Balance, 100% of the
Liquidation Loss Amounts, together with any such Liquidation Loss
Amounts remaining undistributed from any preceding month; provided,
that any Liquidation Loss Amount shall not be required to be paid to
the extent that the Liquidation Loss Amount was reflected in the
reduction of the Outstanding Reserve Amount; and
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(d) an additional amount to be applied to reduce the
Class A Principal Balance (each such amount, a "Special Capital
Distribution Amount"), to the extent necessary to bring the Outstanding
Reserve Amount up to the Reserve Amount Target; and
(iii) the remaining amount, if any, of the P&I Collections shall
be allocated on a pro rata basis as follows: 5% to the Class A Ownership
Interest, and 95% to the Class B Ownership Interest, except as otherwise
provided pursuant to the Operating Agreement.
The "Class A Preferred Return" equals a rate of LIBOR plus ___% per
annum. The "Class A Principal Balance", as of any Payment Date, equals (1) the
Principal Balance of the Revolving Credit Loans plus the balance on deposit in
the Funding Account minus (ii) the Outstanding Reserve Amount.
For any Payment Date, the "Principal Collection Distribution Amount"
will equal (i) Net Principal Collections for such Payment Date so long as no
Amortization Event has occurred and such Payment Date is during the Revolving
Period or (ii) Principal Collections for such Payment Date if an Amortization
Event has occurred or if such Payment Date is after the end of the Revolving
Period.
"Liquidation Loss Amount" means with respect to any Liquidated
Revolving Credit Loan, the unrecovered Principal Balance thereof at the end of
the related Collection Period in which such Revolving Credit Loan became a
Liquidated Revolving Credit Loan, after giving effect to the Net Liquidation
Proceeds allocable to such Principal Balance in connection therewith.
A "Liquidated Revolving Credit Loan" means, as to any Payment Date, any
Revolving Credit Loan in respect of which the Master Servicer has determined,
based on the servicing procedures specified in the Servicing Agreement, as of
the end of the preceding Collection Period that all liquidation proceeds which
it expects to recover with respect to the disposition of the related Mortgaged
Property have been recovered.
As of the Closing Date, the Reserve Amount Target is equal to at least
___% of the Cut-Off Date Pool Balance. The Reserve Amount Target may be
increased or reduced from time to time pursuant to the terms of the Operating
Agreement, with the consent of the Rating Agencies and the Indenture Trustee. To
the extent the Reserve Amount Target is reduced on any Payment Date, the amount
of the Principal Collections distributed pursuant to clause (ii) (b) will be
reduced on such Payment Date and on each subsequent Payment Date to the extent
the remaining Outstanding Reserve Amount is in excess of the reduced Reserve
Amount Target until the Outstanding Reserve Amount equals the Reserve Amount
Target.
The Indenture Trustee will establish the Payment Account into which the
Master Servicer will deposit the portion of the P&I Collections allocable to the
Class A Ownership Interest for each Payment Date on the Business Day prior
thereto. The Payment Account will be an Eligible Account. Amounts on deposit in
the Payment Account will be invested in Eligible Investments maturing on or
before the Business Day prior to the related Payment Date.
On each Payment Date, amounts in the Payment Account, will be allocated
to the Securities in the following order of priority:
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(i) as payment for the accrued interest due and any overdue accrued
interest on the applicable Security Balance of the Term Notes, Variable
Funding Notes and the Certificates;
(ii) as principal on the Term Notes, the Variable Funding Notes
and the Certificates, pro rata, based on the outstanding Security Balances, if
such Payment Date is after the Funding Period, an amount equal to the Principal
Collection Distribution Amount for such Payment Date;
(iii) as principal on the Term Notes, the Variable Funding Notes
and the Certificates, pro rata, based on the outstanding Security Balances, up
to the applicable Security Percentage of Liquidation Loss Amounts for the
related Collection Period, together with the applicable Security Percentage of
Carryover Liquidation Loss Amounts which are Liquidation Loss Amounts for all
previous Collection Periods with respect to which payments of principal have not
previously been made on the Notes and the Certificates Outstanding Reserve;
(iv) as payment for the premium for the Policy;
(v) to reimburse prior draws made on the Policy (with interest thereon);
(vi) as principal on the Term Notes, the Variable Funding
Notes and the Certificates, pro rata, based on the
outstanding Security Balances, up to the Special
Capital Distribution Amount for such Payment Date;
(vii) any other amounts owed to the Insurer pursuant to the Insurance
Agreement; and
(viii) any remaining amounts to the Designated Certificates.
The "Security Balance" of any Security on any day is, with respect to
the Term Notes and the Certificates, the respective initial balance thereof as
of the Closing Date, and with respect to the Variable Funding Notes, the
aggregate amount of Variable Funding Notes issued as of such day, in each case
reduced by all payments of principal thereon as of such day. With respect to any
Payment Date and Security, the "Security Percentage" is the percentage
equivalent of a fraction the numerator of which the Security Balance of such
Security immediately prior to such Payment Date and the denominator of which is
the aggregate of the Security Balances of all Securities (the "Aggregate
Security Balance") immediately prior to such date.
Except as provided below, payments pursuant to clause (i) will be
allocated to the Term Notes, Variable Funding Notes and the Certificates pro
rata based on the amount of interest each such Security is entitled to receive
pursuant to such clause. Except as provided below, payments pursuant to clauses
(ii), (iii) and (vi) will constitute payments of principal and will be allocated
among the Term Notes, Variable Funding Notes and Certificates pro rata based on
the outstanding Security Balances.
For any Payment Date as to which a Credit Enhancer Default has occurred
and is continuing the priorities of distribution described above will be
adjusted such that amounts to be distributed on the Certificates in respect of
interest and principal will be subordinated to the payment of interest and
principal on the Notes. A "Credit Enhancer Default" shall have occurred if the
Insurer fails to make a payment required under the Policy in accordance with its
terms.
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An "Amortization Event" will be deemed to occur upon (i) the occurrence
of certain events relating to a violation of the Seller's obligations under the
Mortgage Loan Purchase Agreement, (ii) the occurrence of certain events of
bankruptcy, insolvency or receivership relating to the Seller or the Master
Servicer, (iii) the [199_-_ LLC] or [Issuer] becomes subject to regulation as an
investment company within the meaning of the Investment Company Act of 1940, as
amended, or (iv) the aggregate of all draws under the Policy exceeds __________;
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the Seller, the conservator, receiver or
trustee-in-bankruptcy may have the power to prevent the commencement of the
Amortization Period.
Outstanding Reserve Amount
The distribution of the Special Capital Distribution Amount, if any, to
the Class A Ownership Interest (and to the Securities) will create the
Outstanding Reserve Amount. The Outstanding Reserve Amount, if any, will be
available to absorb any Liquidation Loss Amounts that are allocated to the Class
A Ownership Interest and not covered by Principal Collections and Interest
Collections. Any Liquidation Loss Amounts allocable to the Securityholders and
not covered by such overcollateralization will be covered by draws on the Policy
to the extent provided herein. The "Outstanding Reserve Amount" on any Payment
Date is the amount, if any, by which the sum of the Pool Balance as of the end
of the related Collection Period and the amounts, if any, on deposit in the
Funding Account in respect of Net Principal Collections on such Payment Date
exceed the Aggregate Security Balance on such day (after giving effect to all
amounts payable and allocable to principal on the Securities and deposits to and
withdrawals from the Funding Account that are applied to reduce the Security
Balances on such Payment Date).
To the extent that such overcollateralization is insufficient or not
available to absorb Liquidation Loss Amounts, payments are not made under the
Policy and the Security Balance of the Certificates is reduced to zero, a
Noteholder may incur a loss.
Funding Account; Funding Period
The Funding Account will be an Eligible Account (as defined herein)
established by the Master Servicer on behalf of the 199_-_ LLC on the Closing
Date. On each Payment Date during the Funding Period, Net Principal Collections
for such Payment Date will be deposited in the Funding Account. During the
Funding Period, amounts on deposit in the Funding Account in respect of Net
Principal Collections will be used to purchase Subsequent Revolving Credit
Loans. Any amount in respect of Net Principal Collections remaining on deposit
in the Funding Account on the last Payment Date of the Funding Period (after
giving effect to the purchase of any Subsequent Revolving Credit Loans on such
date) will be paid to the Securityholders on such Payment Date, as principal,
pro rata based on the outstanding Security Balances immediately prior to such
Payment Date. Except with respect to such Net Principal Collections remaining on
deposit in the Funding Account on the last Payment Date of the Funding Period,
Securityholders will not receive any payments in respect of Net Principal
Collections during the Funding Period.
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The Funding Period is the period commencing on the Closing Date and
ending on the earlier of (x) the Payment Date in ___________ and (y) the
occurrence of an Amortization Event.
The Paying Agent
The Paying Agent shall initially be the [Indenture Trustee], together
with any successor thereto. The Paying Agent shall have the revocable power to
withdraw funds from the Payment Account for the purpose of making payments to
the Securityholders.
Maturity
The Notes will be payable in full on ___________. In addition, the
Issuer will pay the Notes in full upon the exercise by the Master Servicer of
its option to purchase the assets of the Issuer after the Pool Balance is
reduced to an amount less than or equal to $________ (___% of the initial Pool
Balance). The purchase price will be equal to the sum of the outstanding Pool
Balance and accrued and unpaid interest thereon at the weighted average of the
Loan Rates through the day preceding the Payment Date on which the Notes are
paid in full together with all amounts due and owing to the Insurer.
[Optional Retransfers of Mortgage Loans to the Seller
Subject to the conditions specified in the Purchase Agreement and the
Operating Agreement, at any time after the end of the Revolving Period, the
Seller may, but shall not be obligated to, remove on the last Business Day of
any Collection Period from the Trust Fund, the entire Principal Balance of
certain Revolving Credit Loans without notice to the Securityholders for cash in
an amount equal to such Principal Balance (which will be included in Principal
Collections for the following Payment Dates) plus an accrued interest
adjustment. Revolving Credit Loans so designated will only be removed upon
satisfaction of certain conditions specified in the Operating Agreement,
including: (i) no Amortization Event has occurred; (ii) such removal may not
reduce the Outstanding Reserve Amount below the Reserve Amount Target; (iii) the
Seller shall have delivered to the Trustee a "Mortgage Loan Schedule" containing
a list of all Revolving Credit Loans remaining in the Trust Fund after such
removal; (iv) the Seller shall represent and warrant that no selection
procedures reasonably believed by the Seller to be adverse to the interests of
the Securityholders or the Insurer were used by the Seller in selecting such
Revolving Credit Loans; (v) each Rating Agency shall have been notified of the
proposed retransfer and shall not have notified the Seller that such retransfer
would result in a reduction or withdrawal of the ratings of the Securities
without regard to the Policy; and (vi) the Seller shall have delivered to the
Trustee and the Insurer an officer's certificate confirming the conditions set
forth in clauses (i) through (v) above.]
DESCRIPTION OF THE POLICY
On the Closing Date, the Insurer will issue the Policy in favor of the
[Owner Trustee on behalf of the Issuer]. The Policy will unconditionally and
irrevocably guarantee principal payments on the Notes plus accrued and unpaid
interest due on the Notes. On each Payment Date, a draw will be made on the
Policy equal to the sum of (a) the amount by which the sum of interest accrued
at (i) the Note
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Rate on the outstanding Security Balance of the Notes and (b) the amount (the
"Guaranteed Principal Payment Amount"), if any, [by which the Aggregate Security
Balance of the Notes exceeds the sum of the Pool Balance at the end of the
related Collection Period and the amount, if any, on deposit in the Funding
Account in respect of Net Principal Collections on such date (after giving
effect to all amounts paid and allocable to principal on the Notes and deposits
to and withdrawals from the Funding Account that are applied to reduce the
Security Balances on such Payment Date)]. Pursuant to the terms of [the
Indenture], draws under the Policy in respect of the Guaranteed Principal
Payment Amount will be paid on the Notes by the Indenture Trustee, as principal
pro rata, based on the outstanding Security Balances thereof. In addition, the
Policy will guarantee the payment of the outstanding Security Balance of each
Note on the Payment Date in _____________ (after giving effect to all other
amounts paid and allocable to principal on such Payment Date). In the absence of
payments under the Policy, Noteholders will directly bear the credit and other
risks associated with their investment to the extent such risks are not covered
by the Certificates. The Policy does not guarantee any payments to the
Certificates.
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS
The yield to maturity of the Term Notes will depend on the price paid
by the holder for such Note, the Loan Rate and the rate and timing of principal
payments (including payments in excess of required installments, prepayments or
terminations, liquidations and repurchases) on the Revolving Credit Loans and
the rate and timing of Draws and the allocation thereof.
In general, if a Term Note is purchased at a premium over its face
amount and payments of principal on such Term Note occur at a rate faster than
anticipated at the time of purchase, the purchaser's actual yield to maturity
will be lower than that assumed at the time of purchase. Conversely, if a Term
Note is purchased at a discount from its face amount and payments of principal
on such Term Note occur at a rate slower than that assumed at the time of
purchase, the purchaser's actual yield to maturity will be lower than that
originally anticipated.
The rate and timing of defaults on the Revolving Credit Loans will also
affect the rate and timing of principal payments on the Revolving Credit Loans
and thus the yield on the Term Notes. There can be no assurance as to the rate
of losses or delinquencies on any of the Revolving Credit Loans, however, such
losses and delinquencies may be expected to be higher than those of traditional
first lien mortgage loans. To the extent that any losses are incurred on any of
the Revolving Credit Loans that are not covered by [the Certificates or] the
Policy, holders of the Term Notes will bear all risk of such losses resulting
from default by Mortgagors. See "Risk Factors--Limitations, Reduction and
Substitution of Credit Enhancement" in the Prospectus. Even where the Policy
covers all losses incurred on the Revolving Credit Loans, the effect of losses
may be to increase prepayment experience on the Revolving Credit Loans, thus
reducing average weighted life and affecting yield to maturity.
[With respect to ___ Revolving Credit Loans representing ___% of the
Cut-off Date Pool Balance, the Mortgage Rate at origination is below the rate
that would result from the sum of the then-applicable Index and Gross Margin.
Under the applicable underwriting standards, Mortgagors under such Revolving
Credit Loans are generally qualified based on an assumed payment which reflects
a rate significantly lower than the maximum rate. The repayment of any such
Revolving Credit Loan may thus be dependent on the ability of the mortgagor to
make larger interest payments following the adjustment of the Mortgage Rate.]
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With respect to the Revolving Credit Loans required minimum monthly
payments are equal to [the amount of interest currently accruing thereon,] and
therefore are not expected to significantly amortize the outstanding principal
amounts of the Revolving Credit Loans prior to maturity, which amounts 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. Such Revolving Credit Loans pose a greater risk of default than
fully-amortizing mortgage loans, because the Mortgagor's ability to make such a
substantial payment at maturity will generally depend on the Mortgagor's ability
to obtain refinancing of the Revolving Credit Loans or to sell the Mortgaged
Property prior to the maturity of the Revolving Credit Loan. See "Yield and
Prepayment Considerations" in the Prospectus and "Risk Factors" herein.
There can be no assurance as to the rate of principal payments and
Draws on the Revolving Credit Loans. The rate of principal payments and the rate
of Draws may fluctuate substantially from time to time. Generally, home equity
loans are not viewed by mortgagors as permanent financing. Due to the
unpredictable nature of both principal payments and Draws, the rates of
principal payments net of Draws on the Revolving Credit Loans may be much more
volatile than for typical first lien mortgage loans.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Revolving Credit Loans to be transferred to the Issuer by the
Depositor were or will be purchased by the Depositor from Residential Funding
Corporation (the "Seller") pursuant to the Purchase Agreement. Under the
Purchase Agreement, the Seller has agreed to transfer to the Depositor the
Initial Revolving Credit Loans and related Additional Balances. Pursuant to an
assignment by the Depositor executed on the Closing Date, upon such transfer to
the Depositor, the Initial Revolving Credit Loans will be transferred by the
Depositor to the 199_-_ LLC, as well as the Depositor's rights in, to and under
the Purchase Agreement, which will include the right to purchase the Subsequent
Revolving Credit Loans and Additional Balances. The following summary describes
certain terms of the form of the Purchase Agreement and is qualified in its
entirety by reference to the form of Purchase Agreement.
Transfer of Revolving Credit Loans
Pursuant to the Purchase Agreement, the Seller will transfer and assign
to the Depositor all of its right, title and interest in and to the Revolving
Credit Loans, the related mortgage note, mortgages and other related documents
(collectively, the "Related Documents") and all of the Additional Balances
thereafter created prior to an Amortization Event. The purchase price of the
Revolving Credit Loans is a specified percentage of the face amount thereof as
of the time of transfer and is payable by the Depositor, as provided in the
Purchase Agreement. The purchase price of each Additional Balance is the amount
of the related new advance and is payable by the 199_-_ LLC, either in cash or
in the form of an increase in the Security Balance of the Variable Funding
Notes.
Subsequent Revolving Credit Loans will be transferred to the 199_-_
LLC. The transfer of a Subsequent Revolving Credit Loan is subject to the
following additional conditions: (i) each Subsequent Revolving Credit Loan must
meet the general criteria for eligibility under the Purchase Agreement; and (ii)
the Seller shall have delivered prior written notice of the addition of the
Subsequent Revolving
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Credit Loans to the Insurer, the Rating Agencies and the Depositor and shall
have received the consent of the Insurer and the Rating Agencies.
The Purchase Agreement will require that, within the time period
specified therein, the Seller, acting at the Depositor's request, deliver to
____________________ (the "Custodian") (as the 199_-_ LLC's agent for such
purpose) the Revolving Credit Loans and the Related Documents. In lieu of
delivery of original mortgages, the Seller may deliver true and correct copies
thereof which have been certified as to authenticity by the appropriate county
recording office where such mortgage is recorded. In addition, under the terms
of the Purchase Agreement, the Seller will be required to record assignments of
mortgages relating to such Revolving Credit Loans.
Representations and Warranties
The Seller will represent and warrant to the Depositor that, among
other things, as of _________________, it is duly organized and in good standing
and that it has the authority to consummate the transactions contemplated by the
Purchase Agreement.
The Seller will also represent and warrant to the Depositor, that,
among other things, (a) the information with respect to the Initial Revolving
Credit Loans set forth in the schedule attached to the Purchase Agreement is
true and correct in all material respects and (b) immediately prior to the sale
of the Initial Revolving Credit Loans to the Depositor, the Seller was the sole
owner and holder of the Initial Revolving Credit Loans free and clear of any and
all liens and security interests. The Seller will also represent and warrant to
the Depositor, that, among other things, as of ______________, (a) the Purchase
Agreement constitutes a legal, valid and binding obligation of the Seller and
(b) the Purchase Agreement constitutes a valid transfer and assignment to the
Depositor of all right, title and interest of the Seller in and to the Initial
Revolving Credit Loans and the proceeds thereof. Such representations and
warranties will also be made by the Seller with respect to the Subsequent
Revolving Credit Loans as of the date of transfer to the Issuer. The benefit of
the representations and warranties made to the Depositor by the Seller in the
Purchase Agreement will be assigned by the Depositor to the Issuer and by the
Issuer to the Indenture Trustee in the Indenture.
Within ____ days of the Closing Date, the Custodian will review or
cause to be reviewed the Revolving Credit Loans and the Related Documents and if
any Revolving Credit Loan or Related Document is found to be defective in any
material respect and such defect is not cured within ____ days following
notification thereof to the Seller and the Issuer by the Custodian, the Seller
will be obligated under the Purchase Agreement to deposit the Transfer Price
into the Custodial Account. In lieu of any such deposit, the Seller may
substitute an Eligible Substitute Loan. Any such purchase or substitution will
result in the removal of such Defective Loan from the Trust Fund and the lien of
the Indenture. The obligation of the Seller to remove a Defective Loan from the
Trust Fund is the sole remedy regarding any defects in the Revolving Credit
Loans and Related Documents available to the Indenture Trustee or the
Noteholders against the Seller.
With respect to any Revolving Credit Loan, the "Transfer Price" is
equal to the Principal Balance of such Revolving Credit Loan at the time of any
removal described above plus accrued and unpaid interest thereon to the date of
removal. In connection with the substitution of an Eligible Substitute Loan, the
Seller will be required to deposit in the Custodial Account an amount (the
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"Substitution Adjustment Amount") equal to the excess of the Principal Balance
of the related Defective Loan over the Principal Balance of such Eligible
Substitute Loan.
An "Eligible Substitute Loan" is a mortgage loan substituted by the
Issuer for a Defective Loan which must, on the date of such substitution, (i)
have an outstanding Principal Balance (or in the case of a substitution of more
than one Revolving Credit Loan for a Defective Loan, an aggregate Principal
Balance), not in excess of the Principal Balance relating to such Defective
Loan; (ii) have a Loan Rate, Net Loan Rate and Gross Margin no lower than and
not more than 1% in excess of the Loan Rate, Net Loan Rate and Gross Margin,
respectively, of such Defective Loan; (iii) have a Combined Loan-to-Value Ratio
at the time of substitution no higher than that of the Defective Loan at the
time of substitution; (iv) have a remaining term to maturity not more than one
year earlier and not later than the remaining term to maturity of the Defective
Loan; (v) comply with each representation and warranty as to the Revolving
Credit Loans set forth in the Purchase Agreement (deemed to be made as of the
date of substitution); and (vi) satisfy certain other conditions specified in
the Indenture.
In addition the Seller will be obligated to deposit the Transfer Price
or substitute an Eligible Substitute Loan with respect to a Revolving Credit
Loan as to which there is a breach of a representation or warranty in the
Purchase Agreement.
Revolving Credit Loans required to be removed from the Trust Fund as
described in the preceding paragraphs are referred to as "Defective Loans."
ASSIGNMENT TO THE ISSUER
The Seller expressly acknowledges and consents to the Depositor's
transfer of its rights relating to the Revolving Credit Loans and its obligation
to pay for the Subsequent Revolving Credit Loans and Additional Balances under
the Purchase Agreement to the 1994_-_ LLC, the Issuer's pledge of its interest
in the Purchase Agreement to the Indenture Trustee and the enforcement by the
Indenture Trustee of any such right or remedy against the Seller.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing
Agreement, dated as of ________ 1, 19__ between the 199_-_ LLC and the Master
Servicer. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Servicing
Agreement. Whenever particular sections or defined terms of the Servicing
Agreement are referred to, such sections or defined terms are thereby
incorporated herein by reference.
P&I Collections
The Master Servicer shall establish and maintain an account (the
"Custodial Account") in which the Master Servicer shall deposit or cause to be
deposited any amounts representing payments on and any collections received in
respect of the Revolving Credit Loans received by it subsequent to the CutOff
Date. The Custodial Account shall be an Eligible Account. On the _____ day of
each month or if such day is not a Business Day, the next succeeding Business
Day (the "Determination Date"), the
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Master Servicer will notify the Indenture Trustee of the amount of P&I
Collections to be included in funds available distribution to the Class A
Ownership Interest for the related Payment Date.
"Eligible Investments" are specified in the Servicing Agreement and are
limited to investments which meet the criteria of the Rating Agencies from time
to time as being consistent with their then current ratings of the Securities.
On the Business Day prior to each Payment Date, the Master Servicer
will make the following withdrawals from the Custodial Account and deposit such
amounts as follows:
(i) if such Payment Date is during the Funding Period, to the
Eligible Account established and maintained by ___________ (the "Funding
Account"), Net Principal Collections;
(ii) to the Distribution Account, an amount equal to the P&I
Collections for such Payment Date (other than any portion thereof deposited in
the Funding Account pursuant to (i) above); and
(iii) to pay to itself or the Seller various reimbursement amounts and
other amounts as provided in the Servicing Agreement.
As to any Payment Date, "P&I Collections" will equal the sum of (a)
Interest Collections for such Payment Date and (b) so long as an Amortization
Event has not occurred and if during the Revolving Period, "Net Principal
Collections" for such Payment Date which are the excess, if any, of Principal
Collections for such Payment Date over the aggregate amount of Additional
Balances created during the related Collection Period and conveyed to the 199_-_
LLC, or if such event or date has occurred, Principal Collections for such date.
Upon the occurrence of an Amortization Event or after the end of the Revolving
Period, Principal Collections for a Collection Period will no longer be applied
to acquire Additional Balances during such Collection Period.
All collections on the Revolving Credit Loans will generally be
allocated in accordance with the Credit Line Agreements between amounts
collected in respect of interest and amounts collected in respect of principal.
As to any Payment Date, "Interest Collections" will be equal to the sum of (i)
the amounts collected during the related Collection Period, including Net
Liquidation Proceeds (as defined below), allocated to interest pursuant to the
terms of the Credit Line Agreements (exclusive of the pro rata portion thereof
attributable to Additional Balances not conveyed to the 199_-_ LLC following an
Amortization Event), reduced by the Servicing Fees for such Collection Period,
(ii) the interest portion of the Transfer Price for any Defective Loans and
(iii) net investment earnings on amounts on deposit in the Funding Account. As
to any Payment Date, "Principal Collections" will be equal to the sum of (i) the
amount collected during the related Collection Period, including Net Liquidation
Proceeds (as defined herein) allocated to principal pursuant to the terms of the
Credit Line Agreements (exclusive of the pro rata portion thereof attributable
to Additional Balances not conveyed to the 199_-_ LLC following an Amortization
Event) and (ii) the principal portion of the Transfer Price for any Defective
Loans and any Substitution Adjustment Amounts.
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As to any Payment Date other than the first Payment Date, the
"Collection Period" is the calendar month preceding the month of such Payment
Date and in the case of the first Payment Date the period from the Cut-Off Date
to ___________.
"Net Liquidation Proceeds" with respect to a Revolving Credit Loan are
the proceeds (excluding amounts drawn on the Policy) received in connection with
the liquidation of any Revolving Credit Loan, whether through trustee's sale,
foreclosure sale or otherwise, reduced by related expenses, but not including
the portion, if any, of such amount that exceeds the Principal Balance of the
Revolving Credit Loan at the end of the Collection Period immediately preceding
the Collection Period in which such Revolving Credit Loan became a Liquidated
Revolving Credit Loan.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Revolving Credit Loans as of such
date. The Principal Balance of a Revolving Credit Loan (other than a Liquidated
Revolving Credit Loan) on any day is equal to the Cut-Off Date Principal Balance
thereof, plus (i) any Additional Balances in respect of such Revolving Credit
Loan conveyed to the Issuer minus (ii) all collections credited against the
Principal Balance of such Revolving Credit Loan in accordance with the related
Credit Line Agreement prior to such day. The Principal Balance of a Liquidated
Revolving Credit Loan after final recovery of related Liquidation Proceeds shall
be zero.
Collection and Other Servicing Procedures on Revolving Credit Loans
The Master Servicer will make reasonable efforts to collect all
payments called for under the Revolving Credit Loans and will, consistent with
the Servicing Agreement, follow such collection procedures as it follows from
time to time with respect to the home equity loans in its servicing portfolio
comparable to the Revolving Credit Loans. Consistent with the above, the Master
Servicer may in its discretion waive any late payment charge or any assumption
or other fee or charge that may be collected in the ordinary course of servicing
the Revolving Credit Loans.
With respect to the Revolving Credit Loans, the Master Servicer may
arrange with a borrower a schedule for the payment of interest due and unpaid
for a period, provided that any such arrangement is consistent with the Master
Servicer's policies with respect to home equity mortgage loans.
Realization Upon Defaulted Revolving Credit Loans
The Master Servicer will foreclose upon or otherwise comparably convert
to ownership Mortgaged Properties securing such of the Revolving Credit Loans as
come into default when in accordance with applicable servicing procedures under
the Servicing Agreement, no satisfactory arrangements can be made for the
collection of delinquent payments. In connection with such foreclosure or other
conversion, the Master Servicer will follow such practices as it deems necessary
or advisable and as are in keeping with its general subordinate mortgage
servicing activities, provided the Master Servicer will not be required to
expend its own funds in connection with foreclosure or other conversion,
correction of default on a related senior mortgage loan or restoration of any
property unless, in its sole judgment, such foreclosure, correction or
restoration will increase Net Liquidation Proceeds. The Master Servicer will be
reimbursed out of Liquidation Proceeds for advances of its own funds as
liquidation expenses before any Net Liquidation Proceeds are distributed to
Securityholders.
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Evidence as to Compliance
The Servicing Agreement provides for delivery on or before March 31 in
each year, beginning in March 31, 19__, 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 its material obligations under the Servicing
Agreement throughout the preceding calendar year, except as specified in such
statement.
On or before March 31 of each year, beginning March 31, 19__, the
Master Servicer will furnish a report prepared by a firm of nationally
recognized independent public accountants (who may also render other services to
the Master Servicer) to the Indenture Trustee to the effect that such firm has
examined certain documents and the records relating to servicing of the
Revolving Credit Loans under the Servicing Agreement for the preceding calendar
year and that, on the basis of such examination, such firm believes that such
servicing was conducted in compliance with the Servicing Agreement except for
(a) such exceptions as such firm believes to be immaterial and (b) such other
exceptions as shall be set forth in such report.
Certain Matters Regarding the Master Servicer
The Servicing Agreement provides that the Master Servicer may not
resign from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless (i) such duties and obligations are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or its affiliate or (ii) upon the satisfaction of the following
conditions: (a) the Master Servicer has proposed a successor servicer to the
Issuer and the Indenture Trustee in writing and such proposed successor servicer
is reasonably acceptable to the Issuer and the Indenture Trustee; (b) the Rating
Agencies have confirmed to the Issuer and the Indenture Trustee that the
appointment of such proposed successor servicer as the Master Servicer will not
result in the reduction or withdrawal of the then current rating of the
Securities; and (c) such proposed successor servicer is reasonably acceptable to
the Credit Enhancer. 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.
The Master Servicer may perform any of its duties and obligations under
the Servicing Agreement through one or more subservicers or delegates, which may
be affiliates of the Master Servicer. Notwithstanding any such arrangement, the
Master Servicer will remain liable and obligated to the Issuer for the Master
Servicer's duties and obligations under the Servicing Agreement, without any
diminution of such duties and obligations and as if the Master Servicer itself
were performing such duties and obligations.
The Servicing Agreement provides that the Master Servicer will
indemnify the Owner Trustee or the Indenture Trustee, as the case may be, from
and against any loss, liability or expense, imposed by reason of its willful
misfeasance, bad faith or gross negligence in the performance of its duties
under the Servicing Agreement or by reason of its reckless disregard of its
obligations and duties under the Servicing Agreement. The Servicing Agreement
provides that neither the Master Servicer nor its directors, officers, employees
or agents will be under any other liability to the Owner Trustee, the Indenture
Trustee, or any other person for any action taken or for refraining from taking
any action pursuant to the Servicing Agreement. The Master Servicer and any
director or officer or employee or
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agent of the Master Servicer shall be indemnified by the Issuer and held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Servicing Agreement or the Securities, other than
any loss, liability or expense related to any specific Revolving Credit Loan or
Revolving Credit Loans (except as any such loss, liability or expense shall be
otherwise reimbursable pursuant to the Servicing Agreement) and any loss,
liability or expense incurred by reason of its willful misfeasance, bad faith or
gross negligence in the performance of its duties thereunder or by reason of its
reckless disregard of its obligations and duties thereunder. In addition, the
Servicing Agreement provides that the Master Servicer will not be under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to its servicing responsibilities under the Servicing Agreement and
which in its opinion may expose it to any expense or liability. The Master
Servicer may, in its sole discretion, undertake any such legal action which it
may deem necessary or desirable with respect to the Servicing Agreement and the
rights and duties of the parties thereto.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer shall be a party, or any corporation
succeeding to the business of the Master Servicer shall be the successor of the
Master Servicer hereunder, without the execution or filing of any paper or any
further act on the part of any of the parties hereto, anything in the Servicing
Agreement to the contrary notwithstanding.
Events of Servicing Termination
"Events of Servicing Termination" will consist of: (i) any failure by
the Master Servicer to (a) deposit in the Custodial Account, Funding Account or
Payment Account any deposit required to be made under the Servicing Agreement or
(b) to pay when due any amount payable by it under the terms of the Insurance
Agreement, which failure continues unremedied for three Business Days after the
giving of written notice of such failure to the Master Servicer by the Issuer or
Indenture Trustee, or to the Master Servicer, the Issuer and the Indenture
Trustee by the Credit Enhancer; (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 or Insurance Agreement which, in each
case, materially and adversely affects the interests of the Securityholders or
the Credit Enhancer and continues unremedied for ____ days or ____ days,
respectively, after the giving of written notice of such failure to the Master
Servicer by the Issuer or the Indenture Trustee, or to the Master Servicer, the
Issuer and the Indenture Trustee by the Credit Enhancer; (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings relating to the Master Servicer and certain actions by the
Master Servicer indicating insolvency, reorganization or inability to pay its
obligations; or (iv) any merger, consolidation, or combination with another
entity and the surviving entity thereof or corporate successor is not rated at
least investment grade by the Rating Agencies. Under the above circumstances,
the Indenture Trustee with the consent of the Credit Enhancer or the Credit
Enhancer may deliver written notice to the Master Servicer terminating all the
rights and obligations of the Master Servicer under the Servicing Agreement.
Under certain other circumstances, the Credit Enhancer with the consent of 51%
of the outstanding principal amount of the Term Notes and the Certificates may
terminate all the rights and obligations of the Master Servicer under the
Servicing Agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for the applicable periods referred to
therein or referred to under clause (ii) above for the applicable periods
referred to therein, shall not constitute an Event of Servicing Termination if
such
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delay or failure could not be prevented by the exercise of reasonable diligence
by the Master Servicer and such delay or failure was caused by an act of God or
other similar occurrence. Upon the occurrence of any such event the Master
Servicer shall not be relieved from using reasonable efforts to perform its
obligations in a timely manner in accordance with the terms of the Servicing
Agreement and the Master Servicer shall provide the Issuer, the Credit Enhancer
and the Indenture Trustee prompt notice of such failure or delay by it, together
with a description of its efforts to so perform its obligations.
Rights Upon an Event of Servicing Termination
So long as an Event of Servicing Termination remains unremedied, the
Indenture Trustee with the consent of the Credit Enhancer or the Credit Enhancer
may terminate all of the rights and obligations of the Master Servicer under the
Servicing Agreement and in and to the Revolving Credit Loans, whereupon the
Indenture Trustee will succeed to all the responsibilities, duties and
liabilities of the Master Servicer under the Servicing Agreement 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 or
unable so to act, it may appoint, or petition a court of competent jurisdiction
for the appointment of, an established housing and home finance institution or
other mortgage loan or home equity loan servicer with all licenses and permits
required to perform its obligations under the Servicing Agreement and having a
net worth of at least $25,000,000 and acceptable to the Credit Enhancer to act
as successor to the Master Servicer under the Servicing Agreement. Pending such
appointment, the Indenture Trustee will be obligated to act in such capacity
unless prohibited by law. Such successor will be entitled to receive the same
compensation that the Master Servicer would otherwise have received (or such
lesser compensation as the Issuer and such successor may agree). A receiver or
conservator for the Master Servicer may be empowered to prevent the termination
and replacement of the Master Servicer where the only Event of Servicing
Termination that has occurred is an Insolvency Event.
Amendment
The Servicing Agreement may be amended from time to time by the Master
Servicer, the Issuer and the Indenture Trustee, [with the consent of the Credit
Enhancer,] provided that the Rating Agencies confirm in writing that such
amendment will not result in a downgrading or a withdrawal of the rating then
assigned to the Securities.
DESCRIPTION OF THE INDENTURE
The following summary describes certain terms of the Indenture. The
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Indenture. Whenever particular
sections or defined terms of the Indenture are referred to, such sections or
defined terms are thereby incorporated herein by reference.
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The Trust Fund
Simultaneously with the issuance of the Notes, the Issuer will pledge
the Trust Fund to the Indenture Trustee as collateral for the Notes.
Reports To Holders
The Indenture Trustee will mail to each Holder of Term Notes, at its
address listed on the Security Register maintained with the Indenture Trustee a
report setting forth certain amounts relating to the Notes for each Payment
Date, among other things:
(i) the amount of principal, if any, payable on such Payment
Date to Securityholders separately stating the portion thereof in respect of
Liquidation Loss Amounts, Carryover Liquidation Loss Amounts and Special Capital
Distribution Amount and stating the amount of any remaining Carryover
Liquidation Loss Amounts;
(ii) the amount of interest payable on such Payment Date to
Securityholders separately stating the portion thereof in respect of overdue
accrued interest and stating the amount of remaining overdue accrued interest;
(iii) the Security Balance of the Securities after giving effect to
the payment of principal on such Payment Date; (iv) P&I Collections for the
related Collection Period;
(v) the aggregate Principal Balance of the Revolving Credit Loans as
of last day of the related Collection Period;
[(vi) the amount paid, if any, under the Policy separately stating the
portion thereof included in (i) and (ii) above; and]
(vii) the Outstanding Reserve Amount after giving effect to the
payment of principal on the Securities on such Payment Date.
In the case of information furnished pursuant to clauses (i) and (ii)
above, the amounts shall be expressed as a dollar amount per $1,000 in face
amount of Notes.
Certain Covenants
The Indenture will provide that the Issuer may not consolidate with or
merge into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes the
Issuer's obligation to make due and punctual payments upon the Notes and the
performance or observance of any agreement and covenant of the Issuer under the
Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Issuer has been advised
that the ratings of the Securities then in effect would not be reduced or
withdrawn by
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any Rating Agency as a result of such merger or consolidation, (v) any action
that is necessary to maintain the lien and security interest created by the
Indenture is taken and (vi) the Issuer has received an Opinion of Counsel to the
effect that such consolidation or merger would have no material adverse tax
consequence to the Issuer or to any Noteholder or Certificateholder. The Issuer
will not, among other things, (i) except as expressly permitted by the
Indenture, sell, transfer, exchange or otherwise dispose of any of the assets of
the Issuer, (ii) claim any credit on or make any deduction from the principal
and interest payable in respect of the Notes (other than amounts withheld under
the Code or applicable state law) or assert any claim against any present or
former holder of Notes because of the payment of taxes levied or assessed upon
the Issuer, (iii) permit the validity or effectiveness of the Indenture to be
impaired or permit any person to be released from any covenants or obligations
with respect to the Notes under the Indenture except as may be expressly
permitted thereby or (iv) permit any lien, charge excise, claim, security
interest, mortgage or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the Issuer or any part thereof, or
any interest therein or the proceeds thereof. The Issuer may not engage in any
activity other than as specified under "The Issuer" herein.
Modification of Indenture
With the consent of the holders of a majority of each of the
outstanding Term Notes and Variable Funding Notes and the Credit Enhancer, the
Issuer and the Indenture Trustee may execute a supplemental indenture to add
provisions to, change in any manner or eliminate any provisions of, the
Indenture, or modify (except as provided below) in any manner the rights of the
Noteholders. Without the consent of the holder of each outstanding Note affected
thereby, however, no supplemental indenture will: (i) change the due date of any
installment of principal of or interest on any Note or reduce the principal
amount thereof, the interest rate specified thereon or the redemption price with
respect thereto or change any place of payment where or the coin or currency in
which any Note or any interest thereon is payable; (ii) impair the right to
institute suit for the enforcement of certain provisions of the Indenture
regarding payment; (iii) reduce the percentage of the aggregate amount of the
outstanding Notes, the consent of the holders of which is required for any
supplemental indenture or the consent of the holders of which is required for
any waiver of compliance with certain provisions of the Indenture or of certain
defaults thereunder and their consequences as provided for in the Indenture;
(iv) modify or alter the provisions of the Indenture regarding the voting of
Notes held by the Issuer, the Depositor or an affiliate of any of them; (v)
decrease the percentage of the aggregate principal amount of Notes required to
amend the sections of the Indenture which specify the applicable percentage of
aggregate principal amount of the Notes necessary to amend the Indenture or
certain other related agreements; (vi) modify any of the provisions of the
Indenture in such manner as to affect the calculation of the amount of any
payment of interest of principal due on any Note (including the calculation of
any of the individual components of such calculation); or (vii) permit the
creation of any lien ranking prior to or, except as otherwise contemplated by
the Indenture, on a parity with the lien of the Indenture with respect to any of
the collateral for the Notes or, except as otherwise permitted or contemplated
in the Indenture, terminate the lien of the Indenture on any such collateral or
deprive the holder of any Note of the security afforded by the lien of the
Indenture.
The Issuer and the Indenture Trustee may also enter into supplemental
indentures, with the consent of the Credit Enhancer and without obtaining the
consent of the Noteholders, for the purpose
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of, among other things, to cure any ambiguity or to correct or supplement any
provision in the Indenture that may be inconsistent with any other provision
therein.
Certain Matters Regarding the Indenture Trustee and the Issuer
Neither the Issuer, the Indenture Trustee nor any director, officer or
employee of the Issuer or the Indenture Trustee will be under any liability to
the Issuer or the related Noteholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Indenture or for
errors in judgment; provided, however, that none of the Indenture Trustee, the
Issuer and any director, officer or employee thereof will be protected against
any liability which would otherwise be imposed by reason of willful malfeasance,
bad faith or negligence in the performance of duties or by reason of reckless
disregard of obligations and duties under the Indenture. Subject to certain
limitations set forth in the Indenture, the Indenture Trustee and any director,
officer, employee or agent of the Indenture Trustee shall be indemnified by the
Issuer and held harmless against any loss, liability or expense incurred in
connection with investigating, preparing to defend or defending any legal
action, commenced or threatened, relating to the Indenture other than any loss,
liability or expense incurred by reason of willful malfeasance, bad faith or
negligence in the performance of its duties under such Indenture or by reason of
reckless disregard of its obligations and duties under the Indenture. All
persons into which the Indenture Trustee may be merged or with which it may be
consolidated or any person resulting from such merger or consolidation shall be
the successor of the Indenture Trustee under each Indenture.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Notes [will][will not] be treated
as having been issued with "original issue discount" (as defined in the
Prospectus). See "Certain Federal Income Tax Consequences" in the
Prospectus.
Prospective investors in the Notes should see "Certain Federal Income
Tax Consequences" and "State and Other Tax Consequences" in the Prospectus for a
discussion of the application of certain federal income and state and local tax
laws to the Issuer and purchasers of the Notes.
ERISA CONSIDERATIONS
Consultation with Counsel
Any fiduciary or other investor of Plan assets that proposes to acquire
or hold the Term Notes on behalf of or with Plan assets of any Plan should
consult with its counsel with respect to the potential applicability of the
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and the Code to the proposed investment. See "ERISA
Considerations" in the Prospectus.
LEGAL INVESTMENT
The Term Notes will not constitute "mortgage related securities" for
purposes of SMMEA. Accordingly, many institutions with legal authority to invest
in mortgage related securities may not be legally authorized to invest in the
Term Notes. No representation is made herein as to whether the Term Notes
constitute legal investments for any entity under any applicable statute, law,
rule, regulation or
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order. Prospective purchasers are urged to consult with their counsel concerning
the status of the Term Notes as legal investments for such purchasers prior to
investing in Term Notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Depositor has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Depositor, the Term Notes.
The Depositor has been advised by the Underwriter that it proposes to
initially offer the Term Notes to the public at the offering price set forth
herein and to certain dealers at such price less a discount not in excess of
___% of the Term Note denominations. [The Underwriter may allow and such dealers
may reallow a discount not in excess of ___% of the Term Note denominations to
certain other dealers. After the initial public offering, the public offering
price, such concessions and such discounts may be changed.]
The Depositor has been advised by the Underwriter that it presently
intends to make a market in the Term Notes offered hereby; however, it is not
obligated to do so, any market-making may be discontinued at any time, and there
can be no assurance that an active public market for the Term Notes will
develop.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute payments the Underwriter may be required
to make in respect thereof.
LEGAL MATTERS
Certain legal matters with respect to the Term Notes will be passed
upon for the Depositor by [Thacher Proffitt & Wood] [Orrick, Herrington &
Sutcliffe], New York, New York and for the Underwriter by ________________, New
York, New York.
RATINGS
It is a condition to issuance that the Term Notes be rated "___" by
_______________ and "___" by ___________________. The Company has not requested
a rating on the Term Notes by any rating agency other than _______________ and
_______________. However, there can be no assurance as to whether any other
rating agency will rate the Term Notes, or, if it does, what rating would be
assigned by any such other rating agency. A rating on the Term Notes by another
rating agency, if assigned at all, may be lower than the ratings assigned to the
Term Notes by ___________ and ___________________________. A securities rating
addresses the likelihood of the receipt by holders of Term Notes of
distributions on the Revolving Credit Loans. The rating takes into consideration
the structural, legal and tax aspects associated with the Term Notes. The
ratings on the Term Notes do not, however, constitute statements regarding the
possibility that Holders might realize a lower than anticipated yield. A
securities rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
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No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by the Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
TABLE OF CONTENTS
[To be updated] Page
Prospectus Supplement
Summary.............................................. S-
Risk Factors......................................... S-
Description of the Mortgage Pool.....................
Sg of the Revolving Credit Loans
S-
The 199_-_ LLC.......................................
S-
The Issuer...........................................
S-
The Owner Trustee.................................... S-
Description of the Securities........................ -
Description of the Purchase
Agreement....................................... S-
Assignment to the Issuer............................. S-
Description of the Servicing
Agreement....................................... S-
Description of the Indenture......................... S-
Certain Federal Income Tax
Consequences.................................... S-
ERISA Considerations................................. S-
Legal Investment..................................... S-
Method of Distribution............................... S-
Legal Matters........................................ S-
Ratings.............................................. S-
Prospectus
Summary of Prospectus ...............................
Risk Factors.........................................
The Mortgage Pools...................................
Allocation of Revolving Credit
Loan Balances...................................
Revolving Credit Loan Program........................
Description of the Securities........................
Description of Credit Enhancement....................
The Company..........................................
Residential Funding Corporation......................
Servicing of the Revolving Credit Loans
The Agreements.......................................
Yield and Prepayment Considerations..................
Certain Legal Aspects of Mortgage
Loans And Related Matters.......................
Certain Federal Income Tax
Consequences....................................
State and Other Tax Consequences.....................
Legal Investment Considerations......................
Use of Proceeds......................................
Methods of Distribution..............................
Legal Matters........................................
Financial Information................................
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