<PAGE>
RULE NO. 424(b)(5)
REGISTRATION NO. 33-80419
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 10, 1997)
$122,765,141
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
DEPOSITOR
HOME LOAN TRUST 1997-HI3
RESIDENTIAL FUNDING CORPORATION
MASTER SERVICER
HOME LOAN-BACKED NOTES, SERIES 1997-HI3
7.18% Class A-PB Notes
The Home Loan Trust 1997-HI3 (the "ISSUER" or the "TRUST") will be formed
pursuant to a Trust Agreement to be dated as of June 26, 1997 between
Residential Funding Mortgage Securities II, Inc. (the "DEPOSITOR") and
Wilmington Trust Company, the Owner Trustee. The Home Loan-Backed Notes,
Series 1997-HI3 (the "NOTES"), will include the following two classes: the
Class A-PB Notes and the Class A-PV Notes. The Notes will be issued pursuant
to an Indenture to be dated as of June 26, 1997, between the Issuer and The
Chase Manhattan Bank, the Indenture Trustee. The Class A-PV Notes will have an
aggregate initial principal amount of $100,000,000 and will share with the
Class A-PB Notes, on a pro rata basis, in all payments allocable to the Notes.
Pursuant to the Trust Agreement, the Issuer will also issue one or more
classes of Home Loan-Backed Certificates, Series 1997-HI3 (collectively, the
"CERTIFICATES"), with an aggregate initial principal amount of $8,079,565. The
Notes and the Certificates are collectively referred to herein as the
"SECURITIES." Only the Class A-PB Notes (the "OFFERED NOTES") are offered
hereby.
The Offered Notes will be secured equally and ratably with the Class A-PV
Notes by certain closed-end, fixed-rate mortgage loans (the "MORTGAGE LOANS"),
which in turn will be secured primarily by second or third mortgages or deeds
of trust on one- to four-family residential properties. Approximately 97.9% of
the Mortgage Loans will have been sold to the Depositor by Master Financial,
Inc. ("Master Financial") and the remainder of the Mortgage Loans will have
been sold to the Depositor by Residential Funding Corporation ("Residential
Funding"). The proceeds of the Mortgage Loans generally were used by the
related borrowers for home improvement and/or debt consolidation.
Approximately 3.7% of the Mortgage Loans will be partially insured by the
Federal Housing Administration ("FHA") pursuant to Title I of the National
Housing Act of 1934, as amended. In addition, the Offered Notes will have the
benefit of an irrevocable and unconditional financial guaranty insurance
policy (the "POLICY") issued by AMBAC Indemnity Corporation (the "CREDIT
ENHANCER") as described under "Description of the Policy" herein.
AMBAC(R)
-----
Payments of principal and interest on the Offered Notes will be made on the
25th day of each month or, if such day is not a business day, then on the next
business day, commencing in July 1997 (each, a "PAYMENT DATE"). Interest will
accrue on the Offered Notes at the fixed rate (the "NOTE RATE") set forth
above, as described herein. See "Description of the Securities-Interest
Payments on the Notes" herein.
(Continued on following page)
---------------
THE OFFERED NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT
AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER, GMAC
MORTGAGE OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE OFFERED NOTES NOR
THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR, THE MASTER SERVICER, GMAC
MORTGAGE OR ANY OF THEIR RESPECTIVE AFFILIATES.
---------------
THE OFFERED NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE OFFERED
NOTES, SEE "RISK FACTORS" COMMENCING ON PAGE S-11 HEREIN AND "RISK FACTORS" IN
THE PROSPECTUS COMMENCING ON PAGE 9.
---------------
The Offered Notes will be offered by Residential Funding Securities
Corporation, an affiliate of the Depositor (the "UNDERWRITER"), on a best
efforts basis, from time to time to the public, directly or through dealers,
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale. The termination date of the offering is the earlier to occur
of June 20, 1998 or the date on which all of the Offered Notes have been sold.
Proceeds of the offering will not be placed in any escrow, trust or similar
arrangement. The proceeds to the Depositor from any sale of the Offered Notes
will be equal to the purchase price paid by the purchaser thereof, net of any
expenses payable by the Depositor and any compensation payable to the
Underwriter and any dealer. The Offered Notes are offered subject to receipt
and acceptance by the Underwriter, to prior sale and to the Underwriter's
right to reject any order in whole or in part and to withdraw, cancel or
modify the offer without notice. It is expected that delivery of the Offered
Notes will be made in book-entry only form through the facilities of DTC,
Cedel and Euroclear, as discussed herein, on or about June 26, 1997 against
payment therefor in immediately available funds.
RESIDENTIAL FUNDING SECURITIES CORPORATION
The date of this Prospectus Supplement is June 20, 1997.
<PAGE>
(Continued from previous page)
It is a condition of the issuance of the Offered Notes that the Notes be
rated "Aaa" by Moody's Investors Service, Inc. ("MOODY'S") and "AAA" by
Standard & Poor's Ratings Services ("STANDARD & POOR'S").
The yield to maturity on the Offered Notes will depend on the rate and
timing of principal payments (including prepayments, repurchases, defaults and
liquidations) on the Mortgage Loans. In general, defaults on mortgage loans
are expected to occur with greater frequency in their early years and defaults
on mortgage loans secured by second or third liens may be substantially higher
than mortgage loans secured by first liens. In addition, 88.2% of the Mortgage
Loans will have Combined Loan-to-Value Ratios in excess of 100%. If such
Mortgage Loans go into foreclosure and are liquidated, there may be no amounts
recovered from the related Mortgaged Property. See "Risk Factors" herein and
in the Prospectus. The Mortgage Loans generally may be prepaid at any time;
however, prepayment may subject the Mortgagor to a prepayment charge as
described herein. See "Certain Yield and Prepayment Considerations" herein and
"Yield and Prepayment Considerations" in the Prospectus.
---------------
There is currently no secondary market for the Offered Notes. The
Underwriter intends to make a secondary market in the Offered Notes but is not
obligated to do so. There can be no assurance that a secondary market for the
Offered Notes will develop or, if it does develop, that it will continue. The
Offered Notes will not be listed on any securities exchange.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE OFFERED NOTES,
INCLUDING STABILIZING AND SYNDICATE SHORT COVERING TRANSACTIONS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "METHOD OF DISTRIBUTION" HEREIN.
---------------
THE OFFERED NOTES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF SECURITIES BEING OFFERED PURSUANT TO THE DEPOSITOR'S
PROSPECTUS DATED JUNE 10, 1997, 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 OFFERED NOTES MAY NOT BE CONSUMMATED UNLESS
THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
---------------
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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.
Issuer...................... The Offered Notes will be issued by Home Loan
Trust 1997-HI3, a Delaware business trust
established pursuant to the Trust Agreement,
dated as of June 26, 1997 between the
Depositor and the Owner Trustee. The assets
of the Issuer will consist of the Mortgage
Loans (as defined herein) and certain related
assets.
The Offered Notes .......... $122,765,141 Home Loan-Backed Notes, Series
1997-HI3, Class A-PB, are offered hereby. The
Offered Notes, together with the Class A-PV
Notes, will be issued pursuant to an
Indenture, dated as of June 26, 1997, between
the Issuer and the Indenture Trustee.
Depositor .................. Residential Funding Mortgage Securities II,
Inc. (the "DEPOSITOR" or the "COMPANY"). See
"The Company" in the Prospectus.
Master Servicer............. Residential Funding Corporation (the "MASTER
SERVICER" or "RESIDENTIAL FUNDING"), an
affiliate of the Depositor. See "Description
of the Servicing Agreement-The Master
Servicer" herein.
Servicer.................... Master Financial, Inc. ("MASTER FINANCIAL"),
a California corporation. See "Description of
the Mortgage Pool-The Servicer" herein.
Sellers..................... Master Financial and Residential Funding
(collectively, the "SELLERS").
Owner Trustee............... Wilmington Trust Company.
Indenture Trustee........... The Chase Manhattan Bank.
Closing Date................ On or about June 26, 1997.
Payment Date................ The 25th day of each month (or, if such day
is not a business day, the next business
day), beginning in July 1997 (each, a
"PAYMENT DATE").
Denominations and The Offered Notes will be issued in minimum
Registration................ denominations of $1,000 and integral
multiples of $1,000 in excess thereof. The
Offered Notes will be issued in book-entry
only form (any Offered Notes so issued, the
"BOOK-ENTRY ONLY NOTES"). Persons acquiring
beneficial ownership interests in the Offered
Notes ("OFFERED NOTE OWNERS") may elect to
hold their Notes through DTC, in the United
States, or CEDEL or Euroclear, in Europe.
Transfers within DTC, CEDEL or Euroclear, as
the case may be, will be in accordance with
the usual rules and operating procedures of
the relevant system. No Offered Note Owner
will be entitled to receive a physical
certificate representing such person's
interest, except in the event that
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Definitive Notes (as defined herein) are
issued under the limited circumstances
described herein. All references in this
Prospectus Supplement to any Offered Notes
reflect the rights of Offered Note Owners
only as such rights may be exercised through
DTC, and its participating organizations for
so long as such Notes are Book-Entry Only
Notes. See "Description of the Securities-
Book-Entry Only Notes" herein and
"Description of the Notes-Form of Notes" in
the Prospectus.
The Mortgage Pool........... The Mortgage Pool will consist of a pool of
conventional and FHA-insured, closed-end,
fixed-rate, fully-amortizing mortgage loans
(the "MORTGAGE LOANS") with an aggregate
unpaid principal balance as of the close of
business on the business day prior to June 5,
1997 (the "CUT-OFF DATE BALANCE," and such
date, the "CUT-OFF DATE") of $230,844,706.
97.9% of the Mortgage Loans were acquired by
the Depositor from Master Financial, and 2.1%
of the Mortgage Loans were acquired by the
Depositor from Residential Funding. The
proceeds of the Mortgage Loans generally were
used by the related borrowers for home
improvement and/or debt consolidation.
99.9% of the Mortgage Loans (by Cut-off Date
Balance) are secured by second or third
mortgages or deeds of trust and the remainder
are secured by first mortgages or deeds of
trust. At origination, the Mortgage Loans had
individual principal balances of at least
$5,000 but not more than $100,000 with an
average principal balance at origination of
approximately $38,025. The Mortgage Loans
have terms to maturity from the date of
origination or modification of approximately
five, ten, fifteen, twenty or twenty-five
years with respect to 0.42%, 3.97%, 27.89%,
24.85% and 42.87% of the Mortgage Loans
(each, by Cut-off Date Balance),
respectively, and a weighted average
Remaining Term (as defined herein) of
approximately 240 months as of the Cut-off
Date. All percentages of the Mortgage Loans
described herein are approximate percentages
(except as otherwise indicated) by Cut-off
Date Balance of the Mortgage Loans (except as
otherwise indicated). All of the Mortgage
Loans will be serviced for the Master
Servicer by Master Financial.
The Mortgage Loans will bear interest at the
mortgage rate stated in the related Mortgage
Note (the "MORTGAGE RATE") which will be at
least 9.95% per annum but no more than 18.00%
per annum, with a weighted average Mortgage
Rate of 14.12% per annum as of the Cut-off
Date. The Combined Loan-to-Value Ratios for
the Title I Loans (as defined herein) will
range from 19.00% to 164.00%, with a weighted
average of approximately 107.70%, and the
Combined Loan-to-Value Ratios for the
Mortgage Loans other than the Title I Loans
will range from 38.00% to 130.00%, with a
weighted average of approximately 114.90%.
With respect to 88.20% of the Mortgage Loans,
the Combined Loan-to-Value Ratios are in
excess of 100%. The Mortgaged Properties for
58.30% of the Mortgage Loans are located in
California.
S-4
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As of the Cut-off Date, 74.2% of the Mortgage
Loans were High Cost Loans. As to 1.8% of the
Mortgage Loans, during a temporary period the
Monthly Payments received thereon were
applied in a manner that reduced the rate of
principal amortization. As a result, each
such Mortgage Loan may have an unpaid
principal amount on its scheduled maturity
date (assuming no prepayments) of greater
than 1 time and not more than 6 times the
related Monthly Payment.
With respect to 22.3% of the Mortgage Loans,
the Monthly Payments due for the month of
June 1997 were received prior to the Cut-off
Date. Accordingly, the P&I Collections for
the Payment Date in July 1997 will be less
than the total of all Monthly Payments due
for June 1997.
For a further description of the Mortgage
Loans, see "Description of the Mortgage Pool"
herein.
Title I Loans............... 414 Mortgage Loans, representing
approximately 3.7% of the Mortgage Pool (the
"TITLE I LOANS"), were originated under a
program providing for partial insurance by
the Federal Housing Administration (the
"FHA") pursuant to Title I ("TITLE I") of the
National Housing Act of 1934, as amended (the
"NATIONAL HOUSING ACT"). See "-Credit
Enhancement-FHA Insurance" and "Description
of the Mortgage Pool-Description of FHA
Insurance under Title I" herein and
"Description of FHA Insurance under Title I"
in the Prospectus. See "Risk Factors-FHA
Insurance" herein.
Interest Payments........... Interest on the Offered Notes will be paid
monthly on each Payment Date, commencing in
July 1997, at the related Note Rate on a pro
rata basis with the interest payable on the
Class A-PV Notes for such Payment Date. The
Note Rate on the Offered Notes for each
Payment Date will be the fixed rate set forth
on the cover hereof. Interest on the Notes in
respect of any Payment Date will accrue on
the basis of a 30-day month and a 360-day
year.
See "Description of the Securities-Interest
Payments on the Offered Notes" herein.
Principal Payments.......... On each Payment Date, other than the Payment
Date in December 2022, principal payments
will be due and payable on the Offered Notes
in an aggregate amount equal to the Offered
Notes' pro rata portion of the Principal
Collection Distribution Amount (as defined
herein) for such Payment Date. In addition,
on any Payment Date, to the extent of funds
available therefor, holders of the Offered
Notes will also be entitled to receive
principal payments in an aggregate amount
generally equal to their pro rata portion of
(i) Liquidation Loss Distribution Amounts (as
defined herein), as and to the extent
described herein, and (ii) the amount, if
any, necessary to bring the Outstanding
Reserve Amount up to the Reserve Amount
Target. On each Payment Date, the aggregate
amount payable in respect of principal on the
Notes will be allocated between the
S-5
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Offered Notes and the Class A-PV Notes on a
pro rata basis, based on the Note Balances
thereof, in each case until each such class
is paid in full. In no event will principal
payments on the Offered Notes on any Payment
Date exceed the related Note Balance thereof
on such date. On the Payment Date in December
2022, principal will be due and payable on
the Offered Notes in an amount equal to the
Note Balance thereof.
Allocation of Payments on
the Mortgage Loans.........
All collections on the Mortgage Loans will be
allocated by the Master Servicer in
accordance with the terms of the Mortgage
Notes between amounts collected in respect of
interest and amounts collected in respect of
principal. See "Description of the Servicing
Agreement-Allocation of Payments on the
Mortgage Loans" herein, which describes the
calculation of the Interest Collections and
the Principal Collections on the Mortgage
Loans for the Collection Period (as defined
herein) related to each Payment Date that are
distributable pursuant to the Servicing
Agreement (together, the "P&I COLLECTIONS")
for such Payment Date.
Credit Enhancement.......... The Credit Enhancement provided for the
benefit of the Offered Notes consists of (a)
FHA Insurance, to the extent described
herein, (b) the Liquidation Loss Distribution
Amounts, (c) the Outstanding Reserve Amount
and (d) the Policy, each as described below.
FHA Insurance: The insurance provided by the
FHA pursuant to Title I (the "FHA INSURANCE")
that is expected to be available to the Title
I Contract Holder (as defined herein) in
respect of the Title I Loans is $843,372.
Such amount of insurance represents an amount
which is equal to approximately 10% of the
Cut-off Date Balance of the Title I Loans.
Such amount of insurance is expected to be
reflected in an insurance coverage reserve
account maintained by FHA in the name of the
Title I Contract Holder after the Closing
Date. See "Risk Factors--FHA Insurance;
Limitations on FHA Insurance" and
"Description of the Mortgage Pool--
Description of FHA Insurance under Title I."
Subject to the then remaining FHA Insurance
Amount (as defined herein), each Title I Loan
will be insured by the FHA in an amount equal
to 90% of the sum of the following: (i)
generally, the unpaid principal and
uncollected interest earned to the date of
default; (ii) generally, the unpaid amount of
interest on the unpaid principal from the
date of default to the date of the claim's
initial submission to the FHA for payment,
but not for any period greater than nine
months from the date of default, calculated
at 7% per annum (except for the first month,
in which interest is calculated at the
Mortgage Rate); and (iii) certain expenses.
See "Description of the Mortgage Pool-
Description of FHA Insurance under Title I"
herein. Since the remaining FHA Insurance
Amount is dependent upon future events,
including reductions for the payment of
claims, no assurance can be given that the
FHA Insurance Amount will be adequate to
cover 90% of the losses on such Title I
Loans.
S-6
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Liquidation Loss Distribution Amounts:
Holders of the Offered Notes will be
protected against Liquidation Loss Amounts
other than Excess Loss Amounts (each as
defined herein) as a result of the
preferential allocation to the Offered Notes
of a pro rata share of the Liquidation Loss
Distribution Amount (representing excess
interest collections, if available), as
described herein, which will be used to make
corresponding payments on the Offered Notes.
Outstanding Reserve Amount: The Outstanding
Reserve Amount will initially be
approximately 3.5% of the Cut-off Date
Balance, and will be increased by payments of
the Reserve Increase Amount (as defined
herein), if any, to the Noteholders. The
Outstanding Reserve Amount, if any, will
represent overcollateralization which will be
available to absorb any Liquidation Loss
Amounts (other than Excess Loss Amounts) that
are not covered by Liquidation Loss
Distribution Amounts. Any Liquidation Loss
Amounts not so covered by a Liquidation Loss
Distribution Amount or the Outstanding
Reserve Amount will be covered by draws on
the Policy to the extent provided herein. The
"OUTSTANDING RESERVE AMOUNT" available on any
Payment Date is the amount, if any, by which
the Pool Balance (as defined herein) as of
the end of the related Collection Period
exceeds the aggregate of the Note Balances of
all Notes on such Payment Date (after
application of Principal Collections for such
date).
As of the Closing Date, the Reserve Amount
Target is equal to 9.00% of the Cut-off Date
Balance. However, the Reserve Amount Target
may decrease from time to time pursuant to
the terms of the Indenture based on specified
trigger tests, as further described herein.
See "Description of the Securities--
Allocation of Payments on the Mortgage Loans"
herein. To the extent the Reserve Amount
Target decreases on any Payment Date, the
amount of the Principal Collection
Distribution Amount will be reduced on such
Payment Date and on each subsequent Payment
Date to the extent the remaining Outstanding
Reserve Amount is in excess of the reduced
Reserve Amount Target until the Outstanding
Reserve Amount equals the Reserve Amount
Target.
Policy: On the Closing Date, the Credit
Enhancer will issue a Policy in favor of the
Owner Trustee on behalf of the Issuer. The
Policy will unconditionally and irrevocably
guarantee interest on the Notes at the
related Note Rates plus any Liquidation Loss
Amounts allocated to the Notes (net of any
withholding taxes). 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 Notes at the
related Note Rates, (b) any Liquidation Loss
Amount (other than any Excess Loss Amount) to
the extent not currently covered by
Liquidation Loss Distribution Amounts or a
reduction in the Outstanding Reserve Amount
and (c) any Excess Loss Amounts. See
"Description of the Policy" herein and
"Description of Credit Enhancement" in the
Prospectus.
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<PAGE>
Credit Enhancer............. AMBAC Indemnity Corporation. See "The Credit
Enhancer" herein.
The Class A-PV Notes........ $100,000,000 Home Loan-Backed Notes, Series
1997-HI3, Class A-PV, are not offered hereby.
The Class A-PV Notes will have a Note Rate
equal to 7.18% per annum and will share pro
rata in all payments of principal and
interest with the Class A-PB Notes. The Class
A-PV Notes also will share equally with the
Class A-PB Notes (to the extent of the
related Note Balances) in all rights under
the Indenture and under the Policy.
The Certificates............ The Certificates will consist of one or more
classes, collectively having an initial
aggregate principal amount of $8,079,565. The
Certificates will be issued pursuant to the
Trust Agreement and will represent the
beneficial ownership interest of the Trust.
The Certificates are not offered hereby.
Final Payment of Principal
on the Offered Notes.......
The Offered Notes will be payable in full on
the Payment Date in December 2022, to the
extent of the outstanding Note Balance
thereof on such date, if any. In addition,
the Issuer will pay the Offered Notes in full
upon the exercise by the Master Servicer of
its option to purchase all Mortgage Loans and
all property acquired in respect of the
Mortgage Loans. See "Description of the
Securities- Maturity and Optional Redemption"
herein and "The Agreements-Termination;
Redemption of Notes" in the Prospectus.
Special Prepayment The rate and timing of principal payments on
Considerations.............. the Offered Notes will depend on, among other
things, the rate and timing of principal
payments (including prepayments, defaults,
liquidations and purchases of Mortgage Loans
due to a breach of a representation and
warranty) on the Mortgage Loans. The Offered
Notes are subject to inherent cash flow
uncertainties because the Mortgage Loans may
be prepaid at any time. Generally, when
prevailing interest rates increase,
prepayment rates on mortgage loans tend to
decrease, resulting in a slower return of
principal to investors at a time when
reinvestment at such higher prevailing rates
would be desirable. Conversely, when
prevailing interest rates decline, prepayment
rates on mortgage loans tend to increase,
resulting in a faster return of principal to
investors at a time when reinvestment at
comparable yields may not be possible. In
addition, the majority of the Mortgage Loans
provide for payment of a prepayment charge.
Such prepayment charges may reduce the rate
of prepayment on the Mortgage Loans until the
end of such period.
In addition, since mortgage loans secured by
second or third liens are not generally
viewed by borrowers as permanent financing
and generally carry a high rate of interest,
the Mortgage Loans may experience a higher
rate of prepayments than traditional mortgage
loans. In addition, the rate of default on
second and third mortgage
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<PAGE>
loans may be greater than that of mortgage
loans secured by first liens. See "Certain
Yield and Prepayment Considerations-General"
herein.
See "Description of the Securities--Principal
Payments on the Offered Notes" and "Certain
Yield and Prepayment Considerations" herein
and "Yield and Prepayment Considerations" in
the Prospectus. For further information
regarding the effect of principal prepayments
on the weighted average lives of the Offered
Notes, see the table entitled "Percent of
Initial Note Balance Outstanding at the
Following Percentages of Prepayment
Assumption" herein.
Special Yield The yield to maturity on the Offered Notes
Considerations.............. will depend on, among other things, the rate
and timing of principal payments (including
prepayments, defaults, liquidations and
repurchases of Mortgage Loans due to a breach
of a representation and warranty) on the
Mortgage Loans and the allocation thereof to
reduce the Note Balance thereof. Prepayment
Interest Shortfalls resulting from principal
prepayments in full in any calendar month
will not adversely affect the yield to
investors on the Offered Notes because such
Prepayment Interest Shortfalls will be
covered first by excess interest collections,
if available, and then by the Policy. See
"Description of the Securities--Interest
Payments on the Offered Notes" herein.
In general, if the Offered Notes are
purchased at a premium and principal payments
to the Offered Notes occur at a rate faster
than assumed at the time of purchase, the
investor's actual yield to maturity will be
lower than that anticipated at the time of
purchase. Conversely, if the Offered Notes
are purchased at a discount and principal
payments 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 anticipated at the time of
purchase.
The Offered Notes were structured assuming,
among other things, a Prepayment Assumption
(as defined herein) of 100% and corresponding
weighted average lives as described herein.
The prepayment, yield and other assumptions
to be used for pricing purposes for the
respective classes that are to be offered
hereunder may vary as determined at the time
of sale.
Certain Federal Income Tax
Consequences...............
In the opinion of Thacher Proffitt & Wood,
counsel to the Depositor, for federal income
tax purposes, the Offered 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 a
publicly traded partnership within the
meaning of section 7704 of the Code) taxable
as a corporation or as a taxable mortgage
pool within the meaning of section 7701(i) of
the Code.
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<PAGE>
For further information regarding certain
federal income tax consequences of an
investment in the Offered 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 OFFERED NOTES 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 certain
regulatory authorities may be subject to
restrictions on investment in the Offered
Notes. See "Legal Investment" herein.
Rating...................... It is a condition to the issuance of the
Offered Notes that the Notes be rated "Aaa"
by Moody's and "AAA" by Standard & Poor's. A
security rating is not a recommendation to
buy, sell or hold securities and may be
subject to revision or withdrawal at any time
by the assigning rating organization. A
security rating does not address the
frequency of prepayments of Mortgage Loans,
or the corresponding effect on yield to
investors. See "Certain Yield and Prepayment
Considerations" and "Ratings" herein.
S-10
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS IN THE OFFERED NOTES SHOULD CONSIDER, AMONG OTHER
THINGS, THE ITEMS DISCUSSED UNDER "RISK FACTORS" WHICH BEGINS ON PAGE 9 IN THE
PROSPECTUS AND THE FOLLOWING FACTORS IN CONNECTION WITH THE PURCHASE OF THE
OFFERED NOTES:
RISKS ASSOCIATED WITH THE MORTGAGE LOANS
Since substantially all of the Mortgage Loans are subordinate to the rights
of the mortgagee under the related senior mortgage, 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
circumstances when it is determined to be uneconomical to foreclose on the
Mortgaged Property, the Master Servicer may write off the entire outstanding
balance of such Mortgage Loan as a bad debt. The foregoing considerations will
be particularly applicable to Mortgage Loans secured by junior liens that have
high Combined Loan-to-Value Ratios or low Junior Ratios because it is
comparatively more likely that the Master Servicer would determine foreclosure
to be uneconomical in the case of such Mortgage Loans. 88.2% of the Mortgage
Loans will have Combined Loan-to-Value Ratios in excess of 100%. Such Mortgage
Loans were originated with a limited expectation of recovering any amounts
from the foreclosure of the related Mortgaged Property and are underwritten
with an emphasis on the creditworthiness of the related borrower. If such
Mortgage Loans go into foreclosure and are liquidated, there may be no amounts
recovered from the related Mortgaged Property unless the value of the property
increases or the principal amount of the related senior liens have been
reduced such as to reduce the current Combined Loan-to-Value Ratio of the
related Mortgage Loan to below 100%. To the extent that any losses are
incurred on any of the Mortgage Loans that are not covered by FHA Insurance,
if applicable, Liquidation Loss Distribution Amounts, a reduction in the
Outstanding Reserve Amount or the Policy, the holders of the Offered Notes
will bear all risk of such losses resulting from default by Mortgagors on a
pro rata basis with the holders of the Class A-PV Notes.
Defaults on mortgage loans are generally expected to occur with greater
frequency in their early years. The rate of default of second and third
mortgage loans may be greater than that of mortgage loans secured by first
liens on comparable properties.
FHA INSURANCE; LIMITATIONS ON FHA INSURANCE
The availability of FHA Insurance following a default on an FHA Loan is
subject to a number of conditions as further described under "Description of
the Mortgage Pool--Description of FHA Insurance under Title I" herein and in
the Prospectus under "Description of FHA Insurance under Title I." FHA
Insurance that is expected to be available to the Title I Contract Holder in
respect of the Title I Loans is $843,372. Such amount of insurance represents
an amount which is equal to approximately 10% of the Cut-off Date Balance of
the Title I Loans. It is expected that any FHA Reserves (as defined herein)
relating to the Title I Loans included in the Mortgage Pool will consist of
FHA Reserves that cover not only the Title I Loans but also other loans
insured pursuant to Title I not included in the Mortgage Pool, which other
Title I loans may be owned by the Title I Contract Holder or an affiliate
thereof or by Master Financial (prior to the completion of any transfer
initiated by Master Financial of the FHA Reserves relating to the Title I
Loans included in the Mortgage Pool), or may be included in a Related Series
Trust (as defined herein). In the event that the FHA Reserves are applied to
such other Title I loans in a Related Series Trust or otherwise, there may be
insufficient FHA Reserves to cover 90% of losses on Title I Loans included in
the Mortgage Pool. Such an occurrence would result in shortfalls of principal
and interest on the Offered Notes, to the extent such shortfalls are not
covered by Liquidation Loss Amounts, Outstanding Reserve Amounts or the
Policy. See "Description of the Mortgage Pool--Description of FHA Insurance
under Title I" herein and "Description of FHA Insurance under Title I" in the
Prospectus regarding certain other Limitations on FHA Insurance.
S-11
<PAGE>
In addition, subject to the then remaining FHA Insurance Amount, each Title
I Loan will be insured by the FHA in an amount equal to 90% of the sum of the
following: (i) the unpaid principal and uncollected interest earned to the
date of default, calculated on the actuarial method, reduced by certain
amounts received in connection with enforcing a lien on the Mortgaged Property
prior to the lien of the related Title I Loan; (ii) the unpaid amount of
interest on the unpaid principal from the date of default to the date of the
claim's initial submission to the FHA for payment plus 15 calendar days, but
not for any period greater than nine months from the date of default,
calculated at 7% per annum (except for the first month, in which interest is
calculated at the Mortgage Rate); and (iii) the amount of certain uncollected
court costs, attorneys' fees, and expenses for recording the assignment of the
related Title I Loan to the United States of America. Since the remaining FHA
Insurance Amount is dependent upon future events, including reductions for the
payment of claims, no assurance can be given that the FHA Insurance Amount
will be adequate to cover 90% of the losses on such Title I Loans.
LIMITED HISTORICAL DATA WITH RESPECT TO THE TYPES OF MORTGAGE LOANS IN THE
MORTGAGE POOL
The Depositor began purchasing and Residential Funding began master
servicing conventional mortgage loans of the types included in the Mortgage
Pool and Title I Loans in December 1996. Accordingly, no information has been
included herein with respect to Residential Funding's delinquency, loan loss
or liquidation experience for such loans, which, to the limited extent that
such information is available, would not likely be indicative of the Mortgage
Loans comprising the Mortgage Pool.
In addition, Master Financial has, prior to June 1996, acted as servicer or
subservicer on Title I Loans only. Further, Master Financial has limited
experience servicing or subservicing conventional mortgage loans of the types
included in the Mortgage Pool and has only had a substantial servicing
portfolio of such loans since June 1996. Because of such limited experience
and also because Title I Loans only constitute approximately 3.7% of the
Mortgage Loans (by Cut-off Date Balance), no information has been provided
with respect to Master Financial's delinquency, loan loss or liquidation
experience for mortgage loans of the types included in the Mortgage Pool.
LIMITATIONS AND REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
Credit enhancement will be provided for the Offered Notes in the form of FHA
Insurance, if applicable, Liquidation Loss Distribution Amounts (representing
excess interest collections, if available), by the Outstanding Reserve Amount
(representing the initial overcollateralization and any additional
overcollateralization that may have been established as described herein), and
by the Policy to the limited extent described herein. None of the Depositor,
the Master Servicer, or any of their affiliates will have any obligation to
replace or supplement such credit enhancement, or to take any other action to
maintain any rating of the Offered Notes. To the extent that any losses are
incurred on any of the Mortgage Loans that are not covered by FHA Insurance,
Liquidation Loss Distribution Amounts, a reduction in the Outstanding Reserve
Amount or the Policy, the holders of the Notes will bear all risk of such
losses resulting from default by Mortgagors on a pro rata basis with the
holders of the Class A-PV Notes.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with a Cut-off Date Balance
of $230,844,706. 99.9% of the Mortgage Loans are secured by second and third
liens on fee simple or leasehold interests in one- to four-family residential
properties and the remainder are secured by first liens. The Mortgage Loans
will consist of conventional and FHA-insured, closed-end, fixed-rate, fully-
amortizing mortgage loans with terms to maturity of approximately five, ten,
fifteen, twenty or twenty-five years with respect to 0.42%, 3.97%, 27.89%,
24.85% and 42.87% of the Mortgage Loans, respectively, from the date of
origination or modification. The proceeds of the Mortgage Loans generally were
used by the related borrowers for home improvement and/or debt consolidation.
S-12
<PAGE>
With respect to Mortgage Loans which have been modified, references herein to
the date of origination shall be deemed to be the date of the most recent
modification. All percentages of the Mortgage Loans described herein are
approximate percentages (except as otherwise indicated) determined by Cut-off
Date Balance.
414 Mortgage Loans, representing 3.7% of the Mortgage Pool, were originated
under a program providing for partial insurance by the FHA pursuant to Title I
of the National Housing Act. See "--Description of FHA Insurance under Title
I" herein and "Description of FHA Insurance under Title I" in the Prospectus.
97.9% of the Mortgage Loans were acquired by the Depositor from Master
Financial, and 2.1% of the Mortgage Loans were acquired by the Depositor from
Residential Funding. All of the Mortgage Loans will be serviced for the Master
Servicer by Master Financial. See "--The Servicer" below.
All of the Mortgage Loans were generally underwritten as described below
under "--Underwriting Standards".
As to 1.8% of the Mortgage Loans, during a temporary period the Monthly
Payments received thereon were applied in a manner that reduced the rate of
principal amortization. As a result, each such Mortgage Loan may have an
unpaid principal amount on its scheduled maturity date (assuming no
prepayments) of greater than 1 times and not more than 6 times the related
Monthly Payment.
Each Seller will make certain representations and warranties to the
Depositor regarding the Mortgage Loans sold by it as of the date of issuance
of the Offered Notes. Further, each Seller will be required to repurchase or
substitute for any Mortgage Loan sold by it as to which a breach of its
representations and warranties with respect to such Mortgage Loan occurs if
such breach materially adversely affects the interests of the Noteholders or
the Credit Enhancer in such Mortgage Loan; provided that such substitution may
be subject to the delivery of an opinion of counsel regarding certain tax
matters. Residential Funding will repurchase or substitute for any Mortgage
Loan required to be repurchased or substituted for by Master Financial if
Master Financial fails to do so. See "Description of the Mortgage Loan
Purchase Agreements" herein and "Trust Asset Program--Qualifications of
Sellers" and "--Representations Relating to the Trust Assets" and "Description
of the Notes-Review of Trust Assets" in the Prospectus.
MORTGAGE POOL CHARACTERISTICS
None of the Mortgage Loans were originated prior to November 1992 or will
have a maturity date later than June 2022. No Mortgage Loan will have a
remaining term from June 1997 to the stated maturity thereof (a "REMAINING
TERM") of less than 30 months. The weighted average Remaining Term of the
Mortgage Loans as of the Cut-off Date will be approximately 240 months. The
weighted average original term to stated maturity of the Mortgage Loans as of
the Cut-off Date will be approximately 243 months. 0.42% of the Mortgage Loans
will have original terms to maturity of approximately five years, with a
weighted average Remaining Term of 57 months. 3.97% of the Mortgage Loans will
have original terms to maturity of approximately ten years, with a weighted
average Remaining Term of 116 months. 27.89% of the Mortgage Loans will have
original terms of maturity of approximately fifteen years, with a weighted
average Remaining Term of 177 months. 24.85% of the Mortgage Loans will have
original terms to maturity of approximately twenty years, with a weighted
average Remaining Term of 235 months. 42.87% of the Mortgage Loans will have
original terms of maturity of approximately twenty-five years, with a weighted
average Remaining Term of 297 months. All of the Mortgage Loans have principal
and interest payable monthly on various days of each month as specified in the
Mortgage Note (the "DUE DATE"). 88.2% of the Mortgage Loans will be secured by
mortgages or deeds of trust on property in which the borrower has no equity
because the related CLTV at the time of origination exceeds 100%.
With respect to each Mortgage Loan, the "COMBINED LOAN-TO-VALUE RATIO" or
"CLTV" at any date of determination generally will be the ratio, expressed as
a percentage, of (i) the sum of (A) the principal balance of such Mortgage
Loan at such date and (B) the unpaid principal balance at such date of all
mortgage loans, if any, secured by liens that are senior to the lien of such
Mortgage Loan to (ii) the Collateral Value of the related
S-13
<PAGE>
Mortgaged Property. With respect to any Mortgaged Property, the "COLLATERAL
VALUE" will be (x) the value thereof as determined in an appraisal obtained at
the time of origination of the related Mortgage Loan, or (y) if such Mortgage
Loan was originated simultaneously with or not more than 12 months after the
origination of a more senior mortgage loan with respect to the related
Mortgaged Property, the lesser of the appraised value thereof used in the
origination of the more senior mortgage loan and the related sales price, if
any, for such Mortgaged Property, or (z) with respect to any Mortgage Loan
with an original principal balance of less than or equal to $30,000, either
the value thereof as stated in the related borrower's application for such
Mortgage Loan or the Collateral Value described in clause (x) or (y) above, as
determined in connection with the origination or purchase of such Mortgage
Loan by the related Seller.
In connection with each Mortgage Loan that is secured by a leasehold
interest, the related Seller will have represented 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 five years after the maturity
date of each such Mortgage Loan.
Approximately 66.7% of the Mortgage Loans provide for payment of a
prepayment charge. As to each such Mortgage Loan, the prepayment charge
generally is the maximum amount permitted under applicable state law (or, if
no maximum prepayment charge is specified, the prepayment charge generally is
calculated as set forth in the following sentence). 0.59%, 0.24%, 65.48% and
0.38% of the Mortgage Loans (by Cut-off Date Balance of such Mortgage Loans)
with a prepayment charge provision provide for payment of a prepayment charge
for partial prepayments and full prepayments made within approximately one
year, two years, three years and five years of the origination of such
Mortgage Loan calculated in accordance with the terms of the related Mortgage
Note. With respect to the remainder of the Mortgage Loans with a prepayment
charge provision, the prepayment charge is calculated in a different manner.
Master Financial will be entitled to all prepayment charges and late payment
charges received on the Mortgage Loans and such amounts will not be available
for payment on the Offered Notes.
As of the Cut-off Date, no Mortgage Loan will be 30 days or more delinquent
in payment of principal and interest.
As of the Cut-off Date, 74.2% of the Mortgage Loans were High Cost Loans.
Purchasers or assignees of any High Cost Loan, including the Trust, could be
liable for all claims and subject to all defenses that the borrower could
assert against the originator thereof. Remedies available to the borrower
include monetary penalties, as well as recision rights if appropriate
disclosures were not given as required.
As of the Cut-off Date, 97.9% of the Mortgage Loans were assumable pursuant
to the terms of the related Mortgage Note. See "Maturity and Prepayment
Considerations" in the Prospectus.
With respect to 22.3% of the Mortgage Loans, the Monthly Payments due for
the month of June 1997 were received prior to the Cut-off Date. Accordingly,
the P&I Collections for the Payment Date in July 1997 will be less than the
total of all Monthly Payments due for June 1997.
All of the Mortgage Loans were originated pursuant to full documentation
programs.
No Mortgage Loan provides for deferred interest, negative amortization or
future advances.
S-14
<PAGE>
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 (except as
otherwise indicated) by the Cut-off Date Balance. Unless otherwise specified,
all principal balances of the Mortgage Loans are as of the Cut-off Date
Balance and are rounded to the nearest dollar.
MORTGAGE RATES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE MORTGAGE CUT-OFF DATE PERCENTAGE OF
RATES(%) LOANS BALANCE MORTGAGE POOL
-------- --------- ------------ -------------
<S> <C> <C> <C>
9.501 - 10.00............................ 20 $ 424,219 0.18%
10.001 - 10.500........................... 6 123,497 0.05
10.501 - 11.000........................... 80 1,673,324 0.72
11.001 - 11.500........................... 21 795,832 0.34
11.501 - 12.000........................... 228 6,293,332 2.73
12.001 - 12.500........................... 280 12,401,187 5.37
12.501 - 13.000........................... 797 31,945,742 13.84
13.001 - 13.500........................... 533 22,397,160 9.70
13.501 - 14.000........................... 1,293 50,204,875 21.75
14.001 - 14.500........................... 714 28,466,357 12.33
14.501 - 15.000........................... 915 33,264,709 14.41
15.001 - 15.500........................... 384 14,473,759 6.27
15.501 - 16.000........................... 470 16,186,507 7.01
16.001 - 16.500........................... 158 5,818,732 2.52
16.501 - 17.000........................... 161 5,077,381 2.20
17.001 - 17.500........................... 19 556,107 0.24
17.501 - 18.000........................... 29 741,988 0.32
----- ------------ ------
Total.............................. 6,108 $230,844,706 100.00%
===== ============ ======
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Rate of the Mortgage
Loans will be approximately 14.12% per annum.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE CUT-OFF DATE PERCENTAGE OF
PRINCIPAL BALANCE LOANS BALANCE MORTGAGE POOL
----------------- --------- ------------ -------------
<S> <C> <C> <C>
$0.01 - $10,000.00....................... 51 $ 445,520 0.19%
$10,000.01 - $20,000.00.................. 640 10,617,976 4.60
$20,000.01 - $30,000.00.................. 1,877 48,144,839 20.86
$30,000.01 - $40,000.00.................. 1,381 50,054,599 21.68
$40,000.01 - $50,000.00.................. 1,099 51,461,259 22.29
$50,000.01 - $60,000.00.................. 370 20,568,976 8.91
$60,000.01 - $70,000.00.................. 267 17,442,447 7.56
$70,000.01 - $80,000.00.................. 389 28,939,360 12.54
$80,000.01 - $90,000.00.................. 12 1,016,685 0.44
$90,000.01 - $100,000.00................. 22 2,153,046 0.93
----- ------------ ------
Total................................ 6,108 $230,844,706 100.00%
===== ============ ======
</TABLE>
As of the Cut-Off Date, the average Date Balance of the Mortgage Loans will
be approximately $37,794.
S-15
<PAGE>
OCCUPANCY TYPE
<TABLE>
<CAPTION>
PERCENT OF
LOAN PRINCIPAL POOL BY
CATEGORY COUNT BALANCE PRINCIPAL BALANCE
- -------- ----- ------------ -----------------
<S> <C> <C> <C>
Owner Occupied............................. 6,083 $230,293,344 99.76%
Non-Owner occupied......................... 25 551,362 0.24%
----- ------------ ------
Totals:................................ 6,108 $230,844,706 100.00%
===== ============ ======
</TABLE>
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
COMBINED LOAN-TO- NUMBER OF
VALUE MORTGAGE CUT-OFF DATE PERCENTAGE OF
RATIO(%) LOANS BALANCE MORTGAGE POOL
----------------- --------- ------------ -------------
<S> <C> <C> <C>
10.01 - 20.00........................... 1 $ 14,618 0.01%
30.01 - 40.00........................... 3 107,303 0.05
40.01 - 50.00........................... 7 168,689 0.07
50.01 - 60.00........................... 4 133,479 0.06
60.01 - 70.00........................... 14 393,944 0.17
70.01 - 75.00........................... 22 570,124 0.25
75.01 - 80.00........................... 30 758,640 0.33
80.01 - 85.00........................... 60 1,446,711 0.63
85.01 - 90.00........................... 112 3,302,799 1.43
90.01 - 95.00........................... 190 5,974,659 2.59
95.01 - 100.00........................... 476 14,397,179 6.24
100.01 - 105.00........................... 463 15,921,561 6.90
105.01 - 110.00........................... 748 26,043,635 11.28
110.01 - 115.00........................... 873 32,284,564 13.99
115.01 - 120.00........................... 941 37,389,008 16.20
120.01 - 125.00........................... 1,885 81,844,156 35.45
125.01 - 130.00........................... 242 9,272,565 4.02
130.01 - 135.00........................... 9 215,789 0.09
135.01 - 140.00........................... 6 129,600 0.06
140.01 - 145.00........................... 7 148,393 0.06
145.01 - 150.00........................... 6 147,660 0.06
Greater than 150.01....................... 9 179,629 0.08
----- ------------ ------
Total................................. 6,108 $230,844,706 100.00%
===== ============ ======
</TABLE>
The weighted average Combined Loan-to-Value Ratio (or Loan-to-Value Ratio,
with respect to the Mortgage Loans secured by first liens on the related
Mortgage Properties) at origination of the Mortgage Loans will be
approximately 114.6%.
S-16
<PAGE>
JUNIOR RATIOS
<TABLE>
<CAPTION>
JUNIOR NUMBER OF
MORTGAGE MORTGAGE CUT-OFF DATE PERCENTAGE OF
RATIO(%) LOANS BALANCE MORTGAGE POOL
-------- --------- ------------ -------------
<S> <C> <C> <C>
0.01 - 5.00............................ 6 $ 65,558 0.03%
5.01 - 10.00............................ 163 2,777,949 1.20
10.01 - 15.00............................ 641 15,337,348 6.64
15.01 - 20.00............................ 1,266 38,807,464 16.81
20.01 - 25.00............................ 1,512 57,030,106 24.70
25.01 - 30.00............................ 1,151 50,373,452 21.82
30.01 - 40.00............................ 1,018 48,493,133 21.01
40.01 - 50.00............................ 274 14,046,277 6.08
50.01 - 60.00............................ 57 2,912,401 1.26
60.01 - 70.00............................ 7 474,104 0.21
70.01 - 80.00............................ 3 182,579 0.08
80.01 - 90.00............................ 4 210,040 0.09
90.01 - 100.00............................ 6 134,295 0.06
----- ------------ ------
Total................................. 6,108 $230,844,706 100.00%
===== ============ ======
</TABLE>
The weighted average Junior Ratio as of the Cut-off Date will be
approximately 26.3%.
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE CUT-OFF DATE PERCENTAGE OF
STATE LOANS BALANCE MORTGAGE POOL
- ----- --------- ------------ -------------
<S> <C> <C> <C>
California................................. 3,451 $134,560,185 58.29%
Maryland................................... 293 12,018,009 5.21
Nevada..................................... 295 10,260,463 4.44
Washington................................. 257 9,135,112 3.96
Florida.................................... 265 8,022,930 3.48
Colorado................................... 179 7,495,812 3.25
Virginia................................... 175 7,438,918 3.22
Oregon..................................... 161 6,120,540 2.65
Other(/1/)................................. 1,032 35,792,738 15.51
----- ------------ ------
Total.................................. 6,108 $230,844,706 100.00%
===== ============ ======
- --------
(1) "Other" includes states and the District of Columbia that contain
Mortgaged Properties for less than 2.00% of the Mortgage Pool.
MORTGAGED PROPERTY TYPES
<CAPTION>
NUMBER OF
MORTGAGE CUT-OFF DATE PERCENTAGE OF
PROPERTY LOANS BALANCE MORTGAGE POOL
- -------- --------- ------------ -------------
<S> <C> <C> <C>
Condominium................................ 344 $ 10,043,640 4.35%
PUD Detached............................... 13 478,045 0.21
Single Family Residence.................... 5,701 218,630,754 94.71
Multifamily (2-4 Units).................... 38 1,301,502 0.56
Townhouse/Rowhouse Attached................ 2 54,938 0.02
PUD Attached............................... 10 335,827 0.15
----- ------------ ------
Total.................................. 6,108 $230,844,706 100.00%
===== ============ ======
</TABLE>
S-17
<PAGE>
LOAN PURPOSE
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE CUT-OFF DATE PERCENTAGE OF
PURPOSE LOANS BALANCE MORTGAGE POOL
- ------- --------- ------------ -------------
<S> <C> <C> <C>
Debt Consolidation........................ 4,020 $163,579,879 70.86%
Home Improvement/Debt Consolidation....... 1,630 57,209,708 24.78
Home Improvement.......................... 458 10,055,120 4.36
----- ------------ ------
Total................................. 6,108 $230,844,706 100.00%
===== ============ ======
LIEN PRIORITY
<CAPTION>
NUMBER OF
MORTGAGE CUT-OFF DATE PERCENTAGE OF
LIEN PRIORITY LOANS BALANCE MORTGAGE POOL
- ------------- --------- ------------ -------------
<S> <C> <C> <C>
First Lien................................ 7 $ 164,473 0.07%
Second Lien............................... 6,042 229,384,827 99.37
Third Lien................................ 59 1,295,406 0.56
----- ------------ ------
Total................................. 6,108 $230,844,706 100.00%
===== ============ ======
</TABLE>
UNDERWRITING STANDARDS
The following is a brief description of the various underwriting standards
and procedures applicable to the Mortgage Loans originated by Master
Financial, including the Title I Loans.
Master Financial
Generally, the underwriting standards of Master Financial with respect to
the mortgage loans originated or purchased by it place a greater emphasis on
the credit worthiness and debt service capacity of the borrower than on the
underlying collateral in evaluating the likelihood that a borrower will be
able to repay the related mortgage loan.
With respect to mortgage loans originated or purchased by Master Financial,
the collection of loan payments from the related borrowers is subject to
various risks from these borrowers, including without limitation the risk that
a borrower will not satisfy its debt service payments, including payments of
interest and principal on the related loan, and that the realizable value of
the related mortgaged property will not be sufficient to repay the outstanding
interest and principal owed on the loan. Master Financial uses its own credit
evaluation criteria to classify the borrowers of mortgage loans by risk class
as "A++" through "B" grade credits. Borrowers of Title I loans are generally a
"B" grade credit. These criteria include, as a significant component, the
credit score of the prospective borrower (as determined based on a credit
scoring model utilized by Master Financial). Additional criteria include the
borrower's debt-to-income ratio, mortgage credit history and consumer credit
history. Under Master Financial's underwriting standards, the most important
credit characteristic is the borrower's overall credit performance, including
the borrower's credit score and debt-to-income ratio, the latter of which
generally may not exceed 45% of the borrower's gross income.
Master Financial relies on a number of guidelines to assist underwriters in
the credit review and decision process. Such underwriting criteria provide for
the evaluation of a loan applicant's creditworthiness through the use of a
consumer credit report, verification of employment and a review of the debt-
to-income ratio of the applicant. Income is verified through various means,
including without limitation applicant interviews, written verifications with
employers, review of pay stubs or tax returns. The borrower must demonstrate
sufficient levels of disposable income to satisfy debt repayment requirements.
The underwriting standards require the mortgage loans originated or
purchased by Master Financial to have been fully documented. A prospective
borrower is required to fill out a detailed application providing pertinent
credit information.
S-18
<PAGE>
In determining the adequacy of the mortgaged property as collateral for a
mortgage loan originated or purchased by it in cases where the value assigned
to such mortgaged property is not the value thereof as stated in the related
borrower's application for the loan, Master Financial requires that a FNMA
drive-by appraisal, a uniform residential appraisal report completed within
the last 12 months, a statistical property valuation, a HUD-1/HUD-1A on the
purchase transaction of the mortgaged property completed within the last 12
months or a tax assessment provided by the title company be considered for
financing. The Mortgage Loans originated or purchased by Master Financial and
included in the Mortgage Pool generally were originated subject to a maximum
CLTV of 125%, and the related borrowers may have been permitted to retain a
limited amount of the proceeds of such Mortgage Loans. In addition, such
Mortgage Loans (other than the Title I Loans) were generally subject to a
maximum total monthly debt-to-income ratio of 50%. The Title I Loans were also
generally subject to a maximum total monthly debt-to-income ratio of 50%.
There can be no assurance that the CLTV or the debt-to-income ratio for any
Mortgage Loan will not increase from the levels established at origination.
Residential Funding
The underwriting standards of Residential Funding with respect to the
Mortgage Loans originated or purchased by it are substantially similar to the
underwriting standards applicable to the Mortgage Loans originated and
purchased by Master Financial.
Variations
The underwriting standards of both Master Financial and Residential Funding
with respect to mortgage loans originated or purchased by them may be varied
in appropriate cases. There can be no assurance that every Mortgage Loan in
the Mortgage Pool was originated in conformity with the applicable
underwriting standards in all material respects, or that the quality or
performance of the Mortgage Loans will be equivalent under all circumstances.
DESCRIPTION OF FHA INSURANCE UNDER TITLE I
General. 3.7% of the Mortgage Loans are partially insured under the Title I
program and have been originated thereunder. Under the Title I program, the
FHA is authorized and empowered to insure qualified lending institutions (the
"TITLE I LENDERS") against losses on eligible loans. The Title I program
operates as a coinsurance program in which the FHA insures up to 90% of
certain losses incurred on an individual insured loan, including the unpaid
Principal Balance of the loan, but only to the extent of the insurance
coverage available in the lender's FHA insurance coverage reserve account (an
"FHA RESERVE"). The owner of the loan bears the uninsured loss on each loan.
Title I Loans are required to have fixed interest rates and, generally,
provide for equal installment payments due weekly, biweekly, semi-monthly, or
monthly, except that a loan may be payable quarterly or semi-annually in
certain circumstances in order to correspond with the borrower's irregular
flow of income. The first or last payments (or both) may vary in amount but
may not exceed 150% of the regular installment payment, and the first payment
may be due no later than two months from the date the loan is funded. Multiple
payment schedules may not be used in connection with any loan. The note must
contain a provision permitting full or partial prepayment of the loan. The
interest rate must be negotiated and agreed to by the borrower and the Title I
Lender and must be fixed for the term of the loan and recited in the note.
Interest on a Title I Loan must accrue from the date of the loan and be
calculated according to the actuarial method. The Title I Lender must assure
that the note and all other documents evidencing the loan are in compliance
with applicable Federal, state and local laws.
The Title I program requires each lender to use prudent lending standards in
underwriting loans and to satisfy the applicable loan underwriting
requirements under the Title I program, prior to its approval of the loan.
Generally, the Title I Lender must exercise prudence and diligence to
determine whether the borrower and any co-maker is solvent and an acceptable
credit risk, with a reasonable ability to make payments on the loan. The Title
I Lender's credit application and review must determine whether the borrower's
income will be adequate
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to meet the periodic payments required by the loan, as well as the borrower's
other housing and recurring expenses, which determination must be made in
accordance with the expense-to-income ratios published by the Secretary of HUD
unless the lender determines and documents in the loan file the existence of
compensating factors concerning the borrower's creditworthiness which support
approval of the loan. See "--Underwriting Standards" herein.
UNDER THE TITLE I PROGRAM, THE FHA DOES NOT REVIEW OR APPROVE FOR
QUALIFICATION FOR INSURANCE ANY LOAN INSURED THEREUNDER AT THE TIME OF
APPROVAL BY THE LENDING INSTITUTION (AS IS TYPICALLY THE CASE WITH OTHER
FEDERAL LOAN INSURANCE PROGRAMS). If, after a loan has been made and reported
for insurance under Title I, the Title I Lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, the Title I Lender is required promptly
to report this to the FHA. In such case, provided that the validity of any
lien on the property has not been impaired, the insurance of the loan under
Title I will not be affected unless such material misstatement of fact or
misuse of loan proceeds was caused by (or was knowingly sanctioned by) the
lender or its employees.
Requirements for Title I Loans. The maximum principal amounts for home
improvement loans insured under Title I must not exceed the actual cost of the
project plus any applicable fees and charges allowed under the Title I
program. The maximum loan amount for a single family property improvement loan
is $25,000. Any Title I home improvement loan to a single borrower in excess
of $25,000 requires the prior approval of the Secretary of HUD. Generally, the
term of a Title I home improvement loan may not be less than six months nor
greater than 20 years and 32 days. A borrower may obtain multiple Title I home
improvement loans with respect to multiple properties, and a borrower may
obtain more than one Title I home improvement loan with respect to a single
property, as long as the total outstanding balance of all Title I home
improvement loans on the same property does not exceed the maximum loan amount
for the type of Title I home improvement loan thereon.
Borrower eligibility for a Title I home improvement loan requires that the
borrower have at least a one-half interest in either fee simple title to the
real property, a lease thereof for a fixed term expiring at least six months
after the final maturity of the Title I home improvement loan or a properly
recorded land installment contract for the purchase of the real property. Any
Title I home improvement loan in excess of $5,000 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or
deed of trust executed by the borrower and all other owners in fee simple. A
Title I home improvement loan in excess of $15,000 secured by non-owner
occupied property must have an appraised loan-to-value ratio not in excess of
100%.
The proceeds from a Title I home improvement loan may be used only to
finance property improvements which substantially protect or improve the basic
livability or utility of the property as disclosed in the loan application.
The Secretary of HUD has published a list of items and activities which cannot
be financed with proceeds from any Title I home improvement loans and from
time to time the Secretary of HUD may amend such list of items and activities.
The Title I Lender is required to conduct an on-site inspection on any Title I
home improvement loan where the original principal balance is $7,500 or more.
FHA Insurance Coverage. Under the Title I program, the FHA establishes an
FHA Reserve for each Title I Lender which has been granted a Title I insurance
contract. The amount of insurance coverage in this account is a maximum of 10%
of the amount disbursed, advanced or expended by the lender in originating or
purchasing eligible loans registered with the FHA for Title I insurance, with
certain adjustments. The balance in the FHA Reserve is the maximum amount of
insurance claims the FHA is required to pay to the Title I Lender. Loans to be
insured under the Title I program will be registered for insurance by the FHA
and the insurance coverage attributable to such loans will be included in the
FHA Reserve for the originating or purchasing lender following the receipt and
acknowledgment by the FHA of a loan report on the prescribed form pursuant to
the regulations promulgated by the FHA under Title I (the "TITLE I
REGULATIONS"). For each eligible loan reported and acknowledged for insurance,
the FHA charges a fee (the "INSURANCE PREMIUM"). For loans having a maturity
of 25 months or less, the FHA bills the lender for the entire Insurance
Premium in an amount equal to the product of 0.50% of the original loan amount
and the loan term. For home improvement loans with a maturity greater than 25
months, each year that a loan is outstanding the FHA bills the lender for an
Insurance Premium in an
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amount equal to 0.50% of the original loan amount. If a loan is prepaid during
the year, the FHA will not refund the Insurance Premium paid for such year. In
the Servicing Agreement, the Master Servicer will agree to pay all Insurance
Premiums required by FHA Regulations. If the Master Servicer fails to pay any
such premium, the Indenture Trustee or the successor Master Servicer is
obligated to pay such premium. The Indenture Trustee will be entitled to be
reimbursed from collections on the related Title I Loans.
Under the Title I program, 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 (the "TITLE I CONTRACT") 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 Title I Contract. 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.
Originations and acquisitions of new eligible loans will continue to
increase a Title I Lender's insurance coverage reserve account balance by the
lesser of (a) the amount of the FHA Insurance available for transfer at the
time of transfer to another qualified lender and (b) 10% of the amount
disbursed, advanced or expended in originating or acquiring such eligible
loans registered with the FHA for insurance under the Title I program. The
Secretary of HUD may transfer insurance coverage between FHA Reserves with
earmarking with respect to a particular insured loan or group of insured loans
when a determination is made that it is in the Secretary's interest to do so.
As described below under the caption "--Contract of Insurance," the insurance
coverage reserve funds will not be earmarked by the Secretary of HUD solely
for the Trust Fund.
The Title I Lender may transfer (except as collateral in a bona fide loan
transaction) insured loans and loans reported for insurance only to another
Title I Lender under a valid Title I Contract. Unless an insured loan is
transferred with recourse or with a guarantee or repurchase agreement, the
FHA, upon receipt of written notification of the transfer of such loan in
accordance with the Title I Regulations, will transfer from the transferor's
FHA Reserve to the transferee's FHA Reserve an amount, if available, equal to
10% of the actual purchase price or the net unpaid principal balance of such
loan (whichever is less). However, under the Title I program not more than
$5,000 in insurance coverage shall be transferred to or from a lender's
insurance coverage reserve account during any October 1 to September 30 fiscal
year without the prior approval of the Secretary of HUD.
Claims Procedures under Title I. Under the Title I program, the lender may
accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and full payment of
all amounts due under the loan is required and that, if the default persists,
the lender will report the default to an appropriate credit agency. The Title
I Lender may rescind the acceleration of maturity after full payment is due
and reinstate the loan only if the borrower brings the loan current, executes
a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the Title I
Lender may either (a) proceed against the related property under any security
instrument, or (b) make a claim under the Title I Lender's Title I Contract.
Generally Title I Lenders make a claim under their Title I Contract. The
availability of FHA Insurance following a default on a Title I Loan is subject
to a number of conditions, including strict compliance with FHA regulations in
origination and servicing the Title I Loan. If the Title I Lender chooses to
proceed against the property under a security instrument (or if it accepts a
voluntary conveyance or surrender of the property), the Title I Lender can
later file an insurance claim only with the prior approval of the Secretary of
HUD.
When a Title I Lender files an insurance claim with the FHA under the Title
I program, the FHA reviews the claim, the complete loan file certification of
compliance with applicable state and local laws in carrying out any
foreclosure or repossession, and where the borrower is in bankruptcy or
deceased evidence that the Title I
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Lender has properly filed proofs of claims. Generally, for any eligible home
improvement loan, a claim for reimbursement for loss must be filed with the
FHA no later than 9 months after the date of default, except in certain
circumstances pursuant to the Title I Regulations. Concurrently with filing
the insurance claim, the Title I Lender shall assign to the United States the
Title I Lender's entire interest in the loan note (or a judgment in lieu of
the note), in any security held and in any claim filed in any legal
proceedings. If, at the time the note is assigned to the United States, the
Secretary of HUD has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the Title I Lender. If either such defect is discovered after the FHA
has paid a claim, the FHA may require the Title I Lender to repurchase the
paid claim and to accept a reassignment of the loan note. If the Title I
Lender subsequently obtains a valid and enforceable judgment against the
borrower, the Title I Lender may resubmit a new insurance claim with an
assignment of the judgment. Although regulations permit the FHA to contest any
insurance claim and make a demand for repurchase of the loan at any time up to
two years from the date the claim was certified for payment (and may do so
thereafter in the event of fraud or misrepresentation on the part of the
lender), the FHA has expressed an intention to take such action within one
year from the date the claim was certified for payment.
Under the Title I program the amount of an FHA insurance claim payment, when
made, is equal to the Claimable Amount, up to the amount of insurance coverage
in the Title I Lender's FHA Reserve established by HUD. The "CLAIMABLE AMOUNT"
for home improvement loans is equal to 90% of the sum of: (a) the unpaid loan
obligation (net unpaid principal and the uncollected interest earned to the
date of default) with adjustments thereto if the Title I Lender has proceeded
against property security for such loan; (b) the interest on the unpaid amount
of the loan obligation from the date of default to the date of the claim's
initial submission for payment plus 15 calendar days (but not to exceed 9
months from the date of default), calculated at the rate of 7% per annum; (c)
the uncollected court costs; (d) the attorneys' fees not to exceed $500; and
(e) the expenses for recording the assignment of the security to the United
States.
Contract of Insurance. On the Closing Date, Residential Funding (the "TITLE
I CONTRACT HOLDER"), held, or will request for transfer in the name of the
Title I Contract Holder for the benefit of the Trust, the FHA Reserves in an
amount that is equal to $843,372, which is equal to approximately 10% of the
outstanding Cut-off Date Balance of the Title I Loans. With respect to those
Title I Loans for which FHA Insurance coverage reserves have not been
transferred to the Title I Contract Holder FHA Reserve by the Closing Date,
Master Financial will be required to take appropriate steps to cause the FHA
to transfer the appropriate amounts in FHA Reserves of Master Financial to
that of the Title I Contract Holder. To accomplish this transfer, on or after
the date in which Master Financial received the FHA Title I case numbers for
such Title I Loans, Master Financial will be required to submit a transfer of
note report to the Secretary of HUD regarding the conveyance of such Title I
Loans to the Owner Trustee. THERE CAN BE NO ASSURANCE THAT SUCH TRANSFER WILL
BE COMPLETED, OR THAT THE AMOUNT OF FHA RESERVES TRANSFERRED WILL EQUAL THE
AMOUNT SPECIFIED IN THE REPORT. The "FHA INSURANCE AMOUNT" shall mean on any
day of determination the initial FHA Insurance Amount plus all amounts
subsequently transferred by the Secretary of HUD to the Title I Contract
Holder's FHA Reserve account less the amount of FHA Insurance proceeds
previously received under the Title I Contract with respect to the Title I
Loans and any loans in Related Series Trusts (as described below) since the
related Transfer Date. The FHA Claims Administrator (as defined herein) shall
not submit any claim to the FHA if the amount of such claim would exceed the
FHA Insurance Amount applicable to the Title I Loans. All proceeds received in
respect of such claims under the Title I Contract shall be deposited into the
Payment Account.
It is anticipated that FHA Reserves will be held by the Title I Contract
Holder in respect of the Title I Loans included in the Mortgage Pool, as well
as other Title I Loans related to any subsequent series of trusts or otherwise
to which loans are sold directly or indirectly to Residential Funding
(collectively, the "RELATED SERIES TRUSTS"). The Secretary of HUD will not
earmark the insurance reserves held for the Title I Contract Holder for the
benefit of any particular Series. In the event the FHA Insurance is applied to
loans in a Related Series Trust other than the Trust, there may be
insufficient FHA Insurance to cover defaults on the FHA Loans.
The FHA Claims Administrator. Under Title I, the Trust is not eligible to
hold a Title I Contract. The FHA will not recognize the Trust or the
Noteholders as the owners of the Title I Contract, or any portion thereof,
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entitled to submit FHA claims. Residential Funding will serve as the
Administrator for FHA claims (the "FHA CLAIMS ADMINISTRATOR") pursuant to the
Servicing Agreement. The FHA Claims Administrator will be responsible for
administering, processing and submitting FHA claims with respect to the
Contracts of Insurance. The holders of the Offered Notes 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. Such holders'
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 Servicing Agreement. These functions are
obligations of the FHA Claims Administrator but not of the FHA.
RESIDENTIAL FUNDING
Residential Funding will be responsible for master servicing the Mortgage
Loans. Such responsibilities will include the receipt of funds from Master
Financial, the reconciliation of servicing activity with respect to the
Mortgage Loans, investor reporting, remittances to the Indenture Trustee and
the Owner Trustee to accommodate payments to Securityholders and consulting
with Master Financial with respect to Mortgage Loans that are delinquent and
with respect to the related servicing policies, notices and other
responsibilities. Management and liquidation of Mortgaged Properties acquired
by foreclosure or deed in lieu of foreclosure, as well as other loss
mitigation procedures conducted by Master Financial, will be reviewed by
Residential Funding. Neither the Master Servicer nor Master Financial will be
required to make advances in respect of delinquent payments of principal and
interest on the Mortgage Loans.
For information regarding foreclosure procedures, see "Servicing of Trust
Assets-Realization Upon Defaulted Loans" in the Prospectus. Servicing and
charge-off policies and collection practices may change over time in
accordance with Residential Funding's business judgment, changes in
Residential Funding's portfolio of mortgage loans of the types included in the
Mortgage Pool that it services for its clients and applicable laws and
regulations, and other considerations.
Residential Funding serves as the master servicer for closed-end second lien
mortgage loans. As of May 31, 1997, Residential Funding was master servicing
approximately 9,221 of such mortgage loans totalling approximately $301
million. Residential Funding has not had sufficient experience in master
servicing the types of mortgage loans comprising the Mortgage Pool to provide
meaningful disclosure of its delinquency and loss experience with respect to
such mortgage loans.
THE SERVICER
Primary servicing of the Mortgage Loans will be provided by Master Financial
(in such capacity, the "SERVICER"). Master Financial is engaged in the
mortgage banking business, including the origination, purchase, sale and
servicing of closed-end first, second and third lien mortgage loans. As of May
31, 1997, Master Financial was servicing approximately 14,339 closed-end
first, second and third lien mortgage loans, totalling approximately $470
million. Master Financial's executive offices are located in Orange,
California. Master Financial has not had sufficient experience servicing the
types of mortgage loans comprising the Mortgage Pool to provide meaningful
disclosure of its delinquency and loss experience with respect to such
mortgage loans.
Although Master Financial is not an affiliate of Residential Funding, Master
Financial has a lending arrangement with Residential Funding, and in
connection therewith, Residential Funding has the right to acquire an equity
interest in Master Financial in accordance with specified terms and
conditions.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Cut-off Date. Prior to the issuance of the Offered
Notes, Mortgage Loans may be removed from the Mortgage Pool as a result of
incomplete
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documentation or otherwise, if the Depositor deems such removal necessary or
appropriate. A limited number of other mortgage loans may be added to the
Mortgage Pool prior to the issuance of the Offered Notes. The Depositor
believes that the information set forth herein will be substantially
representative of the characteristics of the Mortgage Pool as it will be
constituted at the time the Offered Notes are issued although the range of
Mortgage Rates and maturities and certain other characteristics of the
Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the Offered
Notes and will be filed, together with the Servicing Agreement, the Indenture,
the Trust Agreement and the Mortgage Loan Purchase Agreements (as defined
herein), with the Commission within fifteen days after the initial issuance of
the Offered Notes. In the event Mortgage Loans are removed from or added to
the Mortgage Pool as described in the preceding paragraph, such removal or
addition will be noted in the Current Report on Form 8-K.
THE ISSUER
GENERAL
The Home Loan Trust 1997-HI3 is a business trust formed under the laws of
the State of Delaware pursuant to the Trust Agreement dated as of June 26,
1997 between the Depositor and the Owner Trustee for the purposes described in
this Prospectus Supplement. The Trust Agreement constitutes the "governing
instrument" under the laws of the State of Delaware relating to business
trusts. After its formation, the Issuer will not engage in any activity other
than (i) acquiring and holding the Mortgage Loans and the other assets of the
Issuer and proceeds therefrom, (ii) issuing the Notes and the Certificates (or
issuing additional classes of notes or certificates, subordinate to the
interests of the Noteholders and the Credit Enhancer, as and to the extent
permitted under the Trust Agreement and the Indenture), (iii) making payments
on the Notes and the Certificates and (iv) engaging in other activities that
are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto or connected therewith.
The Issuer's principal offices are in Wilmington, Delaware, in care of
Wilmington Trust Company, as Owner Trustee, at the address listed below.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust Agreement. The
Owner Trustee is a Delaware banking corporation and its principal offices are
located in Wilmington, Delaware.
Neither the Owner Trustee nor any director, officer or employee of the Owner
Trustee will be under any liability to the Issuer or the Securityholders for
any action taken or for refraining from the taking of any action in good faith
pursuant to the Trust Agreement or for errors in judgment; provided, however,
that none of the Owner Trustee and any director, officer or employee thereof
will be protected against any liability which would otherwise be imposed by
reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
Trust Agreement. All persons into which the Owner Trustee may be merged or
with which it may be consolidated or any person resulting from such merger or
consolidation shall be the successor of the Owner Trustee under the Trust
Agreement.
THE INDENTURE TRUSTEE
The Chase Manhattan Bank, a New York State banking corporation, is the
Indenture Trustee under the Indenture. The principal offices of the Indenture
Trustee are located in New York, New York.
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THE CREDIT ENHANCER
The following information has been supplied by AMBAC Indemnity Corporation
(the "CREDIT ENHANCER") for inclusion in this Prospectus Supplement. No
representation is made by the Depositor, the Master Servicer, the Underwriter
or any of their affiliates as to the accuracy or completeness of such
information.
The Credit Enhancer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and Guam. The Credit Enhancer primarily
insures newly issued municipal and structured finance obligations. The Credit
Enhancer is a wholly owned subsidiary of AMBAC Inc., a 100% publicly-held
company. Moody's, Standard & Poor's and Fitch Investors Service, L.P. have
each assigned a triple-A claims-paying ability rating to the Credit Enhancer.
The consolidated financial statements of the Credit Enhancer and its
subsidiaries as of December 31, 1996 and December 31, 1995, and for the three
years ended December 31, 1996, prepared in accordance with generally accepted
accounting principles, included in the Current Report on Form 8-K of AMBAC
Inc. (which was filed with the Commission on March 12, 1997; Commission File
Number 1-10777) and the consolidated financial statements of the Credit
Enhancer and its subsidiaries as of March 31, 1997 and for the periods ending
March 31, 1997 and March 31, 1996 included in the Quarterly Report on Form 10-
Q of AMBAC Inc. for the period ended March 31, 1997 (which was filed with the
Commission on May 15, 1997), are hereby incorporated by reference into this
Prospectus Supplement and shall be deemed to be a part hereof. Any statement
contained in a document incorporated herein by reference shall be modified or
superseded for the purposes of this Prospectus Supplement to the extent that a
statement contained herein by reference herein also modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of the Credit Enhancer and its subsidiaries
included in documents filed by AMBAC Inc. with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Offered Notes shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The following table sets forth the Credit Enhancer's capitalization as of
December 31, 1994, December 31, 1995, December 31, 1996 and March 31, 1997,
respectively, in conformity with generally accepted accounting principles.
AMBAC INDEMNITY CORPORATION
CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996 1997
------------ ------------ ------------ ----------
(AUDITED) (AUDITED) (AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Unearned premiums........... $ 840 $ 906 $ 995 $1,003
Other liabilities........... 136 295 259 243
------ ------ ------ ------
Total liabilities........... $ 976 $1,201 $1,254 $1,246
------ ------ ------ ------
Stockholder's equity:
Common Stock.............. $ 82 $ 82 $ 82 $ 82
Additional paid-in
capital................... 444 481 515 519
Unrealized gains (losses)
on investments; net of
tax....................... (46) 87 66 30
Retained earnings......... 782 907 992 1,034
------ ------ ------ ------
Total stockholder's equity.. $1,262 $1,557 $1,655 $1,665
------ ------ ------ ------
Total liabilities and
stockholder's equity........ $2,238 $2,758 $2,909 $2,911
====== ====== ====== ======
</TABLE>
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For additional financial information concerning the Credit Enhancer, see the
audited and unaudited financial statements of the Credit Enhancer incorporated
by reference herein. Copies of the financial statements of the Credit Enhancer
incorporated herein by reference and copies of the Credit Enhancer's annual
statement for the year ended December 31, 1996 prepared in accordance with
statutory accounting standards are available, without charge, from the Credit
Enhancer. The address of the Credit Enhancer's administrative offices and its
telephone number are One State Street Plaza, 17th Floor, New York, New York
10004 and (212) 668-0340.
The Credit Enhancer makes no representation regarding the Offered Notes or
the advisability of investing in the Offered Notes and makes no representation
regarding, nor has it participated in the preparation of, this Prospectus
Supplement other than the information supplied by the Credit Enhancer and
presented under the headings "The Credit Enhancer" and "Description of the
Policy" and in the financial statements incorporated herein by reference.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
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DESCRIPTION OF THE SECURITIES
GENERAL
The Class A-PB Notes and the Class A-PV Notes will be issued pursuant to the
Indenture dated as of June 26, 1997 between the Issuer and The Chase Manhattan
Bank, as Indenture Trustee. The Certificates will be issued pursuant to the
Trust Agreement dated as of June 26, 1997 between the Depositor and Wilmington
Trust Company, as Owner Trustee. The following summaries describe certain
provisions of the Securities, the Indenture and the Trust Agreement. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the applicable agreement.
Only the Class A-PB Notes are offered hereby.
The Offered Notes will be secured equally and ratably with the Class A-PV
Notes by the Trust Fund pledged by the Issuer to the Indenture Trustee
pursuant to the Indenture, which will consist of: (i) the Mortgage Loans; (ii)
all amounts on deposit in the Payment Account; (iii) the Policy; and (iv)
proceeds of the foregoing, including any FHA Insurance.
BOOK-ENTRY ONLY NOTES
The Offered Notes will initially be issued as Book-Entry Only Notes. Offered
Note Owners may elect to hold their Offered Notes through DTC in the United
States, or CEDEL or Euroclear, in Europe if they are Participants of such
systems, or indirectly through organizations which are Participants in such
systems. The Book-Entry Only Notes will be issued in one or more securities
which equal the aggregate principal balance of the Offered Notes and will
initially be registered in the name of Cede & Co., the nominee of DTC. CEDEL
and Euroclear will hold omnibus positions on behalf of their Participants
through customers' securities accounts in CEDEL's and Euroclear's names on the
books of their respective depositaries (in such capacities, individually the
"RELEVANT DEPOSITARY" and collectively the "EUROPEAN DEPOSITARIES") which in
turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Investors may hold such beneficial
interests in the Book-Entry Only Notes in minimum denominations representing
Note Balances of $1,000 and in integral multiples of $1,000 in excess thereof.
Except as described below, no Offered Note Owner will be entitled to receive a
physical certificate representing such security (a "DEFINITIVE NOTE"). Unless
and until Definitive Notes are issued, it is anticipated that the only
"HOLDER" of the Offered Notes will be Cede & Co., as nominee of DTC. Offered
Note Owners will not be Holders as that term is used in the Indenture.
The Offered Note Owner's ownership of a Book-Entry Only Note will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "FINANCIAL INTERMEDIARY") that maintains
the Offered Note Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Only Notes will be recorded on the
records of DTC (or of a Participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the records
of DTC, if the Offered Note Owner's Financial Intermediary is not a DTC
Participant and on the records of CEDEL or Euroclear, as appropriate).
Offered Note Owners will receive all payments of principal of, and interest
on, the Offered Notes from the Indenture Trustee through DTC and DTC
Participants. While the Offered Notes are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "RULES"), DTC is required
to make book-entry transfers among Participants on whose behalf it acts with
respect to the Offered Notes and is required to receive and transmit payments
of principal of, and interest on, the Offered Notes. Participants and Indirect
Participants with whom Offered Note Owners have accounts with respect to
Offered Notes are similarly required to make book-entry transfers and receive
and transmit such payments on behalf of their respective Offered Note Owners.
Accordingly, although Offered Note Owners will not possess physical
certificates, the Rules provide a mechanism by which Offered Note Owners will
receive payments and will be able to transfer their interest.
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Offered Note Owners will not receive or be entitled to receive Definitive
Notes representing their respective interests in the Offered Notes, except
under the limited circumstances described below. Unless and until Definitive
Notes are issued, Offered Note Owners who are not Participants may transfer
ownership of Offered Notes only through Participants and Indirect Participants
by instructing such Participants and Indirect Participants to transfer the
Offered Notes, by book-entry transfer, through DTC for the account of the
purchasers of such Offered Notes, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Offered Notes will be executed through
DTC and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and Indirect Participants will make
debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Offered Note Owners.
Under a book-entry format, Offered Note Owners of the Book-Entry Only Notes
may experience some delay in their receipt of payments, since such payments
will be forwarded by the Indenture Trustee to Cede & Co. Payments with respect
to Offered Notes held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such payments will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Because DTC
can only act on behalf of Financial Intermediaries, the ability of a Offered
Note Owner to pledge Book-Entry Only Notes to persons or entities that do not
participate in the Depositary system, or otherwise take actions in respect of
such Book-Entry Only Notes, may be limited due to the lack of physical
certificates for such Book-Entry Only Notes. In addition, issuance of the
Book-Entry Only Notes in book-entry form may reduce the liquidity of such
Offered Notes in the secondary market since certain potential investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Only Notes under the Indenture only at the direction
of one or more Financial Intermediaries to whose DTC accounts the Book-Entry
Only Notes are credited, to the extent that such actions are taken on behalf
of Financial Intermediaries whose holdings include such Book-Entry Only Notes.
CEDEL or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by holders of Offered Notes under the Indenture
on behalf of a CEDEL Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect such actions on its behalf through DTC. DTC may
take actions, at the direction of the related Participants, with respect to
some Offered Notes which conflict with actions taken with respect to other
Offered Notes.
Definitive Notes will be issued to Offered Note Owners of the Book-Entry
Only Notes, or their nominees, rather than to DTC, if (a) the Indenture
Trustee determines that the DTC is no longer willing, qualified or able to
discharge properly its responsibilities as nominee and depository with respect
to the Book-Entry Only Notes and the Indenture Trustee is unable to locate a
qualified successor, (b) the Indenture Trustee elects to terminate a book-
entry system through DTC or (c) after the occurrence of an Event of Default,
pursuant to the Indenture, Offered Note Owners having Percentage Interests
aggregating at least a majority of the Note Balances of the Offered Notes
advise the DTC through the Financial Intermediaries and the DTC Participants
in writing that the continuation of a book-entry system through DTC (or a
successor thereto) is no longer in the best interests of Offered Note Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all
Offered Note Owners of the occurrence of such event and the availability
through DTC of Definitive Notes. Upon surrender by DTC of the global
certificate or certificates representing the Book-Entry Only Notes and
instructions for re-registration, the Indenture Trustee will issue and
authenticate Definitive Notes, and thereafter the Indenture Trustee will
recognize the holders of such Definitive Notes as Holders under the Indenture.
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Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Offered Notes among Participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
For additional information regarding DTC, CEDEL, Euroclear and the Offered
Notes, see "Description of the Notes--Form of Notes" in the Prospectus.
PAYMENTS
Payments on the Offered Notes will be made by the Indenture Trustee or the
Paying Agent on the 25th day of each month or, if such day is not a Business
Day, then the next succeeding Business Day, commencing in July 1997. Payments
on the Offered Notes will be made to the persons in whose names such Notes are
registered at the close of business on the day prior to each Payment Date or,
if the Offered Notes are no longer Book-Entry Only Notes, on the Record Date.
See "Description of the Notes--Payments" in the Prospectus. Payments will be
made by check or money order mailed (or, in the case of Book-Entry Only Notes
and otherwise, upon the request of a Holder owning Offered Notes having
denominations aggregating at least $1,000,000, by wire transfer or otherwise)
to the address of the person entitled thereto (which, in the case of Book-
Entry Only Notes, will be DTC or its nominee) as it appears on the Security
Register in amounts calculated as described herein on the Determination Date.
However, the final payment in respect of the Offered Notes will be made only
upon presentation and surrender thereof at the office or the agency of the
Indenture Trustee specified in the notice to Holders of such final payment. A
"BUSINESS DAY" is any day other than (i) a Saturday or Sunday or (ii) a day on
which banking institutions in the State of California, Minnesota, New York,
Illinois or Delaware are required or authorized by law to be closed.
INTEREST PAYMENTS ON THE OFFERED NOTES
Interest payments will be made on the Offered Notes on each Payment Date at
the related Note Rate on a pro rata basis with the interest payable on the
Class A-PV Notes for such Payment Date. The "NOTE RATE" for the Offered Notes
will be the fixed rate set forth on the cover hereof.
Interest on the Securities in respect of any Payment Date will accrue on the
applicable Note Balance on the basis of a 30-day month and a 360-day year.
Interest payments on the Securities will be funded from payments on the
Mortgage Loans and, if necessary, from draws on the Policy.
PRINCIPAL PAYMENTS ON THE OFFERED NOTES
On each Payment Date, other than the Payment Date in December 2022,
principal payments will be due and payable on the Offered Notes in an amount
equal to their pro rata portion of the Principal Collection Distribution
Amount, together with their pro rata portion of any Reserve Increase Amounts
and Liquidation Loss Distribution Amounts (each as defined below) for such
Payment Date, as and to the extent described below. On the Payment Date in
December 2022, principal will be due and payable on the Offered Notes in an
amount equal to the Note Balance, if any, thereof on such Payment Date. In no
event will principal payments on the Offered Notes on any Payment Date exceed
the Note Balance thereof on such date.
ALLOCATION OF PAYMENTS ON THE MORTGAGE LOANS
The Master Servicer on behalf of the Trust will establish an account (the
"PAYMENT ACCOUNT") into which the Master Servicer will deposit P&I Collections
for each Payment Date on the Business Day prior thereto. The Payment Account
will be an Eligible Account and amounts on deposit in the Payment Account will
be invested in Permitted Investments.
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On each Payment Date, P&I Collections will be allocated from the Payment
Account in the following order of priority:
(i) to pay accrued interest due on the Note Balances of the Notes, with
such interest allocated on a pro rata basis between the Offered Notes and
the Class A-PV Notes;
(ii) to pay principal in an amount equal to the Principal Collection
Distribution Amount for such Payment Date on the Notes, with such amount
allocated on a pro rata basis between the Offered Notes and the Class A-PV
Notes;
(iii) to pay as principal on the Notes, an amount equal to (A) 100% of
the Liquidation Loss Amounts (other than any Excess Loss Amounts) on such
Payment Date, plus (B) any such Liquidation Loss Amounts (other than any
Excess Loss Amounts) remaining unpaid from any preceding Payment Date
(together with interest thereon from the date initially distributable to
the date paid), provided, that any such Liquidation Loss Amount shall not
be required to be paid to the extent that such Liquidation Loss Amount was
paid on the Notes by means of a draw on the Policy or was reflected in the
reduction of the Outstanding Reserve Amount (the aggregate amount so paid
under this clause (iii) on any Payment Date, a "LIQUIDATION LOSS
DISTRIBUTION AMOUNT"), and any such amounts paid will be allocated on a pro
rata basis between the Offered Notes and the Class A-PV Notes;
(iv) to pay the Credit Enhancer the premium for the Policy and any
previously unpaid premiums for the Policy (with interest thereon);
(v) to reimburse the Credit Enhancer for prior draws made on the Policy
(with interest thereon) (other than those attributable to Excess Loss
Amounts);
(vi) to pay principal on the Notes, an additional amount to the extent
necessary to bring the Outstanding Reserve Amount up to the Reserve Amount
Target (the aggregate amount so paid on any Payment Date, the "RESERVE
INCREASE AMOUNT"), with any such amount paid to be allocated on a pro rata
basis between the Offered Notes and the Class A-PV Notes;
(vii) to pay the Credit Enhancer any other amounts owed pursuant to the
Insurance Agreement; and
(viii) any remaining amounts to the holders of the Certificates.
For any Payment Date, the "PRINCIPAL COLLECTION DISTRIBUTION AMOUNT" will
equal Principal Collections for such Payment Date, provided however, on any
Payment Date with respect to which the Outstanding Reserve Amount that would
result without regard to this proviso exceeds the Reserve Amount Target, the
Principal Collection Distribution Amount will be reduced by the amount of such
excess until the Outstanding Reserve Amount equals the Reserve Amount Target.
"LIQUIDATION LOSS AMOUNT" means with respect to any Liquidated Mortgage
Loan, the unrecovered Principal Balance thereof and any unpaid accrued
interest thereon at the end of the related Collection Period in which such
Mortgage Loan became a Liquidated Mortgage Loan, after giving effect to the
Net Liquidation Proceeds allocable to such Principal Balance in connection
therewith and any proceeds of FHA Insurance, if applicable.
A "LIQUIDATED MORTGAGE LOAN" means, as to any Payment Date, any Mortgage
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. In addition, the Master Servicer will treat any Mortgage
Loan that is 180 days or more delinquent as having been finally liquidated.
As to any Payment Date prior to the Payment Date in June 2000, the Reserve
Amount Target will be 9.00% of the Cut-off Date Balance. The "STEPDOWN DATE"
shall be the later of (i) the Payment Date in June 2000 and (ii) the Payment
Date on which the Pool Balance as of such Payment Date is less than 50% of the
Cut-off Date Balance. On or after the Stepdown Date, the Reserve Amount Target
will be equal to the lesser of (a) the Reserve
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Amount Target as of the Cut-off Date and (b) 18% of the Pool Balance as of the
beginning of the related Collection Period (but not lower than $3,462,671
(1.50% of the Cut-off Date Balance)); provided however that any scheduled
reduction to the Reserve Amount Target described above shall not be made as of
any Payment Date unless (i)(a) the aggregate cumulative Liquidation Loss
Amounts on the Mortgage Loans prior to any such Payment Date occurring during
the first year, the second year or the third year (or any year thereafter)
after the Stepdown Date are less than 7.0%, 8.0% and 9.0% respectively, of the
aggregate Pool Balance or (b) the average Liquidation Loss Amount on the
Mortgage Loans for the current and five previous Payment Dates is less than
half of the amount remaining in the Payment Account on such Payment Date
following payments pursuant to clauses (i) through (v) of the fourth preceding
paragraph above (other than clause (iii)) and (ii) there has been no draw on
the Policy on such Payment Date that remains unreimbursed. In addition, the
Reserve Amount Target may be reduced with the prior written consent of the
Credit Enhancer and the Rating Agencies.
To the extent the Reserve Amount Target decreases on any Payment Date, the
amount of the Principal Collection Distribution Amount will be reduced on such
Payment Date and on each subsequent Payment Date to the extent the remaining
Outstanding Reserve Amount is in excess of the reduced Reserve Amount Target
until the Outstanding Reserve Amount equals the Reserve Amount Target.
The "NOTE BALANCE" of any Note on any day is the initial balance thereof as
of the Closing Date reduced by all payments of principal thereon prior to and
as of such day.
OUTSTANDING RESERVE AMOUNT
The Outstanding Reserve Amount will initially be approximately 3.50% of the
Cut-off Date Balance, and will be increased by payments of the Reserve
Increase Amount, if any, to the Noteholders. On each Payment Date, the
Outstanding Reserve Amount (as in effect immediately prior to such Payment
Date), if any, shall be deemed to be reduced by an amount equal to any
Liquidation Loss Amounts (other than any Excess Loss Amounts) for such Payment
Date, except to the extent that such Liquidation Loss Amounts were covered on
such Payment Date by a Liquidation Loss Distribution Amount (which amount
would be so paid, if available, from any excess interest collections for such
Payment Date). Any Liquidation Loss Amounts not so covered will be covered by
draws on the Policy to the extent provided herein. However, any Excess Loss
Amounts are required to be covered by a draw on the Policy in all cases,
without regard to the availability of the Outstanding Reserve Amount, and the
Outstanding Reserve Amount will not be reduced by any Excess Loss Amount under
any circumstances. The "OUTSTANDING RESERVE AMOUNT" available on any Payment
Date is the amount, if any, by which (i) the Pool Balance as of the end of the
related Collection Period exceeds (ii) the aggregate Note Balance of all of
the Notes on such Payment Date (after application of Principal Collections for
such date).
To the extent that the Outstanding Reserve Amount is insufficient or not
available to absorb Liquidation Loss Amounts that are not covered by the
Liquidation Loss Distribution Amount, if payments are not made under the
Policy as required, the holders of the Offered Notes may incur a loss on a pro
rata basis with the holders of the Class A-PV Notes.
EXCESS LOSS AMOUNT
On any Payment Date, the "EXCESS LOSS AMOUNT" will be equal to the sum of
(i) any Liquidation Loss Amounts (other than as described in clauses (ii)-
(iii) below) for the related Collection Period which, when added to the
aggregate of such Liquidation Loss Amounts for all preceding Collection
Periods exceed $46,168,941, (ii) any Special Hazard Losses in excess of the
Special Hazard Amount, and (iii) certain losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks as described in the Indenture. Excess Loss Amounts will not be covered
by any Liquidation Loss Distribution Amount or by a reduction in the
Outstanding Reserve Amount. Any Excess Loss Amounts however, will be covered
by the Policy, and in the event payments are not made as required under the
Policy, such losses will be allocated on a pro rata basis between the Offered
Notes and the Class A-PV Notes based on the outstanding Note Balances thereof.
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The "SPECIAL HAZARD AMOUNT" shall initially be equal to $2,308,447. As of
any date of determination following the Cut-off Date, the Special Hazard
Amount will equal the initial amount thereof less the sum of (A) the aggregate
of any Liquidation Loss Amounts on the Mortgage Loans due to Special Hazard
Losses and (B) the Adjustment Amount. The Adjustment Amount will be equal to
an amount calculated pursuant to the terms of the Indenture.
THE PAYING AGENT
The Paying Agent will initially be the Indenture Trustee, together with any
successor thereto. The Paying Agent will have the revocable power to withdraw
funds from the Payment Account for the purpose of making payments to the
Noteholders.
MATURITY AND OPTIONAL REDEMPTION
The Offered Notes will be payable in full on the Payment Date in December
2022, to the extent of the related outstanding Note Balance on such date, if
any. In addition, a principal payment may be made in partial or full
redemption of the Offered Notes after the aggregate Principal Balance of the
Notes is reduced to an amount less than or equal to $23,084,471 (10% of the
aggregate Principal Balance thereof as of the Cut-off Date), upon the exercise
by the Master Servicer of its option to purchase all or a portion of the
Mortgage Loans and related assets. In the event that all of the Mortgage Loans
are purchased by the Master Servicer, the purchase price will be equal to the
sum of the outstanding Pool Balance and accrued and unpaid interest thereon at
the weighted average of the Mortgage Rates through the day preceding the
Payment Date on which such purchase occurs together with all amounts due and
owing to the Credit Enhancer.
In the event that a portion of the Mortgage Loans are purchased by the
Master Servicer, the purchase price will be equal to the sum of the aggregate
Principal Balances of the Mortgage Loans so purchased and accrued and unpaid
interest thereon at the weighted average of the related Mortgage Rates on such
Mortgage Loans through the day preceding the Payment Date on which such
purchase occurs, together with all amounts due and owing to the Credit
Enhancer with respect to the Mortgage Loans so purchased. Any such purchase
will be subject to satisfaction of certain conditions specified in the
Servicing Agreement, including: (i) the Master Servicer shall have delivered
to the Indenture Trustee a mortgage loan schedule containing a list of all
Mortgage Loans remaining in the Trust after such removal; (ii) the Master
Servicer shall represent and warrant that no selection procedures reasonably
believed by the Master Servicer to be adverse to the interests of the
Securityholders or the Credit Enhancer were used by the Master Servicer in
selecting such Mortgage Loans; and (iii) each Rating Agency shall have been
notified of the proposed retransfer and shall not have notified the Master
Servicer that such retransfer would result in a reduction or withdrawal of the
ratings of the Offered Notes without regard to the Policy.
DESCRIPTION OF THE POLICY
On the Closing Date, the Credit Enhancer will issue the Policy in favor of
the Owner Trustee on behalf of the Issuer. The Policy will unconditionally and
irrevocably guarantee certain payments on the Notes. On each Payment Date, a
draw will be made on the Policy equal to the sum of (a) the amount by which
accrued interest on the Notes at the related Note Rates on such Payment Date
exceeds the amount on deposit in the Payment Account available for interest
payments on such Payment Date, (b) any Liquidation Loss Amount (other than any
Excess Loss Amount) for such Payment Date, to the extent not currently covered
by a Liquidation Loss Distribution Amount or a reduction in the Outstanding
Reserve Amount and (c) any Excess Loss Amount for such Payment Date. For
purposes of the foregoing, amounts in the Payment Account available for
interest payments on any Payment Date shall be deemed to include all amounts
available in the Payment Account for such Payment Date, other than the
Principal Collection Distribution Amount and the Liquidation Loss Distribution
Amount (if any). Pursuant to the terms of the Indenture, draws under the
Policy in respect of any Liquidation Loss Amount will be paid to the
Noteholders by the Paying Agent, as principal, on a pro rata basis
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between the Offered Notes and the Class A-PV Notes. In addition, a draw will
be made on the Policy to cover certain shortfalls in amounts allocable to the
Noteholders following the sale, liquidation or other disposition of the assets
of the Trust in connection with either (a) the liquidation of the Trust Fund
as permitted under the Indenture following an Event of Default thereunder, or
(b) a termination of the Issuer as required under the Trust Agreement in the
event of the bankruptcy of the Holder of the Certificates designated as the
"Designated Certificates" in the Trust Agreement. In addition, the Policy will
guarantee the payment of the outstanding Note Balance of each Note on the
Payment Date in December 2022. In the absence of payments under the Policy,
holders of the Offered Notes will directly bear the credit risks associated
with their investment to the extent such risks are not covered by their pro
rata share of the Outstanding Reserve Amount or otherwise.
Notwithstanding the foregoing paragraph, the Policy will not cover any
shortfalls attributable to the liability of the Issuer or the Indenture
Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability).
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yields to maturity and the aggregate amount of payments on the Offered
Notes 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
Liquidation Loss Amounts. The rate of default of mortgage loans secured by
second and third liens may be greater than that of mortgage loans secured by
first liens. In addition, 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
Liquidation Loss Amounts 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 and Prepayment Considerations"), no assurance can be given as to such
rate or the timing of principal payments on the Offered Notes.
The Mortgage Loans generally may be prepaid by the Mortgagors at any time;
however, in certain circumstances, the Mortgage Loans will be subject to a
prepayment charge for prepayments. See "Description of the Mortgage Pool
herein. In addition, as described under "Description of the Mortgage Loans--
Mortgage Pool Characteristics," some of the Mortgage Loans are assumable
pursuant to the terms of the Mortgage Note, and the remainder are subject to
customary due-on-sale provisions. The Master Servicer shall enforce any due-
on-sale clause contained in any Mortgage Note or Mortgage, to the extent
permitted under applicable law and governmental regulations; provided,
however, if the Master Servicer determines that it is reasonably likely that
any Mortgagor will bring, or if any Mortgagor does bring, legal action to
declare invalid or otherwise avoid enforcement of a due-on-sale clause
contained in any Mortgage Note or Mortgage, the Master Servicer shall not be
required to enforce the due-on-sale clause or to contest such action. The
extent to which certain of the Mortgage 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 Offered Notes and may result in a prepayment experience on
such Mortgage Loans that differs from that on other conventional mortgage
loans. See "Maturity and Prepayment Considerations" in the Prospectus.
Prepayments, liquidations and purchases of the Mortgage Loans will result in
payments to holders of the Offered Notes of principal amounts which would
otherwise be paid over the remaining terms of the Mortgage Loans. Factors
affecting prepayment (including defaults and liquidations) of mortgage loans
include changes in Mortgagors' housing needs, job transfers, unemployment,
Mortgagors' net equity in the mortgaged properties, changes in the value of
the mortgaged properties, mortgage market interest rates, solicitations and
servicing decisions. In
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addition, if prevailing mortgage 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 rates rose
significantly above the Mortgage Rates on the Mortgage Loans, the rate of
prepayments on the Mortgage Loans would be expected to decrease. Furthermore,
since mortgage loans secured by second and third liens are not generally
viewed by borrowers as permanent financing and generally carry a high rate of
interest, the Mortgage Loans may experience a higher rate of prepayments than
traditional mortgage loans. Prepayment of the related first lien may also
affect the rate of prepayments on the Mortgage Loans.
The yield to maturity of the Offered Notes will depend on whether, to what
extent, and the timing with respect to which, any Reserve Increase Amount is
used to accelerate payments of principal on the Offered Notes or the Reserve
Amount Target is reduced. See "Description of the Securities--
Overcollateralization" herein.
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. The rate of default of mortgage loans secured by second and third liens
is likely to be greater than that of mortgage loans secured by first liens on
comparable properties. The rate of default 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 and Prepayment Considerations" and
"Risk Factors" in the Prospectus.
In addition, the yield to maturity on the Offered Notes will depend on,
among other things, the price paid by the holders of such Notes and the
related Note Rate. The extent to which the yield to maturity of an Offered
Note is sensitive to prepayments will depend, in part, upon the degree to
which it is purchased at a discount or premium. In general, if an Offered Note
is purchased at a premium and principal payments thereon occur at a rate
faster than assumed at the time of purchase, the investor's actual yield to
maturity will be lower than that anticipated at the time of purchase.
Conversely, if an Offered Note is purchased at a discount and principal
payments 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
anticipated at the time of purchase. For additional considerations relating to
the yield on the Offered Notes, see "Yield and Prepayment Considerations" in
the Prospectus.
Weighted Average Life: 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
payment to the investor of each dollar paid in reduction of principal of such
security (assuming no losses). The weighted average life of the Offered Notes
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.
The prepayment model used in this Prospectus Supplement (the "PREPAYMENT
ASSUMPTION") represents an assumed rate of prepayment each month relative to
the then outstanding principal balance of a pool of mortgage loans. A 100%
Prepayment Assumption assumes a constant prepayment rate ("CPR") of 2% 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 1% per annum
in each month thereafter until the thirteenth month. Beginning in the
thirteenth month and in each month thereafter during the life of the mortgage
loans, a 100% Prepayment Assumption assumes a CPR of 13% per annum each month.
As used in the table below, a 50% Prepayment Assumption assumes prepayment
rates equal to 50% of the Prepayment Assumption. Correspondingly, a 150%
Prepayment Assumption assumes prepayment rates equal to 150% of the Prepayment
Assumption, and so forth. The Prepayment Assumption 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.
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
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<PAGE>
Trust Fund as described under "Description of the Mortgage Pool" herein and
the performance thereof. The table assumes, among other things, that: (i) the
Mortgage Pool consists of five groups of Mortgage Loans, with the Mortgage
Loans in each group having the following aggregate characteristics as of the
Cut-off Date:
<TABLE>
<CAPTION>
INITIAL
AGGREGATE
SERVICING FEE
AGGREGATE MORTGAGE RATE AND POLICY ORIGINAL TERM REMAINING
GROUP PRINCIPAL BALANCE RATE PREMIUM RATE TO MATURITY TERM
----- ----------------- -------- --------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
1....... $ 958,122 14.01% 1.70% 59 57
2....... $ 9,163,787 14.10% 1.70% 119 116
3....... $64,391,721 13.97% 1.70% 180 177
4....... $57,358,743 14.09% 1.70% 240 235
5....... $98,972,334 14.24% 1.70% 300 297
</TABLE>
(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; (iii) none of the Sellers, the Master
Servicer or the Depositor will repurchase any Mortgage Loan, as described
under "Mortgage Loan Program--Representations Relating to Mortgage Loans" and
"Description of the Securities--Assignment of the Trust Fund Assets" in the
Prospectus, and the Master Servicer does not exercise its option to purchase
the Mortgage Loans and thereby cause a termination of the Trust Fund; (iv)
there are no delinquencies or Liquidation Loss Amounts on the Mortgage Loans,
and principal payments on the Mortgage Loans will be timely received together
with prepayments, if any, on the last day of the month and at the respective
constant percentages of the Prepayment Assumption set forth in the table; (v)
there is no Prepayment Interest Shortfall or any other interest shortfall in
any month; (vi) payments on the Offered Notes will be received on the 25th day
of each month, commencing July 25, 1997; (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; (ix) the Offered Notes will be
purchased on June 26, 1997; and (x) the net amount of interest collected on
the Mortgage Loans during the Collection Period for the first Payment Date is
$1,879,852 (collectively, the "STRUCTURING 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 the Prepayment Assumption until maturity or that all of the Mortgage
Loans will prepay at the same level of the Prepayment Assumption. Moreover,
the diverse Remaining Terms and Mortgage Rates of the Mortgage Loans could
produce slower or faster principal payments than indicated in the table at the
various constant percentages of the Prepayment Assumption specified, even if
the weighted average Remaining Term and weighted average Mortgage Rate are as
assumed. Any difference between such assumptions and the actual
characteristics and performance of the Mortgage Loans, or actual prepayment or
loss experience, will affect the percentages of initial Note Balances
outstanding over time and the weighted average life of the Offered Notes.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of each class of Notes, and sets forth the
percentages of the initial Note Balance of each such class of Notes that would
be outstanding after each of the dates shown at various percentages of the
Prepayment Assumption.
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<PAGE>
PERCENT OF INITIAL PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES
OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-PB
-----------------------
PAYMENT DATE 0% 50% 100% 150% 200%
- ------------ ---- --- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage...................................... 100 100 100 100 100
June 25, 1998........................................... 93 88 83 77 72
June 25, 1999........................................... 91 80 69 59 50
June 25, 2000........................................... 89 73 58 45 35
June 25, 2001........................................... 87 66 48 35 25
June 25, 2002........................................... 85 59 40 27 18
June 25, 2003........................................... 82 53 33 21 13
June 25, 2004........................................... 79 47 28 17 9
June 25, 2005........................................... 76 41 23 13 7
June 25, 2006........................................... 72 37 19 10 4
June 25, 2007........................................... 67 32 16 7 2
June 25, 2008........................................... 63 29 13 5 1
June 25, 2009........................................... 57 25 11 4 *
June 25, 2010........................................... 52 21 8 2 0
June 25, 2011........................................... 45 17 6 1 0
June 25, 2012........................................... 39 14 4 * 0
June 25, 2013........................................... 36 12 3 0 0
June 25, 2014........................................... 32 10 2 0 0
June 25, 2015........................................... 28 8 1 0 0
June 25, 2016........................................... 23 6 * 0 0
June 25, 2017........................................... 18 4 0 0 0
June 25, 2018........................................... 15 3 0 0 0
June 25, 2019........................................... 12 2 0 0 0
June 25, 2020........................................... 8 1 0 0 0
June 25, 2021........................................... 3 0 0 0 0
June 25, 2022 and thereafter............................ 0 0 0 0 0
Weighted Average Life in Years**........................ 13.0 7.8 5.2 3.8 2.9
</TABLE>
- --------
(*) Represents an amount greater than 0.0% but less than 0.5%.
(**) The weighted average life of a Note of any class is determined by (i)
multiplying the amount of each net distribution in reduction of Note
Balance by the number of years from the date of issuance of the Note to the
related Payment 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 THIRD
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>
DESCRIPTION OF THE MORTGAGE LOAN PURCHASE AGREEMENTS
The Mortgage Loans of each Seller to be transferred to the Trust by the
Depositor will be purchased by the Depositor from such Seller pursuant to a
Mortgage Loan Purchase Agreement between the Depositor and such Seller (a
"MORTGAGE LOAN PURCHASE AGREEMENT"). The following summary describes certain
terms of each Mortgage Loan Purchase Agreement and is qualified in its
entirety by reference to each Mortgage Loan Purchase Agreement.
PURCHASE OF MORTGAGE LOANS
Pursuant to the applicable Mortgage Loan Purchase Agreement, each Seller
will transfer and assign to the Depositor all of its right, title and interest
in and to the related Mortgage Loans and the Mortgage Note, mortgages and
other documents related thereto (collectively, the "RELATED DOCUMENTS"). The
purchase prices for the Mortgage Loans are specified percentages of the face
amounts thereof as of the time of transfer and are payable by the Depositor as
provided in the related Mortgage Loan Purchase Agreements.
Each Mortgage Loan Purchase Agreement will require that, within the time
period specified therein, the related Seller deliver to the Indenture Trustee
(as pledgee) the Mortgage Loans sold by such Seller and the Related Documents
for such Mortgage Loans. In lieu of delivery of original mortgages, each
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 each Mortgage Loan
Purchase Agreement, the related Seller will be required to record assignments
of mortgages relating to the Mortgage Loans sold by such Seller.
REPRESENTATIONS AND WARRANTIES
Each Seller will also represent and warrant with respect to the Mortgage
Loans sold by such Seller that, among other things, (a) the information with
respect to such Mortgage Loans set forth in the schedule attached to the
related Mortgage Loan Purchase Agreement is true and correct in all material
respects and (b) immediately prior to the sale of such Mortgage Loans to the
Depositor, such Seller was the sole owner and holder of such Mortgage Loans
free and clear of any and all liens and security interests. Each Seller will
also represent and warrant that, among other things, as of the Closing Date,
(a) the related Mortgage Loan Purchase Agreement constitutes a legal, valid
and binding obligation of such Seller and (b) such Mortgage Loan Purchase
Agreement constitutes a valid transfer and assignment of all right, title and
interest of such Seller in and to the related Mortgage Loans and the proceeds
thereof. The benefit of the representations and warranties made by each Seller
will be assigned to the Trust.
Within 90 days of the Closing Date, Norwest Bank Minnesota, N.A. (the
"CUSTODIAN") will review or cause to be reviewed the Mortgage Loans and the
Related Documents, and if any Mortgage Loan or Related Document is found to be
defective in any material respect that may materially and adversely affect the
value of the related Mortgage Loan, or the interests of the Indenture Trustee
(as pledgee of the Mortgage Loans), the Securityholders or the Credit Enhancer
in such Mortgage Loan and such defect is not cured within 90 days following
notification thereof to the related Seller and the Trust by the Custodian,
such Seller will be obligated to deposit the Repurchase Price into the
Custodial Account. In lieu of any such deposit, such Seller may substitute an
Eligible Substitute Loan; provided that any such substitution may be subject
to the delivery of an opinion of counsel regarding certain tax matters. Any
such purchase or substitution will result in the removal of the Mortgage Loan
required to be removed from the Trust (each such Mortgage Loan, a "DELETED
LOAN"). The obligation of each Seller to remove Deleted Loans sold by it from
the Trust is the sole remedy regarding any defects in the Mortgage Loans sold
by such Seller and Related Documents for such Mortgage Loans available to the
Trust, the Certificateholders (or the Owner Trustee on behalf of the
Certificateholders) and the Noteholders (or the Indenture Trustee on behalf of
the Noteholders) against such Seller.
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<PAGE>
With respect to any Mortgage Loan, the "REPURCHASE PRICE" is equal to the
Principal Balance of such Mortgage 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 related
Seller will be required to deposit in the Custodial Account an amount (the
"SUBSTITUTION ADJUSTMENT AMOUNT") equal to the excess of the Principal Balance
of the Deleted Loan to be removed from the Trust over the Principal Balance of
such Eligible Substitute Loan.
An "ELIGIBLE SUBSTITUTE LOAN" is a mortgage loan substituted by a Seller for
a Deleted Loan which must, on the date of such substitution, (i) have an
outstanding Principal Balance (or in the case of a substitution of more than
one Mortgage Loan for a Deleted Loan, an aggregate Principal Balance) not in
excess of the Principal Balance relating to such Deleted Loan; (ii) have a
Mortgage Rate no lower than and not more than 1% in excess of the Mortgage
Rate of such Deleted Loan; (iii) have a Combined Loan-to-Value Ratio at the
time of substitution no higher than that of the Deleted Loan at the time of
substitution; (iv) have, at the time of substitution, a remaining term to
maturity not more than one year earlier and not later than the remaining term
to maturity of the Deleted Loan; (v) comply with each representation and
warranty as to the Mortgage Loans set forth in the related Mortgage Loan
Purchase Agreement (deemed to be made as of the date of substitution); (vi) be
ineligible for inclusion in a real estate mortgage investment conduit
("REMIC") (a "REMIC INELIGIBLE LOAN") if the Deleted Loan was a REMIC
Ineligible Loan (generally, because (a) the value of the real property
securing the Deleted Loan was not at least equal to eighty percent of the
original principal balance of the Deleted Loan, calculated by subtracting the
amount of any liens that are senior to such loan and a proportionate amount of
any lien of equal priority from the value of such property when the loan was
originated and (b) substantially all of the proceeds of the Deleted Loan were
not used to acquire, improve or protect an interest in the real property
securing such loan); and (vii) satisfy certain other conditions specified in
the Indenture.
In addition, each Seller will be obligated to deposit the Repurchase Price
or substitute an Eligible Substitute Loan with respect to a Mortgage Loan as
to which there is a breach of a representation or warranty if such breach is
not cured by such Seller within the time provided.
Pursuant to the Mortgage Loan Purchase Agreement between the Depositor and
Master Financial, Residential Funding will repurchase or substitute for any
Mortgage Loan required to be repurchased or substituted for by Master
Financial under such Mortgage Loan Purchase Agreement if Master Financial
fails to do so.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing Agreement
dated June 26, 1997 among the Trust, the Indenture Trustee and the Master
Servicer. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Servicing
Agreement. Whenever particular defined terms of the Servicing Agreement are
referred to, such defined terms are thereby incorporated herein by reference.
See "The Agreements" in the Prospectus.
THE MASTER SERVICER
Residential Funding, an indirect wholly-owned subsidiary of GMAC Mortgage
and an affiliate of the Depositor, will act as Master Servicer for the
Mortgage Loans pursuant to the Servicing Agreement. For a general description
of Residential Funding and its activities, see "Residential Funding
Corporation" in the Prospectus and "The Mortgage Pool--Residential Funding"
herein.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fee for each Mortgage Loan is payable out of the interest
payments on such Mortgage Loan. The Servicing Fees in respect of each Mortgage
Loan will be 1.42% per annum of the outstanding principal
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<PAGE>
balance of such 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
Master Financial (including any such compensation paid to the Master Servicer
as the successor to Master Financial). The primary compensation to be paid to
the Master Servicer in respect of its master servicing activities will be
0.17% per annum of the outstanding principal balance of each Mortgage Loan.
Master Financial is entitled to servicing compensation in an amount equal to
1.25% per annum of the outstanding principal balance of each Mortgage Loan.
The Master Servicer is obligated to pay certain ongoing expenses associated
with the Trust Fund, including the obligation to pay the Insurance Premiums
required by FHA Regulations, and incurred by the Master Servicer in connection
with its responsibilities under the Servicing Agreement. See "Servicing of
Trust Assets" in the Prospectus for information regarding other possible
compensation to the Master Servicer and the Master Financial and for
information regarding expenses payable by the Master Servicer and Master
Financial.
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 Mortgage Loans received by it subsequent to the Cut-off Date. The
Custodial Account shall be an Eligible Account. On the 20th day of each month
or if such day is not a Business Day, the next succeeding Business Day (the
"DETERMINATION DATE"), the Master Servicer will notify the Paying Agent and
the Indenture Trustee of the amount of aggregate amounts required to be
withdrawn from the Custodial Account and deposited into the Payment Account
prior to the close of business on the Business Day next preceding each Payment
Date.
"PERMITTED INVESTMENTS" are specified in the Servicing Agreement and are
limited to investments which meet the criteria of the Rating Agencies from
time to time as being consistent with their then-current ratings of the
Securities.
The Master Servicer will make the following withdrawals from the Custodial
Account and deposit such amounts as follows:
(i) to the Payment Account, an amount equal to the P&I Collections on the
Business Day prior to each Payment Date; and
(ii) to pay to itself or the Sellers 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 Interest
Collections and Principal Collections for such Payment Date.
All collections on the Mortgage Loans will generally be allocated in
accordance with the Mortgage Notes 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 portion
allocable to interest of all scheduled monthly payments on the Mortgage Loans
received during the related Collection Period, minus the Servicing Fees, (ii)
the interest portion of all Net Liquidation Proceeds (as defined below)
allocated to interest pursuant to the terms of the Mortgage Notes, reduced by
the Servicing Fees for such Collection Period and (iii) the interest portion
of the Repurchase Price for any Deleted Loans and the cash purchase price paid
in connection with any optional purchase of the Mortgage Loans by the Master
Servicer. As to any Payment Date, "PRINCIPAL COLLECTIONS" will be equal to the
sum of (i) the portion allocable to principal of all scheduled monthly
payments on the Mortgage Loans received with respect to the related Collection
Period; (ii) the principal portion of all proceeds of the repurchase of any
Mortgage Loans (or, in the case of a substitution, any Substitution Adjustment
Amounts) as required by the Servicing Agreement during the related Collection
Period; (iii) the amount of the proceeds of any FHA insurance received with
respect to the Mortgage Loans; and (iv) the principal portion of all other
unscheduled collections received on the Mortgage Loans during the related
Collection Period (or
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<PAGE>
deemed to be received during the related Collection Period) (including,
without limitation, full and partial Principal Prepayments made by the
respective Mortgagors and Net Liquidation Proceeds), to the extent not
previously paid.
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 as
for the first Payment Date, the Collection Period is the period from June 5,
1997 to June 30, 1997.
"NET LIQUIDATION PROCEEDS" with respect to a Mortgage Loan are the proceeds
(excluding amounts drawn on the Policy) received in connection with the
liquidation of any Mortgage 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 Mortgage Loan
at the end of the Collection Period immediately preceding the Collection
Period in which such Mortgage Loan became a Liquidated Mortgage Loan.
With respect to any date, the "POOL BALANCE" will be equal to the aggregate
of the Principal Balances of all Mortgage Loans as of such date owned by the
Trust. The Principal Balance of a Mortgage Loan (other than a Liquidated
Mortgage Loan) on any day is equal to the Cut-off Date Balance thereof, minus
all collections credited against the Principal Balance of such Mortgage Loan
in accordance with the related Mortgage Note prior to such day. The Principal
Balance of a Liquidated Mortgage Loan shall be zero.
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE
The following summary describes certain terms of the Trust Agreement and the
Indenture. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Trust
Agreement and the Indenture. Whenever particular defined terms of the
Indenture are referred to, such defined terms are thereby incorporated herein
by reference. See "The Agreements" in the Prospectus.
THE TRUST FUND
Simultaneously with the issuance of the Offered Notes, the Issuer will
pledge the Trust Fund to the Indenture Trustee as collateral for the Notes,
and the Offered Notes thereupon will be secured by such collateral equally and
ratably with the Class A-PV Notes, without preference, priority or
distinction. As pledgee of the Mortgage Loans, the Indenture Trustee will be
entitled to direct the Trust in the exercise of all rights and remedies of the
Trust against Master Financial or Residential Funding under the Mortgage Loan
Purchase Agreements and against the Master Servicer under the Servicing
Agreement.
REPORTS TO HOLDERS
The Indenture Trustee will mail to each Holder of Offered Notes, at its
address listed on the Security Register maintained with the Indenture Trustee,
a report setting forth certain amounts relating to the Securities for each
Payment Date, among other things:
(i) the amount of principal, if any, payable on such Payment Date to the
holders of each class of Securities;
(ii) the amount of interest payable on such Payment Date to the holders
of each class of Securities;
(iii) the aggregate Note Balance of each class of Notes 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 Mortgage Loans as of the end
of the preceding Collection Period;
(vi) the Outstanding Reserve Amount as of the end of the related
Collection Period; and
(vii) the amount paid, if any, under the Policy for such Payment Date.
In the case of information furnished pursuant to clauses (i) and (ii) above
with respect to the Offered Notes, the amounts shall be expressed as a dollar
amount per $1,000 in face amount of such Notes.
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<PAGE>
CERTAIN COVENANTS
The Indenture will provide that the Issuer may not consolidate with or merge
into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes, by an
indenture supplemental to the Indenture, the Issuer's obligation to make due
and punctual payments upon the Notes and the performance or observance of any
agreement and covenant of the Issuer under the Indenture, (iii) no Event of
Default shall have occurred and be continuing immediately after such merger or
consolidation, (iv) the Issuer has received consent of the Credit Enhancer and
has been advised that the ratings of the Securities (without regard to the
Policy) then in effect would not be reduced or withdrawn by any Rating Agency
as a result of such merger or consolidation, (v) any action that is necessary
to maintain the lien and security interest created by the Indenture is taken
and (vi) the Issuer has received an Opinion of Counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Issuer or to any Noteholder or Certificateholder and (vii) the Issuer has
delivered to the Indenture Trustee an officer's certificate and an Opinion of
Counsel each stating that such consolidation or merger and such supplemental
indenture comply with the Indenture and that all conditions precedent, as
provided in the Indenture, relating to such transaction have been complied
with. The Issuer will not, among other things, (i) except as expressly
permitted by the Indenture, sell, transfer, exchange or otherwise 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 the outstanding Notes and
the Credit Enhancer, the Issuer and the Indenture Trustee may execute a
supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the Indenture, or modify (except as provided below) in any
manner the rights of the Noteholders. Without the consent of the holder of
each outstanding Note affected thereby and the Credit Enhancer, however, no
supplemental indenture will: (i) change the due date of any installment of
principal of or interest on any Note or reduce the principal amount thereof,
the interest rate specified thereon or change any place of payment where or
the coin or currency in which any Note or any interest thereon is payable;
(ii) impair the right to institute suit for the enforcement of certain
provisions of the Indenture regarding payment; (iii) reduce the percentage of
the aggregate amount of the outstanding Notes, the consent of the holders of
which is required for any supplemental indenture or the consent of the holders
of which is required for any waiver of compliance with certain provisions of
the Indenture or of certain defaults thereunder and their consequences as
provided for in the Indenture; (iv) modify or alter the provisions of the
Indenture regarding the voting of Notes held by the Issuer, the Depositor or
an affiliate of any of them; (v) decrease the percentage of the aggregate
principal amount of Notes required to amend the sections of the Indenture
which specify the applicable percentage of aggregate principal amount of the
Notes necessary to amend the Indenture or certain other related agreements;
(vi) modify any of the provisions of the Indenture in such manner as to affect
the calculation of the amount of any payment of interest or principal due on
any Note (including the calculation of any of the individual components of
such calculation); or (vii) permit the creation of any lien ranking prior to
or, except as otherwise contemplated by the Indenture, on a parity with the
lien of the Indenture with respect to any of the collateral for the Notes or,
except as otherwise permitted or contemplated in the Indenture, terminate the
lien of the Indenture on any such collateral or deprive the holder of any Note
of the security afforded by the lien of the Indenture.
The Issuer and the Indenture Trustee may also enter into supplemental
indentures, with the consent of the Credit Enhancer and without obtaining the
consent of the Noteholders, for the purpose of, among other things,
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<PAGE>
curing any ambiguity or correcting or supplementing any provision in the
Indenture that may be inconsistent with any other provision therein, or
issuing any additional class of notes subordinate to the interests of the
Noteholders and the Credit Enhancer.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE ISSUER
Neither the Indenture Trustee nor any director, officer or employee of the
Indenture Trustee will be under any liability to the Issuer or the Noteholders
for any action taken or for refraining from the taking of any action in good
faith pursuant to the Indenture or for errors in judgment; provided, however,
that none of the Indenture Trustee and any director, officer or employee
thereof will be protected against any liability which would otherwise be
imposed by reason of willful malfeasance, bad faith or negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties under the Indenture. Subject to certain limitations set forth in the
Indenture, the Indenture Trustee and any director, officer, employee or agent
of the Indenture Trustee shall be indemnified by the Issuer and held harmless
against any loss, liability or expense incurred in connection with
investigating, preparing to defend or defending any legal action, commenced or
threatened, relating to the Indenture other than any loss, liability or
expense incurred by reason of willful malfeasance, bad faith or negligence in
the performance of its duties under such Indenture or by reason of reckless
disregard of its obligations and duties under the Indenture. All persons into
which the Indenture Trustee may be merged or with which it may be consolidated
or any person resulting from such merger or consolidation shall be the
successor of the Indenture Trustee under the Indenture.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Offered Notes 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 100% of the Prepayment Assumption. No representation is made that the
Mortgage Loans will prepay at such rate or at any other rate. See "Certain
Federal Income Tax Consequences" in the Prospectus.
Prospective investors in the Offered 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 Offered Notes.
ERISA CONSIDERATIONS
Any fiduciary or other investor of Plan assets that proposes to acquire or
hold the Offered 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 Offered Notes will not constitute "mortgage related securities" for
purposes of SMMEA, because the Mortgage Pool contains Mortgage Loans that are
secured by subordinate liens on the related Mortgaged Properties. Accordingly,
many institutions with legal authority to invest in mortgage related
securities may not be legally authorized to invest in the Offered Notes. No
representation is made herein as to whether the Offered Notes constitute legal
investments for any entity under any applicable statute, law, rule, regulation
or order. Prospective purchasers are urged to consult with their counsel
concerning the status of the Offered Notes as legal investments for such
purchasers prior to investing in Offered Notes.
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METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated as of June 20, 1997 (the "UNDERWRITING AGREEMENT"), the Underwriter has
agreed to offer the Offered Notes on a best efforts basis and the Depositor
has agreed to sell the Offered Notes to the Underwriter when and if sold by
the Underwriter. The termination date of the offering of the Offered Notes is
the earlier to occur of June 20, 1998, or the date on which all of such
Offered Notes have been sold. Proceeds of the offering of the Offered Notes
will not be placed in any escrow, trust or similar arrangement. It is expected
that delivery of the Offered Notes will be made only in book-entry form
through the facilities of DTC, CEDEL or Euroclear.
The Underwriter is offering the Offered Notes on a best efforts basis and
will only be obligated to pay for and accept delivery of any of the Offered
Notes at such time as it sells such Offered Notes.
In addition, the Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Offered Notes is subject to,
among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of
the Depositor's Registration Statement shall be in effect, and that no
proceedings for such purpose shall be pending before or threatened by the
Securities and Exchange Commission.
The Offered Notes will be offered by the Underwriter, on a best efforts
basis, from time to time to the public, directly or through dealers, in one or
more negotiated transactions, or otherwise, at varying prices to be determined
at the time of sale. The proceeds to the Depositor from any sale of the
Offered Notes will be equal to the purchase price paid by the purchaser
thereof, net of any expenses payable by the Depositor and any compensation
payable to the Underwriter and any such dealer. The Underwriter may effect
such transactions by selling the Offered Notes to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter. In connection with the sale
of the Offered Notes, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting compensation. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Offered Notes may be deemed to be underwriters and any
profit on the resale of the Offered Notes positioned by them may be deemed to
be underwriting discounts and commissions under the Securities Act of 1933, as
amended.
There is currently no secondary market for the Offered Notes. The
Underwriter intends to make a market in the Offered Notes, but it is not
obligated to do so. In addition, any market-making may be discontinued at any
time, and there can be no assurance that an active public market for the
Offered Notes will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
Notes will be the monthly statements as discussed under "Description of the
Trust Agreement and Indenture-- Reports to Holders," which will include
information as to the outstanding Note Balance of the Offered Notes and the
status of the related credit enhancement. There can be no assurance that any
additional information regarding the Offered Notes will be available through
any other source. In addition, the Depositor is not aware of any source
through which price information about the Offered Notes will be generally
available on an ongoing basis. The limited nature of such information
regarding the Offered Notes may adversely affect the liquidity of such Notes,
even if a secondary market for the Offered Notes becomes available.
Until the distribution of the Offered Notes is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriter
and certain selling group members to bid for and purchase the Offered Notes.
As exceptions to these rules, the Underwriter is permitted to engage in
certain transactions intended to stabilize the price of the Offered Notes.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price. The Underwriter also may create a short
position by selling more Offered Notes than it is committed to purchase from
the Depositor, and may purchase Offered Notes in the open market following
completion of the offering to cover all or a portion of any such short
position. In general, any such transactions could cause the price of the
Offered Notes to be higher than it might otherwise be. Neither the Depositor
or any of its affiliates nor the Underwriter makes any representation as to
whether the Underwriter
S-43
<PAGE>
will engage in any such transactions. Any such transactions may be
discontinued without notice. In addition, neither the Depositor or any of its
affiliates nor the Underwriter makes any representation or prediction as to
any effect that such transactions may have on the price of the Offered Notes.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter and that under limited circumstances the Underwriter will
indemnify the Depositor against certain liabilities, including liabilities
under the Securities Act of 1933, or contribute to payments the Underwriter
may be required to make in respect thereof.
Residential Funding Securities Corporation is an affiliate of the Depositor
and the Master Servicer. See "Description of the Mortgage Pool--Residential
Funding" and "--The Servicer" herein.
EXPERTS
The consolidated financial statements of the Credit Enhancer, AMBAC
Indemnity Corporation, as of December 31, 1996 and 1995 and for each of the
years in the three-year period ended December 31, 1996 are incorporated by
reference herein and in the registration statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the Offered Notes will
be passed upon for the Depositor, Residential Funding and the Underwriter by
Thacher Proffitt & Wood, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Notes that the Notes be
rated "Aaa" by Moody's and "AAA" by Standard & Poor's. The Depositor has not
requested a rating on the Offered Notes by any rating agency other than
Moody's and Standard & Poor's. However, there can be no assurance as to
whether any other rating agency will rate the Offered Notes, or, if it does,
what rating would be assigned by any such other rating agency. A rating on the
Offered Notes by another rating agency, if assigned at all, may be lower than
the ratings assigned to the Offered Notes by Moody's and Standard & Poor's.
A securities rating addresses the likelihood of the receipt by holders of
the Offered Notes of payments in respect of the Mortgage Loans. The rating
takes into consideration the structural and legal aspects associated with the
Offered Notes. The ratings on the Offered Notes do not, however, constitute
statements regarding the possibility that holders of the Offered Notes might
realize a lower than anticipated yield due to prepayments or other non-credit
factors. A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
S-44
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.
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<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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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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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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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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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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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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<PAGE>
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
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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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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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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>
Page
PTCE .....................................................111
Purchase Price ......................................................35
Purchase Obligations....................................................57
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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Trust Fund .......................................................1
UBTI .....................................................112
UCC ......................................................86
Unaffiliated Sellers....................................................23
Unsecured Contract......................................................19
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<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO
WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Summary.................................................................... S-3
Risk Factors............................................................... S-11
Description of the Mortgage Pool........................................... S-12
The Issuer................................................................. S-24
The Owner Trustee.......................................................... S-24
The Indenture Trustee...................................................... S-24
The Credit Enhancer........................................................ S-25
Description of the Securities.............................................. S-27
Description of the Policy.................................................. S-32
Certain Yield and Prepayment Considerations................................ S-33
Description of the Mortgage Loan Purchase Agreements....................... S-37
Description of the Servicing Agreement..................................... S-38
Description of the Trust Agreement and Indenture........................... S-40
Certain Federal Income Tax Consequences.................................... S-42
ERISA Considerations....................................................... S-42
Legal Investment........................................................... S-42
Method of Distribution..................................................... S-43
Experts.................................................................... S-44
Legal Matters.............................................................. S-44
Ratings.................................................................... S-44
PROSPECTUS
Additional Information..................................................... 2
Reports to Noteholders..................................................... 2
Incorporation of Certain Information by Reference.......................... 2
Summary of Prospectus...................................................... 4
Risk Factors............................................................... 9
The Pools.................................................................. 15
Trust Asset Program........................................................ 20
Description of the Notes................................................... 27
Description of Credit Enhancement.......................................... 37
Description of FHA Insurance Under Title I................................. 42
The Company................................................................ 44
Residential Funding Corporation............................................ 44
Servicing of Trust Assets.................................................. 44
The Agreements............................................................. 50
Yield and Prepayment Considerations........................................ 53
Certain Legal Aspects of the Trust Assets and Related Matters.............. 58
Certain Federal Income Tax Consequences.................................... 76
State and Other Tax Consequences........................................... 81
ERISA Considerations....................................................... 81
Legal Investment Matters................................................... 84
Use of Proceeds............................................................ 85
Methods of Distribution.................................................... 85
Legal Matters.............................................................. 86
Financial Information...................................................... 86
Index of Principal Definitions............................................. 87
</TABLE>
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
$122,765,141
HOME LOAN-BACKED NOTES,
SERIES 1997-HI3
7.18% CLASS A-PB NOTES
RESIDENTIAL FUNDING
SECURITIES CORPORATION
PROSPECTUS SUPPLEMENT
JUNE 20, 1997