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RULE NO. 424(b)(5)
REGISTRATION NO. 33-80419
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 10, 1997)
$194,000,000
GMAC MORTGAGE CORPORATION
DESIGNATED SELLER AND MASTER SERVICER
HOME EQUITY LOAN TRUST 1997-GMACM4
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
DEPOSITOR
RESIDENTIAL FUNDING CORPORATION
ADMINISTRATOR
HOME EQUITY LOAN-BACKED TERM NOTES, SERIES 1997-GMACM4
The Home Equity Loan Trust 1997-GMACM4 (the "Issuer" or the "Trust") will be
formed pursuant to an Amended and Restated Trust Agreement to be dated as of
August 28, 1997 (the "Trust Agreement"), between Residential Funding
Mortgage Securities II, Inc. (the "Depositor") and Wilmington Trust
Company, the Owner Trustee. The Issuer will issue $194,000,000 aggregate
principal amount of Home Equity Loan-Backed Term Notes, Series 1997-GMACM4
(the "Term Notes"). The Term Notes will be issued pursuant to an
Indenture to be dated as of August 28, 1997, between the Issuer and The
Chase Manhattan Bank, the Indenture Trustee. Pursuant to the Indenture,
the Issuer will also issue an aggregate amount up to the Maximum
Variable Funding Balance (as defined herein) of Home Equity Loan-
Backed Variable Funding Notes, Series 1997-GMACM4 (the "Variable
Funding Notes"). In addition, pursuant to the Trust Agreement, the
Issuer will issue Home Equity Loan-Backed Certificates, Series 1997-
GMACM4 (the "Certificates"). The Term Notes and the Variable
Funding Notes will have equal priorities and are collectively
referred to herein as the "Notes" and the Notes and the
Certificates are collectively referred to herein as the
"Securities." Only the Term Notes are offered hereby.
The Term Notes will be secured by certain adjustable rate home equity
revolving credit loans made or to be made in the future (the
"Revolving Credit Loans") secured by first or second deeds of
trust or mortgages on residential properties that are one- to
four-family properties. In addition, the Notes will have
the benefit of an irrevocable and unconditional
financial guaranty insurance policy (the
"Policy") issued by Ambac Assurance
Corporation (the "Credit Enhancer") as
described under "Description of the
Policy" herein.
AMBAC
(continued on following page)
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THE TERM NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT
AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER, GMAC
MORTGAGE, THE ADMINISTRATOR OR ANY OF THEIR RESPECTIVE AFFILIATES. NONE OF
THE TERM NOTES OR THE UNDERLYING REVOLVING CREDIT LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE
DEPOSITOR, THE MASTER SERVICER, THE ADMINISTRATOR OR ANY OF THEIR
RESPECTIVE AFFILIATES.
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THESE TERM NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
---------------
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE
TERM NOTES, SEE "RISK FACTORS" COMMENCING ON PAGE S-10 HEREIN
AND "RISK FACTORS" IN THE PROSPECTUS COMMENCING ON
PAGE 9.
There is currently no secondary market for the Term Notes. Credit Suisse
First Boston Corporation and Residential Funding Securities Corporation
(together, the "Underwriters") intend to make a secondary market in the Term
Notes, but are not obligated to do so. There can be no assurance that a
secondary market for the Term Notes will develop or, if it does develop, that
it will continue. The Term Notes will not be listed on any securities
exchange.
The Term Notes will be purchased from the Depositor by the Underwriters and
will be offered by the Underwriters from time to time to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. The proceeds to the Depositor from the sale of the Term Notes,
before deducting expenses payable by the Depositor, will be equal to
approximately 99.75% of the initial aggregate principal balance of the Term
Notes. The Term Notes are offered by the Underwriters subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject any order in whole or in part. It is
expected that delivery of the Term Notes will be made on or about August 28,
1997, in book-entry form only through DTC, Cedel and Euroclear as discussed
herein, against payment therefor in immediately available funds.
CREDIT SUISSE FIRST BOSTON RESIDENTIAL FUNDING SECURITIES CORPORATION
Prospectus Supplement dated August 25, 1997.
<PAGE>
(continued from previous page)
Payments of principal and interest on the Term Notes will be made on the
20th day of each month or, if such day is not a business day, then on the next
business day, commencing in September 1997 (each, a "PAYMENT DATE"). Interest
will accrue on the Term Notes at a floating rate (the "NOTE RATE") during each
Interest Period, as described herein. See "Description of the Securities--
Interest Payments on the Notes" herein.
It is a condition of the issuance of the Term Notes that they be rated "Aaa"
by Moody's Investors Service, Inc. ("MOODY'S") and "AAA" by Standard & Poor's
Ratings Services ("STANDARD & POOR'S").
The yield to maturity on the Term Notes will depend on the rate and timing
of principal payments (including payments in excess of required installments,
prepayments in full or terminations, liquidations and repurchases) and the
rate and timing of Draws (as defined herein) on the Revolving Credit Loans.
The Revolving Credit Loans generally may be prepaid at any time without
penalty. In addition, the yield to investors on the Term Notes may also be
adversely affected to the extent of any Interest Shortfalls (as defined
herein). See "Certain Yield and Prepayment Considerations" herein and "Yield
and Prepayment Considerations" in the Prospectus.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE TERM NOTES,
INCLUDING STABILIZING AND SYNDICATE SHORT COVERING TRANSACTIONS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "METHOD OF DISTRIBUTION" HEREIN.
----------------
THE TERM NOTES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF SECURITIES BEING OFFERED PURSUANT TO THE DEPOSITOR'S
PROSPECTUS DATED 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 TERM NOTES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
----------------
UNTIL NOVEMBER 23, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE TERM
NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
S-2
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SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the
meanings assigned in the Prospectus.
Issuer.................... The Term Notes will be issued by Home Equity Loan
Trust 1997-GMACM4, a Delaware business trust estab-
lished pursuant to the Amended and Restated Trust
Agreement, dated as of August 28, 1997 (the "Trust
Agreement"), between the Depositor and the Owner
Trustee. The assets of the Issuer will consist of
the Revolving Credit Loans (as defined herein), and
certain related assets.
The Term Notes............ $194,000,000 Home Equity Loan-Backed Term Notes,
Series 1997-GMACM4, are offered hereby. The Term
Notes will be issued pursuant to an Indenture,
dated as of August 28, 1997, between the Issuer and
the Indenture Trustee.
Depositor................. Residential Funding Mortgage Securities II, Inc.
(the "DEPOSITOR" or the "COMPANY"). See "The Compa-
ny" in the Prospectus.
Master Servicer........... GMAC Mortgage Corporation (the "MASTER SERVICER" or
"GMACM"), an affiliate of the Depositor. See "De-
scription of the Servicing Agreement--The Master
Servicer" herein.
Designated Seller......... GMAC Mortgage Corporation (the "DESIGNATED SELL-
ER"). See "Description of the Designated Seller's
Agreement" herein.
Owner Trustee............. Wilmington Trust Company.
Indenture Trustee......... The Chase Manhattan Bank.
Administrator............. Residential Funding Corporation. See "Description
of the Servicing Agreement--The Administrator"
herein and "Residential Funding Corporation" in the
Prospectus.
Closing Date.............. On or about August 28, 1997.
Payment Date.............. The 20th day of each month (or, if such day is not
a business day, the next business day), commencing
in September 1997 (each, a "PAYMENT DATE").
Denominations and The Term Notes will be issued in minimum denomina-
Registration............. tions of $1,000 and integral multiples of $1,000 in
excess thereof. The Term Notes will initially be
issued in book-entry form. Persons acquiring bene-
ficial ownership interests in the Term Notes ("TERM
NOTE OWNERS") may elect to hold their Term Notes
through DTC, in the United States, or Cedel Bank,
societe anonyme ("Cedel") or Euroclear, in Europe.
Transfers within DTC, Cedel or Euroclear, as the
case may be, will be in accordance with the usual
rules and operating procedures of the
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relevant system. No Term Note Owner will be enti-
tled to receive a physical certificate representing
such person's interest, except in the event that
Definitive Term Notes (as defined herein) are is-
sued under the limited circumstances described
herein. All references in this Prospectus Supple-
ment to any Term Notes reflect the rights of Term
Note Owners only as such rights may be exercised
through DTC and its participating organizations for
so long as such Term Notes are Book-Entry Notes.
See "Description of the Securities--Book-Entry
Notes" herein and "Description of the Notes--Form
of Notes" in the Prospectus.
The Mortgage Pool......... The Mortgage Pool will consist of a pool of Revolv-
ing Credit Loans originated by the Designated
Seller pursuant to Credit Line Agreements and se-
cured by Mortgaged Properties. No more than 86.2%
of the Revolving Credit Loans (by Cut-off Date Bal-
ance) are secured by second mortgages or deeds of
trust and the remainder are secured by first mort-
gages or deeds of trust. The Mortgage Pool will in-
clude the unpaid principal balance of the Revolving
Credit Loans as of the close of the business on the
business day prior to August 1, 1997 (the "CUT-OFF
DATE BALANCE" and, such date, the "CUT-OFF DATE")
and any additions thereto as a result of new ad-
vances of money made pursuant to the applicable
Credit Line Agreement after such day (the "ADDI-
TIONAL BALANCES" or "DRAWS") except as otherwise
provided herein. With respect to any date, the
"POOL BALANCE" will be equal to the aggregate of
the Principal Balances of all Revolving Credit
Loans as of such date. The "PRINCIPAL BALANCE" of a
Revolving Credit Loan (other than a Liquidated Re-
volving Credit Loan) on any day is equal to its
Cut-off Date Balance, plus (i) any Additional Bal-
ances in respect of such Revolving Credit Loan con-
veyed to the Trust prior to such day, minus (ii)
all collections credited against the Principal Bal-
ance of such Revolving Credit Loan in accordance
with the related Credit Line Agreement since the
Cut-off Date. The Principal Balance of a Liquidated
Revolving Credit Loan after the final recovery of
related Liquidation Proceeds shall be zero.
The Pool Balance as of the Cut-off Date will be
$194,062,173. The Combined Loan-to-Value Ratio (as
defined herein) for the Revolving Credit Loans
ranged from 2% to 100% and the weighted average
Combined Loan-to-Value Ratio based on the Cut-off
Date Balance of the Revolving Credit Loans will be
74.1% as of the Cut-off Date. The Junior Ratios for
the Revolving Credit Loans ranged from 2.5% to
100%, and the weighted average Junior Ratio will be
39.1%, as of the Cut-off Date. The weighted average
Credit Utilization Rate based on the Cut-off Date
Balance of the Revolving Credit Loans will be 84.0%
as of the Cut-off Date. The Principal Balances of
the Revolving Credit Loans as of the Cut- off Date
ranged from $106 to $401,443 and averaged $25,734.
Credit Limits under the Revolving Credit Loans as
of the Cut-off Date ranged from $6,600 to $550,000
and averaged $36,296. Each Revolving Credit Loan
was originated in the period from Septem-
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ber 1988 to May 1997. With respect to 20.4% of the
Revolving Credit Loans (by Cut-off Date Balance),
the related Mortgaged Properties will be located in
Michigan. For a further description of the Revolv-
ing Credit Loans, see "Description of the Mortgage
Pool" herein.
Interest Payments......... Interest Payments on the Notes will be paid monthly
on each Payment Date, commencing in September 1997,
at the Note Rate for the related Interest Period
(as defined below), subject to the limitations set
forth below which may result in Interest Shortfalls
(as described below). The Note Rate for each Inter-
est Period will be a floating rate equal to the
lesser of (i) LIBOR plus 0.18% per annum, or, on
any Payment Date when the aggregate Principal Bal-
ance of the Revolving Credit Loans as of the last
day during the related Collection Period is less
than 10% of the sum of the aggregate Cut-off Date
Balance, LIBOR plus 0.36% and (ii) the Maximum Net
Loan Rate (as described herein under "Description
of the Securities--Interest Payments on the
Notes"). However, on any Payment Date on which in-
terest accrued on the Notes during the related In-
terest Period exceeds an amount equal to one-
twelfth of the product of (a) the aggregate Princi-
pal Balance of the Revolving Credit Loans multi-
plied by (b) the Net Loan Rate Cap (as defined
herein), the amount of such difference (any such
amount, an "INTEREST SHORTFALL") will not be in-
cluded as interest payments on the Notes for such
Payment Date and such amount will accrue interest
at the Note Rate on the Notes (as adjusted from
time to time) and will be paid on future Payment
Dates only to the extent funds are available there-
for as set forth herein under "Description of the
Securities--Allocation of Payments on the Revolving
Credit Loans." Interest Shortfalls will not be cov-
ered by the Policy and may remain unpaid on the fi-
nal Payment Date. Interest on the Notes in respect
of any Payment Date will accrue from the preceding
Payment Date (or in the case of the first Payment
Date, from the date of initial issuance of the
Notes (the "CLOSING DATE") through the day preced-
ing such Payment Date (each such period, an "INTER-
EST PERIOD")) on the basis of the actual number of
days in the Interest Period and a 360-day year.
Principal Payments........ On each Payment Date, other than the Payment Date
occurring in November 2011, principal payments will
be due and payable on the Notes in an aggregate
amount (the "PRINCIPAL COLLECTION DISTRIBUTION
AMOUNT") equal to either (i) Net Principal Collec-
tions (as defined herein) for such Payment Date, so
long as no Amortization Event (as defined herein)
has occurred and such Payment Date is during the
Revolving Period or (ii) Principal Collections (as
defined herein) for such Payment Date, if an Amor-
tization Event has occurred or if such Payment Date
is after the end of the Revolving Period. In addi-
tion, on any Payment Date, to the extent of funds
available therefor, Noteholders will also be enti-
tled to receive principal payments in an aggregate
amount generally equal to (i) Liquidation Loss Dis-
tribution 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
S-5
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to the Reserve Amount Target. On each Payment Date,
the aggregate amount payable in respect of princi-
pal on the Notes will be allocated to the Term
Notes and Variable Funding Notes on a pro rata ba-
sis based on the outstanding Security Balances (as
defined herein) thereof until paid in full. In no
event will principal payments on the Notes on any
Payment Date exceed the Security Balance thereof on
such date. On the Payment Date occurring in Novem-
ber 2011, principal will be due and payable on the
Notes in an amount equal to the Security Balance
remaining outstanding on such Payment Date.
Allocation of Payments on
the Revolving Credit
Loans....................
All collections on the Revolving Credit Loans will
be allocated by the Master Servicer in accordance
with the terms of the Credit Line Agreements be-
tween amounts collected in respect of interest and
amounts collected in respect of principal. See "De-
scription of the Servicing Agreement--Allocation of
Payments on the Revolving Credit Loans" herein,
which describes the calculation of the Interest
Collections and the Principal Collections on the
Revolving Credit Loans for the Collection Period
related to each Payment Date. These amounts are
calculated exclusive of the pro rata portion of
collections attributable to Additional Balances not
conveyed to the Trust following an Amortization
Event. With respect to any Payment Date, the por-
tion of Principal Collections and Interest Collec-
tions that are distributable pursuant to the Ser-
vicing Agreement (together, the "P&I COLLECTIONS")
will equal (a) Interest Collections for such Pay-
ment Date and (b) either (1) at any time during the
Revolving Period, so long as an Amortization Event
has not occurred, the Net Principal Collections for
such Payment Date, or (2) at any time after the end
of the Revolving Period, or if an Amortization
Event has occurred, Principal Collections for such
Payment Date.
The Security Balances of the Variable Funding Notes
(as described herein) will be increased from time
to time during the Revolving Period (so long as an
Amortization Event has not occurred) in considera-
tion for Additional Balances sold to the Trust, if
Principal Collections are insufficient or unavaila-
ble to cover the related Draws, up to the Maximum
Variable Funding Balance.
Upon the occurrence of an Amortization Event or af-
ter the end of the Revolving Period, Principal Col-
lections for a Collection Period will no longer be
applied to acquire Additional Balances during such
Collection Period. On any Payment Date after the
end of the Revolving Period, so long as an Amorti-
zation Event has not occurred, the acquisition of
all Additional Balances will be reflected by an in-
crease in the Security Balance of the Variable
Funding Notes, up to the Maximum Variable Funding
Balance at such time, and all Principal Collections
will be paid to the then-outstanding Securities.
Upon the occurrence of an Amortization Event, no
new Additional Balances will be acquired by the
Trust. The Revolving Period is the period commenc-
ing on the Closing Date and ending on August 31,
2002. See "Description of the
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Securities--Allocation of Payments on the Revolving
Credit Loans" for a description of "Amortization
Events."
Credit Enhancement........ The Credit Enhancement provided for the benefit of
the Noteholders consists of (a) the Liquidation
Loss Distribution Amounts, (b) the Outstanding Re-
serve Amount and (c) the Policy, each as described
below.
Liquidation Loss Distribution Amounts: Holders of
the Notes will be protected against Liquidation
Loss Amounts (other than Excess Loss Amounts (as
defined herein)) as a result of the preferential
allocation to the Notes of the Liquidation Loss
Distribution Amount (representing excess interest
collections, if available), as described herein
which will be used to make corresponding payments
on the Notes and distributions on the Certificates.
Outstanding Reserve Amount: The Outstanding Reserve
Amount will initially be equal to approximately
$62,173, and will be increased by distributions of
the Reserve Increase Amount (as defined herein), if
any, to the Notes. 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 cov-
ered by a Liquidation Loss Distribution Amount or
the Outstanding Reserve Amount will be covered by
draws on the Policy to the extent provided herein.
The "OUTSTANDING RESERVE AMOUNT" available on any
Payment Date is the amount, if any, by which the
Pool Balance as of the end of the related Collec-
tion Period exceeds the aggregate Security Balance
of the Notes on such Payment Date (after applica-
tion of Net Principal Collections or Principal Col-
lections, as the case may be, for such date).
As of the Closing Date, the Reserve Amount Target
is equal to 1.75% of the Cut-off Date Balance. The
Reserve Amount Target 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--Alloca-
tion of Payments on the Revolving Credit Loans"
herein. To the extent the Reserve Amount Target de-
creases 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 Outstand-
ing Reserve Amount is in excess of the reduced Re-
serve 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 uncondi-
tionally and irrevocably guarantee interest on the
Notes at the Note Rate (exclusive of any Interest
Shortfalls) plus any Liquidation Loss Amounts allo-
cated to the Notes. 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 Note Rate,
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(b) any Liquidation Loss Amount (other than any Ex-
cess Loss Amount) to the extent not currently cov-
ered by Liquidation Loss Distribution Amounts or a
reduction in the Outstanding Reserve Amount and (c)
any Excess Loss Amounts. Interest Shortfalls will
not be covered by the Policy. See "Description of
the Policy" herein and "Description of Credit En-
hancement" in the Prospectus.
Credit Enhancer........... Ambac Assurance Corporation. See "The Credit
Enhancer" herein.
The Variable Funding Home Equity Loan-Backed Variable Funding Notes, Se-
Notes.................... ries 1997-GMACM4. The Variable Funding Notes will
be issued pursuant to the Indenture. The Variable
Funding Notes will have the same interest rate and
will be paid in the same manner as the Term Notes.
As of the Closing Date, the Security Balance of the
Variable Funding Notes will be zero. See "Descrip-
tion of the Securities--General." The Variable
Funding Notes are not offered hereby.
The Certificates.......... Home Equity Loan-Backed Certificates, Series 1997-
GMACM4, which are not offered hereby. The Certifi-
cates will have an initial principal amount of
$62,173. The Certificates will be issued pursuant
to the Trust Agreement and will represent the bene-
ficial ownership interest in the Trust.
Final Payment of
Principal on the Notes...
The Notes will be payable in full on the Payment
Date occurring in November 2011, to the extent of
the outstanding related Security Balance on such
date, if any. In addition, the Issuer will pay the
Notes in full upon the exercise by the Master
Servicer of its option to purchase all Revolving
Credit Loans and all property acquired in respect
of such Revolving Credit Loans. See "Description of
the Securities--Maturity and Optional Redemption"
herein and "The Agreements--Termination; Redemption
of Notes" in the Prospectus.
Certain Federal Income
Tax Consequences.........
In the opinion of Thacher Proffitt & Wood, counsel
to the Depositor, for federal income tax purposes,
the Term Notes will be characterized as indebted-
ness and the Issuer, as created pursuant to the
terms and conditions of the Trust Agreement, will
not be characterized as an association (or publicly
traded partnership within the meaning of section
7704 of the Code) taxable as a corporation or as a
taxable mortgage pool within the meaning of section
7701(i) of the Code.
For further information regarding certain federal
income tax consequences of an investment in the
Notes, see "Certain Federal Income Tax Conse-
quences" herein and "Certain Federal Income Tax
Consequences" and "State and Other Tax Conse-
quences" in the Prospectus.
Legal Investment.......... THE TERM NOTES WILL NOT CONSTITUTE "MORTGAGE RE-
LATED SECURITIES" FOR PURPOSES OF SMMEA, BECAUSE
THE MORTGAGE POOL INCLUDES REVOLVING CREDIT LOANS
THAT ARE SECURED BY SUBORDINATE LIENS ON THE RE-
LATED MORTGAGED PROPERTIES. Institutions whose in-
vestment activi-
S-8
<PAGE>
ties are subject to legal investment laws and regu-
lations or to review by certain regulatory authori-
ties may be subject to restrictions on investment
in the Term Notes. See "Legal Investment" herein.
Rating.................... It is a condition to the issuance of the Term Notes
that they be rated "Aaa" by Moody's and "AAA" by
Standard & Poor's. A security rating is not a rec-
ommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by
the assigning rating organization. A security rat-
ing does not address the frequency of prepayments
or Draws of Revolving Credit Loans, the likelihood
of the receipt of any amounts in respect of Inter-
est Shortfalls, or the corresponding effect on
yield to investors. See "Certain Yield and Prepay-
ment Considerations" and "Ratings" herein.
S-9
<PAGE>
RISK FACTORS
PROSPECTIVE NOTEHOLDERS SHOULD CONSIDER, AMONG OTHER THINGS, THE ITEMS
DISCUSSED UNDER "RISK FACTORS" WHICH BEGINS ON PAGE 9 IN THE PROSPECTUS AND
THE FOLLOWING FACTORS IN CONNECTION WITH THE PURCHASE OF THE TERM NOTES:
RISKS ASSOCIATED WITH THE REVOLVING CREDIT LOANS
No more than 86.2% (by Cut-off Date Balance) of the Revolving Credit Loans
are subordinate to the rights of the mortgagee under the related senior
mortgage or mortgages. The proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the outstanding balance
of such Revolving Credit Loans secured by subordinate mortgages only to the
extent that the claims of such senior mortgages have been satisfied in full,
including any related foreclosure costs. In circumstances when it is
determined to be uneconomical to foreclose on the Mortgaged Property, the
Master Servicer may write off the entire outstanding balance of such Revolving
Credit Loan as a bad debt. The foregoing considerations will be particularly
applicable to Revolving Credit Loans secured by junior liens that have high
Combined Loan-to-Value Ratios or low Junior Ratios because it is comparatively
more likely that the Master Servicer would determine foreclosure to be
uneconomical in the case of such Revolving Credit Loans. Any losses on
Revolving Credit Loans, to the extent such losses are not covered by the
Liquidation Loss Distribution Amount, a reduction in the Outstanding Reserve
Amount or the Policy will be borne by the Noteholders.
Under the home equity program of the Designated Seller (the "GMACM HOME
EQUITY PROGRAM"), Mortgagors are generally qualified based on an assumed
payment which reflects a rate significantly lower than the maximum rate. The
repayment of any Revolving Credit Loan may thus be dependent on the ability of
the Mortgagor to make larger interest payments following the adjustment of the
Loan Rate during the life of such Revolving Credit Loan.
Defaults on mortgage loans are generally expected to occur with greater
frequency in their early years. The rate of default of second mortgage loans
may be greater than that of mortgage loans secured by first liens on
comparable properties.
As to 97.4% (by Cut-off Date Balance) of the Revolving Credit Loans,
borrowers are not required to make any principal payments until the maturity
of such Revolving Credit Loans (the "BALLOON LOANS"). As a result, a borrower
generally will be required to pay the entire remaining principal amount of the
Balloon Loan at its maturity. The ability of a borrower to make such a payment
may depend on the ability of the borrower to obtain refinancing of the balance
due on the Balloon Loan. An increase in interest rates over the Note Rate
applicable at the time the Balloon Loan was originated may have an adverse
effect on the borrower's ability to obtain refinancing or to pay the required
monthly payment. Collections on the Revolving Credit Loans may also vary due
to seasonal purchasing and payment habits of borrowers.
With respect to certain Balloon Loans, general credit risk may also be
greater to Noteholders than to holders of instruments representing interests
in level payment first mortgage loans since no payment of principal generally
is required until after either a five, ten or fifteen year Draw Period under
the related Credit Line Agreements. Minimum monthly payments will at least
equal and may exceed accrued interest. Even assuming that the Mortgaged
Properties provide adequate security for the Revolving Credit Loans,
substantial delays could be encountered in connection with the liquidation of
Revolving Credit Loans that are delinquent and resulting shortfalls in
payments to Noteholders could occur if the Outstanding Reserve Amount has been
reduced to zero, and the Credit Enhancer were unable to perform on its
obligations under the Policy. Further, liquidation expenses (such as legal
fees, real estate taxes, and maintenance and preservation expenses) will
reduce the proceeds payable to Noteholders and thereby reduce the security for
the Revolving Credit Loans. In the event any of the Mortgaged Properties fail
to provide adequate security for the related Revolving Credit Loans,
Noteholders could experience a loss if the Credit Enhancer was unable to
perform its obligations under the Policy.
S-10
<PAGE>
LIMITATIONS AND REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
Credit enhancement will be provided for the Notes in the form of Liquidation
Loss Distribution Amounts (representing excess interest collections, if
available), by the Outstanding Reserve Amount (representing any
overcollateralization that may have been established as described herein) and
by the Policy to the limited extent described herein. None of the Depositor,
the Master Servicer, the Administrator or any of their affiliates will have
any obligation to replace or supplement such credit enhancement, or to take
any other action to maintain any rating of the Notes. To the extent that any
losses are incurred on any of the Revolving Credit Loans that are not covered
by Liquidation Loss Distribution Amounts, a reduction in the Outstanding
Reserve Amount or the Policy, the holders of the Notes will bear all risk of
such losses resulting from default by Mortgagors.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Revolving Credit Loans were originated pursuant to Credit Line
Agreements, approximately 86.2% (by Cut-off Date Balance) of which are secured
by second mortgages or deeds of trust and the remainder of which are first
mortgages or deeds of trust. The Mortgaged Properties securing the Revolving
Credit Loans consist primarily of residential properties that are one- to
four-family properties. As to approximately 99.8% of the Revolving Credit
Loans, the Mortgagor represented at the time of origination that the related
Mortgaged Property would be owner occupied as a primary or second home.
All percentages of the Revolving Credit Loans described herein are
approximate percentages determined (except as otherwise indicated) by Cut-off
Date Balance.
The Cut-off Date Balance of the Revolving Credit Loans will be $194,062,173.
As of the Cut-off Date, no Revolving Credit Loan will be 30 days or more
delinquent. With respect to the Revolving Credit Loans, the average Cut-off
Date Balance will be $25,734 the minimum Cut-off Date Balance will be $106,
the maximum Cut-off Date Balance will be $401,443, the lowest Loan Rate and
the highest Loan Rate on the Cut-off Date will be 7.22% and 12.50% per annum,
respectively, the weighted average Loan Rate on the Cut-off Date will be 9.57%
per annum and the maximum Combined Loan-to-Value Ratio as of the Cut-off Date
will be 100%. The weighted average Combined Loan-to-Value Ratio based on the
Cut-off Date Balance of the Revolving Credit Loans will be 74.1% as of the
Cut-off Date. The weighted average Credit Utilization Rate based on the Cut-
off Date Balance of the Revolving Credit Loans will be 84.0% as of the Cut-off
Date. The weighted average Junior Ratio based on the Cut-off Date Balance of
the Revolving Credit Loans will be approximately 39.1% as of the Cut-off Date.
The latest scheduled maturity of any Revolving Credit Loan will be October
2011. With respect to 20.4% of the Revolving Credit Loans, the related
Mortgaged Properties will be located in the State of Michigan.
REVOLVING CREDIT LOAN TERMS
Interest on each Revolving Credit Loan is calculated based on the average
daily balance outstanding during the Billing Cycle, and with respect to each
Revolving Credit Loan, the Billing Cycle is the calendar month preceding the
related Due Date (as defined herein).
Each Revolving Credit Loan has a Loan Rate that is subject to adjustment on
each day (with respect to 99.49% of the Revolving Credit Loans) or on each
month (with respect to 0.51% of the Revolving Credit Loans, all of which were
originated in the State of Washington) (each such day, an "ADJUSTMENT DATE")
to equal the sum of (a) an index (the "INDEX") which is either (i) the prime
rate (or high point in a range of prime rates) published in the "Money Rate"
column of The Wall Street Journal or (ii) with respect to approximately 0.51%
of the Revolving Credit Loans, all of which were originated in the State of
Washington, the rate for 26 week Treasury Bills in effect following the first
auction of the month preceding the current billing period and (b) the Gross
Margin specified in the related Credit Line Agreement, provided, however, that
the Loan Rate on each Revolving Credit Loan will in no event be greater than
the maximum Loan Rate (the "MAXIMUM LOAN RATE")
S-11
<PAGE>
set forth in the related Credit Line Agreement (subject to the maximum rate
permitted by applicable law). With respect to approximately 19.2% of the
Revolving Credit Loans, the adjustable Loan Rate will be equal to the Prime
Rate less 1% during the first 6 months of the borrowing period.
With respect to approximately 36.5% of the Revolving Credit Loans, the Gross
Margin is adjustable from time to time based on the then outstanding balance
and CLTV generally as follows:
GROSS MARGINS
<TABLE>
<CAPTION>
CLTV NOT CLTV
OUTSTANDING BALANCE MORE THAN 80% MORE THAN 80%
------------------- ------------- -------------
<S> <C> <C>
$25,000 or less................................ 2.00% 3.00%
$25,001 to $50,000............................. 1.75% 2.75%
$50,001 or more................................ 1.50% 2.50%
</TABLE>
The Gross Margins with respect to the Revolving Credit Loans are reduced
below the applicable levels indicated above by 0.25% or by 0.50% in certain
instances based on specific employee status with General Motors Corporation or
its subsidiaries at the time of origination of the Revolving Credit Loan (with
no adjustment in the event of any change in such status of the Mortgagor).
Each Revolving Credit Loan had a term to maturity from the date of
origination of not more than 180 months (the "15-YEAR LOANS"), 120 months (the
"10-YEAR LOANS") or 60 months (the "5-YEAR LOANS"). The Mortgagor for each
Revolving Credit Loan may make a Draw at any time during the period stated in
the related Credit Line Agreement (the "DRAW PERIOD"). In addition, with
respect to certain of the Revolving Credit Loans, the related Mortgagor will
not be permitted to make any Draw during the time period stated in the related
Credit Line Agreement (the "REPAYMENT PERIOD"). The Draw Period and the
Repayment Period vary for the Revolving Credit Loans based on such loan's CLTV
at origination, State of origination and original term to maturity. With
respect to 15-Year Loans and 10-Year Loans with CLTVs of 90% or less, the Draw
Period will be at any time during the term of the loan and there will be no
Repayment Period for such Revolving Credit Loans, except with respect to 2.3%
of the Revolving Credit Loans, all of which were originated in the
Commonwealth of Massachusetts, and except with respect to 0.3% of the
Revolving Credit Loans, all of which were originated in the State of
Connecticut prior to January 1996, which will have a Draw Period of the first
5 years of the loan and will have a Repayment Period for the last 5 years of
the loan with respect to such 10-Year Loans and a Draw Period for the first 10
years of the loan and a Repayment Period for the last 5 years with respect to
such 15-Year Loans. With respect to 10-Year Loans with CLTVs greater than 90%,
the Draw Period will be the first 5 years of the term of the loan, and the
Repayment Period will be the final 5 years of the loan. With respect to the 5-
Year Loans, the Draw Period will be 5 years and there will be no Repayment
Period.
The maximum amount of each Draw with respect to any Revolving Credit Loan is
equal to the excess, if any, of the Credit Limit over the outstanding
principal balance under such Credit Line Agreement at the time of such Draw.
Each Revolving Credit Loan may be prepaid in full or in part at any time and
without penalty, but with respect to each Revolving Credit Loan, the related
Mortgagor will have the right during the related Draw Period to make a Draw in
the amount of any prepayment theretofore made with respect to such Revolving
Credit Loan. Each Mortgagor generally will have access to make Draws by check,
subject to applicable law. Generally, the Credit Line Agreement or Mortgage
related to each Revolving Credit Loan will, subject to applicable law, contain
a customary "due-on-sale" clause.
As to each Revolving Credit Loan, the Mortgagor's rights to receive Draws
during the Draw Period may be suspended, or the Credit Limit may be reduced,
for cause under a number of circumstances, including, but not limited to: a
materially adverse change in the Mortgagor's financial circumstances; a
decline in the value of the Mortgaged Property significantly below its
appraised value at origination; or a payment default by the Mortgagor.
However, generally such suspension or reduction will not affect the payment
terms for previously drawn
S-12
<PAGE>
balances. The Subservicers and the Master Servicer will have no obligation to
investigate as to whether any such circumstances have occurred and may have no
knowledge thereof; therefore there can be no assurance that any Mortgagor's
ability to receive Draws will be suspended or reduced in the event that the
foregoing circumstances occur. In the event of default under a Revolving
Credit Loan, the Revolving Credit Loan may be terminated and declared
immediately due and payable in full. For this purpose, a default includes, but
is not limited to: the Mortgagor's failure to make any payment as required;
any action or inaction by the Mortgagor that adversely affects the Mortgaged
Property or the rights in the Mortgaged Property; or fraud or material
misrepresentation by a Mortgagor in connection with the Revolving Credit Loan.
Prior to the related Repayment Period or prior to the date of maturity for
loans without Repayment Periods, the Mortgagor for each Revolving Credit Loan
will be obligated to make monthly payments thereon in a minimum amount that
generally will be equal to the Finance Charge (as defined below) for such
Billing Cycle. Except as described below, if such loan has a Repayment Period,
during such period, the Mortgagor will be obligated to make monthly payments
consisting of principal installments which would substantially amortize the
Principal Balance by the maturity date, plus current Finance Charges and
Additional Charges (as defined below). In addition, certain Mortgagors will be
required to pay an annual fee of up to $35.
Notwithstanding the foregoing, with respect to the Balloon Loans,
representing approximately 97.4% of the Revolving Credit Loans, the Mortgagor
will be obligated to make a payment on the related maturity date in an amount
equal to the related Account Balance (as defined below). Such Balloon Loans
will not have a Repayment Period and prior to the related maturity date, the
related Mortgagors will be obligated to make minimum monthly payments
generally similar to those described in the first sentence of the preceding
paragraph. See "Risk Factors--Risks Associated with the Revolving Credit
Loans" herein.
With respect to each Revolving Credit Loan, (a) the "FINANCE CHARGE" for any
Billing Cycle will be an amount equal to the aggregate of, as calculated for
each day in the Billing Cycle, the then-applicable Loan Rate divided by 365
multiplied by the daily Principal Balance and (b) the "ACCOUNT BALANCE" on any
day generally will be the aggregate of the unpaid principal of the Revolving
Credit Loan outstanding at the beginning of such day, plus the sum of any
unpaid fees, insurance premiums and other charges, if any (collectively,
"ADDITIONAL CHARGES") and any unpaid Finance Charges that are due on such
Revolving Credit Loan, plus the aggregate of all related Draws funded on such
day, minus the aggregate of all payments and credits that are applied to the
repayment of any such Draws on such day. Payments made by or on behalf of the
Mortgagor for each Revolving Credit Loan will be applied to any unpaid Finance
Charges that are due thereon, prior to application, to any unpaid principal
outstanding.
With respect to each Revolving Credit Loan, the "COMBINED LOAN-TO-VALUE
RATIO" or "CLTV" generally will be the ratio, expressed as a percentage, of
the sum of (i) the Credit Limit and (ii) any outstanding principal balance, at
origination of such Revolving Credit Loan, of all other mortgage loans, if
any, secured by senior or subordinate liens on the related Mortgaged Property,
to the Appraised Value, or, when not available, the Stated Value. The
"APPRAISED VALUE" for any Revolving Credit Loan will be the appraised value of
the related Mortgaged Property determined in the appraisal used in the
origination of such Revolving Credit Loan (which may have been obtained at an
earlier time); provided that if such Revolving Credit Loan was originated
simultaneously with or not more than 12 months after a senior lien on the
related Mortgaged Property, the Appraised Value shall be the lesser of the
appraised value at the origination of the senior lien and the sales price for
such Mortgaged Property; provided, that with respect to any Revolving Credit
Loan originated not more than 12 months after a senior lien was originated on
the related Mortgaged Property, the Appraised Value will be the appraised
value at the time of origination of the senior lien. However, with respect to
not more than 12.7% of the Revolving Credit Loans for which the documentation
type is known, the "STATED VALUE" will be based on the stated value of the
property as made by the related Mortgagor in his or her application. See
"Revolving Credit Loan Program--Underwriting Standards" in the Prospectus and
"Description of the Mortgage Pool--Underwriting Standards" herein.
S-13
<PAGE>
No more than 1.0% of the Revolving Credit Loans are insured by mortgage
insurance policies covering all or a portion of any losses on each such Loan,
subject to certain limitations.
REVOLVING CREDIT LOAN CHARACTERISTICS
Set forth below is a description of certain additional characteristics of
the Revolving Credit Loans as of the Cut-off Date. Unless otherwise specified,
all principal balances of the Revolving Credit Loans are as of the Cut-off
Date Balance and are rounded to the nearest dollar. All percentages are
approximate percentages by aggregate principal balance as of the Cut-off Date
(except as indicated otherwise). The information relating to property type,
occupancy type and documentation type of the Revolving Credit Loans is not
available with respect to up to 2.05% of the Revolving Credit Loans.
Therefore, the information set forth below in the Property Type, Occupancy
Type and Documentation Type tables below was calculated based on the Revolving
Credit Loans for which such information was available as of the Cut-off Date.
No assurance can be given that the property type, occupancy type and
documentation type characteristics of the Revolving Credit Loans for which
such information was available are representative of the Revolving Credit
Loans in the aggregate.
PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE LOANS FOR
NUMBER OF WHICH PROPERTY TYPE
REVOLVING CUT-OFF DATE IS KNOWN BY CUT-OFF
PROPERTY TYPE CREDIT LOANS BALANCE DATE BALANCE
- ------------- ------------ ------------ -------------------
<S> <C> <C> <C>
Single-Family..................... 6,780 $174,278,822 91.69%
PUD............................... 314 8,312,944 4.37
Condominium....................... 217 5,457,449 2.87
Two-Four Family................... 67 1,666,254 0.88
Manufactured...................... 17 367,103 0.19
----- ------------ ------
Total........................... 7,395 $190,082,572 100.00%
===== ============ ======
</TABLE>
OCCUPANCY TYPES
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE LOANS FOR
NUMBER OF WHICH OCCUPANCY TYPE
OCCUPANCY REVOLVING CUT-OFF DATE IS KNOWN BY CUT-OFF
(AS INDICATED BY BORROWER) CREDIT LOANS BALANCE DATE BALANCE
-------------------------- ------------ ------------ --------------------
<S> <C> <C> <C>
Owner............................. 7,340 $188,110,077 98.82%
Second............................ 51 1,866,193 0.98
Investment........................ 12 375,174 0.20
----- ------------ ------
Total........................... 7,403 $190,351,444 100.00%
===== ============ ======
</TABLE>
S-14
<PAGE>
DOCUMENTATION TYPE
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE LOANS FOR WHICH
NUMBER OF DOCUMENTATION TYPE IS
REVOLVING CUT-OFF DATE KNOWN BY CUT-OFF
DOCUMENTATION CREDIT LOANS BALANCE DATE BALANCE
- ------------- ------------ ------------ ------------------------
<S> <C> <C> <C>
Standard..................... 5,875 $155,926,365 81.91%
No Income No Appraisal....... 974 16,095,872 8.46
No Income Verification....... 267 7,666,131 4.03
Select....................... 215 8,070,306 4.24
Quick........................ 72 2,592,770 1.36
----- ------------ ------
Total...................... 7,403 $190,351,444 100.00%
===== ============ ======
</TABLE>
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF PRINCIPAL BALANCES CREDIT LOANS BALANCE DATE BALANCE
- --------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
$ 0.00 to 25,000.00................. 4,736 $ 70,005,410 36.07%
25,000.01 to 50,000.00................. 2,228 77,775,134 40.08
50,000.01 to 75,000.00................. 370 22,477,757 11.58
75,000.01 to 100,000.00................. 138 12,179,295 6.28
100,000.01 to 125,000.00................. 23 2,544,661 1.31
125,000.01 to 150,000.00................. 16 2,259,205 1.16
150,000.01 to 175,000.00................. 9 1,441,552 0.74
175,000.01 to 200,000.00................. 4 719,684 0.37
200,000.01 to 225,000.00................. 4 861,326 0.44
225,000.01 to 250,000.00................. 6 1,450,093 0.75
250,000.01 to 275,000.00................. 1 265,649 0.14
275,000.01 to 300,000.00................. 2 579,196 0.30
325,000.01 to 350,000.00................. 1 328,309 0.17
350,000.01 to 400,000.00................. 2 773,459 0.40
400,000.01 and Greater................... 1 401,443 0.21
----- ------------ ------
Total.................................. 7,541 $194,062,173 100.00%
===== ============ ======
</TABLE>
The average Principal Balance as of the Cut-off Date will be $25,734.
GEOGRAPHICAL DISTRIBUTIONS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
STATE CREDIT LOANS BALANCE DATE BALANCE
- ----- ------------ ------------ -------------
<S> <C> <C> <C>
Michigan................................ 1,553 $ 39,487,313 20.35%
California.............................. 1,142 32,868,259 16.94
New Jersey.............................. 495 13,710,733 7.07
New York................................ 493 14,457,321 7.45
Other(1)................................ 3,858 93,538,547 48.19
----- ------------ ------
Totals................................ 7,541 $194,062,173 100.00%
===== ============ ======
</TABLE>
- --------
(1) Other includes states under 5% of the Cut-off Date Balance individually.
S-15
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
RANGE OF COMBINED REVOLVING CUT-OFF DATE BY CUT-OFF
LOAN-TO-VALUE RATIOS(%) CREDIT LOANS BALANCE DATE BALANCE
- ----------------------- ------------ ------------ -------------
<S> <C> <C> <C>
0.01 to 5.00......................... 6 $ 53,144 0.03%
5.01 to 10.00......................... 24 602,198 0.31
10.01 to 15.00......................... 28 460,754 0.24
15.01 to 20.00......................... 28 714,386 0.37
20.01 to 25.00......................... 55 1,341,381 0.69
25.01 to 30.00......................... 62 1,487,064 0.77
30.01 to 35.00......................... 89 2,253,115 1.16
35.01 to 40.00......................... 99 3,273,938 1.69
40.01 to 45.00......................... 129 3,388,434 1.75
45.01 to 50.00......................... 153 4,520,616 2.33
50.01 to 55.00......................... 182 6,059,933 3.12
55.01 to 60.00......................... 263 7,733,933 3.99
60.01 to 65.00......................... 320 8,072,541 4.16
65.01 to 70.00......................... 458 13,120,615 6.76
70.01 to 75.00......................... 914 25,189,521 12.98
75.01 to 80.00......................... 2,188 57,057,900 29.40
80.01 to 85.00......................... 335 8,075,196 4.16
85.01 to 90.00......................... 2,125 48,988,754 25.24
90.01 to 95.00......................... 13 229,524 0.12
95.01 to 100.00......................... 70 1,439,224 0.74
----- ------------ ------
Totals................................ 7,541 $194,062,173 100.00%
===== ============ ======
</TABLE>
The weighted average Combined Loan-to-Value Ratio based on the Cut-off Date
Balance of the Revolving Credit Loans as of the Cut-off Date will be 74.1%.
S-16
<PAGE>
JUNIOR RATIOS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
RANGE OF REVOLVING CUT-OFF DATE BY CUT-OFF
JUNIOR RATIOS(%) CREDIT LOANS BALANCE DATE BALANCE
- ---------------- ------------ ------------ -------------
<S> <C> <C> <C>
0.00 to 5.00......................... 13 $ 201,372 0.10%
5.01 to 10.00......................... 382 5,256,958 2.71
10.01 to 15.00......................... 1,192 22,511,000 11.60
15.01 to 20.00......................... 1,367 29,744,456 15.33
20.01 to 25.00......................... 975 22,791,142 11.74
25.01 to 30.00......................... 775 20,227,602 10.42
30.01 to 35.00......................... 571 15,973,274 8.23
35.01 to 40.00......................... 420 12,316,745 6.35
40.01 to 45.00......................... 299 9,663,465 4.98
45.01 to 50.00......................... 221 7,284,036 3.75
50.01 to 55.00......................... 145 5,234,507 2.70
55.01 to 60.00......................... 125 4,308,791 2.22
60.01 to 65.00......................... 106 4,479,760 2.31
65.01 to 70.00......................... 79 3,308,636 1.70
70.01 to 75.00......................... 61 2,163,739 1.11
75.01 to 80.00......................... 54 1,939,462 1.00
80.01 to 85.00......................... 39 1,165,911 0.60
85.01 to 90.00......................... 32 1,253,149 0.65
90.01 to 95.00......................... 33 1,423,655 0.73
95.01 to 100.00......................... 652 22,814,513 11.76
----- ------------ ------
Totals................................ 7,541 $194,062,173 100.00%
===== ============ ======
</TABLE>
The weighted average Junior Ratio as of the Cut-off Date will be 39.1%.
LOAN RATES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF LOAN RATES(%) CREDIT LOANS BALANCE DATE BALANCE
- ---------------------- ------------ ------------ -------------
<S> <C> <C> <C>
7.001% to 8.000%...................... 1,510 $ 37,283,047 19.21%
8.001% to 9.000%...................... 13 720,069 0.37
9.001% to 10.000%...................... 2,915 88,469,469 45.59
10.001% to 11.000%...................... 2,397 53,467,075 27.55
11.001% to 12.000%...................... 637 12,709,749 6.55
12.001% to 13.000%...................... 69 1,412,766 0.73
----- ------------ ------
Totals................................ 7,541 $194,062,173 100.00%
===== ============ ======
</TABLE>
The weighted average Loan Rate as of the Cut-off Date will be 9.57%.
S-17
<PAGE>
CURRENT GROSS MARGINS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF CURRENT GROSS MARGINS(%) CREDIT LOANS BALANCE DATE BALANCE
- --------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Less than 0.000.......................... 1,498 $ 36,986,751 19.06%
0.000 to 1.000........................... 2,473 66,056,473 34.04
1.001 to 2.000........................... 2,730 72,231,888 37.22
2.001 to 3.000........................... 750 16,815,238 8.66
3.001 to 4.000........................... 90 1,971,823 1.02
----- ------------ ------
Totals................................. 7,541 $194,062,173 100.00%
===== ============ ======
</TABLE>
The weighted average current Gross Margin as of the Cut-off Date will be
1.08%.
FULLY INDEXED MARGIN
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF FULLY INDEXED MARGINS(%) CREDIT LOANS BALANCE DATE BALANCE
- --------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
0.000 to 1.000........................... 3,407 $ 90,017,978 46.39%
1.001 to 2.000........................... 3,287 85,058,570 43.83
2.001 to 3.000........................... 750 16,815,238 8.66
3.001 to 4.000........................... 97 2,170,387 1.12
----- ------------ ------
Totals................................. 7,541 $194,062,173 100.00%
===== ============ ======
</TABLE>
The weighted average fully indexed margin as of the Cut-off Date will be
1.53%.
S-18
<PAGE>
CREDIT UTILIZATION RATES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF CREDIT UTILIZATION RATES (%) CREDIT LOANS BALANCE DATE BALANCE
- ------------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
0.01 to 5.00.......................... 103 $ 130,475 0.07%
5.01 to 10.00.......................... 115 518,703 0.27
10.01 to 15.00.......................... 113 820,074 0.42
15.01 to 20.00.......................... 137 1,190,319 0.61
20.01 to 25.00.......................... 140 1,596,868 0.82
25.01 to 30.00.......................... 169 2,225,699 1.15
30.01 to 35.00.......................... 154 2,560,364 1.32
35.01 to 40.00.......................... 180 3,146,286 1.62
40.01 to 45.00.......................... 171 3,482,167 1.79
45.01 to 50.00.......................... 179 3,639,579 1.88
50.01 to 55.00.......................... 195 3,973,862 2.05
55.01 to 60.00.......................... 237 5,400,747 2.78
60.01 to 65.00.......................... 229 5,398,652 2.78
65.01 to 70.00.......................... 277 6,504,057 3.35
70.01 to 75.00.......................... 244 6,323,962 3.26
75.01 to 80.00.......................... 326 9,132,234 4.71
80.01 to 85.00.......................... 401 10,756,270 5.54
85.01 to 90.00.......................... 447 12,350,031 6.36
90.01 to 95.00.......................... 772 22,249,469 11.47
95.01 to 100.00.......................... 2,832 88,294,511 45.50
Over 100.01.............................. 120 4,367,845 2.25
----- ------------ ------
Totals................................. 7,541 $194,062,173 100.00%
===== ============ ======
</TABLE>
The weighted average Credit Utilization Rate based on the Cut-off Date
Balance of the Revolving Credit Loans as of the Cut-off Date will be 84.0%.
S-19
<PAGE>
CREDIT LIMITS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF CREDIT LIMITS CREDIT LOANS BALANCE DATE BALANCE
- ---------------------- ------------ ------------ -------------
<S> <C> <C> <C>
$ 0.01 to 25,000.00............... 3,223 $ 47,285,364 24.37%
25,000.01 to 50,000.00............... 3,176 86,132,075 44.38
50,000.01 to 75,000.00............... 582 23,891,857 12.31
75,000.01 to 100,000.00............... 406 21,780,253 11.22
100,000.01 to 125,000.00............... 41 2,145,147 1.11
125,000.01 to 150,000.00............... 42 3,324,436 1.71
150,000.01 to 175,000.00............... 20 1,895,909 0.98
175,000.01 to 200,000.00............... 20 1,633,134 0.84
200,000.01 to 225,000.00............... 4 519,525 0.27
225,000.01 to 250,000.00............... 11 1,905,721 0.98
250,000.01 to 275,000.00............... 1 58,665 0.03
275,000.01 to 300,000.00............... 6 1,208,555 0.62
300,000.01 to 325,000.00............... 1 19,357 0.01
325,000.01 to 350,000.00............... 2 593,957 0.31
350,000.01 to 400,000.00............... 3 894,002 0.46
400,000.01 and Greater................. 3 774,216 0.40
----- ------------ ------
Totals................................ 7,541 $194,062,173 100.00%
===== ============ ======
</TABLE>
The average of the Credit Limits as of the Cut-off Date will be $36,296.
MAXIMUM LOAN RATES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF MORTGAGE
REVOLVING CUT-OFF DATE POOL BY CUT-OFF
MAXIMUM LOAN RATES (%) CREDIT LOANS BALANCE DATE BALANCE
- ---------------------- ------------ ------------ -------------------
<S> <C> <C> <C>
14.001 to 15.000.................. 7 $ 92,309 0.05%
15.001 to 16.000.................. 423 11,708,113 6.03
16.001 to 17.000.................. 69 2,140,994 1.10
17.001 to 18.000.................. 1,832 46,677,912 24.05
18.001 to 19.000.................. 5,209 133,411,339 68.75
19.001 to 20.000.................. 1 31,506 0.02
----- ------------ ------
Totals.......................... 7,541 $194,062,173 100.00%
===== ============ ======
</TABLE>
The weighted average Maximum Loan Rate as of the Cut-off Date will be 18.08%.
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
RANGE OF MONTHS NUMBER OF PERCENT OF MORTGAGE
REMAINING TO REVOLVING CUT-OFF DATE POOL BY CUT-OFF
SCHEDULED MATURITY CREDIT LOANS BALANCE DATE BALANCE
- ------------------ ------------ ------------ -------------------
<S> <C> <C> <C>
0--120.......................... 7,007 $177,328,117 91.38%
121--180.......................... 534 16,734,055 8.62
----- ------------ ------
Totals.......................... 7,541 $194,062,173 100.00%
===== ============ ======
</TABLE>
The weighted average months remaining to scheduled maturity as of the Cut-off
Date will be 111 months.
S-20
<PAGE>
ORIGINATION YEAR
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL BY
REVOLVING CUT-OFF DATE CUT-OFF
ORIGINATION YEAR CREDIT LOANS BALANCE DATE BALANCE
- ---------------- ------------ ------------ ----------------
<S> <C> <C> <C>
1988................................. 3 $ 121,159 0.06%
1989................................. 2 49,528 0.03
1990................................. 9 209,032 0.11
1991................................. 13 349,470 0.18
1992................................. 71 2,401,109 1.24
1993................................. 207 5,856,333 3.02
1994................................. 252 7,753,607 4.00
1995................................. 612 15,821,307 8.15
1996................................. 4,410 112,941,167 58.20
1997................................. 1,962 48,559,461 25.02
----- ------------ ------
Totals............................. 7,541 $194,062,173 100.00%
===== ============ ======
</TABLE>
LIEN PRIORITY
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL BY
REVOLVING CUT-OFF DATE CUT-OFF
LIEN POSITION CREDIT LOANS BALANCE DATE BALANCE
- ------------- ------------ ------------ ----------------
<S> <C> <C> <C>
Second............................... 6,691 $167,205,638 86.16%
First................................ 850 26,856,534 13.84
----- ------------ ------
Totals............................. 7,541 $194,062,173 100.00%
===== ============ ======
</TABLE>
UNDERWRITING STANDARDS
All of the Revolving Credit Loans will be acquired by the Depositor from the
Designated Seller. The following is a brief description of the various
underwriting standards and procedures applicable to the Revolving Credit
Loans.
The Designated Seller's underwriting standards with respect to the Revolving
Credit Loans generally will conform to those published in the GMAC Mortgage
Underwriting Guidelines (the "GMACM UNDERWRITING GUIDE," as modified from time
to time), including the provisions of the GMACM Underwriting Guide applicable
to the GMACM Home Equity Program. The underwriting standards as set forth in
the GMACM Underwriting Guide are continuously revised based on prevailing
conditions in the residential mortgage market and the market for mortgage
securities.
The underwriting standards of the Designated Seller are generally similar to
the underwriting standards of the Home Equity Program as described in the
Prospectus under "Revolving Credit Loan Program--Underwriting" with a few
differences. First, borrowers with a previous foreclosure or bankruptcy
generally do not qualify for a loan unless extenuating credit circumstances
beyond their control are documented. Second, the monthly payment used to
qualify the borrower is based solely on the payment of interest only on the
loan. Finally, credit scores are not used to deny loans. However, credit
scores are used as a "tool" to analyze a borrower's credit.
The underwriting standards set forth in the GMACM Underwriting Guide with
respect to Revolving Credit Loans originated under the GMACM Home Equity
Program provide for varying levels of documentation. For
S-21
<PAGE>
standard documented loans, a prospective borrower is required to fill out a
detailed application providing pertinent credit information, including tax
returns if they are self-employed or received income from dividends and
interest, rental properties or other income which can be verified via tax
returns. In addition, a borrower may demonstrate income and employment
directly by providing alternative documentation in the form of a pay stub and
a W-2. These loans require drive-by appraisals for property values of $500,000
or less, and full appraisals for property values of more than $500,000.
Under the GMACM Underwriting Guide, loans may also be originated under the
"Quick Program," a no income verification program for self-employed borrowers.
For such loans, only a credit check and an appraisal are required. Such loans
are limited to a loan amount of $100,000 or less, and are limited to primary
residences. In addition, the borrower may be qualified under a "No Income/No
Appraisal" program. Under such a program, a credit check is required, the
borrower may not be self-employed, and the CLTV is limited to 80%. The
borrower is qualified on his or her stated income in the application, the CLTV
is based on the borrower's stated value of the property and no appraisal is
made. The maximum loan under such program is $30,000. In addition, the
borrower may be qualified under a "No Income Verification" program. Under such
program, a credit check is required, the borrower may not be self-employed,
and the CLTV is limited to 80%. The borrower is qualified based on the income
stated on the application. Such loans are limited to an amount of $100,000 or
less, and are limited to primary residences.
In addition, the GMACM Underwriting Guide provides for loans under its
"Select" program to employees and retirees of GM. Such loans are made to
executives of GM or affiliates of GM, dealer principals and general managers
with a minimum annual base salary of $75,000 or to GM or GM affiliate retirees
with a minimum base retirement annual income of $60,000. Underwriting is
subject to a maximum CLTV of 90% for primary residences and a maximum CLTV of
65% for second homes, and a maximum loan amount of $250,000. The CLTV is based
on the borrower's stated value and no appraisal is made for CLTVs of 80% or
less. A drive-by appraisal is required for a CLTV greater than 80%.
The Revolving Credit Loans included in the Mortgage Pool generally were
originated subject to a maximum CLTV of 100%. Additionally, loans were
generally generated with a maximum total monthly debt to income ratio of 45%,
although variances are permitted based on compensating factors. There can be
no assurance that the CLTV or the debt to income ratio for any Revolving
Credit Loans will not increase from the levels established at origination.
The underwriting standards set forth in the GMACM Underwriting Guide with
respect to Revolving Credit Loans originated under the GMACM Home Equity
Program may be varied in appropriate cases. There can be no assurance that
every Revolving Credit Loan was originated in conformity with the applicable
underwriting standards in all material respects, or that the quality or
performance of the Revolving Credit Loans will be equivalent under all
circumstances.
SERVICING OF REVOLVING CREDIT LOANS
GENERAL
The Master Servicer will be responsible for servicing the Revolving Credit
Loans directly (or through one or more Subservicers) in accordance with the
Guide (as defined in the Prospectus) and the terms of the Servicing Agreement.
See "Servicing of Revolving Credit Loans" in the Prospectus. The Custodian
will be The Bank of Maryland.
Billing statements are mailed monthly by the Master Servicer (or any
Subservicers). The statement details the monthly activity on the related
Revolving Credit Loan and specifies the minimum payment due to the Master
Servicer and the available credit line. Notice of changes in the applicable
Loan Rate are provided by the Master
S-22
<PAGE>
Servicer to the Mortgagor with such statements. All payments are due by the
20th day of the month (a "DUE DATE").
For information regarding foreclosure procedures, see "Servicing of
Revolving Credit Loans--Realization Upon Defaulted Loans" in the Prospectus.
Servicing and charge-off policies and collection practices may change over
time in accordance with the Master Servicer's business judgment, changes in
the Master Servicer's portfolio of real estate secured revolving credit line
loans that it services for its clients and applicable laws and regulations,
and other considerations.
DELINQUENCY AND LOSS EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO
The following tables summarize the delinquency and loss experience for all
home equity lines of credit ("HELOC") loans originated by the Master Servicer.
The data presented in the following tables is for illustrative purposes only,
and there is no assurance that the delinquency and loss experience of the
Revolving Credit Loans will be similar to that set forth below.
The information in the tables below has not been adjusted to eliminate the
effect of the significant growth in the size of the Master Servicer's HELOC
loan portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of such HELOC loans serviced for
each period would be higher than those shown if certain of such home equity
loans were artificially isolated at a point in time and the information showed
the activity only with respect to such HELOC loans.
There can be no assurance that the delinquency experience set forth below
will be representative of the results that may be experienced with respect to
the Revolving Credit Loans serviced by the Master Servicer or any
Subservicers.
S-23
<PAGE>
GMAC MORTGAGE CORPORATION DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
FIVE
YEAR ENDED DECEMBER 31, MONTHS ENDED
------------------------------------------------------ MAY 30,
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Number of Accounts with
Balances Managed....... 7,209 8,280 11,577 17,344 21,155
Aggregate Amount........ $251,211,408 $276,617,622 $348,925,061 $496,073,600 $589,266,789
Loan Balance of Mortgage
Loans 30-59 Days Past
Due(1)................. $ 4,429,046 $ 4,896,105 $ 6,155,371 $ 7,472,812 $ 5,672,549
Loan Balance of Mortgage
Loans 60-89 Days Past
Due(1)................. $ 1,574,663 $ 1,118,243 $ 1,147,721 $ 1,052,747 $ 1,686,377
Loan Balance of Mortgage
Loans 90+ Days Past
Due(1)................. $ 779,235 $ 684,166 $ 1,114,707 $ 2,018,333 $ 708,090
Loan Balance of Mortgage
Loans 30+ Days Past
Due(1)................. $ 6,782,944 $ 6,698,514 $ 8,417,799 $ 10,543,892 $ 8,067,016
Loan Balance of Mortgage
Loans 30+ Days Past Due
as a Percentage of
Aggregate Amount
Outstanding(1)......... 2.70% 2.42% 2.41% 2.13% 1.37%
Foreclosures and
Bankruptcies........... $ 1,636,714 $ 3,382,048 $ 2,647,576 $ 2,808,028 $ 4,426,614
Real Estate Owned....... $ 313,975 $ 183,921 $ 1,545,197 $ 1,749,156 $ 600,263
</TABLE>
- --------
(1) Contractually past due excluding loans in the process of foreclosure and
loans where the borrower has filed for bankruptcy.
GMAC MORTGAGE CORPORATION LOSS EXPERIENCE
<TABLE>
<CAPTION>
FIVE
YEAR ENDED DECEMBER 31, MONTHS ENDED
---------------------------------------- MAY 30,
1994 1995 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Aggregate Amount
Outstanding............ $276,617,622 $348,925,061 $496,073,600 $589,266,789
Net Charge-offs(1)...... $ 518,197 $ 522,013 $ 1,553,129 $ 813,342
Net Charge-offs as a
Percentage of Aggregate
Amount Outstanding at
Year-End............... 0.19% 0.15% 0.31% 0.14%
</TABLE>
- --------
(1) Net Charge-offs refers to writedowns on properties prior to liquidation
and the actual liquidated loss incurred on a mortgaged property when sold
net of recoveries.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fees for each Revolving Credit Loan are payable out of the
interest payments on such Revolving Credit Loan. The weighted average
Servicing Fee as of the Cut-off Date will be approximately 0.50% per annum.
The Servicing Fees consist of (a) servicing compensation payable to the Master
Servicer in respect of its master servicing and servicing activities and (b)
subservicing and other related compensation retained by any Subservicer. The
Master Servicer is obligated to pay certain ongoing expenses associated with
its servicing activities and incurred by the Master Servicer in connection
with its responsibilities under the Servicing Agreement.
S-24
<PAGE>
THE ISSUER
GENERAL
The Home Equity Loan Trust 1997-GMACM4 is a business trust formed under the
laws of the State of Delaware pursuant to an Amended and Restated Trust
Agreement dated as of August 28, 1997 (the "TRUST AGREEMENT"), 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 Revolving Credit Loans and the other assets of the Issuer and
proceeds therefrom, (ii) issuing the Notes and the Certificates, (iii) making
payments on the Notes and the Certificates and (iv) engaging in other
activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith.
The Issuer's principal offices are in Wilmington, Delaware, in care of
Wilmington Trust Company, as Owner Trustee, at the address listed below.
THE OWNER TRUSTEE
Wilmington Trust Company will be 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, will be the
Indenture Trustee under the Indenture. The principal offices of the Indenture
Trustee are located in New York, New York.
THE CREDIT ENHANCER
The following information has been supplied by Ambac Assurance Corporation
(the "CREDIT ENHANCER") for inclusion in this Prospectus Supplement. No
representation is made by the Depositor, the Administrator, the Master
Servicer, the Underwriters 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 Financial Group, 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
S-25
<PAGE>
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 June 30, 1997 and for the periods ending
June 30, 1997 and June 30, 1996 included in the Quarterly Report on Form 10-Q
of Ambac Financial Group, Inc. for the period ended June 30, 1997 (which was
filed with the Commission on August 14, 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 Financial Group, 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 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 June 30, 1997,
respectively, in conformity with generally accepted accounting principles.
AMBAC ASSURANCE CORPORATION
CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996 1997
------------ ------------ ------------ -----------
(AUDITED) (AUDITED) (AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Unearned premiums........... $ 840 $ 906 $ 995 $1,036
Other liabilities........... 136 295 259 284
------ ------ ------ ------
Total liabilities....... $ 976 $1,201 $1,254 $1,320
------ ------ ------ ------
Stockholder's equity:
Common Stock.............. $ 82 $ 82 $ 82 $ 82
Additional paid-in
capital.................. 444 481 515 520
Unrealized gains (losses)
on investments; net of
tax...................... (46) 87 66 64
Retained earnings......... 782 907 992 1,079
------ ------ ------ ------
Total stockholder's
equity................. $1,262 $1,557 $1,655 $1,745
------ ------ ------ ------
Total liabilities and
stockholder's equity... $2,238 $2,758 $2,909 $3,065
====== ====== ====== ======
</TABLE>
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 Notes or the
advisability of investing in the 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
S-26
<PAGE>
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.
DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to the Indenture dated as of August 28,
1997, between the Issuer and The Chase Manhattan Bank, as Indenture Trustee.
The Certificates will be issued pursuant to the Trust Agreement. The following
summaries describe certain provisions of the Securities, the Indenture and the
Trust Agreement. The summaries do not purport to be complete and are subject
to, and qualified in their entirety by reference to, the provisions of the
applicable agreement. Only the Term Notes are offered hereby.
The Notes will be secured by the assets of the Trust pledged by the Issuer
to the Indenture Trustee pursuant to the Indenture which will consist of: (i)
the Revolving Credit Loans; (ii) all amounts on deposit in the Payment
Account; (iii) the Policy; and (iv) proceeds of the foregoing.
The Variable Funding Notes initially will be issued to GMACM. The Security
Balance of the Variable Funding Notes will be increased from time to time
during the Revolving Period (as long as an Amortization Event has not
occurred) in consideration for Additional Balances sold to the Trust under the
Designated Seller's Agreement if Principal Collections are insufficient or
unavailable to cover the related Draws. On any Payment Date after the end of
the Revolving Period, so long as an Amortization Event has not occurred, the
acquisition of all Additional Balances will be reflected in an increase in the
Security Balance of the Variable Funding Notes. Notwithstanding the foregoing,
the Security Balance of the Variable Funding Notes may not exceed an aggregate
amount equal to $79,647,493 minus any amounts paid as principal on the
Variable Funding Notes or such greater amount as may be permitted under the
Indenture (the "MAXIMUM VARIABLE FUNDING BALANCE"). Initially the Variable
Funding Notes will have no Security Balance.
BOOK-ENTRY NOTES
The Term Notes will initially be issued as Book-Entry Notes. Term Note
Owners may elect to hold their Term Notes through DTC in the United States, or
Cedel or Euroclear, in Europe if they are Participants of such systems, or
indirectly through organizations which are Participants in such systems. The
Book-Entry Notes will be issued in one or more securities which equal the
aggregate principal balance of the Term Notes and will initially be registered
in the name of Cede & Co., the nominee of DTC. Cedel and Euroclear will hold
omnibus positions on behalf of their Participants through customers'
securities accounts in Cedel's and Euroclear's names on the books of their
respective depositaries (in such capacities, individually the "RELEVANT
DEPOSITARY" and collectively the "EUROPEAN DEPOSITARIES") which in turn will
hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Investors may hold such beneficial interests in the
Book-Entry Notes in minimum denominations representing Security Balances of
$1,000 and in integral multiples of $1,000 in excess thereof. Except as
described below, no Beneficial Owner will be entitled to receive a physical
certificate representing such security (a "DEFINITIVE TERM NOTE"). Unless and
until Definitive Term Notes are issued, it is anticipated that the only
"HOLDER" of the Term Notes will be Cede & Co., as nominee of DTC. Term Note
Owners will not be Holders as that term is used in the Indenture.
The Beneficial Owner's ownership of a Book-Entry Note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "FINANCIAL INTERMEDIARY") that maintains the Beneficial
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Notes will be recorded on the records of DTC (or
of a Participating firm that acts as agent for the Financial Intermediary,
whose interest will in turn be recorded on the records of DTC, if the
Beneficial Owner's Financial Intermediary is not a DTC Participant and on the
records of Cedel or Euroclear, as appropriate).
S-27
<PAGE>
Term Note Owners will receive all payments of principal of, and interest on,
the Term Notes from the Indenture Trustee through DTC and DTC Participants.
While the Term Notes are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "RULES"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Term Notes and
is required to receive and transmit payments of principal of, and interest on,
the Term Notes. Participants and Indirect Participants with whom Term Note
Owners have accounts with respect to Term Notes are similarly required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Term Note Owners. Accordingly, although Term Note Owners will not
possess physical certificates, the Rules provide a mechanism by which Term
Note Owners will receive payments and will be able to transfer their interest.
Term Note Owners will not receive or be entitled to receive Definitive Term
Notes representing their respective interests in the Term Notes, except under
the limited circumstances described below. Unless and until Definitive Term
Notes are issued, Term Note Owners who are not Participants may transfer
ownership of Term Notes only through Participants and Indirect Participants by
instructing such Participants and Indirect Participants to transfer the Term
Notes, by book-entry transfer, through DTC for the account of the purchasers
of such Term Notes, which account is maintained with their respective
Participants. Under the Rules and in accordance with DTC's normal procedures,
transfers of ownership of Term Notes will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and Indirect Participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Term Note Owners.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes may
experience some delay in their receipt of payments, since such payments will
be forwarded by the Indenture Trustee to Cede & Co. Payments with respect to
Term Notes held through Cedel or Euroclear will be credited to the cash
accounts of Cedel Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such payments will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Because DTC
can only act on behalf of Financial Intermediaries, the ability of a
Beneficial Owner to pledge Book-Entry Notes to persons or entities that do not
participate in the Depositary system, or otherwise take actions in respect of
such Book-Entry Notes, may be limited due to the lack of physical certificates
for such Book-Entry Notes. In addition, issuance of the Book-Entry Notes in
book-entry form may reduce the liquidity of such Term Notes in the secondary
market since certain potential investors may be unwilling to purchase
securities for which they cannot obtain physical certificates.
DTC has advised the Indenture Trustee that, unless and until Definitive Term
Notes are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Notes under the Indenture only at the direction of
one or more Financial Intermediaries to whose DTC accounts the Book-Entry
Notes are credited, to the extent that such actions are taken on behalf of
Financial Intermediaries whose holdings include such Book-Entry Notes. Cedel
or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by Term Noteholders under the Indenture on behalf of a
Cedel Participant or Euroclear Participant only in accordance with its
relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Term Notes which conflict with actions taken with respect to other Term Notes.
Definitive Term Notes will be issued to Beneficial Owners of the Book-Entry
Notes, or their nominees, rather than to DTC, if (a) the Indenture Trustee
determines that the DTC is no longer willing, qualified or able to discharge
properly its responsibilities as nominee and depository with respect to the
Book-Entry Notes and the Indenture Trustee is unable to locate a qualified
successor, (b) the Indenture Trustee elects to terminate a book-entry system
through DTC or (c) after the occurrence of an Event of Default, pursuant to
the Indenture, Beneficial Owners having Percentage Interests aggregating at
least a majority of the Security Balances of the Term Notes advise the DTC
through the Financial Intermediaries and the DTC Participants in writing that
the continuation of a book-entry system through DTC (or a successor thereto)
is no longer in the best interests of Beneficial Owners.
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Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all
Beneficial Owners of the occurrence of such event and the availability through
DTC of Definitive Term Notes. Upon surrender by DTC of the global certificate
or certificates representing the Book-Entry Notes and instructions for re-
registration, the Indenture Trustee will issue and authenticate Definitive
Term Notes, and thereafter the Indenture Trustee will recognize the holders of
such Definitive Term Notes as Holders under the Indenture.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Term Notes among Participants of DTC, Cedel
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
For additional information regarding DTC, Cedel, Euroclear and the Term
Notes, see "Description of the Notes--Form of Notes" in the Prospectus.
PAYMENTS ON THE NOTES
Payments on the Notes will be made by the Indenture Trustee or the Paying
Agent on the 20th day of each month or, if such day is not a Business Day,
then the next succeeding Business Day, commencing in September 1997. Payments
on the Term Notes will be made to the persons in whose names such Term Notes
are registered at the close of business on the day prior to each Payment Date
or, if the Term Notes are no longer Book-Entry Notes, on the Record Date. See
"Description of the Notes--Payments" in the Prospectus. Payments will be made
by check or money order mailed (or upon the request of a Holder owning Term
Notes having denominations aggregating at least $1,000,000, by wire transfer
or otherwise) to the address of the person entitled thereto (which, in the
case of Book-Entry Notes, will be DTC or its nominee) as it appears on the
Security Register in amounts calculated as described herein on the
Determination Date. However, the final payment in respect of the Term Notes
will be made only upon presentation and surrender thereof at the office or the
agency of the Indenture Trustee specified in the notice to Holders of such
final payment. A "BUSINESS DAY" is any day other than (i) a Saturday or Sunday
or (ii) a day on which banking institutions in the State of California,
Minnesota, Pennsylvania, New York, Illinois or Delaware are required or
authorized by law to be closed.
INTEREST PAYMENTS ON THE NOTES
Interest payments will be made on the Notes on each Payment Date at the Note
Rate for the related Interest Period, subject to the limitations set forth
below, which may result in Interest Shortfalls. The "NOTE RATE" for an
Interest Period will generally be a floating rate equal to the lesser of (i)
the sum of (a) LIBOR, determined as specified herein, as of the second LIBOR
Business Day prior to the first day of such Interest Period (or as of two
LIBOR Business Days prior to the Closing Date, in the case of the first
Interest Period) plus (b) 0.18% per annum (or, on any Payment Date when the
aggregate Principal Balance of the Revolving Credit Loans as of the last day
during the related Collection Period is less than 10% of the aggregate Cut-off
Date Balance, LIBOR plus 0.36%) and (ii) the Maximum Net Loan Rate (as
described below). However, on any Payment Date on which interest accrued on
the Notes during the related Interest Period exceeds an amount equal to one-
twelfth of the product of (a) the sum of aggregate Principal Balance of the
Revolving Credit Loans multiplied by (b) the Net Loan Rate Cap (as described
below), the amount of such difference (any such amount, an "INTEREST
SHORTFALL") will not be included as interest payments on the Notes for such
Payment Date and such amount will accrue interest at the Note Rate on the
Notes (as adjusted from time to time) and will be paid on future Payment Dates
pro rata based on the Security Balance thereof only to the extent funds are
available therefor as set forth herein under "--Allocation of Payments on the
Revolving Credit Loans." Interest Shortfalls will not be covered by the Policy
and may remain unpaid on the final Payment Date. The "NET LOAN RATE CAP" will
be equal to the weighted average of the Loan Rates as of the last day of the
related Billing Cycle (net of 0.64% per annum), adjusted to an effective rate
reflecting accrued interest calculated on the basis of the actual number of
days in the related Interest Period and a year assumed to consist of 360 days.
The "MAXIMUM NET LOAN RATE" will be equal to the weighted average of the
Maximum Loan Rates on the Revolving Credit Loans as of the first day of the
calendar month in which the Interest Period begins (net of 0.64% per annum),
adjusted to an effective rate
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reflecting accrued interest calculated on the basis of the actual number of
days in the related Interest Period and a year assumed to consist of 360 days.
For a description of the Maximum Loan Rates on the Revolving Credit Loans, see
"Description of the Mortgage Pool--Revolving Credit Loan Terms" herein.
Interest on the Notes in respect of any Payment Date will accrue on the
applicable Security Balance from the preceding Payment Date (or in the case of
the first Payment Date, from the Closing Date) through the day preceding such
Payment Date (each such period, an "INTEREST PERIOD") on the basis of the
actual number of days in the Interest Period and a 360-day year. Interest
payments on the Notes will be funded from payments on the Revolving Credit
Loans, and, if necessary, from draws on the Policy.
On each Payment Date, LIBOR shall be established by the Indenture Trustee
and as to any Interest Period, LIBOR will equal the rate for United States
dollar deposits for one month which appears on the Telerate Screen Page 3750
as of 11:00 A.M., London time, on the second LIBOR Business Day prior to the
first day of such Interest Period. "TELERATE SCREEN PAGE 3750" means the
display designated as page 3750 on the Telerate Service (or such other page as
may replace page 3750 on that service for the purpose of displaying London
interbank offered rates of major banks). If such rate does not appear on such
page (or such other page as may replace that page on that service, or if such
service is no longer offered, such other service for displaying LIBOR or
comparable rates as may be selected by the Indenture Trustee after
consultation with the Master Servicer), the rate will be the Reference Bank
Rate. The "REFERENCE BANK RATE" will be determined on the basis of the rates
at which deposits in U.S. Dollars are offered by the reference banks (which
shall be three major banks that are engaged in transactions in the London
interbank market, selected by the Indenture Trustee after consultation with
the Master Servicer) as of 11:00 A.M., London time, on the day that is two
LIBOR Business Days prior to the immediately preceding Payment Date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the aggregate Security Balances of all of the
Securities then outstanding. The Indenture Trustee will request the principal
London office of each of the reference banks to provide a quotation of its
rate. If at least two such quotations are provided, the rate will be the
arithmetic mean of the quotations. If on such date fewer than two quotations
are provided as requested, the rate will be the arithmetic mean of the rates
quoted by one or more major banks in New York City, selected by the Indenture
Trustee after consultation with the Master Servicer, as of 11:00 A.M., New
York City time, on such date for loans in U.S. Dollars to leading European
banks for a period of one month in amounts approximately equal to the
aggregate Security Balances of all of the Securities then outstanding. If no
such quotations can be obtained, the rate will be LIBOR for the prior Payment
Date. "LIBOR BUSINESS DAY" means any day other than (i) a Saturday or a Sunday
or (ii) a day on which banking institutions in the city of London, England are
required or authorized by law to be closed.
The establishment of LIBOR as to each Interest Period by the Indenture
Trustee and the Indenture Trustee's calculation of the rate of interest
applicable to the Notes for the related Interest Period shall (in the absence
of manifest error) be final and binding.
PRINCIPAL PAYMENTS ON THE NOTES
On each Payment Date, other than the Payment Date occurring in November
2011, principal payments will be due and payable on the Notes in an amount
equal to the aggregate of the Principal Collection Distribution Amount,
together with 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 occurring in November 2011, principal
will be due and payable on the Notes in amounts equal to the Security Balance,
if any, of the Notes on such Payment Date. In no event will principal payments
on the Notes on any Payment Date exceed the Security Balance thereof on such
date.
ALLOCATION OF PAYMENTS ON THE REVOLVING CREDIT LOANS
The Indenture Trustee 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.
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The Payment Account will be an Eligible Account and amounts on deposit in the
Payment Account will be invested in Permitted Investments.
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 applicable Security Balance of the
Term Notes and the Variable Funding Notes (other than any Interest
Shortfalls);
(ii) to pay principal in an amount equal to the Principal Collection
Distribution Amount for such Payment Date on the Term Notes and the
Variable Funding Notes;
(iii) to pay as principal on the Term Notes and the Variable Funding
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
undistributed from any preceding Payment Date (together with interest
thereon from the date initially distributable to the date paid), provided,
that any such Liquidation Loss Amount shall not be required to be paid to
the extent that such Liquidation Loss Amount was paid on the Term Notes and
the Variable Funding Notes by means of a draw on the Policy or was
reflected in the reduction of the Outstanding Reserve Amount (the aggregate
amount so distributed under this clause (iii) on any Payment Date, a
"LIQUIDATION LOSS DISTRIBUTION AMOUNT");
(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 as principal on the Term Notes and the Variable Funding
Notes, an additional amount to the extent necessary to bring the
Outstanding Reserve Amount up to the Reserve Amount Target (the aggregate
amount so distributed on any Payment Date, the "RESERVE INCREASE AMOUNT");
(vii) to pay the Credit Enhancer any other amounts owed pursuant to the
Insurance Agreement;
(viii) to pay the Term Notes and Variable Funding Notes, pro rata based
on the Security Balances thereof, any Interest Shortfalls not previously
paid together with interest thereon; and
(ix) to pay any remaining amounts to the holders of the Certificates.
The "SECURITY BALANCE" of any Security on any day is, with respect to the
Term Notes, the respective initial balance thereof as of the Closing Date, and
with respect to the Variable Funding Notes, the aggregate principal amount
added to the Variable Funding Notes prior to such day, in each case reduced by
all payments of principal thereon prior to and as of such day.
Payments pursuant to clause (i) will be allocated to the Term Notes and
Variable Funding Notes pro rata based on the amount of interest each such
Security is entitled to receive pursuant to such clause. Payments pursuant to
clauses (ii), (iii) and (vi) will constitute payments of principal and will be
allocated among the Term Notes and Variable Funding Notes pro rata based on
the outstanding Security Balances.
For any Payment Date, the "PRINCIPAL COLLECTION DISTRIBUTION AMOUNT" will
equal (i) Net Principal Collections for such Payment Date so long as no
Amortization Event has occurred and such Payment Date is during the Revolving
Period or (ii) Principal Collections for such Payment Date if an Amortization
Event has occurred or if such Payment Date is after the end of the Revolving
Period, provided however, on any Payment Date with respect to which the
Outstanding Reserve Amount that would result without regard to this proviso
exceeds the Reserve Amount Target, the Principal Collection Distribution
Amount will be reduced by the amount of such excess until the Outstanding
Reserve Amount equals the Reserve Amount Target.
"LIQUIDATION LOSS AMOUNT" means with respect to any Liquidated Revolving
Credit Loan, the unrecovered Principal Balance thereof and any unpaid accrued
interest thereon at the end of the related Collection
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Period in which such Revolving Credit Loan became a Liquidated Revolving
Credit Loan, after giving effect to the Net Liquidation Proceeds allocable to
such Principal Balance in connection therewith.
To the extent the amount payable pursuant to clause (B) of the definition of
Liquidation Loss Distribution Amount is covered by a draw on the Policy, such
amount will be available to reimburse the Credit Enhancer for such draws on
the Policy with interest thereon (other than those attributable to Excess Loss
Amounts).
A "LIQUIDATED REVOLVING CREDIT LOAN" means, as to any Payment Date, any
Revolving Credit Loan in respect of which the Master Servicer has determined,
based on the servicing procedures specified in the Servicing Agreement, as of
the end of the preceding Collection Period that all liquidation proceeds which
it expects to recover with respect to the disposition of the related Mortgaged
Property have been recovered.
As to any Payment Date prior to the Payment Date in March 2000, the Reserve
Amount Target will be 1.75% of the Cut-off Date Balance. As to any Payment
Date on or after the Payment Date in March 2000, the Reserve Amount Target
will be equal to the lesser of (a) the Reserve Amount Target as of the Cut-off
Date and (b) 3.50% of the Pool Balance as of the beginning of the related
Collection Period (but not lower than $970,311 (0.5% of the Cut-off Date
Balance) plus 50% of the outstanding Principal Balance of all Revolving Credit
Loans 90 or more days delinquent as of such Payment Date); provided however
that any scheduled reduction to the Reserve Amount Target described above
shall not be made as of any Payment Date unless (i) the outstanding Principal
Balance of the Revolving Credit Loans delinquent 90 days or more averaged over
the last six months as a percentage of the aggregate outstanding Principal
Balance of all Revolving Credit Loans averaged over the last six months does
not exceed 2% and (ii) the aggregate cumulative Liquidation Loss Amounts on
the Revolving Credit Loans prior to any such Payment Date occurring during the
first year, the second year or the third year (or any year thereafter) after
the Payment Date in March 2000 are less than 2.0%, 3.0% and 4.0% respectively,
of the aggregate Cut-off Date Balance and (iii) there has been no draw on the
Policy on such Payment Date that remains unreimbursed. In addition, the
Reserve Amount Target may be reduced with the prior written consent of the
Credit Enhancer and the Rating Agencies.
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.
An "AMORTIZATION EVENT" will be deemed to occur upon (i) the occurrence of
certain events relating to a violation of the Designated Seller's obligations
under the Designated Seller's Agreement, (ii) the occurrence of certain events
of bankruptcy, insolvency or receivership relating to the Designated Seller or
the Issuer, (iii) the Issuer becomes subject to regulation as an investment
company within the meaning of the Investment Company Act of 1940, as amended,
(iv) a Servicing Default relating to the Master Servicer occurs under the
Servicing Agreement and the Master Servicer is the Designated Seller, (v) if
the aggregate of all draws under the Policy exceeds 1% of the Cut-off Date
Balance or (vi) the Issuer is determined to be an association taxable as a
corporation for federal income tax purposes.
OUTSTANDING RESERVE AMOUNT
The Outstanding Reserve Amount will initially be approximately $62,173, and
will be increased by distributions of the Reserve Increase Amount, if any, to
the Notes. On each Payment Date, the Outstanding Reserve Amount (as in effect
immediately prior to such Payment Date), if any, shall be deemed to be reduced
by an amount equal to any Liquidation Loss Amounts (other than any Excess Loss
Amounts) for such Payment Date, except to the extent that such Liquidation
Loss Amounts were covered on such Payment Date by a Liquidation Loss
Distribution Amount (which amount would be so distributed, if available, from
any excess interest collections for such Payment Date). Any Liquidation Loss
Amounts not so covered will be covered by draws on the Policy to the extent
provided herein. However, any Excess Loss Amounts are required to be covered
by a draw on the Policy in all cases, without regard to the availability of
the Outstanding Reserve Amount, and
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the Outstanding Reserve Amount will not be reduced by any Excess Loss Amount
so long as a corresponding draw on the Policy is made as so required. The
"OUTSTANDING RESERVE AMOUNT" available on any Payment Date is the amount, if
any, by which (i) the Pool Balance as of the end of the related Collection
Period exceeds (ii) the aggregate Security Balances of all of the Notes on
such Payment Date (after application of Net Principal Collections or Principal
Collections, as the case may be, for such date).
To the extent that the Outstanding Reserve Amount is insufficient or not
available to absorb Liquidation Loss Amounts that are not covered by the
Liquidation Loss Distribution Amount, if payments are not made under the
Policy as required, a Noteholder may incur a loss.
EXCESS LOSS AMOUNT
On any Payment Date, the "EXCESS LOSS AMOUNT" will be equal to the sum of
(i) any Liquidation Loss Amounts (other than as described in clauses (ii)-(v)
below) for the related Collection Period which, when added to the aggregate of
such Liquidation Loss Amounts for all preceding Collection Periods, exceed
$11,155,000, (ii) any Special Hazard Losses in excess of the Special Hazard
Amount, (iii) any Fraud Losses in excess of the Fraud Loss Amount, (iv) any
Bankruptcy Losses in excess of the Bankruptcy Loss Amount, and (v) certain
losses occasioned by war, civil insurrection, certain governmental actions,
nuclear reaction and certain other risks as described in the Indenture. Excess
Loss Amounts will not be covered by any Liquidation Loss Distribution Amount
or by a reduction in the Outstanding Reserve Amount. Any Excess Loss Amounts
however, will be covered by the Policy, and in the event payments are not made
as required under the Policy, such losses will be allocated first to the
Certificates and, after the Security Balance of the Certificates is reduced to
zero, to the Notes pro rata based on the outstanding Security Balances
thereof.
The "SPECIAL HAZARD AMOUNT" shall initially be equal to $2,737,097. As of
any date of determination following the Cut-off Date, the Special Hazard
Amount shall equal $2,737,097 less the sum of (A) the aggregate of any
Liquidation Loss Amounts on the Revolving Credit Loans due to Special Hazard
Losses and (B) the Adjustment Amount. The Adjustment Amount will be equal to
an amount calculated pursuant to the terms of the Indenture.
The "FRAUD LOSS AMOUNT" shall initially be equal to $8,211,290. As of any
date of determination after the Cut-off Date, the Fraud Loss Amount shall
equal (X) prior to the first anniversary of the Cut-off Date an amount equal
to 3% of the aggregate of the Credit Limits of the Revolving Credit Loans as
of the Cut-off Date minus the aggregate of any Liquidation Loss Amounts on the
Revolving Credit Loans due to Fraud Losses up to such date of determination;
(Y) from the first to the second anniversary of the Cut-off Date, an amount
equal to (1) the lesser of (a) the Fraud Loss Amount as of the most recent
anniversary of the Cut-off Date and (b) 2% of the aggregate of the Credit
Limits of the Revolving Credit Loans as of the most recent anniversary of the
Cut-off Date minus (2) the aggregate of any Liquidation Loss Amounts on the
Revolving Credit Loans due to Fraud Losses since the most recent anniversary
of the Cut-off Date up to such date of determination; and (Z) from the second
to the fifth anniversary of the Cut-off Date, an amount equal to (1) the
lesser of (a) the Fraud Loss Amount as of the most recent anniversary of the
Cut-off Date and (b) 1% of the aggregate of the Credit Limits of the Revolving
Credit Loans as of the most recent anniversary of the Cut-off Date minus (2)
the aggregate of any Liquidation Loss Amounts on the Revolving Credit Loans
due to Fraud Losses since the most recent anniversary of the Cut-off Date up
to such date of determination. On and after the fifth anniversary of the Cut-
off Date the Fraud Loss Amount shall be zero.
The "BANKRUPTCY AMOUNT" will initially be equal to $100,000. As of any date
of determination, the Bankruptcy Amount shall equal $100,000 less the sum of
any Liquidation Loss Amounts on the Revolving Credit Loans due to such losses
up to such date of determination.
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THE PAYING AGENT
The Paying Agent shall initially be the Indenture Trustee, together with any
successor thereto. The Paying Agent shall have the revocable power to withdraw
funds from the Payment Account for the purpose of making payments to the
Noteholders.
MATURITY AND OPTIONAL REDEMPTION
The Notes will be payable in full on the Payment Date occurring in November
2011, to the extent of the related outstanding Security Balance on such date,
if any. In addition a principal payment may be made in partial or full
redemption of the Notes, after the Pool Balance is reduced to an amount less
than or equal to $19,406,217 (10% of the Cut-off Date Balance, upon the
exercise by the Master Servicer of its option to purchase all or a portion of
the Revolving Credit Loans and related assets. In the event that all of the
Revolving Credit Loans are purchased by the Master Servicer, the purchase
price will be equal to the sum of the outstanding Pool Balance and accrued and
unpaid interest thereon at the weighted average of the Loan Rates through the
day preceding the Payment Date (including Interest Shortfalls and interest
thereon) on which such purchase occurs together with all amounts due and owing
to the Credit Enhancer.
In the event that a portion of the Revolving Credit Loans are purchased by
the Master Servicer the purchase price will be equal to the sum of the
aggregate Principal Balances of the Revolving Credit Loans so purchased and
accrued and unpaid interest thereon at the weighted average of the related
Loan Rates on such Revolving Credit Loans through the day preceding the
Payment Date on which such purchase occurs together with all amounts due and
owing to the Credit Enhancer with respect to the Revolving Credit Loans so
purchased. In lieu of a cash payment, if an Amortization Event had previously
occurred, all or a portion of such purchase price may be in the form of
Additional Balances on other Revolving Credit Loans not previously conveyed to
the Trust. 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 schedule containing a
list of all Revolving Credit 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 Revolving Credit Loans; and (iii) each
Rating Agency shall have been notified of the proposed retransfer and shall
not have notified the Master Servicer that such retransfer would result in a
reduction or withdrawal of the ratings of the Securities without regard to the
Policy.
DESCRIPTION OF THE POLICY
On the Closing Date, the Credit Enhancer will issue the Policy in favor of
the Owner Trustee on behalf of the Issuer. The Policy will unconditionally and
irrevocably guarantee certain payments on the 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 Note Rate on such Payment Date (exclusive
of any Interest Shortfalls) exceeds the amount on deposit in the Payment
Account available for interest distributions on such Payment Date, (b) any
Liquidation Loss Amount (other than any Excess Loss Amount) for such Payment
Date, to the extent not currently covered by a Liquidation Loss Distribution
Amount or a reduction in the Outstanding Reserve Amount and (c) any Excess
Loss Amount for such Payment Date. For purposes of the foregoing, amounts in
the Payment Account available for interest distributions on any Payment Date
shall be deemed to include all amounts in the Payment Account for such Payment
Date, other than the Principal Collection Distribution Amount and the
Liquidation Loss Distribution Amount (if any) distributed thereon. Interest
Shortfalls will not be covered by the Policy. Pursuant to the terms of the
Indenture, draws under the Policy in respect of any Liquidation Loss Amount
will be paid to the Notes by the Paying Agent as principal, pro rata among the
Term Notes and the Variable Funding Notes based on the Security Balances
thereof. 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
the liquidation of the Trust as permitted under the Indenture following an
Event of
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Default thereunder. In addition, the Policy will guarantee the payment of the
outstanding Security Balance of the Notes on the Payment Date occurring in
November 2011. In the absence of payments under the Policy, Noteholders will
directly bear the credit risks associated with their investment to the extent
such risks are not covered by the Outstanding Reserve Amount or otherwise.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
PROSPECTIVE NOTEHOLDERS SHOULD CONSIDER, AMONG OTHER THINGS, THE ITEMS
DISCUSSED UNDER "YIELD AND PREPAYMENT CONSIDERATIONS" IN THE PROSPECTUS AND
THE FOLLOWING FACTORS IN CONNECTION WITH THE PURCHASE OF THE TERM NOTES:
The yield to maturity of the Term Notes will depend on the price paid by the
holder for such Note, the Note Rate and the rate and timing of principal
payments (including payments in excess of required installments, prepayments
in full or terminations, liquidations and repurchases) on the Revolving Credit
Loans and rate and timing of Draws and the allocation thereof.
In general, if a Term Note is purchased at a premium over its face amount
and payments of principal on such Term Note occur at a rate faster than
anticipated at the time of purchase, the purchaser's actual yield to maturity
will be lower than assumed at the time of purchase. Conversely, if a Term Note
is purchased at a discount from its face amount and payments of principal on
such Term Note occur at a rate slower than anticipated at the time of
purchase, the purchaser's actual yield to maturity will be lower than
originally assumed.
The rate and timing of defaults on the Revolving Credit Loans will also
affect the rate and timing of principal payments on the Revolving Credit Loans
and thus the yield on the Term Notes. There can be no assurance as to the rate
of losses or delinquencies on any of the Revolving Credit Loans, however, the
rate of such losses and delinquencies are likely to be higher than those of
traditional first lien mortgage loans, particularly in the case of Revolving
Credit Loans with high Combined Loan-to-Value Ratios or low Junior Ratios. In
addition, because borrowers of Balloon Loans are required to make a relatively
large single payment upon maturity, the default risk associated with Balloon
Loans is greater than that associated with fully-amortizing revolving credit
loans. See "Risk Factors" herein. To the extent that any losses are incurred
on any of the Revolving Credit Loans that are not covered by the Liquidation
Loss Distribution Amount, a reduction in the Outstanding Reserve Amount or the
Policy, holders of the Term Notes will bear all risk of such losses resulting
from default by Mortgagors. See "Risk Factors--Limitations, Reduction and
Substitution of Credit Enhancement" in the Prospectus. Even where the Policy
covers all losses incurred on the Revolving Credit Loans, the effect of losses
may be to increase prepayment rates on the Revolving Credit Loans, thus
reducing the weighted average life and affecting the yield to maturity.
In addition, the repayment of any Revolving Credit Loan may be dependent on
the ability of the Mortgagor to make larger interest payments following the
adjustment of the Loan Rate and during the life of such Revolving Credit Loan.
There can be no assurance as to the rate of principal payments and Draws on
the Revolving Credit Loans. The rate of principal payments and the rate of
Draws may fluctuate substantially from time to time. Generally, home equity
loans are not viewed by mortgagors as permanent financing. Due to the
unpredictable nature of both principal payments and Draws, the rates of
principal payments net of Draws on the Revolving Credit Loans may be much more
volatile than for typical first lien mortgage loans. See "Yield and Prepayment
Considerations" in the Prospectus and "Risk Factors" herein.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security to the date of distribution to the
investor of each dollar distributed in reduction of principal of such security
(assuming no losses). The weighted average life of the Term Notes will be
influenced by, among other things, the rate of principal payments and Draws on
the Revolving Credit Loans.
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The prepayment model used in this Prospectus Supplement, the Constant
Prepayment Rate model ("CPR"), assumes that the outstanding principal balance
of a pool of HELOC loans prepays at a specified constant annual rate of CPR.
In generating monthly cash flows, this rate is converted to an equivalent
constant monthly rate. To assume 30% of CPR or any other CPR percentage is to
assume that the stated percentage of the outstanding principal balance of the
pool is prepaid over the course of a year. No representation is made that the
Revolving Credit Loans will prepay at that or any other rate.
The tables set forth below are based on a CPR, constant draw rate (which for
purposes of the assumptions is the amount of Additional Balances on the
Revolving Credit Loans drawn each month expressed as an annualized percentage
of the Pool Balance outstanding at the beginning of such month) and optional
termination assumptions as indicated in the tables below. For the following
tables, it was assumed that the Revolving Credit Loans have been aggregated
into four pools, one pool with a principal balance of $37,185,315.65, a second
pool with a principal balance of $80,754.04, a third pool with a principal
balance of $140,062,047.61 and a fourth pool with a principal balance of
$16,734,055.33. Further, Revolving Credit Loans with respect to the four pools
are assumed to have Loan Rates of 7.499% (which will adjust to 9.853% per
annum in the third month), 9.608% per annum, 10.049% (which will adjust to
10.065% per annum in the second month), and 10.122% per annum, respectively,
Credit Utilization Rates of 83.01%, 87.31%, 85.82% and 70.66%, respectively,
terms in which the loans do not amortize and in which Additional Draws may be
made of 114 months, 47 months, 106 months and 138 months, respectively, and as
of the Closing Date, remaining terms to maturity of 115 months, 48 months, 107
months and 139 months, respectively. In addition, sum of the rate at which the
Servicing Fees and Administrative Fees accrue and the Policy premium rate is
equal to 0.64% per annum.
In addition, it was assumed that (i) payments are made in accordance with
the description set forth under "Description of the Securities," (ii) payments
on the Notes will be made on the 20th day of each calendar month regardless of
the day on which the Payment Date actually occurs commencing in September
1997, (iii) no extension past the scheduled maturity date of a Revolving
Credit Loan is made, (iv) no delinquencies or defaults occur, (v) monthly
Draws are calculated under each of the assumptions as set forth in the tables
below before giving effect to prepayments, (vi) the Revolving Credit Loans pay
on the basis of a 30-day month and a 360-day year, (vii) there is no
restriction on the Maximum Variable Funding Balance, (viii) no Amortization
Event occurs, (ix) the scheduled Due Date for each of the Revolving Credit
Loans is the first day of each month, (x) the Closing Date is August 28, 1997,
(xi) for each Payment Date, LIBOR is equal to 5.6250% per annum and (xii) the
initial Security Balance of the Term Notes is set forth on the cover page
hereof.
The actual characteristics and performance of the Revolving Credit Loans
will differ from the assumptions used in constructing the tables set forth
below, which are hypothetical in nature and are provided only to give a
general sense of how the principal cash flows might behave under varying
prepayment and Draw scenarios. For example, it is very unlikely that the
Revolving Credit Loans will prepay and experience Draws at a constant rate
until maturity or that all of the Revolving Credit Loans will prepay or
experience Draws at the same rate. Moreover, the diverse remaining terms to
stated maturity of the Revolving Credit Loans could produce slower or faster
principal distributions than indicated in the tables at the various
assumptions specified, even if the weighted average remaining term to stated
maturity of the Revolving Credit Loans is as assumed. Any difference between
such assumptions and the actual characteristics and performance of the
Revolving Credit Loans, or actual prepayment experience, will affect the
percentages of initial Security Balance outstanding over time and the weighted
average life of the Term Notes.
S-36
<PAGE>
PERCENTAGE OF ORIGINAL SECURITY BALANCE OUTSTANDING OF THE TERM NOTES (1)(2)
<TABLE>
<CAPTION>
CPR
---------------------------------
PAYMENT DATE 0% 10% 22% 26% 30% 34% 38%
- ------------ --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial...................................... 100% 100% 100% 100% 100% 100% 100%
August 1998.................................. 98 98 93 89 84 79 74
August 1999.................................. 98 98 89 80 72 64 56
August 2000.................................. 98 98 85 72 61 51 42
August 2001.................................. 98 98 80 65 52 41 32
August 2002.................................. 98 98 76 59 44 33 24
August 2003.................................. 98 88 59 43 31 22 15
August 2004.................................. 98 79 46 31 21 14 9
August 2005.................................. 98 71 36 23 15 9 6
August 2006.................................. 28 18 7 4 0 0 0
August 2007.................................. 9 6 0 0 0 0 0
August 2008.................................. 9 5 0 0 0 0 0
August 2009 and thereafter................... 0 0 0 0 0 0 0
Weighted Average Life (years)................ 9.1 8.3 6.3 5.2 4.3 3.6 3.1
</TABLE>
- --------
(1) Assumes (i) that an optional termination is exercised on the first
Payment Date when the Pool Balance is less than or equal to 10% of the
Cut-off Date Balance and (ii) a constant draw rate of 18%.
(2) All percentages are rounded to the nearest 1%.
WEIGHTED AVERAGE LIFE(1) AND FINAL SCHEDULED
PAYMENT DATE(2) SENSITIVITY OF THE TERM NOTES
TO PREPAYMENTS AND DRAWS
<TABLE>
<CAPTION>
CPR(3)
------------------------------------------------------------------------------------------
0% 10% 22% 26% 30% 34% 38%
------------ ------------ ------------ ------------ ------------ ------------ ------------
CONSTANT DRAW RATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE
- ------------------ --- -------- --- -------- --- -------- --- -------- --- -------- --- -------- --- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0%..................... 9.1 Mar-2009 5.7 Mar-2009 3.5 Feb-2009 3.0 Mar-2007 2.6 Mar-2007 2.3 Mar-2007 2.0 Jul-2006
10%..................... 9.1 Mar-2009 8.3 Mar-2009 4.7 Mar-2009 4.0 Mar-2009 3.4 Jan-2009 2.9 Mar-2007 2.5 Mar-2007
14%..................... 9.1 Mar-2009 8.3 Mar-2009 5.4 Mar-2009 4.5 Mar-2009 3.8 Mar-2009 3.2 Jul-2008 2.8 Mar-2007
18%..................... 9.1 Mar-2009 8.3 Mar-2009 6.3 Mar-2009 5.2 Mar-2009 4.4 Mar-2009 3.7 Mar-2009 3.1 Dec-2007
22%..................... 9.1 Mar-2009 8.3 Mar-2009 7.5 Mar-2009 6.1 Mar-2009 5.0 Mar-2009 4.2 Mar-2009 3.5 Mar-2009
<CAPTION>
CPR(4)
------------------------------------------------------------------------------------------
0% 10% 22% 26% 30% 34% 38%
------------ ------------ ------------ ------------ ------------ ------------ ------------
CONSTANT DRAW RATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE
- ------------------ --- -------- --- -------- --- -------- --- -------- --- -------- --- -------- --- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0%..................... 8.9 Mar-2007 5.7 Mar-2007 3.5 Jul-2006 2.9 Apr-2005 2.5 Feb-2004 2.1 Mar-2003 1.8 Jun-2002
10%..................... 9.1 Mar-2009 8.2 Mar-2007 4.7 Jul-2006 4.0 Jul-2006 3.4 Jul-2006 2.8 Feb-2005 2.4 Nov-2003
14%..................... 9.1 Mar-2009 8.3 Mar-2009 5.4 Mar-2007 4.5 Jul-2006 3.8 Jul-2006 3.2 Jun-2006 2.7 Oct-2004
18%..................... 9.1 Mar-2009 8.3 Mar-2009 6.3 Mar-2007 5.2 Mar-2007 4.3 Jul-2006 3.6 Jul-2006 3.1 Jan-2006
22%..................... 9.1 Mar-2009 8.3 Mar-2009 7.4 Mar-2007 6.1 Mar-2007 5.0 Mar-2007 4.2 Jul-2006 3.5 Jul-2006
</TABLE>
- --------
(1) The weighted average life of the Term Notes is determined by (i)
multiplying the amount of each payment allocated to principal by the
number of years from the date of issuance to the related Payment Date,
(ii) adding the results, and (iii) dividing the sum by the original
Security Balance thereof.
(2) The final scheduled payment date of the Term Notes is the date on which
the Security Balance thereof is reduced to zero.
(3) Assumes no optional termination is exercised.
(4) Assumes that an optional termination is exercised on the first Payment
Date when the Pool Balance is less than or equal to 10% of the Cut-off
Date Balance.
S-37
<PAGE>
DESCRIPTION OF THE DESIGNATED SELLER'S AGREEMENT
The Revolving Credit Loans to be transferred to the Trust by the Depositor
were or will be purchased by the Depositor from GMAC Mortgage Corporation (in
such capacity, the "DESIGNATED SELLER") pursuant to the Designated Seller's
Agreement. Under the Designated Seller's Agreement, the Designated Seller has
agreed to transfer to the Depositor the Revolving Credit Loans and related
Additional Balances. Pursuant to an assignment by the Depositor executed on
the Closing Date, upon such transfer to the Depositor, the Revolving Credit
Loans will be transferred by the Depositor to the Trust, as well as the
Depositor's rights in, to and under the Designated Seller's Agreement, which
will include the right to purchase Additional Balances. The following summary
describes certain terms of the form of the Designated Seller's Agreement and
is qualified in its entirety by reference to the form of Designated Seller's
Agreement. For a general description of the Designated Seller, see
"Description of the Servicing Agreement--The Master Servicer" herein.
TRANSFER OF REVOLVING CREDIT LOANS
Pursuant to the Designated Seller's Agreement, the Designated Seller will
transfer and assign to the Depositor all of its right, title and interest in
and to the Revolving Credit Loans, the related Credit Line Agreement,
mortgages and other related documents (collectively, the "RELATED DOCUMENTS")
and all of the Additional Balances thereafter created prior to the occurrence
of an Amortization Event. The purchase price of the Revolving Credit Loans is
a specified percentage of the face amount thereof as of the time of transfer
and is payable by the Depositor, as provided in the Designated Seller's
Agreement. The purchase price of each Additional Balance is the amount of the
related new advance and is payable by the Trust, either in cash or in the form
of an increase in the Security Balance of the Variable Funding Notes (or, in
certain circumstances, the issuance of additional Certificates), as provided
in the Designated Seller's Agreement.
The Designated Seller's Agreement will require that, within the time period
specified therein, the Designated Seller, acting on the Depositor's behalf,
deliver to the Indenture Trustee (as the Trust's agent for such purpose) the
Revolving Credit Loans and the Related Documents. In lieu of delivery of
original mortgages, the Designated Seller may deliver true and correct copies
thereof which have been certified as to authenticity by the appropriate county
recording office where such mortgage is recorded.
REPRESENTATIONS AND WARRANTIES
The Designated Seller will also represent and warrant to the Depositor that,
among other things, (a) the information with respect to the Revolving Credit
Loans set forth in the schedule attached to the Designated Seller's Agreement
is true and correct in all material respects and (b) immediately prior to the
sale of the Revolving Credit Loans to the Depositor, the Designated Seller was
the sole owner and holder of the Revolving Credit Loans free and clear of any
and all liens and security interests. The Designated Seller will also
represent and warrant to the Depositor that, among other things, as of the
Closing Date, (a) the Designated Seller's Agreement constitutes a legal, valid
and binding obligation of the Designated Seller and (b) the Designated
Seller's Agreement constitutes a valid transfer and assignment to the
Depositor of all right, title and interest of the Designated Seller in and to
the Revolving Credit Loans and the proceeds thereof. The benefit of the
representations and warranties made to the Depositor by the Designated Seller
in the Designated Seller's Agreement will be assigned by the Depositor to the
Trust.
Within 90 days of the Closing Date, the Custodian will review or cause to be
reviewed the Revolving Credit Loans and the Related Documents and if any
Revolving Credit Loan or Related Document is found to be defective in any
material respect, which may materially and adversely affect the value of the
related Revolving Credit Loan, or the interests of the Indenture Trustee (as
pledgee of the Trust Fund), the Securityholders or the Credit Enhancer in such
Revolving Credit Loan and such defect is not cured within 90 days following
notification thereof to the Designated Seller and the Trust by the Custodian,
the Designated Seller will be obligated under
S-38
<PAGE>
the Designated Seller's Agreement to deposit the Repurchase Price into the
Custodial Account. In lieu of any such deposit, the Designated Seller may
substitute an Eligible Substitute Loan. Any such purchase or substitution will
result in the removal of such Revolving Credit Loan required to be removed
from the Trust (each such Revolving Credit Loan, a "DELETED LOAN"). The
obligation of the Designated Seller to remove a Deleted Loan from the Trust is
the sole remedy regarding any defects in the Revolving Credit Loans and
Related Documents 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 the Designated Seller.
With respect to any Revolving Credit Loan, the "REPURCHASE PRICE" is equal
to the Principal Balance of such Revolving Credit Loan at the time of any
removal described above plus accrued and unpaid interest thereon to the date
of removal. In connection with the substitution of an Eligible Substitute
Loan, the Designated Seller will be required to deposit in the Custodial
Account an amount (the "SUBSTITUTION ADJUSTMENT AMOUNT") equal to the excess
of the Principal Balance of the related Deleted Loan over the Principal
Balance of such Eligible Substitute Loan.
An "ELIGIBLE SUBSTITUTE LOAN" is a mortgage loan substituted by the
Designated Seller for a Deleted Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Revolving Credit Loan for a Deleted Loan, an
aggregate Principal Balance) not in excess of the Principal Balance relating
to such Deleted Loan; (ii) have a Loan Rate, Net Loan Rate and Gross Margin no
lower than and not more than 1% in excess of the Loan Rate, Net Loan Rate and
Gross Margin, respectively, of such Deleted Loan; (iii) have a Combined Loan-
to-Value Ratio at the time of substitution no higher than that of the Deleted
Loan at the time of substitution; (iv) have a remaining term to maturity not
more than one year earlier and not later than the remaining term to maturity
of the Deleted Loan; (v) comply with each representation and warranty as to
the Revolving Credit Loans set forth in the Designated Seller's Agreement
(deemed to be made as of the date of substitution); and (vi) satisfy certain
other conditions specified in the Indenture.
In addition the Designated Seller will be obligated to deposit the
Repurchase Price or substitute an Eligible Substitute Loan with respect to a
Revolving Credit Loan as to which there is a breach of a representation or
warranty in the Designated Seller's Agreement and such breach is not cured by
the Designated Seller within the time provided in the Designated Seller's
Agreement.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing Agreement,
dated as of August 1, 1997, among the Trust, the Indenture Trustee, the
Administrator and the Master Servicer. The summary does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
provisions of the Servicing Agreement. Whenever particular defined terms of
the Servicing Agreement are referred to, such defined terms are thereby
incorporated herein by reference. See "Servicing of Revolving Credit Loans"
and "The Agreements" in the Prospectus.
THE MASTER SERVICER
GMAC Mortgage Corporation, an affiliate of the Depositor, is Master Servicer
for all of the Revolving Credit Loans. GMACM is an indirect subsidiary of
General Motors Acceptance Corporation and is one of the nation's largest
mortgage bankers. GMACM is engaged in the mortgage banking business, including
the origination, purchase, sale and servicing of residential loans. GMACM's
executive offices are located at 100 Witmer Road, Horsham, Pennsylvania 19044-
0963.
All of the Revolving Credit Loans will initially be serviced by the Master
Servicer, but may be subserviced by one or more subservicers designated by the
Master Servicer pursuant to subservicing agreements between the Master
Servicer and any future subservicers. For a general description of the Master
Servicer and its activities,
S-39
<PAGE>
and certain information concerning the Master Servicer's delinquency
experience on residential revolving credit loans, see "Servicing of Revolving
Credit Loans--Delinquency and Loss Experience of the Master Servicer's
Portfolio" herein.
THE ADMINISTRATOR
Residential Funding, an affiliate of the Company and the Master Servicer,
will act as Administrator for the Securities pursuant to the Servicing
Agreement. The Administrator shall act as tax administrator for the Trust and
shall calculate the amounts to be distributed with respect to the
Securityholders in the aggregate. The Administrative Fees for each Revolving
Credit Loan are payable out of the interest payments on such Revolving Credit
Loan by the Master Servicer pursuant to the Servicing Agreement. The
Administrative Fee will be approximately 0.02% per annum on the aggregate
Security Balance of the Notes. For a general description of Residential
Funding, see "Residential Funding Corporation" in the Prospectus.
P&I COLLECTIONS
The Master Servicer shall establish and maintain an account (the "CUSTODIAL
ACCOUNT") in which the Master Servicer shall deposit or cause to be deposited
any amounts representing payments on and any collections received in respect
of the Revolving Credit Loans received by it subsequent to the Cut-off Date.
The Custodial Account shall be an Eligible Account. On the 15th day of each
month or if such day is not a Business Day, the next succeeding Business Day
(the "DETERMINATION DATE"), the Master Servicer will notify the Paying Agent
and the Indenture Trustee of the amount of aggregate amounts required to be
withdrawn from the Custodial Account and deposited into the Payment Account
prior to the close of business on the Business Day next succeeding each
Determination Date.
"PERMITTED INVESTMENTS" are specified in the Servicing Agreement and are
limited to investments which meet the criteria of the Rating Agencies from
time to time as being consistent with their then-current ratings of the
Securities.
The Master Servicer will make the following withdrawals from the Custodial
Account and deposit such amounts as follows:
(i) to the 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 Designated Seller various reimbursement
amounts and other amounts as provided in the Servicing Agreement.
As to any Payment Date, "P&I COLLECTIONS" will equal the sum of (a) Interest
Collections for such Payment Date and (b) so long as an Amortization Event has
not occurred and if during the Revolving Period, "NET PRINCIPAL COLLECTIONS"
for such Payment Date which are the excess, if any, of Principal Collections
for such Payment Date over the aggregate amount of Additional Balances created
during the related Collection Period and conveyed to the Trust, or if such
event or date has occurred, Principal Collections for such date. Upon the
occurrence of an Amortization Event or after the end of the Revolving Period,
Principal Collections for a Collection Period will no longer be applied to
acquire Additional Balances during such Collection Period.
All collections on the Revolving Credit Loans will generally be allocated in
accordance with the Credit Line Agreements between amounts collected in
respect of interest and amounts collected in respect of principal. As to any
Payment Date, "INTEREST COLLECTIONS" will be equal to the sum of (i) the
amounts collected during the related Collection Period, including Net
Liquidation Proceeds (as defined below), allocated to interest pursuant to the
terms of the Credit Line Agreements (exclusive of the pro rata portion thereof
attributable to Additional Balances not conveyed to the Trust following an
Amortization Event), reduced by the Servicing Fees and Administrative Fees for
such Collection Period and (ii) the interest portion of the Repurchase Price
for any Deleted Loans and the cash purchase price paid in connection with any
optional purchase of the Revolving Credit Loans by the Master Servicer. As to
any Payment Date, "PRINCIPAL COLLECTIONS" will be equal to the sum of (i)
S-40
<PAGE>
the amount collected during the related Collection Period, including Net
Liquidation Proceeds allocated to principal pursuant to the terms of the
Credit Line Agreements (exclusive of the pro rata portion thereof attributable
to Additional Balances not conveyed to the Trust following an Amortization
Event) and (ii) the principal portion of the Repurchase Price for any Deleted
Loans, any Substitution Adjustment Amounts and the cash purchase price paid in
connection with any optional purchase of the Revolving Credit Loans by the
Master Servicer.
As to any Payment Date, the "COLLECTION PERIOD" is the calendar month
preceding the month of such Payment Date.
"NET LIQUIDATION PROCEEDS" with respect to a Revolving Credit Loan are the
proceeds (excluding amounts drawn on the Policy) received in connection with
the liquidation of any Revolving Credit Loan, whether through trustee's sale,
foreclosure sale or otherwise, reduced by related expenses, but not including
the portion, if any, of such amount that exceeds the Principal Balance of the
Revolving Credit Loan at the end of the Collection Period immediately
preceding the Collection Period in which such Revolving Credit Loan became a
Liquidated Revolving Credit Loan.
With respect to any date, the "POOL BALANCE" will be equal to the aggregate
of the Principal Balances of all Revolving Credit Loans as of such date owned
by the Trust. The Principal Balance of a Revolving Credit Loan (other than a
Liquidated Revolving Credit Loan) on any day is equal to the Cut-off Date
Balance thereof, plus (i) any Additional Balances in respect of such Revolving
Credit Loan conveyed to the Trust minus (ii) all collections credited against
the Principal Balance of such Revolving Credit Loan in accordance with the
related Credit Line Agreement prior to such day (exclusive of the pro rata
portion thereof attributable to Additional Balances not conveyed to the Trust
following an Amortization Event). The Principal Balance of a Liquidated
Revolving Credit Loan after final recovery of substantially all of the related
Liquidation Proceeds which the Master Servicer reasonably expects to receive
shall be zero.
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE
The following summary describes certain terms of the Trust Agreement and the
Indenture. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Trust
Agreement and the Indenture. Whenever particular defined terms of the
Indenture are referred to, such defined terms are thereby incorporated herein
by reference. See "The Agreements" in the Prospectus.
THE TRUST FUND
Simultaneously with the issuance of the Notes, the Issuer will pledge the
Trust Fund to the Indenture Trustee as collateral for the Notes. As pledgee of
the Revolving Credit Loans, the Indenture Trustee will be entitled to direct
the Issuer in the exercise of all rights and remedies of the Trust against the
Designated Seller under the Designated Seller's Agreement and against the
Master Servicer under the Servicing Agreement.
REPORTS TO HOLDERS
The Indenture Trustee will mail to each Holder of Term Notes, at its address
listed on the Security Register maintained with the Indenture Trustee, a
report setting forth certain amounts relating to the Notes for each Payment
Date, among other things:
(i) the amount of principal, if any, payable on such Payment Date to
Securityholders;
(ii) the amount of interest payable on such Payment Date to
Securityholders separately stating the portion thereof in respect of
overdue accrued interest;
(iii) the Security Balances of the Notes after giving effect to the
payment of principal on such Payment Date;
S-41
<PAGE>
(iv) P&I Collections for the related Collection Period;
(v) the aggregate Principal Balance of the Revolving Credit Loans as of
the end of the preceding Collection Period;
(vi) the 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,
the amounts shall be expressed as a dollar amount per $1,000 in face amount of
Notes.
CERTAIN COVENANTS
The Indenture will provide that the Issuer may not consolidate with or merge
into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes, by an
indenture supplemental to the Indenture, the Issuer's obligation to make due
and punctual payments upon the Notes and the performance or observance of any
agreement and covenant of the Issuer under the Indenture, (iii) no Event of
Default shall have occurred and be continuing immediately after such merger or
consolidation, (iv) the Issuer has received consent of the Credit Enhancer and
has been advised that the ratings of the Securities (without regard to the
Policy) then in effect would not be reduced or withdrawn by any Rating Agency
as a result of such merger or consolidation, (v) any action that is necessary
to maintain the lien and security interest created by the Indenture is taken
and (vi) the Issuer has received an Opinion of Counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Issuer or to any Noteholder or Certificateholder and (vii) the Issuer has
delivered to the Indenture Trustee an officer's certificate and an Opinion of
Counsel each stating that such consolidation or merger and such supplemental
indenture comply with the Indenture and that all conditions precedent, as
provided in the Indenture, relating to such transaction have been complied
with. The Issuer will not, among other things, (i) except as expressly
permitted by the Indenture, sell, transfer, exchange or otherwise dispose of
any of the assets of the Issuer, (ii) claim any credit on or make any
deduction from the principal and interest payable in respect of the Notes
(other than amounts withheld under the Code or applicable state law) or assert
any claim against any present or former holder of Notes because of the payment
of taxes levied or assessed upon the Issuer, (iii) permit the validity or
effectiveness of the Indenture to be impaired or permit any person to be
released from any covenants or obligations with respect to the Notes under the
Indenture except as may be expressly permitted thereby or (iv) permit any
lien, charge, excise, claim, security interest, mortgage or other encumbrance
to be created on or extend to or otherwise arise upon or burden the assets of
the Issuer or any part thereof, or any interest therein or the proceeds
thereof. The Issuer may not engage in any activity other than as specified
under "The Issuer" herein.
MODIFICATION OF INDENTURE
With the consent of the holders of a majority of each of the outstanding
Term Notes and Variable Funding Notes and the Credit Enhancer, the Issuer and
the Indenture Trustee may execute a supplemental indenture to add provisions
to, change in any manner or eliminate any provisions of, the Indenture, or
modify (except as provided below) in any manner the rights of the Noteholders.
Without the consent of the holder of each outstanding Note affected thereby
and the Credit Enhancer, however, no supplemental indenture will: (i) change
the due date of any installment of principal of or interest on any Note or
reduce the principal amount thereof, the interest rate specified thereon or
change any place of payment where or the coin or currency in which any Note or
any interest thereon is payable; (ii) impair the right to institute suit for
the enforcement of certain provisions of the Indenture regarding payment;
(iii) reduce the percentage of the aggregate amount of the outstanding Notes,
the consent of the holders of which is required for any supplemental indenture
or the consent of the holders of which is required for any waiver of
compliance with certain provisions of the Indenture or of certain defaults
thereunder and their consequences as provided for in the Indenture; (iv)
modify or alter the provisions of the Indenture regarding the voting of Notes
held by the Issuer, the Depositor or an affiliate of any of them; (v) decrease
the percentage of the aggregate principal amount of Notes required to amend
the sections of the
S-42
<PAGE>
Indenture which specify the applicable percentage of aggregate principal
amount of the Notes necessary to amend the Indenture or certain other related
agreements; (vi) modify any of the provisions of the Indenture in such manner
as to affect the calculation of the amount of any payment of interest or
principal due on any Note (including the calculation of any of the individual
components of such calculation); or (vii) permit the creation of any lien
ranking prior to or, except as otherwise contemplated by the Indenture, on a
parity with the lien of the Indenture with respect to any of the collateral
for the Notes or, except as otherwise permitted or contemplated in the
Indenture, terminate the lien of the Indenture on any such collateral or
deprive the holder of any Note of the security afforded by the lien of the
Indenture.
The Issuer and the Indenture Trustee may also enter into supplemental
indentures, with the consent of the Credit Enhancer and without obtaining the
consent of the Noteholders, for the purpose of, among other things, curing any
ambiguity or correcting or supplementing any provision in the Indenture that
may be inconsistent with any other provision therein.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE ISSUER
Neither the Indenture Trustee nor any director, officer or employee of the
Indenture Trustee will be under any liability to the Issuer or the related
Noteholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Indenture or for errors in judgment;
provided, however, that none of the Indenture Trustee and any director,
officer or employee thereof will be protected against any liability which
would otherwise be imposed by reason of willful malfeasance, bad faith or
negligence in the performance of duties or by reason of reckless disregard of
obligations and duties under the Indenture. Subject to certain limitations set
forth in the Indenture, the Indenture Trustee and any director, officer,
employee or agent of the Indenture Trustee shall be indemnified by the Issuer
and held harmless against any loss, liability or expense incurred in
connection with investigating, preparing to defend or defending any legal
action, commenced or threatened, relating to the Indenture other than any
loss, liability or expense incurred by reason of willful 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
In the opinion of Thacher Proffitt & Wood, counsel to the Depositor, for
federal income tax purposes, the Term Notes will be characterized as
indebtedness and the Issuer, as created pursuant to the terms and conditions
of the Trust Agreement, will not be characterized as an association (or
publicly traded partnership within the meaning of section 7704 of the Code)
taxable as a corporation or as a taxable mortgage pool within the meaning of
section 7701(i) of the Code.
For federal income tax purposes, the Term Notes will not be treated as
having been issued with "original issue discount" (as defined in the
Prospectus). See "Certain Federal Income Tax Consequences" in the Prospectus.
Prospective investors in the Notes should see "Certain Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the Prospectus for a
discussion of the application of certain federal income and state and local
tax laws to the Issuer and purchasers of the Term Notes.
ERISA CONSIDERATIONS
Any fiduciary or other investor of Plan assets that proposes to acquire or
hold the Term Notes on behalf of or with Plan assets of any Plan should
consult with its counsel with respect to the potential applicability of the
S-43
<PAGE>
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and the Code to the proposed investment. See "ERISA
Considerations" in the Prospectus.
LEGAL INVESTMENT
The Term Notes will not constitute "mortgage related securities" for
purposes of SMMEA. Accordingly, many institutions with legal authority to
invest in mortgage related securities may not be legally authorized to invest
in the Term Notes. No representation is made herein as to whether the Term
Notes constitute legal investments for any entity under any applicable
statute, law, rule, regulation or order. Prospective purchasers are urged to
consult with their counsel concerning the status of the Term Notes as legal
investments for such purchasers prior to investing in Term Notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated August 25, 1997 (the "UNDERWRITING AGREEMENT"), Credit Suisse First
Boston Corporation ("CREDIT SUISSE") and Residential Funding Securities
Corporation ("RFSC"; and together with Credit Suisse, the "UNDERWRITERS") have
agreed to purchase and the Depositor has agreed to sell to the Underwriters
the Term Notes. Proceeds of the offering of the Term Notes will not be placed
in any escrow, trust or similar arrangement. It is expected that delivery of
the Term Notes will be made only in book-entry form through the facilities of
DTC, Cedel or Euroclear.
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the Term Notes is subject to, among other
things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of the Depositor's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The distribution of the Term Notes by the Underwriters may be effected from
time to time in one or more negotiated transactions, or otherwise, at varying
prices to be determined at the time of sale. Proceeds to the Depositor from
the sale of the Term Notes, before deducting expenses payable by the
Depositor, will be approximately 99.75% of the aggregate Security Balance of
the Term Notes. The Underwriters may effect such transactions by selling the
Term Notes to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
related Underwriter for whom they act as agent. In connection with the sale of
the Term Notes, the related Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting compensation. The
related Underwriter and any dealers that participate with the related
Underwriter in the distribution of Term Notes may be deemed to be underwriters
and any profit on the resale of the Term Notes positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act
of 1933.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriters, and that under limited circumstances the related Underwriter
will indemnify the Depositor, against certain civil liabilities under the
Securities Act of 1933, or contribute to payments required to be made in
respect thereof.
There can be no assurance that a secondary market for the Term Notes will
develop or, if it does develop, that it will continue. The primary source of
information available to investors concerning the Term Notes will be the
monthly statements discussed in the Prospectus under "Description of the
Notes--Reports to Noteholders," which will include information as to the
outstanding principal balance of the Term Notes. There can be no assurance
that any additional information regarding the Term Notes will be available
through any other source. In addition, the Depositor is not aware of any
source through which price information about the Term Notes will be generally
available on an ongoing basis. The limited nature of such information
regarding the Term Notes
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<PAGE>
may adversely affect the liquidity of the Term Notes, even if a secondary
market for the Term Notes becomes available.
Until the distribution of the Term Notes is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Term Notes. As
exceptions to these rules, the Underwriters are permitted to engage in certain
transactions intended to stabilize the price of the Term Notes. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price. The Underwriters also may create a short position by
selling more Term Notes than they are committed to purchase from the
Depositor, and may purchase Term 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 Term Notes to be
higher than it might otherwise be. Neither the Depositor or any of its
affiliates nor either Underwriter makes any representation as to whether the
Underwriters 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 either Underwriter makes any representation or prediction
as to any effect that such transactions may have on the price of the Term
Notes.
RFSC is an affiliate of the Depositor, the Administrator and the Designated
Seller.
EXPERTS
The consolidated financial statements of the Credit Enhancer, Ambac
Assurance 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 Term Notes will be passed upon for
the Depositor, RFSC and the Administrator by Thacher Proffitt & Wood, New
York, New York, for the Master Servicer by General Counsel to the Master
Servicer and for Credit Suisse First Boston by Brown & Wood LLP.
RATINGS
It is a condition to issuance that the Term Notes be rated "Aaa" by Moody's
and "AAA" by Standard & Poor's. The Depositor has not requested a rating on
the Term Notes by any rating agency other than Moody's and Standard & Poor's.
However, there can be no assurance as to whether any other rating agency will
rate the Term Notes, or, if it does, what rating would be assigned by any such
other rating agency. A rating on the Term Notes by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Term Notes by
Moody's and Standard & Poor's. A securities rating addresses the likelihood of
the receipt by holders of Term Notes of distributions on the Revolving Credit
Loans. The rating takes into consideration the structural and legal aspects
associated with the Term Notes. The ratings on the Term Notes do not, however,
constitute statements regarding the possibility that Holders might realize a
lower than anticipated yield. In addition, such ratings do not address the
likelihood of the receipt of any amounts in respect of Interest Shortfalls. A
securities rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
S-45
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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<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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6
<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>
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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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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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUPPLE-
MENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR OR BY
THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTI-
TUTE 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 UN-
LAWFUL 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.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary.................................................................... S-3
Risk Factors............................................................... S-10
Description of the Mortgage Pool........................................... S-11
Servicing of Revolving Credit Loans........................................ S-22
The Issuer................................................................. S-25
The Owner Trustee.......................................................... S-25
The Indenture Trustee...................................................... S-25
The Credit Enhancer........................................................ S-25
Description of the Securities.............................................. S-27
Description of the Policy.................................................. S-34
Certain Yield and Prepayment Considerations................................ S-35
Description of the Designated Seller's Agreement........................... S-38
Description of the Servicing Agreement..................................... S-39
Description of the Trust Agreement and Indenture........................... S-41
Certain Federal Income Tax Consequences.................................... S-43
ERISA Considerations....................................................... S-43
Legal Investment........................................................... S-44
Method of Distribution..................................................... S-44
Experts.................................................................... S-45
Legal Matters.............................................................. S-45
Ratings.................................................................... S-45
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
Purchase Obligations....................................................... 42
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>
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RESIDENTIAL FUNDING
MORTGAGE SECURITIES II, INC.
$194,000,000
HOME EQUITY LOAN-BACKED TERM NOTES, SERIES 1997-GMACM4
PROSPECTUS SUPPLEMENT
CREDIT SUISSE FIRST BOSTON
RESIDENTIAL FUNDING
SECURITIES CORPORATION
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