<PAGE>
<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 10, 1997)
$229,626,000
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
COMPANY
RESIDENTIAL FUNDING CORPORATION
MASTER SERVICER
HOME EQUITY LOAN PASS-THROUGH CERTIFICATES, SERIES 1997-HS5
<TABLE>
<C> <C> <S> <C> <C> <C> <C> <C>
$43,000,000 6.88% Class A-1 Certificates $18,778,000 7.00% Class A-7 Certificates
$16,800,000 6.56% Class A-2 Certificates $20,288,000 6.73% Class A-L1 Certificates
$55,800,000 6.51% Class A-3 Certificates $ 1,220,000 6.88% Class A-L2 Certificates
$10,600,000 6.50% Class A-4 Certificates $ 0 8.00%(1) Class IO Certificates
$18,100,000 6.67% Class A-5 Certificates $19,518,000 7.01% Class M-1 Certificates
$ 8,300,000 6.76% Class A-6 Certificates $ 9,185,000 7.17% Class M-2 Certificates
$8,037,000 7.50%(2) Class B-1 Certificates
</TABLE>
- ------------
(1) Based on the Notional Amount as described herein. After the 30th
Distribution Date, the Pass-Through Rate on the Fixed Strip Certificates
shall be reduced to 0.00%.
(2) Subject to the Maximum Class B-1 Rate as described herein.
------------------------
The Series 1997-HS5 Home Equity Loan Pass-Through Certificates will include
the following ten classes (the 'Senior Certificates'): (i) Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4
Certificates, Class A-5 Certificates and Class A-6 Certificates; (ii) Class A-7
Certificates (the 'Super Senior Certificates'); (iii) Class A-L1 Certificates;
(iv) Class A-L2 Certificates (the 'Senior Support Certificates' and together
with the Class A-L1 Certificates, the 'Lockout Certificates'); and (v) Class IO
Certificates (the 'Fixed Strip Certificates'). In addition to the Senior
Certificates, the Series 1997-HS5 Home Equity Loan Pass-Through Certificates
will also include the following five classes: (i) Class M-1 Certificates and
Class M-2 Certificates (together, the 'Class M Certificates'); (ii) Class B-1
Certificates (together with the Class M Certificates, the 'Subordinate
Certificates'); and (iii) Class R-I Certificates and Class R-II Certificates
(together, the 'Class R Certificates' or the 'Residual Certificates'). Only the
Senior Certificates and the Subordinate Certificates (together, the 'Offered
Certificates') are offered hereby. See 'Index of Principal Definitions' in the
Prospectus for the meanings of capitalized terms and acronyms not otherwise
defined herein.
It is a condition of the issuance of the Senior Certificates (other than the
Fixed Strip Certificates) that they be rated 'AAA' by Standard & Poor's Rating
Services ('Standard & Poor's') and Fitch Investors Service L.P. ('Fitch'). It is
a condition to the issuance of the Fixed Strip Certificates that they be rated
'AAAr' by Standard & Poor's and 'AAA' by Fitch. It is a condition to the
issuance of the Class M-1, Class M-2 and Class B-1 Certificates that they be
rated not lower than 'AA,' 'A' and 'BBB,' respectively, by Standard & Poor's and
Fitch.
The Offered Certificates will not constitute 'mortgage related securities'
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended.
(Continued on following page)
------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST
IN OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER, GMAC MORTGAGE OR ANY
OF THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE
UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, THE
MASTER SERVICER, GMAC MORTGAGE OR ANY OF THEIR RESPECTIVE
AFFILIATES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE OFFERED
CERTIFICATES, SEE 'RISK FACTORS' COMMENCING ON PAGE S-13 HEREIN AND 'RISK
FACTORS' IN THE PROSPECTUS COMMENCING ON PAGE 9.
There is currently no secondary market for the Offered Certificates. Morgan
Stanley & Co. Incorporated (the 'Underwriter') intends to make a secondary
market in the Offered Certificates, but is not obligated to do so. There can be
no assurance that a secondary market for the Offered Certificates will develop
or, if it does develop, that it will continue. The Offered Certificates will not
be listed on any securities exchange.
The Offered Certificates will be purchased from the Company by the
Underwriter and will be offered by the Underwriter from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The proceeds to the Company from the sale of the
Offered Certificates, before deducting expenses payable by the Company, will be
equal to approximately 101.29% of the initial aggregate principal balance of the
Offered Certificates, plus accrued interest thereon from October 1, 1997. The
Offered Certificates are offered by the Underwriter subject to prior sale, when,
as and if delivered to and accepted by the Underwriter and subject to certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
modify such offer and to reject any order in whole or in part. It is expected
that delivery of the Senior Certificates will be made only in book-entry form
through DTC, Cedel and Euroclear (each as defined herein) as discussed herein
and that delivery of the Subordinate Certificates will be made at the offices of
the Underwriter, New York, New York, on or about October 30, 1997, against
payment therefor in immediately available funds.
MORGAN STANLEY DEAN WITTER
OCTOBER 27, 1997
<PAGE>
<PAGE>
(Continued from previous page)
The Certificates in the aggregate will evidence the entire beneficial
ownership interest in a trust fund (the 'TRUST FUND') consisting primarily of a
pool of closed end, fixed-rate, fully-amortizing and balloon payment, one- to
four-family, primarily second lien home equity mortgage loans with terms to
maturity of approximately five, seven, ten, fifteen, twenty, twenty-five or
thirty years as described herein (the 'MORTGAGE LOANS') to be deposited by
Residential Funding Mortgage Securities II, Inc. (the 'COMPANY') into the Trust
Fund. The characteristics of the Mortgage Loans are described herein under
'Description of the Mortgage Pool.'
The Senior Certificates (the 'DTC REGISTERED CERTIFICATES') initially will
be represented by certificates registered in the name of Cede & Co., as nominee
of DTC, as further described herein. Investors in the DTC Registered
Certificates may elect to hold their Certificates through DTC, in the United
States, or Cedel or Euroclear, in Europe. Definitive certificates will be
available for the DTC Registered Certificates only under the limited
circumstances described herein. See 'Description of the
Certificates -- Book-Entry Registration of the Senior Certificates' herein.
As described herein, two separate REMIC elections will be made in connection
with the Trust Fund for federal income tax purposes. Each class of Offered
Certificates will represent ownership of 'regular interests' in the related
REMIC and each class of Residual Certificates will constitute the sole class of
'residual interests' in the related REMIC. See 'Certain Federal Income Tax
Consequences' herein and in the Prospectus.
Distributions on the Offered Certificates will be made on the 25th day of
each month or, if such day is not a business day, then on the next business day,
commencing in November 1997 (each, a 'DISTRIBUTION DATE'). As described herein,
interest distributions on the Offered Certificates will be based on the
Certificate Principal Balance thereof (or the Notional Amount thereof in the
case of the Fixed Strip Certificates) and the applicable Pass-Through Rate
thereof, which will be fixed for all classes of Certificates, and may be reduced
by certain interest shortfalls. Distributions in respect of principal on the
Senior Certificates (other than the Fixed Strip Certificates, which are not
entitled to distributions of principal) will be allocated among the various
classes of Senior Certificates as described herein under 'Description of the
Certificates -- Principal Distributions.' The rights of the holders of the
Subordinate Certificates and Class R Certificates to receive distributions with
respect to the Mortgage Loans will be subordinate to the rights of the holders
of the Senior Certificates to the extent described herein and in the Prospectus.
In addition, certain losses otherwise allocable to the Super Senior Certificates
will be allocated first to the Senior Support Certificates as described herein.
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON THE RATE
AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS AND
LIQUIDATIONS) ON THE MORTGAGE LOANS. IN GENERAL, DEFAULTS ON MORTGAGE LOANS ARE
EXPECTED TO OCCUR WITH GREATER FREQUENCY IN THEIR EARLY YEARS AND THE RATE OF
DEFAULTS AND THE SEVERITY OF LOSSES ON MORTGAGE LOANS SECURED BY SECOND LIENS
MAY BE SUBSTANTIALLY HIGHER THAN MORTGAGE LOANS SECURED BY FIRST LIENS. SEE
'RISK FACTORS' HEREIN AND IN THE PROSPECTUS. THE MORTGAGE LOANS GENERALLY MAY BE
PREPAID IN FULL OR IN PART AT ANY TIME WITHOUT PENALTY. THE YIELD TO INVESTORS
IN THE OFFERED CERTIFICATES MAY ALSO BE ADVERSELY AFFECTED BY THE UNCERTAINTY OF
THE AVAILABILITY OF THE NET MONTHLY EXCESS CASH FLOW (AS DEFINED HEREIN) TO
COVER ANY UNPAID INTEREST SHORTFALLS (AS DEFINED HEREIN) AND SUCH SHORTFALLS MAY
REMAIN UNPAID ON THE FINAL DISTRIBUTION DATE. IN ADDITION, THE YIELD TO MATURITY
OF EACH CLASS OF SUBORDINATE CERTIFICATES WILL BE EXTREMELY SENSITIVE TO LOSSES
DUE TO DEFAULTS ON THE MORTGAGE LOANS (AND THE TIMING THEREOF), TO THE EXTENT
THAT SUCH LOSSES ARE NOT COVERED BY THE OVERCOLLATERALIZATION AMOUNT (AS DEFINED
HEREIN) OR BY ANY CLASS OF SUBORDINATE CERTIFICATES HAVING A LOWER PAYMENT
PRIORITY, AS DESCRIBED HEREIN. INVESTORS IN THE FIXED STRIP CERTIFICATES SHOULD
FULLY CONSIDER THAT AN EXTREMELY RAPID RATE OF PRINCIPAL PAYMENTS ON THE
MORTGAGE LOANS COULD RESULT IN THE FAILURE OF SUCH INVESTORS TO FULLY RECOVER
THEIR INITIAL INVESTMENTS. SEE 'SUMMARY -- SPECIAL PREPAYMENT CONSIDERATIONS,'
' -- SPECIAL YIELD AND PREPAYMENT CONSIDERATIONS' AND 'CERTAIN YIELD AND
PREPAYMENT CONSIDERATIONS' HEREIN AND 'YIELD AND PREPAYMENT CONSIDERATIONS' IN
THE PROSPECTUS.
------------------------
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF CERTIFICATES ISSUED BY THE COMPANY AND ARE BEING OFFERED
PURSUANT TO ITS PROSPECTUS DATED 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 NOT CONTAINED
HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS
PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
------------------------
UNTIL JANUARY 21, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITER AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
S-2
<PAGE>
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Summary.................................................................................................... S-4
Risk Factors............................................................................................... S-13
Description of the Mortgage Pool........................................................................... S-15
Description of Certificates................................................................................ S-23
Certain Yield and Prepayment Considerations................................................................ S-33
Pooling and Servicing Agreement............................................................................ S-41
Certain Federal Income Tax Consequences.................................................................... S-42
Method of Distribution..................................................................................... S-43
Legal Opinions............................................................................................. S-44
Ratings.................................................................................................... S-44
Legal Investment........................................................................................... S-45
ERISA Considerations....................................................................................... S-45
Annex I -- Global Clearance, Settlement and Tax Documentation Procedures................................... I-1
PROSPECTUS
Additional Information..................................................................................... 2
Reports to Certificateholders.............................................................................. 2
Incorporation of Certain Information by Reference.......................................................... 2
Summary of Prospectus...................................................................................... 4
Risk Factors............................................................................................... 9
The Mortgage Pools......................................................................................... 13
Allocation of Revolving Credit Loan Balances............................................................... 19
Mortgage Loan Program...................................................................................... 19
Description of the Certificates............................................................................ 27
Description of Credit Enhancement.......................................................................... 40
Purchase Obligations....................................................................................... 46
The Company................................................................................................ 46
Residential Funding Corporation............................................................................ 47
The Pooling and Servicing Agreement........................................................................ 47
Yield and Prepayment Considerations........................................................................ 51
Certain Legal Aspects of Mortgage Loans and Related Matters................................................ 57
Certain Federal Income Tax Consequences.................................................................... 67
State and Other Tax Consequences........................................................................... 82
ERISA Considerations....................................................................................... 82
Legal Investment Matters................................................................................... 86
Use of Proceeds............................................................................................ 87
Methods of Distribution.................................................................................... 87
Legal Matters.............................................................................................. 88
Financial Information...................................................................................... 88
Index of Principal Definitions............................................................................. 89
</TABLE>
S-3
<PAGE>
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus. See 'Index of Principal Definitions' in the
Prospectus.
<TABLE>
<S> <C>
Title of Securities................. Home Equity Loan Pass-Through Certificates, Series 1997-HS5.
Company............................. Residential Funding Mortgage Securities II, Inc., an affiliate of
Residential Funding. See 'The Company' in the Prospectus.
Master Servicer..................... Residential Funding Corporation. See 'Pooling and Servicing
Agreement -- The Master Servicer' herein and 'Residential Funding
Corporation' in the Prospectus.
Trustee............................. The First National Bank of Chicago, a national banking association.
Delivery Date....................... On or about October 30, 1997.
The Mortgage Pool................... The Mortgage Pool will consist of a pool of closed end, fixed-rate, fully-
amortizing and balloon payment mortgage loans (the 'MORTGAGE LOANS'),
acquired by Residential Funding pursuant to its Home Equity Program with an
aggregate unpaid principal balance as of the close of business on the
business day prior to October 1, 1997 (the 'CUT-OFF DATE BALANCE' and
October 1, 1997, the 'CUT-OFF DATE') of $229,626,574. 99.9% of the Mortgage
Loans (by Cut-off Date Balance) are secured by second liens on fee simple
or leasehold interests in one- to four-family residential real properties
(each, a 'MORTGAGED PROPERTY') and the remainder are secured by first
liens. At origination, the Mortgage Loans had individual principal balances
of at least $6,000 but not more than $230,000 with an average principal
balance at origination of approximately $36,778. The Mortgage Loans have
terms to maturity from the date of origination or modification of
approximately five, seven, ten, fifteen, twenty, twenty-five or thirty
years with respect to 0.2%, 0.1%, 1.4%, 97.1%, 1.2%, 0.1% and 0.1% of the
Mortgage Loans (each, by Cut-off Date Balance), respectively, and a
weighted average remaining term to stated maturity of approximately 176
months as of the Cut-off Date. All of the Mortgage Loans with terms to
maturity from the date of origination or modification of approximately
five, ten, twenty, twenty-five or thirty years and 60.5% of the Mortgage
Loans with terms to maturity from the date of origination or modification
of approximately fifteen years (by Cut-off Date Balance of such Mortgage
Loans) are fully-amortizing. All of the Mortgage Loans with terms to
maturity of seven years, and 39.5% of the Mortgage Loans with terms to
maturity of fifteen years (by Cut-off Date Balance of such Mortgage Loans),
require monthly payments of principal based on 30-year amortization
schedules and have scheduled maturity dates of seven years or fifteen
years, respectively, from the due date of the first monthly payment (each
such Mortgage Loan, a 'BALLOON MORTGAGE LOAN'), in each case leaving a
substantial portion of the original principal amount due and payable on the
respective scheduled maturity date. All percentages of the Mortgage Loans
described herein are approximate percentages (except as otherwise
indicated) by Cut-off Date Balance of the Mortgage Loans (except as
otherwise indicated). All of the Mortgage Loans are initially being
subserviced by GMAC Mortgage Corporation.
The Mortgage Loans will bear interest at Mortgage Rates of at least 8.125%
per annum but no more than 16.500% per annum, with a weighted average
Mortgage Rate of 11.6706% per annum as of the Cut-
</TABLE>
S-4
<PAGE>
<PAGE>
<TABLE>
<S> <C>
off Date. The Combined Loan-to-Value Ratio for the Mortgage Loans range
from 15% to 101% and the weighted average Combined Loan-to-Value Ratio of
the Mortgage Loans as of the Cut-off Date is approximately 91.67%. 56.3% of
the Mortgage Loans have Combined Loan-to-Value Ratios greater than 90%.
52.8% of the Mortgage Loans are located in California.
As of the Cut-off Date, 1.7% of the Mortgage Loans were High Cost Loans.
For a further description of the Mortgage Loans, see 'Description of the
Mortgage Pool' herein.
The Offered Certificates............ The Offered Certificates will be issued pursuant to a Pooling and Servicing
Agreement, to be dated as of October 1, 1997, among the Company, the Master
Servicer and the Trustee (the 'POOLING AND SERVICING AGREEMENT'). The
Offered Certificates will have the following Pass-Through Rates,
Certificate Principal Balances and other features as of the Cut-off Date:
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Class A-1 Certificates 6.88% $43,000,000 Senior
Class A-2 Certificates 6.56% $16,800,000 Senior
Class A-3 Certificates 6.51% $55,800,000 Senior
Class A-4 Certificates 6.50% $10,600,000 Senior
Class A-5 Certificates 6.67% $18,100,000 Senior
Class A-6 Certificates 6.76% $ 8,300,000 Senior
Class A-7 Certificates 7.00% $18,778,000 Super Senior
Class A-L1 Certificates 6.73% $20,288,000 Lockout/Senior
Class A-L2 Certificates 6.88% $ 1,220,000 Lockout/Senior
Support
Class IO Certificates 8.00% $ 0 Fixed Strip/Senior
Class M-1 Certificates 7.01% $19,518,000 Subordinate
Class M-2 Certificates 7.17% $ 9,185,000 Subordinate
Class B-1 Certificates 7.50% $ 8,037,000 Subordinate
</TABLE>
<TABLE>
<S> <C>
The Offered Certificates are subject to various priorities for payment of
interest and principal as described herein. For a description of the
allocation of interest and principal distributions among the Senior
Certificates and on the Subordinate Certificates, see 'Description of the
Certificates -- Interest Distributions' and ' -- Principal Distributions'
herein.
Certificate Registration............ The DTC Registered Certificates will be represented by one or more
certificates registered in the name of Cede & Co., as nominee of DTC. No
Beneficial Owner will be entitled to receive a Certificate of such class in
fully registered, certificated form (a 'DEFINITIVE CERTIFICATE'), except
under the limited circumstances described herein. Investors in the DTC
Registered Certificates may elect to hold their Certificates through DTC,
in the United States, or Cedel or Euroclear, in Europe. Transfers within
DTC, CEDEL or Euroclear, as the case may be, will be in accordance with the
usual rules and operating procedures of the relevant system. The
Subordinate Certificates will be offered in fully registered, certificated
form. For further registration information and denomination amounts see
'Description of the Certificates' herein.
Interest Distributions.............. Holders of each class of Offered Certificates will be entitled to receive
interest distributions in an amount equal to the Accrued Certificate
Interest (as defined herein) on such class on each Distribution Date in the
manner and priority set forth herein.
With respect to any Distribution Date, 'ACCRUED CERTIFICATE INTEREST' will
be equal to, in respect of each class of Offered Certificates, one
</TABLE>
S-5
<PAGE>
<PAGE>
<TABLE>
<S> <C>
month's interest on the Certificate Principal Balance thereof (or the
Notional Amount thereof in the case of the Fixed Strip Certificates) of the
Certificates of such class at the related Pass-Through Rate on such class;
provided that on any Distribution Date on which the Interest Remittance
Amount (as defined herein) is insufficient to pay Accrued Certificate
Interest on any class of Offered Certificates, the amount of such shortfall
will be carried forward with interest thereon (such amount, an 'UNPAID
INTEREST SHORTFALL') and be payable on future Distribution Dates subject to
available funds. Interest will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
The 'PASS-THROUGH RATE' with respect to each class of Offered Certificates
(other than the Fixed Strip Certificates) will be equal to the fixed rate
set forth on the cover hereof, subject, in the case of the Class B-1
Certificates, to the Maximum Class B-1 Rate (as defined herein). The
Pass-Through Rate on the Fixed Strip Certificates will equal 8.00% per
annum for the first 30 Distribution Dates, and 0.00% thereafter.
The 'NOTIONAL AMOUNT' of the Fixed Strip Certificates as of any
Distribution Date will generally be equal to the Certificate Principal
Balance of the Class A-L1 Certificates as of such Distribution Date.
References herein to the Notional Amount are used solely for certain
calculations and do not represent the right of any Class of Certificates to
receive distributions allocable to principal.
See 'Description of the Certificates -- Interest Distributions' herein.
Principal Distributions............. Holders of the Senior Certificates (other than the Fixed Strip
Certificates, which will not be entitled to distributions with respect to
principal) will be entitled to receive a distribution of principal on each
Distribution Date, in the manner and priority set forth herein, to the
extent of the Senior Principal Distribution Amount (as defined herein).
Following the earlier to occur of (i) the Stepdown Date (as defined
herein), so long as no Trigger Event (as defined herein) is in effect, or
(ii) the retirement of the Senior Certificates and any Class M Certificates
senior thereto, holders of the Class M Certificates will be entitled to
receive a distribution of principal on each Distribution Date, in the
manner and priority set forth herein, to the extent of the portion of the
Principal Distribution Amount (as defined herein) remaining after
distributions in respect of principal to the holders of the Senior
Certificates and any class of Class M Certificates having a higher payment
priority.
Following the earlier to occur of (i) the Stepdown Date, so long as no
Trigger Event is in effect, or (ii) the retirement of the Senior
Certificates and the Class M Certificates, holders of the Class B-1
Certificates will be entitled to receive a distribution of principal on
each Distribution Date, in the manner and priority set forth herein, to the
extent of the portion of the Principal Distribution Amount remaining after
distributions in respect of principal to the holders of the Senior
Certificates and the Class M Certificates.
See 'Description of the Certificates -- Principal Distributions' herein.
Net Monthly Excess Cash Flow........ Holders of the Offered Certificates may be entitled to receive additional
distributions in respect of principal (included in the Principal
Distribution Amount) on each Distribution Date to the extent of Net Monthly
Excess Cash Flow. 'NET MONTHLY EXCESS CASH FLOW' will consist primarily of
</TABLE>
S-6
<PAGE>
<PAGE>
<TABLE>
<S> <C>
the portion, if any, of the Interest Remittance Amount not required to pay
Accrued Certificate Interest on the Offered Certificates and any Unpaid
Interest Shortfall on the Senior Certificates. The Net Monthly Excess Cash
Flow generally will be used as follows: (i) first, to pay any Unpaid
Interest Shortfall on the Senior Certificates; (ii) second, as payments in
respect of principal on the Offered Certificates to create
overcollateralization until the Overcollateralization Amount (as defined
herein) has reached the Required Overcollateralization Amount (as defined
herein); (iii) third, to pay any Unpaid Interest Shortfall on the
Subordinate Certificates and to reimburse the Subordinate Certificates for
any Realized Losses previously allocated thereto, in the order of priority
described herein; and (iv) fourth, to be distributed to the Class R
Certificates.
See 'Description of the Certificates -- Net Monthly Excess Cash Flow
Distributions' herein.
Credit Enhancement.................. The credit enhancement provided for the benefit of the Offered
Certificateholders consists of (i) the subordination provisions provided
herein and (ii) the overcollateralization provisions described below.
Subordination: The rights of the holders of the Class M-1 Certificates to
receive distributions with respect to the Mortgage Loans will be
subordinate to the rights of the holders of the Senior Certificates, the
rights of the holders of the Class M-2 Certificates to receive
distributions with respect to the Mortgage Loans will be subordinate to the
rights of the holders of the Senior Certificates and the Class M-1
Certificates, the rights of the holders of the Class B-1 Certificates to
receive distributions with respect to the Mortgage Loans will be
subordinate to the rights of the holders of the Senior Certificates, the
Class M-1 Certificates and the Class M-2 Certificates, in each case to the
extent described herein and in the Prospectus.
Overcollateralization: The subordination and cash flow provisions of the
Trust Fund result in a limited acceleration of the Offered Certificates
relative to the amortization of the Mortgage Loans. This acceleration
feature creates overcollateralization which results from the excess of the
aggregate principal balance of the Mortgage Loans over the aggregate
Certificate Principal Balance of the Offered Certificates. Once the
required level of overcollateralization is reached, the acceleration
feature will cease, unless necessary to maintain the required level of
overcollateralization.
The actual level of overcollateralization may increase or decrease over
time as described herein. An increase would result in a temporary period of
accelerated amortization of the Offered Certificates to increase the actual
level of overcollateralization to its required level; a decrease would
result in a temporary period of decelerated amortization to reduce the
actual level of overcollateralization to its required level. See
'Description of the Certificates -- Overcollateralization Provisions'
herein.
Advances............................ The Master Servicer is not required to make advances in respect of
delinquent payments of principal and interest on the Mortgage Loans.
</TABLE>
S-7
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<PAGE>
<TABLE>
<S> <C>
Allocation of Losses;
Subordination..................... On each Distribution Date following the application of all amounts
distributable on such date, to the extent the aggregate Stated Principal
Balance of the Mortgage Loans is less than the aggregate Certificate
Principal Balances of the Offered Certificates due to Realized Losses
(other than Excess Losses (as defined herein)), the Certificate Principal
Balances of the Class B-1 Certificates and Class M Certificates shall be
reduced as follows, until such deficiency is fully allocated: first, the
Certificate Principal Balance of the Class B-1 Certificates shall be
reduced, until the Certificate Principal Balance thereof has been reduced
to zero; second, the Certificate Principal Balance of the Class M-2
Certificates shall be reduced, until the related Certificate Principal
Balance has been reduced to zero; and third, the Certificate Principal
Balance of the Class M-1 Certificates shall be reduced, until the related
Certificate Principal Balance has been reduced to zero. The Certificate
Principal Balances of the Senior Certificates will not be so reduced and
such Certificates will continue to be entitled to receive Accrued
Certificate Interest on their balance subject to available funds. Any loss
allocated to a Subordinate Certificate may be repaid through the mechanics
of the payment of the Net Monthly Excess Cash Flow as described above.
In addition, any Special Hazard Losses and Fraud Losses (each as defined
herein) in excess of the respective amounts of coverage therefor and any
Extraordinary Losses (as defined herein) on the Mortgage Loans will be
allocated on a pro rata basis among the Senior Certificates and the
Subordinate Certificates, in reduction of the Certificate Principal
Balances thereof, to the extent of a fraction of such Realized Losses equal
to (x) the aggregate Certificate Principal Balance of the Certificates over
(y) the aggregate Stated Principal Balance of the Mortgage Loans, except
that Excess Losses otherwise allocable to the Super Senior Certificates
will be allocated to the Senior Support Certificates until the Certificate
Principal Balance thereof is reduced to zero. The aggregate amounts of
Realized Losses which may be allocated by means of Subordination to cover
Special Hazard Losses and Fraud Losses are initially limited to
approximately $2,296,266 and $6,888,797, respectively. All of the foregoing
amounts are subject to periodic reduction as described herein and may be
further reduced as described in the Prospectus under 'Subordination.'
Neither the Offered Certificates nor the Mortgage Loans are insured or
guaranteed by any governmental agency or instrumentality or by the Company,
the Master Servicer, the Trustee, GMAC Mortgage or any affiliate thereof.
Class R Certificates................ The Class R Certificates will have no Pass-Through Rate and, as of the
Cut-off Date, an aggregate initial Certificate Principal Balance of
$573.80. The Class R Certificates are not being offered hereby. The
aggregate Certificate Principal Balance of the Class R Certificates as of
any Distribution Date will be equal to the Overcollateralization Amount.
Optional Termination................ At its option, on any Distribution Date when the aggregate Stated Principal
Balance of the Mortgage Loans is less than 10% of the Cut-off Date Balance,
the Master Servicer or the Company may (i) purchase from the Trust Fund all
remaining Mortgage Loans and other assets thereof, and thereby effect early
retirement of the Certificates or (ii) purchase in
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whole, but not in part, the Certificates. See 'Pooling and Servicing
Agreement -- Termination' herein and 'The Pooling and Servicing
Agreement -- Termination; Retirement of Certificates' in the Prospectus.
Special Prepayment Considerations... The rate and timing of principal payments on the Offered Certificates will
depend on, among other things, the rate and timing of principal payments
(including prepayments, defaults, liquidations and purchases of Mortgage
Loans due to a breach of a representation and warranty) on the Mortgage
Loans. The Offered Certificates are subject to substantial inherent cash
flow uncertainties because the Mortgage Loans may be prepaid at any time.
Generally, when prevailing interest rates increase, prepayment rates on
mortgage loans tend to decrease, resulting in a slower return of principal
to investors at a time when reinvestment at such higher prevailing rates
would be desirable. Conversely, when prevailing interest rates decline,
prepayment rates on mortgage loans tend to increase, resulting in a faster
return of principal to investors at a time when reinvestment at comparable
yields may not be possible.
In addition, since mortgage loans secured by second liens are not generally
viewed by borrowers as permanent financing and generally carry a high rate
of interest, the Mortgage Loans may experience a higher rate of prepayments
than traditional mortgage loans. In addition, the rate of default on second
mortgage loans may be greater than that of mortgage loans secured by first
liens. See 'Certain Yield and Prepayment Considerations -- General' herein.
The multiple class structure of Offered Certificates results in the
allocation of prepayments among certain classes as follows:
Senior Certificates: The Senior Certificates are subject to various
priorities for payment of principal as described herein. Distributions of
principal on classes of Senior Certificates having an earlier priority of
payment will be affected by the rates of prepayment of the Mortgage Loans
early in the life of the Mortgage Pool. The timing of commencement of
principal distributions and the weighted average lives of the classes of
Senior Certificates with a later priority of payment will be affected by
the rates of prepayment of the Mortgage Loans experienced both before and
after the commencement of principal distributions on such classes.
Lockout Certificates: As described herein, during certain periods all or a
disproportionately large percentage of principal collections on the
Mortgage Loans will be allocated among the classes of Senior Certificates
(other than the Lockout Certificates) and, during certain periods, no
principal collections or a disproportionately small percentage of principal
collections will be distributed on the Lockout Certificates. Unless the
Certificate Principal Balances of the Senior Certificates (other than the
Lockout Certificates) have been reduced to zero, the Lockout Certificates
will not be entitled to receive distributions of principal until the
Distribution Date occurring in November 2000 and will not receive their pro
rata share of the Senior Principal Distribution Amount until the
Distribution Date occurring in November 2003. However, beginning with the
Distribution Date occurring in November 2004, the Lockout Certificates will
receive a disproportionately large percentage of principal collections
until their Certificate Principal Balance has been reduced to zero.
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Certificates with Subordination Features: As described herein, during
certain periods all or a disproportionately large percentage of principal
payments on the Mortgage Loans will be allocated to the Senior Certificates
in the aggregate and, during certain periods, no principal payments will be
distributed to the Subordinate Certificates. Unless the Certificate
Principal Balances of the Senior Certificates have been reduced to zero,
the Subordinate Certificates will not be entitled to receive distributions
of principal until the Stepdown Date. Furthermore, if a Trigger Event is in
effect on or after the Stepdown Date, the Subordinate Certificates will not
be entitled to receive distributions in respect of principal until the
Certificate Principal Balances of the Senior Certificates are reduced to
zero. To the extent that no principal payments are distributed on the
Subordinate Certificates, the Subordination afforded the Senior
Certificates by the Subordinate Certificates (together with the
Overcollateralization Amount), in the absence of offsetting Realized Losses
allocated thereto, will be increased, and the weighted average lives of the
Subordinate Certificates will be extended.
In addition, investors in each class of Subordinate Certificates should be
aware that on and after the Distribution Date on which the
Overcollateralization Amount has been reduced to approximately $1,148,133,
the most subordinate class of Subordinate Certificates then outstanding may
receive more than such class' pro rata share of the Principal Distribution
Amount for such Distribution Date.
See 'Description of the Certificates -- Principal Distributions' and
'Certain Yield and Prepayment Considerations' herein and 'Yield and
Prepayment Considerations' in the Prospectus. For further information
regarding the effect of principal prepayments on the weighted average lives
of the Offered Certificates, see the table entitled 'Percent of Initial
Certificate Principal Balance Outstanding at the Following Percentages of
the Prepayment Assumption' herein.
Special Yield Considerations........ The yield to maturity on the Offered Certificates will depend on, among
other things, the rate and timing of principal payments (including
prepayments, defaults, liquidations and repurchases of Mortgage Loans due
to a breach of a representation and warranty) on the Mortgage Loans and the
allocation thereof to reduce the Certificate Principal Balance of such
class. Prepayment Interest Shortfalls resulting from principal prepayments
in any calendar month will adversely affect the yield to investors in the
Offered Certificates to the extent the Interest Remittance Amount is
insufficient to pay Accrued Certificate Interest on the Offered
Certificates. See 'Description of the Certificates -- Interest
Distributions' herein.
In general, if the Offered Certificates are purchased at a premium and
principal distributions to such class occur at a rate faster than assumed
at the time of purchase, the investor's actual yield to maturity will be
lower than anticipated at the time of purchase. Conversely, if the Offered
Certificates are purchased at a discount and principal distributions
thereon occur at a rate slower than assumed at the time of purchase, the
investor's actual yield to maturity will be lower than anticipated at the
time of purchase.
The Offered Certificates were structured assuming, among other things, a
Prepayment Assumption (as defined herein) of 100% and corresponding
weighted average lives as described herein. The prepayment, yield and
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other assumptions to be used for pricing purposes for the respective
classes that are to be offered hereunder may vary as determined at the time
of sale.
The multiple class structure of the Offered Certificates causes the yield
of certain classes to be particularly sensitive to changes in the rates of
prepayment of the Mortgage Loans and other factors, as follows:
Lockout Certificates: Investors in the Lockout Certificates should be aware
that because the Lockout Certificates do not receive any collections of
principal prior to the Distribution Date occurring in November 2000, and
prior to the Distribution Date occurring in November 2003 will receive a
disproportionately small portion of principal collections with respect to
the Mortgage Loans (unless the Certificate Principal Balances of the Senior
Certificates (other than the Lockout Certificates) have been reduced to
zero), the weighted average life of the Lockout Certificates will be longer
than would otherwise be the case, and the effect on the market value of the
Lockout Certificates of changes in market interest rates or market yields
for similar securities may be greater than for other classes of Senior
Certificates entitled to such distributions. However, beginning with the
Distribution Date occurring in November 2004, the Lockout Certificates will
receive a disproportionately large percentage of principal collections
until their Certificate Principal Balance is reduced to zero.
Fixed Strip Certificates: Investors in the Fixed Strip Certificates should
fully consider that an extremely rapid rate of principal prepayments on the
Mortgage Loans could result in the failure of such investors to fully
recover their initial investments. See 'Certain Yield and Prepayment
Considerations,' especially 'Certain Yield and Prepayment
Considerations -- Fixed Strip Certificate Yield Considerations' herein.
Certificates with Subordination Features: The yield to investors on each
class of Subordinate Certificates, and particularly on those classes of
Subordinate Certificates with lower payment priorities, will be extremely
sensitive to losses due to defaults on the Mortgage Loans (and the timing
thereof), to the extent such losses are not covered by the
Overcollateralization Amount (including overcollateralization created by
the Net Monthly Excess Cash Flow) or by any other class of Subordinate
Certificates having a lower payment priority, because the entire amount of
such losses that are covered by Subordination will be allocable to such
class or classes of Subordinate Certificates, as described herein.
Investors in each class of Subordinate Certificates should also be aware
that on any Distribution Date prior to the Stepdown Date or if on or after
the Stepdown Date a Trigger Event is in effect, such class of Subordinate
Certificates will not be entitled to distributions of principal until the
Certificate Principal Balances of the Senior Certificates and each class of
Subordinate Certificates senior thereto have been reduced to zero.
See 'Certain Yield and Prepayment Considerations' herein and 'Yield
Considerations' in the Prospectus.
Certain Federal Income Tax
Consequences...................... Two separate REMIC elections ('REMIC I' and 'REMIC II') will be made with
respect to the Trust Fund for federal income tax purposes. Upon the
issuance of the Offered Certificates, Thacher Proffitt & Wood, counsel to
the Company, will deliver its opinion generally to the effect
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that, assuming compliance with all provisions of the Pooling and Servicing
Agreement, for federal income tax purposes, REMIC I and REMIC II will each
qualify as a REMIC under Sections 860A through 860G of the Code.
For federal income tax purposes, (a) the Class R-I Certificates will be the
sole class of 'residual interests' in REMIC I, (b) each class of Offered
Certificates will represent ownership of 'regular interests' in REMIC II
and will generally be treated as representing ownership of debt instruments
of REMIC II, and (c) the Class R-II Certificates will constitute the sole
class of 'residual interests' in REMIC II.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see 'Certain Federal Income Tax
Consequences' herein and in the Prospectus.
Legal Investment.................... THE OFFERED CERTIFICATES WILL NOT CONSTITUTE 'MORTGAGE RELATED SECURITIES'
FOR PURPOSES OF SMMEA, BECAUSE THE MORTGAGE POOL CONSISTS OF MORTGAGE LOANS
THAT ARE SECURED BY SUBORDINATE LIENS ON THE RELATED MORTGAGED PROPERTIES.
Institutions whose investment activities are subject to legal investment
laws and regulations or to review by regulatory authorities should consult
with their legal advisors in determining whether and to what extent the
Offered Certificates are subject to restrictions on investment, capital
requirements or otherwise. See 'Legal Investment' herein and in the
Prospectus.
Ratings............................. It is a condition to the issuance of the Senior Certificates (other than
the Fixed Strip Certificates) that they be rated 'AAA' by Standard & Poor's
and Fitch. It is a condition to the issuance of the Fixed Strip
Certificates that they be rated 'AAAr' by Standard & Poor's and 'AAA' by
Fitch. It is a condition to the issuance of the Class M-1, Class M-2 and
Class B-1 Certificates that they be rated not lower than 'AA,' 'A' and
'BBB,' respectively, by Standard & Poor's and Fitch. A security rating is
not a recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the assigning rating organization. A
security rating does not address the frequency of prepayments of Mortgage
Loans or the corresponding effect on yield to investors. The rating of the
Fixed Strip Certificates does not address the possibility that the holders
thereof may fail to fully recover their initial investment. See 'Certain
Yield and Prepayment Considerations' and 'Ratings' herein and 'Yield and
Prepayment Considerations' in the Prospectus.
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RISK FACTORS
Prospective Certificateholders should consider, among other things, the
items discussed under 'Risk Factors' in the Prospectus and the following factors
in connection with the purchase of the Offered Certificates:
SUBORDINATION
As described herein, during certain periods all or a disproportionately
large percentage of principal payments on the Mortgage Loans will be allocated
to the Senior Certificates and, during certain periods, no principal payments
will be distributed to the Subordinate Certificates. Unless the Certificate
Principal Balances of the Senior Certificates have been reduced to zero, the
Subordinate Certificates will not be entitled to receive distributions of
principal until the Stepdown Date. Furthermore, on or after the Stepdown Date,
if a Trigger Event is in effect, no class of Subordinate Certificates will be
entitled to receive distributions in respect of principal until the Certificate
Principal Balances of the Senior Certificates and each class of Subordinate
Certificates senior thereto have been reduced to zero. To the extent that no
principal payments are distributed on the Subordinate Certificates, the
Subordination afforded the Senior Certificates by the Subordinate Certificates
(together with the Overcollateralization Amount (including overcollateralization
created by the Net Monthly Excess Cash Flow)), in the absence of offsetting
Realized Losses allocated thereto, will be increased, and the weighted average
lives of the Subordinate Certificates will be extended.
In addition, investors in each class of Subordinate Certificates should be
aware that on and after the Distribution Date on which the Overcollateralization
Amount has been reduced to approximately $1,148,133, the most subordinate class
of Subordinate Certificates then outstanding may receive more than such class'
pro rata share of the Principal Distribution Amount for such Distribution Date.
The yield to investors on each class of Subordinate Certificates, and
particularly on those classes of Subordinate Certificates with lower payment
priorities, will be extremely sensitive to losses due to defaults on the
Mortgage Loans (and the timing thereof), to the extent such losses are not
covered by the Overcollateralization Amount (including overcollateralization
created by the Net Monthly Excess Cash Flow) or by any other class of
Subordinate Certificates having a lower payment priority, because the entire
amount of such losses that are covered by Subordination will be allocable to
such class or classes of Subordinate Certificates, as described herein.
Furthermore, as described herein, the timing of receipt of principal and
interest by any class of Subordinate Certificates may be adversely affected by
losses even if such class does not ultimately bear such loss.
The yield to investors on each class of Offered Certificates, and
particularly on those classes of Offered Certificates with lower payment
priorities, will be sensitive to (i) Prepayment Interest Shortfalls (as defined
herein) and (ii) shortfalls in amounts available for distribution resulting from
the failure of the Mortgagors to pay their scheduled monthly payments on the
Mortgage Loans on a timely basis (the amount of such shortfall, a 'DELINQUENCY
SHORTFALL'), because such amounts will not be covered by the Master Servicer
either through compensating interest or Advances, respectively. On each
Distribution Date, Prepayment Interest Shortfalls and the interest portion of
Delinquency Shortfalls will reduce the Interest Remittance Amount (as defined
herein) and the principal portion of Delinquency Shortfalls will not be included
in the Principal Remittance Amount (as defined herein), thereby reducing amounts
available for distribution to the Offered Certificates. In certain scenarios
involving Prepayment Interest Shortfalls or Delinquency Shortfalls, the Interest
Remittance Amount may be insufficient to pay Accrued Certificate Interest on the
Offered Certificates in full. Any shortfalls in interest distributions resulting
therefrom will be allocated first to the respective classes of Subordinate
Certificates (in the order in which Realized Losses are allocated thereto) prior
to allocation among the Senior Certificates and will carry forward (with
interest thereon) and will be payable on future Distribution Date subject to
available funds. The Senior Certificates will be reimbursed for such interest
shortfalls prior to the payment of Accrued Certificate Interest on the
Subordinate Certificates. Each respective class of Subordinate Certificates will
be reimbursed for such interest shortfalls from Net Monthly Excess Cashflow only
when the required level of overcollateralization has been reached and any
Subordinate Certificates with a higher payment priority have been reimbursed for
such interest shortfalls and for any other Realized Losses (other than any
Excess Losses) allocated thereto. As a result, holders of the Subordinate
Certificates may experience delays in being reimbursed for such shortfalls.
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RISKS ASSOCIATED WITH THE MORTGAGE LOANS
Since substantially all of the Mortgage Loans are subordinate to the rights
of the mortgagee under the related senior mortgage, the proceeds from any
liquidation, insurance or condemnation proceedings will be available to satisfy
the outstanding balance of such Mortgage Loans secured by subordinate mortgages
only to the extent that the claims of such senior mortgages have been satisfied
in full, including any related foreclosure costs. In circumstances when it is
determined to be uneconomical to foreclose on the Mortgaged Property, the Master
Servicer may write off the entire outstanding balance of such Mortgage Loan as a
bad debt. The foregoing considerations will be particularly applicable to
Mortgage Loans secured by junior liens that have high Combined Loan-to-Value
Ratios or low Junior Ratios because it is comparatively more likely that the
Master Servicer would determine foreclosure to be uneconomical in the case of
such Mortgage Loans. Any losses on Mortgage Loans, to the extent such losses are
not covered by Subordination, will be borne by the Certificateholders.
Defaults on mortgage loans are generally expected to occur with greater
frequency in their early years. The rate of default and the severity of losses
of second lien mortgage loans may be greater than that of mortgage loans secured
by first liens on comparable properties.
38.4% of the Mortgage Loans are not fully amortizing over their terms to
maturity and, thus, will require substantial principal payments (i.e., a Balloon
Payment, as defined herein) at their stated maturity. Mortgage Loans with
Balloon Payments involve a greater degree of risk because the ability of a
Mortgagor to make a Balloon Payment typically will depend upon the Mortgagor's
ability either to timely refinance the loan or to timely sell the related
Mortgaged Property. See 'Description of the Mortgage Pool -- Balloon Mortgage
Loans' herein.
The Bankruptcy Reform Act of 1994 established the National Bankruptcy
Review Commission ('NBRC') for purposes of analyzing the nation's bankruptcy
laws and making recommendations to Congress for legislative changes to the
bankruptcy laws. A similar commission was involved in developing the Bankruptcy
Code. The NBRC delivered its report to Congress, the President of the United
States and the Chief Justice of the Supreme Court on October 20, 1997. Among
other topics, high leverage loans were addressed in the NBRC's report. Despite
certain ambiguities, the NBRC's report appears to recommend that Congress amend
Bankruptcy Code section 1322(b)(2) by treating a claim secured only by a junior
security interest in a borrower's principal residence as protected only to the
extent that the claim was secured when the security interest was made if the
value of the property securing the junior security interest is less than such
amount. However, the express language of the report implies that a claim secured
only by a junior security interest in a borrower's principal residence may not
be modified to reduce such claim below the appraised value of the property at
the time the security interest was made. A strong dissent by certain members of
the NBRC recommends that the protections of Bankruptcy Code section 1322(b)(2)
be extended to creditors principally secured by the borrower's principal
residence. Additionally, the NBRC's report recommends that a creditor's secured
claim in real property should be determined by the property's fair market value,
less hypothetical costs of sale. The standard advocated by this recommendation
would not apply to mortgages on the primary residence of a Chapter 11 or 13
borrower who retains the residence if such mortgages are protected from
modification such as those senior mortgages not subject to modification pursuant
to Bankruptcy Code Sections 1322(b)(2) and 1123(b)(5). The final NBRC report may
ultimately lead to substantive changes to the existing Bankruptcy Code, such as
reducing outstanding loan balances to the appraised value of a borrower's
principal residence at the time the security interest in the property was taken,
which could affect the Mortgage Loans and the enforcement of rights therein.
LIMITATIONS AND REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
Credit enhancement will be provided for the Senior Certificates by the
Overcollateralization Amount (including overcollateralization created by the Net
Monthly Excess Cash Flow) and the subordination provided by the Subordinate
Certificates as described herein. Credit enhancement will be provided for the
Subordinate Certificates by the Overcollateralization Amount (including
overcollateralization created by the Net Monthly Excess Cash Flow) and the
subordination provided by any class of Subordinate Certificates subordinate
thereto. In addition, credit enhancement for the Subordinate Certificates
includes the limited availability of Net Monthly Excess Cash Flow to pay amounts
related to Realized Losses allocated to the Subordinate Certificates, in the
manner and to the extent described herein. None of the Company, the Master
Servicer, the Trustee, the Seller,
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GMAC Mortgage nor any of their affiliates will have any obligation to replace or
supplement such credit enhancement, or to take any other action to maintain any
rating of the Offered Certificates.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with a Cut-off Date
Balance of $229,626,574. 99.9% of the Mortgage Loans are secured by second liens
on fee simple or leasehold interests in one- to four-family residential real
properties and the remainder are secured by first liens. The Mortgage Loans will
consist of fixed-rate, fully-amortizing and balloon payment Mortgage Loans with
terms to maturity of approximately five, seven, ten, fifteen, twenty,
twenty-five or thirty years with respect to 0.2%, 0.1%, 1.4%, 97.1%, 1.2%, 0.1%
and 0.1% of the Mortgage Loans, respectively, from the date of origination or
modification. With respect to Mortgage Loans which have been modified,
references herein to the date of origination shall be deemed to be the date of
the most recent modification. All percentages of the Mortgage Loans described
herein are approximate percentages (except as otherwise indicated) by Cut-off
Date Balance.
All of the Mortgage Loans were purchased by the Company through its
affiliate Residential Funding under Residential Funding's Home Equity Program
from Unaffiliated Sellers as described herein and in the Prospectus, except in
the case of 15.5% of the Mortgage Loans which were purchased by the Company
through its affiliate Residential Funding from HomeComings Financial, Inc. (an
affiliate of the Company). 8.5% of the Mortgage Loans will have been purchased
from First Savings Mortgage, an Unaffiliated Seller. Except as described in the
preceding sentence, no Unaffiliated Seller sold more than 8.5% of the Mortgage
Loans to Residential Funding. All of the Mortgage Loans are being subserviced by
GMAC Mortgage Corporation. See ' -- The Servicer' below.
All of the Mortgage Loans were generally underwritten in conformity with or
in a manner generally consistent with Residential Funding's Home Equity Program.
See ' -- Underwriting Standards' below.
The Company and Residential Funding will make certain limited
representations and warranties regarding the Mortgage Loans as of the date of
issuance of the Certificates. The Company and Residential Funding will be
required to repurchase or substitute for any Mortgage Loan as to which a breach
of its representations and warranties with respect to such Mortgage Loan occurs
if such breach materially adversely affects the interests of the
Certificateholders in any such Mortgage Loan. Each Seller has made or will make
certain limited representations and warranties regarding the related Mortgage
Loans, as of the date of purchase thereof by Residential Funding. However, such
representations and warranties will not be assigned to the Trustee for the
benefit of the holders of the Certificates, and therefore a breach of such
representations and warranties will not be enforceable on behalf of the Trust
Fund. See 'Mortgage Loan Program -- Qualifications of Sellers' and
' -- Representations Relating to the Mortgage Loans' and 'Description of the
Certificates -- Review of Mortgage Loans' in the Prospectus. Neither the Company
nor Residential Funding will be required to repurchase or substitute for any
Mortgage Loan in the event of a breach of its representations and warranties
with respect to such Mortgage Loan if the substance of any such breach also
constitutes fraud in the origination of such affected Mortgage Loan. A limited
amount of losses on Mortgage Loans as to which there was fraud in the
origination of such Mortgage Loans will be covered by the Subordination (as
defined herein) provided by the Overcollateralization Amount (including
overcollateralization created by the Net Monthly Excess Cash Flow) as described
herein under 'Description of the Certificates -- Allocation of Losses;
Subordination.'
PAYMENTS ON THE SIMPLE INTEREST MORTGAGE LOANS
4.0% of the Mortgage Loans are Simple Interest Mortgage Loans, which
require that each monthly payment consist of an installment of interest which is
calculated according to the simple interest method on the basis of the
outstanding principal balance of the Mortgage Loan multiplied by the Mortgage
Rate and further multiplied by a fraction, the numerator of which is the number
of days in the period elapsed since the preceding payment of interest was made
and the denominator of which is the number of days in the annual period for
which interest accrues on such Mortgage Loan (as opposed to 96.0% of the
Mortgage Loans which are Actuarial Mortgage Loans, on which 30 days of interest
is owed each month irrespective of the day on which the payment is received). As
payments are received, the amount received is applied first to interest accrued
to the date of payment and the balance is applied to reduce the unpaid principal
balance. Accordingly, if a Mortgagor pays a
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fixed monthly installment before its scheduled due date, the portion of the
payment allocable to interest for the period since the preceding payment was
made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly greater. However, the next succeeding payment
will result in an allocation of a greater amount to interest if such payment is
made on its scheduled due date.
Conversely, if a Mortgagor pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment is made on or prior to its
scheduled due date, the principal balance of the Mortgage Loan will amortize in
the manner described in the preceding paragraph. However, if the Mortgagor
consistently makes scheduled payments after the scheduled due date the Mortgage
Loan will amortize more slowly than scheduled. Any remaining unpaid principal is
payable on the final maturity date of the Mortgage Loan.
BALLOON MORTGAGE LOANS
38.4% of the Mortgage Loans require monthly payments of principal based on
a 30-year amortization schedule and have scheduled maturity dates of seven or
fifteen years from the due date of the first monthly payment (each such Mortgage
Loan, a 'BALLOON MORTGAGE LOAN'), in each case leaving a substantial portion of
the original principal amount due and payable on the respective scheduled
maturity date (a 'BALLOON PAYMENT'). The existence of a Balloon Payment
generally will require the related Mortgagor to refinance such Mortgage Loan or
to sell the Mortgaged Property on or prior to the scheduled maturity date. The
ability of a Mortgagor to accomplish either of these goals will be affected by a
number of factors, including the level of available mortgage rates at the time
of sale or refinancing, the Mortgagor's equity in the related Mortgaged
Property, the financial condition of the Mortgagor, tax laws, prevailing general
economic conditions and the terms of any related first lien mortgage loan. None
of the Company, the Master Servicer or the Trustee is obligated to refinance any
Balloon Mortgage Loan. Subject to the terms of the Policy, the Policy will
provide coverage on any losses incurred upon liquidation of a Balloon Mortgage
Loan arising out of or in connection with the failure of a Mortgagor to make the
Balloon Payment.
MORTGAGE POOL CHARACTERISTICS
None of the Mortgage Loans were originated prior to May 18, 1995, or will
have a maturity date later than May 1, 2027. No Mortgage Loan will have a
remaining term to stated maturity as of the Cut-off Date of less than 48 months.
The weighted average remaining term to stated maturity of the Mortgage Loans as
of the Cut-off Date will be approximately 176 months. The weighted average
original term to stated maturity of the Mortgage Loans as of the Cut-off Date
will be approximately 180 months. 0.3% of the fully-amortizing Mortgage Loans
will have original terms to maturity of approximately five years, with a
weighted average remaining term to stated maturity of such Mortgage Loans of 56
months. 2.2% of the fully-amortizing Mortgage Loans will have original terms of
maturity of approximately ten years, with a weighted average remaining term to
stated maturity of such Mortgage Loans of 116 months. 95.3% of the
fully-amortizing Mortgage Loans will have original terms to maturity of
approximately fifteen years, with a weighted average remaining term to stated
maturity of such Mortgage Loans of 175 months. 2.0% of the fully-amortizing
Mortgage Loans will have original terms of maturity of approximately twenty
years, with a weighted average remaining term to stated maturity of such
Mortgage Loans of 237 months. 0.1% of the fully-amortizing Mortgage Loans will
have original terms to maturity of approximately twenty-five years, with a
weighted average remaining term to stated maturity of such Mortgage Loans of 299
months. 0.1% of the fully-amortizing Mortgage Loans will have original terms to
maturity of approximately thirty years, with a weighted average remaining term
to stated maturity of such Mortgage Loans of 347 months. 0.1% of the Balloon
Mortgage Loans will have original terms to maturity of approximately seven years
based on 30-year amortization schedules, with a weighted average remaining term
to stated maturity of 79 months. 99.9% of the Balloon Mortgage Loans will have
original terms to maturity of approximately fifteen years based on 30-year
amortization schedules, with a weighted average remaining term to stated
maturity of 177 months. All of the Mortgage Loans have principal and interest
payable monthly on various days of each month as specified in the Mortgage Note
(the 'DUE DATE').
S-16
<PAGE>
<PAGE>
In connection with each Mortgage Loan that is secured by a leasehold
interest, the related Seller will have represented to Residential Funding that,
among other things: (i) the use of leasehold estates for residential properties
is an accepted practice in the area where the related Mortgaged Property is
located; (ii) residential property in such area consisting of leasehold estates
is readily marketable; (iii) the lease is recorded and no party is in any way in
breach of any provision of such lease; (iv) the leasehold is in full force and
effect and is not subject to any prior lien or encumbrance by which the
leasehold could be terminated or subject to any charge or penalty; and (v) the
remaining term of the lease does not terminate less than ten years after the
maturity date of each such Mortgage Loans.
As of the Cut-off Date, no Mortgage Loan will be 30 days or more delinquent
in payment of principal and interest.
As of the Cut-off Date, 1.7% of the Mortgage Loans were High Cost Loans.
No Mortgage Loan provides for deferred interest, negative amortization or
future advances.
Set forth below is a description of certain additional characteristics of
the Mortgage Loans as of the Cut-off Date (except as otherwise indicated). All
percentages of the Mortgage Loans are approximate percentages by Cut-off Date
Balance (except as otherwise indicated). Unless otherwise specified, all
principal balances of the Mortgage Loans are Cut-off Date Balances and are
rounded to the nearest dollar.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
ORIGINAL PERCENT OF
MORTGAGE LOAN NUMBER OF CUT-OFF DATE MORTGAGE
PRINCIPAL BALANCES MORTGAGE LOANS BALANCE POOL
- -------------------------------------------------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
$ 0.01 - $ 10,000.00............................................ 69 $ 661,036 0.29%
$10,000.01 - $ 20,000.00............................................ 850 13,664,464 5.95
$20,000.01 - $ 30,000.00............................................ 1,774 45,164,322 19.67
$30,000.01 - $ 40,000.00............................................ 1,583 55,312,237 24.09
$40,000.01 - $ 50,000.00............................................ 1,120 50,486,592 21.99
$50,000.01 - $ 60,000.00............................................ 372 20,446,378 8.90
$60,000.01 - $ 70,000.00............................................ 215 13,936,416 6.07
$70,000.01 - $ 80,000.00............................................ 125 9,345,816 4.07
$80,000.01 - $ 90,000.00............................................ 71 6,011,223 2.62
$90,000.01 - $100,000.00............................................ 99 9,531,179 4.15
Greater than $100,000.00............................................ 38 5,066,910 2.21
------ ------------ ----------
Total.......................................................... 6,316 $229,626,574 100.00%
------ ------------ ----------
------ ------------ ----------
</TABLE>
As of the Cut-off Date, the average Cut-off Date Balance of the Mortgage
Loans will be approximately $36,356.
S-17
<PAGE>
<PAGE>
MORTGAGE RATES
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE NUMBER OF CUT-OFF DATE MORTGAGE
RATES (%) MORTGAGE LOANS BALANCE POOL
- ----------------------------------------------------------------- -------------- ------------ -------------
<S> <C> <C> <C>
8.001 - 8.500.................................................. 6 $ 213,688 0.09%
8.501 - 9.000.................................................. 91 2,379,808 1.04
9.001 - 9.500.................................................. 120 3,878,256 1.69
9.501 - 10.000.................................................. 376 12,475,458 5.43
10.001 - 10.500.................................................. 587 20,682,598 9.01
10.501 - 11.000.................................................. 843 30,011,019 13.07
11.001 - 11.500.................................................. 925 33,127,091 14.43
11.501 - 12.000.................................................. 1,043 37,980,294 16.54
12.001 - 12.500.................................................. 988 36,512,279 15.90
12.501 - 13.000.................................................. 811 31,938,220 13.91
13.001 - 13.500.................................................. 306 11,573,105 5.04
13.501 - 14.000.................................................. 150 6,357,771 2.77
14.001 - 14.500.................................................. 39 1,590,222 0.69
14.501 - 15.000.................................................. 22 612,206 0.27
15.001 - 15.500.................................................. 4 81,957 0.04
15.501 - 16.000.................................................. 4 184,598 0.08
16.001 - 16.500.................................................. 1 28,003 0.01
------ ------------ -------------
Total....................................................... 6,316 $229,626,574 100.00%
------ ------------ -------------
------ ------------ -------------
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans was approximately 11.6706% per annum.
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENT OF
COMBINED LOAN-TO-VALUE NUMBER OF CUT-OFF DATE MORTGAGE
RATIO (%) MORTGAGE LOANS BALANCE POOL
- ---------------------------------------------------------------- -------------- ------------ -------------
<S> <C> <C> <C>
10.01 - 20.00................................................. 5 $ 133,263 0.06%
20.01 - 30.00................................................. 7 215,229 0.09
30.01 - 40.00................................................. 12 387,540 0.17
40.01 - 50.00................................................. 17 510,739 0.22
50.01 - 60.00................................................. 34 1,023,968 0.45
60.01 - 70.00................................................. 65 2,296,878 1.00
70.01 - 75.00................................................. 97 3,810,286 1.66
75.01 - 80.00................................................. 220 8,622,760 3.76
80.01 - 85.00................................................. 293 9,236,080 4.02
85.01 - 90.00................................................. 2,210 74,064,167 32.25
90.01 - 95.00................................................. 2,263 85,074,009 37.05
95.01 - 100.00................................................. 1,089 44,116,976 19.21
100.01 - 105.00................................................. 4 134,680 0.06
------ ------------ -------------
Total...................................................... 6,316 $229,626,574 100.00%
------ ------------ -------------
------ ------------ -------------
</TABLE>
The weighted average original Combined Loan-to-Value of the Mortgage Loans
will be approximately 91.67% as of the Cut-off Date.
S-18
<PAGE>
<PAGE>
JUNIOR RATIOS
<TABLE>
<CAPTION>
PERCENT OF
JUNIOR MORTGAGE NUMBER OF CUT-OFF DATE MORTGAGE
RATIO (%)(1) MORTGAGE LOANS BALANCE POOL
- -------------------------------------------------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
0.01 - 10.00...................................................... 327 $ 7,356,969 3.21%
10.01 - 20.00...................................................... 4,345 150,111,735 65.44
20.01 - 30.00...................................................... 1,146 48,156,330 20.99
30.01 - 40.00...................................................... 347 16,777,023 7.31
40.01 - 50.00...................................................... 105 5,021,194 2.19
50.01 - 60.00...................................................... 19 915,493 0.40
60.01 - 70.00...................................................... 10 637,677 0.28
70.01 - 80.00...................................................... 5 296,745 0.13
80.01 - 90.00...................................................... 2 85,604 0.04
90.01 - 100.00...................................................... 1 39,653 0.02
------ ------------ ----------
Total.......................................................... 6,307 $229,398,423 100.00%
------ ------------ ----------
------ ------------ ----------
</TABLE>
- ------------
(1) Excludes first mortgages. Defined as the ratio of original principal balance
of the second mortgage loans to the sum of (i) the original principal
balance of the second mortgage loans, and (ii) the unpaid principal balance
of any senior lien balance at the time of origination of the second mortgage
loan.
The weighted average Junior Mortgage Ratio as of the Cut-off Date was
approximately 19.40%.
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF CUT-OFF DATE MORTGAGE
STATE MORTGAGE LOANS BALANCE POOL
- -------------------------------------------------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
California.......................................................... 3,135 $121,250,934 52.80%
Virginia............................................................ 592 22,740,564 9.90
Maryland............................................................ 421 16,537,031 7.20
Florida............................................................. 269 8,297,359 3.61
Washington.......................................................... 246 8,167,440 3.56
Colorado............................................................ 160 5,435,560 2.37
Oregon.............................................................. 152 5,053,556 2.20
Other(1)............................................................ 1,341 42,144,129 18.35
------ ------------ ----------
Total.......................................................... 6,316 $229,626,574 100.00%
------ ------------ ----------
------ ------------ ----------
</TABLE>
- ------------
(1) 'Other' includes states and the District of Columbia that contain less than
2.00% of the Mortgage Pool.
MORTGAGED PROPERTY TYPES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF CUT-OFF DATE MORTGAGE
PROPERTY MORTGAGE LOANS BALANCE POOL
- -------------------------------------------------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
Single Family Residence............................................. 4,749 $171,624,977 74.74%
PUD Detached........................................................ 980 39,229,420 17.08
Condominium......................................................... 293 8,954,138 3.90
PUD Attached........................................................ 182 5,632,197 2.45
Multifamily (2-4 Units)............................................. 63 2,601,312 1.13
Townhouse/Rowhouse Attached......................................... 44 1,430,782 0.62
Manufactured Home................................................... 4 97,985 0.04
Townhouse/Rowhouse Detached......................................... 1 55,764 0.02
------ ------------ ----------
Total.......................................................... 6,316 $229,626,574 100.00%
------ ------------ ----------
------ ------------ ----------
</TABLE>
S-19
<PAGE>
<PAGE>
MORTGAGE LOAN DOCUMENTATION
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF CUT-OFF DATE MORTGAGE
TYPE OF PROGRAM MORTGAGE LOANS BALANCE POOL
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
Full Documentation.......................................... 6,260 $ 227,413,506 99.04%
Reduced Documentation....................................... 56 2,213,068 0.96
------ ----------------- -------
Total.................................................. 6,316 $ 229,626,574 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
OCCUPANCY TYPES
<TABLE>
<CAPTION>
PERCENT OF
OCCUPANCY NUMBER OF CUT-OFF DATE MORTGAGE
(AS INDICATED BY BORROWER) MORTGAGE LOANS BALANCE POOL
- -------------------------------------------------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
Primary Residence................................................... 6,302 $229,247,578 99.83%
Second/Vacation..................................................... 14 378,995 0.17
------ ------------ ----------
Total.......................................................... 6,316 $229,626,574 100.00%
------ ------------ ----------
------ ------------ ----------
</TABLE>
LIEN PRIORITY
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF CUT-OFF DATE MORTGAGE
LIEN PRIORITY MORTGAGE LOANS BALANCE POOL
- -------------------------------------------------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
First Lien.......................................................... 9 $ 228,151 0.10%
Second Lien......................................................... 6,307 229,398,423 99.90
------ ------------ ----------
Total.......................................................... 6,316 $229,626,574 100.00%
------ ------------ ----------
------ ------------ ----------
</TABLE>
UNDERWRITING STANDARDS
The following is a brief description of the various underwriting standards
and procedures applicable to the Mortgage Loans. For a more detailed description
of the underwriting standards and procedures applicable to the Mortgage Loans,
see 'Mortgage Loan Program -- Underwriting Standards' in the Prospectus.
Residential Funding's underwriting standards with respect to the Mortgage
Loans generally will conform to those published in the Seller Guide (together
with its Servicer Guide, the 'GUIDE,' as modified from time to time), including
the provisions of the Guide applicable to the Home Equity Program. The
underwriting standards as set forth in the Guide are continuously revised based
on prevailing conditions in the residential mortgage market and the market for
mortgage securities. Under the Guide, the Mortgage Loans are generally
underwritten by the related Seller or by a designated third party, and
Residential Funding or a designated third party may perform only sample quality
assurance reviews to determine whether Mortgage Loans purchased by it were
underwritten in accordance with applicable standards.
Each Seller is an entity approved by Residential Funding for participation
in the Home Equity Program. Each Seller was required at the time of its approval
to meet certain eligibility requirements, including minimum origination and net
worth levels determined by Residential Funding. However, there can be no
assurance that any Seller currently meets such standards. Generally, the Seller
will have originated the Mortgage Loans sold by it to Residential Funding either
directly or through correspondents or loan brokers, and will have underwritten
each Mortgage Loan prior to funding.
The underwriting standards set forth in the Guide with respect to Mortgage
Loans originated under the Home Equity Program generally require that such
Mortgage Loans be fully documented or that such Mortgage Loans be supported by
alternative documentation. For fully documented loans, a prospective borrower is
required to fill out a detailed application providing pertinent credit
information. For alternatively documented loans, a borrower may demonstrate
income and employment directly by providing alternative documentation in the
form of copies of the borrower's own records relating thereto, rather than by
having the originator obtain independent verifications from third parties (such
as the borrower's employer or mortgage servicer).
S-20
<PAGE>
<PAGE>
In determining the adequacy of the mortgaged property as collateral for a
Mortgage Loan originated under the Home Equity Program, an appraisal is made of
each property considered for financing. Except with respect to no more than 0.1%
of the Mortgage Loans, which were subject to a maximum Combined Loan-to-Value
Ratio of 101%, the Mortgage Loans included in the Mortgage Pool generally were
originated subject to a maximum Combined Loan-to-Value Ratio of 100%. The
Mortgage Loans were also subject to a maximum total monthly debt to income ratio
of 55% (except with respect to two Mortgage Loans, one of which was originated
subject to a maximum debt to income ratio of 63%, and the other, 77%). There can
be no assurance that the Combined Loan-to-Value Ratio or the debt to income
ratio for any Mortgage Loans will not increase from the levels established at
origination.
The underwriting standards set forth in the Guide with respect to Mortgage
Loans originated under the Home Equity Program may be varied in appropriate
cases. There can be no assurance that every Mortgage Loan was originated in
conformity with the applicable underwriting standards in all material respects,
or that the quality or performance of the Mortgage Loans will be equivalent
under all circumstances.
THE INITIAL SUBSERVICER
Primary servicing of the Mortgage Loans will initially be provided by GMAC
Mortgage Corporation (the 'INITIAL SUBSERVICER' or 'GMACMC'), an affiliate of
the Depositor, pursuant to a Subservicing Agreement with the Master Servicer.
GMACMC is engaged in the mortgage banking business, including the origination,
purchase, sale and servicing of residential and commercial mortgage loans. As a
result of substantial differences between the Mortgage Loans and other
Closed-End Home Equity Loans serviced by the Initial Subservicer with respect to
underwriting standards and loan terms and conditions, the loss and delinquency
experience of the Initial Subservicer does not provide a sufficient basis for
meaningful evaluation of the Initial Subservicer's ability to subservice the
Revolving Credit Loans and is therefore not included herein.
GMACMC's executive offices are located at 100 Witmer Road, Horsham,
Pennsylvania 19044.
RESIDENTIAL FUNDING
Residential Funding will be responsible for master servicing the Mortgage
Loans. Such responsibilities will include the receipt of funds from
Subservicers, the reconciliation of servicing activity with respect to the
Mortgage Loans, investor reporting, remittances to the Trustee to accommodate
distributions to Certificateholders, consulting with Subservicers with respect
to Mortgage Loans that are delinquent or for which servicing decisions may need
to be made, management and liquidation of Mortgaged Properties acquired by
foreclosure or deed in lieu of foreclosure, notices and other responsibilities.
Residential Funding is not required to make advances in respect of delinquent
payments of principal and interest on the Mortgage Loans.
For information regarding foreclosure procedures, see 'Description of the
Certificates -- Realization Upon Defaulted Mortgage Loans' in the Prospectus.
Servicing and charge-off policies and collection practices may change over time
in accordance with the Residential Funding's business judgment, changes in
Residential Funding's portfolio of real estate secured home equity mortgage
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
closed-end home equity loans ('CLOSED-END HOME EQUITY LOANS') originated or
acquired by the Master Servicer. The data presented in the following tables is
for illustrative purposes only, and there is no assurance that the delinquency
and loss experience of the Mortgage Loans will be similar to that set forth
below.
The information in the tables below has not been adjusted to eliminate the
effect of the significant growth in the size of the Master Servicer's Closed-End
Home Equity Loan portfolio during the periods shown. Accordingly, loss and
delinquency as percentages of aggregate principal balance of such 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 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 Mortgage Loans serviced by the Subservicers.
S-21
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
CLOSED-END HOME EQUITY LOAN PORTFOLIO DELINQUENCY EXPERIENCE
--------------------------------------------------------------
AT DECEMBER 31, 1996 AT SEPTEMBER 30, 1997
----------------------------- -----------------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF OF AMOUNT OF
LOANS LOANS LOANS LOANS
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Total Closed-End Home Equity Loan Portfolio...... 7,251 $234,983,541 11,949 $405,646,070
Period of Delinquency............................
30-59 days....................................... 373 12,356,347 44 1,245,644
60-89 days....................................... 52 1,512,360 71 2,444,836
90+ days......................................... 67 2,285,295 146 4,818,122
------ ------------ ------ ------------
Total delinquent loans...................... 492 $ 16,154,002 261 $ 8,508,603
------ ------------ ------ ------------
------ ------------ ------ ------------
Percent of Portfolio............................. 6.79% 6.87% 2.18% 2.10%
</TABLE>
<TABLE>
<CAPTION>
TOTAL CLOSED-END HOME EQUITY LOAN
FORECLOSURE EXPERIENCE
---------------------------------------------
AT DECEMBER 31, 1997 AT SEPTEMBER 30, 1997
-------------------- ---------------------
<S> <C> <C>
Total Closed-End Home Equity Loan Portfolio......................... $234,983,541 $ 405,646,070
Completed Foreclosure(2)............................................ $ 0 $ 56,616
Foreclosure %....................................................... 0.00% 0.01%
Completed Chargeoffs(3)............................................. $ 484,134 $ 1,862,819
Completed Chargeoff %............................................... 0.18% 0.38%
Approved/Pending Foreclosures(4).................................... N/A(1) $ 0
Approved/Pending Foreclosure %...................................... N/A(1) 0.00%
Approved/Pending Chargeoffs(5)...................................... N/A(1) $ 1,342,327
Approved/Pending Chargeoff %........................................ N/A(1) 0.27%
</TABLE>
- ------------
(1) Information as of December 31, 1996 is not available.
(2) The aggregate of the outstanding principal balances of the related loans for
which foreclosure proceedings have been completed and resulted in an REO
property.
(3) The aggregate of the outstanding principal balances of the related loans
actually charged-off.
(4) The aggregate of the outstanding principal balances of the related loans for
which foreclosure action has been approved and initiated.
(5) The aggregate of the outstanding principal balances of the related loans
approved for charge-off but will not be charged-off until foreclosure or
liquidation with respect to the related senior lien is completed.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the business day prior to the Cut-off Date. Prior to the issuance
of the Offered Certificates, Mortgage Loans may be removed from the Mortgage
Pool as a result of incomplete documentation or otherwise, if the Company deems
such removal necessary or appropriate. A limited number of other mortgage loans
may be added to the Mortgage Pool prior to the issuance of the Offered
Certificates. The Company believes that the information set forth herein will be
substantially representative of the characteristics of the Mortgage Pool as it
will be constituted at the time the Offered Certificates are issued although the
range of Mortgage Rates and maturities and certain other characteristics of the
Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the Offered
Certificates and will be filed, together with the Pooling and Servicing
Agreement, with the Securities and Exchange Commission within fifteen days after
the initial issuance of the Offered Certificates. In the event Mortgage Loans
are removed from or added to the Mortgage Pool as set forth in the preceding
paragraph, such removal or addition will be noted in the Current Report on Form
8-K.
S-22
<PAGE>
<PAGE>
DESCRIPTION OF CERTIFICATES
GENERAL
The Series 1997-HS5 Home Equity Loan Pass-Through Certificates will include
the following ten classes (the 'Senior Certificates'): (i) Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4
Certificates, Class A-5 Certificates and Class A-6 Certificates; (ii) Class A-7
Certificates (the 'Super Senior Certificates'); (iii) Class A-L1 Certificates;
(iv) Class A-L2 Certificates (the 'Senior Support Certificates' and together
with the Class A-L1 Certificates, the 'Lockout Certificates'); and (v) Class IO
Certificates (the 'Fixed Strip Certificates'). In addition to the Senior
Certificates, the Series 1997-HS5 Home Equity Loan Pass-Through Certificates
will also include the following five classes: (i) Class M-1 Certificates and
Class M-2 Certificates (together, the 'Class M Certificates'); (ii) Class B-1
Certificates (together with the Class M Certificates, the 'Subordinate
Certificates'); and (iii) Class R-I Certificates and Class R-II Certificates
(together, the 'Class R Certificates' or the 'Residual Certificates'). Only the
Senior Certificates and the Subordinate Certificates (together, the 'Offered
Certificates') are offered hereby.
The Certificates will evidence the entire beneficial ownership interest in
the Trust Fund. The Trust Fund will consist of: (i) the Mortgage Loans; (ii)
such assets as from time to time are identified as deposited in respect of the
Mortgage Loans in the Custodial Account and in the Certificate Account and
belonging to the Trust Fund; (iii) property acquired by foreclosure of such
Mortgage Loans or deed in lieu of foreclosure; (iv) any applicable insurance
policies; and (v) all proceeds of the foregoing.
The Senior Certificates (other than the Fixed Strip Certificates) will be
issued in book-entry format in minimum denominations of $25,000 and integral
multiples of $1 in excess thereof. The Fixed Strip Certificates will be issued
in book-entry format in minimum denominations representing initial Notional
Amounts of $2,000,000 and integral multiples of $1 in excess thereof. The Class
M-1 Certificates will be issued in registered, certificated form in minimum
denominations of $25,000 and integral multiples of $1,000 in excess thereof. The
Class M-2 Certificates and Class B-1 Certificates will be issued in registered,
certificated form, in minimum denominations of $250,000 and integral multiples
of $1,000 in excess thereof.
BOOK-ENTRY REGISTRATION OF THE SENIOR CERTIFICATES
Holders of the Senior Certificates (the 'DTC REGISTERED CERTIFICATES') may
elect to hold their DTC Registered Certificates 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 DTC Registered Certificates will be issued in one or more
securities which equal the aggregate Certificate Principal Balance (or Notional
Amount) of the DTC Registered Certificates and will initially be registered in
the name of Cede & Co. ('CEDE'), 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. Except as described below, no DTC Registered
Certificateholder will be entitled to receive a physical certificate
representing such security (a 'DEFINITIVE CERTIFICATE'). Unless and until
Definitive Certificates are issued, it is anticipated that the only 'Holder' of
the DTC Registered Certificates will be Cede, as nominee of DTC. DTC Registered
Certificateholders will not be Holders as that term is used in the Pooling and
Servicing Agreement.
The DTC Registered Certificateholder's ownership of a DTC Registered
Certificate will be recorded on the records of the brokerage firm, bank, thrift
institution or other financial intermediary (each, a 'FINANCIAL INTERMEDIARY')
that maintains the DTC Registered Certificateholder's account for such purpose.
In turn, the Financial Intermediary's ownership of such DTC Registered
Certificates 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 DTC Registered Certificateholder's
Financial Intermediary is not a DTC Participant and on the records of CEDEL or
Euroclear, as appropriate).
DTC Registered Certificateholders will receive all payments of principal
of, and interest on, the DTC Registered Certificates from the Trustee through
DTC and DTC Participants. While the DTC Registered Certificates 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
S-23
<PAGE>
<PAGE>
transfers among Participants on whose behalf it acts with respect to the DTC
Registered Certificates and is required to receive and transmit payments of
principal of, and interest on, the DTC Registered Certificates. Participants and
Indirect Participants with whom DTC Registered Certificateholders have accounts
with respect to DTC Registered Certificates are similarly required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective DTC Registered Certificateholders. Accordingly, although DTC
Registered Certificateholders will not possess physical certificates, the Rules
provide a mechanism by which DTC Registered Certificateholders will receive
payments and will be able to transfer their interest.
DTC Registered Certificateholders will not receive or be entitled to
receive Definitive Certificates representing their respective interests in the
DTC Registered Certificates, except under the limited circumstances described
below. Unless and until Definitive Certificates are issued, DTC Registered
Certificateholders who are not Participants may transfer ownership of DTC
Registered Certificates only through Participants and Indirect Participants by
instructing such Participants and Indirect Participants to transfer the DTC
Registered Certificates, by book-entry transfer, through DTC for the account of
the purchasers of such DTC Registered Certificates, which account is maintained
with their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of DTC Registered Certificates 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 DTC Registered Certificateholders.
Under a book-entry format, DTC Registered Certificateholders of the DTC
Registered Certificates may experience some delay in their receipt of payments,
since such payments will be forwarded by the Trustee to Cede. Payments with
respect to DTC Registered Certificates 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
DTC Registered Certificateholder to pledge DTC Registered Certificates to
persons or entities that do not participate in the Depositary system, or
otherwise take actions in respect of such DTC Registered Certificates, may be
limited due to the lack of physical certificates for such DTC Registered
Certificates. In addition, issuance of the DTC Registered Certificates in
book-entry form may reduce the liquidity of such DTC Registered Certificates 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 Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
DTC Registered Certificates under the Pooling and Servicing Agreement only at
the direction of one or more Financial Intermediaries to whose DTC accounts the
DTC Registered Certificates are credited, to the extent that such actions are
taken on behalf of Financial Intermediaries whose holdings include such DTC
Registered Certificates. CEDEL or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by holders of DTC Registered
Certificates under the Pooling and Servicing Agreement 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 DTC Registered Certificates
which conflict with actions taken with respect to other DTC Registered
Certificates.
Definitive Certificates will be issued to DTC Registered Certificateholders
of the DTC Registered Certificates, or their nominees, rather than to DTC, if
(a) the 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 DTC Registered Certificates and the Trustee is unable to locate a
qualified successor, (b) the Trustee elects to terminate a book-entry system
through DTC or (c) after the occurrence of an Event of Default, pursuant to the
Pooling and Servicing Agreement, DTC Registered Certificateholders of any class
having Percentage Interests aggregating at least a majority of the Certificate
Principal Balances (or Notional Amount) of such DTC Registered Certificates
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 such DTC Registered
Certificateholders.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all DTC Registered
Certificateholders of the occurrence of such event and the
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availability through DTC of Definitive Certificates. Upon surrender by DTC of
the global certificate or certificates representing the DTC Registered
Certificates and instructions for re-registration, the Trustee will issue and
authenticate Definitive Certificates, and thereafter the Trustee will recognize
the holders of such Definitive Certificates as Holders under the Pooling and
Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of DTC Registered Certificates 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. See Annex I hereto.
None of the Company, the Master Servicer or the Trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the DTC Registered Certificates
held by Cede, as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
INTEREST REMITTANCE AMOUNT AND PRINCIPAL REMITTANCE AMOUNT
The 'INTEREST REMITTANCE AMOUNT' for any Distribution Date is equal to (i)
the portion allocable to interest of all scheduled monthly payments on the
Mortgage Loans received during the related Collection Period, after deduction of
the related servicing fees and any subservicing fees (collectively, the
'SERVICING FEES') and (ii) certain unscheduled collections, including Insurance
Proceeds, Liquidation Proceeds and proceeds from repurchases of (and certain
amounts received in connection with any substitutions for) the Mortgage Loans,
received or deemed received during the related Collection Period, to the extent
such amounts are allocable to interest.
The 'PRINCIPAL REMITTANCE AMOUNT' for any Distribution Date is equal to the
sum of (i) the portion allocable to principal of all scheduled monthly payments
on the Mortgage Loans received with respect to the related Collection Period and
(ii) certain unscheduled collections, including full and partial Mortgagor
prepayments on the Mortgage Loans, Insurance Proceeds, Liquidation Proceeds and
proceeds from repurchases of (and certain amounts received in connection with
any substitutions for) the Mortgage Loans, received or deemed received during
the related Collection Period, to the extent such amounts are allocable to
principal. With respect to unscheduled collections, the Master Servicer may
elect to treat such amounts as included in the Interest Remittance Amount and
the Principal Remittance Amount for the Distribution Date in the month of
receipt, but is not obligated to do so. As described herein under ' -- Principal
Distributions,' any such amount with respect to which such election is so made
shall be treated as having been received on the last day of the related
Collection Period for the purposes of calculating the amount of principal and
interest distributions to any class of Certificates. With respect to any
Distribution Date, the 'COLLECTION PERIOD' is the calendar month preceding the
month of such Distribution Date.
INTEREST DISTRIBUTIONS
On each Distribution Date, the Paying Agent shall make the following
distributions, to the extent of the Interest Remittance Amount:
(i) first, to the Senior Certificateholders, an amount equal to the
Accrued Certificate Interest (as defined below) thereon for such
Distribution Date, plus any Unpaid Interest Shortfall (as defined below)
thereon;
(ii) second, from the balance, if any, remaining of the Interest
Remittance Amount after the distribution described in clause (i) above, to
the Class M-1 Certificateholders an amount equal to the Accrued Certificate
Interest thereon for such Distribution Date;
(iii) third, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) and (ii)
above, to the Class M-2 Certificateholders an amount equal to the Accrued
Certificate Interest thereon for such Distribution Date;
(iv) fourth, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) through
(iii) above, to the Class B-1 Certificateholders an amount equal to the
Accrued Certificate Interest thereon for such Distribution Date; and
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(v) fifth, any amount remaining (the 'NET MONTHLY EXCESS INTEREST
AMOUNT') shall be included in the Net Monthly Excess Cash Flow as described
in ' -- Net Monthly Excess Cash Flow Distributions' below and applied as
described therein.
'ACCRUED CERTIFICATE INTEREST' on any Distribution Date will be equal to
one month's interest accrued on the Certificate Principal Balance of the Offered
Certificates, or in the case of the Fixed Strip Certificates, on the Notional
Amount, at the related Pass-Through Rate for such Distribution Date, less (i)
the interest portions of Realized Losses (including Excess Losses (as defined
herein)) not allocated through Subordination and (ii) any other interest
shortfalls not covered by Subordination, including interest shortfalls incurred
for the corresponding period on the Mortgage Loans relating to the Relief Act or
similar legislation or regulations, with all such reductions allocated among the
Offered Certificates in proportion to their respective amounts of related
Accrued Certificate Interest which would have resulted absent such reductions,
to the extent of a fraction of such shortfalls equal to (x) the aggregate
Certificate Principal Balance of the Certificates over (y) the aggregate Stated
Principal Balance of the Mortgage Loans, except that the interest portion of
Excess Losses otherwise allocable to the Super Senior Certificates will be
allocated to the Senior Support Certificates. Interest will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
If on any Distribution Date the Interest Remittance Amount is insufficient
to pay Accrued Certificate Interest on any class of Offered Certificates, the
shortfall (other than with respect to any shortfall caused by Excess Losses or
Relief Act Shortfalls) will be allocated through the priority of payment set
forth above; provided, however, that the aggregate amount of such interest
shortfalls allocable to the Senior Certificates will be allocated on a pro rata
basis, based on the respective amount of Accrued Certificate Interest thereon;
and provided further, that any such shortfalls otherwise allocable to the Super
Senior Certificates shall be allocated to the Senior Support Certificates. Such
shortfalls could occur, for example, if delinquencies on the related Mortgage
Loans were exceptionally high and were concentrated in a particular month. In
addition, such shortfalls could occur if Prepayment Interest Shortfalls were
particularly high in a particular month. The 'PREPAYMENT INTEREST SHORTFALL' for
any Distribution Date is equal to the aggregate shortfall, if any, in
collections of interest (adjusted to the related Net Mortgage Rates) resulting
from Mortgagor prepayments on the Mortgage Loans during the related Collection
Period. Such shortfalls will result because interest on prepayments in full is
paid only to the date of prepayment, and because no interest is paid on
prepayments in part, as such prepayments in part are applied to reduce the
outstanding principal balance of the related Mortgage Loans as of the Due Date
in the month of prepayment. Any Accrued Certificate Interest remaining unpaid as
to any class of the Offered Certificates, as a result of any such shortfalls
(other than any shortfalls caused in connection with Excess Losses or Relief Act
Shortfalls) will be carried forward and will bear interest at the related
Pass-Through Rate and be payable on future Distribution Dates to the extent of
funds available therefor (such amount, including interest thereon, as of any
Distribution Date, the 'UNPAID INTEREST SHORTFALL'). Such amounts payable to the
Senior Certificates will be paid concurrently with Accrued Certificate Interest
thereon pursuant to clause (i) of the second preceding paragraph or from the Net
Monthly Excess Cash Flow. Such amounts owed to the Class M-1, Class M-2 and
Class B-1 Certificates will be payable solely from the Net Monthly Excess Cash
Flow as described in ' -- Net Monthly Excess Cash Flow Distributions' below.
The 'PASS-THROUGH RATE' with respect to each class of Offered Certificates
(other than the Fixed Strip Certificates) is equal to the fixed rate set forth
on the cover hereof, subject, in the case of the Class B-1 Certificates to a
maximum rate equal to the Maximum Class B-1 Rate. With respect to any
Distribution Date, the 'MAXIMUM CLASS B-1 RATE' will be equal to the weighted
average of the Net Mortgage Rates on the Mortgage Loans, weighted on the basis
of the related Stated Principal Balance of each Mortgage Loan as of the first
day of the month preceding the month of such Distribution Date, minus the
product of (x) the Pass-Through Rate on the Fixed Strip Certificates and (y) a
fraction, the numerator of which is the Notional Amount of the Fixed Strip
Certificates and the denominator of which is the aggregate Stated Principal
Balance of the Mortgage Loans as of the beginning of the related Due Period. The
Pass-Through Rate for the Fixed Strip Certificates will be equal to 8.00% per
annum for the first 30 Distribution Dates, and 0.00% thereafter.
As described herein, Accrued Certificate Interest on each class of Offered
Certificates is based on the Certificate Principal Balances thereof (or the
Notional Amount thereof, in the case of the Fixed Strip Certificates)
immediately prior to the related Distribution Date. The 'CERTIFICATE PRINCIPAL
BALANCE' of any class of Senior Certificates (other than the Fixed Strip
Certificates) means the initial Certificate Principal Balance thereof as reduced
by the sum of (x) all amounts actually distributed to the holders of such
Certificates on all prior Distribution Dates on account of principal and (y) the
aggregate, cumulative amount of Excess
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Losses allocated thereto (upon which interest will no longer accrue) on all
prior Distribution Dates. The Certificate Principal Balance of any class of
Subordinate Certificates means the initial Certificate Principal Balance thereof
as reduced by the sum of (x) all amounts actually distributed to the holders of
such Certificates on all prior Distribution Dates on account of principal and
(y) the aggregate, cumulative amount of Realized Losses allocated thereto (upon
which interest will no longer accrue) on all prior Distribution Dates. The
'NOTIONAL AMOUNT' of the Fixed Strip Certificates as of any Distribution Date
will generally be equal to the Certificate Principal Balance of the Class A-L1
Certificates immediately prior to such date. References herein to the Notional
Amount are used solely for certain calculations and do not represent the right
of any Class of Certificates to receive distributions allocable to principal.
The 'NET MORTGAGE RATE' on each Mortgage Loan is equal to the Mortgage Rate
thereon minus the rates per annum at which the master servicing fee and
subservicing fee (collectively, the related 'SERVICING FEE RATE') accrue. The
Net Mortgage Rate with respect to each Mortgage Loan as of the Cut-off Date will
be set forth in the Mortgage Loan Schedule attached to the Pooling and Servicing
Agreement. As of the Cut-off Date, the weighted average Net Mortgage Rate of the
Mortgage Loans is approximately 11.09% per annum, and is expected to change
thereafter as Mortgage Loans are liquidated or paid off.
The 'STATED PRINCIPAL BALANCE' of any Mortgage Loan as of any date of
determination is equal to the Cut-off Date Balance thereof, reduced by all
amounts allocable to principal that have been distributed to Certificateholders
with respect to such Mortgage Loan, and as further reduced to the extent that
any Realized Loss thereon has been allocated to one or more classes of
Certificates on or before the date of determination.
PRINCIPAL DISTRIBUTIONS
The 'PRINCIPAL DISTRIBUTION AMOUNT' means, as of any Distribution Date, the
sum of (i) the Principal Remittance Amount, minus, on any Distribution Date
occurring on or after the Stepdown Date (as defined herein), the
Overcollateralization Reduction Amount (as defined herein), if any, and (ii) the
Extra Principal Distribution Amount (funded as described below under ' -- Net
Monthly Excess Cash Flow Distributions'), if any, for such Distribution Date. On
each Distribution Date prior to the Stepdown Date and on or after the Stepdown
Date if a Trigger Event is in effect, the Principal Distribution Amount will be
distributed to the Offered Certificates (other than the Fixed Strip
Certificates) as follows:
(i) first, to the Senior Certificates, in the manner and priority
described in the ninth following paragraph, until the Certificate Principal
Balances of the Senior Certificates have been reduced to zero;
(ii) second, the balance, if any, remaining of the Principal
Distribution Amount after the distribution described in clause (i) above
shall be distributed to the Class M-1, Class M-2 and Class B-1
Certificates, in that order, in each case until the Certificate Principal
Balance thereof has been reduced to zero; and
(iii) third, any amount remaining shall be included in the Net Monthly
Excess Cash Flow as described in ' -- Net Monthly Excess Cash Flow
Distributions' below and applied as described therein.
On each Distribution Date on or after the Stepdown Date so long as no
Trigger Event is in effect, the Principal Distribution Amount will be
distributed to the Offered Certificates (other than the Fixed Strip
Certificates) as follows:
(i) first, to the Senior Certificates, in the manner and priority as
described in the eighth following paragraph, until the Certificate
Principal Balances of the Senior Certificates have been reduced to zero, an
amount equal to the excess, if any, of (x) the aggregate Certificate
Principal Balance of the Senior Certificates immediately prior to such
Distribution Date over (y) the lesser of (a) the product of (1) the lesser
of (A) the Stepped Up Enhancement Percentage and (B) 64.00% and (2) the
aggregate outstanding Stated Principal Balance of the Mortgage Loans as of
the last day of the related Due Period and (b) the aggregate outstanding
Stated Principal Balance of the Mortgage Loans as of the last day of the
related Due Period minus $1,148,133;
(ii) second, from the balance, if any, remaining of the Principal
Distribution Amount after the distribution described in clause (i) above,
to the Class M-1 Certificates, until the Certificate Principal Balance of
the Class M-1 Certificates has been reduced to zero, the excess, if any, of
(x) the sum of (a) the aggregate Certificate Principal Balance of the
Senior Certificates (after taking into account distributions pursuant to
clause (i) above on such Distribution Date) and (b) the aggregate
Certificate Principal Balance of the Class M-1 Certificates immediately
prior to such Distribution Date over (y) the lesser of (a) the
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product of (1) 81.00% and (2) the aggregate outstanding Stated Principal
Balance of the Mortgage Loans as of the last day of the related Due Period
and (b) the aggregate outstanding Stated Principal Balance of the Mortgage
Loans as of the last day of the related Due Period minus $1,148,133.
(iii) third, from the balance, if any, remaining of the Principal
Distribution Amount after the distributions described in clauses (i) and
(ii) above, to the Class M-2 Certificates, until the Certificate Principal
Balance of the Class M-2 Certificates has been reduced to zero, the excess,
if any, of (x) the sum of (a) the aggregate Certificate Principal Balance
of the Senior Certificates and Class M-1 Certificates (after taking into
account distributions pursuant to clauses (i) and (ii) above on such
Distribution Date) and (b) the aggregate Certificate Principal Balance of
the Class M-2 Certificates immediately prior to such Distribution Date over
(y) the lesser of (a) the product of (1) 89.00% and (2) the aggregate
outstanding Stated Principal Balance of the Mortgage Loans as of the last
day of the related Due Period and (b) the aggregate outstanding Stated
Principal Balance of the Mortgage Loans as of the last day of the related
Due Period minus $1,148,133;
(iv) fourth, from the balance, if any, remaining of the Principal
Distribution Amount after the distributions described in clauses (i)
through (iii) above, to the Class B-1 Certificates, until the Certificate
Principal Balance of the Class B-1 Certificates has been reduced to zero,
the excess, if any, of (x) the sum of (a) the aggregate Certificate
Principal Balance of the Senior Certificates and Class M Certificates
(after taking into account distributions pursuant to clauses (i) though
(iii) above on such Distribution Date) and (b) the aggregate Certificate
Principal Balance of the Class B-1 Certificates immediately prior to such
Distribution Date over (y) the lesser of (a) the product of (1) 96.00% and
(2) the aggregate outstanding Stated Principal Balance of the Mortgage
Loans as of the last day of the related Due Period and (b) the aggregate
outstanding Stated Principal Balance of the Mortgage Loans as of the last
day of the related Due Period minus $1,148,133; and
(v) fifth, any amount remaining shall be included in the Net Monthly
Excess Cash Flow as described in ' -- Net Monthly Excess Cash Flow
Distributions' below and applied as described therein.
A 'TRIGGER EVENT' is in effect on or after the Stepdown Date if on a
Distribution Date the percentage obtained by dividing (x) the aggregate Stated
Principal Balance of the Mortgage Loans that are 60 or more days delinquent in
payment of principal and interest as of such Distribution Date (including
Mortgage Loans in foreclosure and REO Mortgage Loans), by (y) the aggregate
Stated Principal Balance of all of the Mortgage Loans immediately preceding such
Distribution Date, equals or exceeds 50.00% of the Senior Specified Enhancement
Percentage.
The 'STEPPED UP ENHANCEMENT PERCENTAGE' means on any Distribution Date, a
percentage equal to (x) 100% minus (y) two times a percentage obtained by
dividing (i) the aggregate Stated Principal Balance of the Mortgage Loans that
are 60 or more days delinquent in payment of principal and interest as of such
Distribution Date (including Mortgage Loans in foreclosure and REO Mortgage
Loans), by (ii) the aggregate Stated Principal Balance of all of the Mortgage
Loans immediately preceding such Distribution Date.
The 'STEPDOWN DATE' means the later to occur of (x) the Distribution Date
in November 2000 and (y) the first Distribution Date on which the Senior
Enhancement Percentage is greater than or equal to the Senior Specified
Enhancement Percentage.
The 'SENIOR ENHANCEMENT PERCENTAGE' is the percentage obtained by dividing
(x) the sum of (i) the aggregate Certificate Principal Balance of the
Subordinate Certificates immediately prior to such Distribution Date and (ii)
the Overcollateralization Amount (prior to any payments of the Principal
Distribution Amount to the Offered Certificates on such Distribution Date), by
(y) the aggregate Stated Principal Balance of the Mortgage Loans as of the last
day of the related Due Period.
'SENIOR SPECIFIED ENHANCEMENT PERCENTAGE' on any date of determination
thereof means 36.00%.
'EXTRA PRINCIPAL DISTRIBUTION AMOUNT' means, as of any Distribution Date,
the lesser of (x) the Net Monthly Excess Interest Amount for such Distribution
Date and (y) the excess, if any, of (i) the Required Overcollateralization
Amount for such Distribution Date over (ii) the Overcollateralization Amount
(calculated for this purpose after taking into account the reduction on such
Distribution Date of the Certificate Principal Balances of all Classes of
Certificates resulting from the distribution of the Principal Remittance Amount)
for such Distribution Date.
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In no event will any Principal Distribution Amount paid with respect to any
Distribution Date and any class of Offered Certificates be less than zero or
greater than the then outstanding Certificate Principal Balance of such Offered
Certificate.
Distributions of the Principal Distribution Amount payable to the Senior
Certificates on each Distribution Date (such distribution, the 'SENIOR PRINCIPAL
DISTRIBUTION AMOUNT') will be made as follows:
(a) Prior to the occurrence of the Credit Support Depletion Date (as
defined below), the Senior Principal Distribution Amount shall be
distributed to the Senior Certificates as follows:
(i) first, on a pro rata basis, based on the respective Certificate
Principal Balances thereof, to the Lockout Certificates, the Lockout
Distribution Percentage of the Senior Principal Distribution Amount, in
reduction of the Certificate Principal Balances thereof, until such
Certificate Principal Balances have been reduced to zero;
(ii) second, to the Class A-1 Certificates, in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal
Balance has been reduced to zero;
(iii) third, to the Class A-2 Certificates, in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal
Balance has been reduced to zero;
(iv) fourth, to the Class A-3 Certificates, in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal
Balance has been reduced to zero;
(v) fifth, to the Class A-4 Certificates, in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal
Balance has been reduced to zero;
(vi) sixth, to the Class A-5 Certificates, in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal
Balance has been reduced to zero;
(vii) seventh, to the Class A-6 Certificates, in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal
Balance has been reduced to zero;
(viii) eighth, to the Class A-7 Certificates, in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal
Balance has been reduced to zero; and
(ix) ninth, on a pro rata basis, based on the respective
Certificate Principal Balances thereof, to the Lockout Certificates, in
reduction of the Certificate Principal Balances thereof, until such
Certificate Principal Balances have been reduced to zero.
(b) On or after the occurrence of the Credit Support Depletion Date,
all priorities relating to distributions as described above in respect of
principal among the various classes of Senior Certificates will be
disregarded, and the Senior Principal Distribution Amount will be
distributed to all classes of Senior Certificates pro rata in accordance
with their respective outstanding Certificate Principal Balances.
The 'CREDIT SUPPORT DEPLETION DATE' is the first Distribution Date on which
the sum of the Overcollateralization Amount and the Certificate Principal
Balances of the Subordinate Certificates has been reduced to zero.
The 'LOCKOUT CERTIFICATE PERCENTAGE' will be calculated for each
Distribution Date to be the percentage equal to the aggregate Certificate
Principal Balance of the Lockout Certificates divided by the sum of the
aggregate Certificate Principal Balances of the Senior Certificates. The
'LOCKOUT DISTRIBUTION PERCENTAGE' for any Distribution Date occurring prior to
the Distribution Date in November 2000 will be equal to 0%. The Lockout
Distribution Percentage for any Distribution Date occurring after the first
three years following the Delivery Date will be as follows: for any Distribution
Date during the fourth and fifth years after the Delivery Date, 45% of the
Lockout Certificate Percentage for such Distribution Date; for any Distribution
Date during the sixth year after the Delivery Date, 80% of the Lockout
Certificate Percentage for such Distribution Date; for any Distribution Date
during the seventh year after the Delivery Date, 100% of the Lockout Certificate
Percentage for such Distribution Date, and for any Distribution Date thereafter,
the lesser of (x) 300% of the Lockout Certificate Percentage and (y) 100%.
Notwithstanding the foregoing, if the Certificate Principal Balances of the
Senior Certificates (other than the Lockout Certificates) have been reduced to
zero, the Lockout Distribution Percentage will be equal to 100%.
The Master Servicer may elect to treat Insurance Proceeds, Liquidation
Proceeds and other unscheduled collections (not including prepayments by the
Mortgagors) received in any calendar month as included in the Interest
Remittance Amount and the Principal Remittance Amount for the Distribution Date
in the month of
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receipt, but is not obligated to do so. If the Master Servicer so elects, such
amounts will be deemed to have been received (and any related Realized Loss
shall be deemed to have occurred) on the last day of the month prior to the
receipt thereof.
NET MONTHLY EXCESS CASH FLOW DISTRIBUTIONS
On any Distribution Date, the sum of the Net Monthly Excess Interest Amount
and the Overcollateralization Reduction Amount is the 'NET MONTHLY EXCESS CASH
FLOW' for such Distribution Date.
On any Distribution Date, the Net Monthly Excess Cash Flow will be applied
in the following order of priority on such Distribution Date:
(a) first, to pay any Unpaid Interest Shortfall on the Class A
Certificates on a pro rata basis until reduced to zero;
(b) second, to fund the Extra Principal Distribution Amount for such
Distribution Date;
(c) third, to pay any Unpaid Interest Shortfall on the Class M-1
Certificates until reduced to zero;
(d) fourth, to reimburse the Class M-1 Certificates for Realized
Losses (other than Excess Losses) previously allocated thereto as described
below under ' -- Allocation of Losses; Subordination,' until fully
reimbursed;
(e) fifth, to pay any Unpaid Interest Shortfall on the Class M-2
Certificates until reduced to zero;
(f) sixth, to reimburse the Class M-2 Certificates for Realized Losses
(other than Excess Losses) previously allocated thereto as described below
under ' -- Allocation of Losses; Subordination,' until fully reimbursed;
(g) seventh, to pay any Unpaid Interest Shortfall on the Class B-1
Certificates until reduced to zero;
(h) eighth, to reimburse the Class B-1 Certificates for Realized
Losses (other than Excess Losses) previously allocated thereto as described
below under ' -- Allocation of Losses; Subordination,' until fully
reimbursed; and
(i) ninth, any remaining amounts will be distributed to the Class R
Certificates.
OVERCOLLATERALIZATION PROVISIONS
With respect to any Distribution Date, the excess, if any, of (a) the
aggregate Stated Principal Balances of the Mortgage Loans immediately following
such Distribution Date over (b) the Certificate Principal Balance of the Offered
Certificates as of such date (after taking into account the payment to the
Offered Certificates of the Principal Distribution Amount) is the
'OVERCOLLATERALIZATION AMOUNT' as of such Distribution Date. The Pooling and
Servicing Agreement requires that the Net Monthly Excess Cash Flow, to the
extent available therefor as described above, will be applied as an accelerated
payment of principal on the Offered Certificates to the extent that the Required
Overcollateralization Amount exceeds the Overcollateralization Amount as of such
Distribution Date. The 'REQUIRED OVERCOLLATERALIZATION AMOUNT' means as of any
Distribution Date (i) prior to the Step-Down Date $4,592,531, and (ii) on or
after the Step-Down Date, so long as no Trigger Event is in effect, the greater
of (x) the lesser of (a) $4,592,531 and (b) 4.00% of the then current aggregate
Stated Principal Balance of the Mortgage Loans as of the end of the related Due
Period and (y) $1,148,133. Notwithstanding the foregoing, so long as a Trigger
Event has occurred and is continuing, the Required Overcollateralization Amount
with respect to such Distribution Date will remain equal to the amount required
as of the Distribution Date immediately preceding the date on which such Trigger
Event occurred.
In the event that the Required Overcollateralization Amount is permitted to
decrease or 'step down' on a Distribution Date in the future, a portion of the
principal which would otherwise be distributed to the holders of the Offered
Certificates on such Distribution Date shall not be distributed to the holders
of the Offered Certificates on such Distribution Date. This has the effect of
decelerating the amortization of the Offered Certificates relative to the
amortization of the Mortgage Loans, and of reducing the Overcollateralization
Amount. With respect to any Distribution Date, the excess, if any, of (a) the
Overcollateralization Amount on such Distribution Date over (b) the Required
Overcollateralization Amount is the 'EXCESS OVERCOLLATERALIZATION AMOUNT' with
respect to such Distribution Date. If, on any Distribution Date, the Excess
Overcollateralization Amount is, or, after taking into account all other
distributions to be made on such Distribution Date would be, greater than zero
(i.e., the Overcollateralization Amount is or would be greater than
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the Required Overcollateralization Amount), then any amounts relating to
principal which would otherwise be distributed to the holders of the Offered
Certificates on such Distribution Date shall instead be distributed to the
Certificates as described under ' -- Net Monthly Excess Cash Flow Distributions'
herein; such amount being the 'OVERCOLLATERALIZATION REDUCTION AMOUNT' for such
Distribution Date.
ALLOCATION OF LOSSES; SUBORDINATION
On each Distribution Date following the application of all amounts
distributable on such date, to the extent the aggregate Stated Principal Balance
of the Mortgage Loans is less than the aggregate Certificate Principal Balances
of the Offered Certificates due to Realized Losses on the Mortgage Loans (other
than Excess Losses), the Certificate Principal Balances of the Offered
Certificates shall be reduced as follows, until such deficiency is fully
allocated: first, the Certificate Principal Balance of the Class B-1
Certificates shall be reduced, until the Certificate Principal Balance thereof
has been reduced to zero; second, the Certificate Principal Balance of the Class
M-2 Certificates shall be reduced, until the Certificate Principal Balance
thereof has been reduced to zero; and third, the Certificate Principal Balance
of the Class M-1 Certificates shall be reduced, until the Certificate Principal
Balance thereof has been reduced to zero. The Certificate Principal Balances of
the Senior Certificates will not be so reduced and such Certificates will
continue to be entitled to receive Accrued Certificate Interest on their balance
subject to available funds.
Any allocation of the principal portion of a Realized Loss (other than a
Debt Service Reduction) to a Subordinate Certificate will be made by reducing
the Certificate Principal Balance thereof. The interest portion of Realized
Losses and the principal portion of Debt Service Reductions will be allocated to
the Offered Certificates through the priority of payment provisions as described
in 'Description of the Certificates -- Interest Distributions' and
' -- Principal Distributions' herein. As used herein, 'DEBT SERVICE REDUCTION'
means a reduction in the amount of the monthly payment due to certain bankruptcy
proceedings, but does not include any permanent forgiveness of principal. As
used herein, 'SUBORDINATION' refers to the provisions discussed above for the
sequential allocation of Realized Losses among the various classes and also the
subordination provided by the Overcollateralization Amount (including
overcollateralization created by the Net Monthly Excess Cash Flow) inasmuch as
Realized Losses are only allocated to the Offered Certificates after the
Overcollateralization Amount has been reduced to zero, as well as all provisions
effecting such allocations including the priorities for distribution of cash
flows in the amounts described herein. As used herein, 'SPECIAL HAZARD LOSSES'
has the same meaning set forth in the Prospectus, except that Special Hazard
Losses will not include Extraordinary Losses, and Special Hazard Losses will not
exceed the lesser of the cost of repair or replacement of the related Mortgaged
Properties.
Any Special Hazard Losses (as defined herein) in excess of the Special
Hazard Amount ('EXCESS SPECIAL HAZARD LOSSES'), Fraud Losses (as defined in the
Prospectus) in excess of the Fraud Loss Amount ('EXCESS FRAUD LOSSES') and
losses occasioned by war, civil insurrection, certain government actions,
nuclear reaction and certain other risks ('EXTRAORDINARY LOSSES'; and
collectively with Excess Special Hazard Losses and Excess Fraud Losses, 'EXCESS
LOSSES') or other losses of a type not covered by Subordination will be
allocated on a pro rata basis among the Offered Certificates, in reduction of
the Certificate Principal Balances thereof, and in an aggregate amount equal to
the amount of such loss times a fraction equal to (x) the then aggregate
Certificate Principal Balance of the Offered Certificates over (y) the then
aggregate Stated Principal Balance of the Mortgage Loans, except that Excess
Losses otherwise allocable to the Super Senior Certificates will be allocated to
the Senior Support Certificates until the Certificate Principal Balance thereof
is reduced to zero. An allocation of an Excess Loss on a 'pro rata basis' among
two or more classes of Certificates means an allocation to each such class of
Certificates on the basis of its then outstanding Certificate Principal Balance
prior to giving effect to distributions to be made on such Distribution Date in
the case of an allocation of the principal portion of an Excess Loss, or based
on the Accrued Certificate Interest thereon in respect of such Distribution Date
in the case of an allocation of the interest portion of an Excess Loss.
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer or the Subservicer for expenses, including attorneys' fees) towards
interest and principal owing on the Mortgage
S-31
<PAGE>
<PAGE>
Loan. The Master Servicer will treat any Mortgage Loan that is 180 days or more
delinquent as having been finally liquidated. Such amount of loss realized and
any Special Hazard Losses, Fraud Losses and Extraordinary Losses (each as
defined in the Prospectus) are referred to herein as 'REALIZED LOSSES.'
In order to maximize the likelihood of distribution in full of Accrued
Certificate Interest on the Senior Certificates and of the Senior Principal
Distribution Amount, on each Distribution Date, holders of the Senior
Certificates have a right to distributions of the Interest Remittance Amount and
the Principal Distribution Amount that is prior to the rights of the holders of
the Class M Certificates and Class B-1 Certificates, to the extent necessary to
satisfy the payment of Accrued Certificate Interest on, and the Senior Principal
Distribution Amount to, the Senior Certificates. Similarly, holders of the Class
M Certificates have a right to distributions that is prior to the rights of the
holders of the Class B-1 Certificates, and holders of the Class M Certificates
with a higher payment priority have a right to distributions that is prior to
the rights of the holders of any Class M Certificates with a lower payment
priority. In addition, the overcollateralization provisions of the Trust Fund
will also increase the likelihood of distribution of full amounts of interest
and principal to the Offered Certificates on each Distribution Date.
The priority of payment provisions herein will accelerate the amortization
of the Senior Certificates relative to the actual amortization of the Mortgage
Loans. To the extent that the Senior Certificates are amortized faster than the
Mortgage Loans, in the absence of offsetting Realized Losses, the percentage
interest evidenced by such Senior Certificates in the Mortgage Loans will be
decreased, thereby increasing, relative to the Certificate Principal Balances of
the Subordinate Certificates and the Overcollateralization Amount, the
subordination afforded the Senior Certificates by the Subordinate Certificates
and the Overcollateralization Amount.
The priority of payment provisions herein among the Subordinate
Certificates, as described herein, also generally has the effect during certain
periods, in the absence of losses, of decreasing the percentage interest
evidenced by any class of related Subordinate Certificates with a higher payment
priority, thereby increasing, relative to its Certificate Principal Balance, the
Subordination afforded to such class of the Subordinate Certificates by the
Overcollateralization Amount (including overcollateralization created by the Net
Monthly Excess Cash Flow) and any class of Subordinate Certificates with a lower
payment priority. However, investors in the Subordinate Certificates should be
aware that on and after the Distribution Date on which the Overcollateralization
Amount has been reduced to approximately $1,148,133, the most subordinate class
of Subordinate Certificates then outstanding may receive more than such class'
pro rata share of the Principal Distribution Amount for such Distribution Date.
In such case, the most subordinate class of Subordinate Certificates then
outstanding may be retired prior to the most senior class and will therefore not
provide Subordination thereafter (although Subordination will be provided by the
Overcollateralization Amount).
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses (the 'SPECIAL HAZARD AMOUNT') through
Subordination shall initially be equal to $2,296,266. As of any date of
determination following the Cut-off Date, the Special Hazard Amount shall equal
$2,296,266 less the sum of (A) any amounts allocated through Subordination in
respect of Special Hazard Losses and (B) the Adjustment Amount. The Adjustment
Amount will be equal to an amount calculated pursuant to the terms of the
Pooling and Servicing Agreement. As used in this Prospectus Supplement, 'SPECIAL
HAZARD LOSSES' has the same meaning set forth in the Prospectus, except that
Special Hazard Losses will not include and the Subordination will not cover
Extraordinary Losses, and Special Hazard Losses will not exceed the lesser of
the cost of repair or replacement of the related Mortgaged Properties.
The aggregate amount of Realized Losses which may be allocated in
connection with Fraud Losses (the 'FRAUD LOSS AMOUNT') through Subordination
shall initially be equal to $6,888,797. 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 3.00% of the aggregate
principal balance of all of the Mortgage Loans as of the Cut-off Date minus the
aggregate amounts allocated through Subordination with respect to Fraud Losses
up to such date of determination, (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) 2.00% of
the aggregate principal balance of all of the Mortgage Loans as of the most
recent anniversary of the Cut-off Date minus (2) the aggregate amounts allocated
through Subordination with respect to Fraud Losses since the most recent
anniversary of the Cut-off Date up to such date of determination 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) 1.00% of the aggregate principal balance of all of the
Mortgage
S-32
<PAGE>
<PAGE>
Loans as of the most recent anniversary of the Cut-off Date minus (2) the
aggregate amounts allocated through Subordination with respect to Fraud Losses
since the most recent anniversary of the Cut-off Date up to such date of
determination. On and after the fifth anniversary of the Cut-off Date, the Fraud
Loss Amount shall be zero and Fraud Losses shall not be allocated through
Subordination.
The Special Hazard Amount and Fraud Amount are subject to further reduction
as described in the Prospectus under 'Subordination.'
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yield to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans and the amount and timing of Mortgagor defaults
resulting in Realized Losses. The rate of default and the severity of losses of
mortgage loans secured by second liens may be greater than that of mortgage
loans secured by first liens. In addition, such yields may be adversely affected
by a higher or lower than anticipated rate of principal payments on the Mortgage
Loans in the Trust Fund. The rate of principal payments on such Mortgage Loans
will in turn be affected by the amortization schedules of the Mortgage Loans,
the rate and timing of principal prepayments thereon by the Mortgagors,
liquidations of defaulted Mortgage Loans and repurchases of Mortgage Loans due
to certain breaches of representations. The timing of changes in the rate of
prepayments, liquidations and repurchases of the Mortgage Loans may, and the
timing of Realized Losses will, significantly affect the yield to an investor,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation. Since the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described more fully herein and in the Prospectus under
'Yield and Prepayment Considerations'), no assurance can be given as to such
rate or the timing of principal payments on the Offered Certificates.
The Mortgage Loans generally may be prepaid by the Mortgagors at any time
without payment of any prepayment fee or penalty. The Mortgage Loans generally
contain due-on-sale clauses. As described under 'Description of the
Certificates -- Principal Distributions' herein, during certain periods all or a
disproportionately large percentage of principal collections on the Mortgage
Loans will be allocated among the Senior Certificates (other than the Lockout
Certificates), and during certain periods no principal collections or a
disproportionately small portion of principal collections will be distributed on
the Lockout Certificates or to the Subordinate Certificates. Prepayments,
liquidations and purchases of the Mortgage Loans will result in distributions to
holders of the Offered Certificates of principal amounts which would otherwise
be distributed over the remaining terms of the Mortgage Loans. Factors affecting
prepayment (including defaults and liquidations) of mortgage loans include
changes in Mortgagors' housing needs, job transfers, unemployment, Mortgagors'
net equity in the mortgaged properties, changes in the value of the mortgaged
properties, mortgage market interest rates, solicitations and servicing
decisions. In addition, if prevailing mortgage rates fell significantly below
the Mortgage Rates on the Mortgage Loans, the rate of prepayments (including
refinancings) would be expected to increase. Conversely, if prevailing mortgage
rates rose significantly above the Mortgage Rates on the Mortgage Loans, the
rate of prepayments on the Mortgage Loans would be expected to decrease.
Furthermore, since mortgage loans secured by second liens are not generally
viewed by borrowers as permanent financing and generally carry a high rate of
interest, the Mortgage Loans may experience a higher rate of prepayments than
traditional mortgage loans. Prepayment of the related first lien may also affect
the rate of prepayments on the Mortgage Loans.
The Offered Certificates are subject to various priorities for payment of
principal as described herein. Distributions of principal on classes of Offered
Certificates having an earlier priority of payment will be affected by the rates
of prepayment of the Mortgage Loans early in the life of the Mortgage Pool. The
timing of commencement of principal distributions and the weighted average lives
of classes of Offered Certificates with a later priority of payment will be
affected by the rates of prepayment of the Mortgage Loans both before and after
the commencement of principal distributions on such classes. In addition, the
yield to maturity of the Offered Certificates will depend on whether, to what
extent, and the timing with respect to which, Net Monthly Excess Cash Flow is
used to accelerate payments of principal on the Offered Certificates or any
Overcollateralization Reduction Amount is released. See 'Description of the
Certificates -- Overcollaterization' herein.
S-33
<PAGE>
<PAGE>
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default and the severity of losses of mortgage loans secured
by second liens is likely to be greater than that of mortgage loans secured by
first liens on comparable properties. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high Combined Loan-to-Value Ratios, may be higher than for other
types of Mortgage Loans. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans will be affected by the general
economic condition of the region of the country in which the related Mortgaged
Properties are located. The risk of delinquencies and loss is greater and
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values. See 'Yield and Prepayment Considerations' and 'Risk
Factors' in the Prospectus. In addition, because borrowers of Balloon Mortgage
Loans are required to make a relatively large single payment upon maturity, it
is possible that the default risk associated with Balloon Mortgage Loans is
greater than that associated with fully-amortizing mortgage loans. See 'Risk
Factors' herein.
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through Rates
on the Offered Certificates are fixed, such rates will not change in response to
changes in market interest rates. Accordingly, if market interest rates or
market yields for securities similar to the Offered Certificates were to rise,
the market value of the Offered Certificates may decline.
The yield to investors on each class of Offered Certificates, and
particularly on those classes of Offered Certificates with lower payment
priorities, will be sensitive to Prepayment Interest Shortfalls and Delinquency
Shortfalls because such amounts will not be covered by the Master Servicer
either through compensating interest or Advances, respectively. On each
Distribution Date, Prepayment Interest Shortfalls and the interest portion of
Delinquency Shortfalls will reduce the Interest Remittance Amount and the
principal portion of Delinquency Shortfalls will not be included in the
Principal Remittance Amount, thereby reducing amounts available for distribution
to the Offered Certificates. In certain scenarios involving Prepayment Interest
Shortfalls or Delinquency Shortfalls, the Interest Remittance Amount may be
insufficient to pay Accrued Certificate Interest on the Offered Certificates in
full. Any shortfalls in interest distributions resulting therefrom will be
allocated first to the respective classes of Subordinate Certificates (in the
order in which Realized Losses are allocated thereto) prior to allocation among
the Senior Certificates and will carry forward (with interest thereon) and will
be payable on future Distribution Dates subject to available funds. The Senior
Certificates will be reimbursed for such interest shortfalls prior to the
payment of Accrued Certificate Interest on the Subordinate Certificates. Each
respective class of Subordinate Certificates will be reimbursed for such
interest shortfalls from Net Monthly Excess Cashflow only when the required
level of overcollateralization has been reached and any Subordinate Certificates
with a higher payment priority have been reimbursed for such interest shortfalls
and for any other Realized Losses (other than any Excess Losses) allocated
thereto. As a result, holders of the Subordinate Certificates may experience
delays in being reimbursed for such shortfalls.
In addition, the yield to maturity on each class of Offered Certificates
will depend on, among other things, the price paid by the holders of the Offered
Certificates and the related Pass-Through Rate. The extent to which the yield to
maturity of a Offered Certificate is sensitive to prepayments will depend, in
part, upon the degree to which it is purchased at a discount or premium. In
general, if a class of Offered Certificates is purchased at a premium and
principal distributions thereon occur at a rate faster than assumed at the time
of purchase, the investor's actual yield to maturity will be lower than
anticipated at the time of purchase. Conversely, if a class of Offered
Certificates is purchased at a discount and principal distributions thereon
occur at a rate slower than assumed at the time of purchase, the investor's
actual yield to maturity will be lower than anticipated at the time of purchase.
For additional considerations relating to the yield on the Certificates, see
'Yield and Prepayment Considerations' in the Prospectus.
Lockout Certificates: Investors in the Lockout Certificates should be aware
that because the Lockout Certificates do not receive any payments of principal
prior to the Distribution Date occurring in November 2000 and prior to the
Distribution Date occurring in November 2003 will receive a disproportionately
small portion of payments of principal (unless the Certificate Principal
Balances of the Senior Certificates (other than the Lockout Certificates) have
been reduced to zero), the weighted average lives of the Lockout Certificates
will be longer than would otherwise be the case, and the effect on the market
value of the Lockout Certificates of changes in market interest rates or market
yields for similar securities will be greater than for other classes of Senior
Certificates entitled to such distributions. However, beginning with the
Distribution Date occurring in
S-34
<PAGE>
<PAGE>
November 2004, the Lockout Certificates will receive a disproportionately large
percentage of principal collections until their Certificate Principal Balance is
reduced to zero.
Certificates with Subordination Features: As described herein, during
certain periods all or a disproportionately large percentage of principal
payments on the Mortgage Loans will be allocated to the Senior Certificates and,
during certain periods, no principal payments will be distributed to the
Subordinate Certificates. Unless the Certificate Principal Balances of the
Senior Certificates have been reduced to zero, the Subordinate Certificates will
not be entitled to receive distributions of principal until the Stepdown Date.
Furthermore, if a Trigger Event is in effect, the Subordinate Certificates will
not be entitled to receive distributions in respect of principal until the
Certificate Principal Balances of the Senior Certificates have been reduced to
zero. To the extent that no principal payments are distributed on the
Subordinate Certificates, the Subordination afforded the Senior Certificates by
the Subordinate Certificates (together with the Overcollateralization Amount
(including overcollateralization created by the Net Monthly Excess Cash Flow)),
in the absence of offsetting Realized Losses allocated thereto, will be
increased, and the weighted average lives of the Subordinate Certificates will
be extended.
In addition, investors in the Subordinate Certificates should be aware that
on and after the Distribution Date on which the Overcollateralization Amount has
been reduced to approximately $1,148,133, the most subordinate class of
Subordinate Certificates then outstanding may receive more than such class' pro
rata share of the Principal Distribution Amount for such Distribution Date.
The yield to investors on each class of Subordinate Certificates, and
particularly on those classes of Subordinate Certificates with lower payment
priorities, will be extremely sensitive to losses due to defaults on the
Mortgage Loans (and the timing thereof), to the extent such losses are not
covered by the Overcollateralization Amount (including overcollateralization
created by the Net Monthly Excess Cash Flow) or by any other class of
Subordinate Certificates having a lower payment priority, because the entire
amount of such losses that are covered by Subordination will be allocable to
such class or classes of Subordinate Certificates, as described herein.
Furthermore, as described herein, the timing of receipt of principal and
interest by any class of Subordinate Certificates may be adversely affected by
losses even if such class does not ultimately bear such loss.
Assumed Final Distribution Date: The assumed final Distribution Date with
respect to the Offered Certificates is May 25, 2027, which date is the
Distribution Date immediately following the latest scheduled maturity date for
any Mortgage Loan. No event of default, change in the priorities for
distribution among the various classes or other provisions under the Pooling and
Servicing Agreement will arise or become applicable solely by reason of the
failure to retire the entire Certificate Principal Balance of any class of
Certificates on or before its assumed final Distribution Date.
The actual final Distribution Date with respect to each class of Offered
Certificates could occur significantly earlier than the assumed final
Distribution Date for such class because (i) Net Monthly Excess Cash Flow will
be used to make accelerated payments of principal to the holders of the Offered
Certificates, which payments will have the effect of shortening the weighted
average lives of the Offered Certificates of each class, (ii) prepayments are
likely to occur, which will also have the effect of shortening the weighted
average lives of the Offered Certificates and (iii) the Master Servicer or the
Company may cause a termination of the Trust Fund when the aggregate Stated
Principal Balance of the Mortgage Loans in the Trust Fund is less than 10% of
the Cut-off Date Balance.
Weighted Average Life: Weighted average life refers to the average amount
of time that will elapse from the date of issuance of a security to the date of
distribution to the investor of each dollar distributed in reduction of
principal of such security (assuming no losses). The weighted average life of
the Offered Certificates will be influenced by, among other things, the rate at
which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
The prepayment model used in this Prospectus Supplement (the 'PREPAYMENT
ASSUMPTION') represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of mortgage loans. A 100%
Prepayment Assumption assumes a constant prepayment rate ('CPR') of 4% per annum
of the then outstanding principal balance of such mortgage loans in the first
month of the life of the mortgage loans and an additional 17/12% annum in each
month thereafter until the thirteenth month. Beginning in the thirteenth month
and in each month thereafter during the life of the mortgage loans, a 100%
Prepayment Assumption assumes a CPR of 21% per annum each month. As used in the
table below, a 50% Prepayment
S-35
<PAGE>
<PAGE>
Assumption assumes prepayment rates equal to 50% of the Prepayment Assumption.
Correspondingly, a 150% Prepayment Assumption assumes prepayment rates equal to
150% of the Prepayment Assumption, and so forth. The Prepayment Assumption does
not purport to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans.
The table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics of
the Mortgage Loans that are expected to be included in the Trust Fund as
described under 'Description of the Mortgage Pool' herein and the performance
thereof. The table assumes, among other things, that (i) the Trust Fund includes
the following four hypothetical Mortgage Loans:
<TABLE>
<CAPTION>
REMAINING REMAINING
ORIGINAL AMORTIZING TERM TO
NET AMORTIZING TERM TERM MATURITY
PRINCIPAL BALANCE MORTGAGE RATE MORTGAGE RATE (IN MONTHS) (IN MONTHS) (IN MONTHS)
- ----------------- ------------- ------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$ 88,094,135.57 11.6190% 11.0390% 353 350 177
138,434,619.07 11.7330 11.1530 179 174 174
2,888,391.78 10.2410 9.6610 238 235 235
209,427.38 11.8670 11.2870 339 330 330
</TABLE>
(ii) except with respect to the Balloon Mortgage Loans, the scheduled monthly
payment for each Mortgage Loan has been based on its outstanding balance,
interest rate and remaining term to maturity, such that the Mortgage Loan will
amortize in amounts sufficient for repayment thereof over its remaining term to
maturity; (iii) none of the Sellers, the Master Servicer or the Company will
repurchase any Mortgage Loan, as described under 'Mortgage Loan
Program -- Representations Relating to Mortgage Loans' and 'Description of the
Certificates -- Assignment of the Trust Fund Assets' in the Prospectus, and
neither the Master Servicer nor the Company exercises any option to purchase the
Mortgage Loans and thereby cause a termination of the Trust Fund; (iv) there are
no delinquencies or Realized Losses on the Mortgage Loans, and principal
payments on the Mortgage Loans will be timely received together with
prepayments, if any, at the respective constant percentages of the Prepayment
Assumption set forth in the table; (v) there is no Prepayment Interest Shortfall
or any other interest shortfall in any month; (vi) payments on the Certificates
will be received on the 25th day of each month, commencing November 25, 1997;
(vii) payments on the Mortgage Loans earn no reinvestment return; (viii) there
are no additional ongoing Trust Fund expenses payable out of the Trust Fund; and
(ix) the Certificates will be purchased on October 30, 1997 (collectively, the
'STRUCTURING ASSUMPTIONS').
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the table set forth below,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at a
constant level of the Prepayment Assumption until maturity or that all of the
Mortgage Loans will prepay at the same level of the Prepayment Assumption.
Moreover, the diverse remaining terms to maturity of the Mortgage Loans could
produce slower or faster principal distributions than indicated in the table at
the various constant percentages of the Prepayment Assumption specified, even if
the weighted average remaining term to maturity of the Mortgage Loans is as
assumed. Any difference between such assumptions and the actual characteristics
and performance of the Mortgage Loans, or actual prepayment or loss experience,
will affect the percentages of initial Certificate Principal Balances
outstanding over time and the weighted average lives of the classes of Offered
Certificates.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of each class of Offered Certificates, and
sets forth the percentages of the initial Certificate Principal Balance of each
such class of Offered Certificates that would be outstanding after each of the
dates shown at various percentages of the Prepayment Assumption.
S-36
<PAGE>
<PAGE>
PERCENT OF INITIAL PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF
PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-1
-------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 150% 200%
- -------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial
Percentage........ 100% 100% 100% 100% 100% 100%
October 25, 1998.... 79 35 13 0 0 0
October 25, 1999.... 68 0 0 0 0 0
October 25, 2000.... 55 0 0 0 0 0
October 25, 2001.... 42 0 0 0 0 0
October 25, 2002.... 27 0 0 0 0 0
October 25, 2003.... 11 0 0 0 0 0
October 25, 2004.... 0 0 0 0 0 0
October 25, 2005.... 0 0 0 0 0 0
October 25, 2006.... 0 0 0 0 0 0
October 25, 2007.... 0 0 0 0 0 0
October 25, 2008.... 0 0 0 0 0 0
October 25, 2009.... 0 0 0 0 0 0
October 25, 2010.... 0 0 0 0 0 0
October 25, 2011.... 0 0 0 0 0 0
October 25, 2012 and
thereafter........ 0 0 0 0 0 0
Weighted Average
Life in Years**... 3.3 0.8 0.6 0.5 0.4 0.3
<CAPTION>
CLASS A-2
------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 150% 200%
- -------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial
Percentage........ 100% 100% 100% 100% 100% 100%
October 25, 1998.... 100 100 100 75 0 0
October 25, 1999.... 100 37 0 0 0 0
October 25, 2000.... 100 0 0 0 0 0
October 25, 2001.... 100 0 0 0 0 0
October 25, 2002.... 100 0 0 0 0 0
October 25, 2003.... 100 0 0 0 0 0
October 25, 2004.... 83 0 0 0 0 0
October 25, 2005.... 47 0 0 0 0 0
October 25, 2006.... 2 0 0 0 0 0
October 25, 2007.... 0 0 0 0 0 0
October 25, 2008.... 0 0 0 0 0 0
October 25, 2009.... 0 0 0 0 0 0
October 25, 2010.... 0 0 0 0 0 0
October 25, 2011.... 0 0 0 0 0 0
October 25, 2012 and
thereafter........ 0 0 0 0 0 0
Weighted Average
Life in Years**... 7.9 1.9 1.4 1.1 0.8 0.7
<CAPTION>
CLASS A-3
------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 150% 200%
- -------------------- ---- ---- ---- ---- ---- ----
Initial
Percentage........ 100% 100% 100% 100% 100% 100%
October 25, 1998.... 100 100 100 100 88 53
October 25, 1999.... 100 100 78 47 0 0
October 25, 2000.... 100 70 26 0 0 0
October 25, 2001.... 100 36 0 0 0 0
October 25, 2002.... 100 7 0 0 0 0
October 25, 2003.... 100 0 0 0 0 0
October 25, 2004.... 100 0 0 0 0 0
October 25, 2005.... 100 0 0 0 0 0
October 25, 2006.... 100 0 0 0 0 0
October 25, 2007.... 84 0 0 0 0 0
October 25, 2008.... 65 0 0 0 0 0
October 25, 2009.... 41 0 0 0 0 0
October 25, 2010.... 18 0 0 0 0 0
October 25, 2011.... 0 0 0 0 0 0
October 25, 2012 and
thereafter........ 0 0 0 0 0 0
Weighted Average
Life in Years**... 11.6 3.7 2.6 2.0 1.4 1.1
<CAPTION>
CLASS A-4
------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 150% 200%
- -------------------- ---- ---- ---- ---- ---- ----
Initial
Percentage........ 100% 100% 100% 100% 100% 100%
October 25, 1998.... 100 100 100 100 100 100
October 25, 1999.... 100 100 100 100 42 0
October 25, 2000.... 100 100 100 33 0 0
October 25, 2001.... 100 100 53 0 0 0
October 25, 2002.... 100 100 0 0 0 0
October 25, 2003.... 100 43 0 0 0 0
October 25, 2004.... 100 0 0 0 0 0
October 25, 2005.... 100 0 0 0 0 0
October 25, 2006.... 100 0 0 0 0 0
October 25, 2007.... 100 0 0 0 0 0
October 25, 2008.... 100 0 0 0 0 0
October 25, 2009.... 100 0 0 0 0 0
October 25, 2010.... 100 0 0 0 0 0
October 25, 2011.... 87 0 0 0 0 0
October 25, 2012 and
thereafter........ 0 0 0 0 0 0
Weighted Average
Life in Years**... 14.4 6.0 4.1 3.0 2.0 1.5
</TABLE>
- ------------
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a Certificate of any class is determined by (i)
multiplying the amount of each net distribution in reduction of Certificate
Principal Balance by the number of years from the date of issuance of the
Certificate to the related Distribution Date, (ii) adding the results, and
(iii) dividing the sum by the aggregate of the net distributions described in
(i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE THIRD
PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE MORTGAGE LOANS WHICH DIFFER FROM THE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
(Table continued on next page.)
S-37
<PAGE>
<PAGE>
PERCENT OF INITIAL PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF
PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-5
--------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 150% 200%
- -------------------- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial
Percentage........ 100% 100% 100% 100% 100% 100%
October 25, 1998.... 100 100 100 100 100 100
October 25, 1999.... 100 100 100 100 100 0
October 25, 2000.... 100 100 100 100 0 0
October 25, 2001.... 100 100 100 47 0 0
October 25, 2002.... 100 100 69 0 0 0
October 25, 2003.... 100 100 24 0 0 0
October 25, 2004.... 100 86 0 0 0 0
October 25, 2005.... 100 68 0 0 0 0
October 25, 2006.... 100 44 0 0 0 0
October 25, 2007.... 100 18 0 0 0 0
October 25, 2008.... 100 0 0 0 0 0
October 25, 2009.... 100 0 0 0 0 0
October 25, 2010.... 100 0 0 0 0 0
October 25, 2011.... 100 0 0 0 0 0
October 25, 2012.... 0 0 0 0 0 0
October 25, 2013.... 0 0 0 0 0 0
October 25, 2014.... 0 0 0 0 0 0
October 25, 2015 and
thereafter........ 0 0 0 0 0 0
Weighted Average
Life in Years**... 14.7 8.7 5.5 4.0 2.3 1.7
<CAPTION>
CLASS A-6
-------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 150% 200%
- -------------------- ---- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial
Percentage........ 100% 100% 100% 100% 100% 100 %
October 25, 1998.... 100 100 100 100 100 100
October 25, 1999.... 100 100 100 100 100 30
October 25, 2000.... 100 100 100 100 0 0
October 25, 2001.... 100 100 100 100 0 0
October 25, 2002.... 100 100 100 72 0 0
October 25, 2003.... 100 100 100 0 0 0
October 25, 2004.... 100 100 79 0 0 0
October 25, 2005.... 100 100 60 0 0 0
October 25, 2006.... 100 100 22 0 0 0
October 25, 2007.... 100 100 0 0 0 0
October 25, 2008.... 100 81 0 0 0 0
October 25, 2009.... 100 23 0 0 0 0
October 25, 2010.... 100 0 0 0 0 0
October 25, 2011.... 100 0 0 0 0 0
October 25, 2012.... 0 0 0 0 0 0
October 25, 2013.... 0 0 0 0 0 0
October 25, 2014.... 0 0 0 0 0 0
October 25, 2015 and
thereafter........ 0 0 0 0 0 0
Weighted Average
Life in Years**... 14.7 11.6 8.2 5.3 2.7 2.0
<CAPTION>
CLASS A-7
--------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 150% 200%
- -------------------- ---- ----- ----- ---- ---- ----
Initial
Percentage........ 100% 100% 100% 100% 100% 100%
October 25, 1998.... 100 100 100 100 100 100
October 25, 1999.... 100 100 100 100 100 100
October 25, 2000.... 100 100 100 100 66 0
October 25, 2001.... 100 100 100 100 59 0
October 25, 2002.... 100 100 100 100 20 0
October 25, 2003.... 100 100 100 96 8 0
October 25, 2004.... 100 100 100 73 5 0
October 25, 2005.... 100 100 100 71 5 0
October 25, 2006.... 100 100 100 61 5 0
October 25, 2007.... 100 100 90 48 5 0
October 25, 2008.... 100 100 72 36 5 0
October 25, 2009.... 100 100 55 26 2 0
October 25, 2010.... 100 86 40 18 0 0
October 25, 2011.... 100 64 28 12 0 0
October 25, 2012.... 1 0 0 0 0 0
October 25, 2013.... * 0 0 0 0 0
October 25, 2014.... 0 0 0 0 0 0
October 25, 2015 and
thereafter........ 0 0 0 0 0 0
Weighted Average
Life in Years**... 14.7 14.1 12.4 10.0 4.5 2.3
<CAPTION>
CLASS A-L1
------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 150% 200%
- -------------------- ---- ---- ---- ---- ---- ----
Initial
Percentage........ 100% 100% 100% 100% 100% 100%
October 25, 1998.... 100 100 100 100 100 100
October 25, 1999.... 100 100 100 100 100 100
October 25, 2000.... 100 100 100 100 100 29
October 25, 2001.... 98 92 88 90 98 29
October 25, 2002.... 97 83 81 79 81 29
October 25, 2003.... 93 73 68 64 58 25
October 25, 2004.... 88 62 55 48 38 14
October 25, 2005.... 71 38 28 21 23 7
October 25, 2006.... 55 22 13 8 13 1
October 25, 2007.... 40 13 6 3 7 0
October 25, 2008.... 27 7 3 1 1 0
October 25, 2009.... 16 3 1 * * 0
October 25, 2010.... 9 1 * * 0 0
October 25, 2011.... 5 1 * * 0 0
October 25, 2012.... 0 0 0 0 0 0
October 25, 2013.... 0 0 0 0 0 0
October 25, 2014.... 0 0 0 0 0 0
October 25, 2015 and
thereafter........ 0 0 0 0 0 0
Weighted Average
Life in Years**... 9.5 7.4 6.9 6.7 6.7 4.0
</TABLE>
- ------------
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a Certificate of any class is determined by (i)
multiplying the amount of each net distribution in reduction of Certificate
Principal Balance by the number of years from the date of issuance to the
Certificate to the related Distribution Date, (ii) adding the results, and
(iii) dividing the sum by the aggregate of the net distributions described in
(i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE THIRD
PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE MORTGAGE LOANS WHICH DIFFER FROM THE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
(Table continued on next page.)
S-38
<PAGE>
<PAGE>
PERCENT OF INITIAL PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF
PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-L2
-------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 150% 200%
- -------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial
Percentage........ 100% 100% 100% 100% 100% 100%
October 25, 1998.... 100 100 100 100 100 100
October 25, 1999.... 100 100 100 100 100 100
October 25, 2000.... 100 100 100 100 100 29
October 25, 2001.... 98 92 88 90 98 29
October 25, 2002.... 97 83 81 79 81 29
October 25, 2003.... 93 73 68 64 58 25
October 25, 2004.... 88 62 55 48 38 14
October 25, 2005.... 71 38 28 21 23 7
October 25, 2006.... 55 22 13 8 13 1
October 25, 2007.... 40 13 6 3 7 0
October 25, 2008.... 27 7 3 1 1 0
October 25, 2009.... 16 3 1 * * 0
October 25, 2010.... 9 1 * * 0 0
October 25, 2011.... 5 1 * * 0 0
October 25, 2012 and
thereafter........ 0 0 0 0 0 0
Weighted Average
Life in Years**... 9.5 7.4 6.9 6.7 6.7 4.0
<CAPTION>
CLASS M-1
------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 150% 200%
- -------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial
Percentage........ 100% 100% 100% 100% 100% 100 %
October 25, 1998.... 100 100 100 100 100 100
October 25, 1999.... 100 100 100 100 100 100
October 25, 2000.... 100 100 100 100 100 100
October 25, 2001.... 100 100 95 75 44 79
October 25, 2002.... 100 100 77 57 29 30
October 25, 2003.... 100 89 63 43 19 7
October 25, 2004.... 100 76 51 33 12 3
October 25, 2005.... 100 65 40 24 8 0
October 25, 2006.... 100 54 32 18 5 0
October 25, 2007.... 100 45 25 13 1 0
October 25, 2008.... 100 37 19 10 0 0
October 25, 2009.... 100 29 14 7 0 0
October 25, 2010.... 93 22 10 4 0 0
October 25, 2011.... 75 16 7 * 0 0
October 25, 2012 and
thereafter........ 0 0 0 0 0 0
Weighted Average
Life in Years**... 14.3 9.9 7.9 6.3 4.8 4.7
<CAPTION>
CLASS M-2
------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 150% 200%
- -------------------- ---- ---- ---- ---- ---- ----
Initial
Percentage........ 100% 100% 100% 100% 100% 100%
October 25, 1998.... 100 100 100 100 100 100
October 25, 1999.... 100 100 100 100 100 100
October 25, 2000.... 100 100 100 100 100 100
October 25, 2001.... 100 100 95 75 44 23
October 25, 2002.... 100 100 77 57 29 13
October 25, 2003.... 100 89 63 43 19 5
October 25, 2004.... 100 76 51 33 12 0
October 25, 2005.... 100 65 40 24 7 0
October 25, 2006.... 100 54 32 18 0 0
October 25, 2007.... 100 45 25 13 0 0
October 25, 2008.... 100 37 19 10 0 0
October 25, 2009.... 100 29 14 3 0 0
October 25, 2010.... 93 22 10 0 0 0
October 25, 2011.... 75 16 5 0 0 0
October 25, 2012 and
thereafter........ 0 0 0 0 0 0
Weighted Average
Life in Years**... 14.3 9.9 7.8 6.3 4.5 4.0
<CAPTION>
CLASS B-1
------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 150% 200%
- -------------------- ---- ---- ---- ---- ---- ----
Initial
Percentage........ 100% 100% 100% 100% 100% 100%
October 25, 1998.... 100 100 100 100 100 100
October 25, 1999.... 100 100 100 100 100 100
October 25, 2000.... 100 100 100 100 100 100
October 25, 2001.... 100 100 95 75 44 22
October 25, 2002.... 100 100 77 57 29 6
October 25, 2003.... 100 89 63 43 16 0
October 25, 2004.... 100 76 51 33 5 0
October 25, 2005.... 100 65 40 24 0 0
October 25, 2006.... 100 54 32 14 0 0
October 25, 2007.... 100 45 25 7 0 0
October 25, 2008.... 100 37 16 1 0 0
October 25, 2009.... 100 29 8 0 0 0
October 25, 2010.... 93 21 2 0 0 0
October 25, 2011.... 75 12 0 0 0 0
October 25, 2012 and
thereafter........ 0 0 0 0 0 0
Weighted Average
Life in Years**... 14.3 9.8 7.6 6.0 4.3 3.6
</TABLE>
- ------------
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a Certificate of any class is determined by (i)
multiplying the amount of each net distribution in reduction of Certificate
Principal Balance by the number of years from the date of issuance to the
Certificate to the related Distribution Date, (ii) adding the results, and
(iii) dividing the sum by the aggregate of the net distributions described in
(i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE THIRD
PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE MORTGAGE LOANS WHICH DIFFER FROM THE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
(Table continued on next page.)
S-39
<PAGE>
<PAGE>
FIXED STRIP CERTIFICATE YIELD CONSIDERATIONS
INVESTORS SHOULD NOTE THAT THE FIXED STRIP CERTIFICATES ARE ONLY ENTITLED
TO DISTRIBUTIONS PRIOR TO THE DISTRIBUTION DATE IN MAY 2000. The yield to
investors on the Fixed Strip Certificates will be extremely sensitive to the
rate and timing of principal payments on the Mortgage Loans (including
prepayments, defaults and liquidations) under certain extremely rapid rate of
prepayment scenarios. In addition, if prior to the Distribution Date in May
2000, the Master Servicer or the Company effects an optional termination of the
Mortgage Loans, the Fixed Strip Certificates will receive no further
distributions. Investors in the Fixed Strip Certificates should fully consider
the risk that an extremely rapid rate of prepayments on the Mortgage Loans could
result in the failure of such investors to fully recover their investments.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Fixed Strip Certificates to various constant rates of prepayment
on the Mortgage Loans by projecting the monthly aggregate payments of interest
on the Fixed Strip Certificates and computing the corresponding pre-tax yields
to maturity on a corporate bond equivalent basis, based on the Structuring
Assumptions, including the assumptions regarding the characteristics and
performance of the Mortgage Loans which differ from the actual characteristics
and performance thereof and assuming the aggregate purchase prices set forth
below. Any differences between such assumptions and the actual characteristics
and performance of the Mortgage Loans and of the Fixed Strip Certificates may
result in yields being different from those shown in such table. Discrepancies
between assumed and actual characteristics and performance underscore the
hypothetical nature of the table, which is provided only to give a general sense
of the sensitivity of yields in varying prepayment scenarios.
PRE-TAX YIELD TO MATURITY OF THE FIXED STRIP CERTIFICATES
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
ASSUMED PURCHASE PRICE 0% 100% 207% 300% 400%
- --------------------------------------------------------------------- ---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
$3,738,205........................................................... 6.6% 6.6% 6.6% (25.9%) (80.0%)
</TABLE>
Each pre-tax yield to maturity set forth in the preceding table was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Fixed Strip Certificates, would
cause the discounted present value of such assumed stream of cash flows to equal
the assumed purchase price listed in the table. Accrued interest is included in
the assumed purchase price and is used in computing the corporate bond
equivalent yields shown. These yields do not take into account the different
interest rates at which investors may be able to reinvest funds received by them
as distributions on the Fixed Strip Certificates, and thus do not reflect the
return on any investment in the Fixed Strip Certificates when any reinvestment
rates other than the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
table, it is highly unlikely that the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yield to maturity on the Fixed
Strip Certificates may differ from those shown in the table, even if all of the
Mortgage Loans prepay at the indicated constant percentages of the Prepayment
Assumption over any given time period or over the entire life of the
Certificates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Fixed Strip Certificates will conform
to the yields described herein. Moreover, the various remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the preceding table at the various constant
percentages of the Prepayment Assumption specified, even if the weighted average
remaining term to maturity of the Mortgage Loans is as assumed. Investors are
urged to make their investment decisions based on their determinations as to
anticipated rates of prepayment under a variety of scenarios. Investors in the
Fixed Strip Certificates should fully consider the risk that an extremely rapid
rate of prepayments on the Mortgage Loans could result in the failure of such
investors to fully recover their investments.
For additional considerations relating to the yield on the Certificates,
see 'Yield Considerations and Prepayment Considerations' in the Prospectus.
S-40
<PAGE>
<PAGE>
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement dated as of October 1, 1997, among the Company, the Master Servicer
and the Trustee. Reference is made to the Prospectus for important information
in addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Offered Certificates. The Trustee, or
any of its affiliates, in its individual or any other capacity, may become the
owner or pledgee of Certificates with the same rights as it would have if it
were not Trustee. The Trustee will appoint Norwest Bank Minnesota, National
Association to serve as Custodian in connection with the Certificates. The
Offered Certificates will be transferable and exchangeable at the corporate
trust office of the Trustee, which will serve as Certificate Registrar and
Paying Agent. The Company will provide a prospective or actual
Certificateholder, without charge, on written request, a copy (without exhibits)
of the Pooling and Servicing Agreement. Requests should be addressed to the
President, Residential Funding Mortgage Securities, II, Inc., 8400 Normandale
Lake Boulevard, Suite 700, Minneapolis, Minnesota 55437. In addition to the
circumstances described in the Prospectus, the Company may terminate the Trustee
for cause under certain circumstances. See 'The Pooling and Servicing
Agreement -- The Trustee' in the Prospectus.
THE MASTER SERVICER
Residential Funding, an indirect wholly-owned subsidiary of GMAC Mortgage
and an affiliate of the Company, will act as Master Servicer for the Mortgage
Loans pursuant to the Pooling and Servicing Agreement. For a general description
of Residential Funding and its activities, see 'Residential Funding Corporation'
in the Prospectus and 'The Mortgage Pool -- Residential Funding' herein.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fee for each Mortgage Loan is payable out of the interest
payments on such Mortgage Loan. The Servicing Fees in respect of each Mortgage
Loan will be at least 0.58% per annum of the outstanding principal balance of
such Mortgage Loan. The Servicing Fees consist of (a) servicing compensation
payable to the Master Servicer in respect of its master servicing activities,
and (b) subservicing and other related compensation payable to the Subservicer
(including such compensation paid to the Master Servicer as the direct servicer
of a Mortgage Loan for which there is no Subservicer). The primary compensation
to be paid to the Master Servicer in respect of its master servicing activities
will be 0.08% per annum of the outstanding principal balance of each Mortgage
Loan. As described in the Prospectus, a Subservicer is entitled to servicing
compensation in a minimum amount equal to 0.50% per annum of the outstanding
principal balance of each Mortgage Loan serviced by it. The Master Servicer is
obligated to pay certain ongoing expenses associated with the Trust Fund and
incurred by the Master Servicer in connection with its responsibilities under
the Pooling and Servicing Agreement. See 'Pooling and Servicing
Agreement -- Servicing and Administration' in the Prospectus for information
regarding other possible compensation to the Master Servicer and the Subservicer
and for information regarding expenses payable by the Master Servicer.
VOTING RIGHTS
Certain actions specified in the Prospectus that may be taken by holders of
Certificates evidencing a specified percentage of all undivided interests in the
Trust Fund may be taken by holders of Certificates entitled in the aggregate to
such percentage of the Voting Rights. 98% of all Voting Rights will be allocated
among all holders of the Offered Certificates (other than the Fixed Strip
Certificates) in proportion to their then outstanding Certificate Principal
Balances, and 1%, 0.5% and 0.5% of all Voting Rights will be allocated among
holders of the Fixed Strip Certificates, the Class R-I Certificates and the
Class R-II Certificates, respectively, in proportion to the Percentage Interests
(as defined in the Prospectus) evidenced by their respective Certificates.
TERMINATION
The circumstances under which the obligations created by the Pooling and
Servicing Agreement will terminate in respect of the Offered Certificates are
described in 'The Pooling and Servicing Agreement -- Termination; Retirement of
Certificates' in the Prospectus. The Master Servicer or the Company will
S-41
<PAGE>
<PAGE>
have the option on any Distribution Date on which the aggregate Stated Principal
Balance of the Mortgage Loans is less than 10% of the Cut-off Date Balance, (i)
to purchase all remaining Mortgage Loans and other assets in the Trust Fund
thereby effecting early retirement of the Offered Certificates, or (ii) to
purchase in whole, but not in part, the Offered Certificates. Any such purchase
of Mortgage Loans and other assets of the Trust Fund shall be made at a price
equal to the sum of (a) 100% of the unpaid principal balance of each Mortgage
Loan (or the fair market value of the related underlying Mortgaged Properties
with respect to defaulted Mortgage Loans as to which title to such Mortgaged
Properties has been acquired if such fair market value is less than such unpaid
principal balance) as of the date of repurchase plus (b) accrued interest
thereon at the Net Mortgage Rate to, but not including, the first day of the
month in which such repurchase price is distributed. With respect to any such
optional termination where the Mortgage Loans and other assets of the Trust Fund
are purchased, the amount paid by the Master Servicer or the Company (such
amount, the 'TERMINATION AMOUNT') will be distributed to the Certificates as
follows:
(i) first, to the Senior Certificates, on a pro rata basis, one
month's Accrued Certificate Interest thereon,
(ii) second, the balance, if any, of the Termination Amount remaining
after the distribution pursuant to clause (i) above, to the Senior
Certificates, on a pro rata basis, in respect of any Unpaid Interest
Shortfalls thereon;
(iii) third, the balance, if any, of the Termination Amount remaining
after the distributions pursuant to clauses (i) and (ii) above, to the
Senior Certificates, on a pro rata basis, in reduction of the Certificate
Principal Balances thereof, until the Certificate Principal Balances
thereof have been reduced to zero;
(iv) fourth, the balance, if any, of the Termination Amount remaining
after the distributions pursuant to clauses (i) through (iii) above, to the
Subordinate Certificates, in order of priority, first in respect of one
month's Accrued Certificate Interest thereon, and second, in reduction of
the Certificate Principal Balance thereof, until such Certificate Principal
Balance has been reduced to zero;
(v) fifth, the balance, if any, of the Termination Amount remaining
after the distributions pursuant to clauses (i) through (iv) above, to the
Subordinate Certificates, in order of priority, first in respect of Unpaid
Interest Shortfalls thereon and second in respect of unreimbursed Realized
Losses (other than Excess Losses) thereon; and
(vi) sixth, the amount remaining shall be distributed to the Class R
Certificates.
The proceeds of any such distribution may not be sufficient to distribute the
full amount to the Offered Certificates if the purchase price is based in part
on the fair market value of any underlying Mortgaged Property and such fair
market value is less than 100% of the unpaid principal balance of the related
Mortgage Loan. In addition, because Realized Losses (other than Excess Losses)
are not allocated to the Senior Certificates in reduction of the Certificate
Principal Balances thereof, the proceeds from any such distribution may not be
sufficient to pay such Certificates in full. To the extent the Termination
Amount may be insufficient to pay the Offered Certificates in full because of
the priority provisions above, any such shortfall will be allocated to the
Subordinate Certificates in reverse order of payment priority.
Any such purchase of the Certificates will be made at a price equal to 100%
of the Certificate Principal Balance thereof plus the sum of one month's
interest accrued thereon at the applicable Pass-Through Rate, any previously
allocated Unpaid Interest Shortfalls and with respect to the Subordinate
Certificates, any Realized Losses (other than Excess Losses) previously
allocated thereto. Upon the purchase of the Certificates or at any time
thereafter, at the option of the Master Servicer or the Company, the Mortgage
Loans may be sold, thereby effecting a retirement of the Certificates and the
termination of the Trust Fund, or the Certificates so purchased may be held or
resold by the Master Servicer or the Company.
Upon presentation and surrender of the Offered Certificates in connection
with the termination of the Trust Fund or a purchase of Certificates under the
circumstances described above, the holders of the Offered Certificates will
receive the amounts described above.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Thacher Proffitt & Wood,
counsel to the Company, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling and Servicing Agreement,
for federal income tax purposes, REMIC I and REMIC II will each qualify as a
REMIC under the Code.
S-42
<PAGE>
<PAGE>
For federal income tax purposes, (a) the Class R-I Certificates will
constitute the sole class of 'residual interests' in REMIC I, (b) each class of
Offered Certificates will represent ownership of 'regular interests' in REMIC II
and will generally be treated as debt instruments of REMIC II and (c) the Class
R-II Certificates will constitute the sole class of 'residual certificates' in
REMIC II. See 'Certain Federal Income Tax Consequences -- REMICs' in the
Prospectus.
For federal income tax reporting purposes, the Offered Certificates (other
than the Fixed Strip Certificates) will not, and the Fixed Strip Certificates
will, be treated as having been issued with original issue discount. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, market discount and premium, if any, for federal income
tax purposes will be based on the assumption that, subsequent to the date of any
determination the Mortgage Loans will prepay at a rate equal to a 100%
Prepayment Assumption. No representation is made that the Mortgage Loans will
prepay at that rate or at any other rate. See 'Certain Federal Income Tax
Consequences -- General' and ' -- REMICs -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount' in the Prospectus.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder, in particular the Class IO Certificates, the amount of
original issue discount allocable to such period would be zero and such
Certificateholder will be permitted to offset such negative amount only against
future original issue discount (if any) attributable to such Certificates.
In certain circumstances OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, it is possible that the holder of a
Certificate may be able to select a method for recognizing original issue
discount that differs from that used by the Master Servicer in preparing reports
to the Certificateholders and the IRS.
Certain classes of the Offered Certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
such a class of Certificates will be treated as holding a certificate with
amortizable bond premium will depend on such Certificateholder's purchase price
and the distributions remaining to be made on such Certificate at the time of
its acquisition by such Certificateholder. Holders of such classes of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See 'Certain Federal Income Tax
Consequences -- REMICs -- Taxation of Owners of REMIC Regular Certificates' and
' -- Premium' in the Prospectus.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and 'real estate assets' under Section 856(c)(4)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Offered Certificates will be
treated as 'interest on obligations secured by mortgages on real property' under
Section 856(c)(3)(B) of the Code generally to the extent that such Offered
Certificates are treated as 'real estate assets' under Section 856(c)(4)(A) of
the Code. Moreover, the Offered Certificates (other than the Residual
Certificates) will be 'qualified mortgages' within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its startup day in
exchange for a regular or residual interest therein. However, prospective
investors in Offered Certificates that will be generally treated as assets
described in Section 860G(a)(3) of the Code should note that, notwithstanding
such treatment, any repurchase of such a Certificate pursuant to the right of
the Master Servicer or the Company to repurchase such Offered Certificates may
adversely affect any REMIC that holds such Offered Certificates if such
repurchase is made under circumstances giving rise to a Prohibited Transaction
Tax. See 'The Pooling and Servicing Agreement -- Termination' herein and
'Certain Federal Income Tax Consequences -- REMICs -- Characterization of
Investments in REMIC Certificates' in the Prospectus.
Residential Funding will be designated as the 'tax matters person' with
respect to REMIC I and REMIC II as defined in the REMIC Provisions (as defined
in the Prospectus), and in connection therewith will be required to hold not
less than 0.01% of each of the Class R-I Certificates and Class R-II
Certificates.
For further information regarding federal income tax consequences of
investing in the Offered Certificates, see 'Certain Federal Income Tax
Consequences -- REMICs' in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated October 27, 1997 (the 'Underwriting Agreement'), the Underwriter has
agreed to purchase and the Company has agreed to sell the Offered Certificates.
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It is expected that delivery of the Senior Certificates will be made only
in book-entry form through DTC, Cedel and Euroclear, and that delivery of the
Subordinate Certificates will be made at the offices of the Underwriter, New
York, New York on or about October 30, 1997, against payment therefor in
immediately available funds.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of the Offered Certificates is subject to, among
other things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of the Company's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The distribution of the Offered Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the Company
from the sale of the Offered Certificates, before deducting expenses payable by
the Company, will be approximately 101.29% of the aggregate Certificate
Principal Balance of the Offered Certificates plus accrued interest thereon from
the Cut-off Date. The Underwriter may effect such transactions by selling its
Certificates to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
Underwriter for whom they act as agent. In connection with the sale of the
Offered Certificates, the Underwriter may be deemed to have received
compensation from the Company in the form of underwriting compensation. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any profit on the resale of the Offered Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter, and under limited circumstances the Underwriter will indemnify the
Company, against certain civil liabilities under the Securities Act of 1933 or
contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
Certificates will be the monthly statements discussed in the Prospectus under
'Description of the Certificates -- Reports to Certificateholders,' which will
include information as to the outstanding principal balance of the Offered
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Offered
Certificates will be available through any other source. In addition, the
Company is not aware of any source through which price information about the
Offered Certificates will be generally available on an ongoing basis. The
limited nature of such information regarding the Offered Certificates may
adversely affect the liquidity of the Offered Certificates, even if a secondary
market for the Offered Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be passed
upon for the Company by Thacher Proffitt & Wood, New York, New York and for the
Underwriter by Brown & Wood LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Senior Certificates (other than
the Fixed Strip Certificates) that they be rated 'AAA' by Standard & Poor's and
Fitch. It is a condition to the issuance of the Fixed Strip Certificates that
they be rated 'AAAr' by Standard & Poor's and 'AAA' by Fitch. It is a condition
to the issuance of the Class M-1, Class M-2 and Class B-1 Certificates that they
be rated not lower than 'AA,' 'A' and 'BBB,' respectively, by Standard & Poor's
and Fitch.
Standard & Poor's ratings on mortgage pass-through certificates address the
likelihood of the receipt by Certificateholders of payments required under the
Pooling and Servicing Agreement. Standard & Poor's ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the Certificates, and the extent to which the payment
stream in the mortgage pool is adequate to make payments required under the
Certificates. Standard & Poor's rating on the Certificates does not, however,
constitute a statement regarding frequency of prepayments on the mortgages. See
'Certain Yield and Prepayment Considerations' herein. The 'r' of the 'AAAr'
rating of the Fixed Strip Certificates by Standard & Poor's is attached to
highlight derivative, hybrid, and certain other obligations that Standard &
Poor's believes may experience high volatility or high variability in expected
returns due to non-credit risks. Examples of such
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obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an 'r' symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
The ratings assigned by Fitch to mortgage pass-through certificates also
address the likelihood of the receipt by Certificateholders of all distributions
to which such Certificateholders are entitled. The rating process addresses the
structural and legal aspects associated with the Certificates, including the
nature of the underlying mortgage loans. The ratings assigned to mortgage
pass-through certificates do not represent any assessment of the likelihood or
rate of principal prepayments. The ratings do not address the possibility that
Certificateholders might suffer a lower than anticipated yield.
The Company has not requested a rating on the Offered Certificates by any
rating agency other than Standard & Poor's and Fitch. However, there can be no
assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Offered
Certificates by Standard & Poor's and Fitch.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Offered Certificates are subsequently lowered for any reason, no person or
entity is obligated to provide any additional support or credit enhancement with
respect to the Offered Certificates.
LEGAL INVESTMENT
The Offered Certificates will not constitute 'mortgage related securities'
for purposes of SMMEA because the Mortgage Pool includes Mortgage Loans that are
secured by subordinate liens on the related Mortgaged Properties. Institutions
whose investment activities are subject to legal investment laws and regulations
or to review by regulatory authorities should consult with their own legal
advisors in determining whether and to what extent the Offered Certificates are
subject to restrictions on investment, capital requirements or otherwise. See
'Legal Investment Matters' in the Prospectus.
See 'Legal Investment Matters' in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA, or Section 4975 of the Code (a 'PLAN') or any insurance
company (whether through its general or separate accounts) or other person
investing 'plan assets' of any Plan should carefully review with its legal
advisors whether the purchase or holding of Offered Certificates could give rise
to a transaction prohibited or not otherwise permissible under ERISA or Section
4975 of the Code. The purchase or holding of the Offered Certificates (other
than the Subordinate Certificates or the Senior Support Certificates) by or on
behalf of, or with Plan Assets of, a Plan may qualify for exemptive relief under
the Exemption, as described under 'ERISA Considerations Prohibited Transaction
Exemptions' in the Prospectus. However, the Exemption contains a number of
conditions which must be met for the Exemption to apply, including the
requirement that any such Plan must be an 'accredited investor' as defined in
Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under
the Securities Act of 1933, as amended.
The Small Business Job Protection Act of 1996 added a new Section 401(c) to
ERISA, which provides certain exemptive relief from the provisions of Part 4 of
Title I of ERISA and Section 4975 of the Code, including the prohibited
transaction restrictions imposed by ERISA and the related excise taxes imposed
by the Code, for transactions involving an insurance company general account.
Pursuant to Section 401(c) of ERISA, the Department of Labor ('DOL') is required
to issue final regulations ('401(C) REGULATIONS') no later than December 31,
1997 which are to provide guidance for purposes of determining, in cases where
insurance policies supported by an insurer's general account are issued to or
for the benefit of a Plan on or before December 31, 1998, which general account
assets constitute Plan Assets. Section 401(c) of ERISA generally provides that,
until the date which is 18 months after the 401(c) Regulations become final, no
person shall be subject to liability under Part 4 of Title I of ERISA and
Section 4975 of the Code on the basis of a claim that the assets of an insurance
company general account constitute Plan Assets, unless (i) as otherwise provided
by the Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought
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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 Offered
Certificates should consult with their legal advisors with respect to the
applicability of Section 401(c) of ERISA, including the general account's
ability to continue to hold the Offered Certificates after the date which is 18
months after the date the 401(c) Regulations become final.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not likely apply to the purchase, sale
or holding of the Subordinate Certificates or the Senior Support Certificates
(due to the subordinate nature thereof), transfers of such Certificates to a
Plan, to a trustee or other person acting on behalf of any Plan, or to any other
person using the assets of any Plan to effect such acquisition will not be
registered by the Trustee unless the transferee provides the Company, the
Trustee and the Master Servicer with an opinion of counsel satisfactory to the
Company, the Trustee and the Master Servicer, which opinion will not be at the
expense of the Company, the Trustee or the Master Servicer, that the purchase of
such Certificates by or on behalf of such Plan is permissible under applicable
law, will not constitute or result on a non-exempt prohibited transaction under
ERISA or Section 4975 of the Code and will not subject the Company, the Trustee
or the Master Servicer to any obligation in addition to those undertaken in the
Pooling and Servicing Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Offered
Certificates by or on behalf of such Plan is permissible under applicable law,
will not constitute or result in a non-exempt prohibited transaction under ERISA
or Section 4975 of the Code, will not subject the Company, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the Pooling
and Servicing Agreement, and the following statements are correct: (i) the
transferee is an insurance company and the source of funds used to purchase such
Offered Certificates is an 'insurance company general account' (as such term is
defined in PTCE 95-60), (ii) the conditions set forth in Sections I and III of
PTCE 95-60 have been satisfied and (iii) there is no Plan with respect to which
the amount of such general accounts reserves and liabilities for contracts held
by or on behalf of such Plan and all other Plans maintained by the same employer
(or any 'affiliate' thereof, as defined in PTCE 95-60) or by the same employee
organization exceed 10% of the total of all reserves and liabilities of such
general account (as determined under PTCE 95-60) as of the date of the
acquisition of such Offered Certificates.
An opinion of counsel or certification will not be required with respect to
the purchase of the Senior Support Certificates, provided that such certificates
are DTC Registered Certificates. Any purchaser of a DTC Registered Senior
Support Certificate will be deemed to have represented by such purchase that
either (a) such purchaser is not a Plan and is not purchasing such Senior
Support Certificates on behalf of or with 'Plan Assets' of any Plan or (b) the
purchase of any such Senior Support Certificate by or on behalf of or with 'Plan
Assets' of any Plan is permissable under applicable law, will not result in any
non-exempt prohibited transaction under ERISA or Section 4975 of the Code and
will not subject the Master Servicer, the Company or the Trustee to any
obligation in addition to those undertaken in the Pooling and Servicing
Agreement.
Any fiduciary or other investor of Plan Assets that proposes to acquire or
hold the Offered Certificates on behalf of or with Plan Assets of any Plan
should consult with its counsel with respect to the potential applicability of
the fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of the ERISA and the Code to the proposed investment. See 'ERISA
Considerations' in the Prospectus.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Residential
Funding Mortgage Securities II, Inc., Mortgage Pass-Through Certificates, Series
1997-HS5: Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6,
Class A-7, Class A-L1, Class A-L2 and Class IO Certificates (the 'GLOBAL
SECURITIES') will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of DTC, Cedel or
Euroclear. The Global Securities will be traceable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their Relevant Depositary
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in sameday funds. Trading between Cedel
and/or Euroclear Participants. Secondary market trading between Cedel
Participants or Euroclear Participants will be settled using the procedures
applicable to conventional eurobonds in same-day funds. Trading between DTC,
Seller and Cedel or Euroclear Participants. When Global Securities are to be
transferred from the account of a DTC Participant to the account of a Cedel
Participant or a Euroclear Participant, the purchaser will send instructions to
Cedel or Euroclear through a Cedel Participant or Euroclear Participant at least
one business day prior to settlement. Cedel or Euroclear will instruct the
Relevant Depositary, as the case may be, to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date, on the basis of the actual number of days in such accrual period and a
year assumed to consist of 360 days. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first
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day of the following month. Payment will then be made by the Relevant Depositary
to the DTC Participant's account against delivery of the Global Securities.
After settlement has been completed, the Global Securities will be credited to
the respective clearing system and by the clearing system, in accordance with
its usual procedures, to the Cedel Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and the
cash debt will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails), the Cedel or Euroclear cash debt will be valued instead
as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their account one day later. As an alternative, if
Cedel or Euroclear has extended a line of credit to them, Cedel Participants or
Euroclear Participants can elect not to preposition funds and allow that credit
line to be drawn upon to finance settlement. Under this procedure, Cedel
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges, although
the result will depend on each Cedel Participant's or Euroclear Participant's
particular cost of funds. Since the settlement is taking place during New York
business hours, DTC Participants can employ their usual procedures for crediting
Global Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
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(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate: Exemption for
Non-U.S. Persons (Form W-8). Beneficial Holders of Global Securities that are
Non-U.S. Persons (as defined below) can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form 1001 (Holdership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8. Form
1001 may be filed by Certificate Holders or their agent. Exemption for U.S.
Persons (Form W-9). U.S. Persons can obtain a complete exemption from the
withholding tax by filing Form W-9 (Payer's Request for Taxpayer Identification
Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year. The term 'U.S.
PERSON' means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity organized in or under the laws of the
United States or any political subdivision thereof (unless, in the case of a
partnership, future Treasury regulations provide otherwise), (iii) an estate or
trust that is subject to U.S. federal income tax regardless of the source of its
income, or (iv) a trust other than a 'foreign trust,' as defined in Section
7701(a)(31) of the Code. The term 'NON-U.S. PERSON' means any person who is not
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-3
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
PROSPECTUS (Subject to Completion Dated May 29, 1997)
Home Equity Loan Pass-Through Certificates
Residential Funding Mortgage Securities II, Inc.
Depositor
The Home Equity Loan Pass-Through Certificates (the "Certificates") offered
hereby may be sold from time to time in series, as described in the related
Prospectus Supplement. Each series of Certificates will represent in the
aggregate the entire beneficial ownership interest, excluding any interest
retained by Residential Funding Mortgage Securities II, Inc. (the "Company") or
any other entity specified in the related Prospectus Supplement, in a trust fund
consisting primarily of a segregated pool of one- to four-family, first or
junior lien home equity mortgage loans (the "Mortgage Loans"), including home
equity revolving lines of credit ("Revolving Credit Loans") or loans where the
principal amount is advanced in full at origination ("Closed-End Loans"), or
certain balances thereof or interests therein (which may include Mortgage
Securities, as defined herein), acquired by the Company from one or more
affiliated or unaffiliated institutions. See "The Mortgage Pools." See "Index of
Principal Definitions" for the meanings of capitalized terms and acronyms.
The Mortgage Loans and certain other assets described herein under "The Mortgage
Pools" and in the related Prospectus Supplement will be held in trust
(collectively, a "Trust Fund") for the benefit of the holders of the related
series of Certificates and the Excess Spread, if any, pursuant to a Pooling and
Servicing Agreement as described herein under "The Mortgage Pools." Each
Mortgage Pool will consist of one or more types of Mortgage Loans described
under "The Mortgage Pools." Information regarding each class of Certificates of
a series, and the general characteristics of the Mortgage Loans to be evidenced
by such Certificates, will be set forth in the related Prospectus Supplement.
Each series of Certificates will include one or more classes. Each class of
Certificates of any series will represent the right, which right may be senior
or subordinate to the rights of one or more of the other classes of the
Certificates or other interests in the related Trust Fund, to receive a
specified portion of payments of principal or interest (or both) on the Mortgage
Loans in the related Trust Fund in the manner described herein and in the
related Prospectus Supplement. See "Description of the
Certificates--Distributions." A series may include one or more classes of
Certificates entitled to principal distributions, with disproportionate, nominal
or no interest distributions, or to interest distributions, with
disproportionate, nominal or no principal distributions. A series may include
two or more classes of Certificates which differ as to the timing, sequential
order, priority of payment, pass-through rate or amount of distributions of
principal or interest or both.
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Certificates may include any one or any combination of a Financial
Guaranty Insurance Policy, Letter of Credit (each as defined herein), bankruptcy
bond, special hazard insurance policy, Reserve Fund (as defined herein), surety
bond or other form of credit support. In addition to or in lieu of the
foregoing, credit enhancement may be provided by means of subordination. See
"Description of Credit Enhancement."
The rate of payment of principal of each class of Certificates entitled to a
portion of principal payments on the Mortgage Loans in the Mortgage Pool will
depend on the priority of payment of such class and the rate and timing of
principal payments (including payments in excess of required installments,
prepayments or terminations, liquidations and repurchases) on the Mortgage Loans
and other assets in the Trust Fund and the rate and timing of Draws in the case
of Revolving Credit Loans. A rate of principal payment lower or higher than that
anticipated may affect the yield on each class of Certificates in the manner
described herein and in the related Prospectus Supplement. See "Yield and
Prepayment Considerations."
For a discussion of significant matters affecting investments in the
Certificates, see "Risk Factors," which begins on page __.
One or more separate elections may be made to treat a Trust Fund as a "real
estate mortgage investment conduit" (a "REMIC") for federal income tax purposes.
The Prospectus Supplement for a series of Certificates will specify which class
or classes of the related series of Certificates will be considered to be
regular interests in the related REMIC and which class of Certificates or other
interests will be designated as the residual interest in the related REMIC, if
applicable. See "Certain Federal Income Tax Consequences."
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE COMPANY, RESIDENTIAL FUNDING, GMAC MORTGAGE GROUP, INC. ("GMAC MORTGAGE") OR
ANY OF THEIR AFFILIATES. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE
LOANS OR MORTGAGE SECURITIES WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, RESIDENTIAL FUNDING, GMAC MORTGAGE
OR ANY OF THEIR AFFILIATES, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE
RELATED PROSPECTUS SUPPLEMENT. NONE OF SUCH ENTITIES WILL HAVE ANY OBLIGATIONS
IN RESPECT OF THE CERTIFICATES, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE
RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
Offers of the Certificates may be made through one or more different methods,
including offerings through underwriters, as described under "Methods of
Distribution" and in the related Prospectus Supplement.
There will be no secondary market for any series of Certificates prior to the
offering thereof. There can be no assurance that a secondary market for any of
the Certificates will develop or, if it does develop, that it will continue. The
Certificates will not be listed on any securities exchange.
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of securities offered hereby unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is _____________, 1997.
<PAGE>
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ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates (the "Registration Statement"). The
Company is also subject to certain of the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and,
accordingly, will file reports thereunder with the Commission. The Registration
Statement and the exhibits thereto, and reports and other information filed by
the Company pursuant to the Exchange Act can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at certain of its Regional Offices located as
follows: Midwest Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048, at prescribed rates and
electronically through the Commission's Electronic Data Gathering, Analysis and
Retrieval system at the Commission's Web site (http://www.sec.gov).
REPORTS TO CERTIFICATEHOLDERS
Monthly reports that contain information concerning the Trust Fund for
a series of Certificates will be sent by the Master Servicer or the Trustee, to
each holder of record of the Certificates of the related series. See
"Description of the Certificates--Reports to Certificateholders." Any reports
forwarded to holders will contain financial information that has not been
examined nor reported upon by an independent certified public accountant. The
Company will file with the Commission such periodic reports with respect to the
Trust Fund for a series of Certificates as are required under the Exchange Act,
and the rules and regulations of the Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each series of Certificates offered hereby, there are
incorporated herein and in the related Prospectus Supplement by reference all
documents and reports filed or caused to be filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of the offering of the related series of Certificates, that relate specifically
to such related series of Certificates. The Company will provide or cause to be
provided without charge to each person to whom this Prospectus and related
Prospectus Supplement is delivered in connection with the offering of one or
more classes of such series of Certificates, upon written or oral request of
such person, a copy of any or all such reports incorporated herein by reference,
in each case to the extent such reports relate to one or more of such classes of
such series of Certificates, other than the exhibits to such documents, unless
such exhibits are specifically incorporated by reference in such documents.
Requests should be directed in writing to Residential Funding Mortgage
Securities II, Inc., 8400 Normandale Lake Boulevard, Suite 600, Minneapolis,
Minnesota 55437, or by telephone at (612) 832-7000.
<PAGE>
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No dealer, salesman, or any other person has been authorized to give
any information, or to make any representations, other than those contained in
this Prospectus or the related Prospectus Supplement and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any dealer, salesman, or any other person. Neither the
delivery of this Prospectus or the related Prospectus Supplement nor any sale
made hereunder or thereunder shall under any circumstances create an implication
that there has been no change in the information herein or therein since the
date hereof. This Prospectus and the related Prospectus Supplement are not an
offer to sell or a solicitation of an offer to buy any security in any
jurisdiction in which it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
ADDITIONAL INFORMATION................................................... 3
REPORTS TO CERTIFICATEHOLDERS............................................ 3
INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE................................................................ 3
SUMMARY OF PROSPECTUS.................................................... 5
RISK FACTORS............................................................. 14
Special Features of the Mortgage Loans.......................... 14
Limitations, Reduction and Substitution of
Credit Enhancement.............................................. 17
Yield and Prepayment Considerations............................. 18
Limited Liquidity............................................... 19
Limited Obligations............................................. 19
THE MORTGAGE POOLS....................................................... 20
General......................................................... 20
Closed-End Loans................................................ 25
Revolving Credit Loans.......................................... 27
ALLOCATION OF REVOLVING CREDIT LOAN
BALANCES................................................................. 29
MORTGAGE LOAN PROGRAM.................................................... 30
Underwriting Standards.......................................... 30
Qualifications of Sellers....................................... 34
Representations Relating to Mortgage Loans...................... 35
Subservicing.................................................... 39
DESCRIPTION OF THE CERTIFICATES.......................................... 41
General......................................................... 41
Form of Certificates............................................ 42
Assignment of Trust Fund Assets................................. 45
Review of Mortgage Loans........................................ 46
Excess Spread................................................... 47
Payments on Mortgage Loans; Deposits to
Certificate Account............................................. 48
Withdrawals from the Custodial Account.......................... 50
Distributions................................................... 51
Principal and Interest on the Certificates...................... 52
Advances on Closed-End Loans.................................... 53
Funding Account................................................. 54
Reports to Certificateholders................................... 55
Collection and Other Servicing Procedures....................... 57
Realization Upon Defaulted Mortgage Loans....................... 58
Hazard Insurance; Claims Thereunder............................. 60
DESCRIPTION OF CREDIT ENHANCEMENT........................................ 61
Financial Guaranty Insurance Policy............................. 63
Letter of Credit................................................ 64
Special Hazard Insurance Policies............................... 64
Bankruptcy Bonds................................................ 64
Subordination................................................... 65
Overcollateralization........................................... 66
Reserve Funds................................................... 67
Maintenance of Credit Enhancement............................... 68
Reduction or Substitution of Credit
Enhancement..................................................... 69
PURCHASE OBLIGATIONS..................................................... 69
THE COMPANY.............................................................. 70
RESIDENTIAL FUNDING CORPORATION.......................................... 70
THE POOLING AND SERVICING AGREEMENT...................................... 71
Servicing and Administration.................................... 71
Evidence as to Compliance....................................... 72
Certain Matters Regarding the Master Servicer
and the Company................................................. 72
Events of Default............................................... 74
Rights Upon Event of Default.................................... 74
Amendment....................................................... 75
Termination; Retirement of Certificates......................... 76
The Trustee..................................................... 77
YIELD AND PREPAYMENT CONSIDERATIONS...................................... 77
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
AND RELATED MATTERS...................................................... 84
General......................................................... 85
Cooperative Loans............................................... 85
Tax Aspects of Cooperative Ownership............................ 87
Foreclosure on Mortgage Loans................................... 87
Foreclosure on Shares of Cooperatives........................... 89
Rights of Redemption............................................ 90
Anti-Deficiency Legislation and Other
Limitations on Lenders.......................................... 91
Environmental Legislation....................................... 93
Enforceability of Certain Provisions............................ 94
Applicability of Usury Laws..................................... 95
Alternative Mortgage Instruments................................ 96
Soldiers' and Sailors' Civil Relief Act of 1940
............................................................... 96
Junior Mortgages; Rights of Senior
Mortgagees...................................................... 97
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES............................................................. 99
General......................................................... 99
REMICS..........................................................100
STATE AND OTHER TAX CONSEQUENCES.........................................121
ERISA CONSIDERATIONS.....................................................121
Plan Asset Regulations..........................................122
Prohibited Transaction Exemptions...............................123
Tax Exempt Investors............................................128
Consultation with Counsel.......................................128
LEGAL INVESTMENT MATTERS.................................................128
USE OF PROCEEDS..........................................................129
METHODS OF DISTRIBUTION..................................................129
LEGAL MATTERS............................................................131
FINANCIAL INFORMATION....................................................131
INDEX OF PRINCIPAL DEFINITIONS...........................................132
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each series of Certificates contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of such series. Capitalized terms used in this summary that are not
otherwise defined shall have the meanings ascribed thereto in this Prospectus.
An index indicating where certain terms used herein are defined appears at the
end of this Prospectus.
Securities Offered......Home Equity Loan Pass-Through Certificates.
Company.................Residential Funding Mortgage Securities II, Inc.,
the depositor. See "The Company."
Master Servicer.........The entity identified as Master Servicer in the
related Prospectus Supplement, which may be
Residential Funding Corporation, an affiliate of
the Company ("Residential Funding"). See
"Residential Funding Corporation" and "The
Pooling and Servicing Agreement--Certain Mat-
ters Regarding the Master Servicer and the Com-
pany."
Certificate Administrator.. An entity may be named as the Certificate
Administrator in the
related Prospectus
Supplement if required
in addition to or in
lieu of the Master
Servicer or Servicer for
a series of
Certificates.
Trustee.................... The trustee (the "Trustee") for each series of
Certificates will be specified in the related
Prospectus Supplement.
The Certificates........... Each series of Certificates will represent in the
aggregate the entire beneficial ownership interest,
excluding any interest retained by the Company
or any other entity specified in the related
Prospectus Supplement, in a pool (the "Mortgage
Pool") of certain Mortgage Loans or interests
therein (which may include Mortgage Securities
as defined herein), and certain other assets as
described below. Each series of Certificates will
be issued pursuant to a pooling and servicing
agreement among the Company, the Trustee and
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<PAGE>
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the Master Servicer
(each, a "Pooling and
Servicing Agreement").
As specified in the
related Prospectus
Supplement, each series
of Certificates, or
class of Certificates in
the case of a series
consisting of two or
more classes, may have a
stated principal
balance, no stated
principal balance or a
notional amount and may
be entitled to
distributions of
interest based on a
specified interest rate
or rates (each, a
"Pass-Through Rate").
Each series or class of
Certificates may have a
different Pass-Through
Rate, which may be a
fixed, variable or
adjustable Pass-Through
Rate, or any combination
of two or more of such
Pass-Through Rates. The
related Prospectus
Supplement will specify
the Pass-Through Rate or
Rates for each series or
class of Certificates,
or the initial
Pass-Through Rate or
Rates and the method for
determining subsequent
changes to the
Pass-Through Rate or
Rates.
.............. A series may include one or more classes of
Certificates (each, a "Strip Certificate") entitled
to (i) principal distributions, with dispropor-
tionate, nominal or no interest distributions, or
(ii) interest distributions, with disproportionate,
nominal or no principal distributions. In
addition, a series may include classes of Certifi-
cates that differ as to
timing, sequential
order, priority of
payment, Pass-Through
Rate or amount of
distributions of
principal or interest or
both, or as to which
distributions of
principal or interest or
both on any class may be
made upon the occurrence
of specified events, in
accordance with a
schedule or formula, or
on the basis of
collections from
designated portions of
the Mortgage Pool. In
addition, a series may
include one or more
classes of Certificates
("Accrual Certificates")
as to which certain
accrued interest will
not be distributed but
rather will be added to
the principal balance
thereof in the manner
described in the related
Prospectus Supplement.
One or more classes of
Certificates in a series
may be entitled to
receive principal
payments pursuant to an
amortization schedule
under the
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<PAGE>
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circumstances described in the related Prospectus
Supplement.
..................... If so specified in the related Prospectus
Supplement, a series of Certificates may include
one or more classes of Certificates (collectively,
the "Senior Certificates") which are senior to
one or more classes of Certificates (collectively,
the "Subordinate Certificates") in respect of
certain distributions of principal and interest and
allocations of losses on Mortgage Loans. See
"Description of Credit Enhancement
--Subordination." If so specified in the related
Prospectus Supplement, a series of Certificates
may include one or more classes of Certificates
(collectively, the "Mezzanine Certificates")
which are Subordinate Certificates but which are
senior to other classes of Subordinate Certificates
in respect of such distributions or losses. In
addition, certain classes of Senior Certificates
may be senior to other classes of Senior
Certificates in respect of such distributions or
losses. The Certificates will be issued in fully-
registered certificated or book-entry form in the
authorized denominations specified in the related
Prospectus Supplement. See "Description of the
Certificates."
..................... Neither the Certificates nor the underlying
Mortgage Loans or Mortgage Securities will be
guaranteed or insured by any governmental
agency or instrumentality or by the Company,
Residential Funding, GMAC Mortgage or any of
their affiliates, except as expressly set forth
herein or in the related Prospectus Supplement.
See "Risk Factors--Limited Obligations."
The Mortgage Pools... As specified in the related Prospectus
Supplement, each Trust Fund will consist
primarily of Revolving Credit Loans or certain
balances thereof or interests therein, or Closed-
End Loans or interests therein, secured by first or
junior liens on one- to four-family residential
properties located in any one of the 50 states, the
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<PAGE>
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District of Columbia or
the Commonwealth of
Puerto Rico (the
"Mortgaged Properties").
All Mortgage Loans will
have been purchased by
the Company, either
directly or through
Residential Funding,
from mortgage loan
originators or sellers
who, as specified in the
related Prospectus
Supplement, may or may
not be affiliated with
the Company including
GMAC Mortgage
Corporation, Residential
Money Centers, Inc. and
HomeComings Financial
Network, Inc. (each
affiliates of the
Company). See "Mortgage
Loan Program." For a
description of the types
of Mortgage Loans that
may be included in the
Mortgage Pools, see "The
Mortgage Pools--The
Closed-End Loans."
................With respect to any series of Certificates backed
by Revolving Credit Loans, the related Trust
Fund may include the entire balance of such loans
including Draws made after the Cut-off Date, or
may include only the Trust Balances (as defined
herein) thereof which generally will exclude
Draws made after the Cut-off Date and may
exclude Draws made prior to the Cut-off Date.
See "Allocation of Revolving Credit Loan
Balances" herein.
................If specified in the related Prospectus Supplement,
a Trust Fund may include mortgage pass-through
certificates or other instruments evidencing
interests in or secured by Mortgage Loans
("Mortgage Securities"), as described herein.
See "The Mortgage Pools--General" herein.
Interest Distributions....Except as otherwise specified herein or in the
related Prospectus Supplement, interest on each
class of Certificates of each series, other than
Strip Certificates or Accrual Certificates (prior to
the time when accrued interest becomes payable
thereon), will be remitted at the applicable
Pass-Through Rate on the outstanding principal
balance of such class, on the day specified as a
distribution date for such series or class in the
related Prospectus Supplement (each, a
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<PAGE>
-8-
"Distribution Date"). If
the Prospectus
Supplement so specifies,
interest distributions
on any class of
Certificates may be
reduced on account of
negative amortization on
the Mortgage Loans, with
the Deferred Interest
(as defined herein)
allocable to such class
added to the principal
balance thereof, which
Deferred Interest will
thereafter bear interest
at the applicable
Pass-Through Rate.
Distributions, if any,
with respect to interest
on Strip Certificates
will be made on each
Distribution Date as
described herein and in
the related Prospectus
Supplement. See
"Description of the
Certificates--Distributions."
Strip Certificates that
are entitled to
distributions of
principal only will not
receive distributions in
respect of interest.
Interest that has
accrued but is not yet
payable on any Accrual
Certificates will be
added to the principal
balance of such class on
the related Distribution
Date, and will
thereafter bear interest
at the applicable
Pass-Through Rate.
Distributions of
interest with respect to
any series of
Certificates (or
accruals thereof in the
case of Accrual
Certificates), or with
respect to one or more
classes included
therein, may be reduced
to the extent of
interest shortfalls not
covered by principal and
interest advances or the
applicable form of
credit support,
including shortfalls
("Prepayment Interest
Shortfalls") in
collections of a full
month's interest in
connection with
prepayments on
Closed-End Loans which
are Actuarial Mortgage
Loans (as defined
herein). See "Yield and
Prepayment
Considerations" and
"Description of the
Certificates."
Principal Distributions..Except as otherwise specified in the related
Prospectus Supplement, principal distributions on
the Certificates of each series will be payable on
each Distribution Date, commencing with the
Distribution Date in the month following the
month in which the Cut-off Date occurs, to the
holders of the Certificates of such series, or of the
class or classes of Certificates then entitled there-
to, on a pro rata basis among all such Certificates
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<PAGE>
-9-
or among the
Certificates of any such
class, in proportion to
their respective
outstanding principal
balances or the
percentage interests
represented by such
class, in the priority
and manner specified in
the related Prospectus
Supplement. Strip
Certificates with no
principal balance will
not receive
distributions in respect
of principal.
Distributions of
principal with respect
to any class of
Certificates may be
reduced to the extent of
certain delinquencies
not covered by principal
advances or losses not
covered by the
applicable form of
credit enhancement. For
a series of Certificates
backed by Revolving
Credit Loans, as a
result of the payment
terms of the Mortgage
Loans or of the
Certificate provisions
relating to future
Draws, there may be no
principal distributions
on such Certificates in
any given month. See
"The Mortgage Pools,"
"Yield and Prepayment
Considerations" and
"Description of the
Certificates."
Funding Account....... If so specified in the related Prospectus
Supplement, a portion of the proceeds of the sale
of one or more classes of Certificates of a series
or a portion of collections on the Mortgage Loans
in respect of principal may be deposited in a
segregated account to be applied to acquire
additional Mortgage Loans from the Sellers,
subject to the limitations set forth herein under
"Description of the Certificates-Funding
Account." The times and requirements for the
acquisition of such Mortgage Loans will be set
forth in the related Pooling and Servicing
Agreement or other agreement with the Sellers.
Monies on deposit in the Funding Account and
not applied to acquire such additional Mortgage
Loans within the time set forth in the related
Pooling and Servicing Agreement or other
applicable agreement may be treated as principal
and applied in the manner described in the related
Prospectus Supplement.
Yield and Prepayment Considerations... The Mortgage Loans supporting a series
of Certificates will have unique characteristics that
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<PAGE>
-10-
will affect the yield to
maturity and the rate of
payment of principal on
such Certificates. See
"Risk Factors" herein
and "Yield and
Prepayment
Considerations" herein
and in the related
Prospectus Supplement.
Credit Enhancement.....If so specified in the related Prospectus
Supplement, the Trust Fund with respect to any
series of Certificates may include any one or any
combination of a Letter of Credit, Financial
Guaranty Insurance Policy, special hazard
insurance policy, bankruptcy bond, Reserve
Fund, surety bond or other type of credit support
to provide full or partial coverage for certain
defaults and losses relating to the Mortgage
Loans. Credit support also may be provided in
the form of subordination of one or more classes
of Certificates in a series under which certain
losses are first allocated to any Subordinate
Certificates up to a specified limit or in the form
of Overcollateralization (as defined herein). Any
form of credit enhancement may have certain
limitations and exclusions from coverage
thereunder, which will be described in the related
Prospectus Supplement. Losses not covered by
any form of credit enhancement will be borne by
the holders of the related Certificates (or certain
classes thereof). To the extent not set forth
herein, the amount and types of coverage, the
identification of any entity providing the
coverage, the terms of any subordination and
related information will be set forth in the
Prospectus Supplement relating to a series of
Certificates. See "Description of Credit
Enhancement."
Advances on
Closed-End Loans.....If so specified in the related Prospectus
Supplement, the Master Servicer will be obligated
(pursuant to the terms of the related Mortgage
Securities, if applicable) to make certain principal
and interest advances with respect to delinquent
scheduled payments on the Closed-End Loans,
but only to the extent that the Master Servicer
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<PAGE>
-11-
believes that such
amounts will be
recoverable by it. Any
such advance made by the
Master Servicer with
respect to a Mortgage
Loan is recoverable by
it as provided herein
under "Description of
the
Certificates--Advances
on Closed-End Loans"
either from recoveries
on the specific Mortgage
Loan or, with respect to
any such advance
subsequently determined
to be nonrecoverable,
out of funds otherwise
distributable to the
holders of the related
series of Certificates.
Optional Termination... The Master Servicer, the Company or, if
specified in the related Prospectus Supplement,
the holder of the residual interest in a REMIC,
may at its option either (i) effect early retirement
of a series of Certificates through the purchase of
the assets in the related Trust Fund or (ii)
purchase, in whole but not in part, the
Certificates specified in the related Prospectus
Supplement; in each case under the circumstances
and in the manner set forth herein under "The
Pooling and Servicing Agreement--Termination;
Retirement of Certificates" and in the related
Prospectus Supplement.
Rating...................... At the date of issuance, as to each series, each
class of Certificates offered hereby will be rated
at the request of the Company in one of the four
highest rating categories by one or more
nationally recognized statistical rating agencies
(each, a "Rating Agency"). See "Ratings" in the
related Prospectus Supplement.
Legal Investment............ Unless otherwise specified in the related
Prospectus Supplement, the Certificates offered
hereby will not constitute "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"). See "Legal Investment
Matters."
ERISA Considerations........ A fiduciary of an employee benefit plan and
certain other plans and arrangements, including
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<PAGE>
-12-
individual retirement
accounts and annuities,
Keogh plans, bank
collective investment
funds, insurance company
general or separate
accounts and certain
other entities in which
such plans, accounts,
annuities or
arrangements are
invested, which is
subject to the Employee
Retirement Income
Security Act of 1974, as
amended ("ERISA"), or
Section 4975 of the
Internal Revenue Code of
1986 (the "Code"), and
any other person
contemplating purchasing
a Certificate with Plan
Assets (as defined
herein), should review
with its legal counsel
whether the purchase or
holding of Certificates
could give rise to a
transaction that is
prohibited or is not
otherwise permissible
either under ERISA or
Section 4975 of the
Code. See "ERISA
Considerations" herein
and in the related
Prospectus Supplement.
Certain Federal Income
Tax Consequences.......... Certificates of each series offered hereby will
constitute "regular interests" or "residual
interests" in a Trust Fund, or a portion thereof,
treated as a REMIC under Sections 860A through
860G of the Code, unless otherwise specified in
the related Prospectus Supplement. See "Certain
Federal Income Tax Consequences" herein and in
the related Prospectus Supplement.
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<PAGE>
-13-
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Certificates:
Special Features of the Mortgage Loans
Adequacy of Mortgage Collateral
Although all of the Mortgage Loans will be secured by liens on
Mortgaged Properties, such collateral may not provide assurance of repayment of
the Mortgage Loan comparable to that provided under many first lien lending
programs, and the Mortgage Loans (especially those with high Combined
Loan-to-Value Ratios (as defined herein)) may have risk of repayment
characteristics more similar to unsecured consumer loans.
Since the Mortgage Loans are interests in Revolving Credit Loans or
Closed-End Loans which may be subordinate to the rights of the mortgagee under
the related senior mortgage or mortgages, the proceeds from any foreclosure,
liquidation, insurance or condemnation proceedings will be available to satisfy
the outstanding balance of such Mortgage Loans secured by junior mortgages only
to the extent that the claims of such senior mortgages have been satisfied in
full, including any related foreclosure costs. For Mortgage Loans secured by
junior liens that have low Junior Ratios (as defined herein), foreclosure costs
may be substantial relative to the outstanding balance of the Mortgage Loan upon
default, and therefore the amount of any liquidation proceeds distributable to
Certificateholders may be smaller as a percentage of the outstanding balance of
the Mortgage Loan than would be the case in a typical pool of first lien
residential loans. In addition, the holder of a Revolving Credit Loan or
Closed-End Loan secured by a junior mortgage may not foreclose on the Mortgaged
Property unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees at or prior to the foreclosure sale or undertake the obligation to
make payments on the senior mortgages in the event the mortgagor is in default
thereunder. The Trust Fund will not have any source of funds to satisfy the
senior mortgages or make payments due to the senior mortgagees, although the
Master Servicer or Subservicer may, at its option, advance such amounts to the
extent deemed recoverable and prudent, but will not be obligated to do so. In
the event that such proceeds from a foreclosure or similar sale of the related
Mortgaged Property are insufficient to satisfy all senior liens and the Mortgage
Loan in the aggregate, the Trust Fund, as the holder of the junior lien, and,
accordingly, Holders of one or more classes of the Certificates are likely to
(i) incur losses in jurisdictions in which a deficiency judgment against the
borrower is not available, or in the Master Servicer's discretion, seeking such
judgment is not advisable and (ii) incur losses if any deficiency judgment
obtained is not realized upon. See "Certain Legal Aspects of Mortgage Loans and
Related Matters."
No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in value (including as a result
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of the general economic factors discussed below under "--Mortgagor Credit"), any
such decline could extinguish the value of the interest of a junior mortgagee in
the Mortgaged Property before having any adverse effect on the interest of the
related senior mortgagees.
With respect to Mortgage Loans secured by junior liens that have high
Combined Loan-to-Value Ratios or low Junior Ratios, many circumstances exist,
including those described above, under which it would be uneconomical to
foreclose on the Mortgaged Property in the event of a default. For purposes of
the foregoing, the actual Junior Ratio for a Mortgage Loan at any time may be
lower than indicated in the Prospectus Supplement as a result of any reductions
in the Stated Principal Balance thereof. In addition, the actual Combined
Loan-to-Value Ratio for a Mortgage Loan at any time may be higher than indicated
in the Prospectus Supplement if such Mortgage Loan is subject to negative
amortization or the value of the Mortgaged Property declines after the date of
origination. In such circumstances, repayment of the Mortgage Loan would be
dependent solely on the credit of the borrower under the Mortgage Loan (the
"Mortgagor"), and the ability to obtain repayment of the Mortgage Loan may be
generally similar to that which would be experienced if the Mortgage Loan were
an unsecured consumer loan. Moreover, while in most jurisdictions a mortgagee
would be permitted to elect to either foreclose or sue to collect the debt
evidenced by the Mortgage Note, in some jurisdictions that prohibit suits to
collect the debt until the mortgagee has sought to foreclose against the
security, the mortgagee may be forced to foreclose first and obtain a deficiency
judgment. In addition, in some jurisdictions, where the mortgagee has chosen to
sue on the debt in lieu of foreclosure, the mortgagee will be barred from
foreclosing against the security. See "--Anti-Deficiency Legislation and other
Limitations on Lenders."
Mortgagor Credit
As a result of the foregoing considerations, for certain types of
Mortgage Loans, the underwriting standards and procedures applicable thereto, as
well as the repayment prospects thereof, may be more dependent on the
creditworthiness of the Mortgagor and less dependent on the adequacy of the
Mortgaged Property as collateral than would be the case under many first lien
lending programs. As to such Mortgage Loans, future changes in the Mortgagor's
economic circumstances will have a significant effect on the likelihood of
repayment. This is particularly so with respect to Revolving Credit Loans, since
additional Draws may be made by the Mortgagor in the future up to the applicable
Credit Limit. Although Revolving Credit Loans are generally subject to
provisions whereby the Credit Limit may be reduced as a result of a material
adverse change in the Mortgagor's economic circumstances, the Servicer or Master
Servicer generally will not monitor for such changes and may not become aware of
them until after the Mortgagor has defaulted. Under certain circumstances, a
Mortgagor may draw his entire Credit Limit in response to personal financial
needs resulting from an adverse change in circumstances. For a series of
Certificates backed by the Trust Balances of Revolving Credit Loans, even though
the Trust Balance of a Revolving Credit Loan will not increase as a result of
Draws after the Certificates are issued, the foregoing considerations are
relevant because such Trust Balance will share pro rata in any losses incurred
on such Revolving Credit Loan unless otherwise specified in the related
Prospectus Supplement.
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Future changes in a Mortgagor's economic circumstances may result from
a variety of unforeseeable personal factors, including loss of employment,
reduction in income, illness and divorce. Any increase in prevailing market
interest rates may adversely affect a Mortgagor by increasing debt service on
any floating rate Revolving Credit Loans, on Closed-End Loans having adjustable
rates or other similar debt of the Mortgagor. In addition, for any Revolving
Credit Loans or Closed-End Loans secured by junior mortgages, changes in the
payment terms of any related senior mortgage loan may adversely affect the
Mortgagor's ability to pay principal and interest on such senior mortgage loan.
For example, such changes may result if the senior mortgage loan is an
adjustable rate loan and the interest rate thereon increases, which may occur
with or without an increase in prevailing market interest rates if the increase
is due to the phasing out of a reduced initial rate. Specific information about
such senior mortgage loans, other than the amount thereof at origination of the
corresponding Mortgage Loan, generally will not be available and will not be
included in the related Prospectus Supplement.
General economic conditions, both on a national and regional basis,
will also have an impact on the ability of Mortgagors to repay their Mortgage
Loans. Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency than will be
experienced on mortgage loans generally. For example, a region's economic
condition and housing market may be directly, or indirectly, adversely affected
by natural disasters or civil disturbances such as earthquakes, hurricanes,
floods, eruptions or riots. The economic impact of any of these types of events
may also be felt in areas beyond the region immediately affected by the disaster
or disturbance. The Mortgage Loans underlying a series of Certificates may be
concentrated in these regions, and such concentration may present risk
considerations in addition to those generally present for similar
mortgage-backed securities without such concentration. Any change in the
deductibility for federal income tax purposes of interest payments on home
equity loans may also have an impact on the ability of Mortgagors to repay the
Mortgage Loans.
Mortgage Loan Characteristics
Certain of the types of Mortgage Loans that may be included in the
Mortgage Pools may involve additional uncertainties not present in traditional
types of mortgage loans, or in home equity loans originated under other
programs.
For example, certain of the Closed-End Loans may provide for escalating
or variable payments by the Mortgagor, as to which the Mortgagor is generally
qualified on the basis of the initial payment amount, or may be ARM Loans with
an initial Mortgage Rate less than the sum of the then-applicable Index and
Gross Margin, as to which the Mortgagor generally will be qualified on the basis
of the Mortgage Rate in effect at origination. In some instances, Mortgagors may
find it difficult to make their loan payments as their monthly payments increase
and thus, the likelihood of default will increase. An even greater likelihood of
default may exist as monthly payments increase with a Mortgage Loan secured by a
second lien if monthly payments are also increasing on the related first lien
ARM Loan. Some of the Closed-End Loans may be Balloon Loans, and the ability of
the Mortgagor to pay the related Balloon Amount may
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depend on the Mortgagor's ability to refinance the Mortgage Loan or to sell the
related Mortgaged Property. In addition, in the case of Closed-End Loans that
are subject to negative amortization, due to the addition to the principal
balance of Deferred Interest, the principal balances of such Mortgage Loans
could be increased to an amount equal to or in excess of the value of the
underlying Mortgaged Properties, thereby increasing the likelihood of default.
With respect to Revolving Credit Loans, except for certain programs
under which the Draw Period is less than the full term thereof, required minimum
monthly payments are generally equal to or not significantly larger than the
amount of interest currently accruing thereon, and therefore are not expected to
significantly amortize the outstanding principal amount of such Mortgage Loan
prior to maturity, which amount may include substantial Draws recently made. As
a result, a borrower will generally be required to pay a substantial principal
amount at the maturity of a Revolving Credit Loan. The ability of a borrower to
make such a payment may be dependent on the ability to obtain refinancing of the
balance due on such Revolving Credit Loan or to sell the related Mortgaged
Property. Furthermore, Revolving Credit Loans generally have adjustable rates
that are subject to much higher maximum rates than typically apply to adjustable
rate first mortgage loans, and which may be as high as applicable usury
limitations. Mortgagors under Revolving Credit Loans are generally qualified
based on an assumed payment which reflects either the initial interest rate or a
rate significantly lower than the maximum rate. An increase in the interest rate
over the Mortgage Rate applicable at the time the Revolving Credit Loan was
originated may have an adverse effect on the Mortgagor's ability to pay the
required monthly payment. In addition, an increase in prevailing market interest
rates may reduce the borrower's ability to obtain refinancing and to pay the
balance of a Revolving Credit Loan at its maturity.
To the extent that any losses are incurred on any of the Mortgage Loans
that are not covered by the applicable credit enhancement, holders of
Certificates of the series evidencing interests in the related Mortgage Pool (or
certain classes thereof) will bear all risk of such losses resulting from
default by Mortgagors.
Limitations, Reduction and Substitution of Credit Enhancement
With respect to each series of Certificates, credit enhancement may be
provided to cover delinquencies and losses on the underlying Mortgage Loans,
subject to any applicable limitations. Credit enhancement will be provided in
one or more of the forms referred to herein, including, but not limited to:
subordination of other classes of Certificates of the same series;
Overcollateralization; a Financial Guaranty Insurance Policy; a Letter of
Credit; a Special Hazard Insurance Policy; a Bankruptcy Bond; a Reserve Fund; a
Surety Bond; or any combination thereof. See "Description of Credit Enhancement"
herein.
As to any series of Certificates, the amount of coverage under the
applicable credit enhancement may be limited in amount, and if limited may be
subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such credit enhancement may provide only very limited coverage as
to certain types of losses or risks, and may provide no coverage as to certain
other types of losses or risks. For any type of credit enhancement which is
generated in
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whole or in part by cash flows on the underlying Mortgage Loans (as may be the
case for a Reserve Fund or Overcollateralization, for example), the amount of
coverage provided thereby may be adversely affected under a variety of scenarios
by factors such as the prepayment and draw experience of the Mortgage Loans,
changes in the Mortgage Rates or Gross Margins applicable to the Mortgage Loans
pursuant to the terms thereof, and changes in the relationship between the
Mortgage Rates on the Mortgage Loans and the Pass-Through Rates on the
Certificates (which changes may result, in part, from changes in the
relationship between different indexes respectively used to determine the
Mortgage Rates and the Pass-Through Rates). In the event losses exceed the
amount of coverage provided by any credit enhancement or losses of a type not
covered by any credit enhancement occur, such losses will be borne by the
holders of the related Certificates (or certain classes thereof).
The Master Servicer will generally be permitted to reduce, terminate or
substitute all or a portion of the credit enhancement for any series of
Certificates, if the applicable Rating Agency, as set forth in the related
Prospectus Supplement, indicates that the then-current rating thereof will not
be adversely affected. The rating of any series of Certificates by any Rating
Agency may be lowered following the initial issuance thereof as a result of the
downgrading or nonperformance of the obligations of any applicable credit
support provider, or as a result of losses on the related Mortgage Loans in
excess of the levels contemplated by such Rating Agency at the time of its
initial rating analysis. None of the Company, the Master Servicer, GMAC Mortgage
or any of their affiliates will have any obligation to replace or supplement any
credit enhancement, or to take any other action to maintain any rating of any
series of Certificates. See "Description of Credit Enhancement--Reduction or
Substitution of Credit Enhancement."
Yield and Prepayment Considerations
The yield to maturity of the Certificates of each series will depend on
the rate and timing of principal payments (including payments in excess of
required installments, prepayments or terminations, liquidations and
repurchases) on the Mortgage Loans, the rate and timing of Draws in the case of
Revolving Credit Loans, and the price paid by Certificateholders. Such yield may
be adversely affected by a higher or lower than anticipated rate of principal
payments (or Draws if applicable) on the related Mortgage Loans. The yield to
maturity on any Strip Certificates will be extremely sensitive to the rate and
timing of principal payments (or Draws if applicable) on the related Mortgage
Loans. In addition, the yield to maturity on certain other types of classes of
Certificates, including Accrual Certificates, Certificates with a Pass-Through
Rate which fluctuates inversely with an index or certain other classes in a
series including more than one class of Certificates, may be relatively more
sensitive to the rate and timing of principal payments (or Draws if applicable)
on the related Mortgage Loans than other classes of Certificates. Principal
payments (or Draws if applicable) are influenced by a number of factors,
including prevailing market interest rates, national and regional economic
conditions and changes in Mortgagors' personal and economic circumstances. See
"Yield and Prepayment Considerations" herein. The yield to maturity of the
Certificates of each series will also be affected by the rate and timing of
defaults on the related Mortgage Loans. See "Risk Factors--Special Features of
the Mortgage Loans" above.
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The yield to maturity of the Certificates of any series, or the rate
and timing of principal payments (or Draws if applicable) on the related
Mortgage Loans, may be affected by a wide variety of specific terms and
conditions applicable to the respective programs under which the Mortgage Loans
were originated. For example, Revolving Credit Loans may provide for future
Draws to be made only in specified minimum amounts, or alternatively may permit
Draws to be made by check or through a credit card in any amount. A pool of
Revolving Credit Loans subject to the latter provisions may be likely to remain
outstanding longer with a higher aggregate principal balance than a pool of
Revolving Credit Loans with the former provisions, because of the relative ease
of making new Draws. Furthermore, Revolving Credit Loans may provide for
interest rate changes on a daily or monthly basis, or may have Gross Margins
that may vary under certain circumstances over the term of the loan. In
extremely high market interest rate scenarios, Certificates backed by Revolving
Credit Loans with adjustable rates subject to substantially higher maximum rates
than typically apply to adjustable rate first mortgage loans may experience
rates of default and liquidation substantially higher than those that have been
experienced on other adjustable rate mortgage loan pools.
For any series of Certificates backed by Revolving Credit Loans,
provisions governing whether future Draws on the Revolving Credit Loans will be
included in the Trust Fund will have a significant effect on the rate and timing
of principal distributions on the Certificates. For a series of Certificates
backed by the Trust Balances of Revolving Credit Loans, the specific provisions
applicable to the allocation of payments, Draws and losses on the Revolving
Credit Loans between the Trust Balances and the Excluded Balances thereof will
also have a significant effect on the rate and timing of principal distributions
on the Certificates.
Limited Liquidity
There can be no assurance that a secondary market for the Certificates
of any series will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment or that it will continue for the
life of the Certificates of any series. Although the Prospectus Supplement for
any series of Certificates may indicate that an underwriter specified therein
intends to establish a secondary market in such Certificates, no underwriter
will be obligated to do so.
The Certificates will not be listed on any securities exchange.
Limited Obligations
The Certificates will not represent an interest in or obligation of the
Company, Residential Funding, GMAC Mortgage or any of their affiliates. The only
obligations of the foregoing entities with respect to the Certificates, the
Mortgage Loans or any Mortgage Securities will be the obligations (if any) of
Residential Funding pursuant to certain limited representations and warranties
made with respect to the Mortgage Loans, the obligation of Residential Funding
(or such other entity specified in the related Prospectus Supplement) to advance
funds to Mortgagors in respect of Draws on Revolving Credit Loans (if
applicable), the servicing obligations of Residential Funding as Master Servicer
(if applicable) under the related Pooling and Servicing Agreement (including its
limited obligation to make certain Advances, if applicable, in the event
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of delinquencies on the Mortgage Loans, but only to the extent deemed
recoverable) and pursuant to the terms of any Mortgage Securities, and, if and
to the extent expressly described in the related Prospectus Supplement, certain
limited obligations of Residential Funding in connection with an agreement to
purchase or act as remarketing agent with respect to a Convertible Mortgage Loan
upon conversion to a fixed rate. If any affiliate of the Company has originated
any Mortgage Loan, such affiliate will only have an obligation with respect to
such Mortgage Loan to the same extent as a Seller, as described herein. Neither
the Certificates nor the underlying Mortgage Loans or Mortgage Securities will
be guaranteed or insured by any governmental agency or instrumentality, or by
the Company, Residential Funding, GMAC Mortgage or any of their affiliates,
except as expressly set forth herein or in the related Prospectus Supplement.
Proceeds of the assets included in the related Trust Fund (including the
Mortgage Loans or Mortgage Securities and any form of credit enhancement) will
be the sole source of payments on the Certificates, and there will be no
recourse to the Company, Residential Funding, GMAC Mortgage or any other entity
in the event that such proceeds are insufficient or otherwise unavailable to
make all payments provided for under the Certificates.
THE MORTGAGE POOLS
General
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist primarily of Mortgage Loans, or certain balances
thereof, excluding any interest retained by the Company or any other entity
specified in the Prospectus Supplement, evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages or deeds of trust or other similar
security instruments creating first or junior liens on one- to four-family
residential properties, or interests in such Mortgage Loans (which may include
Mortgage Securities). The Mortgage Loans will either be (i) Closed-End Loans or
(ii) Revolving Credit Loans. The Mortgaged Properties will consist primarily of
owner-occupied attached or detached one-family dwelling units, two- to
four-family dwelling units, condominiums, townhouses, row houses, individual
units in planned-unit developments and certain other dwelling units, and the
fee, leasehold or other interests in the underlying real property. The Mortgaged
Properties may include vacation, second and non-owner-occupied homes. If
specified in the related Prospectus Supplement relating to a series of
Certificates, a Mortgage Pool may contain cooperative apartment loans
("Cooperative Loans") evidenced by promissory notes ("Cooperative Notes")
secured by security interests in shares issued by Cooperatives and in the
related proprietary leases or occupancy agreements granting exclusive rights to
occupy specific dwelling units in the related buildings. As used herein, unless
the context indicates otherwise, "Mortgage Loans" includes Cooperative Loans,
"Mortgaged Properties" includes shares in the related Cooperative and the
related proprietary leases or occupancy agreements securing Cooperative Notes,
"Mortgage Notes" includes Cooperative Notes and "Mortgages" includes a security
agreement with respect to a Cooperative Note. In connection with a series of
Certificates backed by Revolving Credit Loans, if the related Prospectus
Supplement indicates that the Mortgage Pool consists of certain balances of such
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Revolving Credit Loans, then the term "Mortgage Loans" as used herein refers
only to such balances where the context so requires.
Each Mortgage Loan will be selected by the Company for inclusion in a
Mortgage Pool from among those purchased by the Company, either directly or
through its affiliates, including Residential Funding, GMAC Mortgage
Corporation, Residential Money Centers, Inc. and HomeComings Financial Network,
Inc. ("Affiliated Sellers"), or from banks, savings and loan associations,
mortgage bankers, investment banking firms, the FDIC and other mortgage loan
originators or sellers not affiliated with the Company ("Unaffiliated Sellers";
Unaffiliated Sellers and Affiliated Sellers are collectively referred to herein
as "Sellers"), all as described below under "Mortgage Loan Program." If a
Mortgage Pool is composed of Mortgage Loans acquired by the Company directly
from Sellers other than Residential Funding, the related Prospectus Supplement
will specify the extent of Mortgage Loans so acquired. The characteristics of
the Mortgage Loans are as described in the related Prospectus Supplement. Other
mortgage loans available for purchase by the Company may have characteristics
which would make them eligible for inclusion in a Mortgage Pool but were not
selected for inclusion in such Mortgage Pool.
Under certain circumstances, the Mortgage Loans will be delivered
either directly or indirectly to the Company by one or more Sellers identified
in the related Prospectus Supplement, concurrently with the issuance of the
related series of Certificates (a "Designated Seller Transaction"). Such
Certificates may be sold in whole or in part to any such Seller in exchange for
the related Mortgage Loans, or may be offered under any of the other methods
described herein under "Methods of Distribution." The related Prospectus
Supplement for a Mortgage Pool composed of Mortgage Loans acquired by the
Company pursuant to a Designated Seller Transaction will generally include
information, provided by the related Seller (the "Designated Seller"), about the
Designated Seller, the Mortgage Loans and the underwriting standards applicable
to the Mortgage Loans. None of the Company, Residential Funding, GMAC Mortgage
or any of their affiliates will make any representation or warranty with respect
to such Mortgage Loans, or any representation as to the accuracy or completeness
of such information provided by the Seller.
Any Seller (including any Designated Seller) or Residential Funding may
retain or acquire any Excluded Balances with respect to any related Revolving
Credit Loans, or any loan secured by a mortgage senior or subordinate to any
Mortgage Loan included in any Mortgage Pool.
If specified in the related Prospectus Supplement, the Trust Fund
underlying a series of Certificates may include Mortgage Securities. The
Mortgage Securities may have been issued previously by the Company or an
affiliate thereof, a financial institution or other entity engaged generally in
the business of mortgage lending or a limited purpose corporation organized for
the purpose of, among other things, acquiring and depositing mortgage loans into
such trusts, and selling beneficial interests in such trusts. Except as
otherwise set forth in the related Prospectus Supplement, such Mortgage
Securities will be generally similar to Certificates offered hereunder. As to
any such series of Certificates, the related Prospectus Supplement will include
a description of such Mortgage Securities and any related credit enhancement,
and the Mortgage Loans
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underlying such Mortgage Securities will be described together with any other
Mortgage Loans included in the Mortgage Pool relating to such series. As to any
such series of Certificates, as used herein the term "Mortgage Pool" includes
the Mortgage Loans underlying such Mortgage Securities. Notwithstanding any
other reference herein to the Master Servicer, with respect to a series of
Certificates as to which the Trust Fund includes Mortgage Securities, the entity
that services and administers such Mortgage Securities on behalf of the holders
of such Certificates may be referred to as the "Manager," if so specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, Residential Funding initially will act as Manager with
respect to such Mortgage Securities as well as the related Certificates, and
references herein to advances to be made and other actions to be taken by the
Master Servicer in connection with the Mortgage Loans may include such advances
made and other actions taken pursuant to the terms of such Mortgage Securities.
The Prospectus Supplement for each series of Certificates will contain
information as to the type of Mortgage Loans which will be included in the
related Mortgage Pool. Each Prospectus Supplement applicable to a series of
Certificates will include certain information, generally as of the Cut-off Date
and to the extent then available to the Company, on an approximate basis, as to
(i) the aggregate principal balance of the Mortgage Loans, (ii) the type of
property securing the Mortgage Loans and related lien priority, (iii) the
original or modified terms to maturity of the Mortgage Loans, (iv) the range of
principal balances of the Closed-End Loans at origination or modification, (v)
the earliest origination or modification date and latest maturity date of the
Mortgage Loans, (vi) the Loan-to-Value Ratios or Combined Loan-to-Value Ratios
of the Mortgage Loans, as applicable, (vii) the Mortgage Rate or range of
Mortgage Rates borne by the Mortgage Loans, (viii) if the Mortgage Loans are ARM
Loans or Revolving Credit Loans, the applicable Index, the range of Gross
Margins, the weighted average Gross Margin, the frequency of adjustments and
maximum loan rate, (ix) the geographical distribution of the Mortgaged
Properties, (x) the percent of ARM Loans, (xi) if the Mortgage Loans are
Revolving Credit Loans, the aggregate Credit Limits of the related Credit Line
Agreements and (xii) if applicable, the weighted average Junior Ratio and Credit
Utilization Rate. A Current Report on Form 8-K will be available upon request to
holders of the related series of Certificates and will be filed, together with
the related Pooling and Servicing Agreement, with the Commission within fifteen
days after the initial issuance of such Certificates. The composition and
characteristics of a Mortgage Pool containing Revolving Credit Loans may change
from time to time as a result of any Draws made after the related Cut-off Date
under the related Credit Line Agreements that are included in such Mortgage
Pool. In the event that Mortgage Loans are added to or deleted from the Trust
Fund after the date of the related Prospectus Supplement other than as a result
of any such Draws, such addition or deletion will be noted in the Current Report
on Form 8-K.
With respect to each Mortgage Loan, the "Combined Loan-to-Value Ratio"
or "CLTV" generally will be the ratio, expressed as a percentage, of the sum of
(i) the greater of the Cut-off Date Principal Balance or the Credit Limit, if
applicable, and (ii) the principal balance of any related senior mortgage loan
at origination of such Mortgage Loan together with any mortgage loan subordinate
thereto, to the lesser of (x) the appraised value of the related Mortgaged
Property determined in the appraisal used in the origination of such Mortgage
Loan and (y) if applicable
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under the corresponding program, the sales price of each Mortgaged Property.
With respect to each Mortgage Loan, the "Junior Ratio" generally will be the
ratio, expressed as a percentage, of the greater of the Cut-off Date Principal
Balance or the Credit Limit, if applicable, of such Mortgage Loan to the sum of
(i) the greater of the Cut-off Date Principal Balance or the Credit Limit, if
applicable, of such Mortgage Loan and (ii) the principal balance of any related
senior mortgage loan at origination of such Mortgage Loan. The "Credit
Utilization Rate" is determined by dividing the Cut-off Date Principal Balance
of a Revolving Credit Loan by the Credit Limit of the related Credit Line
Agreement.
The Company will cause the Mortgage Loans or Trust Balances thereof
constituting each Mortgage Pool (or Mortgage Securities evidencing interests
therein) to be assigned to the Trustee named in the related Prospectus
Supplement, for the benefit of the holders of all of the Certificates of a
series. The Master Servicer named in the related Prospectus Supplement will
service the Mortgage Loans, either directly or through other mortgage servicing
institutions ("Subservicers"), pursuant to a Pooling and Servicing Agreement and
will receive a fee for such services. See "Mortgage Loan Program" and
"Description of the Certificates." With respect to those Mortgage Loans serviced
by the Master Servicer through a Subservicer, the Master Servicer will remain
liable for its servicing obligations under the related Pooling and Servicing
Agreement as if the Master Servicer alone were servicing such Mortgage Loans. In
addition to or in lieu of the Master Servicer for a series of Certificates, the
related Prospectus Supplement may identify a certificate administrator (the
"Certificate Administrator") for the Trust Fund. The Certificate Administrator
may be an affiliate of the Company. All references herein to "Master Servicer"
and any discussions of the servicing and administration functions of the Master
Servicer will also apply to the Certificate Administrator to the extent
applicable.
The Company's assignment of the Mortgage Loans or the Trust Balances to
the Trustee will be without recourse. See "Description of the
Certificates--Assignment of Trust Fund Assets." The Master Servicer's
obligations with respect to the Mortgage Loans will consist principally of its
contractual servicing obligations under the related Pooling and Servicing
Agreement (including its obligation to enforce certain purchase obligations of
Residential Funding or any Designated Seller and other obligations of
Subservicers, as described herein under "Mortgage Loan Program--Representations
Relating to Mortgage Loans," and "--Subservicing" and "Description of the
Certificates--Assignment of Trust Fund Assets," and its obligation to make
certain Advances, if applicable, in the event of delinquencies in payments on or
with respect to the Mortgage Loans in amounts described herein under
"Description of the Certificates--Advances on Closed-End Loans") or pursuant to
the terms of any Mortgage Securities. With respect to Revolving Credit Loans,
Residential Funding (or such other entity specified in the related Prospectus
Supplement) will be obligated to advance funds to Mortgagors in respect of Draws
made after the related Cut-off Date. The obligation of the Master Servicer to
make principal and interest advances on the Closed-End Loans in certain
circumstances will be limited to amounts which the Master Servicer believes
ultimately would be reimbursable out of the proceeds of liquidation of the
Mortgage Loans or any applicable form of credit support. See "Description of the
Certificates--Advances on Closed-End Loans."
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The proceeds of the Mortgage Loans may be used by the borrower to
purchase or improve the related Mortgaged Properties, may be retained by the
related Mortgagors or may be used for purposes unrelated to such Mortgaged
Properties.
A Mortgaged Property securing a Mortgage Loan may be subject to the
senior liens of one or more conventional mortgage loans at the time of
origination and may be subject to one or more junior liens at the time of
origination or thereafter. A mortgage loan secured by any such junior lien or
senior lien will likely not be included in the related Mortgage Pool, and the
Company, an affiliate of the Company or an Unaffiliated Seller may have an
interest in such mortgage loan. Since the Mortgage Loans are primarily Revolving
Credit Loans and Closed-End Loans secured by junior liens, such loans generally
will not be required by the Company to be covered by a primary mortgage guaranty
insurance policy insuring against default on such Mortgage Loan.
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Closed-End Loans
Unless otherwise specified below or in the related Prospectus
Supplement, all of the Closed-End Loans in a Mortgage Pool will (i) be secured
by Mortgaged Properties located in any of the 50 states, the District of
Columbia or the Commonwealth of Puerto Rico and (ii) be of only one type of the
following types of mortgage loans described or referred to in paragraphs
numbered (1) through (5):
(1) Fixed-rate, fully-amortizing Closed-End Loans providing
for level monthly payments of principal and interest and terms to
maturity of generally 5, 10 or 15 years at origination or modification
as specified in the related Prospectus Supplement;
(2) Fully-amortizing adjustable-rate Closed-End Loans ("ARM
Loans") having an original or modified term to maturity of not more
than 30 years with a related interest rate (a "Mortgage Rate") which
generally adjusts initially after a specified period subsequent to the
initial payment date, and thereafter at either one-month, six-month,
one-year or other intervals (with corresponding adjustments in the
amount of monthly payments) over the term of the mortgage loan to equal
the sum of a fixed percentage set forth in the related Mortgage Note
(the "Gross Margin") and an index*. The related Prospectus Supplement
will set forth the relevant index and the highest, lowest and weighted
average Gross Margin with respect to the ARM Loans in the related
Mortgage Pool. The related Prospectus Supplement will also indicate any
periodic or lifetime limitations on changes in any per annum Mortgage
Rate at the time of any adjustment. If specified in the related
Prospectus Supplement, an ARM Loan may include a provision that allows
the Mortgagor to convert the adjustable Mortgage Rate to a fixed rate
at specified times during the term of such ARM Loan;
(3) Negatively-amortizing adjustable-rate Closed-End Loans
having original or modified terms to maturity of not more than 30 years
with Mortgage Rates which generally adjust initially on the payment
date referred to in the related Prospectus Supplement, and thereafter
monthly on each payment date to equal the sum of the Gross Margin and
the index. The scheduled monthly payment will be adjusted as and when
- --------
* The index (the "Index") for a particular Mortgage Pool will be
specified in the related Prospectus Supplement and may include one of
the following indexes: (i) the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of either six months or one
year, (ii) the weekly auction average investment yield of U.S. Treasury
bills of six months, (iii) the daily Bank Prime Loan rate made
available by the Federal Reserve Board, (iv) the cost of funds of
member institutions for the Federal Home Loan Bank of San Francisco,
(v) the interbank offered rates for U.S. dollar deposits in the London
market, each calculated as of a date prior to each scheduled interest
rate adjustment date which will be specified in the related Prospectus
Supplement or (vi) the weekly average of secondary market interest
rates on six-month negotiable certificates of deposit.
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described in the related Prospectus Supplement to an amount that would
fully amortize the mortgage loan over its remaining term on a level
debt service basis; provided that increases in the scheduled monthly
payment may be subject to certain limitations as specified in the
related Prospectus Supplement. If an adjustment to the Mortgage Rate on
a mortgage loan causes the amount of interest accrued thereon in any
month to exceed the scheduled monthly payment on such mortgage loan,
the resulting amount of interest that has accrued but is not then
payable ("Deferred Interest") will be added to the principal balance of
such mortgage loan;
(4) Balloon mortgage loans ("Balloon Loans"), which are
fixed-rate Closed-End Loans having original or modified terms to
maturity of generally 15 years as described in the related Prospectus
Supplement, with level monthly payments of principal and interest based
on a 30-year amortization schedule. The amount of the monthly payment
will remain constant until the maturity date, upon which date the full
outstanding principal balance on such Balloon Loan will be due and
payable (such amount, the "Balloon Amount"); or
(5) Similar Mortgage Loans with other payment characteristics as described
in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, a portion of the
Closed-End Loans underlying a series of Certificates may provide for payments
that are allocated to principal and interest according to the daily simple
interest method (a "Simple Interest Mortgage Loan"). Other Closed-End Loans may
provide for payments in monthly installments including interest equal to
one-twelfth of the applicable Mortgage Rate times the unpaid principal balance,
with any remainder of such payment applied to principal (an "Actuarial Mortgage
Loan").
A Simple Interest Mortgage Loan provides the amortization of the amount
financed under the Mortgage Loan over a series of equal monthly payments
(except, in the case of a Balloon Loan, the final payment). Each monthly payment
consists of an installment of interest which is calculated on the basis of the
outstanding principal balance of the Mortgage Loan multiplied by the stated
Mortgage Rate and further multiplied by a fraction, the numerator of which is
the number of days in the period elapsed since the preceding payment of interest
was made and the denominator of which is the number of days in the annual period
for which interest accrues on such Mortgage Loan. As payments are received under
a Simple Interest Mortgage Loan, the amount received is applied first to
interest accrued to the date of payment and then the remaining amount is applied
to pay any unpaid fees and then to reduce the unpaid principal balance.
Accordingly, if a borrower pays a fixed monthly installment on a Simple Interest
Mortgage Loan before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a fixed monthly
installment after its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be greater
than it would have been had the payment been made
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as scheduled, and the remaining portion, if any, of the payment applied to
reduce the unpaid principal balance will be correspondingly less. If each
scheduled payment under a Simple Interest Mortgage Loan is made on or prior to
its scheduled due date, the principal balance of the Mortgage Loan will amortize
in the manner described above. However, if the borrower consistently makes
scheduled payments after the scheduled due date, the Mortgage Loan will amortize
more slowly than scheduled. If a Simple Interest Mortgage Loan is prepaid, the
borrower is required to pay interest only to the date of prepayment. Such
variable allocations among principal and interest of a Simple Interest Mortgage
Loan may effect the distributions of principal and interest on the Certificates,
as specified in the related Prospectus Supplement.
If provided for in the related Prospectus Supplement, a Mortgage Pool
may contain ARM Loans which allow the Mortgagors to convert the adjustable rates
on such Mortgage Loans to a fixed rate at some point during the life of such
Mortgage Loans (each such Mortgage Loan, a "Convertible Mortgage Loan"),
generally, not later than six to ten years subsequent to the date of
origination, depending upon the length of the initial adjustment period. If
specified in the related Prospectus Supplement, upon any conversion, the Company
will repurchase or Residential Funding, the applicable Designated Seller or a
third party will purchase the converted Mortgage Loan as and to the extent set
forth in the related Prospectus Supplement. Alternatively, if specified in the
related Prospectus Supplement, the Company or Residential Funding (or another
party specified therein) may agree to act as remarketing agent with respect to
such converted Mortgage Loans and, in such capacity, to use its best efforts to
arrange for the sale of converted Mortgage Loans under specified conditions.
Upon the failure of any party so obligated to purchase any such converted
Mortgage Loan, the inability of any remarketing agent to arrange for the sale of
the converted Mortgage Loan and the unwillingness of such remarketing agent to
exercise any election to purchase the converted Mortgage Loan for its own
account, the related Mortgage Pool will thereafter include both fixed rate and
adjustable rate Mortgage Loans. If so specified in the related Prospectus
Supplement, the inclusion of a converted Mortgage Loan in a Mortgage Pool may
adversely affect the holders of the Certificates by restricting the ability of
the related Pass-Through Rate or Rates to adjust to the extent intended by the
adjustable Pass-Through Rate.
Revolving Credit Loans
The Revolving Credit Loans will be originated pursuant to loan
agreements (the "Credit Line Agreements"). Interest on each Revolving Credit
Loan will be calculated based on the average daily balance outstanding during
the billing cycle and the billing cycle generally will be the calendar month
preceding a Due Date. Each Revolving Credit Loan will have a Mortgage Rate that
is subject to adjustment on the day specified in the related Mortgage Note,
which may be daily or monthly, equal to the sum of (a) the Index on such day as
specified in the related Prospectus Supplement, and (b) the Gross Margin
specified in the related Mortgage Note (which may vary under circumstances if so
specified in the related Prospectus Supplement), subject to the Maximum Rate set
forth in the Mortgage Note and the maximum rate permitted by applicable law.
Notwithstanding the forgoing, if so specified in the related Prospectus
Supplement, a Mortgage Loan may have an introductory rate that is lower than the
rate that would be in effect if the
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applicable Index and Gross Margin were used to determine the Mortgage Rate and
as a result of such introductory rate, interest distributions on the
Certificates may initially be lower than expected. See "Risk Factors--Special
Features of the Mortgage Loans--Mortgage Loan Characteristics" herein.
Unless otherwise specified in the related Prospectus Supplement, each
Revolving Credit Loan will have a term to maturity from the date of origination
of not more than 25 years. The Mortgagor for each Revolving Credit Loan may draw
money (each, an "Additional Balance" or a "Draw") under the related Credit Line
Agreement at any time during the period specified therein (such period as to any
Mortgage Loan, the "Draw Period"). Unless otherwise specified in the related
Prospectus Supplement, the Draw Period generally will not be more than 15 years.
Unless otherwise specified in the related Prospectus Supplement, with respect to
each Revolving Credit Loan, if the Draw Period is less than the full term
thereof, the related Mortgagor will not be permitted to make any Draw during the
period from the end of the related Draw Period to the related maturity date. The
Mortgagor for each Revolving Credit Loan will be obligated to make monthly
payments thereon in a minimum amount as specified in the related Mortgage Note,
which generally will be the greater of (i) 1% of the outstanding principal
balance of the Mortgage Loan, (ii) the accrued interest or (iii) $100. The
Mortgagor for each Mortgage Loan will be obligated to make a payment on the
related maturity date in an amount equal to the Account Balance thereof on such
maturity date, which may be a substantial principal amount. The maximum amount
of any Draw with respect to any Revolving Credit Loan is equal to the excess, if
any, of the Credit Limit over the principal balance outstanding under such
Mortgage Note at the time of such Draw. Unless otherwise provided in the related
Prospectus Supplement, Draws made after the related Cut-off Date will be
excluded from the Mortgage Pool.
Unless otherwise specified in the related Prospectus Supplement, with
respect to each Revolving Credit Loan, (a) the Finance Charge (the "Finance
Charge") for any billing cycle generally will be equal to interest accrued on
the average daily principal balance of such Mortgage Loan for such billing cycle
at the related Mortgage Rate, (b) the Account Balance (the "Account Balance") on
any day generally will be the aggregate of the unpaid principal of the Revolving
Credit Loan outstanding at the beginning of such day, plus all related Draws
funded on such day and outstanding at the beginning of such day, plus the sum of
any unpaid Finance Charges and any unpaid fees, insurance premiums and other
charges (collectively, "Additional Charges") that are due on such Mortgage Loan
minus the aggregate of all payments and credits that are applied to the
repayment of any such Draws on such day, and (c) the "principal balance" on any
day generally will be the related Account Balance minus the sum of any unpaid
Finance Charges and Additional Charges that are due on such Revolving Credit
Loan. Payments made by or on behalf of the Mortgagor for each Mortgage Loan
generally will be applied, first, to any unpaid Finance Charges that are due
thereon, second, to any unpaid Additional Charges that are due thereon, and
third, to any related Draws outstanding.
The Mortgaged Property securing each Revolving Credit Loan will be
subject to the lien created by the related mortgage (the "Mortgage") in respect
of the outstanding principal balance of each related Draw or portion thereof
that is not included in the related Mortgage Pool, whether
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made on or prior to the related Cut-off Date or thereafter. Such lien will be
the same rank as the lien created by such Mortgage in respect of such Revolving
Credit Loan, and monthly payments, collections and other recoveries under the
Credit Line Agreement related to such Revolving Credit Loan will be allocated as
described in the related Prospectus Supplement among such Revolving Credit Loan
and the outstanding principal balance of each Draw or portion thereof excluded
from the Mortgage Pool. The Company, an affiliate of the Company or an
Unaffiliated Seller may have an interest in any Draw or portion thereof excluded
from the Mortgage Pool.
Unless otherwise specified in the related Prospectus Supplement, each
Revolving Credit Loan may be prepaid in full or in part at any time and without
penalty, but with respect to each Revolving Credit Loan, the related Mortgagor
will have the right during the related Draw Period to make a Draw in the amount
of any prepayment theretofore made with respect to such Mortgage Loan. The
Mortgage Note or Mortgage related to each Revolving Credit Loan generally will
contain a customary "due-on-sale" clause.
As to each Mortgage Loan, the Mortgagor's rights to receive Draws
during the Draw Period may be suspended, or the Credit Limit may be reduced, for
cause under a limited number of circumstances, including, but not limited to: a
materially adverse change in the Mortgagor's financial circumstances or a
non-payment default by the Mortgagor. However, with respect to each Mortgage
Loan, generally such suspension or reduction will not affect the payment terms
for previously drawn balances. In the event of default under a Mortgage Loan, at
the discretion of the Master Servicer, the Mortgage Loan may be terminated and
declared immediately due and payable in full. For this purpose, a default
includes, but is not limited to: the Mortgagor's failure to make any payment as
required; any action or inaction by the Mortgagor that materially and adversely
affects the Mortgaged Property or the rights in the Mortgaged Property; or fraud
or material misrepresentation by a Mortgagor in connection with the Loan.
The proceeds of the Revolving Credit Loans may be used by the borrower
to improve the related Mortgaged Properties, may be retained by the related
Mortgagors or may be used for purposes unrelated to such Mortgaged Properties.
ALLOCATION OF REVOLVING CREDIT LOAN BALANCES
With respect to any series of Certificates backed by Revolving Credit
Loans, the related Trust Fund may include either (i) the entire principal
balance of each Revolving Credit Loan outstanding at any time, including
balances attributable to Draws made after the related Cut-off Date, or (ii) only
a specified portion (the "Trust Balance") of the total principal balance of each
Revolving Credit Loan outstanding at any time, which except as otherwise
indicated in the related Prospectus Supplement will consist of the principal
balance thereof as of the Cut-off Date minus the portion of all payments and
losses thereafter that are allocated to the Trust Balance, and will not include
any portion of the principal balance attributable to Draws made after the
Cut-off Date.
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In the latter case, that portion of the principal balance of any
Revolving Credit Loan not included in the Trust Balance at any time is referred
to as the "Excluded Balance," which will include balances attributable to Draws
after the Cut-off Date and may include, if so specified in the related
Prospectus Supplement, a portion of the principal balance outstanding as of the
Cut-off Date (such as any such portion included in a different Trust Fund). The
related Prospectus Supplement will set forth the specific provisions by which
payments and losses on any such Revolving Credit Loan will be allocated as
between the Trust Balance and any Excluded Balance. Generally, except as
otherwise so specified, such provisions (i) may provide that principal payments
made by the Mortgagor will be allocated as between the Trust Balance and any
Excluded Balance either (a) on a pro rata basis, (b) first to the Trust Balance
until reduced to zero, then to the Excluded Balance, or (c) in accordance with
other specified priorities, and (ii) will provide that interest payments, as
well as liquidation proceeds or similar proceeds following a default and any
Realized Losses, will be allocated as between the Trust Balance and any Excluded
Balance on a pro rata basis.
Even where a Trust Fund initially includes the entire principal balance
of the Revolving Credit Loans, the Pooling and Servicing Agreement may provide
that after a specified date or upon the occurrence of specified events, the
Trust Fund may not include balances attributable to additional Draws made
thereafter. The related Prospectus Supplement will describe such provisions as
well as the allocation provisions that would be applicable thereto.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Company, either
directly or indirectly through Residential Funding from Sellers. The Mortgage
Loans will generally have been originated in accordance with the Company's
underwriting standards or alternative underwriting criteria as described below
under "Underwriting Standards" or as described in the related Prospectus
Supplement.
Underwriting Standards
General Standards
The Company's underwriting standards with respect to certain Mortgage
Loans will generally conform to those published in Residential Funding's Seller
Guide (together with Residential Funding's Servicer Guide, the "Guide," as
modified from time to time), including, the provisions of the Guide applicable
to the Company's Home Equity Program (the "Home Equity Program"). The
underwriting standards as set forth in the Guide are continuously revised based
on opportunities and prevailing conditions in the residential mortgage market,
the consumer lending market and the market for mortgage securities. The Mortgage
Loans may be underwritten by Residential Funding or by a designated third party.
In certain circumstances, however, the Mortgage Loans may be underwritten only
by the Seller with little or no review performed by Residential Funding. See
"Underwriting Standards--Guide Standards" and "Qualifications of
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Sellers." Residential Funding or a designated third party may perform only
sample quality assurance reviews to determine whether the Mortgage Loans in any
Mortgage Pool were underwritten in accordance with applicable standards.
With respect to the Company's underwriting standards, as well as any
other underwriting standards that may be applicable to any Mortgage Loans, such
underwriting standards generally include a set of specific criteria pursuant to
which the underwriting evaluation is made. However, the application of such
underwriting standards does not imply that each specific criterion was satisfied
individually. Rather, a Revolving Mortgage Loan will be considered to be
originated in accordance with a given set of underwriting standards if, based on
an overall qualitative evaluation, the loan is in substantial compliance with
such underwriting standards. For example, a Mortgage Loan may be considered to
comply with a set of underwriting standards, even if one or more specific
criteria included in such underwriting standards were not satisfied, if other
factors compensated for the criteria that were not satisfied or if the Revolving
Mortgage Loan is considered to be in substantial compliance with the
underwriting standards.
In addition, the Company purchases Mortgage Loans which do not conform
to the underwriting standards set forth in the Guide. Certain of the Mortgage
Loans will be purchased in negotiated transactions, and such negotiated
transactions may be governed by agreements ("Master Commitments") relating to
ongoing purchases of Mortgage Loans by Residential Funding, from Sellers who
will represent that the Mortgage Loans have been originated in accordance with
underwriting standards agreed to by Residential Funding. Residential Funding, on
behalf of the Company or a designated third party, will generally review only a
limited portion of the Mortgage Loans in any delivery of such Mortgage Loans
from the related Seller for conformity with the applicable underwriting
standards. Certain other Mortgage Loans will be purchased from Sellers who will
represent that the Mortgage Loans were originated pursuant to underwriting
standards acceptable to Residential Funding.
The level of review, if any, by Residential Funding or the Company of
any Mortgage Loan for conformity with the applicable underwriting standards will
vary depending on any one of a number of factors, including (i) factors relating
to the experience and status of the Seller, and (ii) factors relating to the
specific Mortgage Loan, including the principal amount or Credit Limit, the
Combined Loan-to-Value Ratio, the loan type or loan program, and the applicable
credit score of the related Mortgagor used in connection with the origination of
the Mortgage Loan (as determined based on a credit scoring model acceptable to
the Company). Generally, such credit scoring models provide a means for
evaluating the information about a prospective borrower that is available from a
credit reporting agency. The underwriting criteria applicable to any program
under which the Mortgage Loans may be originated may provide that qualification
for the loan, the level of review of the loan's documentation, or the
availability of certain loan features (such as maximum loan amount, maximum
Loan-to-Value Ratio, property type and use, and documentation level) may depend
on the mortgagor's credit score.
The underwriting standards utilized in negotiated transactions and
Master Commitments and the underwriting standards applicable to Mortgage Loans
underlying Mortgage Securities may
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vary substantially from the underwriting standards set forth in the Guide. Such
underwriting standards are generally intended to provide an underwriter with
information to evaluate the borrower's repayment ability and the value of the
Mortgaged Property as collateral. Due to the variety of underwriting standards
and review procedures that may be applicable to the Mortgage Loans included in
any Mortgage Pool, the related Prospectus Supplement generally will not
distinguish among the various underwriting standards applicable to the Mortgage
Loans nor describe any review for compliance with applicable underwriting
standards performed by the Company or Residential Funding. Moreover, there can
be no assurance that every Mortgage Loan was originated in conformity with the
applicable underwriting standards in all material respects, or that the quality
or performance of Mortgage Loans underwritten pursuant to varying standards as
described above will be equivalent under all circumstances. In the case of a
Designated Seller Transaction, the applicable underwriting standards will be
those of the Designated Seller or of the originator of the Mortgage Loans, and
will be described in the related Prospectus Supplement.
The Company, either directly or indirectly through Residential Funding,
will also purchase Mortgage Loans from its affiliates, including GMAC Mortgage
Corporation, Residential Money Centers, Inc. and HomeComings Financial Network,
Inc., with underwriting standards generally in accordance with the Guide or as
otherwise agreed to by the Company. However, in certain limited circumstances,
such Mortgage Loans may be employee or preferred customer loans with respect to
which, in accordance with such affiliate's mortgage loan programs, income, asset
and employment verifications and appraisals may not have been required. With
respect to Mortgage Loans made under any employee loan program maintained by
Residential Funding, or its affiliates, in certain limited circumstances
preferential interest rates may be allowed. Neither the Company nor Residential
Funding will review any affiliate's mortgage loans for conformity with the
underwriting standards set forth in the Guide.
Guide Standards
The following is a brief description of the underwriting standards set
forth in the Guide for full documentation loan programs. Initially, a
prospective borrower (other than a trust if the trust is the borrower) is
required to fill out a detailed application providing pertinent credit
information. As part of the application, the borrower is required to provide a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with merchants and
lenders and any record of bankruptcy. Under the Home Equity Program, the
borrower generally must show, among other things, a minimum of one year credit
history reported on the credit report and that no mortgage delinquencies (thirty
days or greater) in the past 12 months existed. Borrowers who have less than a
12 month first mortgage payment history may be subject to certain additional
lending restrictions. In addition, under the Home Equity Program, borrowers with
a previous foreclosure or bankruptcy within the past seven years may not be
allowed and a borrower generally must satisfy all judgments, liens and other
legal actions with an original amount of $1,000 or greater prior to closing. In
addition, an employment verification is obtained which reports the borrower's
current salary and may contain the length of employment and an indication as to
whether it is expected that the borrower will continue such employment in the
future. If a prospective borrower is self-employed, the
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borrower may be required to submit copies of signed tax returns. The borrower
may also be required to authorize verification of deposits at financial
institutions where the borrower has accounts. In the case of a Mortgage Loan
secured by a property owned by a trust, the foregoing procedures may be waived
where the Mortgage Note is executed on behalf of the trust.
Unless otherwise specified in the related Prospectus Supplement, an
appraisal is made of the Mortgaged Property securing each Mortgage Loan. Such
appraisals may be performed by appraisers independent from or affiliated with
the Company, Residential Funding or their affiliates. Such appraisals, however,
will not establish that the Mortgaged Properties provide assurance of repayment
of the Mortgage Loans. See "Risk Factors--Special Features of the Mortgage
Loans--Adequacy of Mortgage Collateral" and "Description of the
Certificates--Realization Upon Defaulted Mortgage Loans" herein. The appraiser
is required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. In certain circumstances, the
appraiser is only required to perform an exterior inspection of the property.
The appraisal is based on various factors, including the market value of
comparable homes and the cost of replacing the improvements. Except as otherwise
provided in the related Prospectus Supplement, under the Home Equity Program,
each appraisal is required to be dated no more than 180 days prior to the date
of origination of the Mortgage Loan; provided, that depending on the principal
amount or Credit Limit an earlier appraisal may be utilized if such appraisal
was made not earlier than two years prior to the date of origination of the
mortgage loan and the related appraiser certifies that the value of the related
mortgaged property has not declined since the date of the original appraisal or
if a field review or statistical property valuation is obtained. Title searches
are undertaken in most cases, and title insurance is required on all Mortgage
Loans with Credit Limits in excess of $100,000.
Under the Home Equity Program, the CLTV is generally calculated by
reference to the lower of the appraised value as so determined or the sales
price, if the Mortgage Loan is originated concurrently with or not more than 12
months after the origination of a first mortgage loan. In all other cases, the
value used is generally the appraised value as so determined.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet the borrower's monthly obligations
on the proposed mortgage loan and other expenses related to the home (such as
property taxes and hazard insurance) and other financial obligations (including
debt service on any related mortgage loan secured by a senior lien on the
related Mortgaged Property). With respect to a Revolving Credit Loan, unless
otherwise provided in the related Prospectus Supplement, for qualification
purposes the monthly payment will be assumed to be an amount equal to 1.00%
times the applicable Credit Limit. The Mortgage Rate in effect from the
origination date of an ARM Loan, a Revolving Credit Loan and certain other types
of loans to the first adjustment date generally will be lower, and may be
significantly lower, than the sum of the then applicable Index and Gross Margin.
Similarly, the amount of the monthly payment on graduated payment Mortgage Loans
will increase periodically. If the borrowers' incomes do not increase in an
amount commensurate with the increases in monthly payments, the likelihood of
default will increase. In addition, in the case of ARM Loans that are
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subject to negative amortization, due to the addition of Deferred Interest the
principal balances of such mortgage loans are more likely to equal or exceed the
value of the underlying mortgaged properties, thereby increasing the likelihood
of defaults and losses. Unless otherwise specified in the related Prospectus
Supplement, Revolving Credit Loans will not provide for negative amortization.
With respect to Balloon Loans and Revolving Credit Loans, payment of the full
outstanding principal balance at maturity may depend on the borrower's ability
to obtain refinancing or to sell the Mortgaged Property prior to the maturity of
the mortgage loan, and there can be no assurance that such refinancing will be
available to the borrower or that such a sale will be possible.
The underwriting standards set forth in the Guide may be varied in
appropriate cases, including in "limited" or "reduced loan documentation"
mortgage loan programs. Limited documentation programs generally permit fewer
supporting documents to be obtained or waive income, asset and employment
documentation requirements, and limited documentation programs generally
compensate for increased credit risk by placing greater emphasis on either the
review of the property to be financed or the borrower's ability to repay the
Mortgage Loan. For example, under Residential Funding's EasyDocs limited
mortgage loan documentation program, certain submission requirements regarding
income verification and debt-to-income ratios are removed, but the Seller is
still required to perform a thorough credit underwriting of the mortgage loan
and the Combined Loan-to-Value Ratio may not exceed 75%. Generally, in order to
be eligible for a reduced loan documentation program, a Mortgagor must have a
good credit history, and other compensating factors (such as a relatively low
Combined Loan-to-Value Ratio, or other favorable underwriting factors) must be
present and the borrower's eligibility for such program may be determined by use
of a credit scoring model.
The Home Equity Program sets forth certain limitations with respect to
the CLTV for the Mortgage Loans and certain restrictions with respect to any
related underlying first mortgage loan. The underwriting guidelines for the Home
Equity Program generally permit CLTV's as high as 100% except as otherwise
provided in the related Prospectus Supplement; however, the maximum permitted
CLTV may be reduced due to a variety of underwriting criteria. In areas where
property values are considered to be declining, the maximum permitted CLTV is
75%. The underwriting guidelines also include restrictions based on the
borrower's debt-to-income ratio. In addition to the foregoing, an evaluation of
the prospective borrower's credit quality will be made based on a credit scoring
model approved by the Company. The Home Equity Program underwriting guidelines
include minimum credit score levels that may apply depending on certain factors
of the Mortgage Loan. The required yields for fixed-rate Closed-End Loans and
required Gross Margins for Revolving Credit Loans purchased under the Home
Equity Program, as announced from time to time, vary based on a number of
factors including CLTV, Credit Limit, documentation level, property type, and
borrower debt-to-income ratio and credit score.
In its evaluation of mortgage loans which have twenty-four or more
months of payment experience, Residential Funding generally places greater
weight on payment history and may take into account market and other economic
trends while placing less weight on underwriting factors generally applied to
newly originated mortgage loans.
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Qualifications of Sellers
Except with respect to Designated Seller Transactions, each Seller
(other than the Federal Deposit Insurance Corporation (the "FDIC") and
investment banking firms) will have been approved by Residential Funding for
participation in Residential Funding's loan purchase program. In determining
whether to approve a seller for participation in the loan purchase program,
Residential Funding generally will consider, among other things, the financial
status (including the net worth) of the seller, the previous experience of the
seller in originating home equity or first mortgage loans, the prior delinquency
and loss experience of the seller, the underwriting standards employed by the
seller and the quality control and, if applicable, servicing operations
established by the seller. There can be no assurance that any Seller presently
meets any qualifications or will continue to meet any qualifications at the time
of inclusion of mortgage loans sold by it in the Trust Fund for a series of
Certificates, or thereafter. If a Seller becomes subject to the direct or
indirect control of the FDIC, or if a Seller's net worth, financial performance
or delinquency and foreclosure rates deteriorate, such institution may continue
to be treated as a Seller. Any such event may adversely affect the ability of
any such Seller to repurchase the Mortgage Loans in the event of a breach of a
representation or warranty which has not been cured.
Residential Funding generally monitors which Sellers are under control
of the FDIC or are insolvent, otherwise in receivership or conservatorship or
financially distressed. Such Seller may make no representations and warranties
with respect to Mortgage Loans sold by it. The FDIC (either in its corporate
capacity or as receiver for a depository institution) may also be a Seller of
the Mortgage Loans, in which event neither the FDIC nor the related depository
institution may make representations and warranties with respect to the Mortgage
Loans sold, or only limited representations and warranties may be made (for
example, that the related legal documents are enforceable). The FDIC may have no
obligation to repurchase any Mortgage Loan for a breach of a representation and
warranty.
Unless otherwise specified in the related Prospectus Supplement, the
qualifications required of Sellers for approval by Residential Funding as
participants in its loan purchase programs may not apply to Designated Sellers.
To the extent the Designated Seller fails to or is unable to repurchase the
Mortgage Loan due to a breach of representation and warranty, neither the
Company, Residential Funding nor any other entity will have assumed the
representations and warranties, and any related losses will be borne by the
Certificateholders or by the credit enhancement, if any.
Representations Relating to Mortgage Loans
Except as set forth above, each Seller (other than a Designated Seller)
will have made representations and warranties to Residential Funding with
respect to the Mortgage Loans sold by such Seller. However, except in the case
of a Designated Seller Transaction or as otherwise provided in the related
Prospectus Supplement, the representations and warranties of the Seller will not
be assigned to the Trustee for the benefit of the holders of the related series
of
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Certificates, and therefore a breach of the representations and warranties of
the Seller generally will not be enforceable on behalf of the Trust Fund.
In the case of a Mortgage Pool consisting of Mortgage Loans purchased
by the Company from Sellers through Residential Funding, Residential Funding,
except in the case of a Designated Seller Transaction or as to Mortgage Loans
underlying any Mortgage Securities or unless otherwise specified in the related
Prospectus Supplement, will have made certain limited representations and
warranties regarding the Mortgage Loans to the Company at the time (just prior
to the initial issuance of the related series of Certificates) that they are
sold to the Company. Such representations and warranties will generally include,
among other things, that: (i) as of the Cut-off Date, the information set forth
in a listing of the related Mortgage Loans is true and correct in all material
respects; (ii) Residential Funding was the sole holder and owner of the Mortgage
Loan free and clear of any and all liens and security interests; (iii) each
Mortgage Loan complied in all material respects with all applicable local, state
and federal laws; (iv) except as otherwise indicated in the related Prospectus
Supplement, no Mortgage Loan is one month or more delinquent in payment of
principal and interest; and (v) there is no delinquent tax or, to the best of
the Residential Funding's knowledge, assessment lien against any Mortgaged
Property. In the event of a breach of a representation or warranty made by
Residential Funding that materially adversely affects the interests of the
Certificateholders in a Mortgage Loan, Residential Funding will be obligated to
repurchase or substitute for such Mortgage Loan as described below. In addition,
Residential Funding will be obligated to repurchase or substitute for any
Mortgage Loan as to which it is discovered that the related Mortgage is not a
valid lien on the related Mortgaged Property having at least the priority set
forth with respect to such Mortgage Loan in the listing of related Mortgage
Loans, subject only to (a) liens of real property taxes and assessments not yet
due and payable, (b) covenants, conditions and restrictions, rights of way,
easements and other matters of public record as of the date of recording of such
Mortgage and certain other permissible title exceptions, (c) other matters to
which like properties are commonly subject which do not materially adversely
affect the value, use, enjoyment or marketability of the Mortgaged Property, and
(d) if applicable, the liens of the related senior mortgage loans. In addition,
with respect to any Mortgage Loan as to which the Company delivers to the
Trustee or the custodian an affidavit certifying that the original Mortgage Note
has been lost or destroyed, if such Mortgage Loan subsequently is in default and
the enforcement thereof or of the related Mortgage is materially adversely
affected by the absence of the original Mortgage Note, Residential Funding will
be obligated to repurchase or substitute for such Mortgage Loan, in the manner
described below. However, Residential Funding will not be required to repurchase
or substitute for any Mortgage Loan as described above if the circumstances
giving rise to such requirement also constitute fraud in the origination of the
related Mortgage Loan. Furthermore, because the listing of the related Mortgage
Loans generally contains information with respect to the Mortgage Loans as of
the Cut-off Date, prepayments and, in certain limited circumstances,
modifications to the interest rate and principal and interest payments may have
been made with respect to one or more of the related Mortgage Loans between the
Cut-off Date and the Closing Date. Residential Funding will not be required to
purchase or substitute for any Mortgage Loan as a result of such prepayment or
modification.
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In a Designated Seller Transaction, unless otherwise specified in the
related Prospectus Supplement, the Designated Seller will have made certain
representations and warranties regarding the Mortgage Loans to the Company
generally similar to those made in the preceding paragraph by Residential
Funding.
The Company will assign to the Trustee for the benefit of the holders
of the related series of Certificates all of its right, title and interest in
each agreement by which it purchased a Mortgage Loan from Residential Funding or
a Designated Seller, insofar as such agreement relates to the representations
and warranties made by a Designated Seller or Residential Funding, as the case
may be, in respect of such Mortgage Loan and any remedies provided for with
respect to any breach of such representations and warranties. If a Designated
Seller or Residential Funding, as the case may be, cannot cure a breach of any
representation or warranty made by it in respect of a Mortgage Loan which
materially and adversely affects the interests of the Certificateholders in such
Mortgage Loan, within 90 days after notice from the Master Servicer, such
Designated Seller or Residential Funding, as the case may be, will be obligated
to purchase such Mortgage Loan at a price (the "Purchase Price") set forth in
the related Pooling and Servicing Agreement, which Purchase Price generally will
be equal to the principal balance thereof as of the date of purchase plus
accrued and unpaid interest to the first day of the month following the month of
repurchase at the Mortgage Rate (less the amount, expressed as a percentage per
annum, payable in respect of master servicing compensation or subservicing
compensation, as applicable, and, if applicable, the Excluded Spread (as defined
herein)).
Unless otherwise specified in the related Prospectus Supplement, as to
any such Mortgage Loan required to be purchased by Residential Funding as
provided above, rather than purchase the Mortgage Loan, Residential Funding may,
at its sole option, remove such Mortgage Loan (a "Deleted Mortgage Loan") from
the Trust Fund and cause the Company to substitute in its place another Mortgage
Loan of like kind (a "Qualified Substitute Mortgage Loan"); however, such
substitution must be effected within 120 days of the date of the initial
issuance of the Certificates with respect to a Trust Fund treated as a grantor
trust for federal income tax purposes. With respect to a Trust Fund for which a
REMIC election is to be made, except as otherwise provided in the Prospectus
Supplement relating to a series of Certificates, such substitution of a
defective Mortgage Loan must be effected within two years of the date of the
initial issuance of the Certificates, and may not be made if such substitution
would cause the Trust Fund to not qualify as a REMIC or result in a prohibited
transaction tax under the Code. Except as otherwise provided in the related
Prospectus Supplement, any Qualified Substitute Mortgage Loan generally will, on
the date of substitution, (i) have an outstanding principal balance, after
deduction of the principal portion of the monthly payment due in the month of
substitution, not in excess of the outstanding principal balance of the Deleted
Mortgage Loan (the amount of any shortfall to be deposited in a custodial
account (the "Custodial Account") in the month of substitution for distribution
to the Certificateholders), (ii) have a Mortgage Rate and a Net Mortgage Rate
not less than (and not more than one percentage point greater than) the Mortgage
Rate and Net Mortgage Rate, respectively, of the Deleted Mortgage Loan as of the
date of substitution, (iii) have a Combined Loan-to-Value Ratio at the time of
substitution no higher than that of the Deleted Mortgage Loan at the time of
substitution, (iv) have a remaining term to maturity not greater than
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(and not more than one year less than) that of the Deleted Mortgage Loan, and
(v) comply with all of the representations and warranties set forth in the
related Pooling and Servicing Agreement as of the date of substitution. The
related Pooling and Servicing Agreement may include additional requirements
relating to ARM Loans, Revolving Credit Loans or other specific types of
Mortgage Loans, or additional provisions relating to meeting the foregoing
requirements on an aggregate basis where a number of substitutions occur
contemporaneously. Unless otherwise specified in the related Prospectus
Supplement, a Designated Seller will have no option to substitute for a Mortgage
Loan that it is obligated to repurchase in connection with a breach of a
representation and warranty.
The Master Servicer will be required under the applicable Pooling and
Servicing Agreement to use its best reasonable efforts to enforce this purchase
or substitution obligation for the benefit of the Trustee and the
Certificateholders, using practices it would employ in its good faith business
judgment and which are normal and usual in its general mortgage servicing
activities; provided, however, that this purchase or substitution obligation
will not become an obligation of the Master Servicer in the event the Designated
Seller or Residential Funding, as the case may be, fails to honor such
obligation. The Master Servicer will be entitled to reimbursement for any costs
and expenses incurred in pursuing such a purchase or substitution obligation,
including but not limited to any costs or expenses associated with litigation.
In instances where a Designated Seller is unable, or disputes its obligation, to
purchase affected Mortgage Loans, the Master Servicer, employing the standards
set forth in the preceding sentence, may negotiate and enter into one or more
settlement agreements with such Designated Seller that may provide for, among
other things, the purchase of only a portion of the affected Mortgage Loans or
coverage of certain loss amounts. Any such settlement could lead to losses on
the Mortgage Loans which would be borne by the related credit enhancement
supporting the related series of Certificates, and to the extent not available,
by the Certificateholders of such series. Furthermore, if applicable, the Master
Servicer may pursue foreclosure (or similar remedies) concurrently with pursuing
any remedy for a breach of a representation and warranty. However, the Master
Servicer is not required to continue to pursue both such remedies if it
determines that one such remedy is more likely to result in a greater recovery.
In accordance with the above described practices, the Master Servicer will not
be required to enforce any purchase of a Designated Seller arising from any
misrepresentation by the Designated Seller, if the Master Servicer determines in
the reasonable exercise of its business judgment that the matters related to
such misrepresentation did not directly cause or are not likely to directly
cause a loss on the related Mortgage Loan. If the Designated Seller fails to
repurchase and no breach of either the Company's or Residential Funding's
representations has occurred, the Designated Seller's purchase obligation will
not become an obligation of the Company or Residential Funding. Unless otherwise
specified in the related Prospectus Supplement, the foregoing obligations will
constitute the sole remedies available to Certificateholders or the Trustee for
a breach of any representation by a Designated Seller or by Residential Funding
in its capacity as a seller of Mortgage Loans to the Company, or for any other
event giving rise to such obligations as described above.
Neither the Company nor the Master Servicer will be obligated to
purchase a Mortgage Loan if a Designated Seller defaults on its obligation to do
so, and no assurance can be given that
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the Designated Sellers will carry out such obligations with respect to Mortgage
Loans. Such a default by a Designated Seller is not a default by the Company or
by the Master Servicer. Any Mortgage Loan not so purchased or substituted for
shall remain in the related Trust Fund and any losses related thereto shall be
allocated to the related credit enhancement, and to the extent not available, to
the related Certificates.
Notwithstanding the foregoing, with respect to any Designated Seller
that requests Residential Funding's consent to the transfer of subservicing
rights relating to any Mortgage Loans to a successor servicer, Residential
Funding may release such Designated Seller from liability under its
representations and warranties described above, upon the assumption of such
successor servicer of the Designated Seller's liability for such representations
and warranties as of the date they were made. In that event, Residential
Funding's rights under the instrument by which such successor servicer assumes
the Designated Seller's liability will be assigned to the Trustee, and such
successor servicer shall be deemed to be the "Designated Seller" for purposes of
the foregoing provisions.
Subservicing
The servicing for each Mortgage Loan will generally either be retained
by the Seller (or its designee approved by the Master Servicer) as Subservicer,
or will be released by the Seller to the Master Servicer and will be
subsequently transferred to a Subservicer approved by the Master Servicer, and
in either case will thereafter be serviced by the Subservicer pursuant to an
agreement between the Master Servicer and the Subservicer (a "Subservicing
Agreement"). The Master Servicer may, but is not obligated to, assign such
subservicing to designated subservicers which will be qualified Sellers and
which may include GMAC Mortgage Corporation or its affiliates. While such
Subservicing Agreement will be a contract solely between the Master Servicer and
the Subservicer, the Pooling and Servicing Agreement pursuant to which a series
of Certificates is issued will provide that, if for any reason the Master
Servicer for such series of Certificates is no longer the master servicer of the
related Mortgage Loans, the Trustee or any successor Master Servicer must
recognize the Subservicer's rights and obligations under such Subservicing
Agreement.
Each Subservicer generally will be required to perform the customary
functions of a servicer, including but not limited to, collection of payments
from Mortgagors and remittance of such collections to the Master Servicer;
maintenance of escrow or impoundment accounts of Mortgagors for payment of
taxes, insurance and other items required to be paid by the Mortgagor pursuant
to the Mortgage Loan, if applicable; processing of assumptions or substitutions
(although, unless otherwise specified in the related Prospectus Supplement, the
Master Servicer is generally required to exercise due-on-sale clauses to the
extent such exercise is permitted by law and would not adversely affect
insurance coverage); attempting to cure delinquencies; supervising foreclosures;
inspection and management of Mortgaged Properties under certain circumstances;
and maintaining accounting records relating to the Mortgage Loans. The
Subservicer may be required to make advances to the holder of any related first
mortgage loan to avoid or cure any delinquencies to the extent that doing so
would be prudent and necessary to
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protect the interests of the Certificateholders. A Subservicer also may be
obligated to make advances to the Master Servicer in respect of delinquent
installments of principal and interest (net of any subservicing or other
compensation) on Closed-End Loans, as described under "Description of the
Certificates--Advances on Closed-End Loans," and in respect of certain taxes and
insurance premiums not paid on a timely basis by Mortgagors. The Subservicer
generally shall be responsible for performing all collection and other servicing
functions with respect to any delinquent loan or foreclosure proceeding. In
addition, the Subservicer is required to advance funds to cover any Draws made
on a Revolving Credit Loan subject to reimbursement by the entity specified in
the related Prospectus Supplement. No assurance can be given that the
Subservicers will carry out their advance or payment obligations with respect to
the Mortgage Loans. Unless otherwise specified in the related Prospectus
Supplement, a Subservicer may transfer its servicing obligations to another
entity that has been approved for participation in Residential Funding's loan
purchase programs, but only with the approval of the Master Servicer.
As compensation for its servicing duties, the Subservicer will be
entitled to a monthly servicing fee (to the extent the related Mortgage Loan
payment has been collected) in a minimum amount set forth in the related
Prospectus Supplement. The Subservicer or Master Servicer may also be entitled
to collect and retain, as part of its servicing compensation, all or a portion
of any late charges, if any, provided in the Mortgage Note or related
instruments and in the case of the Master Servicer, any penalties enforced
against a Subservicer. The remaining portion of such late charges will be
remitted to the Master Servicer. The Subservicer will be reimbursed by the
Master Servicer for certain expenditures which it makes, generally to the same
extent that the Master Servicer would be reimbursed under the applicable Pooling
and Servicing Agreement. See "The Pooling and Servicing Agreement--Servicing and
Administration."
Each Subservicer will be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Subservicer in its servicing
capacity. Each Subservicer is required to maintain a fidelity bond and an errors
and omissions policy with respect to its officers, employees and other persons
acting on its behalf or on behalf of the Master Servicer.
Each Subservicer will be required to service each Mortgage Loan
pursuant to the terms of the Subservicing Agreement for the entire term of such
Mortgage Loan, unless the Subservicing Agreement is earlier terminated by the
Master Servicer or unless servicing is released to the Master Servicer. Subject
to applicable law, the Master Servicer may have the right to terminate a
Subservicing Agreement immediately upon the giving of notice upon certain stated
events, including the violation of such Subservicing Agreement by the
Subservicer, or up to ninety days' notice to the Subservicer without cause upon
payment of certain amounts set forth in the Subservicing Agreement. Upon
termination of a Subservicing Agreement, the Master Servicer may act as servicer
of the related Mortgage Loans or enter into one or more new Subservicing
Agreements. The Master Servicer may agree with a Subservicer to amend a
Subservicing Agreement. Any amendments to a Subservicing Agreement or to a new
Subservicing Agreement may contain provisions different from those described
above which are in effect in the original Subservicing Agreements. However, the
Pooling and Servicing Agreement for each Trust Fund
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will provide that any such amendment or new agreement may not be inconsistent
with or violate such Pooling and Servicing Agreement in a manner which would
materially and adversely affect the interests of the Certificateholders.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued in series. Each series of Certificates
(or, in certain instances, two or more series of Certificates) will be issued
pursuant to a Pooling and Servicing Agreement, similar to one of the forms filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
Each Pooling and Servicing Agreement will be filed with the Commission as an
exhibit to a Form 8-K. The following summaries (together with additional
summaries under "The Pooling and Servicing Agreement" below as well as other
pertinent information included elsewhere in this Prospectus, and subject to the
related Prospectus Supplement) do not describe all terms thereof but reflect the
material provisions relating to the Certificates common to each Pooling and
Servicing Agreement.
Unless otherwise specified in the Prospectus Supplement with respect to
a series, Certificates of each series covered by a particular Pooling and
Servicing Agreement will evidence specified beneficial ownership interests in a
separate Trust Fund created pursuant to such Pooling and Servicing Agreement. A
Trust Fund will consist of, to the extent provided in the Pooling and Servicing
Agreement: (i) such Mortgage Loans (and the related mortgage documents) or
interests therein (including any Mortgage Securities) underlying a particular
series of Certificates as from time to time are subject to the Pooling and
Servicing Agreement, exclusive of, if specified in the related Prospectus
Supplement, any Excluded Spread or other interest retained by the Company or any
of its affiliates with respect to each such Mortgage Loan; (ii) such assets
including, without limitation, all payments and collections in respect of the
Mortgage Loans or Mortgage Securities due after the related Cut-off Date, as
from time to time are identified as deposited in respect thereof in the
Custodial Account and in the related Certificate Account; (iii) property
acquired by foreclosure of such Mortgage Loans or deed in lieu of foreclosure;
(iv) hazard insurance policies and certain proceeds thereof; and (v) any
combination, as and to the extent specified in the related Prospectus
Supplement, of a Letter of Credit, Purchase Obligation, Special Hazard Insurance
Policy, Bankruptcy Bond, Financial Guaranty Insurance Policy, Surety Bond or
other type of credit enhancement as described under "Description of Credit
Enhancement." To the extent that any Trust Fund includes certificates of
interest or participations in Mortgage Loans, the related Prospectus Supplement
will describe the material terms and conditions of such certificates or
participations.
Each series of Certificates may consist of any one or a combination of
the following: (i) a single class of Certificates; (ii) two or more classes of
Certificates, one or more classes of which may be Senior Certificates that are
senior in right of payment to any class or classes of Mezzanine Certificates and
to any other class or classes of Subordinate Certificates, and as to which
certain
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classes of Senior Certificates may be senior to other classes of Senior
Certificates, as described in the respective Prospectus Supplement (any such
series, a "Senior/Subordinate Series"); (iii) one or more classes of Strip
Certificates which will be entitled to (a) principal distributions, with
disproportionate, nominal or no interest distributions or (b) interest
distributions, with disproportionate, nominal or no principal distributions;
(iv) two or more classes of Certificates which differ as to the timing,
sequential order, rate, pass-through rate or amount of distributions of
principal or interest or both, or as to which distributions of principal or
interest or both on any class may be made upon the occurrence of specified
events, in accordance with a schedule or formula (including "planned
amortization classes" and "targeted amortization classes" and "very accurately
defined maturity classes"), or on the basis of collections from designated
portions of the Mortgage Pool, which series may include one or more classes of
Accrual Certificates with respect to which certain accrued interest will not be
distributed but rather will be added to the principal balance thereof on each
Distribution Date for the period described in the related Prospectus Supplement;
or (v) similar classes of Certificates with other payment characteristics, as
described in the related Prospectus Supplement. Credit support for each series
of Certificates will be provided by a Financial Guaranty Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond, Letter of Credit, Reserve
Fund, Surety Bond, by the subordination of one or more classes of Certificates,
Overcollateralization or other credit enhancement as described under
"Description of Credit Enhancement," or by any combination of the foregoing.
Form of Certificates
As specified in the related Prospectus Supplement, the Certificates of
each series will be issued either as physical certificates or in book-entry
form. If issued as physical certificates, the Certificates will be in fully
registered form only in the denominations specified in the related Prospectus
Supplement, and will be transferrable and exchangeable at the corporate trust
office of the person appointed under the related Pooling and Servicing Agreement
to register the Certificates (the "Certificate Registrar"). No service charge
will be made for any registration of exchange or transfer of Certificates, but
the Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. The term "Certificateholder" as used herein refers to the
entity whose name appears on the records of the Certificate Registrar (or, if
applicable, a transfer agent) as the registered holder thereof, except as
otherwise indicated in the related Prospectus Supplement.
If issued in book-entry form certain classes of a series of
Certificates will be initially issued through the book-entry facilities of The
Depository Trust Company ("DTC"), or Cedel Bank, societe anonyme ("CEDEL") or
the Euroclear System ("Euroclear") (in Europe) if they are participants of such
systems, or indirectly through organizations which are participants in such
systems, or through such other depository or facility as may be specified in the
related Prospectus Supplement. As to any such class of Certificates so issued
("Book-Entry Certificates"), the record holder of such Certificates will be
DTC's nominee. CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries (the
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"Depositaries"), which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, which holds securities for its participating organizations
("DTC Participants," and together with the CEDEL and Euroclear participating
organizations "Participants") and facilitates the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in the accounts of Participants. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Other institutions that are not Participants but
clear through or maintain a custodial relationship with Participants (such
institutions, "Indirect Participants") have indirect access to DTC's clearance
system.
Unless otherwise specified in the related Prospectus Supplement, no
person acquiring an interest in any Book-Entry Certificate (each such person, a
"Beneficial Owner") will be entitled to receive a Certificate representing such
interest in registered, certificated form, unless either (i) DTC ceases to act
as depository in respect thereof and a successor depository is not obtained or
(ii) the Trustee elects in its sole discretion to discontinue the registration
of such Certificates through DTC. Prior to any such event, Beneficial Owners
will not be recognized by the Trustee or the Master Servicer as holders of the
related Certificates for purposes of the Pooling and Servicing Agreement, and
Beneficial Owners will be able to exercise their rights as owners of such
Certificates only indirectly through DTC, Participants and Indirect
Participants. Any Beneficial Owner that desires to purchase, sell or otherwise
transfer any interest in Book-Entry Certificates may do so only through DTC,
either directly if such Beneficial Owner is a Participant or indirectly through
Participants and, if applicable, Indirect Participants. Pursuant to the
procedures of DTC, transfers of the beneficial ownership of any Book-Entry
Certificates will be required to be made in minimum denominations specified in
the related Prospectus Supplement. The ability of a Beneficial Owner to pledge
Book-Entry Certificates to persons or entities that are not Participants in the
DTC system, or to otherwise act with respect to such Certificates, may be
limited because of the lack of physical certificates evidencing such
Certificates and because DTC may act only on behalf of Participants.
Because of time zone differences, the securities account of a CEDEL or
Euroclear participant as a result of a transaction with a DTC Participant (other
than a depositary holding on behalf of CEDEL or Euroclear) will be credited
during subsequent securities settlement processing day (which must be a business
day for CEDEL or Euroclear, as the case may be) immediately following the DTC
settlement date. Such credits or any transactions in such securities settled
during such processing will be reported to the relevant Euroclear Participant or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant to a DTC Participant (other than the depositary for CEDEL or
Euroclear) will be received with value on the DTC settlement date, but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC.
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Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant Depositaries; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC. CEDEL
Participants and Euroclear Participants may not deliver instructions directly to
the Depositaries.
CEDEL, as a professional depository, holds securities for its
participating organizations ("CEDEL Participants") and facilitates the clearance
and settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. As a professional
depository, CEDEL is subject to regulation by the Luxembourg Monetary Institute.
Euroclear was created to hold securities for participants of Euroclear
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty
Trust Company of New York (the "Euroclear Operator"), under contract with
Euroclear Clearance Systems S.C., a Belgian co-operative corporation (the
"Clearance Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Clearance
Cooperative. The Clearance Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. The Euroclear Operator is the Belgian branch
of a New York banking corporation which is a member bank of the Federal Reserve
System. As such, it is regulated and examined by the Board of Governors of the
Federal Reserve System and the New York State Banking Department, as well as the
Belgian Banking Commission. Securities clearance accounts and cash accounts with
the Euroclear Operator are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System and
applicable Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts.
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Distributions in respect of the Book-Entry Certificates will be
forwarded by the Trustee to DTC, and DTC will be responsible for forwarding such
payments to Participants, each of which will be responsible for disbursing such
payments to the Beneficial Owners it represents or, if applicable, to Indirect
Participants. Accordingly, Beneficial Owners may experience delays in the
receipt of payments in respect of their Certificates. Under DTC's procedures,
DTC will take actions permitted to be taken by holders of any class of
Book-Entry Certificates under the Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account the Book-Entry
Certificates are credited and whose aggregate holdings represent no less than
any minimum amount of Percentage Interests or voting rights required therefor.
DTC may take conflicting actions with respect to any action of
Certificateholders of any class to the extent that Participants authorize such
actions. None of the Master Servicer, the Company, the Trustee or any of their
respective affiliates will have any liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in the
Book-Entry Certificates, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Assignment of Trust Fund Assets
At the time of issuance of a series of Certificates, the Company will
cause the Mortgage Loans (or Trust Balances thereof, if applicable) or Mortgage
Securities and any other assets being included in the related Trust Fund to be
assigned without recourse to the Trustee or its nominee (which may be the
Custodian) together with, if specified in the related Prospectus Supplement, all
principal and interest received on or with respect to such Mortgage Loans (or
Trust Balances thereof, if applicable) or Mortgage Securities after the Cut-off
Date (other than principal and interest due on or before the Cut-off Date and
any Excluded Spread). The Trustee will, concurrently with such assignment,
deliver a series of Certificates to the Company in exchange for the Mortgage
Loans (or Trust Balances thereof, if applicable) or Mortgage Securities. Each
Mortgage Loan, Trust Balance or Mortgage Security will be identified in a
schedule appearing as an exhibit to the related Pooling and Servicing Agreement.
Such schedule will include, among other things, information as to the principal
balance of each Mortgage Loan as of the Cut-off Date, as well as information
respecting the Mortgage Rate, the currently scheduled monthly payment of
principal and interest, the maturity of the Mortgage Note and the Combined
Loan-to-Value Ratio at origination or modification.
In addition, except as provided below with respect to certain series of
Certificates backed by Trust Balances of Revolving Credit Loans, the Company
will, as to each Mortgage Loan other than Mortgage Loans underlying any Mortgage
Securities, deliver to the Trustee (or to the Custodian) the legal documents
relating to such Mortgage Loan that are in possession of the Company, which may
include: (i) the Mortgage Note (and any modification or amendment thereto)
endorsed without recourse either in blank or to the order of the Trustee (or its
nominee); (ii) the Mortgage (except for any Mortgage not returned from the
public recording office) with evidence of recording indicated thereon or, in the
case of a Cooperative Loan, the respective security agreements and any
applicable UCC financing statements; (iii) an assignment in recordable form of
the Mortgage (or, with respect to a Cooperative Loan, an assignment of the
respective security agreements, any applicable UCC financing statements,
recognition agreements,
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relevant stock certificates, related blank stock powers and the related
proprietary leases or occupancy agreements); and (iv) if applicable, any riders
or modifications to such Mortgage Note and Mortgage, together with certain other
documents at such times as set forth in the related Pooling and Servicing
Agreement. Such assignments may be blanket assignments covering Mortgages
secured by Mortgaged Properties located in the same county, if permitted by law.
If so specified in the related Prospectus Supplement, the Company may not be
required to deliver one or more of such documents if such documents are missing
from the files of the party from whom such Mortgage Loans were purchased.
In the event that, with respect to any Mortgage Loan (except as
provided below), the Company cannot deliver the Mortgage or any assignment with
evidence of recording thereon concurrently with the execution and delivery of
the related Pooling and Servicing Agreement because of a delay caused by the
public recording office, the Company will deliver or cause to be delivered to
the Trustee or the Custodian a true and correct photocopy of such Mortgage or
assignment. The Company will deliver or cause to be delivered to the Trustee or
the Custodian such Mortgage or assignment with evidence of recording indicated
thereon after receipt thereof from the public recording office or from the
related Subservicer.
Assignments of the Mortgage Loans to the Trustee will be recorded in
the appropriate public recording office, except in states where, in the opinion
of counsel acceptable to the Trustee, such recording is not required to protect
the Trustee's interests in the Mortgage Loan against the claim of any subsequent
transferee or any successor to or creditor of the Company or the originator of
such Mortgage Loan, or except as otherwise specified in the related Prospectus
Supplement.
Notwithstanding the preceding three paragraphs, with respect to any
series of Certificates backed by Trust Balances of Revolving Credit Loans, the
foregoing documents generally will have been delivered to an entity specified in
the related Prospectus Supplement which may be the Trustee, a Custodian or
another entity appointed by the Trustee, and such entity shall hold such
documents as or on behalf of the Trustee for the benefit of the
Certificateholders, with respect to the Trust Balances thereof, and on behalf of
any other applicable entity with respect to any Excluded Balance thereof, as
their respective interests may appear.
Review of Mortgage Loans
The Trustee will be authorized to appoint one or more custodians (each,
a "Custodian") pursuant to a custodial agreement to maintain possession of and
review documents relating to the Mortgage Loans as the agent of the Trustee
(except as provided below). The identity of such Custodian, if any, will be set
forth in the related Prospectus Supplement.
The Trustee or the Custodian will hold such documents in trust for the
benefit of the Certificateholders and, generally will review such documents
within 45 days after receipt thereof. If any such document is found to be
defective in any material respect, the Trustee or such Custodian shall notify
the Master Servicer and the Company, and if so specified in the related
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Prospectus Supplement, the Master Servicer, the Servicer or the Trustee shall
notify Residential Funding or the Designated Seller. If Residential Funding or,
in a Designated Seller Transaction, the Designated Seller cannot cure such
defect within 60 days (or within such other period specified in the related
Prospectus Supplement) after notice of the defect is given to Residential
Funding (or, if applicable, the Designated Seller), Residential Funding (or, if
applicable, the Designated Seller) is required to, not later than 90 days after
such notice (or within such other period specified in the related Prospectus
Supplement), either repurchase the related Mortgage Loan or any property
acquired in respect thereof from the Trustee, or if permitted substitute for
such Mortgage Loan a new Mortgage Loan in accordance with the standards set
forth herein. The Master Servicer will be obligated to enforce this obligation
of Residential Funding or the Designated Seller to the extent described above
under "Mortgage Loan Program--Representations Relating to Mortgage Loans," but
such obligation is subject to the provisions described below under
"--Realization Upon Defaulted Mortgage Loans." There can be no assurance that
the applicable Designated Seller will fulfill its obligation to purchase any
Mortgage Loan as described above. Unless otherwise specified in the related
Prospectus Supplement, neither Residential Funding, the Master Servicer nor the
Company will be obligated to purchase or substitute for such Mortgage Loan if
the Designated Seller defaults on its obligation to do so. Unless otherwise
specified in the related Prospectus Supplement, the obligation to repurchase or
substitute for a Mortgage Loan constitutes the sole remedy available to the
Certificateholders or the Trustee for a material defect in a constituent
document. Any Mortgage Loan not so purchased or substituted for shall remain in
the related Trust Fund.
Notwithstanding the foregoing, with respect to the Trust Balance of a
Revolving Credit Loan, such review of the related documents need not be
performed if a similar review has previously been performed by the entity
holding such documents with respect to an Excluded Balance and such review
covered all documentation with respect to any Trust Balance.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Pooling and Servicing Agreement. Upon a breach of any
such representation of the Master Servicer which materially adversely affects
the interests of the Certificateholders in a Mortgage Loan, the Master Servicer
will be obligated either to cure the breach in all material respects or to
purchase the Mortgage Loan at its Purchase Price (less unreimbursed advances, if
applicable, made by the Master Servicer with respect to such Mortgage Loan) or,
unless otherwise specified in the related Prospectus Supplement, to substitute
for such Mortgage Loan a Qualified Substitute Mortgage Loan in accordance with
the provisions for such substitution described above under "Mortgage Loan
Program--Representations Relating to Mortgage Loans." Unless otherwise specified
in the related Prospectus Supplement, this purchase obligation will constitute
the sole remedy available to Certificateholders or the Trustee for such a breach
of representation by the Master Servicer. Any Mortgage Loan not so purchased or
substituted for shall remain in the related Trust Fund.
Excess Spread and Excluded Spread
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The Company, the Master Servicer or any of their affiliates, or such
other entity as may be specified in the related Prospectus Supplement may retain
or be paid a portion of interest due with respect to the related Mortgage Loans
or Mortgage Securities. The payment of any such portion of interest will be
disclosed in the related Prospectus Supplement. This payment may be in addition
to any other payment (such as the servicing fee) that any such entity is
otherwise entitled to receive with respect to the Mortgage Loans or Mortgage
Securities. Any such payment in respect of the Mortgage Loans or Mortgage
Securities will represent a specified portion of the interest payable thereon
and as specified in the related Prospectus Supplement, will either be part of
the assets transferred to the related Trust Fund (the "Excess Spread") or will
be excluded from the assets transferred to the related Trust Fund (the "Excluded
Spread"). The interest portion of a Realized Loss or Extraordinary Loss and any
partial recovery of interest in respect of the Mortgage Loans or Mortgage
Securities will be allocated between the owners of any Excess Spread or Excluded
Spread and the Certificateholders entitled to payments of interest as provided
in the applicable Pooling and Servicing Agreement.
Payments on Mortgage Loans; Deposits to Certificate Account
Each Subservicer servicing a Mortgage Loan pursuant to a Subservicing
Agreement will establish and maintain an account (the "Subservicing Account")
which generally meets the requirements set forth in the Guide from time to time
or is approved by Residential Funding. A Subservicer is required to deposit into
its Subservicing Account on a daily basis all amounts that are received by it in
respect of the Mortgage Loans, less its servicing or other compensation. As
specified in the Subservicing Agreement, the Subservicer must remit or cause to
be remitted to the Master Servicer all funds held in the Subservicing Account
with respect to Mortgage Loans that are required to be so remitted on a periodic
basis not less frequently than monthly. If so specified in the related
Prospectus Supplement, the Subservicer may also be required to advance on the
scheduled date of remittance any monthly installment of principal and interest
(or interest only, with respect to Simple Interest Mortgage Loans), less its
servicing or other compensation, on any Mortgage Loan for which payment was not
received from the Mortgagor.
The Master Servicer will deposit or will cause to be deposited into the
Custodial Account certain payments and collections received by it subsequent to
the Cut-off Date (other than payments due on or before the Cut-off Date), as
specifically set forth in the related Pooling and Servicing Agreement, which
(except as otherwise provided therein) generally will include the following:
(i) payments on account of principal of the Mortgage Loans or on the
Mortgage Securities comprising a Trust Fund;
(ii) payments on account of interest on the Mortgage Loans or
on the Mortgage Securities comprising such Trust Fund, net of the
portion of each payment thereof retained by the Subservicer, if any, as
its servicing or other compensation;
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(iii) amounts (net of unreimbursed liquidation expenses and
insured expenses incurred, and unreimbursed Servicing Advances, if any,
made by the related Subservicer) received and retained in connection
with the liquidation of any defaulted Mortgage Loan, by foreclosure or
otherwise ("Liquidation Proceeds"), including all proceeds of any
Special Hazard Insurance Policy, Bankruptcy Bond, hazard or other
insurance policy or guaranty covering any Mortgage Loan in such
Mortgage Pool (together with any payments under any Letter of Credit,
"Insurance Proceeds") or proceeds from any alternative arrangements
established in lieu of any such insurance and described in the
applicable Prospectus Supplement, other than proceeds to be applied to
the restoration of the related property or released to the Mortgagor in
accordance with the Master Servicer's normal servicing procedures;
(iv) proceeds of any Mortgage Loan in such Trust Fund
purchased (or, in the case of a substitution, certain amounts
representing a principal adjustment) by the Master Servicer, the
Company, Residential Funding, any Subservicer or Seller or any other
person pursuant to the terms of the Pooling and Servicing Agreement.
See "Mortgage Loan Program--Representations Relating to Mortgage
Loans," and "Description of the Certificates--Assignment of Trust Fund
Assets" above;
(v) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments of funds held in the Custodial
Account, as described below; and
(vi) any amounts required to be transferred from the Certificate Account to
the Custodial Account.
In addition to the Custodial Account, the Master Servicer will
establish and maintain, in the name of the Trustee for the benefit of the
holders of each series of Certificates, an account for the disbursement of
payments on the Mortgage Loans evidenced by each series of Certificates (the
"Certificate Account"). Both the Custodial Account and the Certificate Account
must be either (i) maintained with a depository institution whose debt
obligations at the time of any deposit therein are rated by any Rating Agency
that rated any Certificates of the related series not less than a specified
level comparable to the rating category of such Certificates, (ii) an account or
accounts the deposits in which are fully insured to the limits established by
the FDIC, provided that any deposits not so insured shall be otherwise
maintained such that, as evidenced by an opinion of counsel, the
Certificateholders have a claim with respect to the funds in such accounts or a
perfected first priority security interest in any collateral securing such funds
that is superior to the claims of any other depositors or creditors of the
depository institution with which such accounts are maintained, (iii) in the
case of the Custodial Account, a trust account or accounts maintained in either
the corporate trust department or the corporate asset services department of a
financial institution which has debt obligations that meet certain rating
criteria, (iv) in the case of the Certificate Account, a trust account or
accounts maintained with the Trustee, or (v) such other account or accounts
acceptable to any applicable Rating Agency (an "Eligible Account"). The
collateral that is eligible to secure amounts in an Eligible Account is limited
to certain
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permitted investments, which are generally limited to United States government
securities and other investments that are rated, at the time of acquisition, in
one of the categories permitted by the related Pooling and Servicing Agreement
("Permitted Investments").
Unless otherwise set forth in the related Prospectus Supplement, not
later than the business day preceding each Distribution Date, the Master
Servicer will withdraw from the Custodial Account and deposit into the
applicable Certificate Account, in immediately available funds, the amount to be
distributed therefrom to Certificateholders on such Distribution Date. The
Master Servicer or the Trustee will also deposit or cause to be deposited into
the Certificate Account: (i) the amount of any Advances on Closed-End Loans, if
applicable, made by the Master Servicer as described herein under "--Advances on
Closed-End Loans," (ii) any payments under any Letter of Credit, Financial
Guaranty Insurance Policy and any amounts required to be transferred to the
Certificate Account from a Reserve Fund, as described under "Credit Enhancement"
below or (iii) any amounts required to be paid by the Master Servicer out of its
own funds due to the operation of a deductible clause in any blanket policy
maintained by the Master Servicer to cover hazard losses on the Mortgage Loans
as described under "Description of the Certificates--Hazard Insurance; Claims
Thereunder" below, (iv) any distributions received on any Mortgage Securities
included in the Trust Fund and (v) any other amounts as set forth in the related
Pooling and Servicing Agreement.
The portion of any payment received by the Master Servicer in respect
of a Mortgage Loan that is allocable to Excess Spread or Excluded Spread, as
applicable, will generally be deposited into the Custodial Account, but any
Excluded Spread will not be deposited in the Certificate Account for the related
series of Certificates and will be distributed as provided in the related
Pooling and Servicing Agreement.
Funds on deposit in the Custodial Account may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next Distribution Date, and funds on deposit in the related Certificate Account
may be invested in Permitted Investments maturing, in general, no later than the
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, all income and gain realized from any such investment will be for
the account of the Master Servicer as additional servicing compensation. The
amount of any loss incurred in connection with any such investment must be
deposited in the Custodial Account or in the Certificate Account, as the case
may be, by the Master Servicer out of its own funds upon realization of such
loss.
Withdrawals from the Custodial Account
The Master Servicer may, from time to time, make withdrawals from the
Custodial Account for certain purposes, as specifically set forth in the related
Pooling and Servicing Agreement, which (except as otherwise provided therein)
generally will include the following:
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(i) to make deposits to the Certificate Account in the amounts
and in the manner provided in the Pooling and Servicing Agreement and
described above under "--Payments on Mortgage Loans; Deposits to
Certificate Account;"
(ii) to reimburse itself or any Subservicer for Advances, if
applicable, or for amounts advanced in respect of taxes, insurance
premiums or similar expenses ("Servicing Advances") as to any Mortgaged
Property, out of late payments, Insurance Proceeds, Liquidation
Proceeds or collections on the Mortgage Loan with respect to which such
Advances or Servicing Advances were made;
(iii) to pay to itself or any Subservicer unpaid Servicing
Fees and Subservicing Fees, out of payments or collections of interest
on each Mortgage Loan;
(iv) to pay to itself as additional servicing compensation any
investment income on funds deposited in the Custodial Account, any
amounts remitted by Subservicers as interest in respect of partial
prepayments on the Mortgage Loans, and, if so provided in the Pooling
and Servicing Agreement, any profits realized upon disposition of a
Mortgaged Property acquired by deed in lieu of foreclosure or
repossession or otherwise allowed under the Pooling and Servicing
Agreement;
(v) to pay to itself, a Subservicer, Residential Funding, the
Company or the Seller all amounts received with respect to each
Mortgage Loan purchased, repurchased or removed pursuant to the terms
of the Pooling and Servicing Agreement and not required to be
distributed as of the date on which the related Purchase Price is
determined;
(vi) to pay the Company or its assignee, or any other party
named in the related Prospectus Supplement all amounts allocable to the
Excluded Spread, if any, out of collections or payments which represent
interest on each Mortgage Loan (including any Mortgage Loan as to which
title to the underlying Mortgaged Property was acquired);
(vii) to reimburse itself or any Subservicer for any Advance,
if applicable, previously made which the Master Servicer has determined
to not be ultimately recoverable from Liquidation Proceeds, Insurance
Proceeds or otherwise (a "Nonrecoverable Advance"), subject to any
limitations set forth in the Pooling and Servicing Agreement as
described in the related Prospectus Supplement;
(viii) to reimburse itself or the Company for certain other
expenses incurred for which it or the Company is entitled to
reimbursement (including reimbursement in connection with enforcing any
repurchase, substitution or indemnification obligation of any
Designated Seller) or against which it or the Company is indemnified
pursuant to the Pooling and Servicing Agreement;
(ix) to withdraw any amount deposited in the Custodial Account that was not
required to be deposited therein;
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(x) to pay to itself or any Subservicer for the funding of any Draws made
on the Mortgage Loans, if applicable; and
(xi) to make deposits to the Funding Account in the amounts and in the
manner provided in the Pooling and Servicing Agreement, if applicable.
Distributions
Distributions of principal and interest (or, where applicable, of
principal only or interest only) on each class of Certificates entitled thereto
will be made on each Distribution Date either by the Trustee, the Master
Servicer acting on behalf of the Trustee or a paying agent appointed by the
Trustee (the "Paying Agent"). Unless otherwise specified in the related
Prospectus Supplement, such distributions will be made to the persons who are
registered as the holders of such Certificates at the close of business on the
last business day of the preceding month (the "Record Date"). Distributions will
be made in immediately available funds (by wire transfer or otherwise) to the
account of a Certificateholder at a bank or other entity having appropriate
facilities therefor, if such Certificateholder has so notified the Trustee, the
Master Servicer or the Paying Agent, as the case may be, and the applicable
Pooling and Servicing Agreement provides for such form of payment, or by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register. The final distribution in retirement of the Certificates
will be made only upon presentation and surrender of the Certificates at the
office or agency of the Trustee specified in the notice to Certificateholders.
Distributions will be made to each Certificateholder in accordance with such
holder's Percentage Interest in a particular class. The ("Percentage Interest")
represented by a Certificate of a particular class will be equal to the
percentage obtained by dividing the initial principal balance or notional amount
of such Certificate by the aggregate initial amount or notional balance of all
the Certificates of such class.
Principal and Interest on the Certificates
The method of determining, and the amount of, distributions of
principal and interest (or, where applicable, of principal only or interest
only) on a particular series of Certificates will be described in the related
Prospectus Supplement. Distributions of interest on each class of Certificates
will be made prior to distributions of principal thereon. Each class of
Certificates (other than certain classes of Strip Certificates) may have a
different Pass-Through Rate, which may be a fixed, variable or adjustable
Pass-Through Rate, or any combination of two or more such Pass-Through Rates.
The related Prospectus Supplement will specify the Pass-Through Rate or Rates
for each class, or the initial Pass-Through Rate or Rates and the method for
determining the Pass-Through Rate or Rates. Unless otherwise specified in the
related Prospectus Supplement, interest on the Certificates will be calculated
on the basis of a 360-day year consisting of twelve 30-day months.
On each Distribution Date for a series of Certificates, the Trustee or
the Master Servicer on behalf of the Trustee will distribute or cause the Paying
Agent to distribute, as the case may be, to each holder of record on the Record
Date of a class of Certificates, an amount equal to the
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Percentage Interest represented by the Certificate held by such holder
multiplied by such class's Distribution Amount. The "Distribution Amount" for a
class of Certificates for any Distribution Date will be the portion, if any, of
the Principal Distribution Amount (as defined in the related Prospectus
Supplement) allocable to such class for such Distribution Date, plus, if such
class is entitled to payments of interest on such Distribution Date, one month's
interest at the applicable Pass-Through Rate on the principal balance or
notional amount of such class specified in the applicable Prospectus Supplement,
less certain interest shortfalls, which generally will include (i) any Deferred
Interest added to the principal balance of the Mortgage Loans and/or the
outstanding balance of one or more classes of Certificates on the related Due
Date, (ii) any other interest shortfalls (including, without limitation,
shortfalls resulting from application of the Relief Act or similar legislation
or regulations as in effect from time to time) allocable to Certificateholders
which are not covered by advances or the applicable credit enhancement and (iii)
if so specified in the related Prospectus Supplement, Prepayment Interest
Shortfalls (as defined herein) in collections of interest on Closed-End Loans
resulting from Mortgagor prepayments during the month preceding the month of
distribution, in each case in such amount that is allocated to such class on the
basis set forth in the Prospectus Supplement.
In the case of a series of Certificates which includes two or more
classes of Certificates, the timing, sequential order, priority of payment or
amount of distributions in respect of principal, and any schedule or formula or
other provisions applicable to the determination thereof (including
distributions among multiple classes of Senior Certificates or Subordinate
Certificates) shall be as set forth in the related Prospectus Supplement.
Distributions in respect of principal of any class of Certificates will be made
on a pro rata basis among all of the Certificates of such class unless otherwise
set forth in the related Prospectus Supplement. In addition, unless otherwise
specified in the related Prospectus Supplement, distributions of principal on
the Certificates will be limited to monthly principal payments on the Mortgage
Loans, any Excess Interest, if applicable, applied as principal distributions on
the Certificates and any amount distributed as a payment of principal under the
related form of Credit Enhancement. To the extent the Trust Fund contains
Balloon Loans that require no monthly payments and non-amortizing Mortgage Loans
that require only small principal payments in proportion to the principal
balance of such Mortgage Loan, the amount of principal distributions on the
Certificates generally will be less than the amount that would otherwise be
distributable on a similar pool of conventional loans.
On the day specified in the related Prospectus Supplement as the
determination date (the "Determination Date"), the Master Servicer will
determine the amounts of principal and interest which will be passed through to
Certificateholders on the succeeding Distribution Date. Prior to the close of
business on the business day succeeding each Determination Date, the Master
Servicer will furnish a statement to the Trustee (the information in such
statement to be made available to Certificateholders by the Master Servicer on
request) setting forth, among other things, the amount to be distributed on the
next succeeding Distribution Date.
Advances on Closed-End Loans
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Unless otherwise specified in the related Prospectus Supplement, in
connection with Closed-End Loans, the Master Servicer will agree to advance
(either out of its own funds, funds advanced to it by Subservicers or funds
being held in the Custodial Account for future distribution), for the benefit of
the Certificateholders, on or before each Distribution Date, an amount equal to
the aggregate of all scheduled payments of principal (except with respect to
Simple Interest Mortgage Loans and other than any Balloon Amount in the case of
a Balloon Loan) and interest at the applicable Pass-Through Rate or Net Mortgage
Rate, as the case may be (an "Advance"), which were delinquent as of the close
of business on the business day preceding the Determination Date on the Mortgage
Loans in the related Mortgage Pool, but only to the extent that such Advances
would, in the judgment of the Master Servicer, be recoverable out of late
payments by the Mortgagors, Liquidation Proceeds, Insurance Proceeds or
otherwise. Advances will not be made in connection with Revolving Credit Loans,
except as otherwise provided in the related Prospectus Supplement. As specified
in the related Prospectus Supplement with respect to any series of Certificates
as to which the Trust Fund includes Mortgage Securities, the Master Servicer's
advancing obligations will be pursuant to the terms of such Mortgage Securities,
as may be supplemented by the terms of the applicable Pooling and Servicing
Agreement, and may differ from the provisions relating to Advances described
herein. Unless specified in the related Prospectus Supplement, the Master
Servicer will not make any advance with respect to principal on any Simple
Interest Mortgage Loan.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to related Certificateholders. Such advances do not
represent an obligation of the Master Servicer to guarantee or insure against
losses. If Advances have been made by the Master Servicer from cash being held
for future distribution to Certificateholders, such funds will be required to be
replaced on or before any future Distribution Date to the extent that funds in
the Certificate Account on such Distribution Date would be less than payments
required to be made to Certificateholders. Any Advance will be reimbursable to
the Master Servicer out of recoveries on the related Mortgage Loans for which
such amounts were advanced (e.g., late payments made by the related Mortgagor,
any related Liquidation Proceeds and Insurance Proceeds, proceeds of any
applicable form of credit enhancement or proceeds of any Mortgage Loan purchased
by the Company, Residential Funding, a Subservicer or a Seller under the
circumstances described above). Such Advances will also be reimbursable from
cash otherwise distributable to Certificateholders (including the holders of
Senior Certificates, if applicable) to the extent that the Master Servicer shall
determine that any such Advances previously made are not ultimately recoverable
as described above. With respect to any Senior/Subordinate Series, so long as
the related Subordinate Certificates remain outstanding and subject to certain
limitations with respect to Special Hazard Losses, Fraud Losses, Bankruptcy
Losses and Extraordinary Losses, such Advances may also be reimbursable out of
amounts otherwise distributable to holders of the Subordinate Certificates, if
any. The Master Servicer generally will also be obligated to make Servicing
Advances, to the extent recoverable out of Liquidation Proceeds or otherwise, in
respect of certain taxes and insurance premiums not paid by Mortgagors on a
timely basis. Funds so advanced will be reimbursable to the Master Servicer to
the extent permitted by the Pooling and Servicing Agreement. The Master
Servicer's obligation to make Advances may be supported by another entity, the
Trustee, a Financial Guaranty Insurance Policy, a letter of credit or other
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method as may be described in the related Pooling and Servicing Agreement. In
the event that the short-term or long-term obligations of the provider of such
support are downgraded by a Rating Agency rating the related Certificates or if
any collateral supporting such obligation is not performing or is removed
pursuant to the terms of any agreement described in the related Prospectus
Supplement, the Certificates may also be downgraded.
Funding Account
If so specified in the related Prospectus Supplement, a Pooling and
Servicing Agreement or other agreement may provide for the transfer by the
Sellers of additional Mortgage Loans to the related Trust after the Closing Date
for the related Certificates. Such additional Mortgage Loans will be required to
conform to the requirements set forth in the related Pooling and Servicing
Agreement or other agreement providing for such transfer. As specified in the
related Prospectus Supplement, such transfer may be funded by the establishment
of a Funding Account (a "Funding Account"). If a Funding Account is established,
all or a portion of the proceeds of the sale of one or more classes of
Certificates of the related series or a portion of collections on the Mortgage
Loans in respect of principal will be deposited in such account to be released
as additional Mortgage Loans are transferred. Unless otherwise specified in the
related Prospectus Supplement, a Funding Account will be required to be
maintained as an Eligible Account, all amounts therein will be required to be
invested in Permitted Investments and the amount held therein shall at no time
exceed 25% of the aggregate outstanding principal balance of the Certificates.
Unless otherwise specified in the related Prospectus Supplement, the related
Pooling and Servicing Agreement or other agreement providing for the transfer of
additional Mortgage Loans will provide that all such transfers must be made
within 9 months (as to amounts representing proceeds of the sale of the
Certificates) or 12 months (as to amounts representing principal collections on
the Mortgage Loans) after the Closing Date, and that amounts set aside to fund
such transfers (whether in a Funding Account or otherwise) and not so applied
within the required period of time will be deemed to be principal prepayments
and applied in the manner set forth in such Prospectus Supplement.
Reports to Certificateholders
On each Distribution Date, the Master Servicer will forward or cause to
be forwarded to each Certificateholder of record a statement or statements with
respect to the related Trust Fund setting forth the information described in the
related Pooling and Servicing Agreement. Except as otherwise provided in the
related Pooling and Servicing Agreement, such information generally will include
the following, as applicable:
(i) the amount, if any, of such distribution allocable to principal;
(ii) the amount, if any, of such distribution allocable to interest, and
the amount, if any, of any shortfall in the amount of interest and principal;
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(iii) the aggregate unpaid principal balance of the Mortgage
Loans or, if applicable, the Trust Balances thereof after giving effect
to the distribution of principal on such Distribution Date;
(iv) the outstanding principal balance or notional amount of
each class of Certificates after giving effect to the distribution of
principal on such Distribution Date;
(v) based on the most recent reports furnished by
Subservicers, the number of Mortgage Loans in the related Mortgage Pool
that are delinquent (a) one month, (b) two months and (c) three months,
and that are in foreclosure and the aggregate principal balances of
such Mortgage Loans or, if applicable, the Trust Balances thereof;
(vi) the book value of any property acquired by such Trust Fund through
foreclosure or grant of a deed in lieu of foreclosure;
(vii) the balance of the Reserve Fund, if any, at the close of business on
such Distribution Date;
(viii) the percentage of the outstanding principal balance of
the Senior Certificates, if applicable, after giving effect to the
distributions on such Distribution Date;
(ix) the amount of coverage under any Letter of Credit or
other form of credit enhancement covering default risk as of the close
of business on the applicable Determination Date and a description of
any credit enhancement substituted therefor;
(x) if applicable, the Special Hazard Amount, Fraud Loss
Amount and Bankruptcy Amount as of the close of business on the
applicable Distribution Date and a description of any change in the
calculation of such amounts;
(xi) in the case of Certificates benefiting from alternative
credit enhancement arrangements described in a Prospectus Supplement,
the amount of coverage under such alternative arrangements as of the
close of business on the applicable Determination Date; and
(xii) with respect to any series of Certificates as to which
the Trust Fund includes Mortgage Securities, certain additional
information as required under the related Pooling and Servicing
Agreement.
Each amount set forth pursuant to clause (i) or (ii) above will be
expressed as a dollar amount per Single Certificate. As to a particular class of
Certificates, a "Single Certificate" generally will evidence a Percentage
Interest obtained by dividing $1,000 by the initial principal balance or
notional balance of all the Certificates of such class, except as otherwise
provided in the related Pooling and Servicing Agreement. In addition to the
information described above, reports to Certificateholders will contain such
other information as is set forth in the applicable
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Pooling and Servicing Agreement, which may include, without limitation,
information as to Advances, reimbursements to Subservicers and the Master
Servicer and losses borne by the related Trust Fund.
In addition, to the extent described in the Pooling and Servicing
Agreement, within a reasonable period of time after the end of each calendar
year, the Master Servicer will furnish a report to each person that was a holder
of record of any class of Certificates at any time during such calendar year.
Such report will include information as to the aggregate of amounts reported
pursuant to clauses (i) and (ii) above for such calendar year or, in the event
such person was a holder of record of a class of Certificates during a portion
of such calendar year, for the applicable portion of such year.
Collection and Other Servicing Procedures
The Master Servicer, directly or through Subservicers, as the case may
be, will make reasonable efforts to collect all payments called for under the
Mortgage Loans and will, consistent with the related Pooling and Servicing
Agreement and any applicable insurance policy or other credit enhancement,
follow such collection procedures which shall be normal and usual in its general
mortgage servicing activities with respect to mortgage loans comparable to the
Mortgage Loans. Consistent with the foregoing, the Master Servicer may in its
discretion waive any prepayment charge in connection with the prepayment of a
Mortgage Loan or extend the Due Dates for payments due on a Mortgage Note,
provided that the insurance coverage for such Mortgage Loan or any coverage
provided by any alternative credit enhancement will not be adversely affected
thereby. With respect to any series of Certificates as to which the Trust Fund
includes Mortgage Securities, the Master Servicer's servicing and administration
obligations will be pursuant to the terms of such Mortgage Securities.
Under its Subservicing Agreement, a Subservicer is granted certain
discretion to extend relief to Mortgagors whose payments become delinquent. A
Subservicer may grant a period of temporary indulgence (generally up to three
months) to a Mortgagor or may enter into a liquidating plan providing for
repayment by the Mortgagor of delinquent amounts within six months from the date
of execution of the plan, in each case without the prior approval of the Master
Servicer. Other types of forbearance generally require Master Servicer approval.
Neither indulgence nor forbearance with respect to a Mortgage Loan will affect
the Pass-Through Rate or Rates used in calculating distributions to
Certificateholders. See "--Distributions."
In certain instances in which a Mortgage Loan is in default (or if
default is reasonably foreseeable), and if determined by the Master Servicer to
be in the best interests of the related Certificateholders, the Master Servicer
may permit certain modifications of the Mortgage Loan or make forbearances of
the Mortgage Loan rather than proceeding with foreclosure. In making such
determination, the estimated Realized Loss that might result if such Mortgage
Loan were liquidated would be taken into account. Such modifications may have
the effect of reducing the Mortgage Rate or extending the final maturity date of
the Mortgage Loan. Any such modified Mortgage Loan may remain in the related
Trust Fund, and the reduction in collections resulting
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from such modification may result in reduced distributions of interest (or other
amounts) on, or may extend the final maturity of, one or more classes of the
related Certificates.
In connection with any significant partial prepayment of a Mortgage
Loan, the Master Servicer, to the extent not inconsistent with the terms of the
Mortgage Note and local law and practice, may permit the Mortgage Loan to be
re-amortized such that the monthly payment is recalculated as an amount that
will fully amortize the remaining principal amount thereof by the original
maturity date based on the original Mortgage Rate, provided that such
re-amortization shall not be permitted if it would constitute a modification of
the Mortgage Loan for federal income tax purposes.
In any case in which property subject to a Mortgage Loan (other than an
ARM Loan described below) is being conveyed by the Mortgagor, the Master
Servicer, directly or through a Subservicer, shall in general be obligated, to
the extent it has knowledge of such conveyance, to exercise its rights to
accelerate the maturity of such Mortgage Loan under any due-on-sale clause
applicable thereto, but only if the exercise of such rights is permitted by
applicable law and only to the extent it would not adversely affect or
jeopardize coverage under any applicable credit enhancement arrangements. If the
Master Servicer or Subservicer is prevented from enforcing such due-on-sale
clause under applicable law or if the Master Servicer or Subservicer determines
that it is reasonably likely that a legal action would be instituted by the
related Mortgagor to avoid enforcement of such due-on-sale clause, the Master
Servicer or Subservicer will enter into an assumption and modification agreement
with the person to whom such property has been or is about to be conveyed,
pursuant to which such person becomes liable under the Mortgage Note subject to
certain specified conditions. The original Mortgagor may be released from
liability on a Mortgage Loan if the Master Servicer or Subservicer shall have
determined in good faith that such release will not adversely affect the
collectability of the Mortgage Loan. An ARM Loan may be assumed if such ARM Loan
is by its terms assumable and if, in the reasonable judgment of the Master
Servicer or the Subservicer, the proposed transferee of the related Mortgaged
Property establishes its ability to repay the loan and the security for such ARM
Loan would not be impaired by the assumption. If a Mortgagor transfers the
Mortgaged Property subject to an ARM Loan without consent, such ARM Loan may be
declared due and payable. Any fee collected by the Master Servicer or
Subservicer for entering into an assumption or substitution of liability
agreement will be retained by the Master Servicer or Subservicer as additional
servicing compensation unless otherwise set forth in the related Prospectus
Supplement. See "Certain Legal Aspects of Mortgage Loans and Related
Matters-Enforceability of Certain Provisions" herein. In connection with any
such assumption, the Mortgage Rate borne by the related Mortgage Note may not be
altered. Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. The Master Servicer or the related Subservicer may approve such
a request if it has determined, exercising its good faith business judgment in
the same manner as it would if it were the owner of the related Mortgage Loan,
that such approval will not adversely affect the security for, and the timely
and full collectability of, the related Mortgage Loan. Any fee collected by the
Master Servicer or the Subservicer for processing such request will be retained
by the Master Servicer or Subservicer as additional servicing compensation.
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Realization Upon Defaulted Mortgage Loans
With respect to a Mortgage Loan in default, the Master Servicer or the
related Subservicer will decide whether to foreclose upon the Mortgaged Property
or write off the principal balance of the Mortgage Loan, or the Trust Balance
thereof, as a bad debt. In connection with such decision, the Master Servicer or
the related Subservicer will, following usual practices in connection with
senior and junior mortgage servicing activities, estimate the proceeds expected
to be received and the expenses expected to be incurred in connection with such
foreclosure to determine whether a foreclosure proceeding is appropriate. To the
extent that a Mortgage Loan is a junior Mortgage Loan, following any default
thereon, unless foreclosure proceeds for such Mortgage Loan are expected to at
least satisfy the related senior mortgage loan in full and to pay foreclosure
costs, it is likely that such Mortgage Loan will be written off as bad debt with
no foreclosure proceeding. See "Risk Factors--Special Features of the Mortgage
Loans" herein. In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
will be issued to the Trustee or to its nominee on behalf of Certificateholders
and, if applicable, the holders of any Excluded Balances. Notwithstanding any
such acquisition of title and cancellation of the related Mortgage Loan, such
Mortgage Loan (an "REO Mortgage Loan") will be considered for most purposes to
be an outstanding Mortgage Loan or an outstanding Trust Balance of the related
Revolving Credit Loan, held in the Trust Fund until such time as the Mortgaged
Property is sold and all recoverable Liquidation Proceeds and Insurance Proceeds
have been received with respect to such defaulted Mortgage Loan (a "Liquidated
Mortgage Loan"). For purposes of calculations of amounts distributable to
Certificateholders in respect of an REO Mortgage Loan, the amortization schedule
in effect at the time of any such acquisition of title (before any adjustment
thereto by reason of any bankruptcy or any similar proceeding or any moratorium
or similar waiver or grace period) will be deemed to have continued in effect
(and, in the case of an ARM Loan, such amortization schedule will be deemed to
have adjusted in accordance with any interest rate changes occurring on any
adjustment date therefor) so long as such REO Mortgage Loan is considered to
remain in the Trust Fund. If a REMIC election has been made, any Mortgaged
Property so acquired by the Trust Fund must be disposed of in accordance with
applicable federal income tax regulations and consistent with the status of the
Trust Fund as a REMIC. To the extent provided in the related Pooling and
Servicing Agreement, any income (net of expenses and other than gains described
below) received by the Subservicer or the Master Servicer on such Mortgaged
Property prior to its disposition will be deposited in the Custodial Account
upon receipt and will be available at such time to the extent provided in the
related Pooling and Servicing Agreement, for making payments to
Certificateholders.
With respect to a Mortgage Loan in default, the Master Servicer may
pursue foreclosure (or similar remedies) subject to any senior loan positions
and certain other restrictions pertaining to junior loans as described under
"Certain Legal Aspects of Mortgage Loans and Related Matters--Foreclosure on
Mortgage Loans" concurrently with pursuing any remedy for a breach of a
representation and warranty. However, the Master Servicer is not required to
continue to pursue both such remedies if it determines that one such remedy is
more likely to result in a greater recovery. Upon the first to occur of final
liquidation and a repurchase or substitution
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pursuant to a breach of a representation and warranty, such Mortgage Loan will
be removed from the related Trust Fund. The Master Servicer may elect to treat a
defaulted Mortgage Loan as having been finally liquidated if substantially all
amounts expected to be received in connection therewith have been received. Any
additional liquidation expenses relating to such Mortgage Loan thereafter
incurred will be reimbursable to the Master Servicer (or any Subservicer) from
any amounts otherwise distributable to the related Certificateholders, or may be
offset by any subsequent recovery related to such Mortgage Loan. Alternatively,
for purposes of determining the amount of related Liquidation Proceeds to be
distributed to Certificateholders, the amount of any Realized Loss or the amount
required to be drawn under any applicable form of credit enhancement, the Master
Servicer may take into account minimal amounts of additional receipts expected
to be received, as well as estimated additional liquidation expenses expected to
be incurred in connection with such defaulted Mortgage Loan. Upon foreclosure of
a Revolving Credit Loan, the related Liquidation Proceeds will be allocated
among the Trust Balances and Excluded Balances as described in the Prospectus
Supplement.
With respect to certain series of Certificates, if so provided in the
related Prospectus Supplement, the applicable form of credit enhancement may
provide, to the extent of coverage thereunder, that a defaulted Mortgage Loan or
REO Mortgage Loan will be removed from the Trust Fund prior to the final
liquidation thereof in which case any estimated loss may be covered by any
applicable form of credit enhancement or other insurance or the
Certificateholders may bear such loss. If a defaulted Mortgage Loan or REO
Mortgage Loan is not so removed from the Trust Fund, then, upon the final
liquidation thereof, if a loss is realized which is not covered by any
applicable form of credit enhancement or other insurance, the Certificateholders
will bear such loss. However, if a gain results from the final liquidation of an
REO Mortgage Loan which is not required by law to be remitted to the related
Mortgagor, the Master Servicer will be entitled to retain such gain as
additional servicing compensation unless the related Prospectus Supplement
provides otherwise. For a description of the Master Servicer's obligations to
maintain and make claims under applicable forms of credit enhancement and
insurance relating to the Mortgage Loans, see "Description of Credit
Enhancement" and "Description of the Certificates--Hazard Insurance; Claims
Thereunder."
The Master Servicer is required to maintain a fidelity bond and errors
and omissions policy with respect to its officers and employees and other
persons acting on behalf of the Master Servicer in connection with its
activities under the Pooling and Servicing Agreement. The Master Servicer may be
subject to certain restrictions under the Pooling and Servicing Agreement with
respect to the refinancing of a lien senior to a Mortgage Loan on the related
Mortgaged Property.
Hazard Insurance; Claims Thereunder
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan (other than a Cooperative Loan) will be required to be covered by
a hazard insurance policy (as described below). The following summary, as well
as other pertinent information included elsewhere in this Prospectus, do not
describe all terms of a hazard insurance policy but will reflect all material
terms thereof relevant to an investment in the Certificates. Such insurance is
subject
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to underwriting and approval of individual Mortgage Loans by the respective
insurers. The descriptions of any insurance policies described in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to such
forms of policies.
Unless otherwise specified in the related Prospectus Supplement, the
Pooling and Servicing Agreement will require the Master Servicer to cause to be
maintained for each Mortgaged Property a hazard insurance policy providing for
no less than the coverage of the standard form of fire insurance policy with
extended coverage customary in the state in which the property is located. Such
coverage generally will be in an amount equal to the lesser of (i) 100% of the
insurable value of the improvements (guaranteed replacement) or (ii) the sum of
the outstanding balance of such Mortgage Loan plus the outstanding balance on
any mortgage loan senior to such Mortgage Loan. The ability of the Master
Servicer to ensure that hazard insurance proceeds are appropriately applied may
be dependent on its being named as an additional insured under any hazard
insurance policy or upon the extent to which information in this regard is
furnished to the Master Servicer by Mortgagors or Subservicers.
As set forth above, all amounts collected by the Master Servicer under
any hazard policy (except for amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures) will be deposited initially in
the Custodial Account and ultimately in the Certificate Account. The Pooling and
Servicing Agreement provides that the Master Servicer may satisfy its obligation
to cause hazard policies to be maintained by maintaining a blanket policy
insuring against losses on the Mortgage Loans. If such blanket policy contains a
deductible clause, the Master Servicer will deposit in the Custodial Account or
the applicable Certificate Account all amounts which would have been deposited
therein but for such clause.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer shall also cause to be maintained on property acquired upon
foreclosure, or deed in lieu of foreclosure, of any Mortgage Loan, fire
insurance with extended coverage in an amount which is at least equal to the
amount necessary to avoid the application of any co-insurance clause contained
in the related hazard insurance policy.
Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the Mortgage Loans may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss. See "Description of Credit Enhancement--Special Hazard Insurance Policies"
for a description of the limited protection afforded by any Special Hazard
Insurance Policy against losses occasioned by hazards which are otherwise
uninsured against (including losses caused by the application of the
co-insurance clause described in the preceding paragraph).
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DESCRIPTION OF CREDIT ENHANCEMENT
Credit support with respect to each series of Certificates may be
comprised of one or more of the components described below. Each component may
have a dollar limit and will generally provide coverage with respect to Realized
Losses that are, as applicable, (i) attributable to the Mortgagor's failure to
make any payment of principal or interest as required under the Mortgage Note,
but not including Special Hazard Losses, Extraordinary Losses or other losses
resulting from damage to a Mortgaged Property, Bankruptcy Losses or Fraud Losses
(any such loss, a "Defaulted Mortgage Loss"); (ii) of a type generally covered
by a Special Hazard Insurance Policy (any such loss, a "Special Hazard Loss");
(iii) attributable to certain actions which may be taken by a bankruptcy court
in connection with a Mortgage Loan, including a reduction by a bankruptcy court
of the principal balance of or the Mortgage Rate on a Mortgage Loan or an
extension of its maturity (any such loss, a "Bankruptcy Loss"); and (iv)
incurred on defaulted Mortgage Loans as to which there was fraud in the
origination of such Mortgage Loans (any such loss, a "Fraud Loss").
Unless otherwise specified in the related Prospectus Supplement, credit
support will not provide protection against all risks of loss and will not
guarantee repayment of the entire outstanding principal balance of the
Certificates and interest thereon. If losses occur which exceed the amount
covered by credit support or which are not covered by the credit support,
Certificateholders will bear their allocable share of deficiencies. In
particular, Defaulted Mortgage Losses, Special Hazard Losses, Bankruptcy Losses
and Fraud Losses in excess of the amount of coverage provided therefor and
losses occasioned by war, civil insurrection, certain governmental actions,
nuclear reaction and certain other risks ("Extraordinary Losses") will not be
covered. To the extent that the credit enhancement for any series of
Certificates is exhausted, the Certificateholders will bear all further risks of
loss not otherwise insured against.
As set forth below and in the related Prospectus Supplement, (i)
coverage with respect to Defaulted Mortgage Losses may be provided by one or
more Letters of Credit, (ii) coverage with respect to Special Hazard Losses may
be provided by one or more Letters of Credit or a Special Hazard Insurance
Policies (any instrument, to the extent providing such coverage, a "Special
Hazard Instrument"), (iii) coverage with respect to Bankruptcy Losses may be
provided by one or more Letters of Credit or a Bankruptcy Bonds and (iv)
coverage with respect to Fraud Losses may be provided by one or more Letters of
Credit or mortgage repurchase bonds. In addition, if so specified in the
applicable Prospectus Supplement, in lieu of or in addition to any or all of the
foregoing arrangements, credit enhancement may be in the form of (i) a Reserve
Fund to cover such losses, (ii) subordination of one or more classes of
Subordinate Certificates to provide credit support to one or more classes of
Senior Certificates or (iii) Overcollateralization, Letters of Credit, surety
bonds, Financial Guaranty Insurance Policies or other types of insurance
policies, certain other secured or unsecured corporate guarantees or in such
other form as may be described in the related Prospectus Supplement, or in the
form of a combination of two or more of the foregoing. The credit support may be
provided by an assignment of the right to receive certain cash amounts, a
deposit of cash into a Reserve Fund or other pledged assets, or by banks,
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insurance companies, guarantees or any combination thereof identified in the
related Prospectus Supplement.
With respect to any defaulted Mortgage Loan that is finally liquidated,
the amount of loss realized, if any (as described in the related Pooling and
Servicing Agreement, a "Realized Loss"), will equal the portion of the Stated
Principal Balance remaining after application of all amounts recovered (net of
amounts reimbursable to the Master Servicer for related Advances, if applicable,
and expenses allocable to the Trust Fund) towards interest and principal owing
on the Mortgage Loan. With respect to a Mortgage Loan the principal balance of
which has been reduced in connection with bankruptcy proceedings, the amount of
such reduction will be treated as a Realized Loss. The "Stated Principal
Balance" of any Mortgage Loan as of any date of determination is equal to the
principal balance thereof as of the Cut-off Date, after application of all
scheduled principal payments due on or before the Cut-off Date whether received
or not, reduced by all amounts allocable to principal that are distributed to
Certificateholders on or before the date of determination, and as further
reduced to the extent that any Realized Loss thereon has been allocated to any
Certificates on or before such date.
For any series of Certificates backed by Trust Balances of Revolving
Credit Loans, the credit enhancement provided with respect to such Certificates
will cover any portion of any Realized Losses allocated to such Trust Balances,
subject to any limitations described herein and in the related Prospectus
Supplement. See "Allocation of Revolving Credit Loan Balances" herein.
Each Prospectus Supplement will include a description of (a) the amount
payable under the credit enhancement arrangement, if any, provided with respect
to a series, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions under which the amount payable under such credit
support may be reduced and under which such credit support may be terminated or
replaced and (d) the material provisions of any agreement relating to such
credit support. Additionally, each such Prospectus Supplement will set forth
certain information with respect to the Issuer of any third-party credit
enhancement (the "Credit Enhancer"). The Pooling and Servicing Agreement or
other documents may provide for reimbursement rights, control rights or other
provisions that may be required by the Credit Enhancer.
The descriptions of any insurance policies, bonds or other instruments
described in this Prospectus or any Prospectus Supplement and the coverage
thereunder do not describe all terms thereof but will reflect all relevant terms
thereof material to an investment in the Certificates. Copies of such
instruments will be included as exhibits to the Form 8-K to be filed with the
Commission in connection with the issuance of the related series of
Certificates.
Financial Guaranty Insurance Policy
If so specified in the related Prospectus Supplement, a financial
guaranty insurance policy (a "Financial Guaranty Insurance Policy") may be
obtained and maintained for a class or series of Certificates. The issuer of the
Financial Guaranty Insurance Policy (the "Insurer") will be
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described in the related Prospectus Supplement and a copy of the form of
Financial Guaranty Insurance Policy will be filed with the related Current
Report on Form 8-K.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will be unconditional and irrevocable and
will guarantee to holders of the applicable Certificates that an amount equal to
the full amount of distributions due to such holders will be received by the
Trustee or its agent on behalf of such holders for distribution on each
Distribution Date. The specific terms of any Financial Guaranty Insurance Policy
will be set forth in the related Prospectus Supplement. A Financial Guaranty
Insurance Policy may have limitations and generally will not insure the
obligation of the Sellers or the Master Servicer to purchase or substitute for a
defective Mortgage Loan and will not guarantee any specific rate of principal
prepayments. Unless otherwise specified in the related Prospectus Supplement,
the Insurer will be subrogated to the rights of each holder to the extent the
Insurer makes payments under the Financial Guaranty Insurance Policy.
Letter of Credit
If any component of credit enhancement as to any series of Certificates
is to be provided by a letter of credit (the "Letter of Credit"), a bank (the
"Letter of Credit Bank") will deliver to the Trustee an irrevocable Letter of
Credit. The Letter of Credit may provide direct coverage with respect to the
Mortgage Loans. The Letter of Credit Bank, the amount available under the Letter
of Credit with respect to each component of credit enhancement, the expiration
date of the Letter of Credit, and a more detailed description of the Letter of
Credit will be specified in the related Prospectus Supplement. On or before each
Distribution Date, the Letter of Credit Bank will be required to make certain
payments after notification from the Trustee, to be deposited in the related
Certificate Account with respect to the coverage provided thereby. The Letter of
Credit may also provide for the payment of Advances.
Special Hazard Insurance Policies
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained by the Company for a Trust Fund will be issued by
the insurer named in the related Prospectus Supplement. Each Special Hazard
Insurance Policy generally will, subject to limitations described in the related
Prospectus Supplement, if any, will protect the related Certificateholders from
Special Hazard Losses which are (i) losses due to direct physical damage to a
Mortgaged Property other than any loss of a type covered by a hazard insurance
policy or a flood insurance policy, if applicable, and (ii) losses from partial
damage caused by reason of the application of the co-insurance clauses contained
in hazard insurance policies. See "Description of the Certificates--Hazard
Insurance; Claims Thereunder." A Special Hazard Insurance Policy will not cover
losses occasioned by war, civil insurrection, certain governmental actions,
errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, chemical contamination or waste by the
Mortgagor. Aggregate claims under a Special Hazard Insurance Policy will be
limited to the amount set forth in the related Pooling and Servicing Agreement
and will be subject to reduction as set forth in such related Pooling and
Servicing
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Agreement. A Special Hazard Insurance Policy will provide that no claim may be
paid unless hazard and, if applicable, flood insurance on the property securing
the Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid by the Master Servicer.
To the extent set forth in the related Prospectus Supplement, coverage
in respect of Special Hazard Losses for a series of Certificates may be
provided, in whole or in part, by a type of special hazard coverage other than a
Special Hazard Insurance Policy or by means of a representation of the Company
or Residential Funding.
Bankruptcy Bonds
In the event of a personal bankruptcy of a Mortgagor, a bankruptcy
court may establish the value of the Mortgaged Property of such Mortgagor at an
amount less than the then outstanding principal balance of the first and junior
loans secured by such Mortgaged Property (such difference, a "Deficient
Valuation"). The amount of the secured debt could then be reduced to such value,
and, thus, the holder of such first and junior loans would become unsecured
creditors to the extent the outstanding principal balance of such loans exceeds
the value assigned to the Mortgaged Property by the bankruptcy court. In
addition, certain other modifications of the terms of a Mortgage Loan can result
from a bankruptcy proceeding, including a reduction in the amount of the Monthly
Payment on the related Mortgage Loan (a "Debt Service Reduction;" Debt Service
Reductions and Deficient Valuations, collectively referred to herein as
"Bankruptcy Losses"). See "Certain Legal Aspects of Mortgage Loans and Related
Matters--Anti-Deficiency Legislation and Other Limitations on Lenders." Any
Bankruptcy Bond to provide coverage for Bankruptcy Losses resulting from
proceedings under the federal Bankruptcy Code obtained by the Company for a
Trust Fund will be issued by an insurer named in the related Prospectus
Supplement. The level of coverage under each Bankruptcy Bond will be set forth
in the related Prospectus Supplement.
Subordination
A Senior/Subordinate Series of Certificates will consist of one or more
classes of Senior Certificates and one or more classes of Subordinate
Certificates, as set forth in the related Prospectus Supplement. With respect to
any Senior/Subordinate Series, the total amount available for distribution on
each Distribution Date, as well as the method for allocating such amount among
the various classes of Certificates included in such series, will be described
in the related Prospectus Supplement. Generally, with respect to any such series
the amount available for distribution will be allocated first to interest on the
Senior Certificates of such series, and then to principal of the Senior
Certificates up to the amounts described in the related Prospectus Supplement,
prior to allocation of any amounts to the Subordinate Certificates of such
series.
Realized Losses will be allocated to the Subordinate Certificates of
the related series in the order specified in the related Prospectus Supplement
until the outstanding principal balance of such class has been reduced to zero.
Additional Realized Losses, if any, will be allocated to the
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Senior Certificates. If such series includes more than one class of Senior
Certificates, such additional Realized Losses will be allocated either on a pro
rata basis among all of the Senior Certificates in proportion to their
respective outstanding principal balances or as otherwise provided in the
related Prospectus Supplement. The respective amounts of specified types of
losses (including certain Special Hazard Losses, Fraud Losses and Bankruptcy
Losses) that may be borne solely by the Subordinate Certificates may be limited
to an amount described in the related Prospectus Supplement, in which case such
losses would be allocated on a pro rata basis among all outstanding classes of
Certificates. Generally, any allocation of a Realized Loss to a Certificate will
be made by reducing the outstanding principal balance thereof as of the
Distribution Date following the calendar month in which such Realized Loss was
incurred. At any given time, the percentage of the outstanding principal
balances of all of the Certificates evidenced by the Senior Certificates is the
"Senior Percentage," determined in the manner set forth in the related
Prospectus Supplement.
As set forth above, the rights of holders of the various classes of
Certificates of any series to receive distributions of principal and interest is
determined by the aggregate outstanding principal balance of each such class
(or, if applicable, the related notional amount). The outstanding principal
balance of any Certificate will be reduced by all amounts previously distributed
on such Certificate in respect of principal and by any Realized Losses allocated
thereto. If there are no Realized Losses or prepayments of principal on any of
the Mortgage Loans, the respective rights of the holders of Certificates of any
series to future distributions generally would not change. However, to the
extent set forth in the related Prospectus Supplement, holders of Senior
Certificates may be entitled to receive a disproportionately larger amount of
prepayments received during certain specified periods, which will have the
effect (absent offsetting losses) of accelerating the amortization of the Senior
Certificates and increasing the respective percentage ownership interest
evidenced by the Subordinate Certificates in the related Trust Fund (with a
corresponding decrease in the Senior Percentage), thereby preserving the
availability of the subordination provided by the Subordinate Certificates. In
addition, as set forth above, certain Realized Losses generally will be
allocated first to Subordinate Certificates by reduction of the outstanding
principal balance thereof, which will have the effect of increasing the
respective ownership interest evidenced by the Senior Certificates in the
related Trust Fund.
If so provided in the Pooling and Servicing Agreement, the Master
Servicer may be permitted, under certain circumstances, to purchase any Mortgage
Loan (or the Trust Balance thereof, if applicable) that is three or more months
delinquent in payments of principal and interest, at the Purchase Price. Such
Purchase Price will be advanced by the Master Servicer to the Trust Fund,
subject to the right of the Master Servicer to reimbursement from the Trust Fund
for any Realized Losses subsequently incurred. Any Realized Loss so incurred in
connection with any such Mortgage Loan (or the Trust Balance thereof, if
applicable) will be allocated among the then outstanding Certificateholders of
the related series in the same manner as Realized Losses on Mortgage Loans that
have not been so purchased.
To the extent provided in the related Prospectus Supplement, certain
amounts otherwise payable on any Distribution Date to holders of Subordinate
Certificates may be deposited into a
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Reserve Fund. Amounts held in any Reserve Fund may be applied as described
under "Description of Credit Enhancement--Reserve Funds" in the related
Prospectus Supplement.
With respect to any Senior/Subordinate Series, the terms and provisions
of the subordination may vary from those described above. Any such variation and
any additional credit enhancement will be described in the related Prospectus
Supplement.
Overcollateralization
If so specified in the related Prospectus Supplement, interest
collections on the Mortgage Loans, or the Trust Balances of the related
Revolving Credit Loans, as applicable, may exceed interest distributions on the
Certificates for the related Distribution Date (such excess referred to as
"Excess Interest"). Such Excess Interest may be deposited into a Reserve Fund or
applied as a distribution of principal on the Certificates. To the extent Excess
Interest is applied as principal distributions on the Certificates, the effect
will be to reduce the principal balance of the Certificates relative to the
outstanding balance of the Mortgage Loans, thereby creating
"Overcollateralization" and additional protection to the Certificateholders, as
specified in the related Prospectus Supplement.
Reserve Funds
If so specified in the related Prospectus Supplement, the Company will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash or Permitted Investments in specified amounts, or any other
instrument satisfactory to the Rating Agency or Agencies, which will be applied
and maintained in the manner and under the conditions specified in the related
Prospectus Supplement and related Pooling and Servicing Agreement. In the
alternative or in addition to such deposit, to the extent described in the
related Prospectus Supplement, a Reserve Fund may be funded through application
of all or a portion of amounts otherwise payable on any related Certificates,
from the Excess Spread, Excluded Spread or otherwise. A Reserve Fund for a
series of Certificates which is funded over time by depositing therein a portion
of the interest payment on each Mortgage Loan may be referred to as a "Spread
Account" in the related Prospectus Supplement and Pooling and Servicing
Agreement. To the extent that the funding of the Reserve Fund is dependent on
amounts otherwise payable on related Certificates, Excess Spread, Excluded
Spread or other cash flows attributable to the related Mortgage Loans or on
reinvestment income, the Reserve Fund may provide less coverage than initially
expected if the cash flows or reinvestment income on which such funding is
dependent are lower than anticipated. With respect to any series of Certificates
as to which credit enhancement includes a Letter of Credit, if so specified in
the related Prospectus Supplement, under certain circumstances the remaining
amount of the Letter of Credit may be drawn by the Trustee and deposited in a
Reserve Fund.
Amounts in a Reserve Fund may be distributed to Certificateholders, or
applied to reimburse the Master Servicer for outstanding advances, or may be
used for other purposes, in the manner and to the extent specified in the
related Prospectus Supplement. Unless otherwise
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provided in the related Prospectus Supplement, any such Reserve Fund will not be
deemed to be part of the related Trust Fund. A Reserve Fund may provide coverage
to more than one series of Certificates if set forth in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement, Reserve Funds
may be established to provide limited protection against only certain types of
losses and shortfalls. Following each Distribution Date amounts in a Reserve
Fund in excess of any amount required to be maintained therein may be released
from the Reserve Fund under the conditions and to the extent specified in the
related Prospectus Supplement and will not be available for further application
to the Certificates.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee will have a perfected security interest for the benefit of the
Certificateholders in the assets in the Reserve Fund. However, to the extent
that the Company, any affiliate thereof or any other entity has an interest in
any Reserve Fund, in the event of the bankruptcy, receivership or insolvency of
such entity, there could be delays in withdrawals from the Reserve Fund and the
corresponding payments to the Certificateholders. Such delays could adversely
affect the yield to investors on the related Certificates.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
Master Servicer or any other person named in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited to the
related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to the Master Servicer or another service provider as additional
compensation.
Maintenance of Credit Enhancement
If credit enhancement has been obtained for a series of Certificates,
the Master Servicer will be obligated to exercise its best reasonable efforts to
keep or cause to be kept such credit enhancement in full force and effect
throughout the term of the applicable Pooling and Servicing Agreement, unless
coverage thereunder has been exhausted through payment of claims or otherwise,
or substitution therefor is made as described below under "--Reduction or
Substitution of Credit Enhancement." The Master Servicer, on behalf of itself,
the Trustee and Certificateholders, will provide the Trustee information
required for the Trustee to draw any applicable credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will agree to pay the premiums for each Financial Guaranty
Insurance Policy, Special Hazard Insurance Policy or Bankruptcy Bond, as
applicable, on a timely basis. In the event the related insurer ceases to be a
"Qualified Insurer" because it ceases to be qualified under applicable law to
transact such insurance business or coverage is terminated for any reason other
than exhaustion of such coverage, the Master Servicer will use its best
reasonable efforts to obtain from another Qualified Insurer a comparable
replacement insurance policy or bond with a total coverage equal to the then
outstanding coverage of such policy or bond. If the cost of the replacement
policy is
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greater than the cost of such policy or bond, the coverage of the replacement
policy or bond will, unless otherwise agreed to by the Company, be reduced to a
level such that its premium rate does not exceed the premium rate on the
original insurance policy. Any losses in market value of the Certificates
associated with any reduction or withdrawal in rating by an applicable Rating
Agency shall be borne by the Certificateholders.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
Special Hazard Insurance Policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any Letter of Credit, the
Master Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to one or more classes of Certificateholders on liquidation of the
Mortgage Loan after reimbursement of the Master Servicer for its expenses and
(ii) that such expenses will be recoverable by it through Liquidation Proceeds
or Insurance Proceeds. If recovery under any Letter of Credit or other credit
enhancement is not available because the Master Servicer has been unable to make
the above determinations, has made such determinations incorrectly or recovery
is not available for any other reason, the Master Servicer is nevertheless
obligated to follow such normal practices and procedures (subject to the
preceding sentence) as it deems necessary or advisable to realize upon the
defaulted Mortgage Loan and in the event such determination has been incorrectly
made, is entitled to reimbursement of its expenses in connection with such
restoration.
Reduction or Substitution of Credit Enhancement
The amount of credit support provided with respect to any series of
Certificates and relating to various types of losses incurred may be reduced
under certain specified circumstances. In most cases, the amount available as
credit support will be subject to periodic reduction on a non-discretionary
basis in accordance with a schedule or formula set forth in the related Pooling
and Servicing Agreement. Additionally, in most cases, such credit support may be
replaced, reduced or terminated, and the formula used in calculating the amount
of coverage with respect to Bankruptcy Losses, Special Hazard Losses or Fraud
Losses may be changed, without the consent of the Certificateholders, upon the
written assurance from each applicable Rating Agency that the then-current
rating of the related series of Certificates will not be adversely affected
thereby. Furthermore, in the event that the credit rating of any obligor under
any applicable credit enhancement is downgraded, the credit rating of each class
of the related Certificates may be downgraded to a corresponding level, and,
unless otherwise specified in the related Prospectus Supplement, neither the
Master Servicer nor the Company will be obligated to obtain replacement credit
support in order to restore the rating of the Certificates. The Master Servicer
will also be permitted to replace such credit support with other credit
enhancement instruments issued by obligors whose credit ratings are equivalent
to such downgraded level and in lower amounts which would satisfy such
downgraded level, provided that the then-current rating of each class of the
related series of Certificates is maintained. Where the credit support is in the
form of a Reserve Fund, a permitted reduction in the amount of credit
enhancement will result in a release of all or a portion of the assets in the
Reserve Fund to the Company, the Master Servicer or such other
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person that is entitled thereto. Any assets so released and any amount by which
the credit enhancement is reduced will not be available for distributions in
future periods.
PURCHASE OBLIGATIONS
Certain types of Mortgage Loans and certain classes of Certificates of
any series, as specified in the related Prospectus Supplement, may be subject to
a purchase obligation (a "Purchase Obligation") that would become applicable on
one or more specified dates, or upon the occurrence of one or more specified
events, or on demand made by or on behalf of the applicable Certificateholders.
A Purchase Obligation may be in the form of a conditional or unconditional
purchase commitment, liquidity facility, maturity guaranty, put option or demand
feature. The terms and conditions of each Purchase Obligation, including the
purchase price, timing and payment procedure, will be described in the related
Prospectus Supplement. A Purchase Obligation with respect to Mortgage Loans may
apply to that Mortgage Loans or to the related Certificates. Each Purchase
Obligation may be a secured or unsecured obligation of the provider thereof,
which may include a bank or other financial institution or an insurance company.
Each Purchase Obligation will be evidenced by an instrument delivered to the
Trustee for the benefit of the applicable Certificateholders of the related
series. Each Purchase Obligation with respect to Mortgage Loans will be payable
solely to the Trustee for the benefit of the Certificateholders of the related
series. Other Purchase Obligations may be payable to the Trustee or directly to
the holders of the Certificates to which such obligations relate.
THE COMPANY
The Company is an indirect wholly-owned subsidiary of GMAC Mortgage,
which is a wholly-owned subsidiary of General Motors Acceptance Corporation. The
Company was incorporated in the State of Delaware on May 5, 1995. The Company
was organized for the purpose of acquiring first or junior lien home equity
mortgage loans and mortgage securities and issuing securities backed by such
mortgage loans and mortgage securities. The Company anticipates that it will in
many cases have acquired Mortgage Loans indirectly through Residential Funding,
which is also an indirect wholly-owned subsidiary of GMAC Mortgage. The Company
does not have, nor is it expected in the future to have, any significant assets.
The Certificates do not represent an interest in or an obligation of
the Company. The Company's only obligations with respect to a series of
Certificates will be pursuant to certain limited representations and warranties
made by the Company or as otherwise provided in the related Prospectus
Supplement.
The Company maintains its principal office at 8400 Normandale Lake
Boulevard, Suite 600, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000.
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RESIDENTIAL FUNDING CORPORATION
If so specified in the related Prospectus Supplement, Residential
Funding, an affiliate of the Company, will act as the Master Servicer or Manager
for a series of Certificates.
Residential Funding buys mortgage loans under several loan purchase
programs from mortgage loan originators or sellers nationwide, including
affiliates, that meet its seller/servicer eligibility requirements and services
mortgage loans for its own account and for others. Residential Funding's
principal executive offices are located at 8400 Normandale Lake Boulevard, Suite
600, Minneapolis, Minnesota 55437. Its telephone number is (612) 832-7000.
Residential Funding conducts operations from its headquarters in Minneapolis and
from offices located in California, Colorado, Connecticut, Florida, Georgia,
Maryland, New York, North Carolina, Rhode Island and Texas. At March 31, 1997,
Residential Funding was master servicing a first lien loan portfolio of
approximately $34.8 billion and a second lien loan portfolio of approximately
$1.8 billion.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Certificates--General,"
each series of Certificates will be issued pursuant to a Pooling and Servicing
Agreement. The following summaries describe certain additional provisions common
to each Pooling and Servicing Agreement and are qualified entirely by reference
to the actual terms of the Pooling and Servicing Agreement for a series of
Certificates.
Servicing and Administration
The principal servicing compensation to be paid to the Master Servicer
in respect of its master servicing activities for each series of Certificates
will be equal to the percentage per annum described in the related Prospectus
Supplement (which may vary under certain circumstances). As compensation for its
servicing duties, a Subservicer or, if there is no Subservicer, the Master
Servicer will be entitled to a monthly servicing fee as described in the related
Prospectus Supplement, which may vary under certain circumstances from the
amounts described in the Prospectus Supplement. Certain Subservicers may also
receive additional compensation in the amount of all or a portion of the
interest due and payable on the applicable Mortgage Loan which is over and above
the interest rate specified at the time the Company or Residential Funding, as
the case may be, committed to purchase the Mortgage Loan. See "Mortgage Loan
Program--Subservicing." Subservicers will be required to pay to the Master
Servicer an amount equal to one month's interest (net of its servicing or other
compensation) on the amount of any partial Principal Prepayment. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will retain such amounts to the extent collected from Subservicers. In addition,
the Master Servicer or a Subservicer will retain all prepayment charges,
assumption fees and late
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payment charges, to the extent collected from Mortgagors, and any benefit which
may accrue as a result of the investment of funds in the Custodial Account or
the applicable Certificate Account (unless otherwise specified in the related
Prospectus Supplement) or in a Subservicing Account, as the case may be. In
addition, certain reasonable duties of the Master Servicer may be performed by
an affiliate of the Master Servicer who will be entitled to reasonable
compensation therefor from the Trust Fund.
The Master Servicer (or, if specified in the related Pooling and
Servicing Agreement, the Trustee on behalf of the applicable Trust Fund) will
pay or cause to be paid certain ongoing expenses associated with each Trust Fund
and incurred by it in connection with its responsibilities under the Pooling and
Servicing Agreement, including, without limitation, payment of any fee or other
amount payable in respect of certain credit enhancement arrangements, payment of
the fees and disbursements of the Trustee, any custodian appointed by the
Trustee, the Certificate Registrar and any Paying Agent, and payment of expenses
incurred in enforcing the obligations of Subservicers and Designated Sellers.
The Master Servicer will be entitled to reimbursement of expenses incurred in
enforcing the obligations of Subservicers and Designated Sellers under certain
limited circumstances. In addition, as indicated in the preceding section, the
Master Servicer will be entitled to reimbursements for certain expenses incurred
by it in connection with Liquidated Mortgage Loans and in connection with the
restoration of Mortgaged Properties, such right of reimbursement being prior to
the rights of Certificateholders to receive any related Liquidation Proceeds
(including Insurance Proceeds).
Evidence as to Compliance
Each Pooling and Servicing Agreement will provide for delivery (on or
before a specified date in each year) to the Trustee of an annual statement
signed by an officer of the Master Servicer to the effect that the Master
Servicer has fulfilled in all material respects the minimum servicing standards
set forth in the audit guide for audits of non-supervised mortgagees approved by
the Department of Housing and Urban Development for use by independent public
accountants, the Uniform Single Attestation Program for Mortgage Bankers or the
Audit Program for Mortgages serviced for Federal Home Mortgage Corporation
(each, an "Audit Guide") throughout the preceding year or, if there has been a
material default in the fulfillment of any such obligation, such statement shall
specify each such known default and the nature and status thereof. Such
statement may be provided as a single form making the required statements as to
more than one Pooling and Servicing Agreement.
Each Pooling and Servicing Agreement will also provide that on or
before a specified date in each year, beginning the first such date that is at
least a specified number of months after the Cut-off Date, a firm of independent
public accountants will furnish a statement to the Company and the Trustee to
the effect that, on the basis of an examination by such firm conducted
substantially in compliance with the standards established by the American
Institute of Certified Public Accountants, the servicing of mortgage loans under
agreements (including the related Pooling and Servicing Agreement) was conducted
substantially in compliance with the minimum servicing standards set forth in
the related Audit Guide (to the extent that procedures in such Audit
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Guide are applicable to the servicing obligations set forth in such agreements)
except for such significant exceptions or errors in records that shall be
reported in such statement. In rendering its statement such firm may rely, as to
the matters relating to the direct servicing of mortgage loans by Subservicers,
upon comparable statements for examinations conducted substantially in
compliance with the related Audit Guide described above (rendered within one
year of such statement) of firms of independent public accountants with respect
to those Subservicers which also have been the subject of such an examination.
Copies of the annual statement of an officer of the Master Servicer may
be obtained by Certificateholders without charge upon written request to the
Master Servicer, at the address indicated in the monthly statement to
Certificateholders.
Certain Matters Regarding the Master Servicer and the Company
The Pooling and Servicing Agreement for each series of Certificates
will provide that the Master Servicer may not resign from its obligations and
duties thereunder except upon a determination that performance of such duties is
no longer permissible under applicable law or except in connection with a
permitted transfer of servicing. No such resignation will become effective until
the Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the Pooling and Servicing Agreement.
Each Pooling and Servicing Agreement will also provide that, except as
set forth below, neither the Master Servicer, the Company nor any director,
officer, employee or agent of the Master Servicer or the Company will be under
any liability to the Trust Fund or the Certificateholders for any action taken
or for refraining from the taking of any action in good faith pursuant to the
Pooling and Servicing Agreement, or for errors in judgment; provided, however,
that neither the Master Servicer, the Company, nor any such person will be
protected against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
or by reason of reckless disregard of obligations and duties thereunder. Each
Pooling and Servicing Agreement will further provide that the Master Servicer,
the Company and any director, officer, employee or agent of the Master Servicer
or the Company is entitled to indemnification by the Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Pooling and Servicing Agreement or the related
series of Certificates, other than any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. In addition, each Pooling and Servicing Agreement will
provide that the Master Servicer and the Company will not be under any
obligation to appear in, prosecute or defend any legal or administrative action
that is not incidental to its respective duties under the Pooling and Servicing
Agreement and which in its opinion may involve it in any expense or liability.
The Master Servicer or the Company may, however, in its discretion undertake any
such action which it may deem necessary or desirable with respect to the Pooling
and Servicing Agreement and the rights and duties of the parties thereto and the
interests of the Certificateholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
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expenses, costs and liabilities of the Trust Fund and the Master Servicer or the
Company, as the case may be, will be entitled to be reimbursed therefor out of
funds otherwise distributable to Certificateholders.
Any person into which the Master Servicer may be merged or
consolidated, any person resulting from any merger or consolidation to which the
Master Servicer is a party or any person succeeding to the business of the
Master Servicer will be the successor of the Master Servicer under the Pooling
and Servicing Agreement, provided that such person meets the requirements set
forth in the Pooling and Servicing Agreement. In addition, notwithstanding the
prohibition on its resignation, the Master Servicer may assign its rights and
delegate its duties and obligations under a Pooling and Servicing Agreement to
any person reasonably satisfactory to the Company and the Trustee and meeting
the requirements set forth in the related Pooling and Servicing Agreement. In
the case of any such assignment, the Master Servicer will be released from its
obligations under such Pooling and Servicing Agreement, exclusive of liabilities
and obligations incurred by it prior to the time of such assignment.
Events of Default
Events of Default under the Pooling and Servicing Agreement in respect
of a series of Certificates, unless otherwise specified in the Prospectus
Supplement, generally will include: (i) any failure by the Master Servicer to
make a required deposit to the Custodial Account or the Certificate Account or,
if the Master Servicer is the Paying Agent, to distribute to the holders of any
class of Certificates of such series any required payment which continues
unremedied for five business days after the giving of written notice of such
failure to the Master Servicer by the Trustee or the Company, or to the Master
Servicer, the Company and the Trustee by the holders of Certificates of such
class evidencing not less than 25% of the aggregate Percentage Interests
constituting such class; (ii) any failure by the Master Servicer duly to observe
or perform in any material respect any other of its covenants or agreements in
the Pooling and Servicing Agreement with respect to such series of Certificates
which continues unremedied for 30 days (15 days in the case of a failure to pay
the premium for any insurance policy which is required to be maintained under
the Pooling and Servicing Agreement) after the giving of written notice of such
failure to the Master Servicer by the Trustee or the Company, or to the Master
Servicer, the Company and the Trustee by the holders of any class of
Certificates of such series evidencing not less than 25% of the aggregate
Percentage Interests constituting such class; (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings regarding the Master Servicer and certain actions by the
Master Servicer indicating its insolvency or inability to pay its obligations
and (iv) any other Event of Default as set forth in the Pooling and Servicing
Agreement. A default pursuant to the terms of any Mortgage Securities included
in any Trust Fund will not constitute an Event of Default under the related
Pooling and Servicing Agreement.
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Rights Upon Event of Default
So long as an Event of Default remains unremedied, either the Company
or the Trustee may (except as otherwise provided for in the related Pooling and
Servicing Agreement with respect to the Credit Enhancer, if applicable), and, at
the direction of the holders of Certificates evidencing not less than 51% of the
aggregate voting rights in the related Trust Fund, the Trustee shall (except as
otherwise provided for in the related Pooling and Servicing Agreement with
respect to the Credit Enhancer), by written notification to the Master Servicer
and to the Company or the Trustee, as applicable, terminate all of the rights
and obligations of the Master Servicer under the Pooling and Servicing Agreement
(other than any right of the Master Servicer as Certificateholder and other than
the right to receive servicing compensation, expenses for servicing the Mortgage
Loans during any period prior to the date of such termination and such other
reimbursements, of amounts the Master Servicer is entitled to withdraw from the
Custodial Account) covering such Trust Fund and in and to the Mortgage Loans and
the proceeds thereof, whereupon the Trustee will succeed to all
responsibilities, duties and liabilities of the Master Servicer under such
Pooling and Servicing Agreement (other than the obligation to purchase Mortgage
Loans under certain circumstances) and will be entitled to similar compensation
arrangements. In the event that the Trustee would be obligated to succeed the
Master Servicer but is unwilling so to act, it may appoint (or if it is unable
so to act, it shall appoint) or petition a court of competent jurisdiction for
the appointment of an approved mortgage servicing institution with a net worth
of at least $10,000,000 to act as successor to the Master Servicer under the
Pooling and Servicing Agreement (unless otherwise set forth in the Pooling and
Servicing Agreement). Pending such appointment, the Trustee is obligated to act
in such capacity. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial Master Servicer under the Pooling and Servicing Agreement.
No Certificateholder will have any right under a Pooling and Servicing
Agreement to institute any proceeding with respect to such Pooling and Servicing
Agreement unless (a) such holder previously has given to the Trustee written
notice of default and the continuance thereof, (b) the holders of Certificates
of any class evidencing not less than 25% of the aggregate Percentage Interests
constituting such class (i) have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and (ii) have
offered to the Trustee reasonable indemnity and (c) the Trustee has neglected or
refused to institute any such proceeding for 60 days after receipt of such
request and indemnity (except as otherwise provided for in the related Pooling
and Servicing Agreement with respect to the Credit Enhancer). However, the
Trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the Pooling and Servicing Agreement or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of Certificates covered by such Pooling and
Servicing Agreement, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
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Amendment
Each Pooling and Servicing Agreement may be amended by the Company, the
Master Servicer and the Trustee, without the consent of the related
Certificateholders, (i) to cure any ambiguity; (ii) to correct or supplement any
provision therein which may be inconsistent with any other provision therein or
to correct any error; (iii) to change the timing and/or nature of deposits in
the Custodial Account or the Certificate Account or to change the name in which
the Custodial Account is maintained (except that (a) deposits to the Certificate
Account may not occur later than the related Distribution Date, (b) such change
may not adversely affect in any material respect the interests of any
Certificateholder, as evidenced by an opinion of counsel, and (c) such change
may not adversely affect the then-current rating of any rated classes of
Certificates, as evidenced by a letter from each applicable Rating Agency) as
specified in the related Prospectus Supplement; (iv) if a REMIC election has
been made with respect to the related Trust Fund, to modify, eliminate or add to
any of its provisions (a) to the extent necessary to maintain the qualification
of the Trust Fund as a REMIC or to avoid or minimize the risk of imposition of
any tax on the related Trust Fund, provided that the Trustee has received an
opinion of counsel to the effect that (1) such action is necessary or desirable
to maintain such qualification or to avoid or minimize such risk, and (2) such
action will not adversely affect in any material respect the interests of any
related Certificateholder or (b) to restrict the transfer of the REMIC Residual
Certificates, provided that the Company has determined that such change would
not adversely affect the applicable ratings of any classes of the Certificates,
as evidenced by a letter from each applicable Rating Agency as specified in the
related Prospectus Supplement, and that any such amendment will not give rise to
any tax with respect to the transfer of the REMIC Residual Certificates to a
non-permitted transferee; or (v) to make any other provisions with respect to
matters or questions arising under such Pooling and Servicing Agreement which
are not materially inconsistent with the provisions thereof, so long as such
action will not adversely affect in any material respect the interests of any
Certificateholder.
The Pooling and Servicing Agreement may also be amended by the Company,
the Master Servicer and the Trustee (except as otherwise provided for in the
related Pooling and Servicing Agreement with respect to the Credit Enhancer)
with the consent of the holders of Certificates of each class affected thereby
evidencing, in each case, not less than 66% of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Pooling and
Servicing Agreement or of modifying in any manner the rights of the related
Certificateholders, except that no such amendment may (i) reduce in any manner
the amount of, or delay the timing of, payments received on Mortgage Loans which
are required to be distributed on a Certificate of any class without the consent
of the holder of such Certificate, (ii) impair the right of any
Certificateholder to institute suit for the enforcement of the provisions of the
Pooling and Servicing Agreement or (iii) reduce the percentage of Certificates
of any class the holders of which are required to consent to any such amendment
unless the holders of all Certificates of such class have consented to the
change in such percentage.
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Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Fund, the Trustee will not be entitled to consent
to any amendment to a Pooling and Servicing Agreement without having first
received an opinion of counsel to the effect that such amendment or the exercise
of any power granted to the Master Servicer, the Company or the Trustee in
accordance with such amendment will not result in the imposition of a tax on the
related Trust Fund or cause such Trust Fund to fail to qualify as a REMIC.
Termination; Retirement of Certificates
The obligations created by the Pooling and Servicing Agreement for each
series of Certificates (other than certain limited payment and notice
obligations of the Trustee and the Company, respectively) will terminate upon
the payment to the related Certificateholders of all amounts held in the
Certificate Account or by the Master Servicer and required to be paid to such
Certificateholders following the earlier of (i) the final payment or other
liquidation or disposition (or any advance with respect thereto) of the last
Mortgage Loan subject thereto and all property acquired upon foreclosure or deed
in lieu of foreclosure of any Mortgage Loan and (ii) the purchase by the Master
Servicer or the Company or, if specified in the related Prospectus Supplement,
by the holder of the REMIC Residual Certificates (see "Certain Federal Income
Tax Consequences" below) from the Trust Fund for such series of all remaining
Mortgage Loans and all property acquired in respect of such Mortgage Loans. In
addition to the foregoing, the Master Servicer or the Company may have the
option to purchase, in whole but not in part, the Certificates specified in the
related Prospectus Supplement in the manner set forth in the related Prospectus
Supplement. Upon the purchase of such Certificates or at any time thereafter, at
the option of the Master Servicer or the Company, the Mortgage Loans may be
sold, thereby effecting a retirement of the Certificates and the termination of
the Trust Fund, or the Certificates so purchased may be held or resold by the
Master Servicer or the Company. Written notice of termination of the Pooling and
Servicing Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency appointed by the Trustee which will be
specified in the notice of termination. If the Certificateholders are permitted
to terminate the trust under the applicable Pooling and Servicing Agreement, a
penalty may be imposed upon the Certificateholders based upon the fee that would
be foregone by the Master Servicer because of such termination.
Any such purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a series of Certificates shall be made at the option
of the Master Servicer, the Company or, if applicable, the holder of the REMIC
Residual Certificates at the price specified in the related Prospectus
Supplement. The exercise of such right will effect early retirement of the
Certificates of that series, but the right of any such entity to purchase the
Mortgage Loans and related property will be subject to the criteria, and will be
at the price set forth in the related Prospectus Supplement. Such early
termination may adversely affect the yield to holders of certain classes of such
Certificates. If a REMIC election has been made, the termination of the related
Trust Fund will be effected in a manner consistent with applicable federal
income tax regulations and its status as a REMIC.
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The Trustee
The Trustee under each Pooling and Servicing Agreement will be named in
the related Prospectus Supplement. The commercial bank or trust company serving
as Trustee may have normal banking relationships with the Company and/or its
affiliates, including Residential Funding.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement or if the Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Company will be obligated to appoint a
successor Trustee. The Trustee may also be removed at any time by the holders of
Certificates evidencing not less than 51% of the aggregate voting rights in the
related Trust Fund. Any resignation or removal of the Trustee and appointment of
a successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a Certificate will depend on the price paid by
the holder for such Certificate, the Pass-Through Rate on any such Certificate
entitled to payments of interest (which Pass-Through Rate may vary if so
specified in the related Prospectus Supplement) and the rate and timing of
principal payments (including payments in excess of required installments,
prepayments or terminations, liquidations and repurchases) on the Mortgage Loans
and the rate and timing of Draws in the case of Revolving Credit Loans and the
allocation thereof to reduce the principal balance of such Certificate (or
notional amount thereof, if applicable).
The amount of interest payments on a Mortgage Loan distributed (or
accrued in the case of Deferred Interest or Accrual Certificates) monthly to
holders of a class of Certificates entitled to payments of interest will be
calculated on the basis of such class's specified percentage of each such
payment of interest (or accrual in the case of Accrual Certificates) and will be
expressed as a fixed, adjustable or variable Pass-Through Rate payable on the
outstanding principal balance or notional amount of such Certificate, or any
combination of such Pass-Through Rates, calculated as described herein and in
the related Prospectus Supplement. See "Description of the
Certificates--Distributions." Holders of Strip Certificates or a class of
Certificates having a Pass-Through Rate that varies based on the weighted
average Mortgage Rate of the underlying Mortgage Loans will be affected by
disproportionate prepayments and repurchases of Mortgage Loans having higher Net
Mortgage Rates or rates applicable to the Strip Certificates, as applicable.
The effective yield to maturity to each holder of Certificates entitled
to payments of interest will be below that otherwise produced by the applicable
Pass-Through Rate and purchase price of such Certificate to the extent that
interest accrues on each Mortgage Loan during the
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calendar month or a period preceding a Distribution Date instead of through the
day immediately preceding such Distribution Date.
A class of Certificates may be entitled to payments of interest at a
variable or adjustable Pass-Through Rate, or any combination of such
Pass-Through Rates, as specified in the related Prospectus Supplement. A
variable Pass-Through Rate may be calculated based on the weighted average of
the Mortgage Rates (net of Servicing Fees and any Excess Spread or Excluded
Spread) of the related Mortgage Loans (the "Net Mortgage Rate") or certain
balances thereof for the month preceding the Distribution Date, by reference to
an index or otherwise. The aggregate payments of interest on a class of
Certificates, and the yield to maturity thereon, will be affected by the rate of
payment of principal on the Certificates (or the rate of reduction in the
notional amount of Certificates entitled to payments of interest only) and, in
the case of Certificates evidencing interests in ARM Loans, by changes in the
Net Mortgage Rates on the ARM Loans. The yield on the Certificates will also be
affected by liquidations of Mortgage Loans following Mortgagor defaults and by
purchases of Mortgage Loans in the event of certain breaches of representations
made in respect of such Mortgage Loans, or conversions of ARM Loans to a fixed
interest rate. See "Mortgage Loan Program--Representations Relating to Mortgage
Loans" and "Description of the Certificates--Assignment of Trust Fund Assets"
above. In addition, if the index used to determine the Pass-Through Rate for the
Certificates is different than the Index applicable to the Mortgage Rates, the
yield on the Certificates will be sensitive to changes in the index related to
the Pass-Through Rate and the yield on the Certificates may be reduced by
application of a cap on the Pass-Through Rate based on the weighted average of
the Net Mortgage Rates or such other formulas as may be set forth in the related
Prospectus Supplement.
In general, if a Certificate is purchased at a premium over its face
amount and distributions of principal on such Certificate occur at a rate faster
than anticipated at the time of purchase, the purchaser's actual yield to
maturity will be lower than that assumed at the time of purchase. Conversely, if
a Certificate is purchased at a discount from its face amount and distributions
of principal on such Certificate occur at a rate slower than that assumed at the
time of purchase, the purchaser's actual yield to maturity will be lower than
that originally anticipated. If Strip Certificates are issued evidencing a right
to payments of interest only or disproportionate payments of interest, a faster
than expected rate of principal payments on the Mortgage Loans (net of Draws if
applicable) will negatively affect the total return to investors in any such
Certificates. The yield on a class of Strip Certificates that is entitled to
receive payments of interest only will nevertheless be affected by any losses on
the related Mortgage Loans because of the effect on the timing and amount of
payments. In certain circumstances, rapid principal payments on the Mortgage
Loans (net of Draws if applicable) may result in the failure of such holders to
recoup their original investment. If Strip Certificates are issued evidencing a
right to payments of principal only or disproportionate payments of principal, a
slower than expected rate of principal payments on the Mortgage Loans (net of
Draws if applicable) could negatively affect the anticipated yield on such Strip
Certificates. In addition, the total return to investors of Certificates
evidencing a right to distributions of interest at a rate that is based on the
weighted average Net Mortgage Rate of the Mortgage Loans from time to time will
be adversely affected by principal payments on Mortgage Loans with Mortgage
Rates higher than the weighted average Mortgage
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Rate on the Mortgage Loans. In general, mortgage loans with higher Mortgage
Rates or Gross Margins are likely to prepay at a faster rate than mortgage loans
with lower Mortgage Rates or Gross Margins. In addition, the yield to maturity
on certain other types of classes of Certificates, including Accrual
Certificates, Certificates with a Pass-Through Rate that fluctuates inversely
with or at a multiple of an index or certain other classes in a series including
more than one class of Certificates, may be relatively more sensitive to the
rate of principal payments on the related Mortgage Loans (net of Draws if
applicable) than other classes of Certificates.
The timing of changes in the rate of principal distributions on a
Certificate may significantly affect an investor's actual yield to maturity,
even if the average rate of principal distributions experienced over time is
consistent with an investor's expectation. In general, the earlier a
distribution of principal on a Certificate, the greater will be the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal distributions occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of a series of Certificates would not be fully offset by a subsequent like
reduction (or increase) in the rate of principal distributions.
Unless otherwise specified in the related Prospectus Supplement,
prepayments in full or final liquidations of Closed-End Loans will reduce the
amount of interest distributed in the following month to holders of Certificates
entitled to distribution of interest because the resulting Prepayment Interest
Shortfall will not be covered by Compensating Interest. See "Description of the
Certificates--Principal and Interest on the Certificates." Unless otherwise
specified in the related Prospectus Supplement, a partial prepayment of
principal of a Closed-End Loan is applied so as to reduce the outstanding
principal balance thereof as of the first day of the month in which such partial
prepayment is received. As a result, the effect of a partial prepayment on a
Closed-End Loan generally will be to reduce the amount of interest distributed
to holders of Certificates in the month following the receipt of such partial
prepayment by an amount equal to one month's interest at the applicable
Pass-Through Rate or Net Mortgage Rate, as the case may be, on the prepaid
amount. See "Description of the Certificates--Payment on Mortgage Loans;
Deposits to Certificate Account." Neither full nor partial principal prepayments
on Closed-End Loans will be distributed until the Distribution Date in the month
following receipt.
The rate and timing of defaults on the Mortgage Loans will also affect
the rate and timing of principal payments on the Mortgage Loans and thus the
yield on the related Certificates. For a general discussion of the risk of
defaults on the Mortgage Loans, see "Risk Factors--Special Features of the
Mortgage Loans" herein. There can be no assurance as to the rate of losses or
delinquencies on any of the Mortgage Loans, however, such losses and
delinquencies may be expected to be higher than those of traditional first lien
mortgage loans. To the extent that any losses are incurred on any of the
Mortgage Loans that are not covered by the applicable credit enhancement,
holders of Certificates of the series evidencing interests in the related
Mortgage Pool (or certain classes thereof) will bear all risk of such losses
resulting from default by Mortgagors. See "Risk Factors--Limitations, Reduction
and Substitution of Credit Enhancement" herein. Even where the applicable credit
enhancement covers all losses incurred on the Mortgage
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Loans, the effect of losses may be to increase prepayment experience on the
Mortgage Loans, thus reducing average weighted life and affecting yield to
maturity.
With respect to certain Mortgage Loans (including ARM Loans and
Revolving Credit Loans), the Mortgage Rate at origination may be below the rate
that would result from the sum of the then-applicable Index and Gross Margin.
Under the applicable underwriting standards, Mortgagors under Closed-End Loans
generally will be qualified on the basis of the Mortgage Rate in effect at
origination, and Mortgagors under Revolving Credit Loans are generally qualified
based on an assumed payment which reflects a rate significantly lower than the
maximum rate. The repayment of any such Mortgage Loan may thus be dependent on
the ability of the mortgagor to make larger interest payments following the
adjustment of the Mortgage Rate.
With respect to certain Closed-End Loans that permit negative
amortization, during a period of rising interest rates as well as immediately
after origination, that portion of the interest currently accruing thereon but
not currently payable will become Deferred Interest which will be added to the
principal balance thereof and will bear interest at the applicable Mortgage
Rate. The addition of any such Deferred Interest to the principal balance of any
related class of Certificates will lengthen the weighted average life thereof
and may adversely affect yield to holders thereof. Unless otherwise specified in
the related Prospectus Supplement, Revolving Credit Loans will not be subject to
negative amortization.
As discussed under "Risk Factors-Special Features of the Mortgage
Loans-Mortgage Loan Characteristics" with respect to Revolving Credit Loans,
except for certain programs under which the Draw Period is less than the full
term thereof, required minimum monthly payments are generally equal to or not
significantly larger than the amount of interest currently accruing thereon, and
therefore are not expected to significantly amortize the outstanding principal
amounts of such Mortgage Loans prior to maturity, which amounts may include
substantial Draws recently made. As a result, a borrower will generally be
required to pay a substantial principal amount at the maturity of a Revolving
Credit Loan. Alternatively, a pool of Closed-End Loans may include Balloon Loans
which require a single payment at maturity. Such Mortgage Loans pose a greater
risk of default than fully-amortizing Mortgage Loans, because the Mortgagor's
ability to make such a substantial payment at maturity will generally depend on
the Mortgagor's ability to obtain refinancing of such Mortgage Loans or to sell
the Mortgaged Property prior to the maturity of the Balloon Loan. The ability to
obtain refinancing will depend on a number of factors prevailing at the time
refinancing or sale is required, including, without limitation, the Mortgagor's
personal economic circumstances, the Mortgagor's equity in the related Mortgaged
Property, real estate values, prevailing market interest rates, tax laws and
national and regional economic conditions. For a general discussion of factors
that may affect a Mortgagor's personal economic circumstances, see "Risk
Factors--Special Features of the Mortgage Loans--Mortgagor Credit" herein.
Unless otherwise specified in the related Prospectus Supplement, neither the
Company, Residential Funding, GMAC Mortgage nor any of their affiliates will be
obligated to refinance or repurchase any Mortgage Loan or to sell any Mortgaged
Property.
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For any Mortgage Loans secured by junior mortgages, any inability of
the Mortgagor to pay off the balance thereof may also affect the ability of the
Mortgagor to obtain refinancing at any time of any related senior mortgage loan,
thereby preventing a potential improvement in the Mortgagor's circumstances.
Furthermore, if so specified in the related Prospectus Supplement, under the
applicable Pooling and Servicing Agreement the Master Servicer may be restricted
or prohibited from consenting to any refinancing of any related senior mortgage
loan, which in turn could adversely affect the Mortgagor's circumstances or
result in a prepayment or default under the corresponding junior Mortgage Loan.
In addition to the Mortgagor's personal economic circumstances, a
number of factors, including homeowner mobility, job transfers, changes in the
Mortgagor's housing needs, the Mortgagor's net equity in the Mortgaged Property,
changes in the value of the Mortgaged Property, national and regional economic
conditions, enforceability of due-on-sale clauses, prevailing market interest
rates, servicing decisions, solicitations and the availability of mortgage
funds, seasonal purchasing and payment habits of borrowers or changes in the
deductibility for federal income tax purposes of interest payments on home
equity loans, may affect the rate and timing of principal payments or Draws (if
applicable) on the Mortgage Loans. For a discussion of certain factors that may
affect national and regional economic conditions, see "Risk Factors--Special
Features of the Mortgage Loans--Mortgagor Credit" herein. There can be no
assurance as to the rate of principal payments on the Mortgage Loans, and there
can be no assurance of the rate of Draws on Revolving Credit Loans. The rate of
principal payments and the rate of Draws (if applicable) may fluctuate
substantially from time to time. Generally, home equity loans are not viewed by
mortgagors as permanent financing. Accordingly, Closed-End Loans may experience
a higher rate of prepayment than typical first lien mortgage loans. On the other
hand, for Revolving Credit Loans, due to the unpredictable nature of both
principal payments and Draws, the rates of principal payments net of Draws for
such loans may be much more volatile than for typical first lien mortgage loans.
The yield to maturity of the Certificates of any series, or the rate
and timing of principal payments or Draws (if applicable) on the related
Mortgage Loans, may also be affected by a wide variety of specific terms and
conditions applicable to the respective programs under which the Mortgage Loans
were originated. For example, Revolving Credit Loans may provide for future
Draws to be made only in specified minimum amounts, or alternatively may permit
Draws to be made by check or through a credit card in any amount. A pool of
Revolving Credit Loans subject to the latter provisions may be likely to remain
outstanding longer with a higher aggregate principal balance than a pool of
Revolving Credit Loans with the former provisions, because of the relative ease
of making new Draws. Furthermore, Revolving Credit Loans may provide for
interest rate changes on a daily or monthly basis, or may have Gross Margins
that may vary under certain circumstances over the term of the loan. In
extremely high market interest rate scenarios, Certificates backed by Revolving
Credit Loans with adjustable rates subject to substantially higher maximum rates
than typically apply to adjustable rate first mortgage loans may experience
rates of default and liquidation substantially higher than those that have been
experienced on other adjustable rate mortgage loan pools.
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The yield to maturity of the Certificates of any series, or the rate
and timing of principal payments (or Draws if applicable) on the related
Mortgage Loans and corresponding distributions on the Certificates, will also be
affected by the specific terms and conditions applicable to the Certificates.
For example, if the index used to determine the Pass-Through Rates for a series
of Certificates is different from the Index applicable to the Mortgage Rates of
the underlying Mortgage Loans, the yield on the Certificates may be reduced by
application of a cap on the Pass-Through Rates based on the weighted average of
the Mortgage Rates. Depending on applicable cash flow allocation provisions,
changes in the relationship between the two indexes may also affect the timing
of certain principal distributions on the Certificates, or may affect the amount
of any Overcollateralization (or the amount on deposit in any Reserve Fund)
which could in turn accelerate the distribution of principal on the Certificates
if so provided in the Prospectus Supplement. For any series of Certificates
backed by Revolving Credit Loans, provisions governing whether future Draws on
the Revolving Credit Loans will be included in the Trust Fund will have a
significant effect on the rate and timing of principal distributions on the
Certificates. For a series of Certificates backed by the Trust Balances of
Revolving Credit Loans, the specific provisions applicable to the allocation of
payments, Draws and losses on the Revolving Credit Loans between the Trust
Balances and the Excluded Balances thereof will also have a significant effect
on the rate and timing of principal distributions on the Certificates. See
"Allocation of Revolving Credit Loan Balances" herein.
For a series of Certificates backed by Revolving Credit Loans, as a
result of the payment terms of the Mortgage Loans or of the Certificate
provisions relating to future Draws, there may be no principal distributions on
such Certificates in any given month. In addition, it is possible that the
aggregate Draws on Revolving Credit Loans included in a Mortgage Pool may exceed
the aggregate payments with respect to principal on such Revolving Credit Loans
for the related period.
Unless otherwise specified in the related Prospectus Supplement, all
Revolving Credit Loans and all Closed-End Loans (other than ARM Loans) will
contain due-on-sale provisions permitting the mortgagee to accelerate the
maturity of the Mortgage Loan upon sale or certain transfers by the Mortgagor of
the underlying Mortgaged Property. Unless the related Prospectus Supplement
indicates otherwise, the Master Servicer will generally enforce any due-on-sale
clause to the extent it has knowledge of the conveyance or proposed conveyance
of the underlying Mortgaged Property and it is entitled to do so under
applicable law, provided, however, that the Master Servicer will not take any
action in relation to the enforcement of any due-on-sale provision which would
adversely affect or jeopardize coverage under any applicable insurance policy.
An ARM Loan is generally assumable under certain conditions if the proposed
transferee of the related Mortgaged Property establishes its ability to repay
the Mortgage Loan and, in the reasonable judgment of the Master Servicer or the
related Subservicer, the security for the ARM Loan would not be impaired by the
assumption. The extent to which ARM Loans are assumed by purchasers of the
Mortgaged Properties rather than prepaid by the related Mortgagors in connection
with the sales of the Mortgaged Properties will affect the weighted average life
of the related series of Certificates. See "Description of the
Certificates--Collection and Other Servicing Procedures" and "Certain Legal
Aspects of the Mortgage Loans and Related
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Matters--Enforceability of Certain Provisions" for a description of certain
provisions of the Pooling and Servicing Agreement and certain legal developments
that may affect the prepayment experience on the Mortgage Loans.
In addition, certain Mortgage Securities included in a Mortgage Pool
may be backed by underlying Mortgage Loans having differing interest rates.
Accordingly, the rate at which principal payments are received on the related
Certificates will, to a certain extent, depend on the interest rates on such
underlying Mortgage Loans.
At the request of the Mortgagor, the Master Servicer or a Subservicer
may allow the refinancing of a Mortgage Loan in any Trust Fund by accepting
prepayments thereon and permitting a new loan secured by a mortgage on the same
property. In the event of such a refinancing, the new loan would not be included
in the related Trust Fund and, therefore, such refinancing would have the same
effect as a prepayment in full of the related Mortgage Loan. A Subservicer or
the Master Servicer may, from time to time, implement programs designed to
encourage refinancing. Such programs may include, without limitation,
modifications of existing loans, general or targeted solicitations, the offering
of pre-approved applications, reduced origination fees or closing costs, or
other financial incentives. In addition, the Master Servicer or any Subservicers
may encourage the refinancing of Mortgage Loans, including defaulted Mortgage
Loans, that would permit creditworthy borrowers to assume the outstanding
indebtedness of such Mortgage Loans.
If the Pooling and Servicing Agreement for a series of Certificates
provides for a Funding Account or other means of funding the transfer of
additional Mortgage Loans to the related Trust, as described under "Description
of the Certificates; Funding Account" herein, and the Trust is unable to acquire
such additional Mortgage Loans within any applicable time limit, the amounts set
aside for such purpose may be applied as principal distributions on one or more
classes of Certificates of such series.
Although the Mortgage Rates on Revolving Credit Loans and ARM Loans
will be subject to periodic adjustments, such adjustments generally (i) as to
ARM Loans will not increase or decrease such Mortgage Rates by more than a fixed
percentage amount on each adjustment date, (ii) will not increase such Mortgage
Rates over a fixed maximum rate during the life of any Revolving Credit Loan or
ARM Loan and (iii) will be based on an Index (which may not rise and fall
consistently with prevailing market interest rates) plus the related Gross
Margin (which may vary under certain circumstances, and which may be different
from margins being used at the time for newly originated adjustable rate
mortgage loans). As a result, the Mortgage Rates on the Revolving Credit Loans
or ARM Loans in any Mortgage Pool at any time may not equal the prevailing rates
for similar, newly originated adjustable rate home equity mortgage loans or
lines of credit, and accordingly the rate of principal payments (and Draws if
applicable) may be lower or higher that would otherwise be anticipated. In
certain rate environments, the prevailing rates on fixed-rate mortgage loans may
be sufficiently low in relation to the then-current Mortgage Rates on Revolving
Credit Loans or ARM Loans that the rate of prepayment may increase as a result
of refinancings. There can be no certainty as to the rate of principal payments
(or Draws
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if applicable) on the Mortgage Loans during any period or over the life of any
series of Certificates.
With respect to any index used in determining the Pass-Through Rates
for a series of Certificates or Mortgage Rates of the underlying Mortgage Loans,
a number of factors affect the performance of such index and may cause such
index to move in a manner different from other indices. To the extent that such
index may reflect changes in the general level of interest rates less quickly
than other indices, in a period of rising interest rates, increases in the yield
to Certificateholders due to such rising interest rates may occur later than
that which would be produced by other indices, and in a period of declining
rates, such index may remain higher than other market interest rates which may
result in a higher level prepayments of the Mortgage Loans, which adjust in
accordance with such index, than of mortgage loans which adjust in accordance
with other indices.
Under certain circumstances, the Master Servicer, the Company or, if
specified in the related Prospectus Supplement, the holders of the REMIC
Residual Certificates may have the option to purchase the Mortgage Loans in a
Trust Fund, thus resulting in the early retirement of the related Certificates.
See "The Pooling and Servicing Agreement--Termination; Retirement of
Certificates."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
AND RELATED MATTERS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by state law (which laws may differ from state to state), the
summaries do not purport to be complete, to reflect the laws of any particular
state or to encompass the laws of all states in which the Mortgaged Properties
may be situated. The summaries are qualified in their entirety by reference to
the applicable federal and state laws governing the Mortgage Loans.
General
The Mortgage Loans (other than Cooperative Loans) will be secured by
either deeds of trust, mortgages or deeds to secure debt, depending upon the
prevailing practice in the state in which the related Mortgaged Property is
located, and may have first, second or third priority. Mortgages and deeds to
secure debt are herein referred to as "mortgages". In some states, a mortgage or
deed of trust creates a lien upon the real property encumbered by the mortgage
or deed of trust. However, in other states, the mortgage or deed of trust
conveys legal title to the property respectively, to the mortgagee or to a
trustee for the benefit of the mortgagee subject to a condition subsequent
(i.e., the payment of the indebtedness secured thereby). The lien created by the
mortgage or deed of trust is not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers. Priority
between mortgages depends on their terms or on the terms of separate
subordination or inter-creditor agreements, the
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knowledge of the parties in some cases and generally on the order of recordation
of the mortgage in the appropriate recording office. There are two parties to a
mortgage, the mortgagor, who is the borrower and homeowner, and the mortgagee,
who is the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. In the case of a land trust, there
are three parties because title to the property is held by a land trustee under
a land trust agreement of which the borrower is the beneficiary; at origination
of a mortgage loan, the borrower executes a separate undertaking to make
payments on the mortgage note. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties: the trustor who is the
borrower-homeowner; the beneficiary who is the lender; and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. The trustee's authority under a
deed of trust, the grantee's authority under a deed to secure debt and the
mortgagee's authority under a mortgage are governed by the law of the state in
which the real property is located, the express provisions of the deed of trust
or mortgage, and, in certain deed of trust transactions, the directions of the
beneficiary.
Cooperative Loans
If specified in the Prospectus Supplement relating to a series of
Certificates, the Mortgage Loans may include Cooperative Loans. Each debt
instrument (a "Cooperative Note") evidencing a Cooperative Loan will be secured
by a security interest in shares issued by the related corporation (a
"Cooperative") that owns the related apartment building, which is a corporation
entitled to be treated as a housing cooperative under federal tax law, and in
the related proprietary lease or occupancy agreement granting exclusive rights
to occupy a specific dwelling unit in the Cooperative's building. The security
agreement will create a lien upon the shares of the Cooperative, the priority of
which will depend on, among other things, the terms of the particular security
agreement as well as the order of recordation and/or filing of the agreement (or
financing statements related thereto) in the appropriate recording office.
Unless otherwise specified in the related Prospectus Supplement, all
Cooperative buildings relating to the Cooperative Loans are located in the State
of New York. Generally, each Cooperative owns in fee or has a leasehold interest
in all the real property and owns in fee or leases the building and all separate
dwelling units therein. The Cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is an underlying
mortgage (or mortgages) on the Cooperative's building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the Cooperative, as mortgagor or lessor, as the case may be, is also
responsible for fulfilling such mortgage or rental obligations. An underlying
mortgage loan is ordinarily obtained by the Cooperative in connection with
either the construction or purchase of the Cooperative's building or the
obtaining of capital by the Cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that Cooperative is the
landlord is generally subordinate to the interest of the holder of an underlying
mortgage and to the interest of the holder of a land lease. If the Cooperative
is unable to meet the payment obligations (i) arising under an underlying
mortgage, the mortgagee holding an
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underlying mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (ii) arising under
its land lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements. In
addition, an underlying mortgage on a Cooperative may provide financing in the
form of a mortgage that does not fully amortize, with a significant portion of
principal being due in one final payment at maturity. The inability of the
Cooperative to refinance a mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee. Similarly, a land
lease has an expiration date and the inability of the Cooperative to extend its
term or, in the alternative, to purchase the land, could lead to termination of
the Cooperative's interest in the property and termination of all proprietary
leases and occupancy agreements. In either event, a foreclosure by the holder of
an underlying mortgage or the termination of the underlying lease could
eliminate or significantly diminish the value of any collateral held by the
mortgagee who financed the purchase by an individual tenant-stockholder of
shares of the Cooperative or, in the case of the Mortgage Loans, the collateral
securing the Cooperative Loans.
Each Cooperative is owned by shareholders (referred to as
tenant-stockholders) who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. Generally, a tenant-stockholder
of a Cooperative must make a monthly payment to the Cooperative pursuant to the
proprietary lease, which payment represents such tenant-stockholder's pro rata
share of the Cooperative's payments for its underlying mortgage, real property
taxes, maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights may be financed
through a Cooperative Loan evidenced by a Cooperative Note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related shares of the related Cooperative.
The mortgagee generally takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the mortgagee's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the Cooperative Note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares. See "--Foreclosure on Shares of Cooperatives" below.
Tax Aspects of Cooperative Ownership
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of
the Code) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation representing
his proportionate share of certain interest expenses and certain real estate
taxes allowable as a deduction under Section 216(a) of the Code to the
corporation under Sections 163 and 164 of the Code. In order for a corporation
to qualify under Section 216(b)(1)
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of the Code for its taxable year in which such items are allowable as a
deduction to the corporation, such section requires, among other things, that at
least 80% of the gross income of the corporation be derived from its
tenant-stockholders. By virtue of this requirement, the status of a corporation
for purposes of Section 216(b)(1) of the Code must be determined on a
year-to-year basis. Consequently, there can be no assurance that Cooperatives
relating to the Cooperative Loans will qualify under such section for any
particular year. In the event that such a Cooperative fails to qualify for one
or more years, the value of the collateral securing any related Cooperative
Loans could be significantly impaired because no deduction would be allowable to
tenant-stockholders under Section 216(a) of the Code with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that such a failure would be permitted to continue over
a period of years appears remote.
Foreclosure on Mortgage Loans
Although a deed of trust may also be foreclosed by judicial action,
foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In addition to any notice requirements
contained in a deed of trust, in some states, prior to a sale the trustee must
record a notice of default and send a copy to the borrower/trustor and to any
person who has recorded a request for a copy of notice of default and notice of
sale. In addition, in some states, prior to such sale, the trustee must provide
notice to any other individual having an interest of record in the real
property, including any junior lienholders. If the deed of trust is not
reinstated within a specified period, a notice of sale must be posted in a
public place and, in most states, published for a specific period of time in one
or more newspapers in a specified manner prior to the date of trustee's sale. In
addition, some states' laws require that a copy of the notice of sale be posted
on the property and sent to all parties having an interest of record in the real
property.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
Foreclosure of a mortgage generally is accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. If the mortgagee's right to foreclose is contested, the legal
proceedings necessary to resolve the issue can be time-consuming.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is
generally a public sale. However, because of the difficulty a potential
third-party buyer at the sale might have in determining the exact status of
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title, and because the physical condition of the property may have deteriorated
during the foreclosure proceedings, it is uncommon for a third party to purchase
the property at a foreclosure sale. Rather, it is common for the lender to
purchase the property from the trustee or referee for a credit bid less than or
equal to the unpaid principal amount of note plus the accrued and unpaid
interest and the expense of foreclosure, in which case the mortgagor's debt will
be extinguished unless the lender purchases the property for a lesser amount in
order to preserve its right against a borrower to seek a deficiency judgment and
such remedy is available under state law and the related loan documents. In the
same states, there is a statutory minimum purchase price which the lender may
offer for the property and generally, state law controls the amount of
foreclosure costs and expenses, including attorneys' fees, which may be
recovered by a lender. Thereafter, subject to the right of the borrower in some
states to remain in possession during the redemption period, the lender will
assume the burdens of ownership, including obtaining hazard insurance, paying
taxes and making such repairs at its own expense as are necessary to render the
property suitable for sale. Generally, the lender will obtain the services of a
real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property and,
in some states, the lender may be entitled to a deficiency judgment. Any loss
may be reduced by the receipt of any mortgage insurance proceeds or other forms
of credit enhancement for a series of Certificates. See "Description of Credit
Enhancement."
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure by a junior
mortgagee triggers the enforcement of a "due-on-sale" clause in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees to avoid foreclosure. Accordingly,
with respect to those Mortgage Loans which are junior mortgage loans, if the
lender purchases the property, the lender's title will be subject to all senior
liens and claims and certain governmental liens. The proceeds received by the
referee or trustee from the sale are applied first to the costs, fees and
expenses of sale and then in satisfaction of the indebtedness secured by the
mortgage or deed of trust under which the sale was conducted. Any remaining
proceeds are generally payable to the holders of junior mortgages or deeds of
trust and other liens and claims in order of their priority, whether or not the
borrower is in default. Any additional proceeds are generally payable to the
mortgagor or trustor. The payment of the proceeds to the holders of junior
mortgages may occur in the foreclosure action of the senior mortgagee or may
require the institution of separate legal proceedings. See "Risk
Factors--Special Features of the Mortgage Loans" and "Description of the
Certificates--Realization Upon Defaulted Mortgage Loans" herein.
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Foreclosure on Shares of Cooperatives
The Cooperative shares owned by the tenant-stockholder, together with
the rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged, may
be cancelled by the Cooperative for failure by the tenant-stockholder to pay its
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the Cooperative's building incurred by such tenant-stockholder.
Generally, obligations and charges arising under a proprietary lease or
occupancy agreement which are owed to the Cooperative are made liens upon the
shares to which the proprietary lease or occupancy agreement relates. In
addition, the proprietary lease or occupancy agreement generally permits the
Cooperative to terminate such lease or agreement in the event the borrower
defaults in the performance of covenants thereunder. Typically, the lender and
the Cooperative enter into a recognition agreement which, together with any
lender protection provisions contained in the proprietary lease or occupancy
agreement, establishes the rights and obligations of both parties in the event
of a default by the tenant-stockholder on its obligations under the proprietary
lease or occupancy agreement. A default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under such proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the amount realized upon a sale of
the collateral below the outstanding principal balance of the Cooperative Loan
and accrued and unpaid interest thereon.
Recognition agreements also generally provide that in the event the
lender succeeds to the tenant-shareholder's shares and proprietary lease or
occupancy agreement as the result of realizing upon its collateral for a
Cooperative Loan, the lender must obtain the approval or consent of the board of
directors of the Cooperative as required by the proprietary lease before
transferring the Cooperative shares or assigning the proprietary lease. Such
approval or consent is usually based on the prospective purchaser's income and
net worth, among other factors, and may significantly reduce the number of
potential purchasers, which could limit the ability of the lender to sell and
realize upon the value of the collateral. Generally, the lender is not limited
in any rights it may have to dispossess the tenant-stockholder.
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Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
In New York, foreclosure on the Cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the New York
Uniform Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the sale and the sale
price. Generally, a sale conducted according to the usual practice of banks
selling similar collateral in the same area will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "--Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors or other parties are
given a statutory period (generally ranging from six months to two years) in
which to redeem the property from the foreclosure sale. In some states,
redemption may occur only upon payment of the entire principal balance of the
loan, accrued interest and expenses of foreclosure. In other states, redemption
may be authorized if the former borrower pays only a portion of the sums due. In
some states, the right to redeem is an equitable right. The equity of
redemption, which is a non-statutory right that must be exercised prior to a
foreclosure sale, should be distinguished from statutory rights of redemption.
The effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The rights of redemption would defeat
the title of any purchaser subsequent to foreclosure or sale under a deed of
trust. Consequently, the practical effect of the redemption right is to force
the lender to maintain the property and pay the expenses of ownership until the
redemption period has expired.
Anti-Deficiency Legislation and Other Limitations on Lenders
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Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states (including California), statutes limit the right of the
beneficiary or mortgagee to obtain a deficiency judgment against the borrower
following foreclosure. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. In the case of a Mortgage Loan secured by a property owned by a trust
where the Mortgage Note is executed on behalf of the trust, a deficiency
judgment against the trust following foreclosure or sale under a deed of trust,
even if obtainable under applicable law, may be of little value to the mortgagee
or beneficiary if there are no trust assets against which such deficiency
judgment may be executed. Some state statutes require the beneficiary or
mortgagee to exhaust the security afforded under a deed of trust or mortgage by
foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the borrower. In certain other states, the lender has the option
of bringing a personal action against the borrower on the debt without first
exhausting such security; however, in some of these states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. Consequently, the practical effect of the election requirement, in
those states permitting such election, is that lenders will usually proceed
against the security first rather than bringing a personal action against the
borrower.
Finally, in certain other states, statutory provisions limit any
deficiency judgment against the borrower following a foreclosure to the excess
of the outstanding debt over the fair market value of the property at the time
of the public sale. The purpose of these statutes is generally to prevent a
beneficiary or mortgagee from obtaining a large deficiency judgment against the
former borrower as a result of low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
Shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Article 9 to prohibit or limit a deficiency award in certain
circumstances, including circumstances where the disposition of the collateral
(which, in the case of a Cooperative Loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement) was not
conducted in a commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon its
collateral and/or enforce a deficiency judgment. For example, under the federal
bankruptcy law, all actions against the debtor, the debtor's property and any
co-debtor are automatically stayed upon the filing of a bankruptcy petition.
Moreover, a court having federal bankruptcy jurisdiction may permit a debtor
through its Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary
default in respect of a mortgage loan on such debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule, even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the
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debtor's petition. Some courts with federal bankruptcy jurisdiction have
approved plans, based on the particular facts of the reorganization case, that
effected the curing of a mortgage loan default by permitting the borrower to pay
over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property which is not the principal
residence of the debtor may be modified. These courts have allowed modifications
that include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule, forgiving all or a portion of the
debt and reducing the lender's security interest to the value of the residence,
thus leaving the lender a general unsecured creditor for the difference between
the value of the residence and the outstanding balance of the loan. Generally,
however, the terms of a mortgage loan secured only by a mortgage on real
property that is the debtor's principal residence may not be modified pursuant
to a plan confirmed pursuant to Chapter 13 except with respect to mortgage
payment arrearages, which may be cured within a reasonable time period. Courts
with federal bankruptcy jurisdiction similarly may be able to modify the terms
of a Cooperative Loan.
Certain tax liens arising under the Code may, in certain circumstances,
have priority over the lien of a mortgage or deed of trust. This may have the
effect of delaying or interfering with the enforcement of rights with respect to
a defaulted Mortgage Loan. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the mortgage loans.
Certain of the Mortgage Loans may be subject to special rules,
disclosure requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Homeownership and Equity Protection Act of 1994
(such Mortgage Loans, "High Cost Loans"), if such Mortgage Loans were originated
on or after October 1, 1995, are not mortgage loans made to finance the purchase
of the mortgaged property and have interest rates or origination costs in excess
of certain prescribed levels. Purchasers or assignees of any High Cost Loan,
including any Trust Fund, could be liable for all claims and subject to all
defenses arising under such provisions that the borrower could assert against
the originator thereof. Remedies available to the borrower include monetary
penalties, as well as recision rights if the appropriate disclosures were not
given as required.
Environmental Legislation
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and under state law in certain states,
a secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up
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hazardous substances regardless of whether they have contaminated the property.
CERCLA imposes strict, as well as joint and several, liability on several
classes of potentially responsible parties, including current owners and
operators of the property who did not cause or contribute to the contamination.
Furthermore, liability under CERCLA is not limited to the original or
unamortized principal balance of a loan or to the value of the property securing
a loan. Lenders may be held liable under CERCLA as owners or operators unless
they qualify for the secured creditor exemption to CERCLA. This exemption
exempts from the definition of owners and operators those who, without
participating in the management of a facility, hold indicia of ownership
primarily to protect a security interest in the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 (the "Conservation Act") amended, among other things, the provisions of
CERCLA with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the mortgaged property. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of substantially all of the operational functions of the
mortgaged property. The Conservation Act also provides that a lender will
continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
Other federal and state laws in certain circumstances may impose
liability on a secured party which takes a deed-in-lieu of foreclosure,
purchases a mortgaged property at a foreclosure sale, or operates a mortgaged
property on which contaminants other than CERCLA hazardous substances are
present, including petroleum, agricultural chemicals, hazardous wastes,
asbestos, radon, and lead-based paint. Such cleanup costs may be substantial. It
is possible that such cleanup costs could become a liability of a Trust Fund and
reduce the amounts otherwise distributable to the holders of the related series
of Certificates. Moreover, certain federal statutes and certain states by
statute impose a lien for any cleanup costs incurred by such state on the
property that is the subject of such cleanup costs (an "Environmental Lien").
All subsequent liens on such property generally are subordinated to such an
Environmental Lien and, in some states, even prior recorded liens are
subordinated to Environmental Liens. In the latter states, the security interest
of the Trustee in a related parcel of real property that is subject to such an
Environmental Lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps
to evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the
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Company has not made and will not make such evaluations prior to the origination
of the Secured Contracts. Neither the Company nor any replacement Servicer will
be required by any Agreement to undertake any such evaluations prior to
foreclosure or accepting a deed-in-lieu of foreclosure. The Company does not
make any representations or warranties or assume any liability with respect to
the absence or effect of contaminants on any related real property or any
casualty resulting from the presence or effect of contaminants. However, the
Company will not be obligated to foreclose on related real property or accept a
deed-in-lieu of foreclosure if it knows or reasonably believes that there are
material contaminated conditions on such property. A failure so to foreclose may
reduce the amounts otherwise available to Certificateholders of the related
series.
Enforceability of Certain Provisions
The Mortgage Loans generally contain due-on-sale clauses. These clauses
permit the mortgagee to accelerate the maturity of the loan if the borrower
sells, transfers or conveys the property without the prior consent of the
mortgagee. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses has been limited or denied. However, the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn-St Germain Act"), subject to
certain exceptions, preempts state law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms. The Garn-St Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of a prepayment penalty upon the acceleration of a loan pursuant
to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, which may have an impact upon the
average life of the Mortgage Loans and the number of Mortgage Loans which may be
outstanding until maturity.
Forms of notes and mortgages used by lenders may contain provisions
obligating the borrower to pay a late charge if payments are not timely made,
and in some circumstances may provide for prepayment fees or penalties if the
obligation is paid prior to maturity. In certain states, there are or may be
specific limitations upon the late charges which a lender may collect from a
borrower for delinquent payments. Certain states also limit the amounts that a
lender may collect from a borrower as an additional charge if the loan is
prepaid.
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In foreclosure actions, courts have imposed general equitable
principles. These equitable principles are generally designed to relieve the
borrower from the legal effect of its defaults under the loan documents.
Examples of judicial remedies that have been fashioned include judicial
requirements that the lender undertake affirmative and expensive actions to
determine the causes for the borrower's default and the likelihood that the
borrower will be able to reinstate the loan. In some cases, courts have required
that lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial disability. In other cases,
courts have limited the right of the lender to foreclose if the default under
the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second mortgage or
deed of trust affecting the property. Finally, some courts have been faced with
the issue of whether or not federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
deeds of trust or mortgages receive notices in addition to the statutorily
prescribed minimum. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust or under a mortgage having a power of sale, does not involve
sufficient state action to afford constitutional protections to the borrower.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 ("Title V"), provides that state usury limitations shall not
apply to certain types of residential first mortgage loans, including
cooperative loans originated by certain lenders after March 31, 1980. A similar
federal statute was in effect with respect to mortgage loans made during the
first three months of 1980. The Office of Thrift Supervision is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized any state to impose interest
rate limits by adopting, before April 1, 1983, a law or constitutional provision
which expressly rejects application of the federal law. In addition, even where
Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered by
Title V. Certain states have taken action to reimpose interest rate limits or to
limit discount points or other charges.
Usury limits apply to junior mortgage loans in many states. Any
applicable usury limits in effect at origination will be reflected in the
maximum Mortgage Rates for Revolving Credit Loans and ARM Loans, as set forth in
the related Prospectus Supplement.
Unless otherwise set forth in the related Prospectus Supplement, each
Seller of a Mortgage Loan will have represented that such Mortgage Loan was
originated in compliance with then applicable state laws, including usury laws,
in all material respects. However, the Mortgage Rates on the Mortgage Loans will
be subject to applicable usury laws as in effect from time to time.
Alternative Mortgage Instruments
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Alternative mortgage instruments, including adjustable rate mortgage
loans and adjustable rate cooperative loans, and early ownership mortgage loans,
originated by non-federally chartered lenders have historically been subjected
to a variety of restrictions. Such restrictions differed from state to state,
resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act ("Title VIII").
Title VIII provides that, notwithstanding any state law to the contrary, (i)
state-chartered banks may originate alternative mortgage instruments in
accordance with regulations promulgated by the Comptroller of the Currency with
respect to the origination of alternative mortgage instruments by national
banks, (ii) state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions and (iii) all other non-federally chartered
housing creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII also
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
Mortgagors who are members of the Air Force, Army, Marines, Navy, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to Mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Master Servicer to collect full amounts of interest on certain of
the Mortgage Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related Mortgage Loans, would result in a reduction
of the amounts distributable to the holders of the related Certificates, and
would not be covered by Advances and may not be covered by the applicable form
of credit enhancement provided in connection with the related series of
Certificates. In addition, the Relief Act imposes limitations that would impair
the ability of the Master Servicer to foreclose on an affected Mortgage Loan
during the Mortgagor's period of active duty status, and, under certain
circumstances, during an additional
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three month period thereafter. Thus, in the event that the Relief Act or similar
legislation or regulations applies to any Mortgage Loan which goes into default,
there may be delays in payment and losses on the related Certificates in
connection therewith. Any other interest shortfalls, deferrals or forgiveness of
payments on the Mortgage Loans resulting from similar legislation or regulations
may result in delays in payments or losses to Certificateholders of the related
series.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property", including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
Junior Mortgages; Rights of Senior Mortgagees
The Mortgage Loans or Mortgage Securities included in the Trust Fund
for a series will be secured by mortgages or deeds of trust which are Revolving
Credit Loans or Closed-End Loans which may be junior to other mortgages or deeds
of trust held by other lenders or institutional investors. The rights of the
Trust Fund (and therefore the Certificateholders), as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee under the senior mortgage,
including the prior rights of the senior mortgagee to receive hazard insurance
and condemnation proceeds and to cause the property securing the Mortgage Loan
to be sold upon default of the mortgagor, which may extinguish the junior
mortgagee's lien unless the junior mortgagee asserts its subordinate interest in
the property in foreclosure litigation and, in certain cases, either reinitiates
or satisfies the defaulted senior loan or loans. A junior mortgagee may satisfy
a defaulted senior loan in full or, in some states, may cure such default and
bring the senior loan current thereby reinstating the senior loan, in either
event usually adding the amounts expended to the balance due on the junior loan.
In most states, absent a provision in the mortgage or deed of trust, no notice
of default is required to be given to a junior mortgagee. Where applicable law
or the terms of the senior mortgage or deed of trust do not require notice of
default to the junior mortgagee, the lack of any such notice may prevent the
junior mortgagee from exercising any right to reinstate the loan which
applicable law may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard
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insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust, in such order as the mortgagee may determine.
Thus, in the event improvements on the property are damaged or destroyed by fire
or other casualty, or in the event the property is taken by condemnation, the
mortgagee or beneficiary under underlying senior mortgages will have the prior
right to collect any insurance proceeds payable under a hazard insurance policy
and any award of damages in connection with the condemnation and to apply the
same to the indebtedness secured by the senior mortgages. Proceeds in excess of
the amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of junior mortgages in the order of their priority.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are prior to the mortgage
or deed of trust, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee under the mortgage. Upon a failure of
the mortgagor to perform any of these obligations, the mortgagee or beneficiary
is given the right under certain mortgages or deeds of trust to perform the
obligation itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All
sums so expended by a senior mortgagee become part of the indebtedness secured
by the senior mortgage.
The form of credit line trust deed or mortgage used by most
institutional lenders which make Revolving Credit Loans typically contains a
"future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. The priority of the lien securing any
advance made under the clause may depend in most states on whether the deed of
trust or mortgage is designated as a credit line deed of trust or mortgage. If
the beneficiary or lender advances additional amounts, the advance is entitled
to receive the same priority as amounts initially advanced under the trust deed
or mortgage, notwithstanding the fact that there may be junior trust deeds or
mortgages and other liens which intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and notwithstanding
that the beneficiary or lender had actual knowledge of such intervening junior
trust deeds or mortgages and other liens at the time of the advance. In most
states, the trust deed or mortgage lien securing mortgage loans of the type
which includes Revolving Credit Loans applies retroactively to the date of the
original recording of the trust deed or mortgage, provided that the total amount
of advances under the Credit Limit does not exceed the maximum specified
principal amount of the recorded trust deed or mortgage, except as to advances
made after receipt by the lender of a written notice of lien from a judgment
lien creditor of the trustor.
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Negative Amortization Loans
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980 ("DIDMC") and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The holding was limited to the effect of DIDMC on state laws regarding
the compounding of interest and the court did not address the applicability of
the Alternative Mortgage Transaction Parity Act of 1982, which authorizes a
lender to make residential mortgage loans that provide for negative
amortization. The First Circuit's decision is binding authority only on Federal
District Courts in Maine, New Hampshire, Massachusetts, Rhode Island and Puerto
Rico.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of certain anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Certificates offered hereunder. This discussion has been prepared with the
advice of Thacher Proffitt & Wood and Orrick, Herrington & Sutcliffe LLP,
counsel to the Company. This discussion is directed solely to Certificateholders
that hold the Certificates as capital assets within the meaning of Section 1221
of the Code and does not purport to discuss all federal income tax consequences
that may be applicable to particular categories of investors, some of which
(such as banks, insurance companies and foreign investors) may be subject to
special rules. Further, the authorities on which this discussion, and the
opinion referred to below, are based are subject to change or differing
interpretations, which could apply retroactively. Taxpayers and preparers of tax
returns (including those filed by any REMIC or other issuer) should be aware
that under applicable Treasury regulations a provider of advice on specific
issues of law is not considered an income tax return preparer unless the advice
(i) is given with respect to events that have occurred at the time the advice is
rendered and is not given with respect to the consequences of contemplated
actions, and (ii) is directly relevant to the determination of an entry on a tax
return. Accordingly, taxpayers should consult their tax advisors and tax return
preparers regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. In addition to the federal
income tax consequences described herein, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of the Certificates. See "State and Other Tax Consequences."
Certificateholders are advised to consult their tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder.
Unless otherwise specified in the related Prospectus Supplement, as to
each series of Certificates, the Master Servicer will cause an election to be
made to have the related Trust Fund
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treated as a REMIC under Sections 860A through 860G (the "REMIC Provisions") of
the Code. If a REMIC election (or elections) will be made for the related Trust
Fund, the related Prospectus Supplement for each series of Certificates will
identify all "regular interests" and "residual interests" in the REMIC. If a
REMIC election will not be made for a Trust Fund, the federal income
consequences of the purchase, ownership and disposition of the related
Certificates will be set forth in the related Prospectus Supplement. For
purposes of this tax discussion, references to a "Certificateholder" or a
"holder" are to the beneficial owner of a Certificate.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271-1273 and 1275 of the
Code and in the Treasury regulations issued thereunder (the "OID Regulations"),
and in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations, which are effective
with respect to debt instruments issued on or after April 4, 1994, do not
adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
REMICS
Classification of REMICS
Upon the issuance of each series of REMIC Certificates, either Thacher
Proffitt & Wood or Orrick, Herrington & Sutcliffe LLP, counsel to the Company,
will deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the related Trust
Fund (or each applicable portion thereof) will qualify as a REMIC and the REMIC
Certificates offered with respect thereto will be considered to evidence
ownership of "regular interests" ("REMIC Regular Certificates") or "residual
interests" ("REMIC Residual Certificates") in that REMIC within the meaning of
the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for such status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year and thereafter. In that event, such entity may be taxable as a
separate corporation under Treasury regulations, and the related REMIC
Certificates may not be accorded the status or given the tax treatment described
below. Although the Code authorizes the Treasury Department to issue regulations
providing relief in the event of an inadvertent termination of REMIC status, no
such regulations have been issued. Any such relief, moreover, may be accompanied
by sanctions, such as the imposition of a corporate tax on all or a portion of
the Trust Fund's income for the period in which the requirements for such status
are not satisfied. The Pooling and Servicing Agreement with respect to each
REMIC will include provisions designed to maintain the Trust Fund's status as a
REMIC under the REMIC Provisions. It is not anticipated that the status of any
Trust Fund as a REMIC will be terminated.
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Characterization of Investments in REMIC Certificates
In general, the REMIC Certificates will be "real estate assets" within
the meaning of Section 856(c)(5)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
underlying such Certificates would be so treated. Moreover, if 95% or more of
the assets of the REMIC qualify for any of the foregoing treatments at all times
during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and income
allocated to the class of REMIC Residual Certificates will be interest described
in Section 856(c)(3)(B) of the Code to the extent that such Certificates are
treated as "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code. In addition, the REMIC Regular Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code if transferred
to another REMIC on its startup day in exchange for regular or residual
interests therein. The determination as to the percentage of the REMIC's assets
that constitute assets described in the foregoing sections of the Code will be
made with respect to each calendar quarter based on the average adjusted basis
of each category of the assets held by the REMIC during such calendar quarter.
The Master Servicer will report those determinations to Certificateholders in
the manner and at the times required by applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale, and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. In
addition, in some instances Mortgage Loans may not be treated entirely as assets
described in the foregoing sections. The REMIC Regulations do provide, however,
that payments on Mortgage Loans held pending distribution are considered part of
the Mortgage Loans for purposes of Section 856(c)(5)(A) of the Code.
Furthermore, foreclosure property will qualify as "real estate assets" under
Section 856(c)(5)(A) of the Code.
Tiered REMIC Structures
For certain series of REMIC Certificates, two or more separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs ("Tiered REMICs") for federal income tax purposes. Upon the issuance of
any such series of REMIC Certificates, Thacher Proffitt & Wood or Orrick,
Herrington & Sutcliffe LLP, counsel to the Company, will deliver their opinion
generally to the effect that, assuming compliance with all provisions of the
related Pooling and Servicing Agreement, the Tiered REMICs will each qualify as
a REMIC and the REMIC Certificates issued by the Tiered REMICs, respectively,
will be considered to evidence
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ownership of REMIC Regular Certificates or REMIC Residual Certificates in the
related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will
be "real estate assets" within the meaning of Section 856(c)(5)(A) of the Code,
and "loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code, and whether the income on such Certificates is interest described
in Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of REMIC Regular Certificates
General
Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with the method described below, in advance of the receipt of the
cash attributable to such income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to REMIC Regular Certificates and certain
other debt instruments issued with original issue discount. Regulations have not
been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report (the "Committee Report") accompanying the Tax
Reform Act of 1986, indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption used by the Master Servicer in reporting
original issue discount for each series of REMIC Regular Certificates (the
"Prepayment Assumption") will be consistent with this standard and will be
disclosed in the related Prospectus Supplement. However, neither the Company nor
the Master Servicer will make any representation that the Mortgage Loans will in
fact prepay at a rate conforming to the Prepayment Assumption or at any other
rate.
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The original issue discount, if any, on a REMIC Regular Certificate
will be the excess of its stated redemption price at maturity over its issue
price. The issue price of a particular class of REMIC Regular Certificates will
be the first cash price at which a substantial amount of REMIC Regular
Certificates of that class is sold (excluding sales to bond houses, brokers and
underwriters). If less than a substantial amount of a particular class of REMIC
Regular Certificates is sold for cash on or prior to the date of their initial
issuance (the "Closing Date"), the issue price for such class will be treated as
the fair market value of such class on the Closing Date. Under the OID
Regulations, the stated redemption price of a REMIC Regular Certificate is equal
to the total of all payments to be made on such Certificate other than
"qualified stated interest." "Qualified stated interest" includes interest that
is unconditionally payable at least annually at a single fixed rate, or in the
case of a variable rate debt instrument, at a "qualified floating rate," an
"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate," or a
combination of "qualified floating rates" that generally does not operate in a
manner that accelerates or defers interest payments on such REMIC Regular
Certificate. It is possible that the Internal Revenue Service (the "IRS") will
take the position that no portion of interest on a subordinated Certificate (or,
perhaps, any Certificate) is qualified stated interest on the grounds that such
interest is not unconditionally payable.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determina-
tion of the total amount of original issue discount and the timing of the
inclusion thereof will vary according to the characteristics of such REMIC
Regular Certificates. In general terms, original issue discount is accrued by
treating the interest rate of the Certificates as fixed and making adjustments
to reflect actual interest rate adjustments.
Certain classes of the REMIC Regular Certificates may provide for the
first interest payment with respect to such Certificates to be made more than
one month after the date of issuance, a period which is longer than the
subsequent monthly intervals between interest payments. Assuming the "accrual
period" (as defined below) for original issue discount is each monthly period
that ends on a Distribution Date, in some cases, as a consequence of this "long
first accrual period," some or all interest payments may be required to be
included in the stated redemption price of the REMIC Regular Certificate and
accounted for as original issue discount. Because interest on REMIC Regular
Certificates must in any event be accounted for under an accrual method,
applying this analysis would result in only a slight difference in the timing of
the inclusion in income of the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first
Distribution Date is computed with respect to a period that begins prior to the
Closing Date, a portion of the purchase price paid for a REMIC Regular
Certificate will reflect such accrued interest. In such cases, information
returns to the Certificateholders and the IRS will be based on the position that
the portion of the purchase price paid for the interest accrued with respect to
periods prior to the Closing Date is treated as part of the overall purchase
price of such REMIC Regular Certificate (and not as a separate asset the
purchase price of which is recovered entirely out of interest received on the
next Distribution Date) and that portion of the interest paid on the first
Distribution Date in excess of
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interest accrued for a number of days corresponding to the number of days from
the Closing Date to the first Distribution Date should be included in the stated
redemption price of such REMIC Regular Certificate. However, the OID Regulations
state that all or some portion of such accrued interest may be treated as a
separate asset the cost of which is recovered entirely out of interest paid on
the first Distribution Date. It is unclear how an election to do so would be
made under the OID Regulations and whether such an election could be made
unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC Regular Certificate will be considered to be
de minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average maturity. For this
purpose, the weighted average maturity of the REMIC Regular Certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such REMIC Regular Certificate, by multiplying
(i) the number of complete years (rounding down for partial years) from the
issue date until such payment is expected to be made (presumably taking into
account the Prepayment Assumption) by (ii) a fraction, the numerator of which is
the amount of the payment, and the denominator of which is the stated redemption
price at maturity of such REMIC Regular Certificate. Under the OID Regulations,
original issue discount of only a de minimis amount (other than de minimis
original issue discount attributable to a so-called "teaser" interest rate or an
initial interest holiday) will be included in income as each payment of stated
principal is made, based on the product of the total amount of such de minimis
original issue discount and a fraction, the numerator of which is the amount of
such principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "Taxation
of Owners of REMIC Regular Certificates--Market Discount" for a description of
such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess
of a de minimis amount, the holder of such Certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for each
day during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to a Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original issue
discount that accrues in any accrual period will equal the excess, if any, of
(i) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the REMIC Regular Certificate,
if any, in future periods and (B) the distributions made on such REMIC Regular
Certificate during the accrual period of amounts included in the stated
redemption price,
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over (ii) the adjusted issue price of such REMIC Regular Certificate at the
beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that distributions on the REMIC Regular Certificate will be received in
future periods based on the Mortgage Loans being prepaid at a rate equal to the
Prepayment Assumption and (ii) using a discount rate equal to the original yield
to maturity of the Certificate. For these purposes, the original yield to
maturity of the Certificate will be calculated based on its issue price and
assuming that distributions on the Certificate will be made in all accrual
periods based on the Mortgage Loans being prepaid at a rate equal to the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such
Certificate, increased by the aggregate amount of original issue discount that
accrued with respect to such Certificate in prior accrual periods, and reduced
by the amount of any distributions made on such REMIC Regular Certificate in
prior accrual periods of amounts included in its stated redemption price. The
original issue discount accruing during any accrual period, computed as
described above, will be allocated ratably to each day during the accrual period
to determine the daily portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such Certificate at a price (excluding any portion of such price attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price," in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
Market Discount
A Certificateholder that purchases a REMIC Regular Certificate at a
market discount, that is, in the case of a REMIC Regular Certificate issued
without original issue discount, at a purchase price less than its remaining
stated principal amount, or in the case of a REMIC Regular Certificate issued
with original issue discount, at a purchase price less than its adjusted issue
price will recognize income upon receipt of each distribution representing
stated redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent. A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest, discount
(including de minimis market or
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original issue discount) and premium in income as interest, based on a constant
yield method. If such an election were made with respect to a REMIC Regular
Certificate with market discount, the Certificateholder would be deemed to have
made an election to include market discount in income currently with respect to
all other debt instruments having market discount that such Certificateholder
acquires during the taxable year of the election or thereafter, and possibly
previously acquired instruments. Similarly, a Certificateholder that made this
election for a Certificate that is acquired at a premium would be deemed to have
made an election to amortize bond premium with respect to all debt instruments
having amortizable bond premium that such Certificateholder owns or acquires.
See "Taxation of Owners of REMIC Regular Certificates--Premium." Each of these
elections to accrue interest, discount and premium with respect to a Certificate
on a constant yield method or as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate
will be considered to be de minimis for purposes of Section 1276 of the Code if
such market discount is less than 0.25% of the remaining stated redemption price
of such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." Such treatment would result in discount
being included in income at a slower rate than discount would be required to be
included in income using the method described above.
Code Section 1276(b)(3) specifically authorizes the Treasury Department
to issue regulations providing for the method for accruing market discount on
debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is to be used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
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To the extent that REMIC Regular Certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium
A REMIC Regular Certificate purchased at a cost (excluding any portion
of such cost attributable to accrued qualified stated interest) greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of such a REMIC Regular Certificate may elect under Section
171 of the Code to amortize such premium under the constant yield method over
the life of the Certificate. If such an election is made, it will apply to all
debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related REMIC Regular Certificate, rather than as a
separate interest deduction. The OID Regulations also permit Certificateholders
to elect to include all interest, discount and premium in income based on a
constant yield method, further treating the Certificateholder as having made the
election to amortize premium generally. See "Taxation of Owners of REMIC Regular
Certificates--Market Discount." The Committee Report states that the same rules
that apply to accrual of market discount (which rules will require use of a
Prepayment Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether such Certificates have original issue
discount) will also apply in amortizing bond premium under Section 171 of the
Code.
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Realized Losses
Under Code Section 166 both corporate holders of the REMIC Regular
Certificates and noncorporate holders of the REMIC Regular Certificates that
acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their Certificates become wholly or partially worthless as the
result of one or more realized losses on the Mortgage Loans. However, it appears
that a noncorporate holder that does not acquire a REMIC Regular Certificate in
connection with a trade or business will not be entitled to deduct a loss under
Section 166 of the Code until such holder's Certificate becomes wholly worthless
(i.e., until its outstanding principal balance has been reduced to zero) and
that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that, as the result of a realized
loss, ultimately will not be realized, the law is unclear with respect to the
timing and character of such loss or reduction in income.
Taxation of Owners of REMIC Residual Certificates
General
As residual interests, the REMIC Residual Certificates will be subject
to tax rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Mortgage Loans or as debt instruments issued by the
REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts will then be allocated among the REMIC
Residual Certificateholders in proportion to their respective ownership
interests on such day. Any amount included in the gross income or allowed as a
loss of any REMIC Residual Certificateholder by virtue of this allocation will
be treated as ordinary income or loss. The taxable income of the REMIC will be
determined under the rules described below in "Taxable Income of the REMIC" and
will be taxable to the REMIC Residual Certificateholders without regard to the
timing or
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amount of cash distributions by the REMIC. Ordinary income derived from REMIC
Residual Certificates will be "portfolio income" for purposes of the taxation of
taxpayers subject to limitations under Section 469 of the Code on the
deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such
Certificate from a prior holder of such Certificate also will be required to
report on its federal income tax return amounts representing its daily portion
of the taxable income (or net loss) of the REMIC for each day that it holds such
REMIC Residual Certificate. These daily portions generally will equal the
amounts of taxable income or net loss determined as described above. The
Committee Report indicates that certain modifications of the general rules may
be made, by regulations, legislation or otherwise, to reduce (or increase) the
income or loss of a holder of a REMIC Residual Certificateholder that purchased
such REMIC Residual Certificate from a prior holder of such Certificate at a
price greater than (or less than) the adjusted basis (as defined below) such
REMIC Residual Certificate would have had in the hands of an original holder of
such Certificate. The REMIC Regulations, however, do not provide for any such
modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required
to report (or the tax liability associated with such income) may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC Residual Certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be offset, subject to the rules relating to "excess
inclusions," residual interests without "significant value" and "noneconomic"
residual interests discussed below. The fact that the tax liability associated
with the income allocated to REMIC Residual Certificateholders may exceed the
cash distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders' after-tax rate of return.
Taxable Income of the REMIC
The taxable income of the REMIC will equal the income from the Mortgage
Loans and other assets of the REMIC plus any cancellation of indebtedness income
due to the allocation of realized losses to REMIC Regular Certificates, less the
deductions allowed to the REMIC for interest (including original issue discount
and reduced by the amortization of any premium received on issuance) on the
REMIC Regular Certificates (and any other class of REMIC
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Certificates constituting "regular interests" in the REMIC not offered hereby),
amortization of any premium on the Mortgage Loans, bad debt deductions with
respect to the Mortgage Loans and, except as described below, for servicing,
administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to their fair market value
immediately after their transfer to the REMIC. For this purpose, the Master
Servicer intends to treat the fair market value of the Mortgage Loans as being
equal to the aggregate issue prices of the REMIC Regular Certificates and REMIC
Residual Certificates. Such aggregate basis will be allocated among the Mortgage
Loans collectively and the other assets of the REMIC in proportion to their
respective fair market values. The issue price of any REMIC Certificates offered
hereby will be determined in the manner described above under "-Taxation of
Owners of REMIC Regular Certificates-Original Issue Discount." Accordingly, if
one or more classes of REMIC Certificates are retained initially rather than
sold, the Master Servicer may be required to estimate the fair market value of
such interests in order to determine the basis of the REMIC in the Mortgage
Loans and other property held by the REMIC.
Subject to the possible application of the de minimis rules, the method
of accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method of accruing original issue discount income for REMIC Regular
Certificateholders (that is, under the constant yield method taking into account
the Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such discount in income currently, as it accrues, on a
constant interest basis. See "-Taxation of Owners of REMIC Regular Certificates"
above, which describes a method of accruing discount income that is analogous to
that required to be used by a REMIC as to Mortgage Loans with market discount
that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to amortize any premium on the Mortgage
Loans. Premium on any Mortgage Loan to which such election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption.
A REMIC will be allowed deductions for interest (including original
issue discount) on the REMIC Regular Certificates (including any other class of
REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby) equal to the deductions that would be allowed if the REMIC Regular
Certificates (including any other class of REMIC Certificates constituting
"regular interests" in the REMIC not offered hereby) were indebtedness of the
REMIC. Original issue discount will be considered to accrue for this purpose as
described above under "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount," except that
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the de minimis rule and the adjustments for subsequent holders of REMIC Regular
Certificates (including any other class of Certificates constituting "regular
interests" in the REMIC not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess
of the stated redemption price of such class (such excess, "Issue Premium"), the
REMIC will have an additional item of income in an amount equal to the portion
of the Issue Premium that is considered to be amortized or repaid in that year.
Although the matter is not entirely certain, it is likely that Issue Premium
would be amortized under a constant yield method in a manner analogous to the
method of accruing original issue discount described above under "--Taxation of
Owners of REMIC Regular Certificates--Original Issue Discount."
As a general rule, the taxable income of the REMIC is required to be
determined in the same manner as if the REMIC were an individual having the
calendar year as its taxable year and using the accrual method of accounting.
However, no item of income, gain, loss or deduction allocable to a prohibited
transaction will be taken into account. See "-Prohibited Transactions and Other
Possible REMIC Taxes" below. Further, the limitation on miscellaneous itemized
deductions imposed on individuals by Section 67 of the Code (which allows such
deductions only to the extent they exceed in the aggregate two percent of the
taxpayer's adjusted gross income) will not be applied at the REMIC level so that
the REMIC will be allowed deductions for servicing, administrative and other
non-interest expenses in determining its taxable income. All such expenses will
be allocated as a separate item to the holders of REMIC Certificates, subject to
the limitation of Section 67 of the Code and the rules relating to the
alternative minimum tax. See "-Possible Pass-Through of Miscellaneous Itemized
Deductions." If the deductions allowed to the REMIC exceed its gross income for
a calendar quarter, such excess will be the net loss for the REMIC for that
calendar quarter.
Basis Rules, Net Losses and Distributions
The adjusted basis of a REMIC Residual Certificate will be equal to the
amount paid for such REMIC Residual Certificate, increased by amounts included
in the income of the REMIC Residual Certificateholder and decreased (but not
below zero) by distributions made, and by net losses allocated, to such REMIC
Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent such net loss exceeds such
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of such calendar quarter (determined without regard
to such net loss). Any loss that is not currently deductible by reason of this
limitation may be carried forward indefinitely to future calendar quarters and,
subject to the same limitation, may be used only to offset income from the REMIC
Residual Certificate. The ability of REMIC Residual Certificateholders to deduct
net losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
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Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the Trust Fund. However, such basis increases may not occur until the
end of the calendar quarter, or perhaps the end of the calendar year, with
respect to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a Residual Certificateholder may not
amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of its share of any net
losses of the REMIC or upon the sale of its REMIC Residual Certificate. See
"-Sales of REMIC Certificates." For a discussion of possible modifications of
these rules that may require adjustments to income of a holder of a REMIC
Residual Certificate other than an original holder in order to reflect any
difference between the cost of such REMIC Residual Certificate to such holder
and the adjusted basis such REMIC Residual Certificate would have had in the
hands of the original holder, see "-Taxation of Owners of REMIC Residual
Certificates-General."
Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Certificate
will be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the sum
of the daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not
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below zero) by any distributions made with respect to such REMIC Residual
Certificate before the beginning of such quarter. The issue price of a REMIC
Residual Certificate is the initial offering price to the public (excluding bond
houses, brokers and underwriters) at which a substantial amount of the REMIC
Residual Certificates were sold. If less than a substantial amount of REMIC
Residual Certificates is sold for cash on or prior to the Closing Date, the
issue price for such REMIC Residual Certificates will be treated as the fair
market value of such REMIC Residual Certificates on the Closing Date. The
"long-term Federal rate" is an average of current yields on Treasury securities
with a remaining term of greater than nine years, computed and published monthly
by the IRS. Although it has not done so, the Treasury has authority to issue
regulations that would treat the entire amount of income accruing on a REMIC
Residual Certificate as an excess inclusion if the REMIC Residual Certificates
are considered not to have "significant value."
For REMIC Residual Certificateholders, an excess inclusion (i) will not
be permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "-Foreign Investors
in REMIC Certificates," below. Furthermore, for purposes of the alternative
minimum tax, (i) excess inclusions will not be permitted to be offset by the
alternative tax net operating loss deduction and (ii) alternative minimum
taxable income may not be less than the taxpayer's excess inclusions; provided,
however, that for purposes of (ii), alternative minimum taxable income is
determined without regard to the special rule that taxable income cannot be less
than excess inclusions. The latter rule has the effect of preventing
nonrefundable tax credits from reducing the taxpayer's income tax to an amount
lower than the alternative minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on such "noneconomic" REMIC Residual Certificate. The REMIC Regulations
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provide that a REMIC Residual Certificate is noneconomic unless, based on the
Prepayment Assumption and on any required or permitted clean up calls, or
required qualified liquidation provided for in the REMIC's organizational
documents, (1) the present value of the expected future distributions
(discounted using the "applicable Federal rate" for obligations whose term ends
on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) on the REMIC Residual Certificate equals at
least the present value of the expected tax on the anticipated excess
inclusions, and (2) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC Residual Certificate at or after
the time the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. Accordingly, all transfers of REMIC
Residual Certificates that may constitute noneconomic residual interests will be
subject to certain restrictions under the terms of the related Pooling and
Servicing Agreement that are intended to reduce the possibility of any such
transfer being disregarded. Such restrictions will require each party to a
transfer to provide an affidavit that no purpose of such transfer is to impede
the assessment or collection of tax, including certain representations as to the
financial condition of the prospective transferee, as to which the transferor
also is required to make a reasonable investigation to determine such
transferee's historic payment of its debts and ability to continue to pay its
debts as they come due in the future. Prior to purchasing a REMIC Residual
Certificate, prospective purchasers should consider the possibility that a
purported transfer of such REMIC Residual Certificate by such a purchaser to
another purchaser at some future date may be disregarded in accordance with the
above-described rules which would result in the retention of tax liability by
such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Company will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
Mark-to-Market Rules
On December 24, 1996, the IRS released final regulations (the
"Mark-to-Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Mark-to-Market Regulations provide that for purposes of this mark-to-market
requirement, a REMIC Residual Certificate issued after January 4, 1995 is not
treated as a security and thus may not be marked to market. Prospective
purchasers of a REMIC Residual Certificate should consult their tax advisors
regarding the possible application of the mark-to-market requirement to REMIC
Residual Certificates.
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Possible Pass-Through of Miscellaneous Itemized Deductions
Fees and expenses of a REMIC generally will be allocated to the holders
of the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of such fees and expenses should be allocated to
the holders of the related REMIC Regular Certificates. Unless otherwise stated
in the related Prospectus Supplement, such fees and expenses will be allocated
to holders of the related REMIC Residual Certificates in their entirety and not
to the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular
Certificates the holders of which receive an allocation of fees and expenses in
accordance with the preceding discussion, if any holder thereof is an
individual, estate or trust, or a "pass-through entity" beneficially owned by
one or more individuals, estates or trusts, (i) an amount equal to such
individual's, estate's or trust's share of such fees and expenses will be added
to the gross income of such holder and (ii) such individual's, estate's or
trust's share of such fees and expenses will be treated as a miscellaneous
itemized deduction allowable subject to the limitation of Section 67 of the
Code, which permits such deductions only to the extent they exceed in the
aggregate two percent of a taxpayer's adjusted gross income. In addition,
Section 68 of the Code provides that the amount of itemized deductions otherwise
allowable for an individual whose adjusted gross income exceeds a specified
amount will be reduced by the lesser of (i) 3% of the excess of the individual's
adjusted gross income over such amount or (ii) 80% of the amount of itemized
deductions otherwise allowable for the taxable year. The amount of additional
taxable income reportable by REMIC Certificateholders that are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Furthermore, in determining the alternative minimum taxable income of such a
holder of a REMIC Certificate that is an individual, estate or trust, or a
"pass-through entity" beneficially owned by one or more individuals, estates or
trusts, no deduction will be allowed for such holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of such fees and other deductions will be
included in such holder's gross income. Accordingly, such REMIC Certificates may
not be appropriate investments for individuals, estates, or trusts, or
pass-through entities beneficially owned by one or more individuals, estates or
trusts. Such prospective investors should consult with their tax advisors prior
to making an investment in such Certificates.
Sales of REMIC Certificates
If a REMIC Certificate is sold, the selling Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Certificate. The adjusted basis of
a REMIC Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under
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"-Taxation of Owners of REMIC Residual Certificates-Basis Rules, Net Losses and
Distributions." Except as described below, any such gain or loss generally will
be capital gain or loss. The Code as of the date of this Prospectus provides for
a top marginal tax rate of 39.6% for individuals and a maximum marginal rate for
long-term capital gains of individuals of 28%. No such rate differential exists
for corporations. In addition, the distinction between a capital gain or loss
and ordinary income or loss remains relevant for other purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise
be capital gain will be treated as ordinary income to the extent such gain does
not exceed the excess, if any, of (i) the amount that would have been includible
in the seller's income with respect to such REMIC Regular Certificate had income
accrued thereon at a rate equal to 110% of the "applicable Federal rate"
(generally, a rate based on an average of current yields on Treasury securities
having a maturity comparable to that of the Certificate, which rate is computed
and published monthly by the IRS), determined as of the date of purchase of such
REMIC Regular Certificate, over (ii) the amount of ordinary income actually
includible in the seller's income prior to such sale. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
such REMIC Regular Certificate at a market discount will be taxable as ordinary
income to the extent of any accrued and previously unrecognized market discount
that accrued during the period the Certificate was held. See "-Taxation of
Owners of REMIC Regular Certificates-Market Discount."
REMIC Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from
the sale of a REMIC Certificate by a bank or thrift institution to which such
section applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in Certificates or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include such
net capital gain in total net investment income for the taxable year, for
purposes of the limitation on the deduction of interest on indebtedness incurred
to purchase or carry property held for investment to a taxpayer's net investment
income.
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Except as may be provided in Treasury regulations yet to be issued, if
the seller of a REMIC Residual Certificate reacquires the Certificate, any other
residual interest in a REMIC or any similar interest in a "taxable mortgage
pool" (as defined in Section 7701(i) of the Code) within six months of the date
of such sale, the sale will be subject to the "wash sale" rules of Section 1091
of the Code. In that event, any loss realized by the REMIC Residual
Certificateholder on the sale will not be deductible, but instead will be added
to such REMIC Residual Certificateholder's adjusted basis in the newly-acquired
asset.
Prohibited Transactions and Other Possible REMIC Taxes
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions" (a "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions a prohibited transaction means
the disposition of a Mortgage Loan, the receipt of income from a source other
than a Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that any REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on
which the REMIC issues all of its interests could result in the imposition of a
tax on the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to such tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is
not anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to
the extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer or Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement and in respect of
compliance with applicable laws and regulations. Any such tax not borne by the
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Master Servicer or the Trustee will be payable out of the related Trust Fund
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the Certificate, which rate is computed and published
monthly by the IRS) of the total anticipated excess inclusions with respect to
such REMIC Residual Certificate for periods after the transfer and (ii) the
highest marginal federal income tax rate applicable to corporations. The
anticipated excess inclusions must be determined as of the date that the REMIC
Residual Certificate is transferred and must be based on events that have
occurred up to the time of such transfer, the Prepayment Assumption and any
required or permitted clean up calls or required liquidation provided for in the
REMIC's organizational documents. Such a tax generally would be imposed on the
transferor of the REMIC Residual Certificate, except that where such transfer is
through an agent for a disqualified organization, the tax would instead be
imposed on such agent. However, a transferor of a REMIC Residual Certificate
would in no event be liable for such tax with respect to a transfer if the
transferee furnishes to the transferor an affidavit that the transferee is not a
disqualified organization and, as of the time of the transfer, the transferor
does not have actual knowledge that such affidavit is false. Moreover, an entity
will not qualify as a REMIC unless there are reasonable arrangements designed to
ensure that (i) residual interests in such entity are not held by disqualified
organizations and (ii) information necessary for the application of the tax
described herein will be made available. Restrictions on the transfer of REMIC
Residual Certificates and certain other provisions that are intended to meet
this requirement will be included in the Pooling and Servicing Agreement, and
will be discussed more fully in any Prospectus Supplement relating to the
offering of any REMIC Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization.
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For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
Termination
A REMIC will terminate immediately after the Distribution Date
following receipt by the REMIC of the final payment in respect of the Mortgage
Loans or upon a sale of the REMIC's assets following the adoption by the REMIC
of a plan of complete liquidation. The last distribution on a REMIC Regular
Certificate will be treated as a payment in retirement of a debt instrument. In
the case of a REMIC Residual Certificate, if the last distribution on such REMIC
Residual Certificate is less than the REMIC Residual Certificateholder's
adjusted basis in such Certificate, such REMIC Residual Certificateholder should
be treated as realizing a loss equal to the amount of such difference. Such loss
may be subject to the "wash sale" rules of Section 1091 of the Code. See
"--Sales of REMIC Certificates." The character of any such loss as ordinary or
capital is uncertain.
Reporting and Other Administrative Matters
Solely for purposes of the administrative provisions of the Code, the
REMIC will be treated as a partnership and Residual Certificateholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Master Servicer will file REMIC federal income tax returns on
behalf of the related REMIC, will be designated as and will act as the "tax
matters person" with respect to the REMIC in all respects, and generally will
hold at least a nominal amount of REMIC Residual Certificates.
As the tax matters person, the Master Servicer will, subject to certain
notice requirements and various restrictions and limitations, generally have the
authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders will generally be required to
report such REMIC items consistently with their treatment on the related REMIC's
tax return and may in some circumstances be bound by a settlement agreement
between the Master Servicer, as tax matters person, and the IRS concerning any
such REMIC item. Adjustments made to the REMIC tax return may require a REMIC
Residual Certificateholder to make corresponding adjustments on its return, and
an audit of the REMIC's tax return, or the adjustments resulting from such an
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audit, could result in an audit of a REMIC Residual Certificateholder's return.
No REMIC will be registered as a tax shelter pursuant to Section 6111 of the
Code because it is not anticipated that any REMIC will have a net loss for any
of the first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
to the related REMIC, in a manner to be provided in Treasury regulations, the
name and address of such person and other information.
Reporting of interest income, including any original issue discount,
with respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent to individual holders of REMIC Regular
Interests and the IRS; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and certain other non-individuals will
be provided interest and original issue discount income information and the
information set forth in the following paragraph upon request in accordance with
the requirements of the applicable regulations. The information must be provided
by the later of 30 days after the end of the quarter for which the information
was requested, or two weeks after the receipt of the request. The REMIC must
also comply with rules requiring a REMIC Regular Certificate issued with
original issue discount to disclose on its face certain information including
the amount of original issue discount and the issue date, and requiring such
information to be reported to the IRS. Reporting with respect to the REMIC
Residual Certificates, including income, excess inclusions, investment expenses
and relevant information regarding qualification of the REMIC's assets will be
made as required under the Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method requires information relating to the holder's purchase
price that the Master Servicer will not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "Taxation of Owners of REMIC Regular
Certificates--Market Discount."
The responsibility for complying with the foregoing reporting rules
will be borne by the Master Servicer. Certificateholders may request any
information with respect to the returns described in Section 1.6049-7(e)(2) of
the Treasury regulations. Such request should be directed to the Master Servicer
at Residential Funding Corporation, 8400 Normandale Lake Boulevard, Suite 600,
Minneapolis, Minnesota 55437.
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Backup Withholding With Respect to REMIC Certificates
Payments of interest and principal, as well as payments of proceeds
from the sale of REMIC Certificates, may be subject to the "backup withholding
tax" under Section 3406 of the Code at a rate of 31% if recipients of such
payments fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from such tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against such recipient's federal income
tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of
payments that is required to supply information but that does not do so in the
proper manner.
Foreign Investors in REMIC Certificates
A REMIC Regular Certificateholder that is not a "United States person"
(as defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not be subject to United States federal
income or withholding tax in respect of a distribution on a REMIC Regular
Certificate, provided that the holder complies to the extent necessary with
certain identification requirements (including delivery of a statement, signed
by the Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). For these purposes, "United States person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in, or under the laws of, the United States or
any political subdivision thereof, or an estate whose income is subject to
United States federal income tax regardless of its source, or a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the Trust. It is possible that
the IRS may assert that the foregoing tax exemption should not apply with
respect to a REMIC Regular Certificate held by a REMIC Residual
Certificateholder that owns directly or indirectly a 10% or greater interest in
the REMIC Residual Certificates. If the holder does not qualify for exemption,
distributions of interest, including distributions in respect of accrued
original issue discount, to such holder may be subject to a tax rate of 30%,
subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on such
United States shareholder's allocable portion of the interest income received by
such controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be
included in the estate of a non-resident alien individual and would not be
subject to United States estate taxes. However, Certificateholders who are
non-resident alien individuals should consult their tax advisors concerning this
question.
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Unless otherwise stated in the related Prospectus Supplement, transfers
of REMIC Residual Certificates to investors that are not United States Persons
will be prohibited under the related Pooling and Servicing Agreement.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences," potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the Certificates offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their tax advisors
with respect to the various tax consequences of investments in the certificates
offered hereunder.
ERISA CONSIDERATIONS
Sections 404 and 406 of ERISA impose certain fiduciary and prohibited
transaction restrictions on employee pension and welfare benefit plans subject
to ERISA ("ERISA Plans") and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans, bank
collective investment funds and insurance company general and separate accounts
in which such ERISA Plans are invested. Section 4975 of the Code imposes
essentially the same prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code and on Individual
Retirement Accounts described in Section 408 of the Code (collectively, "Tax
Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA), and, if no election has been made under Section
410(d) of the Code, church plans (as defined in Section 3(33) of ERISA), are not
subject to the ERISA requirements discussed herein. Accordingly, assets of such
plans may be invested in Certificates without regard to the ERISA considerations
described below, subject to the provisions of applicable federal and state law.
Any such plan that is qualified and exempt from taxation under Sections 401(a)
and 501(a) of the Code, however, is subject to the prohibited transaction rules
set forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those
of investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving assets of ERISA Plans and Tax-Favored Plans (collectively, "Plans")
and persons ("Parties in Interest" under ERISA or "Disqualified Persons" under
the Code, collectively "Parties in Interest") who have certain specified
relationships to the Plans, unless a statutory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to a penalty (or an
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excise tax) imposed pursuant to Section 502(i) of ERISA or Section 4975 of the
Code, unless a statutory or administrative exemption is available with respect
to any such transaction.
Plan Asset Regulations
An investment of the assets of a Plan in Certificates may cause the
underlying Mortgage Loans, Mortgage Securities or any other assets included in a
Trust Fund to be deemed plan assets ("Plan Assets" as defined below) of such
Plan. The U.S. Department of Labor (the "DOL") has promulgated regulations at 29
C.F.R. ss.2510.3-101 (the "DOL Regulations") concerning whether or not a Plan's
assets would be deemed to include an interest in the underlying assets of an
entity (such as a Trust Fund) for purposes of applying the general fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code, when a Plan acquires an "equity interest" (such as a
Certificate) in such entity. Exceptions contained in the DOL Regulations provide
that a Plan's assets will not include an undivided interest in each asset of an
entity in which it makes an equity investment if: (1) the entity is an operating
company; or (2) the equity investment made by the Plan is either a
"publicly-offered security" that is "widely held," both as defined in the DOL
Regulations, or a security issued by an investment company registered under the
Investment Company Act of 1940, as amended; or (3) Benefit Plan Investors do not
own 25% or more in value of any class of equity securities issued by the entity.
For this purpose, "Benefit Plan Investors" include Plans, as well as any
"employee benefit plan" as defined in Section 3(3) or ERISA which is not subject
to Title I of ERISA, such as governmental plans (as defined in Section 3(32) of
ERISA) and church plans (as defined in Section 3(33) of ERISA) which have not
made an election under Section 410(d) of the Code, foreign plans and any entity
whose underlying assets include Plan Assets by reason of a Plan's investment in
the entity. Because of the factual nature of certain of the rules set forth in
the DOL Regulations, Plan Assets either may be deemed to include an interest in
the assets of an entity (such as a Trust Fund) or may be deemed merely to
include its interest in the instrument evidencing such equity interest (such as
a Certificate). Therefore, neither Plans nor such entities should acquire or
hold Certificates in reliance upon the availability of any exception under the
DOL Regulations. For purposes of this section "ERISA Considerations," the term
"Plan Assets" or "assets of a Plan" has the meaning specified in the DOL
Regulations and includes an undivided interest in the underlying assets of
certain entities in which a Plan invests.
The prohibited transaction provisions of Section 406 of ERISA and
Section 4975 of the Code may apply to a Trust Fund and cause the Company, the
Master Servicer, any Subservicer, the Trustee, the obligor under any credit
enhancement mechanism or certain affiliates thereof to be considered or become
Parties in Interest with respect to an investing Plan (or of a Plan holding an
interest in such an entity). If so, the acquisition or holding of Certificates
by or on behalf of the investing Plan could also give rise to a prohibited
transaction under ERISA and the Code, unless some statutory or administrative
exemption is available. Certificates acquired by a Plan would be assets of that
Plan. Under the DOL Regulations, a Trust Fund, including the Mortgage Loans,
Mortgage Securities or any other assets held in such Trust Fund, may also be
deemed to be assets of each Plan that acquires Certificates. Special caution
should be exercised before Plan Assets are used to acquire a Certificate in such
circumstances, especially if, with respect to such
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assets, the Company, the Master Servicer, any Subservicer, the Trustee, the
obligor under any credit enhancement mechanism or an affiliate thereof either
(i) has investment discretion with respect to the investment of Plan Assets; or
(ii) has authority or responsibility to give (or regularly gives) investment
advice with respect to Plan Assets for a fee pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect to such Plan Assets.
Any person who has discretionary authority or control with respect to
the management or disposition of Plan Assets and any person who provides
investment advice with respect to such Plan Assets for a fee (in the manner
described above) is a fiduciary of the investing Plan. If the Mortgage Loans,
the Mortgage Securities or any other assets in a Trust Fund were to constitute
Plan Assets, then any party exercising management or discretionary control with
respect to those Plan Assets may be deemed to be a Plan "fiduciary," and thus
subject to the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to any investing
Plan. In addition, if the Mortgage Loans, Mortgage Securities or any other
assets in a Trust Fund were to constitute Plan Assets, then the acquisition or
holding of Certificates by or on behalf of a Plan or with Plan Assets, as well
as the operation of such Trust Fund, may constitute or involve a prohibited
transaction under ERISA and the Code.
Prohibited Transaction Exemptions
The DOL issued an individual exemption, Prohibited Transaction
Exemption 94-29, (59 Fed. Reg. 14,674, March 29, 1994 (the "Exemption")), to
Residential Funding and certain of its affiliates, which generally exempts from
the application of certain of the prohibited transaction provisions of Section
406 of ERISA, and the excise taxes imposed on such prohibited transactions
pursuant to Section 4975(a) and (b) of the Code, certain transactions, among
others, relating to the servicing and operation of mortgage pools and the
purchase, sale and holding of pass-through certificates issued by such a trust
as to which (i) the Company or any of its affiliates is the sponsor, and any
entity which has received from the DOL an individual prohibited transaction
exemption which is similar to the Exemption is the sole underwriter, or manager
or co-manager of the underwriting syndicate or a seller or placement agent, or
(ii) the Company or an affiliate is the underwriter, provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
section, the term "Underwriter" shall include (a) the Company and certain of its
affiliates, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with the
Company and certain of its affiliates, (c) any member of the underwriting
syndicate or selling group of which a person described in (a) or (b) is a
manager or co-manager with respect to a class of Certificates, or (d) any entity
which has received an exemption from the DOL relating to Certificates which is
similar to the Exemption.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by a Plan or with Plan Assets must be on terms that are at least as favorable to
the Plan as they would be in an arm's-length transaction with an unrelated
party. Second, the Exemption only applies to Certificates evidencing rights and
interests
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that are not subordinated to the rights and interests evidenced by the other
Certificates of the same trust. Third, the Certificates at the time of
acquisition by a Plan or with Plan Assets must be rated in one of the three
highest generic rating categories by Standard & Poor's Ratings Services, Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors
Service, L.P. (collectively, the "Exemption Rating Agencies"). Fourth, the
Trustee cannot be an affiliate of any member of the "Restricted Group" which
consists of any Underwriter, the Company, the Master Servicer, any Subservicer
and any mortgagor with respect to assets of a Trust Fund constituting more than
5% of the aggregate unamortized principal balance of the assets in the related
Trust Fund as of the date of initial issuance of the Certificates. Fifth, the
sum of all payments made to and retained by the Underwriters must represent not
more than reasonable compensation for underwriting the Certificates; the sum of
all payments made to and retained by the Company pursuant to the assignment of
the assets to the related Trust Fund must represent not more than the fair
market value of such obligations; and the sum of all payments made to and
retained by the Master Servicer and any Subservicer must represent not more than
reasonable compensation for such person's services under the related Pooling and
Servicing Agreement and reimbursement of such person's reasonable expenses in
connection therewith. Sixth, the Exemption states that the investing Plan or
Plan-Asset Investor must be an accredited investor as defined in Rule 501(a)(1)
of Regulation D of the Commission under the Securities Act of 1933, as amended.
The Exemption also requires that each Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) certificates evidencing
interests in such other investment pools must have been rated in one of the
three highest categories of one of the Exemption Rating Agencies for at least
one year prior to the acquisition of Certificates by or on behalf of a Plan or
with Plan Assets; and (iii) certificates in such other investment pools must
have been purchased by investors other than Plans for at least one year prior to
any acquisition of Certificates by or on behalf of a Plan or with Plan Assets.
A fiduciary or other investor of Plan Assets contemplating purchasing a
Certificate must make its own determination that the general conditions set
forth above will be satisfied with respect to such Certificate.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA, as well as the excise taxes imposed by Sections 4975(a) and (b)
of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code, in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of
Certificates by a Plan or with Plan Assets. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E) and 406(a)(2) of ERISA for the
acquisition or holding of a Certificate by an Excluded Plan or with Plan Assets
of an Excluded Plan by any person who has discretionary authority or renders
investment advice with respect to Plan Assets of such Excluded Plan. For
purposes of the Certificates, an "Excluded Plan" is a Plan sponsored by any
member of the Restricted Group.
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If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA, as well as the excise taxes imposed by Section
4975(a) and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code, in
connection with (1) the direct or indirect sale, exchange or transfer of
Certificates in the initial issuance of Certificates between the Company or an
Underwriter and a Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of the relevant Plan
Assets in the Certificates is (a) a mortgagor with respect to 5% or less of the
fair market value of the assets of a Trust Fund or (b) an affiliate of such a
person (provided that, with respect to the acquisition of certificates in
connection with the initial issuance of the certificates, certain quantitative
restrictions set forth in the Exemption are met), (2) the direct or indirect
acquisition or disposition in the secondary market of Certificates by a Plan or
with Plan Assets and (3) the holding of Certificates by a Plan or with Plan
Assets.
Additionally, if certain specific conditions of the Exemption are
satisfied, the Exemption may provide an exemption from the restrictions imposed
by Sections 406(a), 406(b) and 407(a) of ERISA, as well as the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code,
for transactions in connection with the servicing, management and operation of
the Mortgage Pools. Unless otherwise set forth in the related Prospectus
Supplement, the Company expects that the specific conditions of the Exemption
required for this purpose will be satisfied with respect to the Certificates so
that the Exemption would provide an exemption from the restrictions imposed by
Sections 406(a) and (b) of ERISA, as well as the excise taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code,
for transactions in connection with the servicing, management and operation of
the Mortgage Pools, provided that the general conditions of the Exemption are
satisfied.
The Exemption also may provide an exemption from the restrictions
imposed by Sections 406(a) and 407(a) of ERISA, as well as the taxes imposed by
Section 4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through
(D) of the Code, if such restrictions are deemed to otherwise apply merely
because a person is deemed to be a Party In Interest with respect to an
investing Plan (or the investing entity holding Plan Assets) by virtue of
providing services to the Plan (or by virtue of having certain specified
relationships to such a person) solely as a result of the Plan's ownership of
Certificates.
In addition to the Exemption, a fiduciary or other Plan Asset investor
should consider the availability of certain class exemptions granted by the DOL
("Class Exemptions"), which provide relief from certain of the prohibited
transaction provisions of ERISA and the related excise tax provisions of the
Code, including Prohibited Transaction Class Exemption ("PTCE") 83-1, regarding
transactions involving mortgage pool investment trusts; PTCE 95-60, regarding
transactions by insurance company general accounts, PTCE 90-1, regarding
investments by insurance company pooled separate accounts; PTCE 91-38, regarding
investments by bank collective investment funds; PTCE 84-14, regarding
transactions effected by a "qualified professional asset manager"; and PTCE
96-23, regarding transactions effected by an "in-house asset manager." In
particular, in connection with a contemplated purchase of Certificates
representing a beneficial ownership interest in a pool of single-family
residential first or second
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mortgage loans, such fiduciary or other Plan investor should consider the
availability of the Exemption or PTCE 83-1. There can be no assurance that any
of the Class Exemptions will apply with respect to any particular Plan's or Plan
investor's investment in Certificates or, even if a Class Exemption were deemed
to apply, that such Class Exemption would apply to all transactions that may
occur in connection with or as a result of such an investment. The respective
Prospectus Supplement with respect to a series of Certificates may contain
additional information regarding the application of the Exemption, PTCE 83-1 or
any other Class Exemption, with respect to the Certificates offered thereby.
Insurance Company General Accounts
In addition to any exemption that may be available under PTCE 95-60 for
the purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by Section 4975 of the Code, for transactions involving an
insurance company general account. Pursuant to Section 401(c) of ERISA, the DOL
is required to issue final regulations ("401(c) Regulations") no later than
December 31, 1997 which are to provide guidance for the purpose of determining,
in cases where insurance policies supported by an insurer's general account are
issued to or for the benefit of a Plan on or before December 31, 1998, which
general account assets constitute Plan Assets. Section 401(c) of ERISA generally
provides that, until the date which is 18 months after the 401(c) Regulations
become final, no person shall be subject to liability under Part 4 of Title I of
ERISA and Section 4975 of the Code on the basis of a claim that the assets of an
insurance company general account constitute Plan Assets, unless (i) as
otherwise provided by the Secretary of Labor in the 401(c) Regulations to
prevent avoidance of the regulations or (ii) an action is brought by the
Secretary of Labor for certain breaches of fiduciary duty which would also
constitute a violation of federal or state criminal law. Any assets of an
insurance company general account which support insurance policies issued to a
Plan after December 31, 1998 or issued to Plans on or before December 31, 1998
for which the insurance company does not comply with the 401(c) Regulations may
be treated as Plan Assets. In addition, because Section 401(c) does not relate
to insurance company separate accounts, separate account assets are still
treated as Plan Assets of any Plan invested in such separate account. Insurance
companies contemplating the investment of general account assets in the
Certificates should consult with their legal counsel with respect to the
applicability of PTCE 95-60 and Section 401(c) of ERISA, including the general
account's ability to continue to hold the Certificates after the date which is
18 months after the date the 401(c) Regulations become final.
Representation from Investing Plans
It is not clear whether Certificates backed by Revolving Credit Loans
with respect to which certain Trust Balances of Revolving Credit Loans are
included in the related Trust Fund would constitute "certificates" for purposes
of the Exemption. In promulgating the Exemption, the DOL did not have under
consideration interests in mortgage pools of the exact nature described in this
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paragraph and accordingly, unless otherwise provided in the related Prospectus
Supplement, Certificates representing interests as described in this paragraph
should not be purchased by or on behalf of a Plan or with Plan Assets based
solely upon the Exemption. In addition, the exemptive relief afforded by the
Exemption will not apply to the purchase, sale or holding of any class of
Subordinate Certificates and may not apply to any Certificates where the related
Trust Fund contains a Funding Account during the period in which additional
Mortgage Loans are permitted to be transferred to such Trust Fund.
To the extent Certificates are backed by Revolving Credit Loans or are
Subordinate Certificates or the related Trust Fund contains a Funding Account,
except as otherwise specified in the respective Prospectus Supplement, transfers
of such Certificates to a Plan, to a trustee or other person acting on behalf of
any Plan, or to any other person using the Plan Assets to effect such
acquisition will not be registered by the Trustee unless the transferee provides
the Company, the Trustee and the Master Servicer with an opinion of counsel
satisfactory to the Company, the Trustee and the Master Servicer, which opinion
will not be at the expense of the Company, the Trustee or the Master Servicer
that the purchase of such Certificates by or on behalf of such Plan is
permissible under applicable law, will not constitute or result in any
non-exempt prohibited transaction under ERISA or Section 4975 of the Code and
will not subject the Company, the Trustee and the Master Servicer to any
obligation in addition to those undertaken in the Pooling and Servicing
Agreement. In lieu of such opinion of counsel, the transferee may provide a
certification of facts substantially to the effect that the purchase of
Certificates by or on behalf of such Plan is permissible under applicable law,
will not constitute or result in a non-exempt prohibited transaction under ERISA
or Section 4975 of the Code, will not subject the Company, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the Pooling
and Servicing Agreement, and the following conditions are met: (a) the source of
funds used to purchase such Certificates is an "insurance company general
account" (as such term is defined in PTCE 95-60) and (b) the conditions set
forth in Section I and Section III of PTCE 95-60 have been satisfied as of the
date of the acquisition of such Certificates.
Tax Exempt Investors
A Plan that is exempt from federal income taxation pursuant to Section
501 of the Code (a "Tax-Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusions" of a REMIC allocated to a REMIC Residual Certificate held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to federal
income tax. See "Certain Federal Income Tax Consequences--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions."
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Consultation with Counsel
There can be no assurance that the Exemption or any other DOL exemption
will apply with respect to any particular Plan that acquires the Certificates
or, even if all the conditions specified therein were satisfied, that the
exemption would apply to transactions involving a Trust Fund. Prospective Plan
investors should consult with their legal counsel concerning the impact of ERISA
and the Code and the potential consequences to their specific circumstances
prior to making an investment in the Certificates.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm that (a) all the specific and general conditions set forth in the
Exemption or in one of the Class Exemptions would be satisfied and (b) in the
case of a Certificate purchased under the Exemption, the Certificate constitutes
a "certificate" for purposes of the Exemption. In addition to making its own
determination as to the availability of the exemptive relief provided in the
Exemption or in any of the Class Exemptions, the Plan fiduciary should consider
its general fiduciary obligations under ERISA in determining whether to purchase
a Certificate on behalf of a Plan.
LEGAL INVESTMENT MATTERS
Each class of Certificates offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. Unless otherwise specified in
the related Prospectus Supplement, each class of Certificates will evidence an
interest in Mortgage Loans primarily secured by second or more junior liens, and
therefore will not constitute "mortgage related securities" for purposes of
SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their legal advisors to determine whether and to
what extent the Certificates constitute legal investments for them.
All depository institutions considering an investment in the
Certificates should review the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on the Selection of Securities Dealers
and Unsuitable Investment Practices (to the extent adopted by their respective
regulators), setting forth, in relevant part, certain investment practices
deemed to be unsuitable for an institution's investment portfolio, as well as
guidelines for investing in certain
types of mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
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There may be other restrictions on the ability of certain investors
either to purchase certain classes of Certificates or to purchase any class of
Certificates representing more than a specified percentage of the investors'
assets. The Company will make no representations as to the proper
characterization of any class of Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Certificates. Accordingly,
all investors whose investment activities are subject to legal investment laws
and regulations, regulatory capital requirements or review by regulatory
authorities should consult with their legal advisors in determining whether and
to what extent the Certificates of any class constitute legal investments or are
subject to investment, capital or other restrictions.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of
Certificates will be applied by the Company to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the Mortgage Loans
or Mortgage Securities underlying the Certificates or will be used by the
Company for general corporate purposes. The Company expects that it will make
additional sales of securities similar to the Certificates from time to time,
but the timing and amount of any such additional offerings will be dependent
upon a number of factors, including the volume of mortgage loans purchased by
the Company, prevailing interest rates, availability of funds and general market
conditions.
METHODS OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus
Supplements will be offered in series through one or more of the methods
described below. The Prospectus Supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the Company from such sale.
The Company intends that Certificates will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of Certificates may be made through a combination of two or more of these
methods. Such methods are as follows:
1. by negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
2. by placements by the Company with institutional investors through
dealers; and
3. by direct placements by the Company with institutional investors.
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In addition, if specified in the related Prospectus Supplement, a
series of Certificates may be offered in whole or in part to the Seller of the
related Mortgage Loans (and other assets, if applicable) that would comprise the
Mortgage Pool in respect of such Certificates.
If underwriters are used in a sale of any Certificates (other than in
connection with an underwriting on a best efforts basis), such Certificates will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. Such underwriters may be
broker-dealers affiliated with the Company whose identities and relationships to
the Company will be as set forth in the related Prospectus Supplement. The
managing underwriter or underwriters with respect to the offer and sale of a
particular series of Certificates will be set forth on the cover of the
Prospectus Supplement relating to such series and the members of the
underwriting syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of the Certificates, underwriters may
receive compensation from the Company or from purchasers of the Certificates in
the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Company and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the
sale of any series of Certificates will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Company will indemnify the
several underwriters and the underwriters will indemnify the Company against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended, or will contribute to payments required to be made in respect
thereof.
The Prospectus Supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Company and
purchasers of Certificates of such series.
The Company anticipates that the Certificates offered hereby will be
sold primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Certificates, including dealers, may, depending on the
facts and circumstances of such purchases, be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended, in connection with
reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
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LEGAL MATTERS
Certain legal matters, including certain federal income tax matters,
will be passed upon for the Company by Thacher Proffitt & Wood, New York, New
York, or by Orrick, Herrington & Sutcliffe LLP, New York, New York, as specified
in the Prospectus Supplement.
FINANCIAL INFORMATION
The Company has determined that its financial statements are not
material to the offering made hereby. The Certificates do not represent an
interest in or an obligation of the Company. The Company's only obligations with
respect to a series of Certificates will be to repurchase Mortgage Loans or
Mortgage Securities upon any breach of certain limited representations and
warranties made by the Company, or as otherwise provided in the applicable
Prospectus Supplement.
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INDEX OF PRINCIPAL DEFINITIONS
age
401(c) Regulations.....................................................126
Account Balance ......................................................28
Accrual Certificates.....................................................6
Actuarial Mortgage Loan.................................................26
Additional Balance......................................................28
Additional Charges......................................................28
Advance ......................................................53
Affiliated Sellers......................................................21
ARM Loans ......................................................25
Audit Guide ......................................................72
Balloon Amount ......................................................26
Balloon Loans ......................................................26
Bankruptcy Loss ......................................................61
Bankruptcy Losses ......................................................65
Beneficial Owner ......................................................43
Book-Entry Certificates.................................................42
CEDEL ......................................................42
CEDEL Participants......................................................44
CERCLA ......................................................93
Certificate Account.....................................................49
Certificate Administrator...............................................23
Certificate Registrar...................................................42
Certificateholder ......................................................42
Certificates .......................................................1
Class Exemptions .....................................................126
Clearance Cooperative...................................................44
Closed-End Loans .......................................................1
Closing Date .....................................................103
CLTV ......................................................22
Code ......................................................13
Combined Loan-to-Value Ratio............................................22
Commission .......................................................3
Committee Report .....................................................102
Company .......................................................1
Conservation Act ......................................................93
Contributions Tax .....................................................117
Convertible Mortgage Loan...............................................27
Cooperative ......................................................85
Cooperative Loans ......................................................20
Cooperative Note ......................................................85
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Cooperative Notes ......................................................20
Credit Enhancer ......................................................63
Credit Line Agreements..................................................27
Credit Utilization Rate.................................................23
Crime Control Act ......................................................97
Custodial Account ......................................................37
Custodian ......................................................46
Debt Service Reduction..................................................65
Defaulted Mortgage Loss.................................................61
Deferred Interest ......................................................26
Deficient Valuation.....................................................64
Deleted Mortgage Loan...................................................37
Depositaries ......................................................42
Designated Seller ......................................................21
Designated Seller Transaction...........................................21
Determination Date......................................................53
DIDMC ......................................................99
Disqualified Persons...................................................122
Distribution Amount.....................................................52
Distribution Date .......................................................8
DOL .....................................................122
DOL Regulations .....................................................122
Draw ......................................................28
Draw Period ......................................................28
DTC ......................................................42
DTC Participants ......................................................42
Eligible Account ......................................................49
Environmental Lien......................................................93
ERISA ......................................................13
ERISA Plans .....................................................121
Euroclear ......................................................42
Euroclear Operator......................................................44
Euroclear Participants..................................................44
Excess Interest ......................................................66
Excess Spread ......................................................47
Exchange Act .......................................................3
Excluded Balance ......................................................29
Excluded Plan .....................................................125
Excluded Spread ......................................................47
Exemption .....................................................123
Exemption Rating Agencies..............................................124
Extraordinary Losses....................................................62
FDIC ......................................................34
Finance Charge ......................................................28
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Financial Guaranty Insurance Policy.....................................63
Fraud Loss ......................................................62
Funding Account ......................................................55
Garn-St Germain Act.....................................................94
Gross Margin ......................................................25
Guide ......................................................30
High Cost Loans ......................................................92
Home Equity Program.....................................................30
Index ......................................................25
Indirect Participants...................................................43
Insurance Proceeds......................................................48
Insurer ......................................................63
Issue Premium .....................................................110
Junior Ratio ......................................................23
Letter of Credit ......................................................64
Letter of Credit Bank...................................................64
Liquidated Mortgage Loan................................................59
Liquidation Proceeds....................................................48
Manager ......................................................22
Mark-to-Market Regulations.............................................114
Master Commitments......................................................31
Mezzanine Certificates...................................................7
Mortgage ......................................................28
Mortgage Loans .......................................................1
Mortgage Note ......................................................20
Mortgage Rate ......................................................25
Mortgage Securities......................................................8
Mortgaged Properties.....................................................8
Mortgagor ......................................................15
Net Mortgage Rate ......................................................78
Nonrecoverable Advance..................................................51
OID Regulations .....................................................100
Overcollateralization...................................................67
Participants ......................................................42
Parties in Interest....................................................122
Pass-Through Rate .......................................................6
Paying Agent ......................................................51
Percentage Interest.....................................................52
Permitted Investments...................................................49
Plan Assets .....................................................123
Plans .....................................................122
Pooling and Servicing Agreement..........................................6
Prepayment Assumption..................................................102
Prepayment Interest Shortfall............................................9
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Principal Balance ......................................................28
Prohibited Transactions Tax............................................116
PTCE 83-1 .....................................................126
Purchase Price ......................................................37
Purchase Obligations....................................................69
Qualified Insurer ......................................................68
Qualified Substitute Mortgage Loan......................................37
Rating Agency ......................................................12
Realized Loss ......................................................62
Record Date ......................................................52
Registration Statement...................................................3
Relief Act ......................................................96
REMIC .......................................................1
REMIC Provisions .....................................................100
REMIC Regular Certificates.............................................100
REMIC Regulations .....................................................100
REMIC Residual Certificates............................................100
REO Mortgage Loan ......................................................59
Reserve Fund ......................................................67
Residential Funding......................................................5
Revolving Credit Loans...................................................1
RICO ......................................................97
Risk Factors ......................................................14
Sellers ......................................................21
Senior Certificates......................................................7
Senior Percentage ......................................................65
Senior/Subordinate Series...............................................41
Servicing Advances......................................................50
Simple Interest Mortgage Loan...........................................26
Single Certificate......................................................56
SMMEA ......................................................12
Special Hazard Instrument...............................................62
Special Hazard Insurance Policy.........................................64
Special Hazard Loss.....................................................61
Spread Account ......................................................67
Stated Principal Balance................................................62
Strip Certificates.......................................................6
Subordinate Certificates.................................................7
Subservicers ......................................................23
Subservicing Account....................................................48
Subservicing Agreement..................................................39
Tax Favored Plans .....................................................121
Tax-Exempt Investor....................................................128
Terms and Conditions....................................................44
Tiered REMICs .....................................................101
[NY01B:322949.7] 16069-00377 05/27/97 2:24pm
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Title V ......................................................95
Title VIII ......................................................96
Trust Balance ......................................................29
Trust Fund .......................................................1
Trustee .......................................................5
UBTI .....................................................128
UCC ......................................................90
Unaffiliated Sellers....................................................21
[NY01B:322949.7] 16069-00377 05/27/97 2:24pm
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