<PAGE>
<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY 22, 1998)
$391,880,000
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
DEPOSITOR
HOME LOAN TRUST 1998-HI2
RESIDENTIAL FUNDING CORPORATION
MASTER SERVICER
HOME LOAN-BACKED NOTES, SERIES 1998-HI2
------------------------
The Home Loan Trust 1998-HI2 (the 'ISSUER' or the 'TRUST') will be formed
pursuant to an Owner Trust Agreement dated as of June 15, 1998 (as amended by
the Amended and Restated Owner Trust Agreement to be dated as of June 26, 1998,
the 'OWNER TRUST AGREEMENT') between Residential Funding Mortgage Securities II,
Inc. (the 'DEPOSITOR') and Wilmington Trust Company, the Owner Trustee. The Home
Loan-Backed Notes, Series 1998-HI2 (the 'NOTES' or the 'OFFERED NOTES'), will
include the following nine classes: (i) the Class A-1 Notes, Class A-2 Notes,
Class A-3 Notes, Class A-4 Notes, Class A-5 Notes and Class A-6
(continued on next page)
------------------------
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE OFFERED
NOTES, SEE 'RISK FACTORS' COMMENCING ON PAGE S-13 HEREIN AND 'RISK FACTORS' IN
THE PROSPECTUS COMMENCING ON PAGE 9.
THE OFFERED NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT
AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER, GMAC
MORTGAGE OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE OFFERED
NOTES NOR THE UNDERLYING HOME LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR, THE
MASTER SERVICER, GMAC MORTGAGE OR ANY OF THEIR RESPECTIVE
AFFILIATES.
THE OFFERED NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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.
<TABLE>
<CAPTION>
ORIGINAL NOTE
PRINCIPAL UNDERWRITING
BALANCE(1) NOTE RATE PRICE TO PUBLIC DISCOUNT
<S> <C> <C> <C> <C>
Class A-1 Notes......................... $134,680,000.00 Adjustable Rate 100.00000% 0.100%
Class A-2 Notes......................... $ 86,990,000.00 6.29%(2) 99.98915% 0.150%
Class A-3 Notes......................... $ 23,280,000.00 6.33%(2) 99.98906% 0.200%
Class A-4 Notes......................... $ 21,390,000.00 6.61%(2) 99.95205% 0.225%
Class A-5 Notes......................... $ 32,620,000.00 6.81%(2) 99.96048% 0.275%
Class A-6 Notes......................... (4) 5.00%(5) 9.03726% 0.080%
Class M-1 Notes......................... $ 40,400,000.00 6.78%(2) 99.98393% 0.450%
Class M-2 Notes......................... $ 28,280,000.00 7.17%(2) 99.95950% 0.600%
Class B-1 Notes......................... $ 24,240,000.00 8.01%(2) 99.98090% 0.900%
Total................................... $391,880,000.00 $396,340,921.30 $1,059,197.50
<CAPTION>
PROCEEDS TO
DEPOSITOR(3)
<S> <C>
Class A-1 Notes......................... 99.90000%
Class A-2 Notes......................... 99.83915%
Class A-3 Notes......................... 99.78906%
Class A-4 Notes......................... 99.72705%
Class A-5 Notes......................... 99.68548%
Class A-6 Notes......................... 8.95726%
Class M-1 Notes......................... 99.53393%
Class M-2 Notes......................... 99.35950%
Class B-1 Notes......................... 99.08090%
Total................................... $395,281,723.80
</TABLE>
(1) Approximate.
(2) The Note Rate for each class of Notes remaining outstanding will be
increased by 0.50% after the Step-Up Date (as defined herein).
(3) Before deducting expenses, estimated to be $430,000.
(4) Based on the Notional Amount of $50,000,000 as described herein.
(5) After the 24th Payment Date, the Note Rate on the Interest Only Notes shall
be reduced to 0.00%.
------------------------
There is currently no secondary market for the Offered Notes. Bear, Stearns
& Co. Inc. ('Bear Stearns'), Prudential Securities Incorporated ('Prudential')
and Residential Funding Securities Corporation ('RFSC'; and collectively with
Bear Stearns and Prudential, the 'Underwriters') intend to make a secondary
market in the Offered Notes, but are not obligated to do so. There can be no
assurance that a secondary market for the Offered Notes will develop or, if it
does develop, that it will continue. The Offered Notes will not be listed on any
securities exchange.
The Offered Notes are offered by the Underwriters subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify such offer and to reject any order in whole or in part. It is expected
that delivery of the Notes will be made only in book-entry form through DTC,
Cedel and Euroclear (each as defined herein) as discussed herein, on or about
June 26, 1998, against payment therefor in immediately available funds.
UNDERWRITERS OF THE OFFERED NOTES (OTHER THAN THE CLASS A-6 NOTES)
BEAR, STEARNS & CO. INC.
PRUDENTIAL SECURITIES INCORPORATED
RESIDENTIAL FUNDING SECURITIES CORPORATION
UNDERWRITER OF THE CLASS A-6 NOTES
BEAR, STEARNS & CO. INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE 16, 1998.
<PAGE>
<PAGE>
(Continued from cover)
Notes (collectively, the 'SENIOR NOTES'); (ii) the Class M-1 Notes and Class M-2
Notes (together, the 'CLASS M NOTES'); and (iii) the Class B-1 Notes (the 'CLASS
B NOTES,' and together with the Class M Notes, the 'SUBORDINATE NOTES'). The
Class A-6 Notes are also referred to herein as the 'INTEREST ONLY NOTES.' The
Notes will be issued pursuant to an Indenture to be dated as of June 26, 1998
(the 'INDENTURE'), between the Issuer and The Chase Manhattan Bank as Indenture
Trustee. Pursuant to the Owner Trust Agreement, the Issuer will issue one class
of Home Loan-Backed Certificates, Series 1998-HI2 (the 'CERTIFICATE'). The Notes
and the Certificate are collectively referred to herein as the 'SECURITIES.'
Only the Notes are offered hereby.
The assets of the Issuer will consist primarily of a certificate (the
'GRANTOR TRUST CERTIFICATE'), to be issued simultaneously with the Notes,
evidencing 100% of the ownership interest in Grantor Trust 1998-HI2 (the
'GRANTOR TRUST'), to be established on the Closing Date. The assets of the
Grantor Trust will consist primarily of a pool of conventional, closed-end,
fixed-rate home loans (the 'HOME LOANS') contributed to the Grantor Trust by the
Depositor, which in turn will be secured primarily by second mortgages or deeds
of trust on one- to four-family residential properties. The Home Loans will have
been sold to the Depositor by Residential Funding Corporation ('RESIDENTIAL
FUNDING' or the 'SELLER'). Substantially all of the Home Loans will be secured
by Mortgaged Properties in which the borrowers have little or no equity at the
time of origination.
Payments of principal and interest on the Offered Notes will be made on the
25th day of each month or, if such day is not a business day, then on the next
business day, commencing in July 1998 (each, a 'PAYMENT DATE'). Interest will
accrue on the Offered Notes (other than the Class A-1 Notes and the Interest
Only Notes) at the fixed rate (the 'NOTE RATE') set forth above (subject to an
increase of 0.50% per annum after the Step-Up Date (as defined herein)), and on
the Class A-1 Notes at the adjustable rate set forth herein, as described
herein. The Note Rate on the Interest Only Notes will equal 5.00% per annum for
the first 24 Payment Dates, and 0.00% thereafter. See 'Description of the
Securities -- Interest Payments' herein.
It is a condition of the issuance of the Offered Notes that the Senior
Notes be rated 'Aaa' by Moody's Investors Service, Inc. ('MOODY'S') and 'AAA' by
Fitch IBCA, Inc. ('FITCH'), the Class M-1 Notes be rated 'Aa2' by Moody's and
'AA' by Fitch, the Class M-2 Notes be rated 'A2' by Moody's and 'A' by Fitch and
the Class B-1 Notes be rated 'Baa3' by Moody's and 'BBB' by Fitch.
The Notes initially will be represented by notes registered in the name of
Cede & Co., as nominee of DTC, as further described herein. Investors in the
Notes may elect to hold their Notes through DTC, in the United States, or Cedel
or Euroclear, in Europe. Definitive notes will be available for the Notes only
under the limited circumstances described herein. See 'Description of the
Securities -- Book-Entry Registration of the Notes' herein.
THE YIELD TO MATURITY ON THE OFFERED NOTES WILL DEPEND ON THE RATE AND
TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, REPURCHASES, DEFAULTS AND
LIQUIDATIONS) ON THE HOME LOANS. IN GENERAL, DEFAULTS ON MORTGAGE LOANS ARE
EXPECTED TO OCCUR WITH GREATER FREQUENCY IN THEIR EARLY YEARS AND DEFAULTS ON
MORTGAGE LOANS SECURED BY SECOND LIENS MAY BE SUBSTANTIALLY HIGHER THAN MORTGAGE
LOANS SECURED BY FIRST LIENS. IN ADDITION, 92.90% OF THE HOME LOANS WILL HAVE
COMBINED LOAN-TO-VALUE RATIOS IN EXCESS OF 100%. IF SUCH HOME LOANS GO INTO
FORECLOSURE AND ARE LIQUIDATED, THERE MAY BE NO AMOUNTS RECOVERED FROM THE
RELATED MORTGAGED PROPERTY. SEE 'RISK FACTORS' HEREIN AND IN THE PROSPECTUS. THE
HOME LOANS GENERALLY MAY BE PREPAID AT ANY TIME; HOWEVER, PREPAYMENT MAY SUBJECT
THE MORTGAGOR TO A PREPAYMENT CHARGE AS DESCRIBED HEREIN. IN ADDITION, INVESTORS
IN THE INTEREST ONLY NOTES SHOULD FULLY CONSIDER THAT AN EXTREMELY RAPID RATE OF
PRINCIPAL PAYMENTS ON THE HOME LOANS COULD RESULT IN THE FAILURE OF SUCH
INVESTORS TO FULLY RECOVER THEIR INITIAL INVESTMENTS. SEE 'CERTAIN YIELD AND
PREPAYMENT CONSIDERATIONS' HEREIN AND 'YIELD AND PREPAYMENT CONSIDERATIONS' IN
THE PROSPECTUS.
------------------------
There is currently no secondary market for the Offered Notes. The
Underwriters intend to make a secondary market in the Offered Notes but are not
obligated to do so. There can be no assurance that a secondary market for the
Offered Notes will develop or, if it does develop, that it will continue. The
Offered Notes will not be listed on any securities exchange.
S-2
<PAGE>
<PAGE>
THE OFFERED NOTES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF
A SEPARATE SERIES OF SECURITIES BEING OFFERED PURSUANT TO THE DEPOSITOR'S
PROSPECTUS DATED JANUARY 22, 1998, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART
AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE OFFERED NOTES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
------------------------
UNTIL SEPTEMBER 18, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
STABILIZING AND THE PURCHASE OF NOTES TO COVER SYNDICATE SHORT POSITIONS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE 'METHOD OF DISTRIBUTION' HEREIN.
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.
<TABLE>
<S> <C>
Issuer.............................. The Offered Notes will be issued by Home Loan Trust 1998-HI2, a Delaware
business trust established pursuant to an Owner Trust Agreement dated as of
June 15, 1998 (as amended by the Amended and Restated Owner Trust Agreement
to be dated as of June 26, 1998, the 'OWNER TRUST AGREEMENT') between the
Depositor and the Owner Trustee. The assets of the Issuer will consist of
the Grantor Trust Certificate (as defined herein) backed by the Home Loans
(as defined herein) and certain related assets.
The Offered Notes................... $391,880,000 Home Loan-Backed Notes, Series 1998-HI2, are offered hereby.
The Offered Notes will be issued pursuant to an Indenture, dated as of June
26, 1998, between the Issuer and the Indenture Trustee. The Offered Notes
will have the following Note Rates, Note Principal Balances and other
features as of the Cut-off Date:
</TABLE>
<TABLE>
<S> <C> <C> <C>
Class A-1 Notes Adjustable Rate $134,680,000 Senior
Class A-2 Notes 6.29%(1) $ 86,990,000 Senior
Class A-3 Notes 6.33%(1) $ 23,280,000 Senior
Class A-4 Notes 6.61%(1) $ 21,390,000 Senior
Class A-5 Notes 6.81%(1) $ 32,620,000 Senior
Class A-6 Notes 5.00%(3) $ 0(2) Senior/Interest Only
Class M-1 Notes 6.78%(1) $ 40,400,000 Subordinate
Class M-2 Notes 7.17%(1) $ 28,280,000 Subordinate
Class B-1 Notes 8.01%(1) $ 24,240,000 Subordinate
</TABLE>
<TABLE>
<S> <C>
------------
(1) Subject to increase as described herein.
(2) Based on a Notional Amount of $50,000,000 as described herein.
(3) After the 24th Payment Date, the Note Rate on the Interest Only Notes
shall be reduced to 0.00%.
The Offered Notes 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 Notes and on the
Subordinate Notes, see 'Description of the Securities -- Interest Payments'
and ' -- Principal Payments' herein.
Depositor........................... Residential Funding Mortgage Securities II, Inc. (the 'DEPOSITOR' or the
'COMPANY'), an affiliate of Residential Funding. See 'The Company' in the
Prospectus.
Master Servicer..................... Residential Funding Corporation (the 'MASTER SERVICER' or 'RESIDENTIAL
FUNDING'), an affiliate of the Depositor. See 'Residential Funding
Corporation' in the Prospectus.
Grantor Trust....................... Grantor Trust 1998-HI2 (the 'GRANTOR TRUST'), a New York trust, will be
established pursuant to a Grantor Trust Agreement dated as of June 26, 1998
(the 'GRANTOR TRUST AGREEMENT'), among the Depositor, the Grantor Trustee
and Residential Funding. Pursuant to the Grantor Trust Agreement, the
Depositor will deposit the Home Loans (as defined herein) into the Grantor
Trust in exchange for a certificate (the 'GRANTOR TRUST CERTIFICATE')
evidencing 100% of the ownership interest in the Grantor Trust and
representing the entire beneficial ownership interest in the Home Loans.
</TABLE>
S-4
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Initial Subservicers................ GMAC Mortgage Corporation ('GMACMC'), an affiliate of the Depositor and the
Master Servicer, and Master Financial, Inc. ('MASTER FINANCIAL'), a
California corporation. See 'Description of the Home Loan Pool -- The
Initial Subservicers' herein.
Seller.............................. Residential Funding Corporation (the 'SELLER').
Owner Trustee....................... Wilmington Trust Company.
Indenture Trustee and Grantor
Trustee........................... The Chase Manhattan Bank.
Closing Date........................ On or about June 26, 1998.
Payment Date........................ The 25th day of each month (or, if such day is not a business day, the next
business day), beginning in July 1998 (each, a 'PAYMENT DATE').
Denominations and Registration...... The Notes will be represented by one or more notes registered in the name
of Cede & Co., as nominee of DTC. No Beneficial Owner will be entitled to
receive a Note in fully registered, certificated form (a 'DEFINITIVE
NOTE'), except under the limited circumstances described herein. Investors
in the Notes may elect to hold their Notes through DTC, in the United
States, or Cedel or Euroclear, in Europe. Transfers within DTC, CEDEL or
Euroclear, as the case may be, will be in accordance with the usual rules
and operating procedures of the relevant system. The Senior Notes (other
than the Interest Only Notes) will be issued in book-entry format in
minimum denominations of $25,000 and integral multiples of $1 in excess
thereof. The Interest Only Notes 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 Notes will be
issued in book-entry format in minimum denominations of $25,000 and
integral multiples of $1,000 in excess thereof. The Class M-2 Notes and
Class B-1 Notes will be issued in book-entry format in minimum
denominations of $250,000 and integral multiples of $1,000 in excess
thereof. For further registration information see 'Description of the
Securities' herein and 'Description of the Notes -- Form of Notes' in the
Prospectus.
The Home Loan Pool.................. The Home Loan Pool will consist of a pool of conventional, closed-end,
fixed-rate, fully-amortizing home loans (the 'HOME LOANS') with an
aggregate unpaid principal balance as of the close of business on the
business day prior to June 1, 1998 (the 'CUT-OFF DATE BALANCE,' and June 1,
1998, the 'CUT-OFF DATE') of $400,218,259. 99.90% of the Home Loans (by
Cut-off Date Balance) are secured by second mortgages or deeds of trust and
the remainder are secured by first mortgages or deeds of trust. At
origination, the Home Loans had individual principal balances of at least
$4,500 but not more than $116,600 with an average principal balance at
origination of approximately $36,283. The Home Loans have terms to maturity
from the date of origination or modification of approximately five, ten,
fifteen, twenty or twenty-five years with respect to 0.65%, 6.56%, 44.91%,
17.98% and 29.90% of the Home Loans (each, by Cut-off Date Balance),
respectively, and a weighted average Remaining Term (as defined herein) of
approximately 215 months as of the Cut-off Date. All percentages of the
Home Loans described herein are approximate percentages (except as
otherwise indicated) by Cut-off Date Balance of the Home Loans (except as
otherwise indicated). 90.39% and 9.61% of the Home Loans initially will be
subserviced for the Master Servicer by GMACMC and Master Financial,
respectively.
</TABLE>
S-5
<PAGE>
<PAGE>
<TABLE>
<S> <C>
The Home Loans will bear interest at the rate stated in the related
Mortgage Note (the 'LOAN RATE') which will be at least 9.49% per annum but
no more than 19.87% per annum, with a weighted average Loan Rate of
approximately 13.88% per annum as of the Cut-off Date. The Combined
Loan-to-Value Ratios for the Home Loans will range from 12.00% to 130.00%,
with a weighted average of approximately 115.55%. 92.90% of the Home Loans
have Combined Loan-to-Value Ratios in excess of 100%. 19.81% of the
Mortgaged Properties are located in California. As of the Cut-off Date,
26.34% of the Home Loans were High Cost Loans.
For a further description of the Home Loans, see 'Description of the Home
Loan Pool' herein.
Interest Payments................... Interest on the Offered Notes will be paid monthly on each Payment Date,
commencing in July 1998, at the related Note Rate for such Payment Date.
Interest on the Offered Notes (and any Unpaid Interest Shortfalls (as
defined herein)) will be paid, to the extent of the Interest Remittance
Amount (as defined herein) in the following order of priority: first, to
the Interest Only Notes, second, to the Senior Notes (other than the
Interest Only Notes) on a pro rata basis, third, to the Class M-1 Notes,
fourth, to the Class M-2 Notes, and fifth, to the Class B-1 Notes.
The 'NOTE RATE' on each class of Offered Notes (other than the Class A-1
Notes and the Interest Only Notes) for each Payment Date will be the fixed
rate set forth on the cover hereof; provided that the Note Rate on each
such class of Notes then outstanding will increase by 0.50% per annum after
the Step-Up Date, except as described herein. The 'STEP-UP DATE' is the
first Payment Date on which the aggregate Principal Balance of the Home
Loans as of the end of the related Collection Period is equal to or less
than 10% of the Cut-off Date Balance. Notwithstanding the foregoing, the
Note Rates and Component Interest Rate will not increase as described above
if the proceeds of the Optional Redemption (as defined herein) are
available for payment to the Securityholders on or prior to the first
Payment Date occurring after the Step-Up Date. The Note Rate on the Class
A-1 Notes for each Payment Date will be a floating rate equal to the lesser
of (i) LIBOR plus 0.04% per annum and (ii) 12.50% per annum. The Note Rate
on the Interest Only Notes will equal 5.00% per annum for the first 24
Payment Dates, and 0.00% thereafter.
The 'ACCRUAL PERIOD' with respect to any Payment Date will be (i) in the
case of the Class A-1 Notes, the period from and including the Payment Date
in the calendar month preceding the month in which the related Payment Date
occurs (or, in the case of the first Payment Date, from and including the
Closing Date) to but excluding the related Payment Date and (ii) in the
case of the Offered Notes other than the Class A-1 Notes, the calendar
month preceding the month in which the related Payment Date occurs (or in
the case of the first Payment Date, beginning on the Closing Date and
ending the last day of the month in which the Closing Date occurs).
Interest on the Class A-1 Notes will be based on the actual number of days
in the related Accrual Period and a 360-day year. Interest on the Offered
Notes other than the Class A-1 Notes will be based on a 30-day month and a
360-day year.
The 'NOTIONAL AMOUNT' of the Interest Only Notes as of any Payment Date
will be equal to $50,000,000. References herein to the Notional
</TABLE>
S-6
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Amount are used solely for certain calculations and do not represent the
right of the Interest Only Notes to receive distributions allocable to
principal.
See 'Description of the Securities -- Interest Payments' herein.
Principal Payments.................. Holders of the Senior Notes (other than the Interest Only Notes, which will
not be entitled to distributions with respect to principal) will be
entitled to receive a distribution of principal on each Payment Date, in
the manner set forth herein, to the extent of the Senior Principal
Distribution Amount (as defined herein). Prior to the Credit Support
Depletion Date (as defined herein), such Senior Notes will receive payments
of principal sequentially, in increasing numerical order, in each case
until the related Note Principal Balance has been reduced to zero.
Following the earlier to occur of (i) the Stepdown Date (as defined herein)
or (ii) the retirement of the Senior Notes and any Class M Notes senior
thereto, holders of the Class M Notes will be entitled to receive a
distribution of principal on each Payment 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 Notes and any class of
Class M Notes having a higher payment priority.
Following the earlier to occur of (i) the Stepdown Date or (ii) the
retirement of the Senior Notes and the Class M Notes, holders of the Class
B-1 Notes will be entitled to receive a distribution of principal on each
Payment 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 Notes
and the Class M Notes.
See 'Description of the Securities -- Principal Payments' herein.
Net Monthly Excess Cash Flow........ Holders of the Offered Notes may be entitled to receive additional
distributions in respect of principal (included in the Principal
Distribution Amount) on each Payment Date to the extent of Net Monthly
Excess Interest Amount. The 'NET MONTHLY EXCESS INTEREST AMOUNT' will
consist of the portion, if any, of the Interest Remittance Amount (as
defined herein) not required to pay Accrued Note Interest and any Unpaid
Interest Shortfall (each, as defined herein) on the Offered Notes and
Accrued Component Interest (as defined herein) and any Unpaid Interest
Shortfall on the B-2 Component. The amount of the Net Monthly Excess
Interest Amount used to pay principal on the Notes and the B-2 Component is
the 'EXTRA PRINCIPAL DISTRIBUTION AMOUNT.' The 'NET MONTHLY EXCESS CASH
FLOW' will consist of (i) the Net Monthly Excess Interest Amount not used
to fund the Extra Principal Distribution Amount, (ii) the Net Monthly
Excess Principal Amount (as defined herein) and (iii) the
Overcollateralization Reduction Amount (to the extent of the Principal
Remittance Amount). The Net Monthly Excess Cash Flow generally will be used
as follows: (i) first, to pay any remaining Unpaid Interest Shortfall on
the Senior Notes; (ii) second, to pay any remaining Unpaid Interest
Shortfall on the Subordinate Notes and the B-2 Component, to pay any
Allocable Loss Interest (as defined herein) on the Subordinate Notes, in
the order of priority described herein and to reimburse the Subordinate
Notes and the B-2 Component for any Realized Losses (other than Excess
Losses) previously allocated thereto;
</TABLE>
S-7
<PAGE>
<PAGE>
<TABLE>
<S> <C>
and (iii) third, to be distributed to the Certificate in respect of the
Residual Component (as defined herein).
See 'Description of the Securities -- Net Monthly Excess Cash Flow
Distributions' herein.
Credit Enhancement.................. The Credit Enhancement provided for the benefit of the Offered Notes
consists of (a) the subordination provisions described below and (b) the
overcollateralization provisions described below.
Subordination: The rights of the holders of the Senior Notes (other than
the Interest Only Notes) to receive distributions with respect to the Home
Loans will be subordinate to the rights of the holders of the Interest Only
Notes, the rights of the holders of the Class M-1 Notes to receive
distributions with respect to the Home Loans will be subordinate to the
rights of the holders of the Senior Notes, the rights of the holders of the
Class M-2 Notes to receive distributions with respect to the Home Loans
will be subordinate to the rights of the holders of the Senior Notes and
the Class M-1 Notes, the rights of the holders of the Class B-1 Notes to
receive distributions with respect to the Home Loans will be subordinate to
the rights of the holders of the Senior Notes, the Class M-1 Notes and the
Class M-2 Notes, in each case to the extent described herein and in the
Prospectus.
Outstanding Reserve Amount: After the Undercollateralization Amount (as
defined herein) has been reduced to zero, the Outstanding Reserve Amount
will be created by distributions of the Reserve Increase Amount (as defined
herein), if any, to the Notes and the B-2 Component. The Outstanding
Reserve Amount, if any, will represent overcollateralization which will be
available to absorb any Realized Losses (other than any Excess Losses). The
'OUTSTANDING RESERVE AMOUNT' available on any Payment Date is the amount,
if any, by which the aggregate Principal Balance of the Home Loans (the
'POOL BALANCE') as of the end of the related Collection Period exceeds the
sum of the aggregate Note Principal Balance of the Notes and the Component
Principal Balance of the B-2 Component (such sum, the 'SECURITY BALANCE')
on such Payment Date (after application of the Principal Distribution
Amount for such date).
As of the Closing Date, the Security Balance will exceed the Cut-off Date
Balance of the Home Loans by $3,781,741 (approximately 0.94% of the Cut-off
Date Balance) (such excess at any time, the 'UNDERCOLLATERALIZATION
AMOUNT'), representing an initial undercollateralization of the Notes and
the B-2 Component in relation to the Home Loans. On each Payment Date, the
Reserve Increase Amount (as defined herein) will be used first, to
eliminate any undercollateralization by reducing the Security Balance to
equal the Pool Balance as of the end of the related Collection Period, and
then to increase the Outstanding Reserve Amount until such amount is equal
to the Reserve Amount Target.
The 'RESERVE AMOUNT TARGET' means as of any Payment Date (i) prior to the
Stepdown Date, the greater of (a) 3.50% of the Cut-off Date Balance and (b)
the Net Delinquency Amount (as defined herein) for such Payment Date, and
(ii) on or after the Stepdown Date, the greatest of (x) 7.00% of the Pool
Balance as of the end of the related Collection Period, (y) the Net
Delinquency Amount for such Payment Date and (z) $2,001,091. See
'Description of the Securities -- Outstanding Reserve Amount' herein. To
the extent the Reserve Amount Target decreases on
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any Payment Date, the amount of the Principal Distribution Amount will be
reduced on such Payment Date and on each subsequent Payment Date to the
extent the remaining Outstanding Reserve Amount is in excess of the reduced
Reserve Amount Target until the Outstanding Reserve Amount equals the
Reserve Amount Target.
Allocation of Losses;
Subordination..................... Commencing with the earlier of (i) the first Payment Date on which the
Undercollateralization Amount has been reduced to zero and (ii) the sixth
Payment Date, and on each Payment Date thereafter, to the extent the Pool
Balance is less than the Security Balance due to Realized Losses (other
than Excess Losses), the Component Principal Balance of the B-2 Component
and the Note Principal Balances of the Notes shall be reduced as follows,
until such deficiency is fully allocated: first, the Component Principal
Balance of the B-2 Component shall be reduced, until the Component
Principal Balance thereof has been reduced to zero; second, the Note
Principal Balance of the Class B-1 Notes shall be reduced, until the Note
Principal Balance thereof has been reduced to zero; third, the Note
Principal Balance of the Class M-2 Notes shall be reduced, until the Note
Principal Balance thereof has been reduced to zero; and fourth, the Note
Principal Balance of the Class M-1 Notes shall be reduced, until the Note
Principal Balance thereof has been reduced to zero. The Note Principal
Balances of the Senior Notes will not be so reduced and such Notes will
continue to be entitled to receive Accrued Note Interest on their
respective Note Principal Balances subject to available funds. Any loss
(other than an Excess Loss) allocated to a Subordinate Note may be repaid
(with interest thereon) through the mechanics of the payment of the Net
Monthly Excess Cash Flow as described above.
In addition, any Excess Losses will be allocated on a pro rata basis to the
Notes (other than the Interest Only Notes) and the Class B-2 Component as
described herein. See 'Description of the Securities -- Allocation of
Losses; Subordination' herein.
Neither the Offered Notes nor the Home 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.
The Certificate..................... The Certificate will consist of one class with two separate components, the
'B-2 COMPONENT' and the 'RESIDUAL COMPONENT.' The B-2 Component will have a
Component Principal Balance of $12,120,000 and a Component Interest Rate of
8.25% per annum; provided that the Component Interest Rate on such
Component, if outstanding, will increase by 0.50% per annum after the
Step-Up Date, except as described herein. The Residual Component will have
no principal balance or interest rate. The Certificate will be issued
pursuant to the Owner Trust Agreement and will represent the beneficial
ownership interest of the Trust. The B-2 Component and the Residual
Component of the Certificate are not separately transferable. The
Certificate is not offered hereby.
Special Prepayment Considerations... The rate and timing of principal payments on the Offered Notes will depend
on, among other things, the rate and timing of principal payments
(including prepayments, defaults, liquidations and purchases of Home Loans
due to a breach of a representation and warranty) on the Home Loans. The
Offered Notes are subject to inherent cash flow uncertainties because the
Home Loans may be prepaid at any time. In addition, some
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of the Home Loans provide for payment of a prepayment charge for a period
of up to five years. Such prepayment charges may reduce the rate of
prepayment on the Home Loans until the end of such period. See 'Description
of the Home Loan Pool -- Home Loan Pool Characteristics.'
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 Home 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 Notes results in the allocation of
prepayments among certain classes as follows:
Senior Notes: The Senior Notes (other than the Interest Only Notes) are
subject to the sequential priority for payment of principal described
herein. Distributions of principal on classes of such Senior Notes having
an earlier priority of payment will be affected by the rates of prepayment
of the Home Loans early in the life of the Home Loan Pool. The timing of
commencement of principal distributions and the weighted average lives of
the classes of such Senior Notes with a later priority of payment will be
affected by the rates of prepayment of the Home Loans experienced both
before and after the commencement of principal distributions on such
classes.
Notes with Subordination Features: As described herein, during certain
periods all or a disproportionately large percentage of principal payments
on the Home Loans will be allocated to the Senior Notes in the aggregate
and, during certain periods, no principal payments will be distributed to
the Subordinate Notes. Unless the Note Principal Balances of the Senior
Notes have been reduced to zero, the Subordinate Notes will not be entitled
to receive distributions of principal until the Stepdown Date. To the
extent that no principal payments are distributed on the Subordinate Notes,
the subordination afforded the Senior Notes by the Subordinate Notes
(together with the Outstanding Reserve Amount), in the absence of
offsetting Realized Losses allocated thereto, will be increased, and the
weighted average lives of the Subordinate Notes will be extended.
In addition, investors in each class of Subordinate Notes should be aware
that on and after the Payment Date on which the Outstanding Reserve Amount
has been reduced to approximately $2,001,091 and the Component Principal
Balance of the B-2 Component has been reduced to zero, the most subordinate
class of Subordinate Notes then outstanding may receive more than what
would otherwise be such class' share of the Principal Distribution Amount
for such Payment Date.
See 'Description of the Securities -- Principal Payments' and 'Certain
Yield and Prepayment Considerations' herein and 'Yield and Prepayment
Considerations' in the Prospectus. For further information regarding the
effect of principal prepayments on the weighted average lives of the
Offered Notes, see the table entitled 'Percent of Initial Note Principal
Balance Outstanding at the Following Percentages of Prepayment Assumption'
herein.
Special Yield Considerations........ The yield to maturity on the Offered Notes will depend on, among other
things, the rate and timing of principal payments (including prepayments,
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defaults, liquidations and repurchases of Home Loans due to a breach of a
representation and warranty) on the Home Loans and the allocation thereof
to reduce the Note Principal Balances thereof. In addition, Prepayment
Interest Shortfalls, Relief Act Shortfalls and Delinquency Shortfalls
(each, as defined herein) will adversely affect the yield to investors on
the Offered Notes to the extent the Interest Remittance Amount is
insufficient to pay Accrued Note Interest on the Offered Notes. See
'Description of the Securities -- Interest Payments' herein.
In general, if the Offered Notes are purchased at a premium and principal
payments to the Offered Notes occur at a rate faster than assumed at the
time of purchase, the investor's actual yield to maturity will be lower
than that anticipated at the time of purchase. Conversely, if the Offered
Notes are purchased at a discount and principal payments thereon occur at a
rate slower than that assumed at the time of purchase, the investor's
actual yield to maturity will be lower than that anticipated at the time of
purchase.
The Offered Notes were structured assuming, among other things, a
Prepayment Assumption (as defined herein) of 100% and corresponding
weighted average lives as described herein. The prepayment, yield and other
assumptions to be used for pricing purposes for the respective classes that
are to be offered hereunder may vary as determined at the time of sale.
The multiple class structure of the Offered Notes causes the yield of
certain classes to be particularly sensitive to changes in the rates of
prepayment of the Home Loans and other factors, as follows:
Interest Only Notes: Investors in the Interest Only Notes should fully
consider that an extremely rapid rate of principal prepayments on the Home
Loans could result in the failure of such investors to receive all amounts
payable under the Interest Only Notes. See 'Certain Yield and Prepayment
Considerations,' especially 'Certain Yield and Prepayment
Considerations -- Interest Only Note Yield Considerations' herein.
Notes with Subordination Features: The yield to investors on each class of
Subordinate Notes, and particularly on those classes of Subordinate Notes
with lower payment priorities, will be extremely sensitive to losses due to
defaults on the Home Loans (and the timing thereof), to the extent such
losses are not covered by the Outstanding Reserve Amount (including
overcollateralization created by the Net Monthly Excess Interest Amount) or
by any other class of Subordinate Notes having a lower payment priority,
because the entire amount of such losses that are covered by Subordination
(as defined herein) will be allocable to such class or classes of
Subordinate Notes, as described herein.
Investors in each class of Subordinate Notes should also be aware that on
any Payment Date prior to the Stepdown Date, such class of Subordinate
Notes will not be entitled to distributions of principal until the Note
Principal Balances of the Senior Notes and each class of Subordinate Notes
senior thereto have been reduced to zero.
Investors in the Senior Notes (other than the Interest Only Notes) should
note that such Senior Notes are subordinate to the Interest Only Notes with
respect to distributions and the allocation of Realized Losses (including
the interest portion of Excess Losses).
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Certain Federal Income Tax
Consequences...................... In the opinion of Thacher Proffitt & Wood, counsel to the Depositor, for
federal income tax purposes, the Offered Notes will be characterized as
indebtedness, the Grantor Trust, as created pursuant to the terms and
conditions of the Grantor Trust Agreement, will be classified as a grantor
trust under subpart E, part I of subchapter J of Chapter 1 of the Code, and
the Issuer, as created pursuant to the terms and conditions of the Owner
Trust Agreement, will not be characterized as an association (or a publicly
traded partnership within the meaning of section 7704 of the Code) taxable
as a corporation or as a taxable mortgage pool within the meaning of
section 7701(i) of the Code.
For further information regarding certain federal income tax consequences
of an investment in the Offered Notes, see 'Certain Federal Income Tax
Consequences' herein and 'Certain Federal Income Tax Consequences' and
'State and Other Tax Consequences' in the Prospectus.
Legal Investment.................... THE OFFERED NOTES WILL NOT CONSTITUTE 'MORTGAGE RELATED SECURITIES' FOR
PURPOSES OF SMMEA BECAUSE THE HOME LOAN POOL INCLUDES HOME LOANS THAT ARE
SECURED BY SUBORDINATE LIENS ON THE RELATED MORTGAGED PROPERTIES.
Institutions whose investment activities are subject to legal investment
laws and regulations or to review by certain regulatory authorities may be
subject to restrictions on investment in the Offered Notes. See 'Legal
Investment' herein.
Rating.............................. It is a condition of the issuance of the Offered Notes that the Senior
Notes be rated 'Aaa' by Moody's Investors Service, Inc. ('MOODY'S') and
'AAA' by Fitch IBCA, Inc. ('FITCH'), the Class M-1 Notes be rated 'Aa2' by
Moody's and 'AA' by Fitch, the Class M-2 Notes be rated 'A2' by Moody's and
'A' by Fitch and the Class B-1 Notes be rated 'Baa3' by Moody's and 'BBB'
by 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 Home Loans, or the corresponding effect on
yield to investors. The rating of the Interest Only Notes does not address
the possibility that the holders thereof may not receive all amounts
payable thereunder due to an extremely rapid rate of prepayments on the
Home Loans. See 'Certain Yield and Prepayment Considerations' and 'Ratings'
herein.
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RISK FACTORS
PROSPECTIVE INVESTORS IN THE OFFERED NOTES SHOULD CONSIDER, AMONG OTHER
THINGS, THE ITEMS DISCUSSED UNDER 'RISK FACTORS' WHICH BEGINS ON PAGE 9 IN THE
PROSPECTUS AND THE FOLLOWING FACTORS IN CONNECTION WITH THE PURCHASE OF THE
OFFERED NOTES:
ADEQUACY OF CREDIT ENHANCEMENT; SUBORDINATION
Credit enhancement will be provided for the Offered Notes in the form of
the subordination provided to the Notes by the Classes of Notes subordinate
thereto and by the B-2 Component and the Outstanding Reserve Amount
(representing any overcollateralization established as described herein). None
of the Depositor, the Master Servicer, the Seller or any of their affiliates
will have any obligation to replace or supplement such credit enhancement, or to
take any other action to maintain any rating of the Offered Notes. To the extent
that any losses are incurred on any of the Home Loans that are not covered by
Subordination, the holders of the Notes will bear all risk of such losses
resulting from default by Mortgagors.
The yield to investors on each class of Subordinate Notes, and particularly
on those classes of Subordinate Notes with lower payment priorities, will be
extremely sensitive to losses (other than Excess Losses) due to defaults on the
Home Loans (and the timing thereof), to the extent such losses are not covered
by the B-2 Component or the Outstanding Reserve Amount (including
overcollateralization created by the Net Monthly Excess Interest Amount) or by
any other class of Subordinate Notes 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 Notes, as described herein.
Furthermore, as described herein, the timing of receipt of principal and
interest by any class of Subordinate Notes may be adversely affected by losses
even if such class does not ultimately bear such loss. In addition, the yield to
investors on each class of Notes will be sensitive to Excess Losses, which will
not be covered by Subordination. Investors in the Senior Notes (other than the
Interest Only Notes) should note that such Senior Notes are subordinate to the
Interest Only Notes with respect to distributions and the allocation of Realized
Losses (including the interest portion of Excess Losses). The Notes are not
insured by any financial guaranty insurance policy.
The yield to investors on each class of Offered Notes, and particularly on
those classes of Offered Notes with lower payment priorities, will be sensitive
to (i) Prepayment Interest Shortfalls and Relief Act Shortfalls (each, 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 Home 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
Payment Date, Prepayment Interest Shortfalls, Relief Act 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 Notes. In
certain scenarios involving Prepayment Interest Shortfalls, Relief Act
Shortfalls or Delinquency Shortfalls, the Interest Remittance Amount may be
insufficient to pay Accrued Note Interest on the Offered Notes in full. Any
shortfalls in interest distributions resulting therefrom will be allocated first
to the respective classes of Subordinate Notes (in the order in which Realized
Losses (other than Excess Losses) are allocated thereto) prior to allocation
among the Senior Notes and will carry forward (with interest thereon) and will
be payable on future Payment Dates subject to available funds. Any allocation to
the Senior Notes will be made first to the Senior Notes (other than the Interest
Only Notes) on a pro rata basis, and then to the Interest Only Notes. The Notes
will be reimbursed for such interest shortfalls prior to the payment of Accrued
Note Interest on any class of Notes subordinate thereto and from Net Monthly
Excess Cash Flow as described herein. As a result of the priority of payment
provisions herein, holders of the Notes may experience delays in being
reimbursed for such shortfalls, and such shortfalls may remain unreimbursed.
RISKS ASSOCIATED WITH THE HOME LOANS
Since 99.90% of the Home 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 Home Loans secured by subordinate mortgages only to
the extent that the claims of such senior mortgages have been satisfied in full,
including any related liquidation expenses (such as
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legal fees, real estate taxes, and maintenance and preservation expenses). In
circumstances when it is determined to be uneconomical to foreclose on the
Mortgaged Property or engage in other loss mitigation procedures, the Master
Servicer may write off the entire outstanding balance of such Home Loan as a bad
debt. The foregoing considerations will be particularly applicable to Home 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 Home Loans.
As of the Cut-off Date, the weighted average Combined Loan-to-Value Ratio of the
Home Loans is 115.55%, and approximately 92.90% of the Home Loans will have
Combined Loan-to-Value Ratios in excess of 100%. Because the Home Loans have
been recently originated, the borrowers will not build equity in the related
Mortgaged Properties through amortization of the Home Loans for a substantial
period of time.
The Master Servicer is authorized to engage in a wide variety of loss
mitigation practices with respect to the Home Loans. In addition, the Servicing
Agreement permits the Master Servicer to release the lien on the Mortgaged
Property securing a Home Loan under certain circumstances, if the Home Loan is
current in payment. See 'Description of the Servicing Agreement -- Release of
Lien; Refinancing of Senior Lien' and ' -- Collection and Liquidation Practices;
Loss Mitigation' herein.
The Home Loans were originated with a limited expectation of recovering any
amounts from the foreclosure of the related Mortgaged Property and are
underwritten with an emphasis on the creditworthiness of the related borrower.
If such Home Loans go into foreclosure and are liquidated, there may be no
amounts recovered from the related Mortgaged Property unless the value of the
property has increased or the principal amount of the related senior liens has
been reduced to the point where the value of the property, less any related
foreclosure costs, is greater than the principal amount of the related senior
liens. To the extent that any losses are incurred on any of the Home Loans that
are not covered by Subordination, the holders of the Offered Notes will bear all
risk of such losses resulting from default by Mortgagors.
In addition, with respect to the Home Loans with Combined Loan-to-Value
Ratios in excess of 100%, there is a risk that if the related borrowers
relocate, such borrowers will be unable to pay off their Home Loans in full from
the sale proceeds of the related Mortgaged Properties and any other funds
available to these borrowers, in which case the Home Loans could experience
higher rates of delinquency and loss. With respect to Home Loans the proceeds of
which were used for debt consolidation, there can be no assurance that,
following the debt consolidation, the related borrower will not incur further
debt. This reloading of debt could impair the ability of such borrowers to
service their debts, which in turn could result in higher rates of delinquency
and loss on the Home Loans.
In the event of a delinquency or a default on a Home Loan, the Master
Servicer will not have an obligation to advance scheduled monthly payments of
principal and interest on such Home Loan. Delinquencies and defaults on mortgage
loans are generally expected to occur with greater frequency in their early
years. The rate of delinquency and default of second mortgage loans may be
greater than that of mortgage loans secured by first liens on comparable
properties.
ECONOMIC CONDITIONS
Mortgage loans of the type similar to those included in the Home Loan Pool
(with Combined Loan-to-Value Ratios in excess of 100%) have been originated for
a limited period of time. During this time, economic conditions nationally and
in most regions of the country have been generally favorable. However, a
deterioration in economic conditions could be expected to adversely affect the
ability and willingness of borrowers to repay their Home Loans. In such
circumstances, no prediction can be made as to the severity of the effect of an
economic downturn on the rate of delinquencies and losses on the Home Loans.
Because borrowers under the Home Loans generally have little or no equity in the
related Mortgaged Properties, any significant increase in the rate of
delinquencies and losses on the Home Loans could result in losses allocated to
the Notes to the extent not covered by Subordination.
SPECIAL LEGAL CONSIDERATIONS
Violations of certain provisions of federal and state law on the part of
the originator may limit the ability of the Master Servicer or any Subservicer
to collect all or part of the principal of or interest on the Home Loans and in
addition could subject the Trust to damages and administrative enforcement. In
particular, 26.34% of the
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Home Loans are High Cost Loans (as defined in the Prospectus). The originators'
failure to comply with certain requirements of the Federal Truth-in-Lending Act,
as implemented by Regulation Z, with respect to such High Cost Loans, could
subject the Trust (and other assignees) to monetary penalties, and result in the
obligors' rescinding such High Cost Loans against the Trust. Any federal and
state law violations which would result in liability to the Trust would be a
breach of the Seller's representations and warranties, and the Seller would be
obligated to cure, repurchase or, if permitted by the Home Loan Purchase
Agreement, substitute for the High Cost Loan in question. See 'Certain Legal
Aspects of the Trust Assets and Related Matters' in the Prospectus.
BANKRUPTCY CONSIDERATIONS
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. The NBRC delivered its report on October 20, 1997. The NBRC's
report appears to recommend that Congress amend Bankruptcy Code section
1322(b)(2) by treating a claim secured 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. 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. A bill
currently pending before the United States House of Representatives (H.R. 3146),
if enacted, would amend the Bankruptcy Code to permit chapter 13 debtors, under
a plan, to reduce the value of non-purchase money security interests in the
debtor's principal residence to the liquidation value of the property less the
value of any senior secured claims. Any such changes to the Bankruptcy Code
could have a negative effect on the Home Loans and the enforcement of rights
therein.
On June 4, 1998, a consumer bankruptcy reform bill which had previously
been introduced in the Senate (S.1301) was amended to, among other things,
propose an amendment to the Bankrupcty Code (the 'TILA AMENDMENT') that would
authorize bankruptcy judges to disallow claims based on secured debt if the
creditor failed to comply with certain provisions of the Truth in Lending Act
(15 U.S.C. SS 1639). In its present form, S.1301 would apply only to bankruptcy
cases commenced after the enactment of such amendments but would apply
retroactively to secured debt incurred by the debtor prior to the date of
effectiveness of such amendments. The TILA Amendment has not been approved by
the full Senate. A bill that the United States House of Representatives passed
on June 10, 1998 (H.R. 3150), the House version of the consumer bankruptcy bill,
does not contain a comparable provision, and there are presently significant
differences between the House and Senate versions of the legislation that will
have to be reconciled at the House-Senate conference.
If the TILA Amendment in S.1301 becomes law, any violation of the Truth in
Lending Act with respect to the High Cost Loans in the Home Loan Pool could
result in a complete loss with respect to such loan if the related borrower goes
into bankruptcy. Any such violation would be a breach of the Seller's
representation and warranties, and the Seller would be obligated to cure,
repurchase or, if permitted by the Home Loan Purchase Agreement, substitute for
the loan in question.
UNDERWRITING STANDARDS
The Home Loans were originated in accordance with the standards described
in 'Description of the Home Loan Pool -- Underwriting Standards' below.
Residential Funding considers the underwriting policy under which the Home Loans
are underwritten to be analogous to credit lending, rather than equity lending,
since its underwriting decisions are based primarily on the borrower's credit
history and capacity to repay rather than on the potential value of the
collateral upon foreclosure. Accordingly, Residential Funding's underwriting
standards generally allow loans to be approved with Combined Loan-to-Value
Ratios of up to approximately 125%. Because of the relatively high Combined
Loan-to-Value Ratios of the Home Loans and the fact that the Home Loans are
secured by subordinate liens, losses on the Home Loans may be higher than for
mortgage loans underwritten in conformity with first lien mortgage loan programs
which are based on the potential value of the collateral upon foreclosure.
LIMITED HISTORICAL DATA WITH RESPECT TO THE TYPES OF MORTGAGE LOANS IN THE HOME
LOAN POOL
The Depositor began purchasing and Residential Funding began master
servicing conventional mortgage loans of the types included in the Home Loan
Pool in April 1997. Accordingly, no information has been
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included herein with respect to Residential Funding's delinquency, loan loss or
liquidation experience for such loans, which, to the limited extent that such
information is available, would not likely be indicative of the Home Loans
comprising the Home Loan Pool.
GMACMC has limited experience servicing or subservicing conventional
mortgage loans of the types included in the Home Loan Pool and has only had a
substantial servicing portfolio of such loans since February 1998. Because of
such limited experience, no information has been provided with respect to
GMACMC's delinquency, loan loss or liquidation experience for mortgage loans of
the types included in the Home Loan Pool. Because Master Financial is acting as
subservicer with respect to only 9.61% of the Home Loans, no delinquency, loan
loss and liquidation experience for Master Financial has been provided.
DESCRIPTION OF THE HOME LOAN POOL
GENERAL
The Home Loan Pool will consist of Home Loans with an aggregate Principal
Balance as of the Cut-off Date of $400,218,259 (the 'CUT-OFF DATE BALANCE').
99.90% of the Home Loans are secured by second liens on fee simple or leasehold
interests in one- to four-family residential properties and the remainder are
secured by first liens. The Home Loans will consist of conventional, closed-end,
fixed-rate, fully-amortizing home loans with terms to maturity of approximately
five, ten, fifteen, twenty or twenty-five years with respect to 0.65%, 6.56%,
44.91%, 17.98% and 29.90% of the Home Loans, respectively, from the date of
origination or modification. The proceeds of the Home Loans generally were used
by the related borrowers for (i) debt consolidation, (ii) home improvement,
(iii) the partial refinancing of the related Mortgaged Property, (iv) to provide
cash to the borrower (up to 20% of the proceeds) or (v) a combination of the
foregoing. As to each Home Loan the Mortgagor represented at the time of
origination that the related Mortgaged Property would be owner occupied as a
primary home. With respect to Home 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 Home Loans described herein are
approximate percentages (except as otherwise indicated) determined by Cut-off
Date Balance.
All of the Home Loans were acquired by Residential Funding (in such
capacity, the 'SELLER') under its 125 Loan Program from Unaffiliated Sellers as
described herein and in the Prospectus, except in the case of 16.06% of the Home
Loans which were purchased by the Seller through its affiliate HomeComings
Financial Network, Inc. No Unaffiliated Seller sold more than 20.42% of the Home
Loans to Residential Funding. 90.39% and 9.61% of the Home Loans will be
subserviced by GMACMC and Master Financial, respectively. See ' -- The Initial
Subservicers' below.
All of the Home Loans were generally underwritten as described below under
' -- Underwriting Standards'.
The Seller will make certain representations and warranties regarding the
Home Loans sold by it as of the date of issuance of the Offered Notes. Further,
the Seller will be required to repurchase or substitute for any Home Loan sold
by it as to which a breach of its representations and warranties with respect to
such Home Loan occurs if such breach materially adversely affects the interests
of the Securityholders in such Home Loan. See 'Description of the Home Loan
Purchase Agreement' herein and 'Trust Asset Program -- Qualifications of
Sellers' and ' -- Representations Relating to the Trust Assets' and 'Description
of the Notes -- Review of Trust Assets' in the Prospectus.
PAYMENTS ON THE SIMPLE INTEREST HOME LOANS
31.91% of the Home Loans provide for 'simple interest' payments (the
'SIMPLE INTEREST HOME LOANS') which require that each monthly payment consist of
an installment of interest which is calculated according to the simple interest
method. This method calculates interest using the basis of the outstanding
principal balance of the Home Loan multiplied by the Loan 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 Home Loan. As payments are received on the Home Loans,
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 a greater portion of such payment allocated 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 Home 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 Home Loan
will amortize more slowly than scheduled. Any remaining unpaid principal is
payable on the final maturity date of the Home Loan.
68.09% of the Home Loans are actuarial Home Loans, on which 30 days of
interest is owed each month irrespective of the day on which the payment is
received.
HOME LOAN POOL CHARACTERISTICS
None of the Home Loans were originated prior to May 1996 or will have a
maturity date later than June 2023. No Home Loan will have a remaining term from
June 1998 to the stated maturity thereof (a 'REMAINING TERM') of less than 22
months. The weighted average Remaining Term of the Home Loans as of the Cut-off
Date will be approximately 215 months. The weighted average original term to
stated maturity of the Home Loans as of the Cut-off Date will be approximately
222 months. 0.65% of the Home Loans will have original terms to maturity of
approximately five years, with a weighted average Remaining Term of
approximately 66 months. 6.56% of the Home Loans will have original terms to
maturity of approximately ten years, with a weighted average Remaining Term of
approximately 110 months. 44.91% of the Home Loans will have original terms of
maturity of approximately fifteen years, with a weighted average Remaining Term
of approximately 173 months. 17.98% of the Home Loans will have original terms
to maturity of approximately twenty years, with a weighted average Remaining
Term of approximately 233 months. 29.90% of the Home Loans will have original
terms of maturity of approximately twenty-five years, with a weighted average
Remaining Term of approximately 294 months. All of the Home Loans have principal
and interest payable monthly on various days of each month as specified in the
Mortgage Note (the 'DUE DATE'). 92.90% of the Home Loans will be secured by
mortgages or deeds of trust on property in which the borrower has little or no
equity because the related CLTV at the time of origination exceeds 100%.
With respect to each Home Loan, the 'COMBINED LOAN-TO-VALUE RATIO' or
'CLTV' generally will be the ratio, expressed as a percentage, of (i) any
outstanding principal balance, at origination of such Home Loan, of all other
mortgage loans, if any, secured by senior or subordinate liens on the related
Mortgaged Property, to (ii) the Appraised Value, or, if permitted, the Stated
Value. The 'APPRAISED VALUE' for any Home Loan will be the appraised value of
the related Mortgaged Property determined in the appraisal used in the
origination of such Home Loan (which may have been obtained at an earlier time);
provided that if such Home Loan was originated simultaneously with or not more
than 12 months after a senior lien on the related Mortgaged Property, the
Appraised Value shall be the lesser of the appraised value at the origination of
the senior lien and the sales price for such Mortgaged Property. However, with
respect to not more than 25.32% of the Home Loans, the 'STATED VALUE' will be
the value of the property as stated by the related Mortgagor in his or her
application. See 'Description of the Home Loan Pool -- Underwriting Standards'
herein.
In connection with each Home Loan that is secured by a leasehold interest,
the Seller will have represented that, among other things: (i) the use of
leasehold estates for residential properties is an accepted practice in the area
where the related Mortgaged Property is located; (ii) residential property in
such area consisting of leasehold estates is readily marketable; (iii) the lease
is recorded and no party is in any way in breach of any provision of such lease;
(iv) the leasehold is in full force and effect and is not subject to any prior
lien or encumbrance by which the leasehold could be terminated; and (v) the
remaining term of the lease does not terminate less than five years after the
maturity date of each such Home Loan.
S-17
<PAGE>
<PAGE>
Approximately 34.72% of the Home Loans provide for payment of a prepayment
charge, if such loans prepay within a specified time period. As to each such
Home Loan, the prepayment charge generally is the maximum amount permitted under
applicable state law (or, if no maximum prepayment charge is specified, the
prepayment charge generally is calculated as set forth in the following
sentence). 0.73%, 0.31%, 31.38% and 2.30% of the Home Loans (by Cut-off Date
Balance of such Home Loans) with a prepayment charge provision provide for
payment of a prepayment charge for full prepayments made within approximately
one year, two years, three years and five years, respectively, of the
origination of such Home Loan calculated in accordance with the terms of the
related Mortgage Note. With respect to the remainder of the Home Loans with a
prepayment charge provision, the prepayment charge is calculated in a different
manner. The Initial Subservicers will be entitled to all prepayment charges and
late payment charges received on the Home Loans and such amounts will not be
available for payment on the Offered Notes.
As of the Cut-off Date, no Home Loan will be 30 days or more delinquent in
payment of principal and interest.
As of the Cut-off Date, 26.34% of the Home Loans were High Cost Loans.
Purchasers or assignees of any High Cost Loan, including the Trust, could be
liable for all claims and subject to all defenses that the borrower could assert
against the originator thereof. Remedies available to the borrower include
monetary penalties, as well as recission rights if appropriate disclosures were
not given as required. See 'Risk Factors -- Special Legal Considerations' herein
and 'Certain Legal Aspects of the Trust Assets and Related
Matters -- Anti-Deficiency Legislation and Other Limitations on Lenders' in the
Prospectus.
All of the Home Loans were originated pursuant to full documentation
programs.
No Home Loan provides for deferred interest, negative amortization or
future advances.
All of the Mortgaged Properties underlying the Home Loans were
owner-occupied.
Set forth below is a description of certain additional characteristics of
the Home Loans as of the Cut-off Date (except as otherwise indicated). All
percentages of the Home Loans are approximate percentages (except as otherwise
indicated) by the Cut-off Date Balance. Unless otherwise specified, all
principal balances of the Home Loans are as of the Cut-off Date and are rounded
to the nearest dollar.
LOAN RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF HOME LOAN POOL
RANGE OF HOME CUT-OFF DATE BY CUT-OFF DATE
LOAN RATES(%) LOANS BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------------- --------- ------------ -----------------
<S> <C> <C> <C>
9.001 to 9.500................................................... 1 $ 30,898 0.01%
9.501 to 10.000................................................... 4 97,764 0.02
10.001 to 10.500................................................... 8 226,259 0.06
10.501 to 11.000................................................... 24 924,981 0.23
11.001 to 11.500................................................... 180 6,566,654 1.64
11.501 to 12.000................................................... 666 25,823,427 6.45
12.001 to 12.500................................................... 932 36,517,938 9.12
12.501 to 13.000................................................... 1,582 61,391,276 15.34
13.001 to 13.500................................................... 1,271 49,618,571 12.40
13.501 to 14.000................................................... 1,655 61,786,183 15.44
14.001 to 14.500................................................... 1,188 42,430,596 10.60
14.501 to 15.000................................................... 1,213 40,757,428 10.18
15.001 to 15.500................................................... 768 25,176,509 6.29
15.501 to 16.000................................................... 833 25,611,760 6.40
16.001 to 16.500................................................... 492 13,729,835 3.43
16.501 to 17.000................................................... 192 5,254,260 1.31
17.001 to 17.500................................................... 132 3,048,368 0.76
17.501 to 18.000................................................... 38 924,602 0.23
18.001 to 18.500................................................... 5 125,026 0.03
18.501 to 19.000................................................... 3 55,999 0.01
19.001 to 19.500................................................... 1 14,956 0.00
19.501 to 20.000................................................... 4 104,970 0.03
--------- ------------ -------
Total......................................................... 11,192 $400,218,259 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
S-18
<PAGE>
<PAGE>
As of the Cut-off Date, the weighted average Loan Rate of the Home Loans
will be approximately 13.8808% per annum.
ORIGINAL HOME LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF HOME LOAN POOL
RANGE OF ORIGINAL HOME CUT-OFF DATE BY CUT-OFF DATE
PRINCIPAL BALANCES LOANS BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------------- --------- ------------ -----------------
<S> <C> <C> <C>
$0.01 to $ 10,000.00.......................................... 39 $ 338,715 0.08%
$10,000.01 to $ 20,000.00.......................................... 1,178 19,607,849 4.90
$20,000.01 to $ 30,000.00.......................................... 3,423 86,998,722 21.74
$30,000.01 to $ 40,000.00.......................................... 3,141 110,163,485 27.53
$40,000.01 to $ 50,000.00.......................................... 1,882 85,647,656 21.40
$50,000.01 to $ 60,000.00.......................................... 691 37,764,586 9.44
$60,000.01 to $ 70,000.00.......................................... 411 26,487,514 6.62
$70,000.01 to $ 80,000.00.......................................... 332 24,540,418 6.13
$80,000.01 to $ 90,000.00.......................................... 38 3,190,504 0.80
$90,000.01 to $100,000.00.......................................... 56 5,363,500 1.34
Greater than $100,000.00........................................... 1 115,311 0.03
--------- ------------ -------
Total......................................................... 11,192 $400,218,259 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Cut-off Date, the average Cut-off Date Balance of the Home Loans
will be approximately $35,759.
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF HOME LOAN POOL
RANGE OF COMBINED HOME CUT-OFF DATE BY CUT-OFF DATE
LOAN-TO-VALUE RATIOS(%) LOANS BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------------- --------- ------------ -----------------
<S> <C> <C> <C>
10.01 to 20.00................................................... 3 $ 104,828 0.03%
20.01 to 30.00................................................... 2 36,297 0.01
30.01 to 40.00................................................... 5 178,134 0.04
40.01 to 50.00................................................... 6 214,410 0.05
50.01 to 60.00................................................... 17 668,730 0.17
60.01 to 70.00................................................... 20 522,241 0.13
70.01 to 75.00................................................... 22 610,106 0.15
75.01 to 80.00................................................... 36 948,932 0.24
80.01 to 85.00................................................... 56 1,512,210 0.38
85.01 to 90.00................................................... 128 3,495,573 0.87
90.01 to 95.00................................................... 205 6,530,627 1.63
95.01 to 100.00................................................... 448 13,582,318 3.39
100.01 to 105.00................................................... 863 28,215,123 7.05
105.01 to 110.00................................................... 1,420 46,926,338 11.73
110.01 to 115.00................................................... 1,764 61,842,480 15.45
115.01 to 120.00................................................... 1,991 72,653,316 18.15
120.01 to 125.00................................................... 3,996 154,693,818 38.65
125.01 to 130.00................................................... 210 7,482,777 1.87
--------- ------------ -------
Total......................................................... 11,192 $400,218,259 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
The weighted average Combined Loan-to-Value Ratio (or Loan-to-Value Ratio,
with respect to the Home Loans secured by first liens on the related Mortgage
Properties) at origination of the Home Loans will be approximately 115.55%.
S-19
<PAGE>
<PAGE>
JUNIOR RATIOS(1)
<TABLE>
<CAPTION>
PERCENTAGE OF
HOME LOAN POOL
RANGE OF JUNIOR NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
MORTGAGE RATIOS(%) HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
<S> <C> <C> <C>
5.01 to 10.00.................................................. 72 $ 1,327,117 0.33%
10.01 to 15.00.................................................. 587 12,935,544 3.24
15.01 to 20.00.................................................. 1,543 42,864,931 10.72
20.01 to 25.00.................................................. 2,338 77,409,725 19.36
25.01 to 30.00.................................................. 2,308 85,415,741 21.36
30.01 to 40.00.................................................. 2,957 117,340,599 29.35
40.01 to 50.00.................................................. 1,053 47,095,791 11.78
50.01 to 60.00.................................................. 245 11,485,083 2.87
60.01 to 70.00.................................................. 60 3,140,200 0.79
70.01 to 80.00.................................................. 13 567,380 0.14
80.01 to 90.00.................................................. 4 104,732 0.03
90.01 to 100.00.................................................. 3 137,042 0.03
---------- ------------ -------
Total....................................................... 11,183 $399,823,884 100.00%
---------- ------------ -------
---------- ------------ -------
</TABLE>
- ------------
(1) Excludes Home Loans secured by first liens. Defined as the ratio of the
original amount of the Home Loans secured by the second lien to the sum of
(i) the original amount of such Home Loan and (ii) the unpaid principal
balance of any senior lien balance at the time of such Home Loan.
The weighted average Junior Ratio by original loan balance will be
approximately 30.14%.
REMAINING TERM TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF HOME LOAN POOL
RANGE OF MONTHS REMAINING HOME CUT-OFF DATE BY CUT-OFF DATE
TO SCHEDULED MATURITY LOANS BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------------- --------- ------------ -----------------
<S> <C> <C> <C>
1 to 96......................................................... 208 $ 4,517,646 1.13%
97 to 108......................................................... 199 5,053,762 1.26
109 to 120......................................................... 648 19,019,560 4.75
121 to 144......................................................... 41 1,363,558 0.34
145 to 156......................................................... 2 89,128 0.02
157 to 168......................................................... 835 24,720,366 6.18
169 to 180......................................................... 4,366 153,582,496 38.37
181 to 288......................................................... 2,152 79,604,473 19.89
289 to 300......................................................... 2,741 112,267,269 28.05
--------- ------------ -------
Total......................................................... 11,192 $400,218,259 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
The weighted average remaining term to maturity as of the Cut-off Date will
be approximately 215 months.
YEAR OF ORIGINATION
<TABLE>
<CAPTION>
PERCENTAGE OF
HOME LOAN POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
YEAR OF ORIGINATION HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
<S> <C> <C> <C>
1996............................................................. 140 $ 3,797,567 0.95%
1997............................................................. 8,185 286,505,465 71.59
1998............................................................. 2,867 109,915,227 27.46
---------- ------------ -------
Total....................................................... 11,192 $400,218,259 100.00%
---------- ------------ -------
---------- ------------ -------
</TABLE>
S-20
<PAGE>
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
HOME LOAN POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
STATE HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
<S> <C> <C> <C>
California....................................................... 1,904 $ 79,286,031 19.81%
Florida.......................................................... 818 28,097,643 7.02
Illinois......................................................... 713 24,583,628 6.14
Maryland......................................................... 605 22,007,216 5.50
Minnesota........................................................ 570 20,678,012 5.17
Indiana.......................................................... 599 18,897,922 4.72
Virginia......................................................... 428 16,207,289 4.05
Georgia.......................................................... 466 16,136,823 4.03
Michigan......................................................... 456 15,634,403 3.91
Colorado......................................................... 299 11,780,187 2.94
Washington....................................................... 266 10,393,040 2.60
Missouri......................................................... 288 9,323,164 2.33
Wisconsin........................................................ 269 9,185,083 2.30
Pennsylvania..................................................... 264 9,076,991 2.27
North Carolina................................................... 265 8,884,469 2.22
New Jersey....................................................... 254 8,712,215 2.18
Arizona.......................................................... 259 8,563,907 2.14
Ohio............................................................. 312 8,440,741 2.11
Other(1)......................................................... 2,157 74,329,495 18.57
---------- ------------ -------
Total....................................................... 11,192 $400,218,259 100.00%
---------- ------------ -------
---------- ------------ -------
</TABLE>
- ------------
(1) 'Other' includes states and the District of Columbia that contain Mortgaged
Properties for less than 2.00% of the Home Loan Pool.
MORTGAGED PROPERTY TYPES
<TABLE>
<CAPTION>
PERCENTAGE OF
HOME LOAN POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
PROPERTY TYPE HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
<S> <C> <C> <C>
Single Family Residence.......................................... 10,352 $368,630,004 92.11%
PUD Detached..................................................... 250 12,001,867 3.00
Condominium...................................................... 262 8,149,912 2.04
PUD Attached..................................................... 134 5,318,639 1.33
Townhouse/Rowhouse Attached...................................... 138 4,315,406 1.08
Multifamily (2-4 Units).......................................... 34 1,136,872 0.28
Townhouse/Rowhouse Detached...................................... 15 493,502 0.12
Manufactured Home................................................ 7 172,057 0.04
---------- ------------ -------
Total....................................................... 11,192 $400,218,259 100.00%
---------- ------------ -------
---------- ------------ -------
</TABLE>
LOAN PURPOSE
<TABLE>
<CAPTION>
PERCENTAGE OF
HOME LOAN POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
PURPOSE HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
<S> <C> <C> <C>
Debt Consolidation............................................... 9,014 $322,282,237 80.53%
Home Improvement/Debt Consolidation.............................. 1,200 40,258,318 10.06
Home Improvement................................................. 65 2,174,608 0.54
Other............................................................ 913 35,503,095 8.87
---------- ------------ -------
Total....................................................... 11,192 $400,218,259 100.00%
---------- ------------ -------
---------- ------------ -------
</TABLE>
S-21
<PAGE>
<PAGE>
LIEN PRIORITY
<TABLE>
<CAPTION>
PERCENTAGE OF
HOME LOAN POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
LIEN PROPERTY HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
<S> <C> <C> <C>
First Lien....................................................... 9 $ 394,375 0.10%
Second Lien...................................................... 11,183 399,823,884 99.90
---------- ------------ -------
Total....................................................... 11,192 $400,218,259 100.00%
---------- ------------ -------
---------- ------------ -------
</TABLE>
DEBT-TO-INCOME RATIO
<TABLE>
<CAPTION>
PERCENTAGE OF
HOME LOAN POOL
RANGE OF NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
DEBT-TO-INCOME RATIOS (%) HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
<S> <C> <C> <C>
5.01 to 10.00................................................... 2 $ 83,000 0.02%
10.01 to 15.00................................................... 49 1,362,601 0.34
15.01 to 20.00................................................... 135 4,041,977 1.01
20.01 to 25.00................................................... 518 16,877,658 4.22
25.01 to 30.00................................................... 1,243 41,675,839 10.41
30.01 to 35.00................................................... 1,957 67,579,513 16.89
35.01 to 40.00................................................... 2,770 96,328,508 24.07
40.01 to 45.00................................................... 3,422 124,838,581 31.19
45.01 to 50.00................................................... 1,066 46,081,396 11.51
50.01 to 55.00................................................... 30 1,349,186 0.34
---------- ------------ -------
Total....................................................... 11,192 $400,218,259 100.00%
---------- ------------ -------
---------- ------------ -------
</TABLE>
As of the Cut-off Date, the weighted average debt-to-income ratio of the
Home Loans will be approximately 38.15%.
CREDIT SCORES
'Credit Scores' are obtained by many lenders in connection with mortgage
loan applications to help assess a borrower's creditworthiness. Credit Scores
are obtained from credit reports provided by various credit reporting
organizations, each of which may employ differing computer models and
methodologies. The Credit Score is designed to assess a borrower's credit
history at a single point in time, using objective information currently on file
for the borrower at a particular credit reporting organization. Information used
to create a Credit Score may include, among other things, payment history,
delinquencies on accounts, levels of outstanding indebtedness, length of credit
history, types of credit, and bankruptcy experience. The Credit Scores of the
Home Loans range from approximately 620 to approximately 867, with higher scores
indicating an individual with a more favorable credit history compared to an
individual with a lower score. However, a Credit Score purports only to be a
measurement of the relative degree of risk a borrower represents to a lender,
i.e., a borrower with a higher score is statistically expected to be less likely
to default in payment than a borrower with a lower score. In addition, it should
be noted that Credit Scores were developed to indicate a level of default
probability over a two-year period, which does not correspond to the life of a
mortgage loan. Furthermore, Credit Scores were not developed specifically for
use in connection with home loans, but for consumer loans in general, and assess
only the borrower's past credit history. Therefore, a Credit Score does not take
into consideration the differences between home loans and consumer loans
generally or the specific characteristics of the related Home Loan (for example,
the Combined Loan-to-Value Ratio, the collateral for the home loan, or the debt
to income ratio). There can be no assurance that the Credit Scores of the
Mortgagors will be an accurate predictor of the likelihood of repayment of the
related Home Loans.
The following table sets forth information as to the Credit Scores of the
related Mortgagors as used in the origination of the Home Loans.
S-22
<PAGE>
<PAGE>
CREDIT SCORES
<TABLE>
<CAPTION>
PERCENTAGE OF
HOME LOAN POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CREDIT SCORES HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
<S> <C> <C> <C>
620 to 639....................................................... 1,189 $ 34,279,715 8.57%
640 to 659....................................................... 2,492 84,332,704 21.07
660 to 679....................................................... 2,664 97,315,615 24.32
680 to 699....................................................... 2,256 87,631,678 21.90
700 to 719....................................................... 1,496 56,547,840 14.13
720 to 739....................................................... 683 24,780,150 6.19
740 to 759....................................................... 269 9,891,900 2.47
760 to 779....................................................... 106 4,080,581 1.02
780 to 799....................................................... 33 1,198,877 0.30
Greater than or equal to 800..................................... 4 159,199 0.04
---------- ------------ -------
Totals...................................................... 11,192 $400,218,259 100.00%
---------- ------------ -------
---------- ------------ -------
</TABLE>
- ------------
(1) The Home Loan indicated as having a Credit Score that is 'not available' is
either a Home Loan where the Credit Score was not provided by the Seller or
a Home Loan where no credit history can be obtained for the related
Mortgagor.
UNDERWRITING STANDARDS
The following is a brief description of the various underwriting standards
and procedures applicable to the Home Loans.
Generally, the underwriting standards of Residential Funding with respect
to the home loans originated or purchased by it place a greater emphasis on the
creditworthiness and debt service capacity of the borrower than on the
underlying collateral in evaluating the likelihood that a borrower will be able
to repay the related home loan.
Residential Funding relies on a number of guidelines to assist underwriters
in the credit review and decision process. Such underwriting criteria provide
for the evaluation of a loan applicant's creditworthiness through the use of a
consumer credit report, verification of employment and a review of the
debt-to-income ratio of the applicant. Income is verified through various means,
including without limitation applicant interviews, written verifications with
employers, review of pay stubs or tax returns. The borrower must demonstrate
sufficient levels of disposable income to satisfy debt repayment requirements.
The underwriting standards require the home loans originated or purchased
by Residential Funding to have been fully documented. A prospective borrower is
required to fill out a detailed application providing pertinent credit
information.
In determining the adequacy of the mortgaged property as collateral for
home loans included in the Home Loan Pool, an appraisal is made of each property
considered for financing or, if permitted pursuant to the underwriting
standards, the value of the related Mortgaged Property will be the Stated Value.
The Home Loans purchased by Residential Funding and included in the Home Loan
Pool generally were originated subject to a maximum CLTV of 125%, and the
related borrowers may have been permitted to retain a limited amount of the
proceeds of such Home Loans. In addition, such Home Loans were generally subject
to a maximum loan amount of $75,000 and a maximum total monthly debt-to-income
ratio of 55%. There can be no assurance that the CLTV or the debt-to-income
ratio for any Home Loan will not increase from the levels established at
origination.
The underwriting standards of Residential Funding may be varied in
appropriate cases. There can be no assurance that every Home Loan in the Home
Loan Pool was originated in conformity with the applicable underwriting
standards in all material respects, or that the quality or performance of the
Home Loans will be equivalent under all circumstances.
S-23
<PAGE>
<PAGE>
THE INITIAL SUBSERVICERS
Primary servicing for 90.39% of the Home Loans will be provided by GMACMC
pursuant to a Subservicing Agreement with the Master Servicer. GMACMC is an
indirect wholly-owned subsidiary of General Motors Acceptance Corporation.
GMACMC is engaged in the mortgage banking business, including the origination,
purchase, sale and servicing of residential loans.
GMACMC's executive offices are located at 100 Witmer Road, Horsham,
Pennsylvania 19044-0963.
Primary servicing for 9.61% of the Home Loans will be provided by Master
Financial pursuant to a Subservicing Agreement with the Master Servicer. Master
Financial is a California corporation that is a mortgage lender engaged in the
business of originating, purchasing, selling and servicing home loans generally
secured by one- to four-family residential properties, with an emphasis on
non-conforming junior lien loans.
Master Financial has its principal offices at 333 South Anita Drive,
Orange, California 92868.
Although Master Financial is not an affiliate of Residential Funding,
Master Financial has a lending arrangement with Residential Funding, and in
connection therewith, Residential Funding has the right to acquire an equity
interest in Master Financial in accordance with specified terms and conditions.
The Initial Subservicers have not had sufficient experience in servicing
the types of mortgage loans comprising the Home Loan Pool to provide meaningful
disclosure of its delinquency and loss experience with respect to such mortgage
loans.
RESIDENTIAL FUNDING
Residential Funding will be responsible for master servicing the Home
Loans. Such responsibilities will include the receipt of funds from
Subservicers, the reconciliation of servicing activity with respect to the Home
Loans, investor reporting, remittances to the Indenture Trustee and the Owner
Trustee to accommodate payments to Securityholders and consulting with
Subservicers with respect to Home Loans that are delinquent and with respect to
the related servicing policies, notices and other responsibilities. Management
and liquidation of Mortgaged Properties acquired by foreclosure or deed in lieu
of foreclosure, as well as other loss mitigation procedures conducted by any
Subservicer, will be reviewed by Residential Funding. Neither the Master
Servicer nor any Subservicer will be required to make advances in respect of
delinquent payments of principal and interest on the Home Loans.
For information regarding foreclosure procedures, see 'Servicing of Trust
Assets -- Realization Upon Defaulted Loans' in the Prospectus. Servicing and
charge-off policies and collection practices may change over time in accordance
with Residential Funding's business judgment, changes in Residential Funding's
portfolio of mortgage loans of the types included in the Home Loan Pool that it
services for its clients and applicable laws and regulations, and other
considerations.
Residential Funding has not had sufficient experience in master servicing
the types of mortgage loans comprising the Home Loan Pool to provide meaningful
disclosure of its delinquency and loss experience with respect to such mortgage
loans.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Home Loan Pool and the
Mortgaged Properties is based upon the Home Loan Pool as constituted at the
close of business on the Cut-off Date. Prior to the issuance of the Offered
Notes, Home Loans may be removed from the Home Loan Pool as a result of
incomplete documentation or otherwise, if the Depositor deems such removal
necessary or appropriate. A limited number of other home loans may be added to
the Home Loan Pool prior to the issuance of the Offered Notes. The Depositor
believes that the information set forth herein will be substantially
representative of the characteristics of the Home Loan Pool as it will be
constituted at the time the Offered Notes are issued although the range of Loan
Rates and maturities and certain other characteristics of the Home Loans in the
Home Loan Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the Offered
Notes and will be filed, together with the Servicing Agreement, the Indenture,
the Grantor Trust Agreement, the Owner Trust Agreement and the Home Loan
Purchase Agreement (as defined herein), with the Commission within fifteen days
after the
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initial issuance of the Offered Notes. In the event Home Loans are removed from
or added to the Home Loan Pool as described in the preceding paragraph, such
removal or addition will be noted in the Current Report on Form 8-K.
THE GRANTOR TRUST
Grantor Trust 1998-HI2 (the 'GRANTOR TRUST'), a New York trust, will be
established pursuant to a Grantor Trust Agreement dated as of June 26, 1998 (the
'GRANTOR TRUST AGREEMENT'), among the Depositor, the Grantor Trustee and
Residential Funding. Pursuant to the Grantor Trust Agreement, the Depositor will
deposit the Home Loans into the Grantor Trust in exchange for a certificate (the
'GRANTOR TRUST CERTIFICATE') evidencing 100% of the ownership interest in the
Grantor Trust and representing the entire beneficial ownership interest in the
Home Loans. The assets of the Grantor Trust will include (i) the Home Loans;
(ii) payments of principal and interest in respect of the Home Loans received
after the Cut-off Date (other than the Excluded Interest Portion (as defined
herein)), whether or not due after the Cut-off Date; (iii) an assignment of the
Depositor's rights under the Home Loan Purchase Agreement; and (iv) proceeds of
the foregoing.
THE ISSUER
The Home Loan Trust 1998-HI2 is a business trust formed under the laws of
the State of Delaware pursuant to an Owner Trust Agreement dated as of June 15,
1998 (as amended by the Amended and Restated Owner Trust Agreement to be dated
as of June 26, 1998, the 'OWNER TRUST AGREEMENT') between the Depositor and the
Owner Trustee for the purposes described in this Prospectus Supplement. The
Owner Trust Agreement constitutes the 'governing instrument' under the laws of
the State of Delaware relating to business trusts. After its formation, the
Issuer will not engage in any activity other than (i) acquiring and holding the
Grantor Trust Certificate and the other assets of the Issuer and proceeds
therefrom, (ii) issuing the Notes and the Certificate, (iii) making payments on
the Notes and the Certificate and (iv) engaging in other activities that are
necessary, suitable or convenient to accomplish the foregoing or are incidental
thereto or connected therewith.
The Issuer's principal offices are in Wilmington, Delaware, in care of
Wilmington Trust Company, as Owner Trustee, at the address listed below.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Owner Trust
Agreement. The Owner Trustee is a Delaware banking corporation and its principal
offices are located in Wilmington, Delaware.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Securityholders
for any action taken or for refraining from the taking of any action in good
faith pursuant to the Owner Trust Agreement or for errors in judgment; provided,
however, that none of the Owner Trustee and any director, officer or employee
thereof will be protected against any liability which would otherwise be imposed
by reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
Owner Trust Agreement. All persons into which the Owner Trustee may be merged or
with which it may be consolidated or any person resulting from such merger or
consolidation shall be the successor of the Owner Trustee under the Owner Trust
Agreement.
THE INDENTURE TRUSTEE AND THE GRANTOR TRUSTEE
The Chase Manhattan Bank, a New York State banking corporation, is the
Indenture Trustee under the Indenture and the Grantor Trustee under the Grantor
Trust Agreement. The principal offices of the Indenture Trustee are located in
New York, New York.
DESCRIPTION OF THE SECURITIES
GENERAL
The Home Loan-Backed Notes, Series 1998-HI2 (the 'NOTES' or the 'OFFERED
NOTES'), will include the following nine classes: (i) the Class A-1 Notes, Class
A-2 Notes, Class A-3 Notes, Class A-4 Notes, Class A-5
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Notes and Class A-6 Notes (collectively, the 'SENIOR NOTES'); (ii) the Class M-1
Notes and Class M-2 Notes (together, the 'CLASS M NOTES'); and (iii) the Class
B-1 Notes (the 'CLASS B NOTES', and together with the Class M Notes, the
'SUBORDINATE NOTES'). The Class A-6 Notes are also referred to herein as the
'INTEREST ONLY NOTES.' The Notes will be issued pursuant to an Indenture to be
dated as of June 26, 1998 (the 'INDENTURE'), between the Issuer and The Chase
Manhattan Bank, the Indenture Trustee. Pursuant to the Owner Trust Agreement,
the Issuer will issue one class of Home Loan-Backed Certificates, Series
1998-HI2 (the 'CERTIFICATE'). The Notes and the Certificate are collectively
referred to herein as the 'SECURITIES.' Only the Notes (the 'OFFERED NOTES') are
offered hereby.
The Certificate will consist of one class with two separate components, the
'B-2 COMPONENT' and the 'RESIDUAL COMPONENT.' The B-2 Component will have an
initial Component Principal Balance of $12,120,000 and a Component Interest Rate
of 8.25% per annum; provided that the Component Interest Rate on such Component,
if outstanding, will increase by 0.50% per annum after the Step-Up Date. The
Residual Component will have no principal balance or interest rate.
Distributions of interest and principal on the Certificate will be subordinate
to distributions of interest and principal on the Notes. The Certificate will be
issued pursuant to the Owner Trust Agreement and will represent the beneficial
ownership interest of the Trust. The B-2 Component and the Residual Component of
the Certificate are not separately transferable. The Certificate is not offered
hereby.
The Offered Notes will be secured by the Trust pledged by the Issuer to the
Indenture Trustee pursuant to the Indenture, which will consist of (i) the
Grantor Trust Certificate; (ii) all amounts on deposit in the Payment Account;
and (iii) proceeds of the foregoing.
The Grantor Trust Certificate will be secured by the Home Loans pursuant to
the Grantor Trust Agreement.
The Senior Notes (other than the Interest Only Notes) will be issued in
book-entry format in minimum denominations of $25,000 and integral multiples of
$1 in excess thereof. The Interest Only Notes 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 Notes
will be issued in book-entry format in minimum denominations of $25,000 and
integral multiples of $1,000 in excess thereof. The Class M-2 Notes and Class
B-1 Notes will be issued in book-entry format in minimum denominations of
$250,000 and integral multiples of $1,000 in excess thereof.
BOOK-ENTRY REGISTRATION OF THE NOTES
Holders of the Notes may elect to hold their Notes through DTC, in the
United States, or CEDEL or Euroclear, in Europe, if they are Participants of
such systems, or indirectly through organizations which are Participants in such
systems. Each class of Notes will be issued in one or more securities which
equal the aggregate initial Note Principal Balance (or Notional Amount) of such
class of Notes 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 Noteholder will be entitled to receive a physical note
representing such security (a 'DEFINITIVE NOTE'). Unless and until Definitive
Notes are issued, it is anticipated that the only 'Holder' of the Notes will be
Cede, as nominee of DTC. Noteholders will not be Holders as that term is used in
the Indenture.
The Noteholder's ownership of a Note will be recorded on the records of the
brokerage firm, bank, thrift institution or other financial intermediary (each,
a 'FINANCIAL INTERMEDIARY') that maintains the Noteholder's account for such
purpose. In turn, the Financial Intermediary's ownership of such Notes will be
recorded on the records of DTC (or of a Participating firm that acts as agent
for the Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, if the Noteholder's Financial Intermediary is not a DTC
Participant and on the records of CEDEL or Euroclear, as appropriate).
Noteholders will receive all payments of principal of, and interest on, the
Notes from the Indenture Trustee through DTC and DTC Participants. While the
Notes are outstanding (except under the circumstances described below), under
the rules, regulations and procedures creating and affecting DTC and its
operations (the 'RULES'), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the
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Notes and is required to receive and transmit payments of principal of, and
interest on, the Notes. Participants and Indirect Participants with whom
Noteholders have accounts with respect to Notes are similarly required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Noteholders. Accordingly, although Noteholders will not possess
physical notes, the Rules provide a mechanism by which Noteholders will receive
payments and will be able to transfer their interest.
Noteholders will not receive or be entitled to receive Definitive Notes
representing their respective interests in the Notes, except under the limited
circumstances described below. Unless and until Definitive Notes are issued,
Noteholders who are not Participants may transfer ownership of Notes only
through Participants and Indirect Participants by instructing such Participants
and Indirect Participants to transfer the Notes, by book-entry transfer, through
DTC for the account of the purchasers of such Notes, which account is maintained
with their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Notes will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and Indirect Participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Noteholders.
Under a book-entry format, Noteholders of the Notes may experience some
delay in their receipt of payments, since such payments will be forwarded by the
Indenture Trustee to Cede. Payments with respect to Notes held through CEDEL or
Euroclear will be credited to the cash accounts of CEDEL Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such payments
will be subject to tax reporting in accordance with relevant United States tax
laws and regulations. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a Noteholder to pledge Notes to persons or
entities that do not participate in the Depositary system, or otherwise take
actions in respect of such Notes, may be limited due to the lack of physical
Notes for such Notes. In addition, issuance of the Notes in book-entry form may
reduce the liquidity of such Notes in the secondary market since certain
potential investors may be unwilling to purchase securities for which they
cannot obtain physical notes.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by the holders
of the Notes under the Indenture only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Notes are credited, to the extent that
such actions are taken on behalf of Financial Intermediaries whose holdings
include such Notes. CEDEL or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by holders of Notes under the
Indenture on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect such actions on its behalf through DTC. DTC
may take actions, at the direction of the related Participants, with respect to
some Notes which conflict with actions taken with respect to other Notes.
Definitive Notes will be issued to Noteholders of the Notes, or their
nominees, rather than to DTC, if (a) the Indenture Trustee determines that DTC
is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the Notes and the
Indenture Trustee is unable to locate a qualified successor, (b) the Indenture
Trustee elects to terminate a book-entry system through DTC or (c) after the
occurrence of an Event of Default, pursuant to the Indenture, Noteholders of any
class having Percentage Interests aggregating at least a majority of the Note
Principal Balances (or Notional Amount) of such Notes advise 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 Noteholders.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all
Noteholders of the occurrence of such event and the availability through DTC of
Definitive Notes. Upon surrender by DTC of the global note or notes representing
the Notes and instructions for re-registration, the Indenture Trustee will issue
and authenticate Definitive Notes, and thereafter the Indenture Trustee will
recognize the holders of such Definitive Notes as Holders under the Indenture.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Notes among Participants of DTC, CEDEL and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time. See Annex I
hereto.
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None of the Company, the Master Servicer or the Indenture 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 Notes held by Cede, as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
For additional information regarding DTC, CEDEL, Euroclear and the Offered
Notes, see 'Description of the Notes -- Form of Notes' in the Prospectus.
PAYMENTS
Payments on the Offered Notes will be made by the Indenture Trustee or the
Paying Agent on the 25th day of each month or, if such day is not a Business
Day, then the next succeeding Business Day, commencing in July 1998. Payments on
the Offered Notes will be made to the persons in whose names such Notes are
registered at the close of business on the day prior to each Payment Date or, if
such Notes are not or no longer registered with DTC, on the Record Date. See
'Description of the Notes -- Payments' in the Prospectus. Payments will be made
by check or money order mailed (or upon the request of a Holder owning Offered
Notes having denominations aggregating at least $1,000,000, by wire transfer or
otherwise) to the address of the person entitled thereto (which, in the case of
Notes registered with DTC, will be DTC or its nominee) as it appears on the
Security Register in amounts calculated as described herein on the Determination
Date. However, the final payment in respect of the Offered Notes will be made
only upon presentation and surrender thereof at the office or the agency of the
Indenture Trustee specified in the notice to Holders of such final payment. A
'BUSINESS DAY' is any day other than (i) a Saturday or Sunday or (ii) a day on
which banking institutions in the State of California, Minnesota, New York,
Pennsylvania, Illinois or Delaware are required or authorized by law to be
closed.
INTEREST REMITTANCE AMOUNT AND PRINCIPAL REMITTANCE AMOUNT
The 'INTEREST REMITTANCE AMOUNT' for any Payment Date is equal to (i) the
portion allocable to interest of all scheduled monthly payments on the Home
Loans received during the related Collection Period, after deduction of the
related master 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 Home Loans,
received or deemed received during the related Collection Period, to the extent
such amounts are allocable to interest; provided, however, that on the first
Payment Date, an amount (the 'EXCLUDED INTEREST AMOUNT') will be excluded from
the Interest Remittance Amount equal to the sum of 70% of clauses (i) and (ii)
above.
The 'PRINCIPAL REMITTANCE AMOUNT' for any Payment Date is equal to the sum
of (i) the portion allocable to principal of all scheduled monthly payments on
the Home Loans received with respect to the related Collection Period and (ii)
certain unscheduled collections, including full and partial Mortgagor
prepayments on the Home Loans, Insurance Proceeds, Liquidation Proceeds and
proceeds from repurchases of (and certain amounts received in connection with
any substitutions for) the Home 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 Payment Date in the month of receipt,
but is not obligated to do so. As described herein under 'Principal Payments,'
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 Securities. With respect to any Payment Date, the 'COLLECTION
PERIOD' is the calendar month preceding the month of such Payment Date.
INTEREST PAYMENTS
On each Payment Date, the Paying Agent shall make the following
distributions, to the extent of the Interest Remittance Amount:
(i) first, to the Interest Only Noteholders, an amount equal to the
Accrued Note Interest (as defined below) thereon for such Payment Date,
plus any Unpaid Interest Shortfall (as defined below) thereon;
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(ii) second, from the balance, if any, remaining of the Interest
Remittance Amount after the distribution described in clause (i) above, to
the Senior Noteholders (other than the Interest Only Noteholders) on a pro
rata basis, an amount equal to the Accrued Note Interest thereon for such
Payment Date, plus any Unpaid Interest Shortfall thereon;
(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-1 Noteholders an amount equal to the Accrued Note
Interest thereon for such Payment Date, plus any Unpaid Interest Shortfall
thereon;
(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 M-2 Noteholders an amount equal to the Accrued
Note Interest thereon for such Payment Date, plus any Unpaid Interest
Shortfall thereon;
(v) fifth, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) through
(iv) above, to the Class B-1 Noteholders an amount equal to the Accrued
Note Interest thereon for such Payment Date, plus any Unpaid Interest
Shortfall thereon;
(vi) sixth, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) through
(v) above, to the Certificate in respect of the B-2 Component, an amount
equal to the Accrued Component Interest thereon for such Payment Date, plus
any Unpaid Interest Shortfall thereon; and
(vii) seventh, the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) through
(vi) above (the 'Net Monthly Excess Interest Amount') shall be included in
the Extra Principal Distribution Amount and the Net Monthly Excess Cash
Flow as described in ' -- Net Monthly Excess Cash Flow Distributions' below
and applied as described therein.
'ACCRUED NOTE INTEREST' (with respect to the Notes) or 'ACCRUED COMPONENT
INTEREST' (with respect to the B-2 Component) on any Payment Date will be equal
to interest accrued for the related Accrual Period on (i) in the case of the
Offered Notes (other than the Interest Only Notes), the related Note Principal
Balance thereof, (ii) in the case of the Interest Only Notes, on the Notional
Amount thereof, or (iii) in the case of the B-2 Component, the Component
Principal Balance thereof, in each case at the related Note Rate or Component
Interest Rate, as applicable, for such Payment Date; less the interest portion
of Excess Losses for such Payment Date in the case of clauses (i) and (iii),
with such Excess Losses allocated to the Notes (other than the Interest Only
Notes) and the B-2 Component on a pro rata basis, based on the amount of Accrued
Note Interest or Accrued Component Interest, respectively, payable thereon.
Interest payments will be made on the Offered Notes on each Payment Date at
the related Note Rate. The 'NOTE RATE' for each class of Offered Notes (other
than the Class A-1 Notes and the Interest Only Notes) will be the fixed rate set
forth on the cover hereof; provided, however, that after the Step-Up Date, the
Note Rate on each such class of Notes then outstanding will be increased by
0.50% per annum, except as provided below. The 'STEP-UP DATE' is the first
Payment Date on which the aggregate Principal Balance of the Home Loans as of
the end of the related Collection Period is equal to or less than 10% of the
Cut-off Date Balance. The Note Rate for the Class A-1 Notes for an Accrual
Period will be a floating rate equal to the lesser of (i) the sum of (a) LIBOR,
determined as specified herein, as of the second LIBOR Business Day prior to the
first day of such Accrual Period (or as of two LIBOR Business Days prior to the
Closing Date, in the case of the first Accrual Period) plus (b) 0.04% per annum
and (ii) 12.50% per annum. The Note Rate on the Interest Only Notes will equal
5.00% per annum for the first 24 Payment Dates, and 0.00% thereafter. Interest
payments will be made on the B-2 Component on each Payment Date at the related
Component Interest Rate. The 'COMPONENT INTEREST RATE' for the B-2 Component
will be 8.25% per annum; provided, however, that after the Step-Up Date, the
Component Interest Rate will be increased by 0.50% per annum. Notwithstanding
the foregoing, the Note Rates and Component Interest Rate will not increase as
described above if the proceeds of the Optional Redemption (as defined herein)
are available for payment to the Securityholders on or prior to the first
Payment Date occurring after the Step-Up Date.
The 'ACCRUAL PERIOD' with respect to any Payment Date will be (i) in the
case of the Class A-1 Notes, the period from and including the Payment Date in
the calendar month preceding the month in which the related Payment Date occurs
(or, in the case of the first Payment Date, from and including the Closing Date)
to but excluding the related Payment Date and (ii) in the case of the Offered
Notes other than the Class A-1 Notes, the calendar month preceding the month in
which the related Payment Date occurs (or in the case of the first
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Payment Date, beginning on the Closing Date and ending the last day of the month
in which the Closing Date occurs). Interest on the Class A-1 Notes will be based
on the actual number of days in the related Accrual Period and a 360-day year.
Interest on the Offered Notes other than the Class A-1 Notes will be based on a
30-day month and a 360-day year.
The 'NOTIONAL AMOUNT' of the Interest Only Notes as of any Payment Date
will be equal to $50,000,000. References herein to the Notional Amount are used
solely for certain calculations and do not represent the right of the Interest
Only Notes to receive distributions allocable to principal.
On each Payment Date, LIBOR shall be established by the Indenture Trustee
and as to any Accrual Period, LIBOR will equal the rate for United States dollar
deposits for one month which appears on the Telerate Screen Page 3750 as of
11:00 A.M., London time, on the second LIBOR Business Day prior to the first day
of such Accrual Period. 'TELERATE SCREEN PAGE 3750' means the display designated
as page 3750 on the Telerate Service (or such other page as may replace page
3750 on that service for the purpose of displaying London interbank offered
rates of major banks). If such rate does not appear on such page (or such other
page as may replace that page on that service, or if such service is no longer
offered, such other service for displaying LIBOR or comparable rates as may be
selected by the Indenture Trustee after consultation with the Master Servicer),
the rate will be the Reference Bank Rate. The 'REFERENCE BANK RATE' will be
determined on the basis of the rates at which deposits in U.S. Dollars are
offered by the reference banks (which shall be three major banks that are
engaged in transactions in the London interbank market, selected by the
Indenture Trustee after consultation with the Master Servicer) as of 11:00 A.M.,
London time, on the day that is two LIBOR Business Days prior to the immediately
preceding Payment Date to prime banks in the London interbank market for a
period of one month in amounts approximately equal to the Note Principal Balance
of the Class A-1 Notes. The Indenture Trustee will request the principal London
office of each of the reference banks to provide a quotation of its rate. If at
least two such quotations are provided, the rate will be the arithmetic mean of
the quotations. If on such date fewer than two quotations are provided as
requested, the rate will be the arithmetic mean of the rates quoted by one or
more major banks in New York City, selected by the Indenture Trustee after
consultation with the Master Servicer, as of 11:00 A.M., New York City time, on
such date for loans in U.S. Dollars to leading European banks for a period of
one month in an amount approximately equal to the Note Principal Balance of the
Class A-1 Notes. If no such quotations can be obtained, the rate will be LIBOR
for the prior Payment Date. 'LIBOR BUSINESS DAY' means any day other than (i) a
Saturday or a Sunday or (ii) a day on which banking institutions in the city of
London, England are required or authorized by law to be closed.
The establishment of LIBOR as to each Accrual Period by the Indenture
Trustee and the Indenture Trustee's calculation of the rate of interest
applicable to the Class A-1 Notes for the related Accrual Period shall (in the
absence of manifest error) be final and binding.
If on any Payment Date the Interest Remittance Amount is insufficient to
pay Accrued Note Interest on any class of Offered Notes, the shortfall will be
allocated through the priority of payment set forth above. Such shortfalls could
occur, for example, if delinquencies on the Home Loans were exceptionally high
and were concentrated in a particular month. In addition, such shortfalls could
occur if Prepayment Interest Shortfalls or Relief Act Shortfalls were
particularly high in a particular month. The 'PREPAYMENT INTEREST SHORTFALL' for
any Payment Date is equal to the aggregate shortfall, if any, in collections of
interest (adjusted to the related Net Loan Rates) resulting from Mortgagor
prepayments on the Home 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 Home Loans as of the Due Date in the month of prepayment. 'RELIEF
ACT SHORTFALLS' are interest shortfalls due to the application of the Relief Act
or similar legislation or regulations. Accrued Note Interest and Accrued
Component Interest remaining unpaid as to any class of the Offered Notes and the
B-2 Component, respectively, as a result of any such shortfalls will be carried
forward and will bear interest at the related Note Rate or Component Interest
Rate, as applicable, and be payable on future Payment Dates to the extent of
funds available therefor (such amount, including interest thereon, as of any
Payment Date, the 'UNPAID INTEREST SHORTFALL'). Such amounts payable to the
Notes and the B-2 Component will be paid concurrently with Accrued Note Interest
and Accrued Component Interest thereon and, to the extent remaining unpaid, from
the Net Monthly Excess Cash Flow as described in ' -- Net Monthly Excess Cash
Flow Distributions' below.
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As described herein, Accrued Note Interest on each class of Offered Notes
is based on the Note Principal Balance thereof (or the Notional Amount thereof,
in the case of the Interest Only Notes) immediately prior to the related Payment
Date. The 'NOTE PRINCIPAL BALANCE' of any class of Senior Notes (other than the
Interest Only Notes) means the initial Note Principal Balance thereof as reduced
by the sum of (x) all amounts actually distributed to the holders of such Notes
on all prior Payment Dates on account of principal and (y) the aggregate,
cumulative amount of Excess Losses allocated thereto (upon which interest will
no longer accrue) on all prior Payment Dates. The Note Principal Balance of any
class of Subordinate Notes means the initial Note Principal Balance thereof as
reduced by the sum of (x) all amounts actually distributed to the holders of
such Notes on all prior Payment Dates on account of principal and (y) the
aggregate, cumulative amount of Realized Losses (including Excess Losses)
allocated thereto on all prior Payment Dates. The 'COMPONENT PRINCIPAL BALANCE'
of the B-2 Component means the initial Component Principal Balance thereof as
reduced by the sum of (x) all amounts actually distributed to the Certificate in
respect of the B-2 Component on all prior Payment Dates on account of principal
and (y) the aggregate, cumulative amount of Realized Losses (including Excess
Losses) allocated thereto on all prior Payment Dates.
The 'NET LOAN RATE' on each Home Loan is equal to the Loan 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 Loan Rate with
respect to each Home Loan as of the Cut-off Date will be set forth in the Home
Loan Schedule attached to the Grantor Trust Agreement. As of the Cut-off Date,
the weighted average Net Loan Rate of the Home Loans is approximately 13.23% per
annum, and is expected to change thereafter as Home Loans are liquidated or
prepaid.
The 'PRINCIPAL BALANCE' of any Home 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 Noteholders with respect to such Home
Loan; provided, however, that the Principal Balance of a Liquidated Home Loan
shall be zero. A 'LIQUIDATED HOME LOAN' means, as to any Payment Date, any Home
Loan in respect of which the Master Servicer has determined, based on the
servicing procedures specified in the Servicing Agreement, as of the end of the
preceding Collection Period that all liquidation proceeds which it expects to
recover with respect to the disposition of the related Mortgaged Property have
been recovered. The Master Servicer will treat any Home Loan that is 180 days or
more delinquent as a Liquidated Home Loan.
PRINCIPAL PAYMENTS
The 'PRINCIPAL DISTRIBUTION AMOUNT' means, as of any Payment Date, the sum
of (i) the Principal Remittance Amount, minus the Overcollateralization
Reduction Amount (as defined herein), if any, and (ii) the Extra Principal
Distribution Amount (as defined herein) (funded from the Net Monthly Excess
Interest Amount as described below under ' -- Net Monthly Excess Cash Flow
Distributions'), if any, for such Payment Date. On each Payment Date prior to
the Stepdown Date, the Principal Distribution Amount will be distributed to the
Offered Notes (other than the Interest Only Notes) and the B-2 Component as
follows:
(i) first, to the Senior Notes, in the manner and priority described
in the eighth following paragraph, until the Note Principal Balances of the
Senior Notes 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 sequentially to the Class M-1, Class M-2 and Class B-1
Notes, in that order, in each case until the Note Principal Balance thereof
has been reduced to zero;
(iii) third, the balance, if any, remaining of the Principal
Distribution Amount after the distributions described in clauses (i) and
(ii) above shall be distributed to the Certificate in respect of the B-2
Component, until the Component Principal Balance thereof has been reduced
to zero; and
(iv) fourth, the balance, if any, remaining of the Principal
Distribution Amount after the distributions described in clauses (i)
through (iii) above 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 Payment Date on or after the Stepdown Date, the Principal
Distribution Amount will be distributed to the Offered Notes (other than the
Interest Only Notes) and the B-2 Component as follows:
(i) first, to the Senior Notes, in the manner and priority as
described in the seventh following paragraph, until the aggregate Note
Principal Balance of the Senior Notes has been reduced to an amount
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equal to (x) the Pool Balance (as defined herein) as of the last day of the
related Collection Period minus (y) the greater of (a) the sum of (1)
approximately 52.49% of the Pool Balance as of the last day of the related
Collection Period and (2) the Reserve Amount Target for such Payment Date
(calculated without giving effect to clause (z) in the definition thereof)
and (b) $2,001,091;
(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 Notes, until the aggregate Note Principal Balance of the
Senior Notes and Class M-1 Notes has been reduced to an amount equal to (x)
the Pool Balance as of the last day of the related Collection Period minus
(y) the greater of (a) the sum of (1) approximately 32.30% of the Pool
Balance as of the last day of the related Collection Period and (2) the
Reserve Amount Target for such Payment Date (calculated without giving
effect to clause (z) in the definition thereof) and (b) $2,001,091;
(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 Notes, until the aggregate Note Principal
Balance of the Senior Notes and Class M Notes has been reduced to an amount
equal to (x) the Pool Balance as of the last day of the related Collection
Period minus (y) the greater of (a) the sum of (1) approximately 18.17% of
the Pool Balance as of the last day of the related Collection Period and
(2) the Reserve Amount Target for such Payment Date (calculated without
giving effect to clause (z) in the definition thereof) and (b) $2,001,091;
(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 Notes, until the sum of the aggregate
Note Principal Balance of the Senior Notes and Subordinate Notes has been
reduced to an amount equal to (x) the Pool Balance as of the last day of
the related Collection Period minus (y) the greater of (a) the sum of (1)
approximately 6.06% of the Pool Balance as of the last day of the related
Collection Period and (2) the Reserve Amount Target for such Payment Date
(calculated without giving effect to clause (z) in the definition thereof)
and (b) $2,001,091;
(v) fifth, from the balance, if any, remaining of the Principal
Distribution Amount after the distributions described in clauses (i)
through (iv) above, to the Certificate in respect of the B-2 Component,
until the sum of the aggregate Note Principal Balance of the Senior Notes
and Subordinate Notes and the Component Principal Balance of the B-2
Component has been reduced to an amount equal to the Pool Balance as of the
last day of the related Collection Period minus the Reserve Amount Target
for such Payment Date; and
(vi) sixth, the balance, if any, remaining of the Principal
Distribution Amount after the distributions described in clauses (i)
through (v) above 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.
The 'STEPDOWN DATE' means the first Payment Date occurring after the
Payment Date occurring in June 2001 as to which the aggregate Note Principal
Balance of the Senior Notes (after giving effect to distributions of the
Principal Remittance Amount and amounts distributable pursuant to clause (y)(ii)
of the Extra Principal Distribution Amount on such Payment Date) will be able to
be reduced on such Payment Date (such determination to be made by the Indenture
Trustee prior to making actual distributions on such Payment Date) to an amount
equal to the excess, if any, of (i) the aggregate outstanding Principal Balance
of the Home Loans as of the end of the related Collection Period over (ii) the
greater of (a) approximately 52.49% of the Pool Balance as of the end of the
related Collection Period plus the Reserve Amount Target for such Payment Date
(calculated without giving effect to clause (z) in the definition thereof) and
(b) $2,001,091.
The 'NET DELINQUENCY AMOUNT' means with respect to any Payment Date, the
excess, if any, of (x) the product of 1.50 and the Six-Month Rolling Delinquency
Average over (y) the aggregate Net Monthly Excess Interest Amount for the three
immediately preceding Payment Dates.
The 'SIX-MONTH ROLLING DELINQUENCY AVERAGE' means with respect to each
Payment Date, the average of the applicable Sixty-Day Delinquency Amounts for
each of the six immediately preceding Collection Periods.
The 'SIXTY-DAY DELINQUENCY AMOUNT' for any Collection Period is the
aggregate Principal Balance of Home Loans that are 60 or more days delinquent in
payment of principal and interest as of the end of the related Collection Period
(including Home Loans in foreclosure and Home Loans which are REO Loans).
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'EXTRA PRINCIPAL DISTRIBUTION AMOUNT' means, as of any Payment Date, the
lesser of (x) the Net Monthly Excess Interest Amount for such Payment Date and
(y) the sum of (i) the excess, if any, of (a) the Reserve Amount Target for such
Payment Date over (b) the Outstanding Reserve Amount (calculated for this
purpose after taking into account the reduction on such Payment Date of the Note
Principal Balances of all Classes of Notes and the Component Principal Balance
of the B-2 Component resulting from the distribution of the Principal Remittance
Amount) for such Payment Date and (ii) the amount of Realized Losses (other than
Excess Losses) on the Home Loans during the preceding Collection Period.
In no event will any Principal Distribution Amount paid with respect to any
Payment Date and any class of Notes be less than zero or greater than the then
outstanding Note Principal Balance of such Note.
Distributions of the Principal Distribution Amount payable to the Senior
Notes on each Payment 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 sequentially to the Senior Notes as follows: first, to the
Class A-1 Notes, second, to the Class A-2 Notes, third, to the Class A-3
Notes, fourth, to the Class A-4 Notes, and fifth, to the Class A-5 Notes,
in each case until the Note Principal Balance thereof has been reduced to
zero; and
(b) On or after the occurrence of the Credit Support Depletion Date,
the Senior Principal Distribution Amount will be distributed to all classes
of Senior Notes pro rata in accordance with their respective outstanding
Note Principal Balances.
The 'CREDIT SUPPORT DEPLETION DATE' is the first Payment Date on which the
sum of the Outstanding Reserve Amount, the aggregate Note Principal Balance of
the Subordinate Notes and the Component Principal Balance of the B-2 Component
has been reduced to zero.
NET MONTHLY EXCESS CASH FLOW DISTRIBUTIONS
On each Payment Date, the Net Monthly Excess Interest Amount will be used
first, to fund the Extra Principal Distribution Amount for such Payment Date.
On any Payment Date, the 'NET MONTHLY EXCESS CASH FLOW' is equal to the sum
of (i) the Net Monthly Excess Interest Amount remaining after funding the Extra
Principal Distribution Amount, (ii)(a) prior to the Stepdown Date, the amount
described in clause (iv) of the first paragraph under ' -- Principal Payments,'
if any, and (b) on or after the Stepdown Date, the amount described in clause
(vi) of the second paragraph under ' -- Principal Payments,' if any (the amount
payable under such clauses, the 'NET MONTHLY EXCESS PRINCIPAL AMOUNT'), and
(iii) the lesser of (a) the Overcollateralization Reduction Amount for such
Payment Date and (b) the Principal Remittance Amount for such Payment Date.
On each Payment Date, the Net Monthly Excess Cash Flow will be distributed
as follows:
(a) first, to pay any Unpaid Interest Shortfall on the Senior Notes on
a pro rata basis until reduced to zero;
(b) second, to pay any Unpaid Interest Shortfall on the Class M-1
Notes until reduced to zero;
(c) third, to pay any Allocable Loss Interest (as defined below) on
the Class M-1 Notes until fully reimbursed;
(d) fourth, to reimburse the Class M-1 Notes 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 Notes
until reduced to zero;
(f) sixth, to pay any Allocable Loss Interest on the Class M-2 Notes
until fully reimbursed;
(g) seventh, to reimburse the Class M-2 Notes for Realized Losses
(other than Excess Losses) previously allocated thereto as described below
under ' -- Allocation of Losses; Subordination' until fully reimbursed;
(h) eighth, to pay any Unpaid Interest Shortfall on the Class B-1
Notes until reduced to zero;
(i) ninth, to pay any Allocable Loss Interest on the Class B-1 Notes
until fully reimbursed;
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(j) tenth, to reimburse the Class B-1 Notes for Realized Losses (other
than Excess Losses) previously allocated thereto as described below under
' -- Allocation of Losses; Subordination,' until fully reimbursed;
(k) eleventh, to pay any Unpaid Interest Shortfall on the B-2
Component until reduced to zero;
(l) twelfth, to reimburse the B-2 Component for Realized Losses (other
than Excess Losses) previously allocated thereto as described below under
' -- Allocation of Losses; Subordination,' until fully reimbursed; and
(m) thirteenth, any remaining amounts will be distributed to the
Certificate in respect of the Residual Component.
The 'ALLOCABLE LOSS INTEREST' with respect to any Payment Date and as to
any class of Subordinate Notes, is equal to interest at the related Note Rate on
any Realized Losses (other than Excess Losses) previously allocated to such
class and not reimbursed, from the Payment Date such class was allocated such
loss until the end of the Collection Period preceding the current Payment Date.
OUTSTANDING RESERVE AMOUNT
As of the Closing Date, the aggregate Security Balance (as defined below)
of the Notes and the B-2 Component will exceed the Cut-off Date Balance of the
Home Loans by $3,781,741 (approximately 0.94% of the Cut-off Date Balance) (such
excess at any time, the 'UNDERCOLLATERALIZATION AMOUNT'), representing an
initial undercollateralization of the Notes and the B-2 Component relative to
the aggregate Principal Balance of the Home Loans. On each Payment Date, the
Extra Principal Distribution Amount will be used first, to eliminate any
undercollateralization by reducing the sum of the aggregate Note Principal
Balance of the Notes and the Component Principal Balance of the B-2 Component
(such sum, the 'SECURITY BALANCE') until it is equal to the aggregate Principal
Balance of the Home Loans (the 'POOL BALANCE') as of the end of the related
Collection Period, and then to increase the Outstanding Reserve Amount, until
such amount is equal to the Reserve Amount Target. With respect to any Payment
Date, the excess, if any, of (a) the Pool Balance at the end of the related
Collection Period over (b) the Security Balance as of such date (after taking
into account the payment to the Notes and the B-2 Component of the Principal
Distribution Amount) is the 'OUTSTANDING RESERVE AMOUNT' as of such Payment
Date. The Indenture requires that the Net Monthly Excess Interest Amount, to the
extent available therefor as described above, will be applied as an accelerated
payment of principal on the Notes and the B-2 Component to the extent that the
Reserve Amount Target exceeds the Outstanding Reserve Amount as of such Payment
Date. The 'RESERVE AMOUNT TARGET' means as of any Payment Date (i) prior to the
Stepdown Date, the greater of (a) 3.50% of the Cut-off Date Balance and (b) the
Net Delinquency Amount for such Payment Date, and (ii) on or after the Stepdown
Date, the greatest of (x) 7.00% of the Pool Balance as of the end of the related
Collection Period, (y) the Net Delinquency Amount for such Payment Date and (z)
$2,001,091.
In the event that the Reserve Amount Target is permitted to decrease or
'step down' on a Payment Date in the future, a portion of the principal which
would otherwise be distributed to the holders of the Notes and B-2 Component on
such Payment Date shall not be distributed to the holders of the Notes and B-2
Component on such Payment Date. This has the effect of decelerating the
amortization of the Notes and B-2 Component relative to the amortization of the
Home Loans, and of reducing the Outstanding Reserve Amount. With respect to any
Payment Date, the excess, if any, of (a) the Outstanding Reserve Amount
(calculated for this purpose after taking into account the reduction on such
Payment Date of the Note Principal Balances of all Classes of Notes and the
Component Principal Balance of the B-2 Component resulting from the distribution
of the Principal Remittance Amount) on such Payment Date over (b) the Reserve
Amount Target is the 'EXCESS RESERVE AMOUNT' with respect to such Payment Date.
If, on any Payment Date, the Excess Reserve Amount is, or, after taking into
account all other distributions to be made on such Payment Date would be,
greater than zero (i.e., the Outstanding Reserve Amount is or would be greater
than the Reserve Amount Target), then any amounts relating to principal which
would otherwise be distributed to the holders of the Notes and B-2 Component on
such Payment Date shall instead be distributed, to the extent of the Excess
Reserve Amount, to the Notes and the B-2 Component and Residual Component of the
Certificate as described under ' -- Net Monthly Excess Cash Flow Distributions'
herein; such amount being the 'OVERCOLLATERALIZATION REDUCTION AMOUNT' for such
Payment Date.
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ALLOCATION OF LOSSES; SUBORDINATION
Commencing on the earlier of (i) the first Payment Date on which the
Undercollateralization Amount has been reduced to zero and (ii) the sixth
Payment Date, and on each Payment Date thereafter, following the application of
all amounts distributable on such date, to the extent the Pool Balance is less
than the Security Balance due to Realized Losses (other than Excess Losses) on
the Home Loans, the Note Principal Balances of the Offered Notes and the
Component Principal Balance of the B-2 Component shall be reduced as follows,
until such deficiency is fully allocated: first, the Component Principal Balance
of the B-2 Component shall be reduced, until the Component Principal Balance
thereof has been reduced to zero; second, the Note Principal Balance of the
Class B-1 Notes shall be reduced, until the Note Principal Balance thereof has
been reduced to zero; third, the Note Principal Balance of the Class M-2 Notes
shall be reduced, until the Note Principal Balance thereof has been reduced to
zero; and fourth, the Note Principal Balance of the Class M-1 Notes shall be
reduced, until the Note Principal Balance thereof has been reduced to zero. The
Note Principal Balances of the Senior Notes will not be so reduced and such
Notes will continue to be entitled to receive Accrued Note Interest on their
respective Note Principal Balances subject to available funds.
On any Payment Date, an 'EXCESS LOSS' will be any Realized Loss which is
(i) a Fraud Loss in excess of the Fraud Loss Amount, (ii) a Special Hazard Loss
in excess of the Special Hazard Amount, and (iii) a loss occasioned by war,
civil insurrection, certain governmental actions, nuclear reaction and certain
other risks as described in the Indenture. The principal portion of Excess
Losses will be allocated among the Notes (other than the Interest Only Notes)
and the B-2 Component on a pro rata basis, based on the related Note Principal
Balances and Component Principal Balance, respectively, thereof. The interest
portion of Excess Losses will be allocated to the Notes (other than the Interest
Only Notes) and the B-2 Component as described above under ' -- Interest
Payments.' Excess Losses will not be reimbursed by any Net Monthly Excess Cash
Flow.
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 $4,002,183. As of any date of
determination following the Cut-off Date, the Special Hazard Amount will equal
the initial amount thereof less the sum of (A) the aggregate of any Realized
Losses on the Home Loans due to Special Hazard Losses and (B) the Adjustment
Amount. The 'ADJUSTMENT AMOUNT' will be equal to an amount calculated pursuant
to the terms of the Indenture. 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 $12,006,548. 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 Home 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 Home 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 Home
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 Loss Amount are subject to further
reduction as described in the Prospectus under 'Subordination.'
Any allocation of the principal portion of a Realized Loss (including an
Excess Loss), other than a Debt Service Reduction, to a Subordinate Note or the
B-2 Component or an Excess Loss to a Senior Note will be made by reducing the
Note Principal Balance or Component Principal Balance, as applicable, thereof.
The interest portion of Realized Losses and the principal portion of Debt
Service Reductions will be allocated to the
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Offered Notes through the priority of payment provisions as described in
'Description of the Securities -- Interest Payments' and ' -- Principal
Payments' herein; provided, that the principal portion of Debt Service
Reductions will not be allocated to the Senior Notes. 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 (other than Excess
Losses) among the various classes and also the subordination provided by the
Outstanding Reserve Amount (including overcollateralization created by the Net
Monthly Excess Interest Amount) inasmuch as Realized Losses (other than Excess
Losses) are only allocated to the Subordinate Notes and the B-2 Component after
the Outstanding Reserve 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.
With respect to any defaulted Home Loan that is finally liquidated, through
foreclosure sale, disposition of the related Mortgaged Property if acquired on
behalf of the Securityholders by deed in lieu of foreclosure, or otherwise, the
amount of loss realized, if any, will equal the portion of the Principal Balance
remaining, if any, plus interest thereon through the last day of the month in
which such Home Loan was finally liquidated, after application of all amounts
recovered (net of amounts reimbursable to the Master Servicer or any Subservicer
for expenses, including attorneys' fees) towards interest and principal owing on
the Home Loan. The Master Servicer will treat any Home Loan that is 180 days or
more delinquent as having been finally liquidated. Such amount of loss realized
is referred to herein as 'REALIZED LOSSES.'
In order to maximize the likelihood of distribution in full of Accrued Note
Interest on the Interest Only Notes, on each Payment Date, holders of the
Interest Only Notes have a right to distributions of the Interest Remittance
Amount that is prior to the rights of the holders of the Senior Notes (other
than the Interest Only Notes), to the extent necessary to satisfy the payment of
Accrued Note Interest on the Interest Only Notes. Similarly, in order to
maximize the likelihood of distribution in full of Accrued Note Interest on the
Senior Notes and of the Senior Principal Distribution Amount, on each Payment
Date, holders of the Senior Notes 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 Notes and Class B-1 Notes, to the extent
necessary to satisfy the payment of Accrued Note Interest on, and the Senior
Principal Distribution Amount to, the Senior Notes. In addition, holders of the
Class M Notes have a right to distributions that is prior to the rights of the
holders of the Class B-1 Notes, and holders of the Class M Notes with a higher
payment priority have a right to distributions that is prior to the rights of
the holders of any Class M Notes with a lower payment priority. In addition, the
subordination of the B-2 Component and the overcollateralization provisions of
the Trust will also increase the likelihood of distribution of full amounts of
interest and principal to the Offered Notes on each Payment Date.
The priority of payment provisions herein will accelerate the amortization
of the Senior Notes relative to the actual amortization of the Home Loans. To
the extent that the Senior Notes are amortized faster than the Home Loans, in
the absence of offsetting Realized Losses, the percentage interest evidenced by
such Senior Notes in the Home Loans will be decreased, thereby increasing,
relative to the Note Principal Balances of the Subordinate Notes, the Component
Principal Balance of the B-2 Component and the Outstanding Reserve Amount, the
Subordination afforded the Senior Notes by the Subordinate Notes, the B-2
Component and the Outstanding Reserve Amount.
The priority of payment provisions herein among the Subordinate Notes, 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 Subordinate Notes with a higher payment priority, thereby increasing,
relative to its Note Principal Balance, the Subordination afforded to such class
of the Subordinate Notes by the B-2 Component and the Outstanding Reserve Amount
(including overcollateralization created by the Net Monthly Excess Interest
Amount) and any class of Subordinate Notes with a lower payment priority.
However, investors in the Subordinate Notes should be aware that on and after
the Payment Date on which the Outstanding Reserve Amount has been reduced to
approximately $2,001,091 and the Component Principal Balance of the B-2
Component has been reduced to zero, the most subordinate class of Subordinate
Notes then outstanding may receive more than what would otherwise be such class'
share of the Principal Distribution Amount for such Payment Date. In such case,
the most subordinate class of Subordinate Notes 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 Outstanding Reserve
Amount).
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THE PAYING AGENT
The Paying Agent will initially be the Indenture Trustee, together with any
successor thereto. The Paying Agent will have the revocable power to withdraw
funds from the Payment Account for the purpose of making payments to the
Noteholders.
MATURITY AND OPTIONAL REDEMPTION
The Notes will be payable in full on the related Final Scheduled Payment
Date, to the extent of the related outstanding Note Principal Balance on such
date. The 'FINAL SCHEDULED PAYMENT DATE' with respect to each class of Notes is
as follows: Class A-1 Notes, February 25, 2010; Class A-2 Notes, July 25, 2013;
Class A-3 Notes, November 25, 2014; Class A-4 Notes, November 25, 2018; Class
A-6 Notes, June 25, 2000; and Class A-5, Class M-1, Class M-2 and Class B-1
Notes, January 25, 2024. The Final Scheduled Payment Dates of the Class A-1,
Class A-2, Class A-3 and Class A-4 Notes were determined by calculating the
final Payment Date with respect to each such class on the basis of the
Structuring Assumptions (as defined herein), except that (i) the Prepayment
Assumption was 0%, (ii) no Net Monthly Excess Interest Amounts were applied to
reduce the Note Principal Balances of the Notes and (iii) two years were added
thereto. The Final Scheduled Payment Date of the Class A-5, Class M-1, Class M-2
and Class B-1 Notes is the seventh Payment Date following the Collection Period
in which the Principal Balances of all Home Loans have been reduced to zero,
assuming that all the Home Loans pay in accordance with their terms. The actual
maturity of any class of Notes may be significantly earlier than the Final
Scheduled Payment Date.
The Offered Notes may be redeemed after the aggregate Principal Balance of
the Home Loans as of the end of the related Collection Period is equal to or
less than 10% of the Cut-off Date Balance, upon the exercise by the Master
Servicer of its option to purchase all of the Home Loans and related assets for
the Termination Price (such redemption, the 'OPTIONAL REDEMPTION'). The
'TERMINATION PRICE' is equal to the greater of (i) the sum of the outstanding
Pool Balance and accrued and unpaid interest thereon at the weighted average of
the Net Loan Rates through the day preceding the Payment Date on which such
purchase occurs and (ii) the sum of (a) the aggregate Note Principal Balance of
the Notes (other than the Interest Only Notes) and the Component Principal
Balance of the B-2 Component, (b) the adjusted issue price of the Interest Only
Notes (as described in the Servicing Agreement), (c) the aggregate amount of
Accrued Note Interest on the Notes and the B-2 Component and (d) the aggregate
amount of Unpaid Interest Shortfalls on the Notes and the B-2 Component. In the
event of such purchase, the Termination Price will be applied as follows: first,
to each class of Notes and the B-2 Component, in reduction of the Note Principal
Balances or Component Principal Balance thereof to zero, any amounts in respect
of Accrued Note Interest or Unpaid Interest Shortfalls thereon and to the
Interest Only Notes, the adjusted issue price, second, to the Class M-1 Notes,
Class M-2 Notes and Class B-1 Notes, in that order, in respect of Allocable Loss
Interest and reimbursement of Realized Losses (other than Excess Losses)
previously allocated thereto, until the amount thereof has been reduced to zero,
third, to the B-2 Component, in respect of reimbursement of Realized Losses
(other than Excess Losses) previously allocated thereto, until the amount
thereof has been reduced to zero and fourth, to the Residual Component of the
Certificate.
On January 25, 2024 (the 'FINAL MATURITY DATE'), the assets of the Trust
will be liquidated and any amounts received will be applied as follows: first,
to the Interest Only Notes, the amount of interest due and unpaid, second to the
Senior Notes (other than the Interest Only Notes) on a pro rata basis, the
amount of interest due and unpaid, and in reduction of the Note Principal
Balances thereof, until reduced to zero, third, to the Class M-1 Notes, the
amount of interest due and unpaid, and in reduction of the Note Principal
Balance thereof, until reduced to zero, fourth, to the Class M-2 Notes, the
amount of interest due and unpaid, and in reduction of the Note Principal
Balance thereof, until reduced to zero, fifth to the Class B-1 Notes, the amount
of interest due and unpaid, and in reduction of the Note Principal Balance
thereof, until reduced to zero, sixth to the B-2 Component, the amount of
interest due and unpaid, and in reduction of the Component Principal Balance
thereof, until reduced to zero, seventh, to the Class M-1 Notes, Class M-2 Notes
and Class B-1 Notes, in that order, in respect of Allocable Loss Interest and
reimbursement of Realized Losses (other than Excess Losses) previously allocated
thereto, until the amount thereof has been reduced to zero, eighth, to the B-2
Component, in respect of reimbursement of Realized Losses (other than Excess
Losses) previously allocated thereto, until the amount thereof has been reduced
to zero, and ninth, to the Residual Component of the Certificate.
S-37
<PAGE>
<PAGE>
EVENTS OF DEFAULT
An 'Event of Default' with respect to the Notes is defined in the Indenture
as follows: (a) the failure to pay (but only to the extent funds are available
to make such payment as described under 'Description of the Securities') (i)
Accrued Note Interest or Unpaid Interest Shortfalls with respect to any class of
Notes, (ii) the Principal Distribution Amount with respect to any class of
Notes, and (iii) the Extra Principal Distribution Amount with respect to a
Payment Date; (b) a default in the observance of certain negative covenants in
the Indenture; (c) a default in the observance of any other covenant of the
Indenture, and the continuation of any such default for a period of thirty days
after notice to the Issuer by the Indenture Trustee, or by the Holders of at
least 25% of the Note Principal Balance of the Notes; (d) any representation or
warranty made by the Issuer in the Indenture or in any Note or other writing
delivered pursuant thereto having been incorrect in a material respect as of the
time made, and the circumstance in respect of which such representation or
warranty is incorrect not having been cured within thirty days after notice
thereof is given to the Issuer by the Indenture Trustee, or by Noteholders
representing at least 25% of the Note Principal Balance of the Notes; (e)
certain events of bankruptcy, insolvency, receivership or reorganization of the
Issuer; or (f) the failure by the Issuer on the related Final Scheduled Payment
Date to reduce the Note Principal Balance of any class of the Notes to zero or
to pay Accrued Note Interest and any Unpaid Interest Shortfalls thereon.
RIGHTS UPON EVENT OF DEFAULT
In case an Event of Default should occur and be continuing with respect to
the Notes, the Indenture Trustee may, and on request of Noteholders representing
not less than 50% of the Note Principal Balance of the Notes then outstanding
shall, declare the principal of such Notes to be immediately due and payable.
Such declaration may under certain circumstances be rescinded by Noteholders
representing more than 50% of the Note Principal Balance of the Notes then
outstanding.
If, following an Event of Default, the Notes have been declared to be due
and payable, the Indenture Trustee may, in its discretion (provided that
Noteholders representing more than 50% of the Note Principal Balance of the
Notes then outstanding have not directed the Indenture Trustee to sell the
assets included in the Trust), refrain from selling such assets and continue to
apply all amounts received on such assets to payments due on the Notes in
accordance with their terms, notwithstanding the acceleration of the maturity of
such Notes. The Indenture Trustee, however, must sell the assets included in the
Trust if collections in respect of such assets are determined to be insufficient
to pay certain expenses payable under the Indenture and to make all scheduled
payments on the Notes, in which case payments will be made on the Notes in the
same manner as described in the next sentence with regard to instances in which
such assets are sold. In addition, upon an Event of Default the Indenture
Trustee may sell the assets included in the Trust, in which event the
collections on, or the proceeds from the sale of, such assets will be applied as
follows: (i) to the payment of the fees of the Indenture Trustee which have not
been previously paid, (ii) to the Interest Only Notes, the amount of interest
due and unpaid and the adjusted issue price, (iii) to the Senior Notes (other
than the Interest Only Notes) on a pro rata basis, the amount of interest due
and unpaid, and in reduction of the Note Principal Balances thereof, until
reduced to zero, (iv) to the Class M-1 Notes, the amount of interest due and
unpaid, and in reduction of the Note Principal Balance thereof, until reduced to
zero, (v) to the Class M-2 Notes, the amount of interest due and unpaid, and in
reduction of the Note Principal Balance thereof, until reduced to zero, (vi) to
the Class B-1 Notes, the amount of interest due and unpaid, and in reduction of
the Note Principal Balance thereof, until reduced to zero, (vii) to the B-2
Component, the amount of interest due and unpaid, and in reduction of the
Component Principal Balance thereof, until reduced to zero, (viii) to the Class
M-1 Notes, Class M-2 Notes and Class B-1 Notes, in that order, in respect of
Allocable Loss Interest and reimbursement of Realized Losses (other than Excess
Losses) previously allocated thereto, until the amount thereof has been reduced
to zero, (ix) to the B-2 Component, in respect of reimbursement for Realized
Losses (other than Excess Losses) previously allocated thereto, until the amount
thereof has been reduced to zero, and (x) to the Residual Component of the
Certificate.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing,
the Indenture Trustee shall be under no obligation to exercise any of the rights
and powers under the Indenture at the request or direction of any of the
Noteholders, unless such Noteholders shall have offered to the Indenture Trustee
reasonable security or indemnity satisfactory to it against the costs, expenses
and liabilities which might be incurred by it in compliance with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, Noteholders
S-38
<PAGE>
<PAGE>
representing more than 50% of the Note Principal Balance of the Notes shall have
the right to direct the time, method, and place of conducting any proceeding or
any remedy available to the Indenture Trustee or exercising any trust or power
conferred on the Indenture Trustee with respect to such Notes; and Noteholders
representing more than 50% of the Note Principal Balance of the Notes may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of the holder of each outstanding Note affected thereby.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yields to maturity and the aggregate amount of payments on the Offered
Notes will be affected by the rate and timing of principal payments on the Home
Loans and the amount and timing of Mortgagor defaults resulting in Realized
Losses. The rate of default 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 Home Loans in the Trust. The rate of principal
payments on such Home Loans will in turn be affected by the amortization
schedules of the Home Loans, the rate and timing of principal prepayments
thereon by the Mortgagors, liquidations of defaulted Home Loans and repurchases
of Home Loans due to certain breaches of representations. The timing of changes
in the rate of prepayments, liquidations and repurchases of the Home 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 Home Loans will depend on future events and on a
variety of factors (as described more fully herein and in the Prospectus under
'Yield and Prepayment Considerations'), no assurance can be given as to such
rate or the timing of principal payments on the Offered Notes.
The Home Loans generally may be prepaid by the Mortgagors at any time;
however, in certain circumstances, the Home Loans will be subject to a
prepayment charge for prepayments. See 'Description of the Home Loan Pool'
herein. In addition, as described under 'Description of the Home Loan
Pool -- Home Loan Pool Characteristics,' some of the Home Loans may be assumable
pursuant to the terms of the Mortgage Note, and some may be subject to customary
due-on-sale provisions. The Master Servicer shall enforce any due-on-sale clause
contained in any Mortgage Note or Mortgage, to the extent permitted under
applicable law and governmental regulations; provided, however, if the Master
Servicer determines that it is reasonably likely that any Mortgagor will bring,
or if any Mortgagor does bring, legal action to declare invalid or otherwise
avoid enforcement of a due-on-sale clause contained in any Mortgage Note or
Mortgage, the Master Servicer shall not be required to enforce the due-on-sale
clause or to contest such action. The extent to which certain of the Home Loans
are assumed by purchasers of the Mortgaged Properties rather than prepaid by the
related Mortgagors in connection with the sales of the Mortgaged Properties will
affect the weighted average life of the Offered Notes and may result in a
prepayment experience on such Home Loans that differs from that on other
conventional mortgage loans. See 'Yield and Prepayment Considerations' in the
Prospectus. Prepayments, liquidations and purchases of the Home Loans will
result in payments to holders of the Offered Notes of principal amounts which
would otherwise be paid over the remaining terms of the Home 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, 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 Home 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 Home Loans.
The Offered Notes are subject to various priorities for payment of
principal as described herein. Distributions of principal on classes of Offered
Notes having an earlier priority of payment will be affected by the rates of
prepayment of the Home Loans early in the life of the Home Loan Pool. The timing
of commencement of principal distributions and the weighted average lives of
classes of Offered Notes with a later priority of payment will be affected by
the rates of prepayment of the Home Loans both before and after the commencement
of principal distributions on such classes. In addition, the yield to maturity
of the Offered Notes
S-39
<PAGE>
<PAGE>
will depend on whether, to what extent, and the timing with respect to which,
Net Monthly Excess Interest Amount is used to accelerate payments of principal
on the Offered Notes or any Overcollateralization Reduction Amount is released.
See 'Description of the Securities -- Outstanding Reserve Amount' herein.
The rate of defaults on the Home Loans will also affect the rate and timing
of principal payments on the Home Loans. In general, defaults on mortgage loans
are expected to occur with greater frequency in their early years. The rate of
default of mortgage loans secured by second liens is likely to be greater than
that of mortgage loans secured by first liens on comparable properties. The rate
of default on Home Loans with high Combined Loan-to-Value Ratios may be higher
than for other types of Home Loans. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the Home 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.
Because the Loan Rates on the Home Loans and the Note Rates on the Offered
Notes (other than the Class A-1 Notes) 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 Notes were to rise,
the market value of the Offered Notes may decline. In addition, yield to
investors in the Class A-1 Notes will be sensitive to fluctuations in the level
of LIBOR.
The yield to investors on each class of Offered Notes, and particularly on
those classes of Offered Notes with lower payment priorities, will be sensitive
to Prepayment Interest Shortfalls, Relief Act Shortfalls and Delinquency
Shortfalls because such amounts will not be covered by the Master Servicer
either through compensating interest or Advances, respectively. On each Payment
Date, Prepayment Interest Shortfalls, Relief Act 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 Notes. In certain scenarios involving Prepayment Interest
Shortfalls, Relief Act Shortfalls or Delinquency Shortfalls, the Interest
Remittance Amount may be insufficient to pay Accrued Note Interest on the
Offered Notes in full. Any shortfalls in interest distributions resulting
therefrom will be allocated first to the B-2 Component, and then to the
Subordinate Notes (in the order in which Realized Losses (other than Excess
Losses) are allocated thereto) prior to allocation among the Senior Notes and
will carry forward (with interest thereon) and will be payable on future Payment
Dates subject to available funds. Any allocation to the Senior Notes will be
made first to the Senior Notes (other than the Interest Only Notes) on a pro
rata basis, and then to the Interest Only Notes. The Notes will be reimbursed
for such interest shortfalls prior to the payment of Accrued Note Interest on
any class of Notes subordinate thereto and from Net Monthly Excess Cash Flow as
described herein. As a result of the priority of payment provisions herein,
holders of the Notes may experience delays in being reimbursed for such
shortfalls, and such shortfalls may remain unreimbursed.
In addition, the yield to maturity on the Offered Notes will depend on,
among other things, the price paid by the holders of such Notes and the related
Note Rate. The extent to which the yield to maturity of an Offered Note is
sensitive to prepayments will depend, in part, upon the degree to which it is
purchased at a discount or premium. In general, if an Offered Note is purchased
at a premium and principal payments thereon occur at a rate faster than assumed
at the time of purchase, the investor's actual yield to maturity will be lower
than that anticipated at the time of purchase. Conversely, if an Offered Note is
purchased at a discount and principal payments thereon occur at a rate slower
than that assumed at the time of purchase, the investor's actual yield to
maturity will be lower than that anticipated at the time of purchase. For
additional considerations relating to the yield on the Offered Notes, see 'Yield
and Prepayment Considerations' in the Prospectus.
Notes with Subordination Features: As described herein, during certain
periods all or a disproportionately large percentage of principal payments on
the Home Loans will be allocated to the Senior Notes and, during certain
periods, no principal payments will be distributed to the Subordinate Notes.
Unless the Note Principal Balances of the Senior Notes have been reduced to
zero, the Subordinate Notes will not be entitled to receive distributions of
principal until the Stepdown Date. To the extent that no principal payments are
distributed on the Subordinate Notes, the Subordination afforded the Senior
Notes by the Subordinate Notes (together with the Outstanding Reserve Amount
(including overcollateralization created by the Net Monthly Excess Interest
Amount)), in the absence of offsetting Realized Losses allocated thereto, will
be increased, and the weighted average lives of the Subordinate Notes will be
extended.
S-40
<PAGE>
<PAGE>
In addition, investors in the Subordinate Notes should be aware that on and
after the Payment Date on which the Outstanding Reserve Amount has been reduced
to approximately $2,001,091 and the Component Principal Balance of the B-2
Component has been reduced to zero, the most subordinate class of Subordinate
Notes then outstanding may receive more than what would otherwise be such class'
share of the Principal Distribution Amount for such Payment Date.
The yield to investors on each class of Subordinate Notes, and particularly
on those classes of Subordinate Notes with lower payment priorities, will be
extremely sensitive to losses due to defaults on the Home Loans (and the timing
thereof), to the extent such losses are not covered the Outstanding Reserve
Amount (including overcollateralization created by the Net Monthly Excess
Interest Amount) or by any other class of Subordinate Notes 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 Notes,
as described herein. Furthermore, as described herein, the timing of receipt of
principal and interest by any class of Subordinate Notes may be adversely
affected by losses even if such class does not ultimately bear such loss.
Weighted Average Life: Weighted average life refers to the average amount
of time that will elapse from the date of issuance of a security to the date of
payment to the investor of each dollar paid in reduction of principal of such
security (assuming no losses). The weighted average life of the Offered Notes
will be influenced by, among other things, the rate at which principal of the
Home 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 home loans. A 100% Prepayment
Assumption assumes a constant prepayment rate ('CPR') of 2% per annum of the
then outstanding principal balance of such home loans in the first month of the
life of the home loans and an additional 0.9286% (precisely 13/14ths) per annum
in each month thereafter until the fifteenth month. Beginning in the fifteenth
month and in each month thereafter during the life of the home loans, a 100%
Prepayment Assumption assumes a CPR of 15% per annum each month. As used in the
table below, a 50% Prepayment Assumption assumes prepayment rates equal to 50%
of the Prepayment Assumption. Correspondingly, a 150% Prepayment Assumption
assumes prepayment rates equal to 150% of the Prepayment Assumption, and so
forth. The Prepayment Assumption does not purport to be a historical description
of prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of home loans, including the Home 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 Home Loans that are expected to be included in the Trust as described under
'Description of the Home Loan Pool' herein and the performance thereof. The
table assumes, among other things, that: (i) the Home Loan Pool consists of
eight groups of Home Loans, with the Home Loans in each group having the
following aggregate characteristics as of the Cut-off Date:
<TABLE>
<CAPTION>
AGGREGATE NET LOAN ORIGINAL TERM REMAINING TERM
GROUP PRINCIPAL BALANCE LOAN RATE RATE TO MATURITY TO MATURITY
- ----- ----------------- --------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C>
1 $ 27,102,671.17 14.382% 13.802% 112 105
2 $ 159,545,268.15 14.067% 13.487% 180 173
3 $ 67,011,673.59 13.824% 13.244% 239 233
4 $ 108,093,607.76 13.736% 13.156% 300 295
5 $ 1,377,076.80 13.106% 11.776% 112 103
6 $ 19,754,310.25 13.290% 11.960% 180 170
7 $ 5,696,594.85 13.250% 11.920% 240 231
8 $ 11,637,055.93 13.238% 11.908% 300 291
</TABLE>
(ii) the scheduled monthly payment for each Home Loan has been based on its
outstanding balance, interest rate and remaining term to maturity, such that the
Home Loan will amortize in amounts sufficient for repayment thereof over its
Remaining Term; (iii) none of the Seller, the Master Servicer or the Depositor
will repurchase any Home Loan, as described under 'Trust Asset
Program -- Representations Relating to Trust Assets' and 'Description of the
Notes -- Assignment of the Trust Assets' in the Prospectus, and the Master
Servicer does not exercise its option to purchase the Home Loans and thereby
cause a termination of the Trust (except as indicated in the table); (iv) there
are no delinquencies or Realized Losses on the Home Loans, and principal
payments on the Home Loans will be timely received together with prepayments, if
any, on the last day of the month and at the respective constant percentages of
the Prepayment Assumption set forth in the table; (v) there is no Prepayment
Interest Shortfall or any other interest shortfall in any month; (vi) the Note
Rate on the
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<PAGE>
<PAGE>
Class A-1 Notes remains constant at approximately 5.69234% per annum; (vii) the
Home Loans, including the Simple Interest Home Loans, pay on the basis on a
30-day month and a 360-day year; (viii) payments on the Offered Notes will be
received on the 25th day of each month, commencing July 25, 1998; (ix) payments
on the Home Loans earn no reinvestment return; (x) there are no additional
ongoing Trust expenses payable out of the Trust; (xi) the Offered Notes will be
purchased on June 26, 1998; and (xii) the amount of interest collected on the
Home Loans during the Collection Period for the first Payment Date is $1,304,922
(collectively, the 'STRUCTURING ASSUMPTIONS').
The actual characteristics and performance of the Home 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 Home Loans will prepay at a constant level
of the Prepayment Assumption until maturity or that all of the Home Loans will
prepay at the same level of the Prepayment Assumption. Moreover, the diverse
Remaining Terms and Loan Rates of the Home Loans could produce slower or faster
principal payments than indicated in the table at the various constant
percentages of the Prepayment Assumption specified, even if the weighted average
Remaining Term and weighted average Loan Rate are as assumed. Any difference
between such assumptions and the actual characteristics and performance of the
Home Loans, or actual prepayment or loss experience, will affect the percentages
of initial Note Principal Balances outstanding over time and the weighted
average life of the Offered Notes.
S-42
<PAGE>
<PAGE>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2
---------------------------------------------- -----------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- -------------------- --- --- --- ---- ---- ---- ---- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage........ 100% 100% 100% 100 % 100 % 100 % 100% 100% 100% 100 % 100 % 100%
June 25, 1999....... 81 63 54 45 36 26 100 100 100 100 100 100
June 25, 2000....... 75 37 19 2 0 0 100 100 100 100 77 52
June 25, 2001....... 68 13 0 0 0 0 100 100 82 46 14 0
June 25, 2002....... 59 0 0 0 0 0 100 84 39 2 0 0
June 25, 2003....... 50 0 0 0 0 0 100 51 3 0 0 0
June 25, 2004....... 39 0 0 0 0 0 100 19 0 0 0 0
June 25, 2005....... 26 0 0 0 0 0 100 0 0 0 0 0
June 25, 2006....... 12 0 0 0 0 0 100 0 0 0 0 0
June 25, 2007....... 0 0 0 0 0 0 94 0 0 0 0 0
June 25, 2008....... 0 0 0 0 0 0 71 0 0 0 0 0
June 25, 2009....... 0 0 0 0 0 0 45 0 0 0 0 0
June 25, 2010....... 0 0 0 0 0 0 16 0 0 0 0 0
June 25, 2011....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2012....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2013....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2014....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2015....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2016....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2017....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2018....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2019....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2020....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2021....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2022....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2023....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2024....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2025....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2026....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2027....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2028....... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
(in Years)**...... 4.6 1.6 1.2 1.0 0.8 0.7 10.8 5.1 3.8 3.0 2.5 2.1
Weighted Average
Life Assuming
Optional
Redemption
(in Years)**...... 4.6 1.6 1.2 1.0 0.8 0.7 10.8 5.1 3.8 3.0 2.5 2.1
<CAPTION>
CLASS A-3 CLASS A-4
---------------------------------------------- ------------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- -------------------- ---- --- --- ---- ---- ---- ---- ---- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage........ 100% 100% 100% 100 % 100 % 100 % 100% 100% 100% 100 % 100 % 100 %
June 25, 1999....... 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 2000....... 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 2001....... 100 100 100 100 100 41 100 100 100 100 100 100
June 25, 2002....... 100 100 100 100 54 7 100 100 100 100 100 100
June 25, 2003....... 100 100 100 47 0 0 100 100 100 100 92 42
June 25, 2004....... 100 100 59 0 0 0 100 100 100 94 37 0
June 25, 2005....... 100 94 14 0 0 0 100 100 100 47 0 0
June 25, 2006....... 100 51 0 0 0 0 100 100 70 6 0 0
June 25, 2007....... 100 11 0 0 0 0 100 100 31 0 0 0
June 25, 2008....... 100 0 0 0 0 0 100 75 0 0 0 0
June 25, 2009....... 100 0 0 0 0 0 100 40 0 0 0 0
June 25, 2010....... 100 0 0 0 0 0 100 6 0 0 0 0
June 25, 2011....... 82 0 0 0 0 0 100 0 0 0 0 0
June 25, 2012....... 23 0 0 0 0 0 100 0 0 0 0 0
June 25, 2013....... 0 0 0 0 0 0 86 0 0 0 0 0
June 25, 2014....... 0 0 0 0 0 0 64 0 0 0 0 0
June 25, 2015....... 0 0 0 0 0 0 40 0 0 0 0 0
June 25, 2016....... 0 0 0 0 0 0 12 0 0 0 0 0
June 25, 2017....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2018....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2019....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2020....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2021....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2022....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2023....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2024....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2025....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2026....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2027....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2028....... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
(in Years)**...... 13.6 8.1 6.3 5.0 4.1 3.3 16.5 10.8 8.6 7.0 5.8 4.9
Weighted Average
Life Assuming
Optional
Redemption
(in Years)**...... 13.6 8.1 6.3 5.0 4.1 3.3 16.5 10.8 8.6 7.0 5.8 4.9
</TABLE>
- ------------
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a Note is determined by (i) multiplying the net
reduction, if any, of the Note Principal Balance by the number of years from
the date of issuance of the Note to the related Payment Date, (ii) adding the
results, and (iii) dividing the sum by the aggregate of the net reductions of
the Note Principal Balance described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE STRUCTURING ASSUMPTIONS (INCLUDING THE
ASSUMPTIONS REGARDING THE CHARACTERISTICS AND PERFORMANCE OF THE HOME LOANS
WHICH DIFFER FROM THE ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD
BE READ IN CONJUNCTION THEREWITH.
(Table continued on next page.)
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<PAGE>
<PAGE>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-5 CLASS M-1
------------------------------------------------- ------------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- -------------------- ---- ---- ---- ---- ---- ---- ---- ---- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage........ 100% 100% 100% 100 % 100 % 100 % 100% 100% 100% 100 % 100 % 100%
June 25, 1999....... 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 2000....... 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 2001....... 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 2002....... 100 100 100 100 100 100 100 100 100 98 82 69
June 25, 2003....... 100 100 100 100 100 100 100 100 98 80 64 51
June 25, 2004....... 100 100 100 100 100 95 100 100 84 65 50 38
June 25, 2005....... 100 100 100 100 96 70 100 94 71 53 39 28
June 25, 2006....... 100 100 100 100 73 51 100 81 59 42 29 20
June 25, 2007....... 100 100 100 82 55 37 100 70 48 33 22 15
June 25, 2008....... 100 100 99 65 42 26 100 60 40 26 17 11
June 25, 2009....... 100 100 81 51 31 19 100 51 32 20 12 8
June 25, 2010....... 100 100 64 38 22 13 100 42 26 15 9 5
June 25, 2011....... 100 83 49 28 16 9 90 33 20 11 6 3
June 25, 2012....... 100 62 35 19 10 5 73 25 14 8 4 1
June 25, 2013....... 100 49 27 14 7 3 63 20 11 6 3 0
June 25, 2014....... 100 42 22 11 5 * 57 17 9 4 1 0
June 25, 2015....... 100 34 17 8 3 0 51 14 7 3 0 0
June 25, 2016....... 100 27 13 6 1 0 43 11 5 2 0 0
June 25, 2017....... 87 20 9 4 0 0 35 8 4 0 0 0
June 25, 2018....... 71 15 7 1 0 0 29 6 3 0 0 0
June 25, 2019....... 59 12 5 0 0 0 24 5 1 0 0 0
June 25, 2020....... 45 8 2 0 0 0 18 3 0 0 0 0
June 25, 2021....... 29 5 0 0 0 0 12 1 0 0 0 0
June 25, 2022....... 11 0 0 0 0 0 4 0 0 0 0 0
June 25, 2023....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2024....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2025....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2026....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2027....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2028....... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
(in Years)**...... 21.6 16.1 13.8 11.8 10.2 8.8 17.5 11.9 9.8 8.2 6.9 6.0
Weighted Average
Life Assuming
Optional
Redemption
(in Years)**...... 20.8 14.2 12.2 10.3 8.7 7.5 17.2 11.2 9.2 7.6 6.4 5.5
<CAPTION>
CLASS M-2 CLASS B-1
----------------------------------------------- ------------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- -------------------- ---- ---- --- ---- ---- ---- ---- ---- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage........ 100% 100% 100% 100 % 100 % 100 % 100% 100% 100% 100 % 100 % 100 %
June 25, 1999....... 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 2000....... 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 2001....... 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 2002....... 100 100 100 98 82 69 100 100 100 98 82 69
June 25, 2003....... 100 100 98 80 64 51 100 100 98 80 64 51
June 25, 2004....... 100 100 84 65 50 38 100 100 84 65 50 38
June 25, 2005....... 100 94 71 53 39 28 100 94 71 53 39 28
June 25, 2006....... 100 81 59 42 29 20 100 81 59 42 29 20
June 25, 2007....... 100 70 48 33 22 15 100 70 48 33 22 15
June 25, 2008....... 100 60 40 26 17 11 100 60 40 26 17 11
June 25, 2009....... 100 51 32 20 12 8 100 51 32 20 12 7
June 25, 2010....... 100 42 26 15 9 5 100 42 26 15 9 3
June 25, 2011....... 90 33 20 11 6 3 90 33 20 11 5 0
June 25, 2012....... 73 25 14 8 4 0 73 25 14 8 * 0
June 25, 2013....... 63 20 11 6 1 0 63 20 11 4 0 0
June 25, 2014....... 57 17 9 4 0 0 57 17 9 1 0 0
June 25, 2015....... 51 14 7 2 0 0 51 14 6 0 0 0
June 25, 2016....... 43 11 5 0 0 0 43 11 3 0 0 0
June 25, 2017....... 35 8 3 0 0 0 35 8 0 0 0 0
June 25, 2018....... 29 6 * 0 0 0 29 4 0 0 0 0
June 25, 2019....... 24 5 0 0 0 0 24 2 0 0 0 0
June 25, 2020....... 18 2 0 0 0 0 18 0 0 0 0 0
June 25, 2021....... 12 0 0 0 0 0 12 0 0 0 0 0
June 25, 2022....... 4 0 0 0 0 0 1 0 0 0 0 0
June 25, 2023....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2024....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2025....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2026....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2027....... 0 0 0 0 0 0 0 0 0 0 0 0
June 25, 2028....... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
(in Years)**...... 17.5 11.9 9.8 8.2 6.9 6.0 17.5 11.8 9.7 8.1 6.8 5.9
Weighted Average
Life Assuming
Optional
Redemption
(in Years)**...... 17.2 11.2 9.2 7.6 6.4 5.5 17.2 11.2 9.2 7.6 6.4 5.5
</TABLE>
- ------------
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a Note is determined by (i) multiplying the net
reduction, if any, of the Note Principal Balance by the number of years from
the date of issuance of the Note to the related Payment Date, (ii) adding the
results, and (iii) dividing the sum by the aggregate of the net reductions of
the Note Principal Balance described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE STRUCTURING ASSUMPTIONS (INCLUDING THE
ASSUMPTIONS REGARDING THE CHARACTERISTICS AND PERFORMANCE OF THE HOME LOANS
WHICH DIFFER FROM THE ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD
BE READ IN CONJUNCTION THEREWITH.
(Table continued from previous page.)
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<PAGE>
<PAGE>
INTEREST ONLY NOTE YIELD CONSIDERATIONS
INVESTORS SHOULD NOTE THAT THE INTEREST ONLY NOTES ARE ONLY ENTITLED TO
DISTRIBUTIONS PRIOR TO THE PAYMENT DATE IN JULY 2000. The yield to investors on
the Interest Only Notes will be extremely sensitive to the rate and timing of
principal payments on the Home Loans (including prepayments, defaults and
liquidations) under certain extremely rapid rate of prepayment scenarios. In
addition, if prior to the Payment Date in July 2000, the Master Servicer or the
Company effects an optional termination of the Home Loans, the Interest Only
Notes will receive no further distributions. Investors in the Interest Only
Notes should fully consider the risk that an extremely rapid rate of prepayments
on the Home Loans could result in the failure of such investors to receive the
amounts payable under the Interest Only Notes.
For additional considerations relating to the yield on the Offered Notes,
see 'Yield and Prepayment Considerations' in the Prospectus.
DESCRIPTION OF THE HOME LOAN PURCHASE AGREEMENT
The Home Loans to be deposited in the Grantor Trust by the Depositor will
be purchased by the Depositor from the Seller pursuant to the Home Loan Purchase
Agreement dated as of June 26, 1998 (the 'HOME LOAN PURCHASE AGREEMENT') between
the Seller and the Depositor. The following summary describes certain terms of
the Home Loan Purchase Agreement and is qualified in its entirety by reference
to the Home Loan Purchase Agreement.
PURCHASE OF HOME LOANS
Pursuant to the Home Loan Purchase Agreement, the Seller will transfer and
assign to the Depositor all of its right, title and interest in and to the Home
Loans and the Mortgage Note, mortgages and other documents related thereto
(collectively, the 'RELATED DOCUMENTS'). The purchase prices for the Home Loans
are specified percentages of the face amounts thereof as of the time of transfer
and are payable by the Depositor as provided in the Home Loan Purchase
Agreement.
The Home Loan Purchase Agreement will require that, within the time period
specified therein, the Seller deliver to the Grantor Trustee (or the Custodian)
the Home Loans sold by the Seller and the Related Documents for such Home Loans.
In lieu of delivery of original mortgages, the Seller may deliver true and
correct copies thereof which have been certified as to authenticity by the
appropriate county recording office where such mortgage is recorded.
REPRESENTATIONS AND WARRANTIES
The Seller will also represent and warrant with respect to the Home Loans
that, among other things, (a) the information with respect to the Home Loans set
forth in the schedule attached to the Home Loan Purchase Agreement is true and
correct in all material respects and (b) immediately prior to the sale of such
Home Loans to the Depositor, the Seller was the sole owner and holder of such
Home Loans free and clear of any and all liens and security interests. The
Seller will also represent and warrant that, among other things, as of the
Closing Date, (a) the Home Loan Purchase Agreement constitutes a legal, valid
and binding obligation of the Seller and (b) the Home Loan Purchase Agreement
constitutes a valid transfer and assignment of all right, title and interest of
the Seller in and to the Home Loans and the proceeds thereof. The benefit of the
representations and warranties made by the Seller will be assigned to the
Grantor Trust.
Within 90 days of the Closing Date, Norwest Bank Minnesota, N.A. (the
'CUSTODIAN') will review or cause to be reviewed the Home Loans and the Related
Documents, and if any Home Loan or Related Document is found to be defective in
any material respect, which may materially and adversely affect the value of the
related Home Loan, or the interests of the Grantor Trustee or the
Securityholders in such Home Loan and such defect is not cured within 90 days
following notification thereof to the Seller and the Grantor Trust by the
Custodian, the Seller will be obligated to deposit the Repurchase Price into the
Custodial Account. In lieu of any such deposit, the Seller may substitute an
Eligible Substitute Loan; provided that such substitution may be subject to the
delivery of an opinion of counsel regarding certain tax matters. Any such
purchase or substitution will result in the removal of the Home Loan required to
be removed from the Grantor Trust (each such Home Loan, a 'DELETED LOAN'). The
obligation of the Seller to remove Deleted Loans sold by it from the Grantor
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Trust is the sole remedy regarding any defects in the Home Loans sold by the
Seller and Related Documents for such Home Loans available against the Seller.
With respect to any Home Loan, the 'REPURCHASE PRICE' is equal to the
Principal Balance of such Home Loan at the time of any removal described above
plus accrued and unpaid interest thereon to the date of removal. In connection
with the substitution of an Eligible Substitute Loan, the Seller will be
required to deposit in the Custodial Account an amount (the 'SUBSTITUTION
ADJUSTMENT AMOUNT') equal to the excess of the Principal Balance of the Deleted
Loan to be removed from the Grantor Trust over the Principal Balance of such
Eligible Substitute Loan.
An 'ELIGIBLE SUBSTITUTE LOAN' is a home loan substituted by the Seller for
a Deleted Loan which must, on the date of such substitution, (i) have an
outstanding Principal Balance (or in the case of a substitution of more than one
Home Loan for a Deleted Loan, an aggregate Principal Balance) not in excess of
the Principal Balance relating to such Deleted Loan; (ii) have a Loan Rate no
lower than and not more than 1% in excess of the Loan Rate of such Deleted Loan;
(iii) have a Combined Loan-to-Value Ratio at the time of substitution no higher
than that of the Deleted Loan at the time of substitution; (iv) have, at the
time of substitution, a remaining term to maturity not more than one year
earlier and not later than the remaining term to maturity of the Deleted Loan;
(v) comply with each representation and warranty as to the Home Loans set forth
in the Home Loan Purchase Agreement (deemed to be made as of the date of
substitution); (vi) be ineligible for inclusion in a real estate mortgage
investment conduit ('REMIC') (a 'REMIC INELIGIBLE LOAN') if the Deleted Loan was
a REMIC Ineligible Loan (generally, because (a) the value of the real property
securing the Deleted Loan was not at least equal to eighty percent of the
original principal balance of the Deleted Loan, calculated by subtracting the
amount of any liens that are senior to such loan and a proportionate amount of
any lien of equal priority from the value of such property when the loan was
originated and (b) substantially all of the proceeds of the Deleted Loan were
not used to acquire, improve or protect an interest in the real property
securing such loan); and (vii) satisfy certain other conditions specified in the
Indenture.
In addition, the Seller will be obligated to deposit the Repurchase Price
or substitute an Eligible Substitute Loan with respect to a Home Loan as to
which there is a breach of a representation or warranty if such breach is not
cured by the Seller within the time provided.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing Agreement
dated June 1, 1998 (the 'SERVICING AGREEMENT') among the Depositor, the Grantor
Trustee and the Master Servicer. The summary does not purport to be complete and
is subject to, and qualified in its entirety by reference to, the provisions of
the Servicing Agreement. Whenever particular defined terms of the Servicing
Agreement are referred to, such defined terms are thereby incorporated herein by
reference. See 'The Agreements' in the Prospectus.
THE MASTER SERVICER
Residential Funding, an indirect wholly-owned subsidiary of GMAC Mortgage
Group, Inc., and an affiliate of the Depositor, will act as Master Servicer for
the Home Loans pursuant to the Servicing Agreement. For a general description of
Residential Funding and its activities, see 'Residential Funding Corporation' in
the Prospectus and 'Description of the Home Loan Pool -- Residential Funding'
herein.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fee for each Home Loan is payable out of the interest
payments on such Home Loan. The weighted average of the Servicing Fees in
respect of the Home Loans will be approximately 0.65% per annum. The Servicing
Fees consist of (a) servicing compensation payable to the Master Servicer in
respect of its master servicing activities, and (b) subservicing and other
related compensation payable to any subservicer (including any such compensation
paid to GMACMC or Master Financial). 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 Home Loan. The Master
Servicer is obligated to pay certain ongoing expenses associated with the Trust
and incurred by the Master Servicer in connection with its responsibilities
under the Servicing Agreement. See 'Servicing of Trust Assets' in the Prospectus
for information regarding other possible
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<PAGE>
<PAGE>
compensation to the Master Servicer and any Subservicer and for information
regarding expenses payable by the Master Servicer and any Subservicer.
RELEASE OF LIEN; REFINANCING OF SENIOR LIEN
The Servicing Agreement permits the Master Servicer to release the lien on
the Mortgaged Property securing a Home Loan under certain circumstances, if the
Home Loan is current in payment. Such a release may be made in any case where
the borrower simultaneously delivers a mortgage on a substitute Mortgaged
Property, if the Combined Loan-to-Value Ratio is not increased. A release may
also be made, in connection with a simultaneous substitution of the Mortgaged
Property, if the Combined Loan-to-Value Ratio would be increased to not more
than the lesser of (a) 125% and (b) 105% times the Combined Loan-to-Value Ratio
previously in effect, if the Master Servicer determines that appropriate
compensating factors are present. Furthermore, a release may also be permitted
in cases where no substitute Mortgaged Property is provided, causing the Home
Loan to become unsecured, subject to certain limitations set forth in the
Servicing Agreement. At the time of such release, certain terms of the Home Loan
may be modified (including a Loan Rate increase), and the terms of the Home Loan
may be further modified in the event that the borrower subsequently delivers a
mortgage on a substitute Mortgage Property.
The Servicer may permit the refinancing of any existing lien senior to a
Home Loan, provided that the resulting Combined Loan-to-Value Ratio may not
exceed the greater of (a) the Combined Loan-to-Value Ratio previously in effect,
or (b) 70% (or, if the borrower satisfies certain credit score criteria, 80%).
COLLECTION AND LIQUIDATION PRACTICES; LOSS MITIGATION
The Servicer is authorized to engage in a wide variety of loss mitigation
practices with respect to the Mortgage Loans, including waivers, modifications,
payment forbearances, partial forgiveness, entering into repayment schedule
arrangements, and capitalization of arrearages; provided in any case that the
Master Servicer determines that such action is not materially adverse to the
interests of the Indenture Trustee as pledgee of the Grantor Trust Certificate
and is generally consistent with the Master Servicer's policies with respect to
similar loans; and provided further that certain of such modifications
(including reductions in the Loan Rate, partial forgiveness or a maturity
extension) may only be taken if the Home Loan is in default or if default is
reasonably foreseeable. With respect to Home Loans that come into and continue
in default, the Master Servicer may take a variety of actions including
foreclosure upon the Mortgaged Property, writing off the balance of the Home
Loan as bad debt, taking a deed in lieu of foreclosure, accepting a short sale,
permitting a short refinancing, arranging for a repayment plan, modifications as
described above, or taking an unsecured note. See 'Servicing of Trust Assets' in
the Prospectus.
OPTIONAL REPURCHASE OF DEFAULTED HOME LOANS
Pursuant to the Servicing Agreement, the Master Servicer will have the
option to purchase from the Grantor Trust any Home Loan which is 60 days or more
delinquent at a purchase price equal to the Principal Balance thereof plus
accrued interest thereon.
DESCRIPTION OF THE GRANTOR TRUST AGREEMENT,
OWNER TRUST AGREEMENT AND INDENTURE
The following summary describes certain terms of the Grantor Trust
Agreement, the Owner Trust Agreement and the Indenture. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of the Grantor Trust Agreement, the Owner Trust
Agreement and the Indenture. Whenever particular defined terms of the Indenture
are referred to, such defined terms are thereby incorporated herein by
reference. See 'The Agreements' in the Prospectus.
SALE AND ASSIGNMENT OF THE HOME LOANS AND THE GRANTOR TRUST CERTIFICATE
On the Closing Date, all of the Seller's right, title and interest in and
to the Home Loans will be sold by the Seller to the Depositor, and then by the
Depositor to the Grantor Trustee. On the Closing Date, all of the Depositor's
right, title and interest in and to the Grantor Trust Certificate will be sold
by the Depositor to the
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Issuer. Simultaneously with the issuance of the Offered Notes, the Issuer will
pledge the assets of the Trust to the Indenture Trustee as collateral for the
Notes. As pledgee of the Grantor Trust Certificate, the Indenture Trustee will
be entitled to direct the Grantor Trust in the exercise of all rights and
remedies of the Grantor Trust against Residential Funding under the Home Loan
Purchase Agreement and against the Master Servicer under the Servicing
Agreement.
REPORTS TO HOLDERS
The Indenture Trustee will mail to each Holder of Offered Notes, at its
address listed on the Security Register maintained with the Indenture Trustee, a
report setting forth certain amounts relating to the Securities for each Payment
Date, among other things:
(i) the amount of principal, if any, payable on such Payment Date to
the holders of each class of Securities;
(ii) the amount of interest payable on such Payment Date to the
holders of each class of Securities;
(iii) the aggregate Note Principal Balance of each class of Notes
after giving effect to the payment of principal on such Payment Date;
(iv) the Interest Remittance Amount and the Principal Remittance
Amount for the related Collection Period;
(v) the Pool Balance as of the end of the preceding Collection Period;
and
(vi) the Outstanding Reserve Amount as of the end of the related
Collection Period.
In the case of information furnished pursuant to clauses (i) and (ii) above
with respect to the Offered Notes, the amounts shall be expressed as a dollar
amount per $1,000 in face amount of such Notes.
CERTAIN COVENANTS
The Indenture will provide that the Issuer may not consolidate with or
merge into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes, by an
indenture supplemental to the Indenture, the Issuer's obligation to make due and
punctual payments upon the Notes and the performance or observance of any
agreement and covenant of the Issuer under the Indenture, (iii) no Event of
Default shall have occurred and be continuing immediately after such merger or
consolidation, (iv) the Issuer has been advised that the ratings of the
Securities then in effect would not be reduced or withdrawn by any Rating Agency
as a result of such merger or consolidation, (v) any action that is necessary to
maintain the lien and security interest created by the Indenture is taken and
(vi) the Issuer has received an Opinion of Counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Issuer or to any Noteholder or Certificateholder and (vii) the Issuer has
delivered to the Indenture Trustee an officer's certificate and an Opinion of
Counsel each stating that such consolidation or merger and such supplemental
indenture comply with the Indenture and that all conditions precedent, as
provided in the Indenture, relating to such transaction have been complied with.
The Issuer will not, among other things, (i) except as expressly permitted by
the Indenture, sell, transfer, exchange or otherwise dispose of any of the
assets of the Issuer, (ii) claim any credit on or make any deduction from the
principal and interest payable in respect of the Notes (other than amounts
withheld under the Code or applicable state law) or assert any claim against any
present or former holder of Notes because of the payment of taxes levied or
assessed upon the Issuer, (iii) permit the validity or effectiveness of the
Indenture to be impaired or permit any person to be released from any covenants
or obligations with respect to the Notes under the Indenture except as may be
expressly permitted thereby or (iv) permit any lien, charge, excise, claim,
security interest, mortgage or other encumbrance to be created on or extend to
or otherwise arise upon or burden the assets of the Issuer or any part thereof,
or any interest therein or the proceeds thereof. The Issuer may not engage in
any activity other than as specified under 'The Issuer' herein.
MODIFICATION OF INDENTURE
With the consent of the holders of a majority of the outstanding Notes, the
Issuer and the Indenture Trustee may execute a supplemental indenture to add
provisions to, change in any manner or eliminate any provisions
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of, the Indenture, or modify (except as provided below) in any manner the rights
of the Noteholders. Without the consent of the holder of each outstanding Note
affected thereby, however, no supplemental indenture will: (i) change the due
date of any installment of principal of or interest on any Note or reduce the
principal amount thereof, the interest rate specified thereon or change any
place of payment where or the coin or currency in which any Note or any interest
thereon is payable; (ii) impair the right to institute suit for the enforcement
of certain provisions of the Indenture regarding payment; (iii) reduce the
percentage of the aggregate amount of the outstanding Notes, the consent of the
holders of which is required for any supplemental indenture or the consent of
the holders of which is required for any waiver of compliance with certain
provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the Issuer,
the Depositor or an affiliate of any of them; (v) decrease the percentage of the
aggregate principal amount of Notes required to amend the sections of the
Indenture which specify the applicable percentage of aggregate principal amount
of the Notes necessary to amend the Indenture or certain other related
agreements; (vi) modify any of the provisions of the Indenture in such manner as
to affect the calculation of the amount of any payment of interest or principal
due on any Note (including the calculation of any of the individual components
of such calculation); or (vii) permit the creation of any lien ranking prior to
or, except as otherwise contemplated by the Indenture, on a parity with the lien
of the Indenture with respect to any of the collateral for the Notes or, except
as otherwise permitted or contemplated in the Indenture, terminate the lien of
the Indenture on any such collateral or deprive the holder of any Note of the
security afforded by the lien of the Indenture.
The Issuer and the Indenture Trustee may also enter into supplemental
indentures, without obtaining the consent of the Noteholders, for the purpose
of, among other things, curing any ambiguity or correcting or supplementing any
provision in the Indenture that may be inconsistent with any other provision
therein, or issuing any additional class of notes subordinate to the interests
of the Noteholders.
No supplement or modification of the Indenture can affect the rights of the
Certificate without the consent of the holder thereof.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE, THE GRANTOR TRUSTEE AND THE
ISSUER
Neither the Indenture Trustee nor any director, officer or employee of the
Indenture Trustee will be under any liability to the Issuer or the Noteholders
for any action taken or for refraining from the taking of any action in good
faith pursuant to the Indenture or for errors in judgment; provided, however,
that none of the Indenture Trustee and any director, officer or employee thereof
will be protected against any liability which would otherwise be imposed by
reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
Indenture. Subject to certain limitations set forth in the Indenture, the
Indenture Trustee and any director, officer, employee or agent of the Indenture
Trustee shall be indemnified by the Issuer and held harmless against any loss,
liability or expense incurred in connection with investigating, preparing to
defend or defending any legal action, commenced or threatened, relating to the
Indenture other than any loss, liability or expense incurred by reason of
willful malfeasance, bad faith or negligence in the performance of its duties
under such Indenture or by reason of reckless disregard of its obligations and
duties under the Indenture. All persons into which the Indenture Trustee may be
merged or with which it may be consolidated or any person resulting from such
merger or consolidation shall be the successor of the Indenture Trustee under
the Indenture.
Neither the Grantor Trustee nor any director, officer or employee of the
Grantor Trustee will be under any liability to the Issuer or the Noteholders for
any action taken or for refraining from the taking of any action in good faith
pursuant to the Grantor Trust Agreement or for errors in judgment; provided,
however, that none of the Grantor Trustee and any director, officer or employee
thereof will be protected against any liability which would otherwise be imposed
by reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
Grantor Trust Agreement. Subject to certain limitations set forth in the Grantor
Trust Agreement, the Grantor Trustee and any director, officer, employee or
agent of the Grantor Trustee shall be indemnified by the Issuer and held
harmless against any loss, liability or expense incurred in connection with
investigating, preparing to defend or defending any legal action, commenced or
threatened, relating to the Grantor Trust Agreement other than any loss,
liability or expense incurred by reason of willful malfeasance, bad faith or
negligence in the performance of its duties under such Grantor Trust Agreement
or by reason of reckless disregard of its obligations and duties under the
Grantor Trust
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Agreement. All persons into which the Grantor Trustee may be merged or with
which it may be consolidated or any person resulting from such merger or
consolidation shall be the successor of the Grantor Trustee under the Grantor
Trust Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Interest Only Notes will be treated as
having been issued with 'original issue discount' (as defined in the
Prospectus). The prepayment assumption that will be used in determining the rate
of accrual of original issue discount, market discount and premium, if any, for
federal income tax purposes will be 100% of the Prepayment Assumption. No
representation is made that the Home Loans will prepay at such rate or at any
other rate. See 'Certain Federal Income Tax Consequences' in the Prospectus.
Prospective investors in the Offered Notes should see 'Certain Federal
Income Tax Consequences' and 'State and Other Tax Consequences' in the
Prospectus for a discussion of the application of certain federal income and
state and local tax laws to the Issuer and purchasers of the Offered Notes.
ERISA CONSIDERATIONS
Any fiduciary or other investor of Plan assets that proposes to acquire or
hold the Offered Notes on behalf of or with Plan assets of any Plan should
consult with its counsel with respect to the potential applicability of the
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and the Code to the proposed investment. Each purchaser of
an Offered Note, by its acceptance of such Offered Note, shall be deemed to have
represented that the acquisition of the Offered Note by such purchaser does not
constitute or give rise to a prohibited transaction under section 406 of ERISA
or section 4975 of the Code for which no statutory, regulatory or administrative
exemption is available. See 'ERISA Considerations' in the Prospectus.
LEGAL INVESTMENT
The Offered Notes will not constitute 'mortgage related securities' for
purposes of SMMEA, because the Home Loan Pool contains Home Loans that are
secured by subordinate liens on the related Mortgaged Properties. Accordingly,
many institutions with legal authority to invest in mortgage related securities
may not be legally authorized to invest in the Offered Notes. No representation
is made herein as to whether the Offered Notes constitute legal investments for
any entity under any applicable statute, law, rule, regulation or order.
Prospective purchasers are urged to consult with their counsel concerning the
status of the Offered Notes as legal investments for such purchasers prior to
investing in Offered Notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated June 16, 1998 (the 'UNDERWRITING AGREEMENT'), the Underwriters have
severally agreed to purchase and the Depositor has agreed to sell to the
Underwriters the principal amount or notional amount of Notes set forth opposite
its name in the tables below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF:
------------------------------------------
UNDERWRITER CLASS A-1 CLASS A-2 CLASS A-3
- ------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
Bear, Stearns & Co. Inc............................................ $ 44,894,000 $28,998,000 $ 7,760,000
Prudential Securities Incorporated................................. $ 44,893,000 $28,996,000 $ 7,760,000
Residential Funding Securities Corporation......................... $ 44,893,000 $28,996,000 $ 7,760,000
------------ ----------- -----------
Total......................................................... $134,680,000 $86,990,000 $23,280,000
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
S-50
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OR NOTIONAL AMOUNT OF:
-----------------------------------------
UNDERWRITER CLASS A-4 CLASS A-5 CLASS A-6
- -------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Bear, Stearns & Co. Inc............................................. $ 7,130,000 $10,874,000 $50,000,000
Prudential Securities Incorporated.................................. $ 7,130,000 $10,873,000 $ 0
Residential Funding Securities Corporation.......................... $ 7,130,000 $10,873,000 $ 0
----------- ----------- -----------
Total.......................................................... $21,390,000 $32,620,000 $50,000,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF:
-----------------------------------------
UNDERWRITER CLASS M-1 CLASS M-2 CLASS B-1
- -------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Bear, Stearns & Co. Inc............................................. $13,468,000 $ 9,428,000 $ 8,080,000
Prudential Securities Incorporated.................................. $13,466,000 $ 9,426,000 $ 8,080,000
Residential Funding Securities Corporation.......................... $13,466,000 $ 9,426,000 $ 8,080,000
----------- ----------- -----------
Total.......................................................... $40,400,000 $28,280,000 $24,240,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Seller has been advised by the Underwriters that they propose initially
to offer the Notes to the public at the prices set forth herein, and to certain
dealers at such prices less the initial concession set forth below for each
Class. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of that set forth below for each Class. After the initial public
offering of the Notes, the public offering price and such concessions and
reallowances may be changed.
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Concession..................................... 0.060% 0.090% 0.120% 0.135% 0.165%
Reallowances................................... 0.040% 0.065% 0.085% 0.095% 0.125%
</TABLE>
<TABLE>
<CAPTION>
CLASS A-6 CLASS M-1 CLASS M-2 CLASS B-1
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Concession................................................ 0.048% 0.270% 0.360% 0.540%
Reallowances.............................................. 0.035% 0.185% 0.275% 0.375%
</TABLE>
Until the distribution of the Notes is completed, rules of the Commission
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase the Notes. As an exception to these rules, the Underwriters
are permitted to engage in certain transactions that stabilize the price of the
Notes. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Notes.
If the Underwriters create a short position in the Notes in connection with
the offering, i.e., if they sell more Notes than are set forth on the cover page
of this Prospectus Supplement, the Underwriters may reduce that short position
by purchasing Notes in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Seller nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Notes. In addition, neither the
Seller nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
It is expected that delivery of the Notes will be made only in book-entry
form through DTC, Cedel and Euroclear as discussed herein, on or about June 26,
1998, against payment therefor in immediately available funds.
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the Offered Notes is subject to, among other
things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of the 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 Underwriting Agreement provides that the Company will indemnify the
Underwriters, and that under limited circumstances the related Underwriter will
indemnify the Company, against certain civil liabilities under the Securities
Act of 1933, as amended, or contribute to payments required to be made in
respect thereof.
S-51
<PAGE>
<PAGE>
There can be no assurance that a secondary market for the Offered Notes
will develop or, if it does develop, that it will continue. The primary source
of information available to investors concerning the Offered Notes will be the
monthly statements discussed in the Prospectus under 'Description of the
Notes -- Reports to Noteholders,' which will include information as to the
outstanding principal balance of the Offered Notes. There can be no assurance
that any additional information regarding the Offered Notes will be available
through any other source. In addition, the Company is not aware of any source
through which price information about the Offered Notes will be generally
available on an ongoing basis. The limited nature of such information regarding
the Offered Notes may adversely affect the liquidity of the Offered Notes, even
if a secondary market for the Offered Notes becomes available.
RFSC is an affiliate of the Depositor and the Master Servicer. See
'Description of the Home Loan Pool -- Residential Funding' herein.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the Offered Notes
will be passed upon for the Depositor, RFSC and Residential Funding by Thacher
Proffitt & Wood, New York, New York and for Bear Stearns and Prudential by Brown
& Wood LLP, New York, New York.
RATINGS
It is a condition of the issuance of the Offered Notes that the Senior
Notes be rated 'Aaa' by Moody's Investors Service, Inc. ('MOODY'S') and 'AAA' by
Fitch IBCA, Inc. ('FITCH'), the Class M-1 Notes be rated 'Aa2' by Moody's and
'AA' by Fitch, the Class M-2 Notes be rated 'A2' by Moody's and 'A' by Fitch and
the Class B-1 Notes be rated 'Baa3' by Moody's and 'BBB' by Fitch. The Depositor
has not requested a rating on the Offered Notes by any rating agency other than
Moody's and Fitch. However, there can be no assurance as to whether any other
rating agency will rate the Offered Notes, or, if it does, what rating would be
assigned by any such other rating agency. A rating on the Offered Notes by
another rating agency, if assigned at all, may be lower than the ratings
assigned to the Offered Notes by Moody's and Fitch.
The rating of the Interest Only Notes does not address the possibility that
the holders thereof may not receive all amounts payable thereunder due to an
extremely high rate of prepayments of the Home Loans.
A securities rating addresses the likelihood of the receipt by holders of
the Offered Notes of payments in respect of the Home Loans. The rating takes
into consideration the structural and legal aspects associated with the Offered
Notes. The ratings on the Offered Notes do not, however, constitute statements
regarding the possibility that holders of the Offered Notes might realize a
lower than anticipated yield due to prepayments or other non-credit factors. A
securities rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
S-52
<PAGE>
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Residential
Funding Mortgage Securities II, Inc., Home Loan-Backed Notes, Series 1998-HI2,
Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class M-1,
Class M-2 and Class B-1 (collectively, 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 tradeable 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 Global Securities 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 same-day 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
I-1
<PAGE>
<PAGE>
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 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 of 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;
I-2
<PAGE>
<PAGE>
(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
(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 Holders of Global Securities 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 (treated as a corporation or
partnership for federal income tax purposes) organized in or under the laws of
the United States, any state thereof or the District of Columbia (unless, in the
case of a partnership, future Treasury regulations provide otherwise), (iii) an
estate 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
<PAGE>
<PAGE>
PROSPECTUS
ASSET-BACKED NOTES
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
Depositor
The Asset-Backed Notes (the 'NOTES') offered hereby may be sold from time to
time in series, as described in the related Prospectus Supplement. Each series
of Notes will represent indebtedness of the related trust fund (the 'TRUST
FUND') secured by certain assets deposited therein (the 'TRUST ASSETS')
described below. The Trust Fund for a series of Notes and the related
Certificates (as defined herein, and together with the Notes, the 'SECURITIES')
will consist primarily of a segregated pool (a 'POOL') of (i) one- to
four-family first or junior lien home equity revolving lines of credit (the
'REVOLVING CREDIT LOANS'); (ii) one- to four-family first or junior lien closed
end home equity loans for property improvement, debt consolidation and home
equity purposes (the 'HOME EQUITY LOANS'); (iii) home improvement installment
sales contracts and installment loan agreements (the 'HOME IMPROVEMENT
CONTRACTS'), that are either unsecured or secured by first or junior liens on
one- to four-family residential properties or by purchase money security
interests in the home improvements financed thereby (the 'HOME IMPROVEMENTS');
(iv) manufactured housing installment sales contracts and installment loan
agreements (the 'MANUFACTURED HOUSING CONTRACTS' and together with the Home
Improvement Contracts, the 'CONTRACTS') secured by either security interests in
Manufactured Homes (as defined herein) or by mortgages on real estate on which
the related Manufactured Homes are located; (v) certain balances of the
foregoing and/or (vi) certain interests in the foregoing (which may include
Private Securities, as defined herein). To the extent specified in the related
Prospectus Supplement, the Contracts may be partially insured by the Federal
Housing Administration (the 'FHA') pursuant to Title I (as defined herein) (the
'TITLE I CONTRACTS'). Each of the Trust Assets will be acquired by the Company
from one or more affiliated or unaffiliated institutions. See 'The Pools.' Only
the Notes are offered hereby. See 'Index of Principal Definitions' for the
meanings of capitalized terms and acronyms.
The Trust Assets described herein under 'The Pools' and in the related
Prospectus Supplement will be held in the related Trust Fund pursuant to a trust
agreement (the 'TRUST AGREEMENT') and pledged pursuant to an indenture (the
'INDENTURE') to secure a series of Notes to the extent and as described herein
and in the related Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, each Pool will consist of one or more types of
Trust Assets described under 'The Pools.' Information regarding each class of
Notes of a series, and the general characteristics of the Trust Assets securing
such Notes, will be set forth in the related Prospectus Supplement.
Each series of Notes will include one or more classes. Each class of Notes of
any series will represent the right, which right may be senior or subordinate to
the rights of one or more of the other classes of Securities or other interests
in the related Trust Fund, to receive a specified portion of payments of
principal or interest (or both) on the Trust Assets in the related Trust Fund in
the manner described herein and in the related Prospectus Supplement. See
'Description of the Notes -- Payments.' A series may include one or more classes
of Notes entitled to principal payments, with disproportionate, nominal or no
interest payments, or to interest payments, with disproportionate, nominal or no
principal payments. A series may include two or more classes of Notes which
differ as to the timing, sequential order, priority of payment, Interest Rate or
amount of payments of principal or interest or both.
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Notes may include any one or any combination of a Financial Guaranty
Insurance Policy, Letter of Credit (each as defined herein), bankruptcy bond,
special hazard insurance policy, Reserve Fund (as defined herein), or other form
of credit support. In addition to or in lieu of the foregoing, credit
enhancement may be provided by means of subordination. See 'Description of
Credit Enhancement.'
The rate of payment of principal of each class of Notes will depend on the
priority of payment of such class and the rate and timing of principal payments
(including payments in excess of required installments, prepayments, Draws or
terminations, liquidations and repurchases) on the Trust Assets. A rate of
principal payment lower or higher than that anticipated may affect the yield on
each class of Notes in the manner described herein and in the related Prospectus
Supplement. See 'Yield and Prepayment Considerations.'
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE NOTES, SEE
'RISK FACTORS,' WHICH BEGINS ON PAGE 9.
PROCEEDS OF THE TRUST ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS
ON THE NOTES. THE NOTES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
COMPANY, RESIDENTIAL FUNDING, GMAC MORTGAGE GROUP, INC. ('GMAC MORTGAGE') OR ANY
OF THEIR AFFILIATES. NEITHER THE NOTES NOR THE UNDERLYING TRUST ASSETS WILL BE
GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE
COMPANY, RESIDENTIAL FUNDING CORPORATION, GMAC MORTGAGE OR ANY OF THEIR
AFFILIATES, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT. NONE OF SUCH ENTITIES WILL HAVE ANY OBLIGATIONS IN RESPECT OF THE
NOTES, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT.
THESE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Offers of the Notes may be made through one or more different methods, including
offerings through underwriters, as described under 'Methods of Distribution' and
in the related Prospectus Supplement.
There will be no secondary market for any series of Notes prior to the offering
thereof. There can be no assurance that a secondary market for any of the Notes
will develop or, if it does develop, that it will continue. The Notes will not
be listed on any securities exchange.
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of Notes offered hereby unless accompanied by a Prospectus
Supplement.
------------------------
The date of this Prospectus is January 22, 1998.
<PAGE>
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'COMMISSION') a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Notes (the 'REGISTRATION STATEMENT'). The Company
is also subject to certain of the information requirements of the Securities
Exchange Act of 1934, as amended (the 'EXCHANGE ACT'), and, accordingly, will
file reports thereunder with the Commission. The Registration Statement and the
exhibits thereto, and reports and other information filed by the Company
pursuant to the Exchange Act can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at certain of its Regional Offices located as follows: Midwest
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and Northeast Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048 and electronically through the Commission's
Electronic Data Gathering, Analysis and Retrieval System at the Commission's Web
Site (http://www.sec.gov).
REPORTS TO NOTEHOLDERS
Monthly reports that contain information concerning the Trust Fund for a
series of Notes will be sent by the Master Servicer or the Indenture Trustee to
each holder of record of the Notes of the related series. See 'Description of
the Notes -- Reports to Noteholders.' Any reports forwarded to holders will
contain financial information that has not been examined nor reported upon by an
independent certified public accountant. The Company will file with the
Commission such periodic reports with respect to the Trust Fund for a series of
Notes as are required under the Exchange Act, and the rules and regulations of
the Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each series of Notes offered hereby, there are incorporated
herein and in the related Prospectus Supplement by reference all documents and
reports filed or caused to be filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, prior to the termination of the offering
of the related series of Notes, that relate specifically to such related series
of Notes. The Company will provide or cause to be provided without charge to
each person to whom this Prospectus and related Prospectus Supplement is
delivered in connection with the offering of one or more classes of such series
of Notes, upon written or oral request of such person, a copy of any or all such
reports incorporated herein by reference, in each case to the extent such
reports relate to one or more of such classes of such series of Notes, other
than the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents. Requests should be directed in
writing to Residential Funding Mortgage Securities II, Inc., 8400 Normandale
Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437, or by telephone at
(612) 832-7000.
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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
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Additional Information............................ 2
Reports to Noteholders............................ 2
Incorporation of Certain Information by
Reference....................................... 2
Summary of Prospectus............................. 4
Risk Factors...................................... 9
Special Features of Certain Trust Assets that
are Secured by Junior Liens on Mortgaged
Properties.................................. 9
Limitations on FHA Insurance for Title I
Contracts................................... 11
Risks Associated with Certain Trust Assets.... 12
Limitations, Reduction and Substitution of
Credit Enhancement.......................... 13
Yield and Prepayment Considerations........... 13
Limited Liquidity............................. 14
Limited Obligations........................... 14
The Pools......................................... 15
General....................................... 15
Revolving Credit Loans........................ 17
The Home Equity Loans and the Contracts....... 18
Trust Asset Program............................... 19
Underwriting Standards Applicable to the
Revolving Credit Loans...................... 19
Qualifications of Sellers..................... 22
Representations Relating to Trust Assets...... 23
Subservicing.................................. 25
Description of the Notes.......................... 26
General....................................... 26
Form of Notes................................. 26
Assignment of the Trust Assets................ 28
Review of Trust Assets........................ 29
Excess Spread and Excluded Spread............. 30
Payments on Trust Assets; Deposits to Payment
Account..................................... 30
Withdrawals from the Custodial Account........ 32
Payments...................................... 32
Funding Account............................... 33
Reports to Noteholders........................ 34
Hazard Insurance; Claims Thereunder........... 35
Description of Credit Enhancement................. 36
Financial Guaranty Insurance Policy........... 37
Letter of Credit.............................. 37
Subordination................................. 37
Overcollateralization......................... 38
Reserve Funds................................. 38
Maintenance of Credit Enhancement............. 39
Reduction or Substitution of Credit
Enhancement................................. 39
Purchase Obligations.............................. 40
Description of FHA Insurance under Title I........ 40
The Company....................................... 42
Residential Funding Corporation................... 42
Servicing of Trust Assets......................... 42
Subservicing.................................. 42
Collection and Other Servicing Procedures..... 43
Realization Upon Defaulted Loans.............. 44
Servicing Compensation and Payment of
Expenses.................................... 45
Evidence as to Compliance..................... 46
Certain Matters Regarding the Master Servicer
and the Company............................. 46
The Agreements.................................... 47
Events of Default; Rights Upon Event of
Default..................................... 47
Amendment..................................... 49
Termination; Redemption of Notes.............. 50
The Owner Trustee............................. 50
The Indenture Trustee......................... 50
Yield and Prepayment Considerations............... 50
Certain Legal Aspects of the Trust Assets and
Related Matters................................. 56
General; Trust Assets Secured by Mortgages on
Mortgaged Property.......................... 56
Cooperative Loans............................. 56
Tax Aspects of Cooperative Ownership.......... 57
Manufactured Housing Contracts................ 58
Foreclosure on Revolving Credit Loans, Home
Equity Loans and Certain Contracts.......... 59
Foreclosure on Shares of Cooperatives......... 60
Repossession with Respect to Manufactured
Housing Contracts........................... 61
Rights of Redemption.......................... 62
Notice of Sale; Redemption Rights with Respect
to Manufactured Homes....................... 62
Anti-Deficiency Legislation and Other
Limitations on Lenders...................... 63
Environmental Legislation..................... 64
Consumer Protection Laws with Respect to
Manufactured Housing Contracts.............. 65
Enforceability of Certain Provisions.......... 66
Transfer of Manufactured Homes................ 66
The Home Improvement Contracts................ 67
Applicability of Usury Laws................... 69
Alternative Mortgage Instruments.............. 69
Formaldehyde Litigation with Respect to
Manufactured Housing Contracts.............. 70
Soldiers' and Sailors' Civil Relief Act of
1940........................................ 70
Forfeitures in Drug and RICO Proceedings...... 71
Junior Mortgages; Rights of Senior
Mortgagees.................................. 71
Certain Federal Income Tax Consequences........... 72
General....................................... 72
State and Other Tax Consequences.................. 77
ERISA Considerations.............................. 77
Plan Asset Regulations........................ 77
Prohibited Transaction Exemptions............. 78
Insurance Company General Accounts............ 79
Representation from Plans Investing in Notes
with 'Substantial Equity Features'.......... 79
Tax Exempt Investors.......................... 79
Consultation with Counsel..................... 80
Legal Investment Matters.......................... 80
Use of Proceeds................................... 80
Methods of Distribution........................... 80
Legal Matters..................................... 81
Financial Information............................. 81
Index of Principal Definitions.................... 82
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SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each series of Notes contained in the Prospectus
Supplement to be prepared and delivered in connection with the offering of such
series. Capitalized terms used in this summary that are not otherwise defined
shall have the meanings ascribed thereto in this Prospectus. An index indicating
where certain terms used herein are defined appears at the end of this
Prospectus.
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Securities Offered........................ Asset-Backed Notes.
Company................................... Residential Funding Mortgage Securities II, Inc., the depositor. See
'The Company.'
Master Servicer........................... The entity identified as Master Servicer in the related Prospectus
Supplement, which may be Residential Funding Corporation, an
affiliate of the Company ('RESIDENTIAL FUNDING'). See 'Residential
Funding Corporation' and 'Servicing of the Trust Assets -- Certain
Matters Regarding the Master Servicer and the Company.'
Administrator............................. An entity may be named as the Administrator in the related Prospectus
Supplement if required in addition to or in lieu of the Master
Servicer or Servicer for a series of Notes (the 'ADMINISTRATOR').
Indenture Trustee......................... The Indenture Trustee for each series of Notes will be specified in
the related Prospectus Supplement (the 'INDENTURE TRUSTEE').
Owner Trustee............................. The Owner Trustee for each related Trust Fund will be specified in
the related Prospectus Supplement (the 'OWNER TRUSTEE').
The Notes................................. Each series of Notes will be secured by a Pool of Trust Assets as
described herein (exclusive of any portion of interest payments (the
Excess Spread or Excluded Spread as defined herein) relating to each
Trust Asset retained by the Company or any of its affiliates), and
certain other assets as described below. The Trust Fund (sometimes
referred to herein as the 'ISSUER') will be created pursuant to a
Trust Agreement between the Company and the Owner Trustee. The
ownership of the Trust Fund will be evidenced by certificates (the
'CERTIFICATES') issued under the Trust Agreement, which are not
offered hereby. Each series of Notes will represent indebtedness of
the related Trust Fund and will be issued pursuant to an Indenture
between the Trust Fund and the Indenture Trustee.
As specified in the related Prospectus Supplement, each series of
Notes, or class of Notes in the case of a series consisting of two or
more classes, may have a stated principal balance, no stated
principal balance or a notional amount and may be entitled to
payments of interest based on a specified interest rate or rates
(each, an 'INTEREST RATE'). Each series or class of Notes may have a
different Interest Rate, which may be a fixed, variable or adjustable
Interest Rate, or any combination of two or more of such Interest
Rates. The related Prospectus Supplement will specify the Interest
Rate or Rates for each series or class of Notes, or the initial
Interest Rate or Rates and the method for determining subsequent
changes to the Interest Rate or Rates.
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A series may include one or more classes of Notes (each, a 'STRIP
NOTE') entitled to (i) principal payments, with disproportionate,
nominal or no interest payments, or (ii) interest payments, with
disproportionate, nominal or no principal payments. In addition, a
series may include classes of Notes that differ as to timing,
sequential order, priority of payment, Interest Rate or amount of
payments of principal or interest or both, or as to which payments of
principal or interest or both on any class may be made upon the
occurrence of specified events, in accordance with a schedule or
formula, or on the basis of collections from designated portions of
the Pool. In addition, a series may include one or more classes of
Notes ('ACCRUAL NOTES') as to which certain accrued interest will not
be paid but rather will be added to the principal balance thereof in
the manner described in the related Prospectus Supplement. One or
more classes of Notes in a series may be entitled to receive
principal payments pursuant to an amortization schedule under the
circumstances described in the related Prospectus Supplement.
Each series of Notes will be senior in right of payment to the
related Certificates. If so provided in the related Prospectus
Supplement, a series of Notes may include one or more classes of
Notes which are senior to one or more other classes of notes
(collectively, together with the related Certificates, the
'SUBORDINATE SECURITIES') in respect of certain payments of principal
and interest and allocations of losses on the Trust Assets. See
'Description of Credit Enhancement -- Subordination.' The Notes will
be issued in fully-registered certificated or book-entry form in the
authorized denominations specified in the related Prospectus
Supplement. See 'Description of the Notes.'
Neither the Notes nor the underlying Trust Assets will be guaranteed
or insured by any governmental agency or instrumentality or the
Company, Residential Funding, GMAC Mortgage or any of their
affiliates, except as set forth herein or in the related Prospectus
Supplement. See 'Risk Factors -- Limited Obligations.'
The Pools................................. As specified in the related Prospectus Supplement, each Trust Fund
will consist primarily of a Pool of Trust Assets which may include
(i) Revolving Credit Loans secured by first or junior liens on one- to
four-family residential properties located in any one of the fifty
states, the District of Columbia or the Commonwealth of Puerto Rico
(the 'MORTGAGED PROPERTIES'); (ii) Home Equity Loans; (iii) Home
Improvement Contracts; (iv) Manufactured Housing Contracts; (v)
certain balances of the foregoing and/or (vi) Private Securities. All
or a portion of the Contracts underlying a series of Notes may be
partially insured by the FHA pursuant to Title I ('TITLE I') of the
National Housing Act of 1934, as amended (the 'NATIONAL HOUSING
ACT'). All of the Trust Assets will have been purchased by the
Company, either directly or through Residential Funding, from loan
originators or sellers who, as specified in the related Prospectus
Supplement, may or may not be affiliated with the Company, including
GMAC Mortgage Corporation, Residential Money Centers, Inc. and
HomeComings Financial Network, Inc. (each affiliates of the Company).
See 'Trust Asset Program.' For a
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description of the types of Trust Assets that may be included in the
Pools, see 'The Pools.'
If specified in the related Prospectus Supplement, a Trust Fund may
include pass-through certificates or other instruments evidencing
interests in or secured by Revolving Credit Loans, Home Equity Loans,
Home Improvement Contracts and Manufactured Housing Contracts, or
certain balances of any of the foregoing ('PRIVATE SECURITIES') and
certain interests in the foregoing, as described herein. See 'The
Pools -- General' herein.
Interest Payments......................... Except as otherwise specified herein or in the related Prospectus
Supplement, interest on each class of Notes of each series, other
than Strip Notes or Accrual Notes (prior to the time when accrued
interest becomes payable thereon), will be remitted at the applicable
Interest Rate on the outstanding principal balance of such class, on
the day specified as a payment date for such series or class in the
related Prospectus Supplement (each, a 'PAYMENT DATE'). Payments, if
any, with respect to interest on Strip Notes will be made on each
Payment Date as described herein and in the related Prospectus
Supplement. See 'Description of the Notes -- Payments.' Strip Notes
that are entitled to payments of principal only will not receive
payments in respect of interest. Interest that has accrued but is not
yet payable on any Accrual Notes will be added to the principal
balance of such class on the related Payment Date, and will
thereafter bear interest at the applicable Interest Rate. Payments of
interest with respect to any series of Notes (or accruals thereof in
the case of Accrual Notes), or with respect to one or more classes
included therein, may be reduced to the extent of interest shortfalls
not covered by the applicable form of credit support. See 'Yield and
Prepayment Considerations' and 'Description of the Notes.'
Principal Payments........................ Except as otherwise specified in the related Prospectus Supplement,
principal payments on the Notes of each series, or of the class or
classes of Notes then entitled thereto, will be made on a pro rata
basis among all such Notes or among the Notes of any such class, in
proportion to their respective outstanding principal balances or the
percentage interests represented by such class, in the priority and
manner specified in the related Prospectus Supplement. Strip Notes
with no principal balance will not receive payments of principal. In
the event that principal payments on the Trust Assets are reduced due
to certain delinquencies or losses not covered by the applicable form
of credit enhancement, the payments of principal on the Notes may be
reduced.
In addition, for any series of Notes, there may be no principal
payments on such Notes in any given month as a result of the payment
terms of any of the Revolving Credit Loans in the Trust Fund, certain
of which may require only limited or no payments of principal prior
to the related maturity date, or the payment terms of such series of
Notes, including provisions whereby principal payments on certain
Revolving Credit Loans may be applied to cover Draws on other
Revolving Credit Loans. If specified in the related Prospectus
Supplement, a series of Notes may provide for a period during which
all or a portion of the principal collections on
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the Revolving Credit Loans are reinvested in Additional Balances or
additional Revolving Credit Loans or are accumulated in a trust
account pending commencement of an amortization period. See 'The
Pools,' 'Yield and Prepayment Considerations' and 'Description of the
Notes.'
Funding Account........................... If so specified in the related Prospectus Supplement, a portion of
the proceeds of the sale of one or more classes of Notes of a series
or a portion of collections on the Trust Assets in respect of
principal may be deposited in a segregated account to be applied to
acquire additional Trust Assets from the Sellers, subject to the
limitations set forth herein under 'Description of the
Notes -- Funding Account.' Monies on deposit in the Funding Account
and not applied to acquire such additional Trust Assets within the
time set forth in the related Trust Agreement or other applicable
agreement may be treated as principal and applied in the manner
described in the related Prospectus Supplement.
Yield and Prepayment Considerations....... The Trust Assets supporting a series of Notes will have unique
characteristics that will affect the yield to maturity and the rate
of payment of principal on such Notes. See 'Risk Factors' herein and
'Yield and Prepayment Considerations' herein and in the related
Prospectus Supplement.
Credit Enhancement........................ If so specified in the related Prospectus Supplement, the Trust Fund
with respect to any series of Notes may include any one or any
combination of a Letter of Credit, Financial Guaranty Insurance
Policy, special hazard insurance policy, bankruptcy bond, Reserve
Fund, or other type of credit support to provide full or partial
coverage for certain defaults and losses relating to the Trust
Assets. Credit support also will be provided in the form of
subordination of the Certificates and may be provided in the form of
subordination of one or more classes of subordinate Notes in a series
under which certain losses are first allocated to such Subordinate
Securities up to a specified limit or in the form of
Overcollateralization (as defined herein). Any form of credit
enhancement may have certain limitations and exclusions from coverage
thereunder, which will be described in the related Prospectus
Supplement. Losses not covered by any form of credit enhancement will
be borne by the holders of the related Notes (or certain classes
thereof). If so specified in the related Prospectus Supplement, the
Contracts may be partially insured by the FHA pursuant to Title I. To
the extent not set forth herein, the amount and types of coverage,
the identification of any entity providing the coverage, the terms of
any subordination and related information will be set forth in the
Prospectus Supplement relating to a series of Notes. See 'Description
of Credit Enhancement.'
Optional Redemption....................... The Master Servicer, the Company or a person specified in the related
Prospectus Supplement, may at its option either (i) effect early
redemption of any series of Notes through the purchase of the Pool in
the related Trust Fund or (ii) purchase, in whole but not in part,
the Notes of any series; in each case under the circumstances and in
the manner set forth herein under 'The Agreements -- Termination;
Redemption of Notes' and in the related Prospectus Supplement.
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Rating.................................... At the date of issuance, as to each series, each class of Notes
offered hereby will be rated at the request of the Company in one of
the four highest rating categories by one or more nationally
recognized statistical rating agencies (each, a 'RATING AGENCY'). See
'Ratings' in the related Prospectus Supplement.
Legal Investment.......................... Unless otherwise specified in the related Prospectus Supplement, the
Notes offered hereby will not constitute 'mortgage related
securities' for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ('SMMEA'). See 'Legal Investment Matters.'
ERISA Considerations...................... A fiduciary of an employee benefit plan and certain other plans and
arrangements, including individual retirement accounts and annuities,
Keogh plans, bank collective investment funds, insurance company
general or separate accounts and certain other entities in which such
plans, accounts, annuities or arrangements are invested, which is
subject to the Employee Retirement Income Security Act of 1974, as
amended ('ERISA'), or Section 4975 of the Internal Revenue Code of
1986 (the 'CODE'), and any other person contemplating purchasing a
Note with Plan Assets (as defined herein), should carefully review
with its legal counsel whether the purchase or holding of Notes could
give rise to a transaction that is prohibited or is not otherwise
permissible either under ERISA or Section 4975 of the Code. See
'ERISA Considerations' herein and in the related Prospectus
Supplement.
Certain Federal Income Tax Consequences... In the opinion of Tax Counsel (as defined herein), for federal income
tax purposes, the Notes will be characterized as indebtedness and the
Issuer, as created pursuant to the terms and conditions of the Trust
Agreement, will not be characterized as an association (or publicly
traded partnership) taxable as a corporation or as a taxable mortgage
pool within the meaning of section 7701(i) of the Code.
For further information regarding certain federal income tax
consequences of an investment in the Notes see 'Certain Federal
Income Tax Consequences' and 'State and Other Tax Consequences'
herein and 'Certain Federal Income Tax Consequences' in the
Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Notes:
SPECIAL FEATURES OF CERTAIN TRUST ASSETS THAT ARE SECURED BY JUNIOR LIENS ON
MORTGAGED PROPERTIES
General
Although the Revolving Credit Loans, Home Equity Loans and, if applicable,
Contracts may be secured by liens on Mortgaged Properties, such collateral may
not provide assurance of repayment of such Trust Assets comparable to that
provided under many first lien lending programs, and such Trust Assets
(especially those with high Combined Loan-to-Value Ratios (as defined herein))
may have risk of repayment characteristics more similar to unsecured consumer
loans.
Since the Revolving Credit Loans, Home Equity Loans and, if applicable,
Contracts may be subordinate to the rights of the mortgagee under the related
senior mortgage or mortgages, the proceeds from any foreclosure, liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of such Trust Assets secured by junior mortgages only to the
extent that the claims of such senior mortgages have been satisfied in full,
including any related foreclosure costs. With respect to a Contract partially
insured by the FHA pursuant to Title I, however, an FHA claim may be payable
subject to certain limitations, as described in the related Prospectus
Supplement and herein. With respect to the Trust Assets secured by junior liens
that have low Junior Ratios (as defined herein), foreclosure costs may be
substantial relative to the outstanding balance of such Trust Assets upon
default, and therefore the amount of any liquidation proceeds payable to
Noteholders may be smaller as a percentage of the outstanding balance of such
Trust Assets than would be the case in a typical pool of first lien residential
loans. In addition, the holder of a loan secured by a junior mortgage may not
foreclose on the Mortgaged Property unless it forecloses subject to the senior
mortgages, in which case it must either pay the entire amount due on the senior
mortgages to the senior mortgagees at or prior to the foreclosure sale or
undertake the obligation to make payments on the senior mortgages in the event
the mortgagor is in default thereunder. The Trust Fund will not have any source
of funds to satisfy the senior mortgages or make payments due to the senior
mortgagees, although the Master Servicer or Subservicer may, at its option,
advance such amounts to the extent deemed recoverable and prudent, but will not
be obligated to do so. In the event that such proceeds from a foreclosure or
similar sale of the related Mortgaged Property are insufficient to satisfy all
senior liens and such Trust Asset in the aggregate, the Trust Fund, as the
holder of the junior lien, and, accordingly, Holders of one or more classes of
the Notes are likely to (i) incur losses in jurisdictions in which a deficiency
judgment against the borrower is not available or in the Master Servicer's
discretion, seeking such judgment is not advisable, and (ii) incur losses if any
deficiency judgment obtained is not realized upon. See 'Certain Legal Aspects of
the Trust Assets and Related Matters.'
No assurance can be given that the values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Trust Assets. If the residential real estate market should experience an
overall decline in value (including as a result of the general economic factors
discussed below under ' -- Mortgagor Credit'), any such decline could extinguish
the value of the interest of a junior mortgagee in the Mortgaged Property before
having any adverse effect on the interest of the related senior mortgagees.
With respect to Trust Assets secured by junior liens that have high
Combined Loan-to-Value Ratios or low Junior Ratios, many circumstances exist,
including those described above, under which it would be uneconomical to
foreclose on the Mortgaged Property in the event of a default. For purposes of
the foregoing, the actual Junior Ratio for a Trust Asset at any time may be
lower than indicated in the Prospectus Supplement as a result of any reductions
in the Stated Principal Balance thereof. In such circumstances, repayment of the
Trust Asset would be dependent solely on the credit of the borrower under the
related Revolving Credit Loan, Home Equity Loan or Contract (the 'MORTGAGOR'),
and the ability to obtain repayment of such Trust Asset may be generally similar
to that which would be experienced if such Trust Asset were an unsecured
consumer loan. Moreover, while in most jurisdictions a mortgagee would be
permitted to elect to either foreclose or sue to collect the debt evidenced by
the Mortgage Note, in some jurisdictions that prohibit suits to collect the debt
until the mortgagee has sought to foreclose against the security, the mortgagee
may be forced to foreclose first and obtain a deficiency judgment. In addition,
in some jurisdictions, where the mortgagee has chosen to sue on the debt in lieu
of foreclosure, the mortgagee will be barred from foreclosing against the
security. In addition, no
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assurance can be given that a borrower under the related Home Improvement
Contract (other than Title I Contracts) will use the proceeds thereof for Home
Improvements and consequently, no additional value will have been added to the
Mortgage Property. See 'Certain Legal Aspects of the Trust Assets and Related
Matters -- Anti-Deficiency Legislation and Other Limitations on Lenders.'
Mortgagor Credit
As a result of the foregoing considerations, the underwriting standards and
procedures applicable thereto, as well as the repayment prospects thereof, may
be more dependent on the creditworthiness of the Mortgagor and less dependent on
the adequacy of the Mortgaged Property as collateral than would be the case
under many first lien lending programs. As to such Trust Assets, future changes
in the Mortgagor's economic circumstances will have a significant effect on the
likelihood of repayment. This is particularly so with respect to Revolving
Credit Loans, since additional Draws may be made by the Mortgagor in the future
up to the applicable Credit Limit. Although the Revolving Credit Loans are
generally subject to provisions whereby the Credit Limit may be reduced as a
result of a material adverse change in the Mortgagor's economic circumstances,
the Servicer or Master Servicer generally will not monitor for such changes and
may not become aware of them until after the Mortgagor has defaulted. Under
certain circumstances, a Mortgagor may draw his entire Credit Limit in response
to personal financial needs resulting from an adverse change in circumstances.
Future changes in a Mortgagor's economic circumstances may result from a
variety of unforeseeable personal factors, including loss of employment,
reduction in income, illness and divorce. Any increase in prevailing market
interest rates may adversely affect a Mortgagor by increasing debt service on
any floating rate Revolving Credit Loans, Home Equity Loans, Contracts or other
similar debt of the Mortgagor. In addition, for any Trust Assets secured by
junior mortgages, changes in the payment terms of any related senior mortgage
loan may adversely affect the Mortgagor's ability to pay principal and interest
on such senior mortgage loan. For example, such changes may result if the senior
mortgage loan is an adjustable rate loan and the interest rate thereon
increases, which may occur with or without an increase in prevailing market
interest rates if the increase is due to the phasing out of a reduced initial
rate. Specific information about such senior mortgage loans, other than the
amount thereof at origination of the corresponding Trust Asset, generally will
not be available and will not be included in the related Prospectus Supplement.
General economic conditions, both on a national and regional basis, will
also have an impact on the ability of Mortgagors to repay their Revolving Credit
Loans, Home Equity Loans or Contracts. Certain geographic regions of the United
States from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency than will be experienced on mortgage loans generally. For example, a
region's economic condition and housing market may be directly, or indirectly,
adversely affected by natural disasters or civil disturbances such as
earthquakes, hurricanes, floods, eruptions or riots. The economic impact of any
of these types of events may also be felt in areas beyond the region immediately
affected by the disaster or disturbance. The Trust Assets underlying a series of
Notes may be concentrated in these regions, and such concentration may present
risk considerations in addition to those generally present for similar
mortgage-backed securities without such concentration. Any change in the
deductibility for federal income tax purposes of interest payments on home
equity loans may also have an impact on the ability of Mortgagors to repay such
Trust Assets.
Revolving Credit Loan Characteristics
Certain of the types of Revolving Credit Loans that may be included in the
Pools may involve additional uncertainties not present in traditional types of
mortgage loans, or in home equity or home improvement loans originated under
other programs.
Except for certain programs under which the Draw Period is less than the
full term thereof, required minimum monthly payments on Revolving Credit Loans
are generally equal to or not significantly larger than the amount of interest
currently accruing thereon, and therefore are not expected to significantly
amortize the outstanding principal amount of such Revolving Credit Loan prior to
maturity, which amount may include substantial Draws recently made. As a result,
a borrower will generally be required to pay a substantial principal amount at
the maturity of a Revolving Credit Loan. The ability of a borrower to make such
a payment may be dependent on the ability to obtain refinancing of the balance
due on such Revolving Credit Loan or to sell the
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related Mortgaged Property. Furthermore, Revolving Credit Loans generally have
adjustable rates that are subject to much higher maximum rates than typically
apply to adjustable rate first mortgage loans, and which may be as high as
applicable usury limitations. Mortgagors under such Revolving Credit Loans are
generally qualified based on an assumed payment which reflects either the
initial interest rate or a rate significantly lower than the maximum rate. An
increase in the interest rate over the Mortgage Rate applicable at the time the
Revolving Credit Loan was originated may have an adverse effect on the
Mortgagor's ability to pay the required monthly payment. In addition, an
increase in prevailing market interest rates may reduce the borrower's ability
to obtain refinancing and to pay the balance of a Revolving Credit Loan at its
maturity.
To the extent that any losses are incurred on any of the Revolving Credit
Loans that are not covered by the applicable credit enhancement, holders of
Notes of the series secured by the related Pool (or certain classes thereof)
will bear all risk of such losses resulting from default by Mortgagors.
LIMITATIONS ON FHA INSURANCE FOR TITLE I CONTRACTS
The related Prospectus Supplement will specify the number and percentage of
Contracts, if any, included in the related Trust Fund that are partially insured
by the FHA pursuant to Title I. Since the FHA Insurance Amount (as defined
herein) for the Title I Contracts is limited as described herein and in the
related Prospectus Supplement, and since the adequacy of such FHA Insurance
Amount is dependent upon future events, including reductions for the payment of
FHA claims, no assurance can be given that the FHA Insurance Amount is or will
be adequate to cover 90% of all potential losses on the Title I Contracts
included in the related Trust Fund. If the FHA Insurance Amount for the Title I
Contracts is reduced to zero, such contracts will be uninsured from and after
the date of such reduction. Under Title I, until a claim for insurance
reimbursement is submitted to the FHA, the FHA does not review or approve for
qualification for insurance the individual Title I Contract insured thereunder
(as is typically the case with other federal loan insurance programs).
Consequently, the FHA has not acknowledged that any of the Title I Contracts are
eligible for FHA insurance, nor has the FHA reviewed or approved the
underwriting and qualification by the originating lenders of any individual
Title I Contracts. See 'Description of FHA Insurance Under Title I.'
The availability of FHA insurance reimbursement following a default on a
Title I Contract is subject to a number of conditions, including strict
compliance by the originating lender of such loan, the Seller, the FHA Claims
Administrator (as defined herein), the servicer and any subservicer with the FHA
Regulations (as defined herein) in originating and servicing such Title I
Contract, and limits on the aggregate insurance coverage available in the FHA
Reserve (as defined herein). For example, the FHA Regulations provide that,
prior to originating a Title I Contract, a lender must exercise prudence and
diligence in determining whether the borrower and any co-maker or co-signer is
solvent and an acceptable credit risk with a reasonable ability to make payments
on the loan. Although the related Seller will represent and warrant that the
Title I Contracts have been originated and serviced in compliance with all FHA
Regulations, these regulations are susceptible to substantial interpretation.
Failure to comply with any FHA Regulations may result in a denial of FHA claims,
and there can be no assurance that the FHA's enforcement of the FHA Regulations
will not become more strict in the future. See 'Description of FHA Insurance
Under Title I.'
Because the Trust Fund is not eligible to hold an FHA contract of insurance
under Title I, the FHA will not recognize the Trust Fund or the Noteholders as
the owners of the Title I Contracts, or any portion thereof, entitled to submit
FHA claims. Accordingly, neither the Trust Fund nor the Noteholders will have a
direct right to receive insurance payments from the FHA. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will either
serve as or contract with the person specified in the Prospectus Supplement to
serve as the Administrator for FHA claims (each an 'FHA CLAIMS ADMINISTRATOR')
pursuant to an FHA claims administration agreement (the 'FHA CLAIMS
ADMINISTRATION AGREEMENT'). The FHA Claims Administrator will be responsible for
administering, processing and submitting FHA claims with respect to the Title I
Contracts. The Noteholders will be dependent on the FHA Claims Administrator to
(i) make claims on the Title I Contracts in accordance with FHA Regulations and
(ii) remit all FHA insurance proceeds received from the FHA in accordance with
the related agreement. The Noteholders' rights relating to the receipt of
payment from and the administration, processing and submission of FHA claims by
any FHA Claims Administrator is limited and governed by the related agreement
and the FHA Claims Administration Agreement and these functions are obligations
of the FHA Claims Administrator, but not the FHA.
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RISKS ASSOCIATED WITH CERTAIN TRUST ASSETS
No Hazard Insurance for Title I Contracts
With respect to any Title I Contract, the FHA Regulations do not require
that a borrower obtain title or fire and casualty insurance as a condition to
obtaining a Home Improvement Contract. However, with respect to both
Manufactured Home Contracts and House Improvement Contracts that are Title I
Contracts, if the related Mortgaged Property is located in a flood hazard area,
flood insurance in an amount at least equal to the loan amount is required. In
addition, the FHA Regulations do not require that the borrower obtain insurance
against physical damage arising from earth movement (including earthquakes,
landslides and mudflows) as a condition to obtaining a property improvement loan
insured under Title I. Accordingly, if a Mortgaged Property that secures a Title
I Contract suffers any uninsured hazard or casualty losses, holders of the
related series of Notes that are secured in whole or in part by such Title I
Contract may bear the risk of loss resulting from a default by the borrower to
the extent such losses are not recovered by foreclosure on the defaulted loans
or from any FHA Insurance Proceeds (as defined herein). Such loss may be
otherwise covered by amounts available from the credit enhancement provided for
the related series of Notes, as specified in the related Prospectus Supplement.
Contracts Secured by Manufactured Homes
The Manufactured Housing Contracts will be secured by security interests in
Manufactured Homes that are not considered to be real property because such
homes are not permanently affixed to real estate. Perfection of security
interests in such Manufactured Homes and enforcement of rights to realize upon
the value of such Manufactured Homes as collateral for such Manufactured Housing
Contracts are subject to a number of Federal and state laws, including the UCC
as adopted in each state and each state's certificate of title statutes. The
steps necessary to perfect the security interest in a Manufactured Home will
vary from state to state. Because of the expense and administrative
inconvenience involved, unless otherwise specified in the related Prospectus
Supplement, the certificate of title to Manufactured Homes will not be amended
to change the lienholder specified therein to the applicable Owner Trustee and
will not deliver any certificate of title to such Owner Trustee or note thereon.
Consequently, in some states, in the absence of such an amendment, the
assignment to such Owner Trustee of the security interest in the Manufactured
Home may not be effective or such security interest may not be perfected and, in
the absence of such notation or delivery to such Owner Trustee, the assignment
of the security interest in the Manufactured Home may not be effective against
creditors of the lienholder or a trustee in bankruptcy of the lienholder. In
addition, if the owner of a Manufactured Home were to relocate such Manufactured
Home to another state or if a Manufactured Home becomes permanently attached to
its site, other parties could obtain an interest in the Manufactured Home which
may be prior to the original security interest. See 'Certain Legal Aspects of
the Trust Assets and Related Matters -- Manufactured Housing Contracts.' If any
related Credit Enhancement is exhausted and such Manufactured Housing Contract
is in default, then recovery of outstanding principal and unpaid interest due on
such Contract generally is dependent on repossession and resale of the
Manufactured Home securing such Manufactured Housing Contract. Manufactured
Homes, unlike Mortgaged Properties, generally depreciate in value and may have a
limited market for resale. Therefore, the amount recoverable upon repossession
and resale may not be sufficient to pay amounts due on the defaulted Contract.
Certain other factors may limit the ability of the Master Servicer to realize
upon a Manufactured Home or may limit the amount realized to less than the
amount due.
Unsecured Contracts
The obligations of the borrower under any unsecured Contract included as
part of the related Trust Fund will not be secured by an interest in the related
real estate or otherwise (an 'UNSECURED CONTRACT'), and the related Owner
Trustee on behalf of the Trust Fund, as the owner of such Unsecured Contract,
will be a general unsecured creditor as to such obligations. As a consequence,
in the event of a default under an Unsecured Contract, the related Trust Fund
will have recourse only against the borrower's assets generally, along with all
the other general unsecured creditors of such borrower. In a bankruptcy or
insolvency proceeding relating to a borrower on an Unsecured Contract, the
obligations of the borrower under such Unsecured Contract may be discharged in
their entirety or in part (for example, the amount due and owing by such
borrower under such Unsecured Contract that exceeds payments made to the
Indenture Trustee as a general unsecured creditor may be discharged). Investors
should be aware that a borrower on an Unsecured Contract may not demonstrate the
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same degree of concern over performance of its obligations under such Unsecured
Contract as a borrower whose obligations were secured by a single family
residence owned by such borrower.
Consumer Protection Laws Related to Contracts
Numerous federal and state consumer protection laws impose requirements on
lending under retail installment sales contracts and installment loan agreements
such as the Contracts, and the failure by the lender or seller of goods to
comply with such requirements could cause assignees of such agreements to be
partially liable for amounts due under such agreements and claims by such
assignees may be subject to set-off or rescission as a result of such lender's
or seller's noncompliance. See 'Certain Legal Aspects of the Trust Assets and
Related Matters -- Consumer Protection Laws with Respect to Manufactured Housing
Contracts' and ' -- The Home Improvement Contracts -- Consumer Protection Laws.'
These laws would apply to an Indenture Trustee as an assignee of Contracts. Each
Seller will warrant that each Contract complies with all requirements of law
and, with respect to any Manufactured Housing Contract secured only by the
related Manufactured Home, will make certain warranties relating to the
validity, subsistence, perfection and priority of the security interest in each
Manufactured Home securing such Contract.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
With respect to each series of Notes, credit enhancement may be provided to
cover delinquencies and losses on the underlying Trust Assets, subject to any
applicable limitations. Credit enhancement will be provided in one or more of
the forms referred to herein, including, but not limited to: subordination of
Subordinate Securities of the same series; Overcollateralization; a Financial
Guaranty Insurance Policy; a Letter of Credit; a Reserve Fund or any combination
thereof. If so specified in the related Prospectus Supplement, the Contracts may
be partially insured by the FHA pursuant to Title I. See 'Description of Credit
Enhancement' herein.
As to any series of Notes, the amount of coverage under the applicable
credit enhancement may be limited in amount, and if limited may be subject to
periodic reduction in accordance with a schedule or formula. Furthermore, such
credit enhancement may provide only very limited coverage as to certain types of
losses or risks, and may provide no coverage as to certain other types of losses
or risks. For any type of credit enhancement which is generated in whole or in
part by cash flows on the underlying Trust Assets (as may be the case for a
Reserve Fund or Overcollateralization, for example), the amount of coverage
provided thereby may be adversely affected under a variety of scenarios by
factors such as the prepayment and draw experience of the Trust Assets, changes
in the Mortgage Rates or Gross Margins applicable to the Trust Assets pursuant
to the terms thereof, and changes in the relationship between the Mortgage Rates
on the Trust Assets and the Interest Rates on the Notes (which changes may
result, in part, from changes in the relationship between different indexes
respectively used to determine the Mortgage Rates and the Interest Rates). In
the event losses exceed the amount of coverage provided by any credit
enhancement or losses of a type not covered by any credit enhancement occur,
such losses will be borne by the holders of the related Notes (or certain
classes thereof).
The rating of any series of Notes by any Rating Agency may be lowered
following the initial issuance thereof as a result of the downgrading or
nonperformance of the obligations of any applicable credit support provider, or
as a result of losses on the related Trust Assets in excess of the levels
contemplated by such Rating Agency at the time of its initial rating analysis.
None of the Company, the Master Servicer, GMAC Mortgage or any of their
affiliates will have any obligation to replace or supplement any credit
enhancement, or to take any other action to maintain any rating of any series of
Notes. See 'Description of Credit Enhancement -- Reduction or Substitution of
Credit Enhancement.'
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Notes of each series will depend on the rate
and timing of principal payments (including payments in excess of required
installments, prepayments or terminations, liquidations and repurchases) on the
Trust Assets, the rate and timing of Draws, and the price paid by Noteholders.
Such yield may be adversely affected by a higher or lower than anticipated rate
of principal payments or Draws on the related Revolving Credit Loans. The Trust
Assets generally may be prepaid in full or in part without penalty. The Company
has no significant experience with respect to the rate of principal prepayments
on home improvement contracts or manufactured housing contracts, but generally
expects that prepayments on home
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improvement contracts will be higher than certain other Trust Assets due to the
possibility of increased property value resulting from the home improvement and
greater refinance options. The Company generally expects that prepayments on
manufactured housing contracts will be lower than on other Trust Assets because
manufactured housing contracts may have less refinance options. Principal
payments or Draws are influenced by a number of factors, including prevailing
market interest rates, national and regional economic conditions and changes in
Mortgagors' personal and economic circumstances. See 'Yield and Prepayment
Considerations' herein. In addition, the yield to maturity of the Notes of any
series, or the rate and timing of principal payments or Draws on the related
Revolving Credit Loans, may be affected by a wide variety of specific terms and
conditions applicable to the respective programs under which the Revolving
Credit Loans were originated. For example, the Revolving Credit Loans may
provide for future Draws to be made only in specified minimum amounts, or
alternatively may permit Draws to be made by check or through a credit card in
any amount. A pool of Revolving Credit Loans subject to the latter provisions
may be likely to remain outstanding longer with a higher aggregate principal
balance than a pool of Revolving Credit Loans with the former provisions,
because of the relative ease of making new Draws. Furthermore, certain Trust
Assets may provide for interest rate changes on a daily or monthly basis, or may
have Gross Margins that may vary under certain circumstances over the term of
the loan. In extremely high market interest rate scenarios, Notes secured by
Trust Assets with adjustable rates subject to substantially higher maximum rates
than typically apply to adjustable rate first mortgage loans may experience
rates of default and liquidation substantially higher than those that have been
experienced on other adjustable rate mortgage loan pools. The yield to maturity
of the Notes of each series will also be affected by the rate and timing of
defaults on the related Trust Assets. See ' -- Special Features of Certain Trust
Assets Secured by Junior Liens on Mortgaged Properties' above.
The yield to maturity on any Strip Notes will be extremely sensitive to the
rate and timing of principal payments or Draws on the related Revolving Credit
Loans. In addition, the yield to maturity on certain other types of classes of
Notes, including Accrual Notes, Notes with a Interest Rate which fluctuates
inversely with an index or certain other classes in a series including more than
one class of Notes, may be relatively more sensitive to the rate and timing of
principal payments or Draws on the related Revolving Credit Loans than other
classes of Notes.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Notes of any
series will develop or, if it does develop, that it will provide Noteholders
with liquidity of investment or that it will continue for the life of the Notes
of any series. Although the Prospectus Supplement for any series of Notes may
indicate that an underwriter specified therein intends to establish a secondary
market in such Notes, no underwriter will be obligated to do so. The Notes will
not be listed on any securities exchange.
LIMITED OBLIGATIONS
The Notes will evidence an obligation of the related Trust Fund to remit
certain payments to the registered holder thereof. The Notes will not represent
an interest in or obligation of the Company, Residential Funding, GMAC Mortgage
or any of their affiliates. The only obligations of the foregoing entities with
respect to the Notes, the Revolving Credit Loans, the Home Equity Loans, the
Contracts or any Private Securities will be the obligations (if any) of
Residential Funding pursuant to certain limited representations and warranties
made with respect to such Trust Assets, the obligation of Residential Funding
(or such other entity specified in the related Prospectus Supplement) to advance
funds to Mortgagors in respect of Draws and the servicing obligations of
Residential Funding as Master Servicer under the related Servicing Agreement. If
any affiliate of the Company has originated any Trust Assets, such affiliate
will only have an obligation with respect to such Trust Assets to the same
extent as a Seller, as described herein. Neither the Notes nor the underlying
Trust Assets will be guaranteed or insured by any governmental agency or
instrumentality, or by the Company, Residential Funding, GMAC Mortgage or any of
their affiliates, except as expressly set forth herein or in the related
Prospectus Supplement. Proceeds of the assets included in the related Trust Fund
(including the Trust Assets and any form of credit enhancement) will be the sole
source of payments on the Notes, and there will be no recourse to the Company,
Residential Funding, GMAC Mortgage or any other entity in the event that such
proceeds are insufficient or otherwise unavailable to make all payments provided
for under the Notes.
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THE POOLS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each Pool
will consist primarily of (i) Revolving Credit Loans; (ii) Home Equity Loans;
(iii) Home Improvement Contracts; (iv) Manufactured Housing Contracts; (v)
certain balances of any of the foregoing and/or (vi) certain interests in the
foregoing (which may include Private Securities) excluding any interest retained
by the Company or any other entity specified in the Prospectus Supplement. The
Revolving Credit Loans, Home Equity Loans and, if applicable, Contracts will be
evidenced by promissory notes (the 'MORTGAGE NOTES') secured by mortgages or
deeds of trust or other similar security instruments (collectively, 'MORTGAGES')
creating first or junior liens on one- to four-family residential properties.
All or a portion of the Contracts underlying a series of Notes may be partially
insured by the FHA pursuant to Title I. The Mortgaged Properties will consist
primarily of owner-occupied attached or detached one-family dwelling units, two-
to four-family dwelling units, condominiums, townhouses, row houses, individual
units in planned-unit developments, Manufactured Homes which may be permanently
affixed to the real property on which they are located and certain other
dwelling units, and the fee, leasehold or other interests in the underlying real
property. The Mortgaged Properties may include vacation, second and non-
owner-occupied homes. If specified in the related Prospectus Supplement relating
to a series of Notes, a Pool may contain cooperative apartment loans
('COOPERATIVE LOANS') evidenced by promissory notes ('COOPERATIVE NOTES')
secured by security interests in shares issued by Cooperatives and in the
related proprietary leases or occupancy agreements granting exclusive rights to
occupy specific dwelling units in the related buildings. As used herein, unless
the context indicates otherwise, 'Revolving Credit Loans,' 'Home Equity Loans'
and, if applicable, 'Contracts' include Cooperative Loans, 'Mortgaged
Properties' includes shares in the related Cooperative and the related
proprietary leases or occupancy agreements securing Cooperative Notes, 'Mortgage
Notes' includes Cooperative Notes and 'Mortgages' includes a security agreement
with respect to a Cooperative Note.
Each Trust Asset will be selected by the Company for inclusion in a Pool
from among those purchased by the Company, either directly or through its
affiliates, including Residential Funding, GMAC Mortgage Corporation,
Residential Money Centers, Inc. and HomeComings Financial Network, Inc.
('AFFILIATED SELLERS'), or from banks, savings and loan associations, mortgage
bankers, investment banking firms, the FDIC and other mortgage loan originators
or sellers not affiliated with the Company ('UNAFFILIATED SELLERS');
(Unaffiliated Sellers and Affiliated Sellers are collectively referred to herein
as 'SELLERS'), all as described below under 'Trust Asset Program.' If a Pool is
composed of Trust Assets acquired by the Company directly from Sellers other
than Residential Funding, the related Prospectus Supplement will specify the
extent of Trust Assets so acquired. The characteristics of the Trust Assets are
as described in the related Prospectus Supplement. Other mortgage loans
available for purchase by the Company may have characteristics which would make
them eligible for inclusion in a Pool but were not selected for inclusion in
such Pool.
Under certain circumstances, the Trust Assets will be delivered either
directly or indirectly to the Company by one or more Sellers identified in the
related Prospectus Supplement, concurrently with the issuance of the related
series of Notes (a 'DESIGNATED SELLER TRANSACTION'). Such Notes may be sold in
whole or in part to any such Seller in exchange for the related Trust Assets, or
may be offered under any of the other methods described herein under 'Methods of
Distribution.' The related Prospectus Supplement for a Pool composed of Trust
Assets acquired by the Company pursuant to a Designated Seller Transaction will
generally include information, provided by the related Seller (the 'DESIGNATED
SELLER'), about the Designated Seller, the Trust Assets and the underwriting
standards applicable to the Trust Assets. None of the Company, Residential
Funding, GMAC Mortgage or any of their affiliates will make any representation
or warranty with respect to such Trust Assets, or any representation as to the
accuracy or completeness of such information provided by the Seller.
If specified in the related Prospectus Supplement, the Trust Fund securing
a series of Notes may include Private Securities. The Private Securities may
have been issued previously by the Company or an affiliate thereof, a financial
institution or other entity engaged generally in the business of mortgage
lending or a limited purpose corporation organized for the purpose of, among
other things, acquiring and depositing mortgage loans into such trusts, and
selling beneficial interests in such trusts. As to any such series of Notes, the
related Prospectus Supplement will include a description of such Private
Securities and any related credit enhancement, and the assets underlying such
Private Securities will be described together with any other Trust Assets
included in the Pool relating to such series.
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In addition, with respect to any series of Notes secured by Private
Securities, such Private Securities may consist of an ownership interest (an
'OWNERSHIP INTEREST') in a structuring entity formed by the Company for the
limited purpose of holding the Trust Assets relating to such series of Notes (a
'SPECIAL PURPOSE ENTITY'). A Special Purpose Entity may be organized in the form
of a trust, limited partnership or limited liability company, and will be
structured in a manner that will insulate the holders of Notes from liabilities
of the Special Purpose Entity. The provisions governing such Special Purpose
Entity generally will restrict the Special Purpose Entity from engaging in or
conducting any business other than the holding of Trust Assets and any related
assets and the issuance of ownership interests in such Trust Assets and certain
activities incidental thereto. Any such Ownership Interest will evidence an
ownership interest in the related Trust Assets as well as the right to receive
specified cash flows derived from such Trust Assets, as described in the related
Prospectus Supplement. The obligations of the Depositor in respect of any such
Ownership Interest will generally be limited to certain representations and
warranties with respect to the Trust Assets, as described herein. Credit support
of any of the types described herein under 'Description of Credit Enhancement'
may be provided for the benefit of any such Ownership Interest, if so specified
in the related Prospectus Supplement. As to any such series of Notes, the term
'Pool' includes the Trust Assets underlying such Private Securities.
The Prospectus Supplement for each series of Notes will contain information
as to the type of Trust Assets which will be included in the related Pool. Each
Prospectus Supplement applicable to a series of Notes will include certain
information, generally as of the Cut-off Date and to the extent then available
to the Company, on an approximate basis, as to (i) the aggregate principal
balance of the Trust Assets, (ii) the type of property securing the Trust Assets
and related lien priority, if any, (iii) the original or modified terms to
maturity of the Trust Assets, (iv) the earliest origination or modification date
and latest maturity date of the Trust Assets, (v) the Loan-to-Value Ratios or
Combined Loan-to-Value Ratios of the Trust Assets, as applicable, (vi) the
Mortgage Rate or range of Mortgage Rates borne by the Trust Assets, (vii) the
applicable Index, the range of Gross Margins, the weighted average Gross Margin,
the frequency of adjustments and maximum loan rate, (viii) the geographical
distribution of the Mortgaged Properties, (ix) the aggregate Credit Limits of
the related Credit Line Agreements, (x) the number and percentage of Contracts
that are partially insured by the FHA pursuant to Title I and (xi) if
applicable, the weighted average Junior Ratio and Credit Utilization Rate. A
Current Report on Form 8-K will be available upon request to holders of the
related series of Notes and will be filed, together with the related Trust
Agreement, with the Commission within fifteen days after the initial issuance of
such Notes. The composition and characteristics of a Pool that contains
Revolving Credit Loans may change from time to time as a result of any Draws
made after the related Cut-off Date under the related Credit Line Agreements
that are included in such Pool. In the event that Trust Assets are added to or
deleted from the Trust Fund after the date of the related Prospectus Supplement
other than as a result of any such Draws with respect to the Revolving Credit
Loans, such addition or deletion will be noted in the Current Report on Form
8-K.
With respect to each Revolving Credit Loan, the 'Combined Loan-to-Value
Ratio' or 'CLTV' generally will be the ratio, expressed as a percentage, of the
sum of (i) the greater of the Cut-off Date Principal Balance or the Credit
Limit, if applicable, and (ii) the principal balance of any related senior
mortgage loan at origination of such Revolving Credit Loan together with any
mortgage loan subordinate thereto, to the lesser of (x) the appraised value of
the related Mortgaged Property determined in the appraisal used in the
origination of such Revolving Credit Loan and (y) if applicable under the
corresponding program, the sales price of each Mortgaged Property. With respect
to each Revolving Credit Loan, the 'JUNIOR RATIO' generally will be the ratio,
expressed as a percentage, of the greater of the Cut-off Date Principal Balance
or the Credit Limit, if applicable, of such Revolving Credit Loan to the sum of
(i) the greater of the Cut-off Date Principal Balance or the Credit Limit, if
applicable, of such Revolving Credit Loan and (ii) the principal balance of any
related senior mortgage loan at origination of such Revolving Credit Loan. With
respect to each Home Equity Loan or Contract, the CLTV and Junior Ratio will be
computed in the manner described in the related Prospectus Supplement. The
'CREDIT UTILIZATION RATE' is determined by dividing the Cut-off Date Principal
Balance of a Revolving Credit Loan by the Credit Limit of the related Credit
Line Agreement.
The Company will cause the Trust Assets constituting each Pool (or Private
Securities evidencing interests therein) to be assigned to the Owner Trustee
named in the related Prospectus Supplement, for the benefit of the holders of
all of the Securities of a series. The Master Servicer named in the related
Prospectus Supplement will service the Trust Assets, either directly or through
other mortgage servicing institutions ('SUBSERVICERS'), pursuant to a Servicing
Agreement and will receive a fee for such services. See 'Trust Asset Program'
and 'Description of the Notes.' With respect to those Trust Assets serviced by
the Master Servicer through a
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Subservicer, the Master Servicer will remain liable for its servicing
obligations under the related Servicing Agreement as if the Master Servicer
alone were servicing such Trust Assets. In addition to or in lieu of the Master
Servicer for a series of Notes, the related Prospectus Supplement may identify
an Administrator for the Trust Fund. The Administrator may be an affiliate of
the Company. All references herein to 'Master Servicer' and any discussions of
the servicing and administration functions of the Master Servicer will also
apply to the Administrator to the extent applicable.
The Company's assignment of the Trust Assets to the Owner Trustee on behalf
of the Trust will be without recourse. See 'Description of the
Notes -- Assignment of Trust Assets.' The Master Servicer's obligations with
respect to the Trust Assets will consist principally of its contractual
servicing obligations under the related Servicing Agreement (including its
obligation to enforce certain purchase obligations of Residential Funding or any
Designated Seller and other obligations of Subservicers, as described herein
under 'Trust Asset Program -- Representations Relating to Trust Assets,' and
' -- Subservicing' and 'Description of the Notes -- Assignment of Trust Assets'
or pursuant to the terms of any Private Securities. Residential Funding (or such
other entity specified in the related Prospectus Supplement) will be obligated
to advance funds to Mortgagors in respect of Draws made after the related
Cut-off Date.
A Mortgaged Property securing a Revolving Credit Loan, Home Equity Loan
and, if applicable, a Contract may be subject to the senior liens of one or more
conventional mortgage loans at the time of origination and may be subject to one
or more junior liens at the time of origination or thereafter. A mortgage loan
secured by any such junior lien or senior lien will likely not be included in
the related Pool, and the Company, an affiliate of the Company or an
Unaffiliated Seller may have an interest in such mortgage loan. Revolving Credit
Loans, Home Equity Loans and Contracts that are secured by junior liens
generally will not be required by the Company to be covered by a primary
mortgage guaranty insurance policy insuring against default on such Trust
Assets.
REVOLVING CREDIT LOANS
The Revolving Credit Loans will be originated pursuant to loan agreements
(the 'CREDIT LINE AGREEMENTS'). Interest on each Revolving Credit Loan will be
calculated based on the average daily balance outstanding during the billing
cycle and the billing cycle generally will be the calendar month preceding a Due
Date. Each Revolving Credit Loan will have an interest rate (a 'MORTGAGE RATE')
that is subject to adjustment on the day specified in the related Mortgage Note,
which may be daily or monthly, equal to the sum of (a) the index* on such day as
specified in the related Prospectus Supplement, and (b) a fixed percentage set
forth in the related Mortgage Note (the 'GROSS MARGIN'), subject to the maximum
rate set forth in the Mortgage Note and permitted by applicable law.
Notwithstanding the forgoing, if so specified in the related Prospectus
Supplement, a Revolving Credit Loan may have an introductory rate that is lower
than the rate that would be in effect if the applicable Index and Gross Margin
were used to determine the Mortgage Rate and as a result of such introductory
rate, interest payments on the Notes may initially be lower than expected. See
'Risk Factors -- Special Features of Certain Trust Assets Secured by Junior
Liens on Mortgaged Properties -- Revolving Credit Loan Characteristics' herein.
Unless otherwise specified in the related Prospectus Supplement, each
Revolving Credit Loan will have a term to maturity from the date of origination
of not more than 25 years. The Mortgagor for each Revolving Credit Loan may draw
money (each, an 'ADDITIONAL BALANCE' or a 'DRAW') under the related Credit Line
Agreement at any time during the period specified therein (such period as to any
Revolving Credit Loan, the 'DRAW PERIOD'). Unless otherwise specified in the
related Prospectus Supplement, the Draw Period generally will not be more than
15 years. Unless otherwise specified in the related Prospectus Supplement, if
the Draw
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*The index (the 'INDEX') for a particular Pool will be specified in the related
Prospectus Supplement and may include one of the following indexes: (i) the
weekly average yield on U.S. Treasury securities adjusted to a constant maturity
of either six months or one year, (ii) the weekly auction average investment
yield of U.S. Treasury bills of six months, (iii) the daily Bank Prime Loan rate
made available by the Federal Reserve Board, (iv) the cost of funds of member
institutions for the Federal Home Loan Bank of San Francisco, (v) the interbank
offered rates for U.S. dollar deposits in the London market, each calculated as
of a date prior to each scheduled interest rate adjustment date which will be
specified in the related Prospectus Supplement or (vi) the weekly average of
secondary market interest rates on six-month negotiable certificates of deposit.
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Period is less than the full term thereof, the related Mortgagor will not be
permitted to make any Draw during the period from the end of the related Draw
Period to the related maturity date. The Mortgagor for each Revolving Credit
Loan will be obligated to make monthly payments thereon in a minimum amount as
specified in the related Mortgage Note, which generally will not be less than
the Finance Charge for the related billing cycle. The Mortgagor for each
Revolving Credit Loan will be obligated to make a payment on the related
maturity date in an amount equal to the Account Balance thereof on such maturity
date, which may be a substantial principal amount. The maximum amount of any
Draw is equal to the excess, if any, of the Credit Limit over the principal
balance outstanding under such Mortgage Note at the time of such Draw.
Unless otherwise specified in the related Prospectus Supplement, (a) the
Finance Charge (the 'FINANCE CHARGE') for any billing cycle generally will be
equal to interest accrued on the average daily principal balance of such
Revolving Credit Loan for such billing cycle at the related Mortgage Rate, (b)
the Account Balance (the 'ACCOUNT BALANCE') on any day generally will be the
aggregate of the unpaid principal of the Revolving Credit Loan outstanding at
the beginning of such day, plus all related Draws funded on such day, plus the
sum of any unpaid Finance Charges and any unpaid fees, insurance premiums and
other charges (collectively, 'ADDITIONAL CHARGES') that are due on such
Revolving Credit Loan minus the aggregate of all payments and credits that are
applied to the repayment of any such Draws on such day, and (c) the 'principal
balance' on any day generally will be the related Account Balance minus the sum
of any unpaid Finance Charges and Additional Charges that are due on such
Revolving Credit Loan. Payments made by or on behalf of the Mortgagor for each
Revolving Credit Loan generally will be applied, first, to any unpaid Finance
Charges that are due thereon, second, to any unpaid Additional Charges that are
due thereon, and third, to any related Draws outstanding.
Unless otherwise specified in the related Prospectus Supplement, each
Revolving Credit Loan may be prepaid in full or in part at any time and without
penalty, the related Mortgagor will have the right during the related Draw
Period to make a Draw in the amount of any prepayment theretofore made with
respect to such Revolving Credit Loan. The Mortgage Note or Mortgage related to
each Revolving Credit Loan will generally contain a customary 'due-on-sale'
clause.
As to each Revolving Credit Loan, the Mortgagor's rights to receive Draws
during the Draw Period may be suspended, or the Credit Limit may be reduced, for
cause under a limited number of circumstances, including, but not limited to: a
materially adverse change in the Mortgagor's financial circumstances or a
non-payment default by the Mortgagor. However, with respect to each Revolving
Credit Loan, generally such suspension or reduction will not affect the payment
terms for previously drawn balances. In the event of default under a Revolving
Credit Loan, at the discretion of the Master Servicer, the Revolving Credit Loan
may be terminated and declared immediately due and payable in full. For this
purpose, a default includes, but is not limited to: the Mortgagor's failure to
make any payment as required; any action or inaction by the Mortgagor that
materially and adversely affects the Mortgaged Property or the rights in the
Mortgaged Property; or fraud or material misrepresentation by a Mortgagor in
connection with the Loan.
The proceeds of the Revolving Credit Loans may be used by the borrower to
improve the related Mortgaged Properties, may be retained by the related
Mortgagors or may be used for purposes unrelated to such Mortgaged Properties.
THE HOME EQUITY LOANS AND THE CONTRACTS
As specified in the related Prospectus Supplement, the Home Equity Loans
will be secured by first or junior liens on the related Mortgaged Properties,
mortgage loans for property improvement, debt consolidation and/or home equity
purposes. As specified in the related Prospectus Supplement, the Manufactured
Housing Contracts will be secured by either Manufactured Homes (as defined
below), located in any of the fifty states, the District of Columbia or the
Commonwealth or Puerto Rico, or by Mortgages on the real estate on which the
Manufactured Homes are located. As specified in the related Prospectus
Supplement, the Home Improvement Contracts will either be unsecured or secured
primarily by (i) Mortgages on one- to four-family residential properties that
are generally subordinate to other mortgages on the same Mortgaged Property, or
(ii) purchase money security interests in the Home Improvements financed
thereby. The Contracts will be conventional contracts or contracts partially
insured by the FHA pursuant to Title I. Unless otherwise specified in the
related Prospectus Supplement, the Home Equity Loans and the Contracts will be
fully amortizing and may have fixed interest rates or adjustable interest rates
and may provide for other payment characteristics as described below and in the
related Prospectus Supplement.
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Unless otherwise specified in the related Prospectus Supplement, the Home
Improvements securing the Home Improvement Contracts include, but are not
limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels. The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or lot
(or cooperative interest therein) on which to place such home or the purchase of
both a manufactured home loan and the lot (or cooperative interest therein) on
which such home is placed.
Unless otherwise specified in the related Prospectus Supplement, the
manufactured homes (the 'MANUFACTURED HOMES') underlying the Manufactured
Housing Contracts will consist of manufactured homes within the meaning of Title
42 of the United States Code, Section 5402(6). Section 5402(6) defines a
'manufactured home' as 'a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width, forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air-conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of HUD and complies with the standards
established under [this] chapter.'
Manufactured Homes and Home Improvements, unlike Mortgaged Properties,
generally depreciate in value. Consequently, at any time after origination it is
possible, especially in the case of Contracts with high Loan-to-Value Ratios at
origination, that the market value of a Manufactured Home or Home Improvement
may be lower than the principal amount outstanding under the related Contract.
TRUST ASSET PROGRAM
The Trust Assets will have been purchased by the Company, either directly
or indirectly through Residential Funding from Sellers. The Revolving Credit
Loans will generally have been originated in accordance with the Company's
underwriting standards or alternative underwriting criteria as described below
under 'Underwriting Standards Applicable to the Revolving Credit Loans' or as
described in the related Prospectus Supplement. The Home Equity Loans and the
Contracts generally will have been originated in accordance with the
underwriting standards described in the related Prospectus Supplement.
UNDERWRITING STANDARDS APPLICABLE TO THE REVOLVING CREDIT LOANS
General Standards
The Company's underwriting standards with respect to the Revolving Credit
Loans will generally conform to those published in Residential Funding's Seller
Guide (together with Residential Funding's Servicer Guide, the 'GUIDE,' as
modified from time to time), including the provisions of the Guide applicable to
the Company's Home Equity Program (the 'HOME EQUITY PROGRAM'). The underwriting
standards as set forth in the Guide are continuously revised based on
opportunities and prevailing conditions in the residential mortgage market, the
consumer lending market and the market for mortgage securities. The Revolving
Credit Loans may be underwritten by Residential Funding or by a designated third
party. In certain circumstances, however, the Revolving Credit Loans may be
underwritten only by the Seller with little or no review performed by
Residential Funding. See 'Underwriting Standards Applicable to the Revolving
Credit Loans -- Guide Standards' and 'Qualifications of Sellers.' Residential
Funding or a designated third party may perform only sample quality assurance
reviews to determine whether the Revolving Credit Loans in any Pool were
underwritten in accordance with applicable standards.
With respect to the Company's underwriting standards, as well as any other
underwriting standards that may be applicable to any Revolving Credit Loans,
such underwriting standards generally include a set of specific criteria
pursuant to which the underwriting evaluation is made. However, the application
of such underwriting standards does not imply that each specific criterion was
satisfied individually. Rather, a Revolving Credit Loan will be considered to be
originated in accordance with a given set of underwriting standards if, based on
an overall qualitative evaluation, the loan is in substantial compliance with
such underwriting standards. For example, a Revolving Credit Loan may be
considered to comply with a set of underwriting
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standards, even if one or more specific criteria included in such underwriting
standards were not satisfied, if other factors compensated for the criteria that
were not satisfied or if the Revolving Credit Loan is considered to be in
substantial compliance with the underwriting standards.
In addition, the Company purchases Revolving Credit Loans which do not
conform to the underwriting standards set forth in the Guide. Certain of the
Revolving Credit Loans will be purchased in negotiated transactions, and such
negotiated transactions may be governed by agreements ('MASTER COMMITMENTS')
relating to ongoing purchases of Revolving Credit Loans by Residential Funding,
from Sellers who will represent that the Revolving Credit Loans have been
originated in accordance with underwriting standards agreed to by Residential
Funding. Residential Funding, on behalf of the Company or a designated third
party, will generally review only a limited portion of the Revolving Credit
Loans in any delivery of such Revolving Credit Loans from the related Seller for
conformity with the applicable underwriting standards. Certain other Revolving
Credit Loans will be purchased from Sellers who will represent that the
Revolving Credit Loans were originated pursuant to underwriting standards
acceptable to Residential Funding.
The level of review, if any, by Residential Funding or the Company of any
Revolving Credit Loan for conformity with the applicable underwriting standards
will vary depending on a number of factors, including (i) factors relating to
the experience and status of the Seller, and (ii) factors relating to the
specific Revolving Credit Loan, including the principal amount or Credit Limit,
the Combined Loan-to-Value Ratio, the loan type or loan program, and the
applicable credit score of the related Mortgagor used in connection with the
origination of the Revolving Credit Loan (as determined based on a credit
scoring model acceptable to the Company). Generally, such credit scoring models
provide a means for evaluating the information about a prospective borrower that
is available from a credit reporting agency. The underwriting criteria
applicable to any program under which the Mortgage Loans may be originated may
provide that qualification for the loan, the level of review of the loan's
documentation, or the availability of certain loan features (such as maximum
loan amount, maximum Loan-to-Value Ratio, property type and use, and
documentation level) may depend on the mortgagor's credit score.
The underwriting standards utilized in negotiated transactions and Master
Commitments and the underwriting standards applicable to Revolving Credit Loans
underlying Private Securities may vary substantially from the underwriting
standards set forth in the Guide. Such underwriting standards are generally
intended to provide an underwriter with information to evaluate the borrower's
repayment ability and the value of the Mortgaged Property as collateral. Due to
the variety of underwriting standards and review procedures that may be
applicable to the Revolving Credit Loans included in any Pool, the related
Prospectus Supplement generally will not distinguish among the various
underwriting standards applicable to the Revolving Credit Loans nor describe any
review for compliance with applicable underwriting standards performed by the
Company or Residential Funding. Moreover, there can be no assurance that every
Revolving Credit Loan was originated in conformity with the applicable
underwriting standards in all material respects, or that the quality or
performance of Revolving Credit Loans underwritten pursuant to varying standards
as described above will be equivalent under all circumstances. In the case of a
Designated Seller Transaction, the applicable underwriting standards will be
those of the Designated Seller or of the originator of the Revolving Credit
Loans, and will be described in the related Prospectus Supplement.
The Company, either directly or indirectly through Residential Funding,
will also purchase Revolving Credit Loans from its affiliates, including GMAC
Mortgage Corporation, Residential Money Centers, Inc. and HomeComings Financial
Network, Inc., with underwriting standards generally in accordance with the
Guide or as otherwise agreed to by the Company. However, in certain limited
circumstances, such Revolving Credit Loans may be employee or preferred customer
loans with respect to which, in accordance with such affiliate's mortgage loan
programs, income, asset and employment verifications and appraisals may not have
been required. With respect to Revolving Credit Loans made under any employee
loan program maintained by Residential Funding, or its affiliates, in certain
limited circumstances preferential interest rates may be allowed. Neither the
Company nor Residential Funding will review any affiliate's mortgage loans for
conformity with the underwriting standards set forth in the Guide.
Guide Standards
The following is a brief description of the underwriting standards under
the Home Equity Program set forth in the Guide for full documentation loan
programs. Initially, a prospective borrower (other than a trust if the
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trust is the borrower) is required to fill out a detailed application providing
pertinent credit information. As part of the application, the borrower is
required to provide a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the borrower's
credit history with merchants and lenders and any record of bankruptcy. Under
the Home Equity Program, the borrower generally must show, among other things, a
minimum of one year credit history reported on the credit report and that no
mortgage delinquencies (thirty days or greater) in the past 12 months existed.
Borrowers who have less than a 12 month first mortgage payment history may be
subject to certain additional lending restrictions. In addition, under the Home
Equity Program, borrowers with a previous foreclosure or bankruptcy within the
past seven years may not be allowed and a borrower generally must satisfy all
judgments, liens and other legal actions with an original amount of $1,000 or
greater prior to closing. In addition, an employment verification is obtained
which reports the borrower's current salary and may contain the length of
employment and an indication as to whether it is expected that the borrower will
continue such employment in the future. If a prospective borrower is self-
employed, the borrower may be required to submit copies of signed tax returns.
The borrower may also be required to authorize verification of deposits at
financial institutions where the borrower has accounts. In the case of a
Revolving Credit Loan secured by a property owned by a trust, the foregoing
procedures may be waived where the Mortgage Note is executed on behalf of the
trust.
Unless otherwise specified in the related Prospectus Supplement, an
appraisal is made of the Mortgaged Property securing each Revolving Credit Loan.
Such appraisals may be performed by appraisers independent from or affiliated
with the Company, Residential Funding or their affiliates. Such appraisals,
however, will not establish that the Mortgaged Properties provide assurance of
repayment of the Revolving Credit Loans. See 'Risk Factors' and 'Servicing of
Trust Assets -- Realization Upon Defaulted Loans' herein. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. In certain circumstances, the
appraiser is only required to perform an exterior inspection of the property.
The appraisal is based on various factors, including the market value of
comparable homes and the cost of replacing the improvements. Except as otherwise
provided in the related Prospectus Supplement, under the Home Equity Program,
each appraisal is required to be dated no more than 180 days prior to the date
of origination of the Revolving Credit Loan; provided, that depending on the
Credit Limit an earlier appraisal may be utilized if such appraisal was made not
earlier than two years prior to the date of origination of the mortgage loan and
the related appraiser certifies that the value of the related mortgaged property
has not declined since the date of the original appraisal or if a field review
or statistical property valuation is obtained. Title searches are undertaken in
most cases, and title insurance is required on all Revolving Credit Loans with
Credit Limits in excess of $100,000.
Under the Home Equity Program, the CLTV is generally calculated by
reference to the lower of the appraised value as so determined or the sales
price, if the Revolving Credit Loan is originated concurrently with or not more
than 12 months after the origination of a first mortgage loan. In all other
cases, the value used is generally the appraised value as so determined.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet the borrower's monthly obligations
on the proposed mortgage loan and other expenses related to the home (such as
property taxes and hazard insurance) and other financial obligations (including
debt service on any related mortgage loan secured by a senior lien on the
related Mortgaged Property). Unless otherwise provided in the related Prospectus
Supplement, for qualification purposes the monthly payment will be assumed to be
an amount equal to 1.00% times the applicable Credit Limit. The Mortgage Rate in
effect from the origination date of a Revolving Credit Loan to the first
adjustment date generally will be lower, and may be significantly lower, than
the sum of the then applicable Index and Gross Margin. Unless otherwise
specified in the related Prospectus Supplement, the Revolving Credit Loans will
not provide for negative amortization. Payment of the full outstanding principal
balance at maturity may depend on the borrower's ability to obtain refinancing
or to sell the Mortgaged Property prior to the maturity of the mortgage loan,
and there can be no assurance that such refinancing will be available to the
borrower or that such a sale will be possible.
The underwriting standards set forth in the Guide may be varied in
appropriate cases, including in 'limited' or 'reduced loan documentation'
mortgage loan programs. Limited documentation programs generally permit fewer
supporting documents to be obtained or waive income, asset and employment
documentation requirements, and limited documentation programs generally
compensate for increased credit
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risk by placing greater emphasis on either the review of the property to be
financed or the borrower's ability to repay the Revolving Credit Loan. For
example, under Residential Funding's Easy Docs limited mortgage loan
documentation program, certain submission requirements regarding income
verification and debt-to-income ratios are removed, but the Seller is still
required to perform a thorough credit underwriting of the mortgage loan.
Generally, in order to be eligible for a reduced loan documentation program, a
Mortgagor must have a good credit history, and other compensating factors (such
as a relatively low Combined Loan-to-Value Ratio, or other favorable
underwriting factors) must be present and the borrower's eligibility for such
program may be determined by use of a credit scoring model.
The Home Equity Program sets forth certain limitations with respect to the
CLTV for the Revolving Credit Loans and certain restrictions with respect to any
related underlying first mortgage loan. The underwriting guidelines for the Home
Equity Program generally permit CLTV's as high as 100% except as otherwise
provided in the related Prospectus Supplement; however, the maximum permitted
CLTV may be reduced due to a variety of underwriting criteria. In areas where
property values are considered to be declining, the maximum permitted CLTV is
75%. The underwriting guidelines also include restrictions based on the
borrower's debt-to-income ratio. In addition to the foregoing, an evaluation of
the prospective borrower's credit quality will be made based on a credit scoring
model approved by the Company. The Home Equity Program underwriting guidelines
include minimum credit score levels that may apply depending on certain factors
of the Revolving Credit Loan. The required Gross Margins for Revolving Credit
Loans purchased under the Home Equity Program, as announced from time to time,
vary based on a number of factors including CLTV, Credit Limit, documentation
level, property type, and borrower debt-to-income ratio and credit score.
In its evaluation of mortgage loans which have twenty-four or more months
of payment experience, Residential Funding generally places greater weight on
payment history and may take into account market and other economic trends while
placing less weight on underwriting factors generally applied to newly
originated mortgage loans.
QUALIFICATIONS OF SELLERS
Except with respect to Designated Seller Transactions or unless otherwise
specified in the related Prospectus Supplement, each Seller (other than the
Federal Deposit Insurance Corporation (the 'FDIC') and investment banking firms)
will have been approved by Residential Funding for participation in Residential
Funding's loan purchase program. In determining whether to approve a seller for
participation in the loan purchase program, Residential Funding generally will
consider, among other things, the financial status (including the net worth) of
the seller, the previous experience of the seller in originating home equity,
home improvement, manufactured housing or first mortgage loans, the prior
delinquency and loss experience of the seller, the underwriting standards
employed by the seller and the quality control and, if applicable, servicing
operations established by the seller. There can be no assurance that any Seller
presently meets any qualifications or will continue to meet any qualifications
at the time of inclusion of mortgage loans sold by it in the Trust Fund for a
series of Notes, or thereafter. If a Seller becomes subject to the direct or
indirect control of the FDIC, or if a Seller's net worth, financial performance
or delinquency and foreclosure rates deteriorate, such institution may continue
to be treated as a Seller. Any such event may adversely affect the ability of
any such Seller to repurchase the Mortgage Loans in the event of a breach of a
representation or warranty which has not been cured.
Residential Funding generally monitors which Sellers are under control of
the FDIC or are insolvent, otherwise in receivership or conservatorship or
financially distressed. Such Seller may make no representations and warranties
with respect to Trust Assets sold by it. The FDIC (either in its corporate
capacity or as receiver for a depository institution) may also be a Seller of
Trust Assets, in which event neither the FDIC nor the related depository
institution may make representations and warranties with respect to the Trust
Assets sold, or only limited representations and warranties may be made (for
example, that the related legal documents are enforceable). The FDIC may have no
obligation to repurchase any Trust Asset for a breach of a representation and
warranty.
Unless otherwise specified in the related Prospectus Supplement, the
qualifications required of Sellers for approval by Residential Funding as
participants in its loan purchase programs may not apply to Designated Sellers.
To the extent the Designated Seller fails to or is unable to repurchase the
Trust Asset due to a breach of representation and warranty, neither the Company,
Residential Funding nor any other entity will have assumed
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the representations and warranties, and any related losses will be borne by the
Noteholders or by the credit enhancement, if any.
REPRESENTATIONS RELATING TO TRUST ASSETS
Except as set forth above, each Seller (other than a Designated Seller)
will have made representations and warranties to Residential Funding with
respect to the Trust Assets sold by such Seller. However, except as otherwise
provided in the related Prospectus Supplement, the representations and
warranties of the Seller will not be assigned to the Indenture Trustee for the
benefit of the holders of the related series of Notes, and therefore a breach of
the representations and warranties of the Seller generally will not be
enforceable on behalf of the Trust Fund.
In the case of a Pool consisting of Trust Assets purchased by the Company
from Sellers through Residential Funding, Residential Funding, except in the
case of a Designated Seller Transaction or as to Trust Assets underlying any
Private Securities or unless otherwise specified in the related Prospectus
Supplement, will have made certain limited representations and warranties
regarding the Trust Assets to the Company at the time that they are sold to the
Company. Such representations and warranties will generally include, among other
things, that: (i) as of the Cut-off Date, the information set forth in a listing
of the related Trust Assets is true and correct in all material respects; (ii)
Residential Funding was the sole holder and owner of the Trust Assets free and
clear of any and all liens and security interests; (iii) each Trust Asset
complied in all material respects with all applicable local, state and federal
laws; (iv) except as otherwise indicated in the related Prospectus Supplement,
no Trust Asset is one month or more delinquent in payment of principal and
interest; (v) there is no delinquent tax, or to the best of Residential
Funding's knowledge, assessment lien against any Mortgaged Property; and (vi) to
the best of Residential Funding's knowledge, any Contract that is partially
insured by the FHA pursuant to Title I was originated in accordance with
applicable FHA regulations and is insured, without set-off, surcharge or defense
by the FHA. In the event of a breach of a representation or warranty made by
Residential Funding that materially adversely affects the interests of the
Noteholders in a Trust Asset, Residential Funding will be obligated to
repurchase or substitute for such Trust Asset as described below. In addition,
Residential Funding will be obligated to repurchase or substitute for any
Revolving Credit Loan, Home Equity Loan and any Contract secured by a lien on
Mortgaged Property as to which it is discovered that the related Mortgage is not
a valid lien on the related Mortgaged Property having at least the priority set
forth with respect to such Revolving Credit Loan, Home Equity Loan or such
Contract, as applicable, in the listing of related Trust Assets, subject only to
(a) liens of real property taxes and assessments not yet due and payable, (b)
covenants, conditions and restrictions, rights of way, easements and other
matters of public record as of the date of recording of such Mortgage and
certain other permissible title exceptions, (c) other matters to which like
properties are commonly subject which do not materially adversely affect the
value, use, enjoyment or marketability of the Mortgaged Property, and (d) if
applicable, the liens of the related senior mortgage loans. In addition, with
respect to any Revolving Credit Loan, Home Equity Loan or Contract as to which
the Company delivers to the Indenture Trustee or the custodian an affidavit
certifying that the original Mortgage Note has been lost or destroyed, if such
Trust Asset subsequently is in default and the enforcement thereof or of the
related Mortgage is materially adversely affected by the absence of the original
Mortgage Note, Residential Funding will be obligated to repurchase or substitute
for such Trust Asset, in the manner described below. However, Residential
Funding will not be required to repurchase or substitute for any Trust Asset as
described above if the circumstances giving rise to such requirement also
constitute fraud in the origination of the related Revolving Credit Loan, Home
Equity Loan or Contract. Furthermore, because the listing of the related Trust
Assets generally contains information with respect to the Trust Assets as of the
Cut-off Date, prepayments and, in certain limited circumstances, modifications
to the interest rate and principal and interest payments may have been made with
respect to one or more of the related Trust Assets between the Cut-off Date and
the Closing Date. Residential Funding will not be required to purchase or
substitute for any Trust Asset as a result of such prepayment or modification.
In a Designated Seller Transaction, unless otherwise specified in the
related Prospectus Supplement, the Designated Seller will have made certain
representations and warranties regarding the Trust Assets to the Company
generally similar to those made in the preceding paragraph by Residential
Funding.
The Company will assign to the Owner Trustee (or the Special Purpose
Entity, if applicable) all of its right, title and interest in each agreement by
which it purchased a Trust Asset from Residential Funding or a
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Designated Seller, insofar as such agreement relates to the representations and
warranties made by a Designated Seller or Residential Funding, as the case may
be, in respect of such Trust Asset and any remedies provided for with respect to
any breach of such representations and warranties. If a Designated Seller or
Residential Funding, as the case may be, cannot cure a breach of any
representation or warranty made by it in respect of a Trust Asset which
materially and adversely affects the interests of the Noteholders in such Trust
Asset, within 90 days after notice from the Master Servicer, such Designated
Seller or Residential Funding, as the case may be, will be obligated to purchase
such Trust Asset at a price (the 'PURCHASE PRICE') set forth in the related
Agreement, which Purchase Price generally will be equal to the principal balance
thereof as of the date of purchase plus accrued and unpaid interest to the first
day of the month following the month of repurchase at the Mortgage Rate (less
the amount, expressed as a percentage per annum, payable in respect of master
servicing compensation or subservicing compensation, as applicable, and if
applicable, the Excluded Spread (as defined herein)).
Unless otherwise specified in the related Prospectus Supplement, as to any
such Trust Asset required to be purchased by Residential Funding as provided
above, rather than purchase the Trust Asset, Residential Funding may, at its
sole option, remove such Trust Asset (a 'DELETED LOAN') from the Trust Fund (or
from the assets underlying any Private Securities, if applicable) and cause the
Company to substitute in its place another Trust Asset of like kind (an
'ELIGIBLE SUBSTITUTE LOAN'). The related Prospectus Supplement will set forth
the condition of any Eligible Substitute Loan. The related Agreement may include
additional requirements or additional provisions relating to meeting the
foregoing requirements on an aggregate basis where a number of substitutions
occur contemporaneously. Unless otherwise specified in the related Prospectus
Supplement, a Designated Seller will have no option to substitute for a Trust
Asset that it is obligated to repurchase in connection with a breach of a
representation and warranty.
The Master Servicer will be required under the Servicing Agreement to use
its best reasonable efforts to enforce this purchase or substitution obligation
for the benefit of the Indenture Trustee and the Noteholders, using practices it
would employ in its good faith business judgment and which are normal and usual
in its general mortgage servicing activities; provided, however, that this
purchase or substitution obligation will not become an obligation of the Master
Servicer in the event the Designated Seller or Residential Funding, as the case
may be, fails to honor such obligation. The Master Servicer will be entitled to
reimbursement for any costs and expenses incurred in pursuing such a purchase or
substitution obligation, including but not limited to any costs or expenses
associated with litigation. In instances where a Designated Seller is unable, or
disputes its obligation, to purchase affected Trust Assets, the Master Servicer,
employing the standards set forth in the preceding sentence, may negotiate and
enter into one or more settlement agreements with such Designated Seller that
may provide for, among other things, the purchase of only a portion of the
affected Trust Assets or coverage of certain loss amounts. Any such settlement
could lead to losses on the Trust Assets which would be borne by the Credit
Enhancement supporting the related series of Notes, and to the extent not
available, by the Noteholders of such series. Furthermore, if applicable, the
Master Servicer may pursue foreclosure (or similar remedies) concurrently with
pursuing any remedy for a breach of a representation and warranty. However, the
Master Servicer is not required to continue to pursue both such remedies if it
determines that one such remedy is more likely to result in a greater recovery.
In accordance with the above described practices, the Master Servicer will not
be required to enforce any purchase of a Designated Seller arising from any
misrepresentation by the Designated Seller, if the Master Servicer determines in
the reasonable exercise of its business judgment that the matters related to
such misrepresentation did not directly cause or are not likely to directly
cause a loss on the related Trust Asset. If the Designated Seller fails to
repurchase and no breach of either the Company's or Residential Funding's
representations has occurred, the Designated Seller's purchase obligation will
not become an obligation of the Company or Residential Funding. Unless otherwise
specified in the related Prospectus Supplement, the foregoing obligations will
constitute the sole remedies available to Noteholders or the Indenture Trustee
for a breach of any representation by a Designated Seller or by Residential
Funding in its capacity as a seller of Trust Assets to the Company, or for any
other event giving rise to such obligations as described above.
Neither the Company nor the Master Servicer will be obligated to purchase a
Trust Asset if a Designated Seller defaults on its obligation to do so, and no
assurance can be given that the Designated Sellers will carry out such
obligations with respect to Trust Assets. Such a default by a Designated Seller
is not a default by the Company or by the Master Servicer. Any Trust Asset not
so purchased or substituted for shall remain in the related Trust Fund and any
losses related thereto shall be allocated to the related credit enhancement, and
to the extent not available to the related Notes.
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Notwithstanding the foregoing, with respect to any Designated Seller that
requests Residential Funding's consent to the transfer of subservicing rights
relating to any Trust Assets to a successor servicer, Residential Funding may
release such Designated Seller from liability under its representations and
warranties described above, upon the assumption of such successor servicer of
the Designated Seller's liability for such representations and warranties as of
the date they were made. In that event, Residential Funding's rights under the
instrument by which such successor servicer assumes the Designated Seller's
liability will be assigned to the Owner Trustee (or the Special Purpose Entity,
if applicable), and such successor servicer shall be deemed to be the Designated
Seller for purposes of the foregoing provisions.
SUBSERVICING
The servicing for each Trust Asset will generally either be retained by the
Seller (or its designee approved by the Master Servicer) as Subservicer, or will
be released by the Seller to the Master Servicer and will be subsequently
transferred to a Subservicer approved by the Master Servicer, and in either case
will thereafter be serviced by the Subservicer pursuant to an agreement between
the Master Servicer and the Subservicer (a 'SUBSERVICING AGREEMENT'). The Master
Servicer may, but is not obligated to, assign such subservicing to designated
subservicers which will be qualified Sellers and which may include GMAC Mortgage
Corporation or its affiliates. While such Subservicing Agreement will be a
contract solely between the Master Servicer and the Subservicer, the Servicing
Agreement applicable to any series of Notes will provide that, if for any reason
the Master Servicer for such series of Notes is no longer the master servicer of
the related Trust Assets, any successor Master Servicer must recognize the
Subservicer's rights and obligations under such Subservicing Agreement. For
further information relating to subservicing see 'Servicing of Trust
Assets-Subservicing' herein.
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DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued in series. Each series of Notes will be issued
pursuant to an Indenture between the related Trust Fund and the entity named in
the related Prospectus Supplement as Indenture Trustee with respect to such
series. A form of Indenture has been filed as an exhibit to the Registration
Statement of which this prospectus forms a part. Each Indenture and Trust
Agreement will be filed with the Commission as an exhibit to a Form 8-K. The
following summaries (together with additional summaries under 'The Agreements'
below as well as other pertinent information included elsewhere in this
Prospectus, and subject to the related Prospectus Supplement) do not describe
all terms thereof but reflect the material provisions relating to the Notes
common to each Agreement.
Each series of Notes may consist of any one or a combination of the
following: (i) a single class of Notes; (ii) two or more classes of Notes, one
or more classes of Notes that are senior to any class or classes of any class or
classes of Subordinate Securities as described in the respective Prospectus
Supplement (any such series, a 'SENIOR/SUBORDINATE SERIES'); (iii) one or more
classes of Strip Notes which will be entitled to (a) principal payments, with
disproportionate, nominal or no interest payments or (b) interest payments, with
disproportionate, nominal or no principal payments; (iv) two or more classes of
Notes which differ as to the timing, sequential order, rate or amount of
payments of principal or interest or both, or as to which payments of principal
or interest or both on any class may be made upon the occurrence of specified
events, in accordance with a schedule or formula (including 'planned
amortization classes' and 'targeted amortization classes' and 'very accurately
defined maturity classes'), or on the basis of collections from designated
portions of the Pool, which series may include one or more classes of Accrual
Notes with respect to which certain accrued interest will not be paid but rather
will be added to the principal balance thereof on each Payment Date for the
period described in the related Prospectus Supplement; or (v) similar classes of
Notes with other payment characteristics, as described in the related Prospectus
Supplement. Credit support for each series of Notes will be provided by a
Financial Guaranty Insurance Policy, Letter of Credit, Reserve Fund, by the
subordination of one or more classes of Subordinate Securities,
Overcollateralization or other credit enhancement as described in the Prospectus
Supplement or under 'Description of Credit Enhancement,' or by any combination
of the foregoing.
FORM OF NOTES
As specified in the related Prospectus Supplement, the Notes of each series
will be issued either as physical certificates or in book-entry form. If issued
as physical certificates, the Notes will be in fully registered form only in the
denominations specified in the related Prospectus Supplement, and will be
transferrable and exchangeable at the corporate trust office of the person
appointed under the related Agreement to register the Notes (the 'NOTE
REGISTRAR'). No service charge will be made for any registration of exchange or
transfer of Notes, but the Indenture Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge. The term 'NOTEHOLDER'
as used herein refers to the entity whose name appears on the records of the
Note Registrar (or, if applicable, a transfer agent) as the registered holder
thereof, except as otherwise indicated in the related Prospectus Supplement.
If issued in book-entry form certain classes of a series of Notes will be
initially issued through the book-entry facilities of The Depository Trust
Company ('DTC'), or Cedel Bank, societeanonyme ('CEDEL') or the Euroclear System
('EUROCLEAR') (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems, or
through such other depository or facility as may be specified in the related
Prospectus Supplement. As to any such class of Notes so issued ('BOOK-ENTRY
NOTES'), the record holder of such Notes will be DTC's nominee. CEDEL and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries (the 'DEPOSITARIES'), which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, which holds securities for its participating organizations
('DTC PARTICIPANTS,' and together with the CEDEL and Euroclear participating
organizations 'PARTICIPANTS') and facilitates the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in the accounts of Participants. Participants include
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securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations. Other institutions that are not
Participants but clear through or maintain a custodial relationship with
Participants (such institutions, 'INDIRECT PARTICIPANTS') have indirect access
to DTC's clearance system.
Unless otherwise specified in the related Prospectus Supplement, no person
acquiring an interest in any Book-Entry Notes (each such person, a 'BENEFICIAL
OWNER') will be entitled to receive a Note representing such interest in
registered, certificated form, unless either (i) DTC ceases to act as depository
in respect thereof and a successor depository is not obtained or (ii) the
Indenture Trustee elects in its sole discretion to discontinue the registration
of such Notes through DTC. Prior to any such event, Beneficial Owners will not
be recognized by the Indenture Trustee or the Master Servicer as holders of the
related Notes for purposes of the related Agreement, and Beneficial Owners will
be able to exercise their rights as owners of such Notes only indirectly through
DTC, Participants and Indirect Participants. Any Beneficial Owner that desires
to purchase, sell or otherwise transfer any interest in Book-Entry Notes may do
so only through DTC, either directly if such Beneficial Owner is a Participant
or indirectly through Participants and, if applicable, Indirect Participants.
Pursuant to the procedures of DTC, transfers of the beneficial ownership of any
Book-Entry Notes will be required to be made in minimum denominations specified
in the related Prospectus Supplement. The ability of a Beneficial Owner to
pledge Book-Entry Notes to persons or entities that are not Participants in the
DTC system, or to otherwise act with respect to such Notes, may be limited
because of the lack of physical certificates evidencing such Notes and because
DTC may act only on behalf of Participants.
Because of time zone differences, the securities account of a CEDEL or
Euroclear participant as a result of a transaction with a DTC Participant (other
than a depositary holding on behalf of CEDEL or Euroclear) will be credited
during subsequent securities settlement processing day (which must be a business
day for CEDEL or Euroclear, as the case may be) immediately following the DTC
settlement date. Such credits or any transactions in such securities settled
during such processing will be reported to the relevant Euroclear Participant or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant to a DTC Participant (other than the depositary for CEDEL or
Euroclear) will be received with value on the DTC settlement date, but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant Depositaries; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC. CEDEL
Participants and Euroclear Participants may not deliver instructions directly to
the Depositaries.
CEDEL, as a professional depository, holds securities for its participating
organizations ('CEDEL PARTICIPANTS') and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. As a professional
depository, CEDEL is subject to regulation by the Luxembourg Monetary Institute.
Euroclear was created to hold securities for participants of Euroclear
('EUROCLEAR PARTICIPANTS') and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty
Trust Company of New York (the 'EUROCLEAR OPERATOR'), under contract with
Euroclear Clearance Systems S.C., a Belgian co-operative corporation (the
'CLEARANCE COOPERATIVE'). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Clearance
Cooperative. The Clearance Cooperative establishes
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policy for Euroclear on behalf of Euroclear Participants. The Euroclear Operator
is the Belgian branch of a New York banking corporation which is a member bank
of the Federal Reserve System. As such, it is regulated and examined by the
Board of Governors of the Federal Reserve System and the New York State Banking
Department, as well as the Belgian Banking Commission. Securities clearance
accounts and cash accounts with the Euroclear Operator are governed by the Terms
and Conditions Governing Use of Euroclear and the related Operating Procedures
of the Euroclear System and applicable Belgian law (collectively, the 'TERMS AND
CONDITIONS'). The Terms and Conditions govern transfers of securities and cash
within Euroclear, withdrawals of securities and cash from Euroclear, and
receipts of payments with respect to securities in Euroclear. All securities in
Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts.
Payments in respect of the Book-Entry Notes will be forwarded by the
Indenture Trustee to DTC, and DTC will be responsible for forwarding such
payments to Participants, each of which will be responsible for disbursing such
payments to the Beneficial Owners it represents or, if applicable, to Indirect
Participants. Accordingly, Beneficial Owners may experience delays in the
receipt of payments in respect of their Notes. Under DTC's procedures, DTC will
take actions permitted to be taken by holders of any class of Book-Entry Notes
under the related Agreement only at the direction of one or more Participants to
whose account the Book-Entry Notes are credited and whose aggregate holdings
represent no less than any minimum amount of Percentage Interests or voting
rights required therefor. DTC may take conflicting actions with respect to any
action of Noteholders of any class to the extent that Participants authorize
such actions. None of the Master Servicer, the Company, the Indenture Trustee,
the Owner Trustee or any of their respective affiliates will have any liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the Book-Entry Notes, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
ASSIGNMENT OF THE TRUST ASSETS
At the time of issuance of a series of Notes, the Company will cause the
Trust Assets and any other assets being included in the related Trust Fund to be
assigned without recourse to the Owner Trustee or its nominee (which may be the
Custodian), on behalf of the related Trust, together with, if specified in the
related Prospectus Supplement, all principal and interest received on or with
respect to such Trust Assets after the Cut-off Date (other than principal and
interest due on or before the Cut-off Date and any Excluded Spread). The Owner
Trustee will, concurrently with such assignment, grant a security interest in
the related Trust Fund to the Indenture Trustee to secure such Notes. Each Trust
Asset will be identified in a schedule appearing as an exhibit to the related
Agreement. Such schedule will include, among other things, information as to the
principal balance of each Trust Asset as of the Cut-off Date, as well as
information respecting the Mortgage Rate, the currently scheduled monthly
payment of principal and interest, the maturity of the Mortgage Note and the
Combined Loan-to-Value Ratio at origination or modification.
The Company will, as to each Trust Asset other than Trust Assets underlying
any Private Securities, deliver to an entity specified in the related Prospectus
Supplement (which may be the Indenture Trustee, a Custodian or another entity
appointed by the Indenture Trustee) the legal documents relating to such Trust
Assets that are in possession of the Company, which may include, as applicable,
depending upon whether such Trust Asset is secured by a lien on Mortgaged
Property: (i) the Mortgage Note (and any modification or amendment thereto)
endorsed without recourse either in blank or to the order of the Owner Trustee
or the Indenture Trustee (or a nominee thereof); (ii) the Mortgage (except for
any Mortgage not returned from the public recording office) with evidence of
recording indicated thereon or, in the case of a Cooperative Loan, the
respective security agreements and any applicable UCC financing statements;
(iii) an assignment in recordable form of the Mortgage (or, with respect to a
Cooperative Loan, an assignment of the respective security agreements, any
applicable UCC financing statements, recognition agreements, relevant stock
certificates, related blank stock powers and the related proprietary leases or
occupancy agreements); (iv) if applicable, any riders or modifications to such
Mortgage Note and Mortgage, together with certain other documents at such times
as set forth in the related Agreement; and (v) the original Contract and copies
of documents and instruments related to each Contract and, other than in the
case of unsecured Contracts, the security interest in the property securing such
Contract. Such assignments may be blanket assignments covering Mortgages secured
by Mortgaged Properties located in the same county, if permitted by law. If so
specified in the related Prospectus Supplement, the Company may not be
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required to deliver one or more of such documents if such documents are missing
from the files of the party from whom such Revolving Credit Loans, Home Equity
Loans and certain Contracts were purchased.
In the event that, with respect to any Revolving Credit Loan, Home Equity
Loan or Contract secured by a lien on Mortgaged Property, the Company cannot
deliver the Mortgage or any assignment with evidence of recording thereon
concurrently with the execution and delivery of the related Trust Agreement
because of a delay caused by the public recording office, the Company will
deliver or cause to be delivered to the Indenture Trustee, the Custodian or
another entity appointed by the Indenture Trustee a true and correct photocopy
of such Mortgage or assignment. The Company will deliver or cause to be
delivered to the Indenture Trustee or the Custodian such Mortgage or assignment
with evidence of recording indicated thereon after receipt thereof from the
public recording office or from the related Subservicer.
Assignments of the Revolving Credit Loans, Home Equity Loans and Contracts
secured by a lien on Mortgaged Property will be recorded in the appropriate
public recording office, except in states where, in the opinion of counsel
acceptable to the Indenture Trustee or Owner Trustee, such recording is not
required to protect the Indenture Trustee's or Owner Trustee's interests in such
Revolving Credit Loans, Home Equity Loans and Contracts against the claim of any
subsequent transferee or any successor to or creditor of the Company or the
originator of such Revolving Credit Loans, Home Equity Loans or Contracts, or
except as otherwise specified in the related Prospectus Supplement.
Under certain circumstances, as to any series of Notes, the Company may
have the option to repurchase Trust Assets from the Trust Fund for cash, or in
exchange for other Trust Assets or Permitted Investments. Alternatively, for any
series of Notes secured by Private Securities, the Company may have the right to
so repurchase Revolving Credit Loans, Home Equity Loans and/or Contracts from
the entity that issued such Private Securities. All provisions relating to such
optional repurchase provisions will be described in the related Prospectus
Supplement.
REVIEW OF TRUST ASSETS
The Indenture Trustee will be authorized to appoint one or more custodians
(each, a 'CUSTODIAN') pursuant to a custodial agreement to maintain possession
of and review documents relating to the Trust Assets as the agent of the
Indenture Trustee or, following payment in full of the Notes and discharge of
the Indenture, the Owner Trustee. The identity of such Custodian, if any, will
be set forth in the related Prospectus Supplement.
The Indenture Trustee or the Custodian will hold such documents in trust
for the benefit of the holders of the Securities (the 'SECURITYHOLDERS') and,
generally will review such documents within such period specified in the related
Prospectus Supplement. If any such document is found to be defective in any
material respect, the Indenture Trustee or such Custodian shall notify the
Master Servicer and the Company, and if so specified in the related Prospectus
Supplement, the Master Servicer, the Servicer or the Indenture Trustee shall
notify Residential Funding or the Designated Seller. If Residential Funding or,
in a Designated Seller Transaction, the Designated Seller cannot cure such
defect within such period specified in the related Prospectus Supplement after
notice of the defect is given to Residential Funding (or, if applicable, the
Designated Seller), Residential Funding (or, if applicable, the Designated
Seller) is required to, within such period specified in the related Prospectus
Supplement, either repurchase the related Trust Asset or any property acquired
in respect thereof from the Indenture Trustee, or if permitted substitute for
such Trust Asset a new Trust Asset in accordance with the standards set forth
herein. The Master Servicer will be obligated to enforce this obligation of
Residential Funding or the Designated Seller to the extent described above under
'Trust Asset Program -- Representations Relating to Trust Assets,' but such
obligation is subject to the provisions described below under 'Servicing of
Trust Assets -- Realization Upon Defaulted Loans.' There can be no assurance
that the applicable Designated Seller will fulfill its obligation to purchase
any Trust Asset as described above. Unless otherwise specified in the related
Prospectus Supplement, neither Residential Funding, the Master Servicer nor the
Company will be obligated to purchase or substitute for such Trust Asset if the
Designated Seller defaults on its obligation to do so. Unless otherwise
specified in the related Prospectus Supplement, the obligation to repurchase or
substitute for a Trust Asset constitutes the sole remedy available to the
Noteholders or the Indenture Trustee for a material defect in a constituent
document. Any Trust Asset not so purchased or substituted for shall remain in
the related Trust Fund.
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The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under the Servicing Agreement. Upon a breach of any such
representation of the Master Servicer which materially adversely affects the
interests of the Securityholders in a Trust Asset, the Master Servicer will be
obligated either to cure the breach in all material respects or to purchase the
Trust Asset at its Purchase Price (less unreimbursed advances, if applicable,
made by the Master Servicer with respect to such Trust Asset) or, unless
otherwise specified in the related Prospectus Supplement, to substitute for such
Trust Asset an Eligible Substitute Loan in accordance with the provisions for
such substitution described above under 'Trust Asset Program -- Representations
Relating to Trust Assets.' Unless otherwise specified in the related Prospectus
Supplement, this purchase obligation will constitute the sole remedy available
to Noteholders or the Indenture Trustee for such a breach of representation by
the Master Servicer. Any Trust Asset not so purchased or substituted for shall
remain in the related Trust Fund.
EXCESS SPREAD AND EXCLUDED SPREAD
The Company, the Master Servicer or any of their affiliates, or such other
entity as may be specified in the related Prospectus Supplement may retain or be
paid a portion of interest due with respect to the related Trust Assets. The
payment of any such portion of interest will be disclosed in the related
Prospectus Supplement. This payment may be in addition to any other payment
(such as the servicing fee) that any such entity is otherwise entitled to
receive with respect to the Trust Assets. Any such payment in respect of the
Trust Assets will represent a specified portion of the interest payable thereon
and as specified in the related Prospectus Supplement, will either be part of
the assets transferred to the related Trust Fund (the 'EXCESS SPREAD') or will
be excluded from the assets transferred to the related Trust Fund (the 'EXCLUDED
SPREAD'). The interest portion of a Realized Loss or Extraordinary Loss and any
partial recovery of interest in respect of the Trust Assets will be allocated
between the owners of any Excess Spread or Excluded Spread and the Noteholders
entitled to payments of interest as provided in the applicable Agreement.
PAYMENTS ON TRUST ASSETS; DEPOSITS TO PAYMENT ACCOUNT
Each Subservicer servicing a Trust Asset pursuant to a Subservicing
Agreement will establish and maintain an account (the 'SUBSERVICING ACCOUNT')
which generally meets the requirements set forth in the Guide from time to time
or is approved by Residential Funding. A Subservicer is required to deposit into
its Subservicing Account on a daily basis all amounts that are received by it in
respect of the Trust Assets, less its servicing or other compensation.
As specified in the Subservicing Agreement, the Subservicer must remit or
cause to be remitted to the Master Servicer all funds held in the Subservicing
Account with respect to Trust Assets that are required to be so remitted on a
periodic basis not less frequently than monthly. If so specified in the related
Prospectus Supplement, the Subservicer may also be required to advance on the
scheduled date of remittance any monthly installment of principal and interest,
less its servicing or other compensation, on any Trust Asset for which payment
was not received from the Mortgagor.
The Master Servicer will deposit or will cause to be deposited into an
account (the 'CUSTODIAL ACCOUNT') certain payments and collections received by
it subsequent to the Cut-off Date (other than payments due on or before the
Cut-off Date), as specifically set forth in the related Agreement, which (except
as otherwise provided therein) generally will include the following:
(i) payments on account of principal on the Trust Assets comprising a
Trust Fund;
(ii) payments on account of interest on the Trust Assets comprising
such Trust Fund, net of the portion of each payment thereof retained by the
Subservicer, if any, as its servicing or other compensation;
(iii) amounts (net of unreimbursed liquidation expenses and insured
expenses incurred, and unreimbursed Servicing Advances, if any, made by the
related Subservicer) received and retained in connection with the
liquidation of any defaulted Trust Asset, by foreclosure or otherwise
('LIQUIDATION PROCEEDS'), including all proceeds of any hazard or other
insurance policy or guaranty covering any Trust Asset in such Pool
including proceeds from FHA insurance (with respect to any Contract
partially insured by the FHA pursuant to Title I included in the Pool))
(together with any payments under any Letter 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
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the restoration of the related property or released to the Mortgagor in
accordance with the Master Servicer's normal servicing procedures;
(iv) proceeds of any Trust Asset in such Trust Fund purchased (or, in
the case of a substitution, certain amounts representing a principal
adjustment) by the Master Servicer, the Company, Residential Funding, any
Subservicer or Seller or any other person pursuant to the terms of the
related Agreement. See 'Trust Asset Program -- Representations Relating to
Trust Assets,' and ' -- Assignment of Trust Assets' above;
(v) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments of funds held in the
Custodial Account, as described below; and
(vi) any amounts required to be transferred from the Payment Account
to the Custodial Account.
In addition to the Custodial Account, the Master Servicer will establish
and maintain, in the name of the Indenture Trustee for the benefit of the
holders of each series of Notes, an account for the disbursement of payments on
the Trust Assets evidenced by each series of Notes (the 'PAYMENT ACCOUNT'). Both
the Custodial Account and the Payment Account must be either (i) maintained with
a depository institution whose debt obligations at the time of any deposit
therein are rated by any Rating Agency that rated any Notes of the related
series not less than a specified level comparable to the rating category of such
Notes, (ii) an account or accounts the deposits in which are fully insured to
the limits established by the FDIC, provided that any deposits not so insured
shall be otherwise maintained such that, as evidenced by an opinion of counsel,
the Noteholders have a claim with respect to the funds in such accounts or a
perfected first priority security interest in any collateral securing such funds
that is superior to the claims of any other depositors or creditors of the
depository institution with which such accounts are maintained, (iii) in the
case of the Custodial Account, a trust account or accounts maintained in either
the corporate trust department or the corporate asset services department of a
financial institution which has debt obligations that meet certain rating
criteria, (iv) in the case of the Payment Account, a trust account or accounts
maintained with the Indenture Trustee, or (v) such other account or accounts
acceptable to any applicable Rating Agency (an 'ELIGIBLE ACCOUNT'). The
collateral that is eligible to secure amounts in an Eligible Account is limited
to certain permitted investments, which are generally limited to United States
government securities and other investments that are rated, at the time of
acquisition, in one of the categories permitted by the related Agreement
('PERMITTED INVESTMENTS').
On the day set forth in the related Prospectus Supplement, the Master
Servicer will withdraw from the Custodial Account and deposit into the
applicable Payment Account, in immediately available funds, the amount to be
paid therefrom to Noteholders on such Payment Date, except as otherwise provided
in the related Prospectus Supplement. The Master Servicer or the Indenture
Trustee will also deposit or cause to be deposited into the Payment Account (i)
any payments under any Letter of Credit, Financial Guaranty Insurance Policy and
any amounts required to be transferred to the Payment Account from a Reserve
Fund, as described under 'Credit Enhancement' below or (iii) any amounts
required to be paid by the Master Servicer out of its own funds due to the
operation of a deductible clause in any blanket policy maintained by the Master
Servicer to cover hazard losses on the Trust Assets as described under
'Description of the Notes -- Hazard Insurance; Claims Thereunder' below, any
payments received on any Private Securities included in the Trust Fund and any
other amounts as set forth in the related Agreement.
The portion of any payment received by the Master Servicer in respect of a
Trust Asset that is allocable to Excess Spread or Excluded Spread, as
applicable, will generally be deposited into the Custodial Account, but any
Excluded Spread will not be deposited in the Payment Account for the related
series of Notes and will be paid as provided in the related Agreement.
Funds on deposit in the Custodial Account may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next Payment Date, and funds on deposit in the related Payment Account may be
invested in Permitted Investments maturing, in general, no later than the
Payment Date. Unless otherwise specified in the related Prospectus Supplement,
all income and gain realized from any such investment will be for the account of
the Master Servicer as additional servicing compensation. The amount of any loss
incurred in connection with any such investment must be deposited in the
Custodial Account or in the Payment Account, as the case may be, by the Master
Servicer out of its own funds upon realization of such loss.
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WITHDRAWALS FROM THE CUSTODIAL ACCOUNT
The Master Servicer may, from time to time, make withdrawals from the
Custodial Account for certain purposes, as specifically set forth in the related
Agreement, which (except as otherwise provided therein) generally will include
the following:
(i) to make deposits to the Payment Account in the amounts and in the
manner provided in the related Agreement and described above under
' -- Payments on Trust Assets; Deposits to Payment Account' or in the
related Prospectus Supplement;
(ii) to reimburse itself or any Subservicer for amounts advanced in
respect of taxes, insurance premiums or similar expenses ('SERVICING
ADVANCES') as to any Mortgaged Property, out of late payments, Insurance
Proceeds, Liquidation Proceeds or collections on the Trust Asset with
respect to which such Servicing Advances were made;
(iii) to pay to itself or any Subservicer unpaid Servicing Fees and
Subservicing Fees, out of payments or collections of interest on each Trust
Asset;
(iv) to pay to itself as additional servicing compensation any
investment income on funds deposited in the Custodial Account, any amounts
remitted by Subservicers as interest in respect of partial prepayments on
the Trust Assets, and, if so provided in the Servicing Agreement, any
profits realized upon disposition of a Mortgaged Property acquired by deed
in lieu of foreclosure or repossession or otherwise allowed under the
Agreement;
(v) to pay to itself, a Subservicer, Residential Funding, the Company
or the Seller all amounts received with respect to each Trust Asset
purchased, repurchased or removed pursuant to the terms of the related
Agreement and not required to be paid as of the date on which the related
Purchase Price is determined;
(vi) to pay the Company or its assignee, or any other party named in
the related Prospectus Supplement all amounts allocable to the Excluded
Spread, if any, out of collections or payments which represent interest on
each Trust Asset (including any Trust Asset as to which title to the
underlying Mortgaged Property was acquired);
(vii) to reimburse itself or the Company for certain other expenses
incurred for which it or the Company is entitled to reimbursement
(including reimbursement in connection with enforcing any repurchase,
substitution or indemnification obligation of any Designated Seller),
including payment of FHA insurance premiums, if applicable, or against
which it or the Company is indemnified pursuant to the related Agreement;
(viii) to withdraw any amount deposited in the Custodial Account that
was not required to be deposited therein;
(ix) to pay to itself or any Subservicer for the funding of any Draws
made on the Revolving Credit Loans, if applicable; and
(x) to make deposits to the Funding Account in the amounts and in the
manner provided in the related Agreement, if applicable.
PAYMENTS
On each Payment Date, payments of principal and interest (or, where
applicable, of principal only or interest only) on each class of Notes entitled
thereto will be made from amounts on deposit in the Payment Account by the
Indenture Trustee, the Master Servicer acting on behalf of the Indenture Trustee
or a paying agent appointed by the Indenture Trustee or the Issuer (the 'PAYING
AGENT'). Unless otherwise specified in the related Prospectus Supplement, such
payments will be made to the persons who are registered as the holders of such
Notes at the close of business on the last business day of the preceding month
(the 'RECORD DATE'). Payments will be made in immediately available funds (by
wire transfer or otherwise) to the account of a Noteholder at a bank or other
entity having appropriate facilities therefor, if such Noteholder has so
notified the Indenture Trustee, the Master Servicer or the Paying Agent, as the
case may be, and the applicable Agreement provides for such form of payment, or
by check mailed to the address of the person entitled thereto as it appears on
the Note Register. The final payment in redemption of the Notes will be made
only upon presentation and surrender of the Notes at the office or agency of the
Indenture Trustee specified in the notice to Noteholders.
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Payments will be made to each Noteholder in accordance with such holder's
Percentage Interest in a particular class. The ('PERCENTAGE INTEREST')
represented by a Note of a particular class will be equal to the percentage
obtained by dividing the initial principal balance or notional amount of such
Note by the aggregate initial amount or notional balance of all the Notes of
such class. In addition, amounts remaining in the Payment Account on each
Payment Date after payments on the Notes will be applied for the purposes set
forth in the Agreements, as described in the related Prospectus Supplement,
including distributions on the related Certificates. Any amounts so distributed
on the Certificates will be released from the lien of the Indenture.
Principal and Interest on the Notes
The method of determining, and the amount of, payments of principal and
interest (or, where applicable, of principal only or interest only) on a
particular series of Notes will be described in the related Prospectus
Supplement. Payments of interest on each class of Notes will be made prior to
payments of principal thereon. Each class of Notes (other than certain classes
of Strip Notes) may have a different Interest Rate, which may be a fixed,
variable or adjustable Interest Rate, or any combination of two or more such
Interest Rates. The related Prospectus Supplement will specify the Interest Rate
or Rates for each class, or the initial Interest Rate or Rates and the method
for determining the Interest Rate or Rates. Unless otherwise specified in the
related Prospectus Supplement, interest on the Notes will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
On each Payment Date for a series of Notes, the Indenture Trustee or the
Master Servicer on behalf of the Indenture Trustee will pay or cause the Paying
Agent to pay, as the case may be, principal and interest to each holder of
record on the Record Date of a class of Notes. Unless otherwise specified in the
related Prospectus Supplement, payments to Noteholders of all classes within a
series in respect of interest will have the same priority.
In the case of a series of Notes which includes two or more classes of
Notes, the timing, sequential order, priority of payment or amount of payments
in respect of principal, and any schedule or formula or other provisions
applicable to the determination thereof shall be as set forth in the related
Prospectus Supplement. Payments in respect of principal of any class of Notes
will be made on a pro rata basis among all of the Notes of such class unless
otherwise set forth in the related Prospectus Supplement. In addition, unless
otherwise specified in the related Prospectus Supplement, payments of principal
on the Notes will be limited to monthly principal payments on the Trust Assets,
any Excess Interest, if applicable, applied as principal payments on the Notes
and any amount paid as a payment of principal under the related form of Credit
Enhancement. If so specified in the related Prospectus Supplement, a series of
Notes may provide for a period during which all or a portion of the principal
collections on the Trust Assets otherwise available for payment to the Notes are
reinvested in Additional Balances or additional Trust Assets or accumulated in a
trust account pending the commencement of an amortization period specified in
the related Prospectus Supplement or the occurrence of certain events specified
in the related Prospectus Supplement.
On the day specified in the related Prospectus Supplement as the
determination date (the 'DETERMINATION DATE'), the Master Servicer will
determine the amounts of principal and interest which will be paid to
Noteholders on the succeeding Payment Date. Prior to the close of business on
the business day succeeding each Determination Date, the Master Servicer will
furnish a statement to the Indenture Trustee setting forth, among other things,
the amount to be paid on the next succeeding Payment Date.
FUNDING ACCOUNT
If so specified in the related Prospectus Supplement, the Trust Agreement
or other agreement may provide for the transfer by the Sellers of additional
Trust Assets to the related Trust after the Closing Date. Such additional Trust
Assets will be required to conform to the requirements set forth in the related
Agreement or other agreement providing for such transfer. As specified in the
related Prospectus Supplement, such transfer may be funded by the establishment
of a Funding Account (a 'FUNDING ACCOUNT'). If a Funding Account is established,
all or a portion of the proceeds of the sale of one or more classes of Notes of
the related series or a portion of collections on the Trust Assets in respect of
principal will be deposited in such account to be released as additional Trust
Assets are transferred. Unless otherwise specified in the related Prospectus
Supplement, a Funding Account will be required to be maintained as an Eligible
Account, all amounts therein will be required
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to be invested in Permitted Investments and the amount held therein shall at no
time exceed 25% of the aggregate outstanding principal balance of the Notes.
Unless otherwise specified in the related Prospectus Supplement, the related
Agreement or other agreement providing for the transfer of additional Trust
Assets will provide that all such transfers must be made within 9 months (as to
amounts representing proceeds of the sale of the Securities) or 12 months (as to
amounts representing principal collections on the Trust Assets ) after the
Closing Date, and that amounts set aside to fund such transfers (whether in a
Funding Account or otherwise) and not so applied within the required period of
time will be deemed to be principal prepayments and applied in the manner set
forth in such Prospectus Supplement.
REPORTS TO NOTEHOLDERS
On each Payment Date, the Master Servicer will forward or cause to be
forwarded to each Noteholder of record a statement or statements with respect to
the related Trust Fund setting forth the information described in the related
Agreement. Except as otherwise provided in the related Agreement, such
information generally will include the following, as applicable:
(i) the amount, if any, of such payment allocable to principal;
(ii) the amount, if any, of such payment allocable to interest, and
the amount, if any, of any shortfall in the amount of interest and
principal;
(iii) the aggregate unpaid principal balance of the Trust Assets after
giving effect to the payment of principal on such Payment Date;
(iv) the outstanding principal balance or notional amount of each
class of Notes after giving effect to the payment of principal on such
Payment Date;
(v) based on the most recent reports furnished by Subservicers, the
number of Trust Assets in the related Pool that are delinquent (a) one
month, (b) two months and (c) three months, and that are in foreclosure and
the aggregate principal balances of such Trust Assets or;
(vi) the book value of any property acquired by such Trust Fund
through foreclosure or grant of a deed in lieu of foreclosure;
(vii) the balance of the Reserve Fund, if any, at the close of
business on such Payment Date;
(viii) the amount of coverage under any Letter of Credit or other form
of credit enhancement covering default risk as of the close of business on
the applicable Determination Date and a description of any credit
enhancement substituted therefor;
(ix) if applicable, any limited amounts available under the applicable
credit support to cover Special Hazard Losses, Fraud Losses and Bankruptcy
Losses, as of the close of business on the applicable Payment Date and a
description of any change in the calculation of such amounts;
(x) in the case of Notes benefiting from alternative credit
enhancement arrangements described in a Prospectus Supplement, the amount
of coverage under such alternative arrangements as of the close of business
on the applicable Determination Date;
(xi) with respect to any series of Notes as to which the Trust Fund
includes Private Securities, certain additional information as required
under the related Agreement; and
(xii) the FHA Insurance Amount.
Each amount set forth pursuant to clause (i) or (ii) above will be
expressed as a dollar amount per Single Note. As to a particular class of Notes,
a 'SINGLE NOTE' generally will evidence a Percentage Interest obtained by
dividing $1,000 by the initial principal balance or notional balance of all the
Notes of such class, except as otherwise provided in the related Agreement. In
addition to the information described above, reports to Noteholders will contain
such other information as is set forth in the applicable Agreement, which may
include, without limitation, reimbursements to Subservicers and the Master
Servicer and losses borne by the related Trust Fund.
In addition, to the extent described in the related Agreement, within a
reasonable period of time after the end of each calendar year, the Master
Servicer will furnish a report to each holder of record of a class of Notes at
any time during such calendar year. Such report will include information as to
the aggregate of amounts
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reported pursuant to clauses (i) and (ii) above for such calendar year or, in
the event such person was a holder of record of a class of Notes during a
portion of such calendar year, for the applicable portion of such year.
HAZARD INSURANCE; CLAIMS THEREUNDER
Unless otherwise specified in the related Prospectus Supplement, each
Revolving Credit Loan, Home Equity Loan and Contract that is secured by a lien
on a Mortgaged Property (in each case, other than a Cooperative Loan) will be
required to be covered by a hazard insurance policy (as described below). See
'Risk Factors -- Risks Associated with Certain Trust Assets -- No Hazard
Insurance for Title I Contracts.' The following summary, as well as other
pertinent information included elsewhere in this Prospectus, do not describe all
terms of a hazard insurance policy but will reflect all material terms thereof
relevant to an investment in the Notes. Such insurance is subject to
underwriting and approval of individual Trust Assets by the respective insurers.
The descriptions of any insurance policies described in this Prospectus or any
Prospectus Supplement and the coverage thereunder do not purport to be complete
and are qualified in their entirety by reference to such forms of policies.
Unless otherwise specified in the related Prospectus Supplement, the
Servicing Agreement will require the Master Servicer to cause to be maintained
for each Mortgaged Property a hazard insurance policy providing for no less than
the coverage of the standard form of fire insurance policy with extended
coverage customary in the state in which the property is located. Such coverage
generally will be in an amount equal to the lesser of (i) the maximum insurable
value of the Mortgaged Property or (ii) the outstanding balance of the related
Revolving Credit Loan, Home Equity Loan or Contract plus the outstanding balance
on any mortgage loan senior to such Revolving Credit Loan, Home Equity Loan or
Contract except that, if generally available, such coverage must not be less
than the minimum amount required under the terms thereof to fully compensate for
any damage or loss on a replacement cost basis. The ability of the Master
Servicer to ensure that hazard insurance proceeds are appropriately applied may
be dependent on its being named as an additional insured under any hazard
insurance policy or upon the extent to which information in this regard is
furnished to the Master Servicer by Mortgagors or Subservicers.
As set forth above, all amounts collected by the Master Servicer under any
hazard policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures) will be deposited initially in
the Custodial Account and ultimately in the Payment Account. The Master Servicer
may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy insuring against losses on such Trust Assets. If
such blanket policy contains a deductible clause, the Master Servicer will
deposit in the Custodial Account or the applicable Payment Account all amounts
which would have been deposited therein but for such clause.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer shall also cause to be maintained on property acquired upon
foreclosure, or deed in lieu of foreclosure, of any applicable Trust Asset, fire
insurance with extended coverage in an amount which is at least equal to the
amount necessary to avoid the application of any co-insurance clause contained
in the related hazard insurance policy. See 'Risk Factors -- Risks Associated
with Certain Trust Assets -- No Hazard Insurance for Title I Contracts.'
Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the Revolving Credit Loans, Home Equity
Loans and Contracts may decline as the principal balances owing thereon
decrease, and since residential properties have historically appreciated in
value over time, hazard insurance proceeds could be insufficient to restore
fully the damaged property in the event of a partial loss.
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DESCRIPTION OF CREDIT ENHANCEMENT
As set forth in the related Prospectus Supplement, the credit support
provided with respect to each series of Notes will include one or more of the
following: subordination provided by the related Certificates, and by any other
class of Subordinated Securities related to such series of Notes;
Overcollateralization; a Reserve Fund; a Financial Guaranty Insurance Policy; a
Letter of Credit; mortgage repurchase bond, mortgage pool insurance policy,
special hazard insurance policy, bankruptcy bond or other types of insurance
policies, or a secured or unsecured corporate guaranty, as described in the
related Prospectus Supplement; or in such other form as may be described in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Contracts may be partially insured by the FHA pursuant to Title
I. See 'Risk Factors -- Limitations on FHA Insurance for Title I Contracts' and
'Description of FHA Insurance Under Title I' herein.
As to each series of Notes, each element of the credit support will cover
losses or shortfalls incurred on the Trust Assets, or losses or shortfalls
allocated to or borne by the Notes, as and to the extent described in the
related Prospectus Supplement and at such times as described therein. If so
provided in the related Prospectus Supplement, any element of the credit support
may not be subject to limitations relating to the specific type of loss or
shortfall incurred as to any Trust Asset. Alternatively, if so provided in the
related Prospectus Supplement, the coverage provided by any element of the
credit support may be comprised of one or more of the components described
below. Each such component may have a dollar limit and will generally provide
coverage with respect to Realized Losses, as defined below, that are, as
applicable, (i) attributable to the Mortgagor's failure to make any payment of
principal or interest as required under the Mortgage Note, but not including
Special Hazard Losses, Extraordinary Losses or other losses resulting from
damage to a Mortgaged Property, Bankruptcy Losses or Fraud Losses (any such
loss, a 'DEFAULTED LOAN LOSS'); (ii) of a type generally covered by a special
hazard insurance policy (any such loss, a 'SPECIAL HAZARD LOSS') as described in
the related Prospectus Supplement; (iii) attributable to certain actions which
may be taken by a bankruptcy court in connection with a Trust Asset, including a
reduction by a bankruptcy court of the principal balance of or the Mortgage Rate
on a Trust Asset or an extension of its maturity (any such loss, a 'BANKRUPTCY
LOSS'); and (iv) incurred on defaulted Trust Assets as to which there was fraud
in the origination of such Trust Assets (any such loss, a 'FRAUD LOSS').
Unless otherwise specified in the related Prospectus Supplement, credit
support will not provide protection against all risks of loss and will not
guarantee repayment of the entire outstanding principal balance of the Notes and
interest thereon. If losses occur which exceed the amount covered by credit
support or which are not covered by the credit support, Noteholders will bear
their allocable share of deficiencies. In particular, if so provided in the
related Prospectus Supplement, Defaulted Loan Losses, Special Hazard Losses,
Bankruptcy Losses and Fraud Losses in excess of the amount of coverage provided
therefor and losses occasioned by war, civil insurrection, certain governmental
actions, nuclear reaction and certain other risks ('EXTRAORDINARY LOSSES') will
not be covered. To the extent that the credit enhancement for any series of
Notes is exhausted or unavailable for any reason, the Noteholders will bear all
further risks of loss not otherwise insured against.
With respect to any defaulted Trust Asset that is finally liquidated, the
amount of loss realized, if any (as described in the related Agreement, a
'REALIZED LOSS'), will equal the portion of the Stated Principal Balance
remaining after application of all amounts recovered (net of expenses allocable
to the Trust Fund) towards interest and principal owing on the Trust Asset. With
respect to a Trust Asset the principal balance of which has been reduced in
connection with bankruptcy proceedings, the amount of such reduction will be
treated as a Realized Loss. The 'STATED PRINCIPAL BALANCE'of any Trust Asset as
of any date of determination is equal to the principal balance thereof as of the
Cut-off Date, after application of all scheduled principal payments due on or
before the Cut-off Date whether received or not, reduced by all amounts
allocable to principal that are paid to Noteholders on or before the date of
determination, and as further reduced to the extent that any Realized Loss
thereon has been allocated to any Notes on or before such date.
Each Prospectus Supplement will include a description of (a) the amount
payable under the credit enhancement arrangement, if any, provided with respect
to a series, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions under which the amount payable under such credit
support may be reduced and under which such credit support may be terminated or
replaced and (d) the material provisions of any agreement relating to such
credit support. Additionally, each such Prospectus Supplement will set forth
certain information with respect to the issuer of any third-party credit
enhancement (the 'CREDIT ENHANCER'). As to any series of Notes, the related
Agreements may be modified from the descriptions set forth
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herein to provide for reimbursement rights, control rights or other provisions
that may be required by the Credit Enhancer.
The descriptions of any insurance policies, bonds or other instruments
described in this Prospectus or any Prospectus Supplement and the coverage
thereunder do not describe all terms thereof but will reflect all relevant terms
thereof material to an investment in the Notes. Copies of such instruments will
be included as exhibits to the Form 8-K to be filed with the Commission in
connection with the issuance of the related series of Notes.
FINANCIAL GUARANTY INSURANCE POLICY
If so specified in the related Prospectus Supplement, a financial guaranty
insurance policy (a 'FINANCIAL GUARANTY INSURANCE POLICY') may be obtained and
maintained for a class or series of Notes. The issuer of the Financial Guaranty
Insurance Policy (the 'INSURER') will be described in the related Prospectus
Supplement and a copy of the form of Financial Guaranty Insurance Policy will be
filed with the related Current Report on Form 8-K.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will be unconditional and irrevocable and
will guarantee to holders of the applicable Notes that an amount equal to the
full amount of payments due to such holders will be received by the Indenture
Trustee or its agent on behalf of such holders for payment on each Payment Date.
The specific terms of any Financial Guaranty Insurance Policy will be set forth
in the related Prospectus Supplement. A Financial Guaranty Insurance Policy may
have limitations and generally will not insure the obligation of the Sellers or
the Master Servicer to purchase or substitute for a defective Trust Asset and
will not guarantee any specific rate of principal prepayments. Unless otherwise
specified in the related Prospectus Supplement, the Insurer will be subrogated
to the rights of each holder to the extent the Insurer makes payments under the
Financial Guaranty Insurance Policy.
LETTER OF CREDIT
If any component of credit enhancement as to any series of Notes is to be
provided by a letter of credit (the 'LETTER OF CREDIT'), a bank (the 'LETTER OF
CREDIT BANK') will deliver to the Indenture Trustee an irrevocable Letter of
Credit. The Letter of Credit may provide direct coverage with respect to the
Trust Assets. The Letter of Credit Bank, the amount available under the Letter
of Credit with respect to each component of credit enhancement, the expiration
date of the Letter of Credit, and a more detailed description of the Letter of
Credit will be specified in the related Prospectus Supplement. On or before each
Payment Date, the Letter of Credit Bank will be required to make certain
payments after notification from the Indenture Trustee, to be deposited in the
related Payment Account with respect to the coverage provided thereby.
SUBORDINATION
With respect to each series of Notes, the related Certificates will be
subordinate thereto as described in the Prospectus Supplement. A
Senior/Subordinate Series of Notes will consist of one or more classes of Notes
and one or more classes of Subordinate Securities, as set forth in the related
Prospectus Supplement. With respect to any Senior/Subordinate Series, the total
amount available for payment on each Payment Date, as well as the method for
allocating such amount among the various classes of Notes included in such
series, will be described in the related Prospectus Supplement. Generally, with
respect to any such series the amount available for payment will be allocated
first to interest on the Notes of such series, and then to principal of the
Notes up to the amounts described in the related Prospectus Supplement, prior to
allocation of any amounts to the Subordinate Securities of such series.
Realized Losses will be allocated to the Subordinate Securities of the
related series in the order specified in the related Prospectus Supplement until
the outstanding principal balance of such class has been reduced to zero.
Additional Realized Losses, if any, will be allocated to the Notes. If such
series includes more than one class of Notes, such additional Realized Losses
will be allocated either on a pro rata basis among all of the Notes in
proportion to their respective outstanding principal balances or as otherwise
provided in the related Prospectus Supplement. The respective amounts of
specified types of losses (including certain Special Hazard Losses, Fraud Losses
and Bankruptcy Losses) that may be borne solely by the Subordinate Securities
may be limited to an amount described in the related Prospectus Supplement, in
which case such losses would be
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allocated on a pro rata basis among all outstanding classes of Notes. Generally,
any allocation of a Realized Loss to a Note will be made by reducing the
outstanding principal balance thereof as of the Payment Date following the
calendar month in which such Realized Loss was incurred.
To the extent provided in the related Prospectus Supplement, certain
amounts otherwise payable on any Payment Date to holders of Subordinate
Securities may be deposited into a Reserve Fund. Amounts held in any Reserve
Fund may be applied as described under 'Description of Credit Enhancement
Reserve Funds' in the related Prospectus Supplement.
With respect to any Senior/Subordinate Series, the terms and provisions of
the subordination may vary from those described above. Any such variation and
any additional credit enhancement will be described in the related Prospectus
Supplement.
OVERCOLLATERALIZATION
If so specified in the related Prospectus Supplement, interest collections
on the Trust Assets may exceed interest payments on the Securities for the
related Payment Date (such excess referred to as 'EXCESS INTEREST'). Such Excess
Interest may be deposited into a Reserve Fund or applied as a payment of
principal on the Notes. To the extent Excess Interest is applied as principal
payments on the Notes, the effect will be to reduce the principal balance of the
Notes relative to the outstanding balance of the Trust Assets, thereby creating
'OVERCOLLATERALIZATION' and additional protection to the Noteholders, as
specified in the related Prospectus Supplement.
RESERVE FUNDS
If so specified in the related Prospectus Supplement, the Company will
deposit or cause to be deposited in an account (a 'RESERVE FUND') any
combination of cash or Permitted Investments in specified amounts, or any other
instrument satisfactory to the Rating Agency or Agencies, which will be applied
and maintained in the manner and under the conditions specified in the related
Prospectus Supplement and related Agreement. In the alternative or in addition
to such deposit, to the extent described in the related Prospectus Supplement, a
Reserve Fund may be funded through application of all or a portion of amounts
otherwise payable on any related Securities, from the Excess Spread, Excluded
Spread or otherwise. A Reserve Fund for a series of Notes which is funded over
time by depositing therein a portion of the interest payment on each Trust Asset
may be referred to as a 'SPREAD ACCOUNT' in the related Prospectus Supplement
and related Agreement. To the extent that the funding of the Reserve Fund is
dependent on amounts otherwise payable on related Subordinate Securities, Excess
Spread, Excluded Spread or other cash flows attributable to the related Trust
Assets or on reinvestment income, the Reserve Fund may provide less coverage
than initially expected if the cash flows or reinvestment income on which such
funding is dependent are lower than anticipated. With respect to any series of
Notes as to which credit enhancement includes a Letter of Credit, if so
specified in the related Prospectus Supplement, under certain circumstances the
remaining amount of the Letter of Credit may be drawn by the Indenture Trustee
and deposited in a Reserve Fund.
Amounts in a Reserve Fund may be paid to Noteholders, or applied to
reimburse the Master Servicer for outstanding advances, or may be used for other
purposes, in the manner and to the extent specified in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement, any
such Reserve Fund will not be deemed to be part of the related Trust Fund. A
Reserve Fund may provide coverage to more than one series of Notes if set forth
in the related Prospectus Supplement. If so specified in the related Prospectus
Supplement, Reserve Funds may be established to provide limited protection
against only certain types of losses and shortfalls. Following each Payment Date
amounts in a Reserve Fund in excess of any amount required to be maintained
therein may be released from the Reserve Fund under the conditions and to the
extent specified in the related Prospectus Supplement and will not be available
for further application to the Notes.
Unless otherwise specified in the related Prospectus Supplement, the
Indenture Trustee will have a perfected security interest for the benefit of the
Noteholders in the assets in the Reserve Fund. However, to the extent that the
Company, any affiliate thereof or any other entity has an interest in any
Reserve Fund, in the event of the bankruptcy, receivership or insolvency of such
entity, there could be delays in withdrawals from the Reserve Fund and the
corresponding payments to the Noteholders. Such delays could adversely affect
the yield to investors on the related Notes.
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Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
Master Servicer or any other person named in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited to the
related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to the Master Servicer or another service provider as additional
compensation.
MAINTENANCE OF CREDIT ENHANCEMENT
If credit enhancement has been obtained for a series of Notes, the
Indenture Trustee or Master Servicer (as set forth in the related Agreement)
will be obligated to exercise its best reasonable efforts to keep or cause to be
kept such credit enhancement in full force and effect throughout the term of the
applicable Agreements, unless coverage thereunder has been exhausted through
payment of claims or otherwise, or substitution therefor is made as described
below under ' -- Reduction or Substitution of Credit Enhancement.' The Master
Servicer, on behalf of itself, the Indenture Trustee and Noteholders, will
provide the Indenture Trustee information required for the Indenture Trustee to
draw any applicable credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will agree to pay the premiums for each Financial Guaranty Insurance
Policy on a timely basis. In the event the related insurer ceases to be a
'QUALIFIED INSURER' because it ceases to be qualified under applicable law to
transact such insurance business or coverage is terminated for any reason other
than exhaustion of such coverage, the Master Servicer will use its best
reasonable efforts to obtain from another Qualified Insurer a comparable
replacement insurance policy or bond with a total coverage equal to the then
outstanding coverage of such policy or bond. If the cost of the replacement
policy is greater than the cost of such policy or bond, the coverage of the
replacement policy or bond will, unless otherwise agreed to by the Company, be
reduced to a level such that its premium rate does not exceed the premium rate
on the original insurance policy. Any losses in market value of the Notes
associated with any reduction or withdrawal in rating by an applicable Rating
Agency shall be borne by the Noteholders.
For Trust Assets secured by a lien on Mortgaged Property, if any property
securing such a defaulted Trust Asset is damaged and proceeds, if any, from the
related hazard insurance policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any Letter of Credit, the
Master Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to one or more classes of Noteholders on liquidation of such Trust
Asset after reimbursement of the Master Servicer for its expenses and (ii) that
such expenses will be recoverable by it through Liquidation Proceeds or
Insurance Proceeds. If recovery under any Letter of Credit or other credit
enhancement is not available because the Master Servicer has been unable to make
the above determinations, has made such determinations incorrectly or recovery
is not available for any other reason, the Master Servicer is nevertheless
obligated to follow such normal practices and procedures (subject to the
preceding sentence) as it deems necessary or advisable to realize upon the
defaulted Trust Asset and in the event such determination has been incorrectly
made, is entitled to reimbursement of its expenses in connection with such
restoration.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
The amount of credit support provided with respect to any series of Notes
and relating to various types of losses incurred may be reduced under certain
specified circumstances. In most cases, the amount available as credit support
will be subject to periodic reduction on a non-discretionary basis in accordance
with a schedule or formula set forth in the related Agreement. Additionally, in
most cases, such credit support may be replaced, reduced or terminated, and the
formula used in calculating the amount of coverage with respect to Bankruptcy
Losses, Special Hazard Losses or Fraud Losses may be changed, without the
consent of the Noteholders, upon the written assurance from each applicable
Rating Agency that the then-current rating of the related series of Notes will
not be adversely affected thereby. Furthermore, in the event that the credit
rating of any obligor under any applicable credit enhancement is downgraded, the
credit rating of each class of the related Notes may be downgraded to a
corresponding level, and, unless otherwise specified in the related Prospectus
Supplement, neither the Master Servicer nor the Company will be obligated to
obtain replacement credit support in order to restore the rating of the Notes.
The Master Servicer will also be permitted to replace such credit support with
other credit enhancement instruments issued by obligors whose credit ratings are
equivalent to such downgraded level and in lower amounts which would satisfy
such downgraded level, provided that the then-current rating of
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each class of the related series of Notes is maintained. Where the credit
support is in the form of a Reserve Fund, a permitted reduction in the amount of
credit enhancement will result in a release of all or a portion of the assets in
the Reserve Fund to the Company, the Master Servicer or such other person that
is entitled thereto. Any assets so released and any amount by which the credit
enhancement is reduced will not be available for payments in future periods.
PURCHASE OBLIGATIONS
Certain types of Trust Assets and certain classes of Notes of any series,
as specified in the related Prospectus Supplement, may be subject to a purchase
obligation (a 'PURCHASE OBLIGATION') that would become applicable on one or more
specified dates, or upon the occurrence of one or more specified events, or on
demand made by or on behalf of the applicable Noteholders. A Purchase Obligation
may be in the form of a conditional or unconditional purchase commitment,
liquidity facility, maturity guaranty, put option or demand feature. The terms
and conditions of each Purchase Obligation, including the purchase price, timing
and payment procedure, will be described in the related Prospectus Supplement. A
Purchase Obligation with respect to Trust Assets may apply to those Trust Assets
or to the related Notes. Each Purchase Obligation may be a secured or unsecured
obligation of the provider thereof, which may include a bank or other financial
institution or an insurance company. Each Purchase Obligation will be evidenced
by an instrument delivered to the Trustee for the benefit of the applicable
Noteholders of the related series. Each Purchase Obligation with respect to
Trust Assets will be payable solely to the Trustee for the benefit of the
Noteholders of the related series. Other Purchase Obligations may be payable to
the Trustee or directly to the holders of the Notes to which such obligations
relate.
DESCRIPTION OF FHA INSURANCE UNDER TITLE I
Certain of the Contracts contained in a Trust Fund may be loans insured
under the Title I Program (the 'TITLE I LOANS') as described below and in the
related Prospectus Supplement. The regulations, rules and procedures promulgated
by the FHA under the Title I (the 'FHA REGULATIONS') contain the requirements
under which lenders approved for participation in the Title I Program (the
'TITLE I LENDERS') may obtain insurance against a portion of losses incurred
with respect to eligible loans that have been originated and serviced in
accordance with FHA Regulations, subject to the amount of insurance coverage
available in such Title I Lender's FHA Reserve, as described below and in the
related Prospectus Supplement, and subject to the terms and conditions
established under the National Housing Act and FHA Regulations. While FHA
Regulations permit the Secretary of the Department of Housing and Urban
Development ('HUD'), subject to statutory limitations, to waive a Title I
Lender's noncompliance with FHA Regulations if enforcement would impose an
injustice on the lender (provided the Title I Lender has acted in good faith, is
in substantial compliance with FHA Regulations and has credited the borrower for
any excess charges), in general, an insurance claim against the FHA will be
denied if the Title I Loan to which it relates does not strictly satisfy the
requirements of the National Housing Act and FHA Regulations.
Unlike certain other government loan insurance programs, loans under the
Title I Program (other than loans in excess of $25,000) are not subject to prior
review by the FHA. Under the Title I Program, the FHA disburses insurance
proceeds with respect to defaulted loans for which insurance claims have been
filed by a Title I Lender prior to any review of such loans. A Title I Lender is
required to repurchase a Title I Loan from the FHA that is determined to be
ineligible for insurance after insurance claim payments for such loan have been
paid to such lender. Under the FHA Regulations, if the Title I Lender's
obligation to repurchase the Title I Loan is unsatisfied, the FHA is permitted
to offset the unsatisfied obligation against future insurance claim payments
owed by the FHA to such lender. FHA Regulations permit the FHA to disallow an
insurance claim with respect to any loan that does not qualify for insurance for
a period of up to two years after the claim is made and to require the Title I
Lender that has submitted the insurance claim to repurchase the loan.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or lot
(or cooperative interest therein) on which to place such home or the purchase of
both a manufactured home loan and the lot (or cooperative interest therein) on
which such home is placed.
Subject to certain limitations described below, eligible Title I Loans are
generally insured by the FHA for 90% of an amount equal to the sum of (i) the
net unpaid principal amount and the uncollected interest earned to
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the date of default, (ii) interest on the unpaid loan obligation from the date
of default to the date of the initial submission of the insurance claim, plus 15
calendar days (the total period not to exceed nine months) at a rate of 7% per
annum, (iii) uncollected court costs, (iv) title examination costs, (v) fees for
required inspections by the lenders or its agents, up to $75, and (vi)
origination fees up to a maximum of 5% of the loan amount. However, the
insurance coverage provided by the FHA is limited to the extent of the balance
in the Title I Lender's FHA Reserve maintained by the FHA. Accordingly if
sufficient insurance coverage is available in such FHA Reserve, then the Title I
Lender bears the risk of losses on a Title I Loan for which a claim for
reimbursement is paid by the FHA of at least 10% of the unpaid principal,
uncollected interest earned to the date of default, interest from the date of
default to the date of the initial claim submission and certain expenses. Unlike
most other FHA insurance programs, the obligation of the FHA to reimburse a
Title I Lender for losses in the portfolio of insured loans held by such Title I
Lender is limited to the amount in an FHA Reserve maintained on a
lender-by-lender basis and not on a loan-by-loan basis.
Under Title I, the FHA maintains an FHA insurance coverage reserve account
(a 'FHA RESERVE') for each Title I Lender. The amount in each Title I Lender's
FHA Reserve is a maximum of 10% of the amounts disbursed, advanced or expended
by a Title I Lender in originating or purchasing eligible loans registered with
the FHA for Title I insurance, with certain adjustments permitted or required by
FHA Regulations. The balance of such FHA Reserve is the maximum amount of
insurance claims the FHA is required to pay to the related Title I Lender. Title
I Loans to be insured under Title I will be registered for insurance by the FHA.
Following either the origination or transfer of loans eligible under Title I,
the Title I Lender will submit such loans for FHA insurance coverage within its
FHA Reserve by delivering a transfer of note report or through an electronic
submission to the FHA in the form prescribed under the FHA Regulations (the
'TRANSFER REPORT'). The increase in the FHA insurance coverage for such loans in
the Title I Lender's FHA Reserve will occur on the date following the receipt
and acknowledgement by the FHA of the Transfer Report for such loans. The
insurance available to any Trust Fund will be subject to the availability, from
time to time, of amounts in each Title I Lender's FHA Reserve, which will
initially be limited to the amount specified in the related Prospectus
Supplement (the 'FHA INSURANCE AMOUNT').
Under the Title I, the FHA will reduce the insurance coverage available in
a Title I Lender's FHA Reserve with the respect to loans insured under such
Title I Lender's contract of insurance by (i) the amount of FHA insurance claims
approved for payment related to such loans and (ii) the amount of reduction of
the Title I Lender's FHA Reserve by reason of the sale, assignment or transfer
of loans registered under the Title I Lender's contract of insurance. Such
insurance coverage also may be reduced for any FHA insurance claims previously
disbursed to the Title I Lender that are subsequently rejected by the FHA.
In general, the FHA will insure Home Improvement Contracts up to $25,000
for a single-family property, with a maximum term of 20 years. The FHA will
insure loans of up to $17,500 for manufactured homes which qualify as real
estate under applicable state law and loans of up to $12,000 per unit for a
$48,000 limit for four units for owner-occupied multiple-family homes. If the
loan amount is $15,000 or more, the FHA requires a drive-by appraisal, the
current tax assessment value, or a full Uniform Residential Appraisal Report
dated within 12 months of the closing to verify the property's value. The
maximum loan amount on transactions requiring an appraisal is the amount of
equity in the property shown by the market value determination of the property.
Following a default on a Home Improvement Contract partially insured by the
FHA, the Master Servicer, either directly or through a subsidiary, may, subject
to certain conditions, either commence foreclosure proceedings against the
improved property securing the loan, if applicable, or submit a claim to FHA,
but may submit a claim to FHA after proceeding against the improved property
only with the prior approval of the Secretary of HUD. The availability of FHA
Insurance following a default on a Contract is subject to a number of
conditions, including strict compliance with FHA Regulations in originating and
servicing the Contract. Failure to comply with FHA Regulations may result in a
denial of or surcharge on the FHA insurance claim. Prior to declaring a Contract
in default and submitting a claim to FHA, the Master Servicer must take certain
steps to attempt to cure the default, including personal contact with the
borrower either by telephone or in a meeting and providing the borrower with 30
days' written notice prior to declaration of default. FHA may deny insurance
coverage if the borrower's nonpayment is related to a valid objection to faulty
contractor performance. In such event, the Master Servicer or other entity as
specified in the related Prospectus Supplement will seek to obtain payment by or
a judgment against the borrower, and may resubmit the claim to FHA following
such a judgment.
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THE COMPANY
The Company is an indirect wholly-owned subsidiary of GMAC Mortgage, which
is a wholly-owned subsidiary of General Motors Acceptance Corporation. The
Company was incorporated in the State of Delaware on May 5, 1995. The Company
was organized for the purpose of acquiring first or junior lien home equity
mortgage loans, home improvement contracts, manufactured housing contracts and
mortgage securities and issuing securities backed by such mortgage loans,
contracts and mortgage securities. The Company anticipates that it will in many
cases have acquired Trust Assets indirectly through Residential Funding, which
is also an indirect wholly-owned subsidiary of GMAC Mortgage. The Company does
not have, nor is it expected in the future to have, any significant assets.
The Notes do not represent an interest in or an obligation of the Company.
The Company's only obligations with respect to a series of Notes will be
pursuant to certain limited representations and warranties made by the Company
or as otherwise provided in the related Prospectus Supplement.
The Company maintains its principal office at 8400 Normandale Lake
Boulevard, Suite 600, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000.
RESIDENTIAL FUNDING CORPORATION
If so specified in the related Prospectus Supplement, Residential Funding,
an affiliate of the Company, will act as the Master Servicer or Administrator
for a series of Notes.
Residential Funding buys mortgage loans under several loan purchase
programs from mortgage loan originators or sellers nationwide, including
affiliates, that meet its seller/servicer eligibility requirements and services
mortgage loans for its own account and for others. Residential Funding's
principal executive offices are located at 8400 Normandale Lake Boulevard, Suite
600, Minneapolis, Minnesota 55437. Its telephone number is (612) 832-7000.
Residential Funding conducts operations from its headquarters in Minneapolis and
from offices located in California, Colorado, Connecticut, Florida, Georgia,
Maryland, New York, North Carolina, Rhode Island and Texas. At March 31, 1997,
Residential Funding was master servicing a first lien loan portfolio of
approximately $34.8 billion and a second lien loan portfolio of approximately
$1.8 billion.
SERVICING OF TRUST ASSETS
The Master Servicer will be required to service and administer the Trust
Assets in a manner generally consistent with the terms of the servicing
agreement entered into by the Master Servicer with the Company, an affiliate of
the Company or other applicable entity (each, a 'SERVICING AGREEMENT') and the
Guide with respect to the Revolving Credit Loans or with respect to a Designated
Seller Transaction, as specified in the related Prospectus Supplement.
As to any series of Notes secured by Private Securities, the applicable
procedures for servicing of the related Revolving Credit Loans, Home Equity
Loans, Home Improvement Contracts and Manufactured Housing Contracts will be
described in the related Prospectus Supplement.
SUBSERVICING
In connection with any series of Securities the Master Servicer may enter
into one or more Subservicing Agreements. See 'Trust Asset
Program -- Subservicing.' Each Subservicer generally will be required to perform
the customary functions of a servicer, including but not limited to, collection
of payments from Mortgagors and remittance of such collections to the Master
Servicer; maintenance of escrow or impoundment accounts of Mortgagors for
payment of taxes, insurance and other items required to be paid by the Mortgagor
pursuant to the Trust Asset, if applicable; processing of assumptions or
substitutions (although, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer is generally required to exercise due-on-sale
clauses to the extent such exercise is permitted by law and would not adversely
affect insurance coverage); attempting to cure delinquencies; supervising
foreclosures; inspection and management of Mortgaged Properties under certain
circumstances; and maintaining accounting records relating to the Trust Assets.
The Subservicer may be required to make advances to the holder of any related
first mortgage loan to avoid or cure any delinquencies to the extent that doing
so would be prudent and necessary to protect the interests of the
Securityholders. A Subservicer also may be obligated to make advances to the
Master Servicer in respect of certain taxes and
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insurance premiums not paid on a timely basis by Mortgagors. The Subservicer
generally shall be responsible for performing all collection and other servicing
functions with respect to any delinquent loan or foreclosure proceeding. In
addition, the Subservicer is required to advance funds to cover any Draws made
on a Revolving Credit Loan subject to reimbursement by the entity specified in
the related Prospectus Supplement. No assurance can be given that the
Subservicers will carry out their advance or payment obligations with respect to
the Trust Assets. Unless otherwise specified in the related Prospectus
Supplement, a Subservicer may transfer its servicing obligations to another
entity that has been approved for participation in Residential Funding's loan
purchase programs, but only with the approval of the Master Servicer.
Each Subservicer will be required to agree to indemnify the Master Servicer
for any liability or obligation sustained by the Master Servicer in connection
with any act or failure to act by the Subservicer in its servicing capacity.
Each Subservicer is required to maintain a fidelity bond and an errors and
omissions policy with respect to its officers, employees and other persons
acting on its behalf or on behalf of the Master Servicer.
Each Subservicer will be required to service each Trust Asset pursuant to
the terms of the Subservicing Agreement for the entire term of such Trust Asset,
unless the Subservicing Agreement is earlier terminated by the Master Servicer
or unless servicing is released to the Master Servicer. Subject to applicable
law, the Master Servicer may have the right to terminate a Subservicing
Agreement immediately upon the giving of notice upon certain stated events,
including the violation of such Subservicing Agreement by the Subservicer, or up
to ninety days' notice to the Subservicer without cause upon payment of certain
amounts set forth in the Subservicing Agreement. Upon termination of a
Subservicing Agreement, the Master Servicer may act as servicer of the related
Trust Assets or enter into one or more new Subservicing Agreements. The Master
Servicer may agree with a Subservicer to amend a Subservicing Agreement. Any
amendments to a Subservicing Agreement or to a new Subservicing Agreement may
contain provisions different from those described above which are in effect in
the original Subservicing Agreements.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Subservicers, as the case may be,
will make reasonable efforts to collect all payments called for under the Trust
Assets and will, consistent with the related Servicing Agreement and any
applicable insurance policy, FHA insurance or other credit enhancement, follow
such collection procedures which shall be normal and usual in its general
mortgage servicing activities with respect to mortgage loans comparable to the
Trust Assets. Consistent with the foregoing, the Master Servicer may in its
discretion waive any prepayment charge in connection with the prepayment of a
Trust Asset or extend the Due Dates for payments due on a Trust Asset, provided
that the insurance coverage for such Trust Asset or any coverage provided by any
alternative credit enhancement will not be adversely affected thereby. With
respect to any series of Notes as to which the Trust Fund includes Private
Securities, the Master Servicer's servicing and administration obligations will
be pursuant to the terms of such Private Securities.
Under its Subservicing Agreement, a Subservicer is granted certain
discretion to extend relief to Mortgagors whose payments become delinquent. A
Subservicer may grant a period of temporary indulgence (generally up to three
months) to a Mortgagor or may enter into a liquidating plan providing for
repayment by the Mortgagor of delinquent amounts within six months from the date
of execution of the plan, in each case without the prior approval of the Master
Servicer. Other types of forbearance generally require Master Servicer approval.
Neither indulgence nor forbearance with respect to a Trust Asset will affect the
interest rate or rates used in calculating payments to Securityholders. See
'Description of the Notes -- Payments.'
In certain instances in which a Trust Asset is in default (or if default is
reasonably foreseeable), and if determined by the Master Servicer to be in the
best interests of the related Noteholders, the Master Servicer may permit
certain modifications of the Trust Asset or make forbearances on the Trust Asset
rather than proceeding with foreclosure or repossession (if applicable). In
making such determination, the estimated Realized Loss that might result if such
Trust Asset were liquidated would be taken into account. Such modifications may
have the effect of reducing the Mortgage Rate or extending the final maturity
date of the Trust Asset. Any such modified Trust Asset may remain in the related
Trust Fund, and the reduction in collections resulting from such modification
may result in reduced distributions of interest (or other amounts) on, or may
extend the final maturity of, one or more classes of the related Notes.
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In any case in which property subject to a Trust Asset is being conveyed by
the Mortgagor, the Master Servicer, directly or through a Subservicer, shall in
general be obligated, to the extent it has knowledge of such conveyance, to
exercise its rights to accelerate the maturity of such Trust Asset under any
due-on-sale clause applicable thereto, but only if the exercise of such rights
is permitted by applicable law and only to the extent it would not adversely
affect or jeopardize coverage under any applicable credit enhancement
arrangements. If the Master Servicer or Subservicer is prevented from enforcing
such due-on-sale clause under applicable law or if the Master Servicer or
Subservicer determines that it is reasonably likely that a legal action would be
instituted by the related Mortgagor to avoid enforcement of such due-on-sale
clause, the Master Servicer or Subservicer will enter into an assumption and
modification agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person will become liable under the
Mortgage Note subject to certain specified conditions. The original Mortgagor
may be released from liability on a Trust Asset if the Master Servicer or
Subservicer shall have determined in good faith that such release will not
adversely affect the ability to make full and timely collections on the related
Trust Asset. Any fee collected by the Master Servicer or Subservicer for
entering into an assumption or substitution of liability agreement will be
retained by the Master Servicer or Subservicer as additional servicing
compensation unless otherwise set forth in the related Prospectus Supplement.
See 'Certain Legal Aspects of Trust Assets and Related Matters -- Enforceability
of Certain Provisions' herein. In connection with any such assumption, the
Mortgage Rate borne by the related Mortgage Note may not be altered.
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. The Master Servicer or the related Subservicer may approve such
a request if it has determined, exercising its good faith business judgment in
the same manner as it would if it were the owner of the related Trust Asset,
that such approval will not adversely affect the security for, and the timely
and full collectability of, the related Trust Asset. Any fee collected by the
Master Servicer or the Subservicer for processing such request will be retained
by the Master Servicer or Subservicer as additional servicing compensation.
The Master Servicer is required to maintain a fidelity bond and errors and
omissions policy with respect to its officers and employees and other persons
acting on behalf of the Master Servicer in connection with its activities under
the Servicing Agreement. The Master Servicer may be subject to certain
restrictions under the Servicing Agreement with respect to the refinancing of a
lien senior to a Revolving Credit Loan, Home Equity Loan or a Contract secured
by a lien on the related Mortgaged Property.
REALIZATION UPON DEFAULTED LOANS
With respect to a Revolving Credit Loan, Home Equity Loan or a Contract
secured by a lien on a Mortgaged Property in default, the Master Servicer or the
related Subservicer will decide whether to foreclose upon the Mortgaged Property
or with respect to any such Trust Asset, write off the principal balance of the
Trust Asset as a bad debt or take an unsecured note. Realization on other
defaulted Contracts may be accomplished through repossession and subsequent
resale of the underlying Manufactured Home or Home Improvement. In connection
with such decision, the Master Servicer or the related Subservicer will,
following usual practices in connection with senior and junior mortgage
servicing activities or repossession and resale activities, estimate the
proceeds expected to be received and the expenses expected to be incurred in
connection with such foreclosure or repossession and resale to determine whether
a foreclosure proceeding or a repossession and resale is appropriate. To the
extent that a Revolving Credit Loan, Home Equity Loan or a Contract secured by a
lien on a Mortgaged Property is junior to another lien on the related Mortgaged
Property, following any default thereon, unless foreclosure proceeds for such
Trust Asset are expected to at least satisfy the related senior mortgage loan in
full and to pay foreclosure costs, it is likely that such Trust Asset will be
written off as bad debt with no foreclosure proceeding. See 'Risk
Factors -- Special Features of Certain Trust Assets Secured by Junior Liens on
Mortgaged Properties' herein. In the event that title to any Mortgaged Property
is acquired in foreclosure or by deed in lieu of foreclosure, the deed or
certificate of sale will be issued to the Indenture Trustee or to its nominee on
behalf of Noteholders. Notwithstanding any such acquisition of title and
cancellation of the related Trust Asset, such Revolving Credit Loan, Home Equity
Loan or Contract secured by a lien on a Mortgaged Property (an 'REO LOAN') will
be considered for most purposes to be an outstanding Trust Asset held in the
Trust Fund until such time as the Mortgaged Property is sold and all recoverable
Liquidation Proceeds and Insurance Proceeds have been received with respect to
such defaulted Trust Asset (a 'LIQUIDATED LOAN'). To
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the extent provided in the related Agreement and related Servicing Agreement,
any income (net of expenses and other than gains described below) received by
the Subservicer or the Master Servicer on such Mortgaged Property, prior to its
disposition will be deposited in the Custodial Account upon receipt and will be
available at such time for making payments to Noteholders.
With respect to a Revolving Credit Loan, Home Equity Loan or a Contract
secured by a lien on a Mortgaged Property in default, the Master Servicer may
pursue foreclosure (or similar remedies) subject to any senior lien positions
and certain other restrictions pertaining to junior loans as described under
'Certain Legal Aspects of Trust Assets and Related Matters -- Foreclosure on
Revolving Credit Loans, Home Equity Loans and Certain Contracts' concurrently
with pursuing any remedy for a breach of a representation and warranty. However,
the Master Servicer is not required to continue to pursue both such remedies if
it determines that one such remedy is more likely to result in a greater
recovery. Upon the first to occur of final liquidation and a repurchase or
substitution pursuant to a breach of a representation and warranty, such Trust
Asset will be removed from the related Trust Fund. The Master Servicer may elect
to treat a defaulted Trust Asset as having been finally liquidated if
substantially all amounts expected to be received in connection therewith have
been received. Any additional liquidation expenses relating to such Trust Asset
thereafter incurred will be reimbursable to the Master Servicer (or any
Subservicer) from any amounts otherwise payable to the related Noteholders, or
may be offset by any subsequent recovery related to such Trust Asset.
Alternatively, for purposes of determining the amount of related Liquidation
Proceeds to be paid to Noteholders, the amount of any Realized Loss or the
amount required to be drawn under any applicable form of credit enhancement, the
Master Servicer may take into account minimal amounts of additional receipts
expected to be received, as well as estimated additional liquidation expenses
expected to be incurred in connection with such defaulted Trust Asset.
With respect to certain series of Notes, if so provided in the related
Prospectus Supplement, the applicable form of credit enhancement may provide, to
the extent of coverage thereunder, that a defaulted Trust Asset or REO Loan will
be removed from the Trust Fund prior to the final liquidation thereof. In
addition, the Master Servicer will generally have the option to purchase from
the Trust Fund any defaulted Trust Asset after a specified period of
delinquency. If a defaulted Trust Asset or REO Loan is not so removed from the
Trust Fund, then, upon the final liquidation thereof, if a loss is realized
which is not covered by any applicable form of credit enhancement or other
insurance, the Noteholders will bear such loss. However, if a gain results from
the final liquidation of an REO Loan which is not required by law to be remitted
to the related Mortgagor, the Master Servicer will be entitled to retain such
gain as additional servicing compensation unless the related Prospectus
Supplement provides otherwise. For a description of the Master Servicer's
obligations to maintain and make claims under applicable forms of credit
enhancement and insurance relating to the Trust Assets, see 'Description of
Credit Enhancement' and 'Description of the Securities -- Hazard Insurance;
Claims Thereunder.'
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each series of Notes will be
equal to the percentage per annum described in the related Prospectus Supplement
(which may vary under certain circumstances). As compensation for its servicing
duties, a Subservicer or, if there is no Subservicer, the Master Servicer will
be entitled to a monthly servicing fee as described in the related Prospectus
Supplement, which may vary under certain circumstances from the amounts
described in the Prospectus Supplement. Certain Subservicers may also receive
additional compensation in the amount of all or a portion of the interest due
and payable on the applicable Trust Asset which is over and above the interest
rate specified at the time the Company or Residential Funding, as the case may
be, committed to purchase the Trust Asset. See 'Trust Asset
Program -- Subservicing.' Subservicers will be required to pay to the Master
Servicer an amount equal to one month's interest (net of its servicing or other
compensation) on the amount of any partial Principal Prepayment. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will retain such amounts to the extent collected from Subservicers. The Master
Servicer or a Subservicer will retain all prepayment charges, assumption fees
and late payment charges, to the extent collected from Mortgagors, and any
benefit which may accrue as a result of the investment of funds in the Custodial
Account or the applicable Payment Account (unless otherwise specified in the
related Prospectus Supplement) or in a Subservicing Account, as the case may be.
In addition, certain duties of the Master Servicer may be
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performed by an affiliate of the Master Servicer who will be entitled to
reasonable compensation therefor from the Trust Fund.
The Master Servicer (or, if specified in the related Agreement, the
Indenture Trustee on behalf of the applicable Trust Fund) will pay or cause to
be paid certain ongoing expenses associated with each Trust Fund and incurred by
it in connection with its responsibilities under the Servicing Agreement,
including, without limitation, payment of any fee or other amount payable in
respect of certain credit enhancement arrangements, payment of any FHA insurance
premiums, if applicable, payment of the fees and disbursements of the Indenture
Trustee, the Owner Trustee, any custodian, the Note Registrar and any Paying
Agent, and payment of expenses incurred in enforcing the obligations of
Subservicers and Designated Sellers. The Master Servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of Subservicers
and Designated Sellers under certain limited circumstances. In addition, as
indicated in the preceding section, the Master Servicer will be entitled to
reimbursements for certain expenses incurred by it in connection with Liquidated
Loans and in connection with the restoration of Mortgaged Properties, such right
of reimbursement being prior to the rights of Noteholders to receive any related
Liquidation Proceeds (including Insurance Proceeds).
EVIDENCE AS TO COMPLIANCE
Each Servicing Agreement will provide for delivery (on or before a
specified date in each year) to the Indenture Trustee of an annual statement
signed by an officer of the Master Servicer to the effect that the Master
Servicer has fulfilled in all material respects the minimum servicing standards
set forth in the audit guide for audits of non-supervised mortgagees approved by
the Department of Housing and Urban Development for use by independent public
accountants, the Uniform Single Attestation Program for Mortgage Bankers or the
Audit Program for Mortgages serviced for Federal Home Loan Mortgage Corporation
(each, an 'AUDIT GUIDE') throughout the preceding year or, if there has been a
material default in the fulfillment of any such obligation, such statement shall
specify each such known default and the nature and status thereof. Such
statement may be provided as a single form making the required statements as to
more than one Servicing Agreement.
Each Servicing Agreement will also provide that on or before a specified
date in each year, beginning the first such date that is at least a specified
number of months after the Cut-off Date, a firm of independent public
accountants will furnish a statement to the Company and the Indenture Trustee to
the effect that, on the basis of an examination by such firm conducted
substantially in compliance with the standards established by the American
Institute of Certified Public Accountants, the servicing of mortgage loans under
agreements (including the related Servicing Agreement) was conducted
substantially in compliance with the minimum servicing standards set forth in
the related Audit Guide (to the extent that procedures in such Audit Guide are
applicable to the servicing obligations set forth in such agreements) except for
such significant exceptions or errors in records that shall be reported in such
statement. In rendering its statement such firm may rely, as to the matters
relating to the direct servicing of mortgage loans by Subservicers, upon
comparable statements for examinations conducted substantially in compliance
with the related Audit Guide described above (rendered within one year of such
statement) of firms of independent public accountants with respect to those
Subservicers which also have been the subject of such an examination.
Copies of the annual statement of an officer of the Master Servicer may be
obtained by Noteholders without charge upon written request to the Master
Servicer, at the address indicated in the monthly statement to Noteholders.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
The Servicing Agreement for each series of Notes will provide that the
Master Servicer may not resign from its obligations and duties thereunder except
upon a determination that performance of such duties is no longer permissible
under applicable law or except in connection with a permitted transfer of
servicing. No such resignation will become effective until the Indenture Trustee
or a successor servicer has assumed the Master Servicer's obligations and duties
under the Servicing Agreement.
Each Servicing Agreement will also provide that, except as set forth below,
neither the Master Servicer, the Company nor any director, officer, employee or
agent of the Master Servicer or the Company will be under any liability to the
Trust Fund or the Noteholders for any action taken or for refraining from the
taking of any action in good faith pursuant to the Servicing Agreement, or for
errors in judgment; provided, however, that neither the
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Master Servicer, the Company nor any such person will be protected against any
liability which would otherwise be imposed by reason of willful misfeasance, bad
faith or gross negligence in the performance of duties or by reason of reckless
disregard of obligations and duties thereunder. Each Servicing Agreement will
further provide that the Master Servicer, the Company and any director, officer,
employee or agent of the Master Servicer or the Company is entitled to
indemnification by the Trust Fund (or the Special Purpose Entity, if applicable)
and will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Servicing Agreement or the
related series of Notes, other than any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. In addition, each Servicing Agreement will provide that the
Master Servicer and the Company will not be under any obligation to appear in,
prosecute or defend any legal or administrative action that is not incidental to
its respective duties under the Servicing Agreement and which in its opinion may
involve it in any expense or liability. The Master Servicer or the Company may,
however, in its discretion undertake any such action which it may deem necessary
or desirable with respect to the Servicing Agreement and the rights and duties
of the parties thereto and the interests of the Noteholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund (or the
Special Purpose Entity, if applicable) and the Master Servicer or the Company,
as the case may be will be entitled to be reimbursed therefor out of funds
otherwise payable to Noteholders.
Any person into which the Master Servicer may be merged or consolidated,
any person resulting from any merger or consolidation to which the Master
Servicer is a party or any person succeeding to the business of the Master
Servicer will be the successor of the Master Servicer under the Servicing
Agreement, provided that such person meets the requirements set forth in the
Servicing Agreement. In addition, notwithstanding the prohibition on its
resignation, the Master Servicer may assign its rights and delegate its duties
and obligations under a Servicing Agreement to any person reasonably
satisfactory to the Company and the Indenture Trustee and meeting the
requirements set forth in the related Servicing Agreement. In the case of any
such assignment, the Master Servicer will be released from its obligations under
such Servicing Agreement, exclusive of liabilities and obligations incurred by
it prior to the time of such assignment.
THE AGREEMENTS
The following summaries describe certain provisions of the Trust Agreement,
the Indenture and Servicing Agreement relating to a series of Notes (each, an
'AGREEMENT' and, collectively, the 'AGREEMENTS'). The summaries do not purport
to be complete and are qualified entirely by reference to the actual terms of
the Agreements relating to a series of Notes.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Servicing Agreement
A 'SERVICING DEFAULT' under the Servicing Agreement in respect of a series
of Securities, unless otherwise specified in the Prospectus Supplement,
generally will include: (i) any failure by the Master Servicer to make a
required deposit to the Custodial Account or the Payment Account or, if the
Master Servicer is the Paying Agent, to pay to the holders of any class of
Securities of such series any required payment which continues unremedied for
five business days after the giving of written notice of such failure to the
Master Servicer by the Indenture Trustee or the Issuer (or the majority holder
of the Ownership Interest in the Special Purpose Entity or the Credit Enhancer,
if applicable); (ii) any failure by the Master Servicer duly to observe or
perform in any material respect any other of its covenants or agreements in the
Servicing Agreement with respect to such series of Securities which continues
unremedied for 45 days after the giving of written notice of such failure to the
Master Servicer by the Indenture Trustee or the Issuer (or the majority holder
of the Ownership Interest in the Special Purpose Entity or the Credit Enhancer,
if applicable); (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings regarding the
Master Servicer and certain actions by the Master Servicer indicating its
insolvency or inability to pay its obligations and (iv) any other Servicing
Default as set forth in the Servicing Agreement. A default pursuant to the terms
of any Servicing Agreement relating to any Private Securities included in any
Trust Fund will not constitute an Event of Default under the related Trust
Agreement or Indenture.
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So long as a Servicing Default remains unremedied, either the Company or
the Indenture Trustee may (except as otherwise provided for in the related
Agreement with respect to the Special Purpose Entity or the Credit Enhancer, if
applicable), by written notification to the Master Servicer and to the Issuer or
the Indenture Trustee or Trust Fund, as applicable, terminate all of the rights
and obligations of the Master Servicer under the Servicing Agreement (other than
any right of the Master Servicer as Securityholder and other than the right to
receive servicing compensation, expenses for servicing the Trust Assets during
any period prior to the date of such termination, and such other reimbursement,
of amounts the Master Servicer is entitled to withdraw from the Custodial
Account) whereupon the Indenture Trustee will succeed to all responsibilities,
duties and liabilities of the Master Servicer under such Servicing Agreement
(other than the obligation to purchase Trust Assets under certain circumstances)
and will be entitled to similar compensation arrangements. In the event that the
Indenture Trustee would be obligated to succeed the Master Servicer but is
unwilling so to act, it may appoint (or if it is unable so to act, it shall
appoint) or petition a court of competent jurisdiction for the appointment of an
approved mortgage servicing institution with a net worth of at least $10,000,000
to act as successor to the Master Servicer under the Servicing Agreement (unless
otherwise set forth in the Servicing Agreement). Pending such appointment, the
Indenture Trustee is obligated to act in such capacity. The Indenture Trustee
and such successor may agree upon the servicing compensation to be paid, which
in no event may be greater than the compensation to the initial Master Servicer
under the Servicing Agreement.
Indenture
An 'EVENT OF DEFAULT' under the Indenture in respect of each series of
Notes, unless otherwise specified in the Prospectus Supplement, generally will
include: (i) a default for five days or more in the payment of any principal of
or interest on any Note of such series; (ii) failure to perform any other
covenant of the Company or the Trust Fund in the Indenture which continues for a
period of thirty days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement (and if the Credit
Enhancer defaults in the performance of its obligations, if applicable); (iii)
any representation or warranty made by the Company or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such series having been
incorrect in a material respect as of the time made, and such breach is not
cured within thirty days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iv) certain events
of bankruptcy, insolvency, receivership or liquidation of the Company or the
Trust Fund (and if the Credit Enhancer defaults in the performance of its
obligations, if applicable); or (v) any other Event of Default provided with
respect to Notes of that series.
If an Event of Default with respect to the Notes of any series at the time
outstanding occurs and is continuing, either the Indenture Trustee, the Credit
Enhancer (if applicable) or the holders of a majority of the then aggregate
outstanding amount of the Notes of such series may declare the principal amount
(or, if the Notes of that series are Accrual Notes, such portion of the
principal amount as may be specified in the terms of that series, as provided in
the related Prospectus Supplement) of all the Notes of such series to be due and
payable immediately. Such declaration may, under certain circumstances, be
rescinded and annulled by the holders of a majority in aggregate outstanding
amount of the related Notes.
If, following an Event of Default with respect to any series of Notes, the
Notes of such series have been declared to be due and payable, the Indenture
Trustee (with the consent of the Credit Enhancer, if applicable) may, in its
discretion, notwithstanding such acceleration, elect to maintain possession of
the collateral securing the Notes of such series and to continue to apply
payments on such collateral as if there had been no declaration of acceleration
if such collateral continues to provide sufficient funds for the payment of
principal of and interest on the Notes of such series as they would have become
due if there had not been such a declaration. In addition, the Indenture Trustee
may not sell or otherwise liquidate the collateral securing the Notes of a
series following an Event of Default, unless (a) the holders of 100% of the then
aggregate outstanding amount of the Notes of such series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding Notes of
such series (and to reimburse the Credit Enhancer, if applicable) at the date of
such sale or (c) the Indenture Trustee determines that such collateral would not
be sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such Notes had not been declared due and
payable, and the Indenture Trustee obtains
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the consent of the holders of 66 2/3% of the then aggregate outstanding amount
of the Notes of such series (and the Credit Enhancer, if applicable).
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default, the Indenture provides that the Indenture
Trustee will have a prior lien on the proceeds of any such liquidation for
unpaid fees and expenses. As a result, upon the occurrence of such an Event of
Default, the amount available for payments to the Noteholders would be less than
would otherwise be the case. However, the Indenture Trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the Noteholders after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount that is unamortized.
No Securityholder generally will have any right under a Trust Agreement or
Indenture to institute any proceeding with respect to such Agreement unless (a)
such holder previously has given to the Indenture Trustee written notice of
default and the continuance thereof, (b) the holders of Securities of any class
evidencing not less than 25% of the aggregate Percentage Interests constituting
such class (i) have made written request upon the Indenture Trustee to institute
such proceeding in its own name as Indenture Trustee thereunder and (ii) have
offered to the Indenture Trustee reasonable indemnity, (c) the Indenture Trustee
has neglected or refused to institute any such proceeding for 60 days after
receipt of such request and indemnity and (d) no direction inconsistent with
such written request has been given to the Indenture Trustee during such 60 day
period by the Holders of a majority of the Security Balances of such class
(except as otherwise provided for in the related Agreement with respect to the
Credit Enhancer). However, the Indenture Trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the applicable Agreement or
to institute, conduct or defend any litigation thereunder or in relation thereto
at the request, order or direction of any of the holders of Securities covered
by such Agreement, unless such Securityholders have offered to the Indenture
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
AMENDMENT
Unless otherwise stated in the related Prospectus Supplement, each
Agreement may be amended by the parties thereto (except as otherwise provided
for in the related Agreement with respect to the Credit Enhancer) without the
consent of the related Noteholders, (i) to cure any ambiguity; (ii) to correct
or supplement any provision therein which may be inconsistent with any other
provision therein or to correct any error; (iii) to change the timing and/or
nature of deposits in the Custodial Account or the Payment Account or to change
the name in which the Custodial Account is maintained (except that (a) deposits
to the Payment Account may not occur later than the related Payment Date, (b)
such change may not adversely affect in any material respect the interests of
any Securityholder, as evidenced by an opinion of counsel, and (c) such change
may not adversely affect the then-current rating of any rated Securities, as
evidenced by a letter from each applicable Rating Agency) as specified in the
related Prospectus Supplement; or (iv) to make any other provisions with respect
to matters or questions arising under such Agreement which are not materially
inconsistent with the provisions thereof, so long as such action will not
adversely affect in any material respect the interests of any Securityholder.
Unless otherwise stated in the related Prospectus Supplement, each
Agreement may also be amended by the parties thereto (except as otherwise
provided for in the related Agreement with respect to the Credit Enhancer) with
the consent of the holders of Securities of each class affected thereby
evidencing, in each case, not less than 66% of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Agreement or
of modifying in any manner the rights of the related Securityholders, except
that no such amendment may (i) reduce in any manner the amount of, or delay the
timing of, payments received on Trust Assets which are required to be paid on a
Security of any class without the consent of the holder of such Security, (ii)
impair the right of any Securityholder to institute suit for the enforcement of
the provisions of the Agreements or
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(iii) reduce the percentage of Securities of any class the holders of which are
required to consent to any such amendment unless the holders of all Securities
of such class have consented to the change in such percentage.
TERMINATION; REDEMPTION OF NOTES
Trust Agreement
The obligations created by the Trust Agreement for each series of
Securities (other than certain limited payment and notice obligations of the
Owner Trustee and the Company, respectively) will terminate upon the payment to
the related Securityholders (including, the Notes issued pursuant to the related
Indenture) of all amounts held by the Master Servicer and required to be paid to
such Securityholders following the earlier of (i) the final payment or other
liquidation or disposition (or any advance with respect thereto) of the last
Trust Asset subject thereto and all property acquired upon foreclosure or deed
in lieu of foreclosure of any Trust Asset and (ii) the purchase by the Master
Servicer or the Company from the Trust Fund (or from the Special Purpose Entity,
if applicable) for such series of all remaining Trust Assets and all property
acquired in respect of such Trust Assets.
Indenture
The Indenture will be discharged with respect to a series of Notes (except
with respect to certain continuing rights specified in the Indenture) upon the
distribution to Noteholders of all amounts required to be distributed pursuant
to the Indenture.
THE OWNER TRUSTEE
The Owner Trustee under the Trust Agreement will be named in the related
Prospectus Supplement. The commercial bank or trust company serving as Owner
Trustee may have normal banking relationships with the Company and/or its
affiliates, including Residential Funding.
The Owner Trustee may resign at any time, in which event the Administrator
or the Indenture Trustee will be obligated to appoint a successor owner trustee
as set forth in the Agreements. The Administrator or the Indenture Trustee may
also remove the Owner Trustee if the Owner Trustee ceases to be eligible to
continue as such under the Trust Agreement or if the Owner Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Administrator or the
Indenture Trustee will be obligated to appoint a successor Owner Trustee. Any
resignation or removal of the Owner Trustee and appointment of a successor Owner
Trustee will not become effective until acceptance of the appointment by the
successor Owner Trustee.
THE INDENTURE TRUSTEE
The Indenture Trustee under the Indenture will be named in the related
Prospectus Supplement. The commercial bank or trust company serving as Indenture
Trustee may have normal banking relationships with the Company and/or its
affiliates, including Residential Funding.
The Indenture Trustee may resign at any time, in which event the Company,
the Owner Trustee or the Administrator will be obligated to appoint a successor
indenture trustee as set forth in the Indenture. The Company, the Owner Trustee
or the Administrator as set forth in the Indenture may also remove the Indenture
Trustee if the Indenture Trustee ceases to be eligible to continue as such under
the Indenture or if the Indenture Trustee becomes insolvent. Upon becoming aware
of such circumstances, the Company, the Owner Trustee or the Administrator will
be obligated to appoint a successor Indenture Trustee. If so specified in the
Indenture, the Indenture Trustee may also be removed at any time by the holders
of a majority principal balance of the Notes. Any resignation or removal of the
Indenture Trustee and appointment of a successor Indenture Trustee will not
become effective until acceptance of the appointment by the successor Indenture
Trustee.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a Note will depend on the price paid by the holder
for such Note, the Interest Rate on any such Note entitled to payments of
interest (which Interest Rate may vary if so specified in the related Prospectus
Supplement) and the rate and timing of principal payments (including payments in
excess of required
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installments, prepayments or terminations, liquidations and repurchases) on the
Trust Assets and the rate and timing of Draws (if applicable) and the allocation
thereof to reduce the principal balance of such Note (or notional amount
thereof, if applicable).
The amount of interest payments on a Trust Asset made monthly to holders of
a class of Notes entitled to payments of interest will be calculated on the
basis of such class's specified percentage of each such payment of interest (or
accrual in the case of Accrual Notes) and will be expressed as a fixed,
adjustable or variable Interest Rate payable on the outstanding principal
balance or notional amount of such Note, or any combination of such Interest
Rates, calculated as described herein and in the related Prospectus Supplement.
See 'Description of the Notes -- Payments.' Holders of Strip Notes or a class of
Notes having a Interest Rate that varies based on the weighted average Mortgage
Rate of the underlying Trust Assets will be affected by disproportionate
prepayments and repurchases of Trust Assets having higher Net Mortgage Rates or
rates applicable to the Strip Notes, as applicable.
The effective yield to maturity to each holder of Notes entitled to
payments of interest will be below that otherwise produced by the applicable
Interest Rate and purchase price of such Note to the extent that interest
accrues on each Trust Asset during the calendar month or a period preceding a
Payment Date instead of through the day immediately preceding such Payment Date.
A class of Notes may be entitled to payments of interest at a variable or
adjustable Interest Rate, or any combination of such Interest Rates, as
specified in the related Prospectus Supplement. A variable Interest Rate may be
calculated based on the weighted average of the Mortgage Rates (net of Servicing
Fees and any Excess Spread or Excluded Spread) of the related Trust Assets (the
'NET MORTGAGE RATE') or certain balances thereof for the month preceding the
Payment Date, by reference to an index or otherwise. The aggregate payments of
interest on a class of Notes, and the yield to maturity thereon, will be
affected by the rate of payment of principal on the Notes (or the rate of
reduction in the notional amount of Notes entitled to payments of interest
only). The yield on the Notes will also be affected by liquidations of Trust
Assets following Mortgagor defaults and by purchases of Trust Assets in the
event of certain breaches of representations made in respect of such Trust
Assets. See 'Trust Asset Program -- Representations Relating to Trust Assets'
and 'Description of the Notes -- Assignment of Trust Assets' above. In addition,
if the index used to determine the Interest Rate for the Notes is different than
the Index applicable to the Mortgage Rates, the yield on the Notes will be
sensitive to changes in the index related to the Interest Rate and the yield on
the Notes may be reduced by application of a cap on the Interest Rate based on
the weighted average of the Net Mortgage Rates or such other formulas as may be
set forth in the related Prospectus Supplement.
In general, if a Note is purchased at a premium over its face amount and
payments of principal on such Note occur at a rate faster than anticipated at
the time of purchase, the purchaser's actual yield to maturity will be lower
than that assumed at the time of purchase. Conversely, if a Note is purchased at
a discount from its face amount and payments of principal on such Note occur at
a rate slower than that assumed at the time of purchase, the purchaser's actual
yield to maturity will be lower than that originally anticipated. If Strip Notes
are issued evidencing a right to payments of interest only or disproportionate
payments of interest, a faster than expected rate of principal payments on the
Trust Assets (net of Draws, if applicable) will negatively affect the total
return to investors in any such Notes. The yield on a class of Strip Notes that
is entitled to receive payments of interest only will nevertheless be affected
by any losses on the related Trust Assets because of the effect on the timing
and amount of payments. In certain circumstances, rapid principal payments on
the Trust Assets (net of Draws, if applicable) may result in the failure of such
holders to recoup their original investment. If Strip Notes are issued
evidencing a right to payments of principal only or disproportionate payments of
principal, a slower than expected rate of principal payments on the Trust Assets
(net of Draws, if applicable) could negatively affect the anticipated yield on
such Strip Notes. In addition, the total return to investors of Notes evidencing
a right to payments of interest at a rate that is based on the weighted average
Net Mortgage Rate of the Trust Assets from time to time will be adversely
affected by principal payments on Trust Assets with Mortgage Rates higher than
the weighted average Mortgage Rate on the Trust Assets. In general, mortgage
loans with higher Mortgage Rates or Gross Margins are likely to prepay at a
faster rate than mortgage loans with lower Mortgage Rates or Gross Margins. In
addition, the yield to maturity on certain other types of classes of Notes,
including Accrual Notes, Notes with a Interest Rate that fluctuates inversely
with or at a multiple of an index or certain other classes in a series including
more than one class of Notes, may be relatively more sensitive to the rate of
principal payments on the related Trust Assets (net of Draws if applicable) than
other classes of Notes.
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The outstanding principal balances of manufactured housing contracts, home
equity loans and home improvement contracts are, in general, much smaller than
traditional first lien mortgage loan balances, and the original terms to
maturity of such contracts are generally shorter than those of traditional first
lien mortgage loans. As a result, changes in interest rates will not affect the
monthly payments on manufactured housing contracts and home improvement
contracts to the same degree that changes in mortgage interest rates will affect
the monthly payments on such mortgage loans. Consequently, the effect of changes
in prevailing interest rates on the prepayment rates on manufactured housing
contracts and home improvement contracts may not be similar to the effects of
such changes on mortgage loan prepayment rates, or such effects may be similar
to the effects of such changes on mortgage loan prepayment rates, but to a
smaller degree.
The timing of changes in the rate of principal payments on a Note may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments experienced over time is consistent with an
investor's expectation. In general, the earlier a payment of principal on a
Note, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments occurring at a
rate higher (or lower) than the rate anticipated by the investor during the
period immediately following the issuance of a series of Notes would not be
fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
The rate and timing of defaults on the Trust Assets will also affect the
rate and timing of principal payments on the Trust Assets and thus the yield on
the related Notes. For a general discussion of the risk of defaults on the Trust
Assets, see 'Risk Factors' herein. There can be no assurance as to the rate of
losses or delinquencies on any of the Trust Assets, however, such losses and
delinquencies may be expected to be higher than those of traditional first lien
mortgage loans. To the extent that any losses are incurred on any of the Trust
Assets that are not covered by the applicable credit enhancement, holders of
Notes of the series evidencing interests in the related Pool (or certain classes
thereof) will bear all risk of such losses resulting from default by Mortgagors.
See 'Risk Factors -- Limitations, Reduction and Substitution of Credit
Enhancement' herein. Even where the applicable credit enhancement covers all
losses incurred on the Trust Assets, the effect of losses may be to increase
prepayment experience on the Trust Assets, thus reducing average weighted life
and affecting yield to maturity.
With respect to certain Trust Assets, the Mortgage Rate at origination may
be below the rate that would result from the sum of the then-applicable Index
and Gross Margin. Under the applicable underwriting standards, Mortgagors are
generally qualified based on an assumed payment which reflects a rate
significantly lower than the maximum rate. The repayment of any such Trust Asset
may thus be dependent on the ability of the mortgagor to make larger interest
payments following the adjustment of the Mortgage Rate.
As discussed under 'Risk Factors -- Special Features of Certain Trust
Assets Secured by Junior Liens on Mortgaged Properties -- Revolving Credit Loan
Characteristics,' the Revolving Credit Loans are not expected to significantly
amortize prior to maturity. As a result, a borrower will generally be required
to pay a substantial principal amount at the maturity of a Revolving Credit
Loan. Such Revolving Credit Loans pose a greater risk of default than
fully-amortizing Revolving Credit Loans, because the Mortgagor's ability to make
such a substantial payment at maturity will generally depend on the Mortgagor's
ability to obtain refinancing of such Revolving Credit Loans or to sell the
Mortgaged Property prior to the maturity of the Revolving Credit Loan. The
ability to obtain refinancing will depend on a number of factors prevailing at
the time refinancing or sale is required, including, without limitation, the
Mortgagor's personal economic circumstances, the Mortgagor's equity in the
related Mortgaged Property, real estate values, prevailing market interest
rates, tax laws and national and regional economic conditions. For a general
discussion of factors that may affect a Mortgagor's personal economic
circumstances, see 'Risk Factors -- Special Features of Certain Trust Assets
Secured by Junior Liens on Mortgaged Properties -- Mortgagor Credit' herein.
Unless otherwise specified in the related Prospectus Supplement, neither the
Company, Residential Funding, GMAC Mortgage nor any of their affiliates will be
obligated to refinance or repurchase any Trust Asset or to sell any Mortgaged
Property.
For any Revolving Credit Loans, Home Equity Loans and any Contracts secured
by junior mortgages, any inability of the Mortgagor to pay off the balance
thereof may also affect the ability of the Mortgagor to obtain refinancing at
any time of any related senior mortgage loan, thereby preventing a potential
improvement in the Mortgagor's circumstances. Furthermore, if so specified in
the related Prospectus Supplement, under the Servicing Agreement the Master
Servicer may be restricted or prohibited from consenting to any refinancing of
any related senior mortgage loan, which in turn could adversely affect the
Mortgagor's circumstances or result in
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a prepayment or default under the corresponding junior Revolving Credit Loan,
Home Equity Loan or Contract, as applicable.
In addition to the Mortgagor's personal economic circumstances, a number of
factors, including homeowner mobility, job transfers, changes in the Mortgagor's
housing needs, the Mortgagor's net equity in the Mortgaged Property, changes in
the value of the Mortgaged Property, national and regional economic conditions,
enforceability of due-on-sale clauses, prevailing market interest rates,
servicing decisions, solicitations and the availability of mortgage funds,
seasonal purchasing and payment habits of borrowers or changes in the
deductibility for federal income tax purposes of interest payments on home
equity loans, may affect the rate and timing of principal payments on the Trust
Assets or Draws on the Revolving Credit Loans. For a discussion of certain
factors that may affect national and regional economic conditions, see 'Risk
Factors -- Special Features of Certain Trust Assets Secured by Junior Liens on
Mortgaged Properties -- Mortgagor Credit' herein. There can be no assurance as
to the rate of principal payments or Draws on the Revolving Credit Loans. The
Trust Assets generally may be prepaid in full or in part without penalty. The
Company has no significant experience with respect to the rate of principal
prepayments on home improvement contracts or manufactured housing contracts, but
generally expects that prepayments on home improvement contracts will be higher
than certain other Trust Assets due to the possibility of increased property
value resulting from the home improvement and greater refinance options. The
Company generally expects that prepayments on manufactured housing contracts
will be lower than on other Trust Assets because manufactured housing contracts
may have less refinance options. The rate of principal payments and the rate of
Draws (if applicable) may fluctuate substantially from time to time. Generally,
home equity loans are not viewed by mortgagors as permanent financing. Due to
the unpredictable nature of both principal payments and Draws, the rates of
principal payments net of Draws for such loans may be much more volatile than
for typical first lien mortgage loans.
The yield to maturity of the Notes of any series, or the rate and timing of
principal payments or Draws (if applicable) on the related Trust Assets, may
also be affected by a wide variety of specific terms and conditions applicable
to the respective programs under which the Trust Assets were originated. For
example, the Revolving Credit Loans may provide for future Draws to be made only
in specified minimum amounts, or alternatively may permit Draws to be made by
check or through a credit card in any amount. A pool of Revolving Credit Loans
subject to the latter provisions may be likely to remain outstanding longer with
a higher aggregate principal balance than a pool of Revolving Credit Loans with
the former provisions, because of the relative ease of making new Draws.
Furthermore, the Trust Assets may provide for interest rate changes on a daily
or monthly basis, or may have Gross Margins that may vary under certain
circumstances over the term of the loan. In extremely high market interest rate
scenarios, Notes backed by Trust Assets with adjustable rates subject to
substantially higher maximum rates than typically apply to adjustable rate first
mortgage loans may experience rates of default and liquidation substantially
higher than those that have been experienced on other adjustable rate mortgage
loan pools.
The yield to maturity of the Notes of any series, or the rate and timing of
principal payments on the Trust Assets or Draws on the related Revolving Credit
Loans and corresponding payments on the Notes, will also be affected by the
specific terms and conditions applicable to the Notes. For example, if the index
used to determine the Interest Rates for a series of Notes is different from the
Index applicable to the Mortgage Rates of the underlying Trust Assets, the yield
on the Notes may be reduced by application of a cap on the Interest Rates based
on the weighted average of the Mortgage Rates. Depending on applicable cash flow
allocation provisions, changes in the relationship between the two indexes may
also affect the timing of certain principal payments on the Notes, or may affect
the amount of any Overcollateralization (or the amount on deposit in any Reserve
Fund) which could in turn accelerate the payment of principal on the Notes if so
provided in the Prospectus Supplement. For any series of Notes backed by
Revolving Credit Loans, provisions governing whether future Draws on the
Revolving Credit Loans will be included in the Trust Fund will have a
significant effect on the rate and timing of principal payments on the Notes.
The yield to maturity of the Notes of any series, or the rate and timing of
principal payments on the Trust Assets may also be affected by the risks
associated with certain Trust Assets. See 'Risk Factors -- Risks Associated with
Certain Trust Assets' herein and 'Risk Factors' in the related Prospectus
Supplement.
As a result of the payment terms of the Revolving Credit Loans or of the
Note provisions relating to future Draws, there may be no principal payments on
such Notes in any given month. In addition, it is possible that the aggregate
Draws on Revolving Credit Loans included in a Pool may exceed the aggregate
payments with respect
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to principal on such Revolving Credit Loans for the related period. If specified
in the related Prospectus Supplement, a series of Notes may provide for a period
during which all or a portion of the principal collections on the Revolving
Credit Loans are reinvested in Additional Balances or are accumulated in a trust
account pending commencement of an amortization period with respect to the
Notes.
Unless otherwise specified in the related Prospectus Supplement, Revolving
Credit Loans generally will and Home Equity Loans and, as applicable, Contracts
may contain due-on-sale provisions permitting the mortgagee to accelerate the
maturity of such Trust Asset upon sale or certain transfers by the Mortgagor of
the underlying Mortgaged Property. Unless the related Prospectus Supplement
indicates otherwise, the Master Servicer will generally enforce any due-on-sale
clause to the extent it has knowledge of the conveyance or proposed conveyance
of the underlying Mortgaged Property and it is entitled to do so under
applicable law; provided, however, that the Master Servicer will not take any
action in relation to the enforcement of any due-on-sale provision that would
adversely affect or jeopardize coverage under any applicable insurance policy.
Adjustable Rate Home Equity Loans and, as applicable, Contracts may be assumable
under certain conditions if the proposed transferee of the related Mortgaged
Property establishes its ability to repay such Trust Asset and, in the
reasonable judgment of the Master Servicer or the related Subservicer, the
security for such Trust Asset would not be impaired by the assumption. The
extent to which Trust Assets are assumed by purchasers of the Mortgaged
Properties rather than prepaid by the related Mortgagors in connection with the
sales of the Mortgaged Properties will affect the weighted average life of the
related series of Notes. See 'Servicing of Trust Assets -- Collection and Other
Servicing Procedures' and 'Certain Legal Aspects of the Trust Assets and Related
Matters -- Enforceability of Certain Provisions' for a description of certain
provisions of the Servicing Agreement and certain legal developments that may
affect the prepayment experience on the Trust Assets.
In addition, certain Private Securities included in a Pool may be backed by
underlying Trust Assets having differing interest rates. Accordingly, the rate
at which principal payments are received on the related Notes will, to a certain
extent, depend on the interest rates on such underlying Trust Assets.
A Subservicer or the Master Servicer may allow the refinancing of a Trust
Asset in any Trust Fund by accepting prepayments thereon and permitting a new
loan to the same borrower secured by a mortgage on the same property, which may
be originated by the Subservicer or the Master Servicer or any of their
respective affiliates or by an unrelated entity. In the event of such a
refinancing, the new loan would not be included in the related Trust Fund and,
therefore, such refinancing would have the same effect as a prepayment in full
of the related Trust Asset. A Subservicer or the Master Servicer may, from time
to time, implement programs designed to encourage refinancing. Such programs may
include, without limitation, modifications of existing loans, general or
targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. Targeted
solicitations may be based on a variety of factors, including the credit of the
borrower or the location of the mortgaged property. In addition, Subservicers or
the Master Servicer may encourage assumptions of Trust Assets, including
defaulted Trust Assets, under which creditworthy borrowers assume the
outstanding indebtedness of such Trust Assets which may be removed from the
related Pool. As a result of such programs, with respect to the Pool underlying
any Trust Fund (i) the rate of principal prepayments of the Trust Assets in such
Pool may be higher than would otherwise be the case, and (ii) in some cases, the
average credit or collateral quality of the Trust Assets remaining in the Pool
may decline.
If the applicable Agreement for a series of Notes provides for a Funding
Account or other means of funding the transfer of additional Trust Assets to the
related Trust, as described under 'Description of the Notes -- Funding Account'
herein, and the Trust is unable to acquire such additional Trust Assets within
any applicable time limit, the amounts set aside for such purpose may be applied
as principal payments on one or more classes of Notes of such series. In
addition, if the Trust Fund for a series of Notes includes Additional Balances
and the rate at which such Additional Balances are generated decreases, the rate
and timing of principal payments on the Notes will be affected and the weighted
average life of the Notes will vary accordingly. The rate at which Additional
Balances are generated may be affected by a variety of factors. See 'Risk
Factors -- Yield and Prepayment Considerations.'
Although the Mortgage Rates on Revolving Credit Loans will and certain
Trust Assets may be subject to periodic adjustments, such adjustments generally
(i) will not increase such Mortgage Rates over a fixed maximum rate during the
life of any Trust Asset and (ii) will be based on an Index (which may not rise
and fall consistently with prevailing market interest rates) plus the related
Gross Margin (which may vary under certain circumstances, and which may be
different from margins being used at the time for newly originated adjustable
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rate mortgage loans). As a result, the Mortgage Rates on the Trust Assets in any
Pool at any time may not equal the prevailing rates for similar, newly
originated adjustable rate home equity mortgage loans, lines of credit, home
improvement loans or manufactured housing contracts and accordingly the rate of
principal payments and Draws (if applicable) may be lower or higher that would
otherwise be anticipated. In certain rate environments, the prevailing rates on
fixed-rate mortgage loans may be sufficiently low in relation to the
then-current Mortgage Rates on Trust Assets that the rate of prepayment may
increase as a result of refinancings. There can be no certainty as to the rate
of principal payments on the Trust Assets or Draws on the Revolving Credit Loans
during any period or over the life of any series of Notes.
With respect to any index used in determining the Interest Rates for a
series of Notes or Mortgage Rates of the underlying Trust Assets, a number of
factors affect the performance of such index and may cause such index to move in
a manner different from other indices. To the extent that such index may reflect
changes in the general level of interest rates less quickly than other indices,
in a period of rising interest rates, increases in the yield to Noteholders due
to such rising interest rates may occur later than that which would be produced
by other indices, and in a period of declining rates, such index may remain
higher than other market interest rates which may result in a higher level
prepayments of the Trust Assets, which adjust in accordance with such index,
than of mortgage loans which adjust in accordance with other indices.
Under certain circumstances, the Master Servicer, the Company or, if
specified in the related Prospectus Supplement, another person may have the
option to purchase the Trust Assets in a Trust Fund, thus resulting in the early
retirement of the related Notes. See 'The Agreements -- Termination; Redemption
of Notes.'
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CERTAIN LEGAL ASPECTS OF THE TRUST ASSETS
AND RELATED MATTERS
The following discussion contains summaries of certain legal aspects of the
Trust Assets that are general in nature. Because such legal aspects are governed
in part by state law (which laws may differ from state to state), the summaries
do not purport to be complete, to reflect the laws of any particular state or to
encompass the laws of all states in which the Trust Assets may be situated.
These legal aspects are in addition to the requirements of any applicable FHA
Regulations described in 'Description of FHA Insurance' herein and in the
related Prospectus Supplement with respect to the Contracts partially insured by
FHA pursuant to Title I. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Revolving
Credit Loans, Home Equity Loans, Home Improvement Contracts and Manufactured
Housing Contracts.
GENERAL; TRUST ASSETS SECURED BY MORTGAGES ON MORTGAGED PROPERTY
The Revolving Credit Loans and Home Equity Loans will and, if applicable,
Contracts (in each case other than Cooperative Loans) may be secured by either
deeds of trust, mortgages or deeds to secure debt, depending upon the prevailing
practice in the state in which the related Mortgaged Property is located, and
may have first, second or third priority. Mortgages and deeds to secure debt are
herein referred to as 'mortgages.' Manufactured Housing Contracts evidence both
the obligation of the obligor to repay the loan evidenced thereby and grant a
security interest in the related Manufactured Homes to secure repayment of such
loan. However, as Manufactured Homes have become larger and often have been
attached to their sites without any apparent intention by the borrowers to move
them, courts in many states have held that Manufactured Homes may, under certain
circumstances become subject to real estate title and recording laws. See
' -- Manufactured Housing Contracts' below. In some states, a mortgage or deed
of trust creates a lien upon the real property encumbered by the mortgage or
deed of trust. However, in other states, the mortgage or deed of trust conveys
legal title to the property respectively, to the mortgagee or to a trustee for
the benefit of the mortgagee subject to a condition subsequent (i.e., the
payment of the indebtedness secured thereby). The lien created by the mortgage
or deed of trust is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers. Priority between
mortgages depends on their terms or on the terms of separate subordination or
inter-creditor agreements, the knowledge of the parties in some cases and
generally on the order of recordation of the mortgage in the appropriate
recording office. There are two parties to a mortgage, the mortgagor, who is the
borrower and homeowner, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. In the case of a land trust, there are three parties because title to
the property is held by a land trustee under a land trust agreement of which the
borrower is the beneficiary; at origination of a mortgage loan, the borrower
executes a separate undertaking to make payments on the mortgage note. Although
a deed of trust is similar to a mortgage, a deed of trust has three parties: the
trustor who is the borrower-homeowner; the beneficiary who is the lender; and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. The
trustee's authority under a deed of trust, the grantee's authority under a deed
to secure debt and the mortgagee's authority under a mortgage are governed by
the law of the state in which the real property is located, the express
provisions of the deed of trust or mortgage, and, in certain deed of trust
transactions, the directions of the beneficiary.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of Notes,
the Revolving Credit Loans, Home Equity Loans and Contracts may include
Cooperative Loans. Each debt instrument (a 'COOPERATIVE NOTE') evidencing a
Cooperative Loan will be secured by a security interest in shares issued by the
related corporation (a 'COOPERATIVE') that owns the related apartment building,
which is a corporation entitled to be treated as a housing cooperative under
federal tax law, and in the related proprietary lease or occupancy agreement
granting exclusive rights to occupy a specific dwelling unit in the
Cooperative's building. The security agreement will create a lien upon the
shares of the Cooperative, the priority of which will depend on, among other
things, the terms of the particular security agreement as well as the order of
recordation and/or filing of the agreement (or financing statements related
thereto) in the appropriate recording office.
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Unless otherwise specified in the related Prospectus Supplement, all
Cooperative buildings relating to the Cooperative Loans are located in the State
of New York. Generally, each Cooperative owns in fee or has a leasehold interest
in all the real property and owns in fee or leases the building and all separate
dwelling units therein. The Cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is an underlying
mortgage (or mortgages) on the Cooperative's building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the Cooperative, as mortgagor or lessor, as the case may be, is also
responsible for fulfilling such mortgage or rental obligations. An underlying
mortgage loan is ordinarily obtained by the Cooperative in connection with
either the construction or purchase of the Cooperative's building or the
obtaining of capital by the Cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that Cooperative is the
landlord is generally subordinate to the interest of the holder of an underlying
mortgage and to the interest of the holder of a land lease. If the Cooperative
is unable to meet the payment obligations (i) arising under an underlying
mortgage, the mortgagee holding an underlying mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements or (ii) arising under its land lease, the holder of the landlord's
interest under the land lease could terminate it and all subordinate proprietary
leases and occupancy agreements. In addition, an underlying mortgage on a
Cooperative may provide financing in the form of a mortgage that does not fully
amortize, with a significant portion of principal being due in one final payment
at maturity. The inability of the Cooperative to refinance a mortgage and its
consequent inability to make such final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land,
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
a foreclosure by the holder of an underlying mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the mortgagee who financed the purchase by an individual
tenant-stockholder of shares of the Cooperative or, in the case of the Revolving
Credit Loans and the Home Equity Loans, the collateral securing the Cooperative
Loans.
Each Cooperative is owned by shareholders (referred to as
tenant-stockholders) who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. Generally, a tenant-stockholder
of a Cooperative must make a monthly payment to the Cooperative pursuant to the
proprietary lease, which payment represents such tenant-stockholder's pro rata
share of the Cooperative's payments for its underlying mortgage, real property
taxes, maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights may be financed
through a Cooperative Loan evidenced by a Cooperative Note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related shares of the related Cooperative.
The mortgagee generally takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the mortgagee's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the Cooperative Note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares. See ' -- Foreclosure on Shares of Cooperatives' below.
TAX ASPECTS OF COOPERATIVE OWNERSHIP
In general, a 'tenant-stockholder' (as defined in Section 216(b)(2) of the
Code) of a corporation that qualifies as a 'cooperative housing corporation'
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation representing
his proportionate share of certain interest expenses and certain real estate
taxes allowable as a deduction under Section 216(a) of the Code to the
corporation under Sections 163 and 164 of the Code. In order for a corporation
to qualify under Section 216(b)(1) of the Code for its taxable year in which
such items are allowable as a deduction to the corporation, such section
requires, among other things, that at least 80% of the gross income of the
corporation be derived from its tenant-stockholders. By virtue of this
requirement, the status of a corporation for purposes of Section 216(b)(1) of
the Code must be determined on a year-to-year basis. Consequently, there can be
no assurance that Cooperatives relating to the Cooperative Loans will qualify
under such section for any particular
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year. In the event that such a Cooperative fails to qualify for one or more
years, the value of the collateral securing any related Cooperative Loans could
be significantly impaired because no deduction would be allowable to
tenant-stockholders under Section 216(a) of the Code with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that such a failure would be permitted to continue over
a period of years appears remote.
MANUFACTURED HOUSING CONTRACTS
Except as set forth below, under the laws of most states, manufactured
housing constitutes personal property and is subject to the motor vehicle
registration laws of the state or other jurisdiction in which the unit is
located. In the few states in which certificates of title are not required for
manufactured homes, security interests are perfected by the filing of a
financing statement under Article 9 of the UCC, which has been adopted by all
states. Such financing statements are effective for five years and must be
renewed prior to the end of each five year period. The certificate of title laws
adopted by the majority of states provide that ownership of motor vehicles and
manufactured housing shall be evidenced by a certificate of title issued by the
motor vehicles department (or a similar entity) of such state. In the states
that have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law.
The Master Servicer will be required under the related agreement to effect
such notation or delivery of the required documents and fees, and to obtain
possession of the certificate of title, as appropriate under the laws of the
state in which any Manufactured Home is registered. In the event the Master
Servicer fails, due to clerical errors or otherwise, to effect such notation or
delivery, or files the security interest under the wrong law (for example, under
a motor vehicle title statute rather than under the UCC, in a few states), the
Indenture Trustee may not have a first priority perfected security interest in
the Manufactured Home securing a Manufactured Housing Contract. As Manufactured
Homes have become larger and often have been attached to their sites without any
apparent intention by the borrowers to move them, courts in many states have
held that Manufactured Homes may, under certain circumstances, become subject to
real estate title and recording laws. As a result, a security interest in a
Manufactured Home could be rendered subordinate to the interests of other
parties claiming an interest in the Manufactured Home under applicable state
real estate law. In order to perfect a security interest in a Manufactured Home
under real estate laws, the holder of the security interest must file either a
'fixture filing' under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the home is located. These filings must
be made in the real estate records office of the county where the home is
located. Generally, Manufactured Housing Contracts will contain provisions
prohibiting the obligor from permanently attaching the Manufactured Home to its
site. So long as the obligor does not violate this agreement, a security
interest in the Manufactured Home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to its site, other parties could
obtain an interest in the Manufactured Home that is prior to the security
interest originally retained by the seller and transferred to the Depositor.
The Depositor will assign or cause to be assigned a security interest in
the Manufactured Homes to the Indenture Trustee, on behalf of the
Securityholders. Unless otherwise specified in the related Prospectus
Supplement, neither the Depositor, the Master Servicer nor the Indenture Trustee
will amend the certificates of title to identify the Indenture Trustee, on
behalf of the Securityholders, as the new secured party and, accordingly, the
Depositor or the Seller will continue to be named as the secured party on the
certificates of title relating to the Manufactured Homes. In most states, such
assignment is an effective conveyance of such security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the Depositor's rights as the secured party. However,
in some states there exists a risk that, in the absence of an amendment to the
certificate of title, such assignment of the security interest might not be
effective against creditors of the Depositor or Seller.
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In the absence of fraud, forgery, permanent affixation of the Manufactured
Home to its site, or administrative error by state recording officials, the
notation of the lien of the Depositor on the certificate of title or delivery of
the required documents and fees would be sufficient to protect the Indenture
Trustee against the rights of subsequent purchasers of a Manufactured Home or
subsequent lenders who take a security interest in the Manufactured Home. If
there are any Manufactured Homes as to which the Depositor has failed to perfect
or cause to be perfected the security interest assigned to the Trust Fund, such
security interest would be subordinate to, among others, subsequent purchasers
for value of such Manufactured Home and holders of perfected security interests
in such Manufactured Home. There also exists a risk in not identifying the
Indenture Trustee, on behalf of the Securityholders, as the new secured party on
the certificate of title that, through fraud or negligence, the security
interest of the Indenture Trustee could be released.
In the event that the owner of a Manufactured Home moves such house to a
state other than the state in which such Manufactured Home initially is
registered, under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in the new state.
If the owner were to relocate a Manufactured Home to another state and
re-register the Manufactured Home in such state, and if the Depositor did not
take steps to re-perfect its security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Depositor must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states that provide for notation of lien, the
Depositor would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the
Depositor would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states that do not require a
certificate of title for registration of a Manufactured Home, re-registration
could defeat perfection. Similarly, when an obligor under a manufactured housing
conditional sales contract sells a Manufactured Home, the obligee must surrender
possession of the certificate of title or it will receive notice as a result of
its lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related manufactured housing conditional sales contract
before release of the lien. Under each related agreement, the Master Servicer
will be obligated to take such steps, at the Master Servicer's expense, as are
necessary to maintain perfection of security interests in the Manufactured
Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a prior perfected security interest
therein. The Depositor will obtain the representation of the Seller that it has
no knowledge of any such liens with respect to any Manufactured Home securing a
Manufactured Housing Contract. However, such liens could arise at any time
during the term of a Manufactured Housing Contract. No notice will be given to
the Indenture Trustee or Noteholders in the event such a lien arises.
FORECLOSURE ON REVOLVING CREDIT LOANS, HOME EQUITY LOANS AND CERTAIN CONTRACTS
Although a deed of trust may also be foreclosed by judicial action,
foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In addition to any notice requirements
contained in a deed of trust, in some states, prior to a sale the trustee must
record a notice of default and send a copy to the borrower/trustor and to any
person who has recorded a request for a copy of notice of default and notice of
sale. In addition, in some states, prior to such sale, the trustee must provide
notice to any other individual having an interest of record in the real
property, including any junior lienholders. If the deed of trust is not
reinstated within a specified period, a notice of sale must be posted in a
public place and, in most states, published for a specific period of time in one
or more newspapers in a specified manner prior to the date of trustee's sale. In
addition, some states' laws require that a copy of the notice of sale be posted
on the property and sent to all parties having an interest of record in the real
property.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
in such states, the borrower, or any other person having a junior encumbrance on
the real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation.
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Foreclosure of a mortgage generally is accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. If the mortgagee's right to foreclose is contested, the legal
proceedings necessary to resolve the issue can be time consuming.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is generally a
public sale. However, because of the difficulty a potential third-party buyer at
the sale might have in determining the exact status of title, and because the
physical condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for a credit bid less than or equal to the unpaid
principal amount of note plus the accrued and unpaid interest and the expense of
foreclosure, in which case the mortgagor's debt will be extinguished unless the
lender purchases the property for a lesser amount in order to preserve its right
against a borrower to seek a deficiency judgment and such remedy is available
under state law and the related loan documents. In the same states, there is a
statutory minimum purchase price which the lender may offer for the property and
generally, state law controls the amount of foreclosure costs and expenses,
including attorneys' fees, which may be recovered by a lender. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale.
Generally, the lender will obtain the services of a real estate broker and pay
the broker's commission in connection with the sale of the property. Depending
upon market conditions, the ultimate proceeds of the sale of the property may
not equal the lender's investment in the property and, in some states, the
lender may be entitled to a deficiency judgment. Any loss may be reduced by the
receipt of any mortgage insurance proceeds or other forms of credit enhancement
for a series of Notes. See 'Description of Credit Enhancement.'
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure by a junior
mortgagee triggers the enforcement of a 'due-on-sale' clause in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees to avoid foreclosure. Accordingly,
with respect to those Trust Assets which are junior mortgage loans, if the
lender purchases the property, the lender's title will be subject to all senior
liens and claims and certain governmental liens. The proceeds received by the
referee or trustee from the sale are applied first to the costs, fees and
expenses of sale and then in satisfaction of the indebtedness secured by the
mortgage or deed of trust under which the sale was conducted. Any remaining
proceeds are generally payable to the holders of junior mortgages or deeds of
trust and other liens and claims in order of their priority, whether or not the
borrower is in default. Any additional proceeds are generally payable to the
mortgagor or trustor. The payment of the proceeds to the holders of junior
mortgages may occur in the foreclosure action of the senior mortgagee or may
require the institution of separate legal proceedings. See 'Risk
Factors -- Special Features of Certain Trust Assets Secured by Junior Liens on
Mortgaged Properties' and 'Servicing of Trust Assets -- Realization Upon
Defaulted Loans' herein.
FORECLOSURE ON SHARES OF COOPERATIVES
The Cooperative shares owned by the tenant-stockholder, together with the
rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged, may
be cancelled by the Cooperative for failure by the tenant-stockholder to pay its
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the Cooperative's building incurred by such tenant-stockholder.
Generally, obligations and charges arising under a proprietary lease or
occupancy agreement which are owed to the Cooperative are made liens upon the
shares to which the
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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.
Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
In New York, foreclosure on the Cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the New York
Uniform Commercial Code (the 'UCC') and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
'commercially reasonable' manner. Whether a sale has been conducted in a
'commercially reasonable' manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the sale and the sale
price. Generally, a sale conducted according to the usual practice of banks
selling similar collateral in the same area will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See ' -- Anti-Deficiency Legislation
and Other Limitations on Lenders' below.
REPOSSESSION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
Repossession of manufactured housing is governed by state law. A few states
have enacted legislation that requires that the debtor be given an opportunity
to cure its default (typically 30 days to bring the account current) before
repossession can commence. So long as a manufactured home has not become so
attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in the
event of a default by the obligor will generally be governed by the UCC
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(except in Louisiana). Article 9 of the UCC provides the statutory framework for
the repossession of manufactured housing units. While the UCC as adopted by the
various states may vary in certain small particulars, the general repossession
procedure established by the UCC is as follows:
(i) Except in those states where the debtor must receive notice of the
right to cure a default, repossession can commence immediately upon default
without prior notice. Repossession may be effected either through self-help
(peaceable retaking without court order), voluntary repossession or through
judicial process (repossession pursuant to court-issued writ of replevin).
The self-help and/or voluntary repossession methods are more commonly
employed, and are accomplished simply by retaking possession of the
manufactured home. In cases in which the debtor objects or raises a defense
to repossession, a court order must be obtained from the appropriate state
court, and the manufactured home must then be repossessed in accordance
with that order. Whether the method employed is self-help, voluntary
repossession or judicial repossession, the repossession can be accomplished
either by an actual physical removal of the manufactured home to a secure
location for refurbishment and resale or by removing the occupants and
their belongings from the manufactured home and maintaining possession of
the manufactured home on the location where the occupants were residing.
Various factors may affect whether the manufactured home is physically
removed or left on location, such as the nature and term of any lease of
the site on which it is located and the condition of the unit. In many
cases, leaving the manufactured home on location is preferable, in the
event that the home is already constructed, in order to avoid the cost of
removing the structure. However, in cases where the home is not moved,
expenses for site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation for the
subsequent sale of the manufactured home can commence. Such disposition may
be by public or private sale provided the method, manner, time, place and
terms of the sale are commercially reasonable.
(iii) Sale proceeds will be applied first to repossession expenses
(including expenses incurred in repossessing, storing, refurbishing and
selling costs) and then to satisfaction of the indebtedness. While some
states impose prohibitions or limitations on deficiency judgments if the
net proceeds from resale do not cover the full amount of the indebtedness,
the remainder may be sought from the debtor in the form of a deficiency
judgment in those states that do not prohibit or limit such judgments. The
deficiency judgment is a personal judgment against the debtor for the
deficiency. Occasionally, after resale of a manufactured home and payment
of all expenses and indebtedness, there is a surplus of funds. In such
event, the UCC requires the party suing for the deficiency judgment to
remit the surplus to the debtor. Because the defaulting owner of a
manufactured home generally has very little capital or income available
following repossession, a deficiency judgment is generally not sought or,
if obtained, will be settled at a significant discount in light of the
defaulting owner's limited financial condition.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors or other parties are given
a statutory period (generally ranging from six months to two years) in which to
redeem the property from the foreclosure sale. In some states, redemption may
occur only upon payment of the entire principal balance of the loan, accrued
interest and expenses of foreclosure. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. In some
states, the right to redeem is an equitable right. The equity of redemption,
which is a non-statutory right that must be exercised prior to a foreclosure
sale, should be distinguished from statutory rights of redemption. The effect of
a statutory right of redemption is to diminish the ability of the lender to sell
the foreclosed property. The rights of redemption would defeat the title of any
purchaser subsequent to foreclosure or sale under a deed of trust. Consequently,
the practical effect of the redemption right is to force the lender to maintain
the property and pay the expenses of ownership until the redemption period has
expired.
NOTICE OF SALE; REDEMPTION RIGHTS WITH RESPECT TO MANUFACTURED HOMES
While state laws do not usually require notice to be given to debtors prior
to repossession, many states require delivery of a notice of default and notice
of the debtor's right to cure defaults before repossession. The
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law in most states also requires that the debtor be given notice of sale prior
to the resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states (including California), statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender. In
the case of a Revolving Credit Loan, Home Equity Loan and a Contract secured by
a property owned by a trust where the Mortgage Note is executed on behalf of the
trust, a deficiency judgment against the trust following foreclosure or sale
under a deed of trust, even if obtainable under applicable law, may be of little
value to the mortgagee or beneficiary if there are no trust assets against which
such deficiency judgment may be executed. Some state statutes require the
beneficiary or mortgagee to exhaust the security afforded under a deed of trust
or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. In certain other states, the
lender has the option of bringing a personal action against the borrower on the
debt without first exhausting such security; however, in some of these states,
the lender, following judgment on such personal action, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the security. Consequently, the practical effect of the election requirement, in
those states permitting such election, is that lenders will usually proceed
against the security first rather than bringing a personal action against the
borrower.
Finally, in certain other states, statutory provisions limit any deficiency
judgment against the borrower following a foreclosure to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a beneficiary
or mortgagee from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative Shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Article 9 to prohibit or limit a deficiency award in certain
circumstances, including circumstances where the disposition of the collateral
(which, in the case of a Cooperative Loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement) was not
conducted in a commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon its collateral and/or
enforce a deficiency judgment. For example, under the federal bankruptcy law,
all actions against the debtor, the debtor's property and any co-debtor are
automatically stayed upon the filing of a bankruptcy petition. Moreover, a court
having federal bankruptcy jurisdiction may permit a debtor through its Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on such debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule, even though the lender accelerated the mortgage loan and final
judgment of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by permitting the borrower to pay over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property which is not the principal
residence of the debtor may be modified. These courts have allowed modifications
that include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule, forgiving all or a portion of the
debt and reducing the lender's security interest to the value of the residence,
thus leaving the lender a general unsecured creditor for the difference between
the value of the residence and the outstanding balance of the loan. Generally,
however, the terms of a mortgage loan secured only by a mortgage on real
property that is the debtor's principal residence may not be modified pursuant
to a plan confirmed pursuant to Chapter 13 except with respect to mortgage
payment arrearages, which may be cured within a reasonable time period. Courts
with federal bankruptcy jurisdiction similarly may be able to modify the terms
of a Cooperative Loan.
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Certain tax liens arising under the Code may, in certain circumstances,
have priority over the lien of a mortgage or deed of trust. This may have the
effect of delaying or interfering with the enforcement of rights with respect to
a defaulted Revolving Credit Loan, Home Equity Loan or a Contract. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
The Revolving Credit Loans, Home Equity Loans and Contracts may be subject
to special rules, disclosure requirements and other provisions that were added
to the federal Truth-in-Lending Act by the Home Ownership and Equity Protection
Act of 1994 (such Revolving Credit Loans, Home Equity Loans and Contracts, 'HIGH
COST LOANS'), if such Trust Assets were originated on or after October 1, 1995,
are not loans made to finance the purchase of the mortgaged property and have
interest rates or origination costs in excess of certain prescribed levels.
Purchasers or assignees of any High Cost Loan, including any Trust Fund, could
be liable for all claims and subject to all defenses arising under such
provisions that the borrower could assert against the originator thereof.
Remedies available to the borrower include monetary penalties, as well as
rescission rights if the appropriate disclosures were not given as required.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ('CERCLA'), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the 'CONSERVATION ACT') amended, among other things, the provisions of CERCLA
with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the mortgaged property. The
Conservation Act provides that 'merely having the capacity to influence, or
unexercised right to control' operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of substantially all of the operational functions of the
mortgaged property. The Conservation Act also provides that a lender will
continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
Other federal and state laws in certain circumstances may impose liability
on a secured party which takes a deed-in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a mortgaged property on
which contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. Such cleanup costs may be substantial. It is possible that
such cleanup costs could become a liability of a Trust Fund and reduce the
amounts otherwise payable to the holders of the related series of Notes.
Moreover, certain federal statutes and certain states by statute impose a lien
for any cleanup costs incurred by such state on the property that is the subject
of such cleanup costs (an 'ENVIRONMENTAL LIEN'). All subsequent liens on such
property generally are
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subordinated to such an Environmental Lien and, in some states, even prior
recorded liens are subordinated to Environmental Liens. In the latter states,
the security interest of the trustee in a related parcel of real property that
is subject to such an Environmental Lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged property
prior to the origination of the mortgage loan or prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Accordingly, the Company has not made
and will not make such evaluations prior to the origination of the Secured
Contracts. Neither the Company nor any replacement Servicer will be required by
any Agreement to undertake any such evaluations prior to foreclosure or
accepting a deed-in-lieu of foreclosure. The Company does not make any
representations or warranties or assume any liability with respect to the
absence or effect of contaminants on any related real property or any casualty
resulting from the presence or effect of contaminants. However, the Company will
not be obligated to foreclose on related real property or accept a deed-in-lieu
of foreclosure if it knows or reasonably believes that there are material
contaminated conditions on such property. A failure so to foreclose may reduce
the amounts otherwise available to Noteholders of the related series.
CONSUMER PROTECTION LAWS WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
federal Truth-in-Lending Act, Regulation 'Z', the Equal Credit Opportunity Act,
Regulation 'B', the Fair Credit Reporting Act and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions. In some cases, this liability may affect an assignee's ability
to enforce the related contract. In addition, certain of the Contracts may be
subject to special rules, disclosure requirements and other provisions that are
applicable to High Cost Loans discussed above.
Manufactured housing contracts often contain provisions requiring the
obligor to pay late charges if payments are not timely made. In certain cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Unless otherwise provided in the related Prospectus Supplement,
under the related agreement, late charges will be retained by the Master
Servicer as additional servicing compensation and any inability to collect these
amounts will not affect payments to Noteholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called 'HOLDER-IN-DUE-COURSE' Rule of the Federal Trade Commission
(the 'FTC RULE') has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses that the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due thereunder.
Most of the Manufactured Housing Contracts in a Trust Fund will be subject
to the requirements of the FTC Rule. Accordingly, the Indenture Trustee, as
holder of the Manufactured Housing Contracts, will be subject to any claims or
defenses that the purchaser of the related Manufactured Home may assert against
the seller of the Manufactured Home, subject to a maximum liability equal to the
amounts paid by the obligor on the Manufactured Housing Contract. If an obligor
is successful in asserting any such claim or defense, and if the Seller had or
should have had knowledge of such claim or defense, the Master Servicer will
have the right to require the Seller to repurchase the Manufactured Housing
Contract because of a breach of its Seller's representation and warranty that no
claims or defenses exist that would affect the obligor's obligation to make the
required payments under the Manufactured Housing Contract. The Seller would then
have the right to require the originating dealer to repurchase the Manufactured
Housing Contract from it and might also have the
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right to recover from the dealer any losses suffered by the Seller with respect
to which the dealer would have been primarily liable to the obligor.
ENFORCEABILITY OF CERTAIN PROVISIONS
The Revolving Credit Loans, Home Equity Loans and, as applicable, Contracts
generally contain due-on-sale clauses. These clauses permit the mortgagee to
accelerate the maturity of the loan if the borrower sells, transfers or conveys
the property without the prior consent of the mortgagee. The enforceability of
these clauses has been the subject of legislation or litigation in many states,
and in some cases the enforceability of these clauses has been limited or
denied. However, the Garn-St Germain Depository Institutions Act of 1982 (the
'GARN-ST GERMAIN ACT'), subject to certain exceptions, preempts state law that
prohibits the enforcement of due-on-sale clauses and permits lenders to enforce
these clauses in accordance with their terms. The Garn-St Germain Act does
'encourage' lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of a prepayment penalty upon the acceleration of a loan pursuant
to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the related Trust Assets and the number of Trust Assets which may be
outstanding until maturity.
Forms of notes and mortgages used by lenders may contain provisions
obligating the borrower to pay a late charge if payments are not timely made,
and in some circumstances may provide for prepayment fees or penalties if the
obligation is paid prior to maturity. In addition to limitations imposed by FHA
Regulations with respect to Contracts partially insured by the FHA pursuant to
Title I, in certain states, there are or may be specific limitations upon the
late charges that a lender may collect from a borrower for delinquent payments.
Certain states also limit the amounts that a lender may collect from a borrower
as an additional charge if the loan is prepaid.
In foreclosure actions, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have required that lenders reinstate
loans or recast payment schedules in order to accommodate borrowers who are
suffering from temporary financial disability. In other cases, courts have
limited the right of the lender to foreclose if the default under the mortgage
instrument is not monetary, such as the borrower failing to adequately maintain
the property or the borrower executing a second mortgage or deed of trust
affecting the property. Finally, some courts have been faced with the issue of
whether or not federal or state constitutional provisions reflecting due process
concerns for adequate notice require that borrowers under deeds of trust or
mortgages receive notices in addition to the statutorily prescribed minimum. For
the most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale by a trustee under a deed of trust or under a
mortgage having a power of sale, does not involve sufficient state action to
afford constitutional protections to the borrower.
TRANSFER OF MANUFACTURED HOMES
Generally, Manufactured Housing Contracts contain provisions prohibiting
the sale or transfer of the related manufactured homes without the consent of
the obligee on the contract and permitting the acceleration of the maturity of
such contracts by the obligee on the contract upon any such sale or transfer to
which consent has not been given. Unless otherwise provided in the related
Prospectus Supplement, the Master Servicer will, to the extent it has knowledge
of such conveyance or proposed conveyance, exercise or cause to be exercised its
rights to accelerate the maturity of the related Manufactured Housing Contracts
through enforcement of due-on-sale
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clauses, subject to applicable state law. In certain cases, the transfer may be
made by a delinquent obligor in order to avoid a repossession proceeding with
respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the related due-on-sale clause. The Garn-St Germain Act preempts, subject to
certain exceptions and conditions, state laws prohibiting enforcement of
due-on-sale clauses applicable to the Manufactured Homes. Consequently, in some
cases the Master Servicer may be prohibited from enforcing a due-on-sale clause
in respect of certain Manufactured Homes.
THE HOME IMPROVEMENT CONTRACTS
General
The Home Improvement Contracts, other than those Home Improvement Contracts
that are unsecured or secured by mortgages on real estate (such Home Improvement
Contracts are hereinafter referred to in this section as 'contracts') generally
are 'chattel paper' or constitute 'purchase money security interests' each as
defined in the UCC. Pursuant to the UCC, the sale of chattel paper is treated in
a manner similar to perfection of a security interest in chattel paper. Under
the related agreement, the Depositor will transfer physical possession of the
contracts to the Indenture Trustee or a designated custodian or may retain
possession of the contracts as custodian for the Indenture Trustee. In addition,
the Depositor will make an appropriate filing of a UCC-1 financing statement in
the appropriate states to give notice of the Indenture Trustee's ownership of
the contracts. Unless otherwise specified in the related Prospectus Supplement,
the contracts will not be stamped or otherwise marked to reflect their
assignment from the Depositor to the Indenture Trustee. Therefore, if through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
Indenture Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements
The contracts that are secured by the Home Improvements financed thereby
grant to the originator of such contracts a purchase money security interest in
such Home Improvements to secure all or part of the purchase price of such Home
Improvements and related services. A financing statement generally is not
required to be filed to perfect a purchase money security interest in consumer
goods. Such purchase money security interests are assignable. In general, a
purchase money security interest grants to the holder a security interest that
has priority over a conflicting security interest in the same collateral and the
proceeds of such collateral. However, to the extent that the collateral subject
to a purchase money security interest becomes a fixture, in order for the
related purchase money security interest to take priority over a conflicting
interest in the fixture, the holder's interest in such Home Improvement must
generally be perfected by a timely fixture filing. In general, under the UCC, a
security interest does not exist under the UCC in ordinary building material
incorporated into an improvement on land. Home Improvement Contracts that
finance lumber, bricks, other types of ordinary building material or other goods
that are deemed to lose such characterization, upon incorporation of such
materials into the related property, will not be secured by a purchase money
security interest in the Home Improvement being financed.
Enforcement of Security Interest in Home Improvements
So long as the Home Improvement has not become subject to the real estate
law, a creditor can repossess a Home Improvement securing a contract by
voluntary surrender, 'self-help' repossession that is 'peaceful' (i.e., without
breach of the peace) or, in the absence of voluntary surrender and the ability
to repossess without breach of the peace, judicial process. The holder of a
contract must give the debtor a number of days' notice, which varies from 10 to
30 days or more depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states restrict
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states also
requires that the debtor be given notice of any sale prior to resale of the
related property so that the debtor may redeem it at or before such resale.
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Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equity principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws
The FTC Rule is intended to defeat the ability of the transferor of a
consumer credit contract that is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
that the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Indenture Trustee against such obligor. Numerous other
federal and state consumer protections laws impose requirements applicable to
the origination and lending pursuant to the contracts, including the Truth in
Lending Act, the Federal Trade Commission Act, the Fair Credit Billing Act, the
Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt
Collection Practices Act and the Uniform Consumer Credit Code. In the case of
some of these laws, the failure to comply with their provisions may affect the
enforceability of the related contract.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ('TITLE V') provides that, subject to the following conditions,
state usury limitations shall not apply to any contract that is secured by a
first lien on certain kinds of consumer goods. The contracts would be covered if
they satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no contract that imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
Installment Contracts
The Trust Assets may also consist of installment sales contracts. Under an
installment contract ('INSTALLMENT CONTRACT') the seller (hereinafter referred
to in this section as the 'lender') retains legal title to the property and
enters into an agreement with the purchaser (hereinafter referred to in this
section as the 'borrower') for the payment of the purchase price, plus interest,
over the term of such contract. Only after full performance by the borrower of
the Installment Contract is the lender obligated to convey title to the property
to the purchaser. As with mortgage or deed of trust financing, during the
effective period of the Installment
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Contract, the borrower is generally responsible for the maintaining the property
in good condition and for paying real estate taxes, assessments and hazard
insurance premiums associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated and the
buyer's equitable interest in the property is forfeited. The lender in such a
situation is not required to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the Installment Contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an Installment Contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under Installment Contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the Installment Contract may be reinstated upon full payment of the defaulted
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an Installment Contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, the lender's procedures for obtaining possession and clear title
under an Installment Contract in a given state are simpler and less time
consuming and costly than are the procedures for foreclosing and obtaining clear
title to a property subject to one or more liens.
APPLICABILITY OF USURY LAWS
Title V provides that state usury limitations shall not apply to certain
types of residential first mortgage loans, including cooperative loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to impose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision which expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits or to limit discount
points or other charges.
Usury limits apply to junior mortgage loans in many states. Any applicable
usury limits in effect at origination will be reflected in the maximum Mortgage
Rates for the Trust Assets, as set forth in the related Prospectus Supplement.
Unless otherwise set forth in the related Prospectus Supplement, each
Seller of a Revolving Credit Loan, Home Equity Loan and a Contract will have
represented that such Revolving Credit Loan, Home Equity Loan or Contract was
originated in compliance with then applicable state laws, including usury laws,
in all material respects. However, the Mortgage Rates on the Revolving Credit
Loans and the Home Equity Loans will be subject to applicable usury laws as in
effect from time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and adjustable rate cooperative loans, and early ownership mortgage loans,
originated by non-federally chartered lenders have historically been subjected
to a variety of restrictions. Such restrictions differed from state to state,
resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act ('TITLE VIII').
Title VIII provides that, notwithstanding any state law to the contrary, (i)
state-chartered banks may originate alternative mortgage instruments in
accordance with regulations promulgated by the Comptroller of the Currency with
respect to the origination of alternative mortgage instruments by national
banks, (ii) state-chartered credit unions may originate alternative mortgage
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instruments in accordance with regulations promulgated by the National Credit
Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions and (iii) all other non-federally chartered
housing creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII also
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
FORMALDEHYDE LITIGATION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts and related
persons in the distribution process. The Depositor is aware of a limited number
of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under ' -- Consumer Protection
Laws' and 'Consumer Protection Laws with Respect to Manufactured Housing
Contracts,' the holder of any Contract secured by a Manufactured Home with
respect to which a formaldehyde claim has been successfully asserted may be
liable to the obligor for the amount paid by the obligor on the related Contract
and may be unable to collect amounts still due under the Contract. The
successful assertion of such claim constitutes a breach of a representation or
warranty of the Seller, and the related Trust Fund would suffer a loss only to
the extent that (i) the Seller breached its obligation to repurchase the
Contract in the event an obligor is successful in asserting such a claim, and
(ii) the Seller, the Depositor or the Indenture Trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the Noteholders
against the manufacturer or other persons who were directly liable to the
plaintiff for the damages. Typical products liability insurance policies held by
manufacturers and component suppliers of Manufactured Homes may not cover
liabilities arising from formaldehyde in manufactured housing, with the result
that recoveries from such manufacturers, suppliers or other persons may be
limited to their corporate assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the 'RELIEF ACT'), a Mortgagor who enters military service after the
origination of such Mortgagor's Revolving Credit Loan, Home Equity Loan and
certain Contracts (including a Mortgagor who was in reserve status and is called
to active duty after origination of the Revolving Credit Loan, Home Equity Loan
and certain Contracts) may not be charged interest (including fees and charges)
above an annual rate of 6% during the period of such Mortgagor's active duty
status, unless a court orders otherwise upon application of the lender. The
Relief Act applies to Mortgagors who are members of the Air Force, Army,
Marines, Navy, National Guard, Reserves, Coast Guard, and officers of the U.S.
Public Health Service assigned to duty with the military. Because the Relief Act
applies to Mortgagors who enter military service (including reservists who are
called to active duty) after origination of the related Revolving Credit Loan,
Home Equity Loan and related Contract, no information can be provided as to the
number of loans that may be affected by the Relief Act. Application of the
Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Master Servicer to collect full amounts of interest on certain of
the Revolving Credit Loans, Home Equity Loans and Contracts. Any shortfall in
interest collections resulting from the application of the Relief Act or similar
legislation or regulations, which would not be recoverable from the related
Revolving Credit Loans, Home Equity Loans and Contracts, would result in a
reduction of the amounts payable to the holders of the related Notes, and may
not be covered by the applicable form of credit enhancement provided in
connection with the related series of Notes. In addition, the Relief Act imposes
limitations that would impair the ability of the Master Servicer to foreclose on
an affected Revolving Credit Loan, Home Equity Loan or Contract during the
Mortgagor's period of active duty status, and, under certain circumstances,
during an additional three month period thereafter. Thus, in the event that the
Relief Act or similar legislation or regulations applies to any Revolving Credit
Loan, Home Equity Loan and Contract
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which goes into default, there may be delays in payment and losses on the
related Notes in connection therewith. Any other interest shortfalls, deferrals
or forgiveness of payments on the Revolving Credit Loans, Home Equity Loans and
Contracts resulting from similar legislation or regulations may result in delays
in payments or losses to Noteholders of the related series.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ('RICO') statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the 'CRIME
CONTROL ACT'), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties 'known to have an alleged interest in the property,' including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, 'reasonably without cause to believe' that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
The Revolving Credit Loans, Home Equity Loans, certain Contracts or certain
Private Securities included in the Trust Fund for a series will be secured by
mortgages or deeds of trust which generally will be junior to other mortgages or
deeds of trust held by other lenders or institutional investors. The rights of
the Trust Fund (and therefore the Noteholders), as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee under the senior mortgage,
including the prior rights of the senior mortgagee to receive hazard insurance
and condemnation proceeds and to cause the property securing the Revolving
Credit Loan, Home Equity Loan or Contract to be sold upon default of the
mortgagor, which may extinguish the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, in certain cases, either reinitiates or satisfies the defaulted
senior loan or loans. A junior mortgagee may satisfy a defaulted senior loan in
full or, in some states, may cure such default and bring the senior loan current
thereby reinstating the senior loan, in either event usually adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee. Where applicable law or the terms of the senior
mortgage or deed of trust do not require notice of default to the junior
mortgagee, the lack of any such notice may prevent the junior mortgagee from
exercising any right to reinstate the loan which applicable law may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply such proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in such order as
the mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property is
taken by condemnation, the mortgagee or beneficiary under underlying senior
mortgages will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of junior mortgages in the order
of their priority. Another provision sometimes found in the form of the mortgage
or deed of trust used by institutional lenders obligates the mortgagor to pay
before delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are prior to the mortgage
or deed of trust, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee under the mortgage. Upon a failure of
the mortgagor to perform any of these obligations, the mortgagee or beneficiary
is given the right under certain mortgages or deeds of trust to perform the
obligation itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All
sums so expended by a senior mortgagee become part of the indebtedness secured
by the senior mortgage.
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The form of credit line trust deed or mortgage used by most institutional
lenders which make Revolving Credit Loans typically contains a 'future advance'
clause, which provides, in essence, that additional amounts advanced to or on
behalf of the borrower by the beneficiary or lender are to be secured by the
deed of trust or mortgage. The priority of the lien securing any advance made
under the clause may depend in most states on whether the deed of trust or
mortgage is designated as a credit line deed of trust or mortgage. If the
beneficiary or lender advances additional amounts, the advance is entitled to
receive the same priority as amounts initially advanced under the trust deed or
mortgage, notwithstanding the fact that there may be junior trust deeds or
mortgages and other liens which intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and notwithstanding
that the beneficiary or lender had actual knowledge of such intervening junior
trust deeds or mortgages and other liens at the time of the advance. In most
states, the trust deed or mortgage lien securing mortgage loans of the type
which includes Revolving Credit Loans applies retroactively to the date of the
original recording of the trust deed or mortgage, provided that the total amount
of advances under the Credit Limit does not exceed the maximum specified
principal amount of the recorded trust deed or mortgage, except as to advances
made after receipt by the lender of a written notice of lien from a judgment
lien creditor of the trustor.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of certain anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Notes offered hereunder. This discussion has been prepared with the advice
of Thacher Proffitt & Wood and Orrick, Herrington & Sutcliffe LLP, counsel to
the Company. This discussion is directed solely to Noteholders that hold the
Notes as capital assets within the meaning of Section 1221 of the Code and does
not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which may be subject
to special rules (such as banks, insurance companies, foreign investors,
tax-exempt organizations, dealers in securities or currencies, mutual funds,
real estate investment trusts, natural persons, cash method taxpayers, S
corporations, estates and trusts, investors that hold the Notes as part of a
hedge, straddle or, an integrated or conversion transaction, or holders whose
'functional currency' is not the United States dollar. Also, it does not address
alternative minimum tax consequences or the indirect effects on the holders of
equity interests in a Noteholder). Further, the authorities on which this
discussion, and the opinion referred to below, are based are subject to change
or differing interpretations, which could apply retroactively. Taxpayers and
preparers of tax returns should be aware that under applicable Treasury
regulations a provider of advice on specific issues of law is not considered an
income tax return preparer unless the advice (i) is given with respect to events
that have occurred at the time the advice is rendered and is not given with
respect to the consequences of contemplated actions, and (ii) is directly
relevant to the determination of an entry on a tax return. Accordingly,
taxpayers should consult their tax advisors and tax return preparers regarding
the preparation of any item on a tax return, even where the anticipated tax
treatment has been discussed herein. In addition to the federal income tax
consequences described herein, potential investors should consider the state and
local tax consequences, if any, of the purchase, ownership and disposition of
the Notes. See 'State and Other Tax Consequences.' Noteholders are advised to
consult their tax advisors concerning the federal, state, local or other tax
consequences to them of the purchase, ownership and disposition of the Notes
offered hereunder.
Upon the issuance of the Notes, Thacher Proffitt & Wood or Orrick,
Herrington & Sutcliffe LLP ('TAX COUNSEL'), counsel to the Company, will deliver
its opinion generally to the effect that, for federal income tax purposes,
assuming compliance with all provisions of the Indenture, Trust Agreement and
certain related documents, (i) the Notes will be treated as indebtedness and
(ii) the Issuer, as created pursuant to the terms and conditions of the Trust
Agreement, will not be characterized as an association (or publicly traded
partnership within the meaning of Code section 7704) taxable as a corporation or
as a taxable mortgage pool within the meaning of Code section 7701(i). The
following discussion is based in part upon the rules governing original issue
discount that are set forth in Code sections 1271-1273 and 1275 and in the
Treasury regulations issued thereunder (the 'OID REGULATIONS'). The OID
Regulations do not adequately address certain issues relevant to, and in some
instances provide that they are not applicable to, securities such as the Notes.
For purposes of this tax discussion, references to a 'Noteholder' or a 'holder'
are to the beneficial owner of a Note.
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Status as Real Property Loans
(i) Notes held by a domestic building and loan association will not
constitute 'loans . . . secured by an interest in real property' within the
meaning of Code section 7701(a)(19)(C)(v); and (ii) Notes held by a real estate
investment trust will not constitute 'real estate assets' within the meaning of
Code section 856(c)(5)(A) and interest on Notes will not be considered 'interest
on obligations secured by mortgages on real property' within the meaning of Code
section 856(c)(3)(B).
Original Issue Discount
The Notes are not expected to be considered issued with original issue
discount since the principal amount of the Notes will not exceed their issue
price by more than a de minimis amount. The stated interest thereon will be
taxable to a Noteholder as ordinary interest income when received or accrued in
accordance with such Noteholder's method of tax accounting. Under the OID
Regulations, a holder of a Note issued with a de minimis amount of original
issue discount must include such discount in income, on a pro rata basis, as
principal payments are made on the Note.
The original issue discount, if any, on a Note would be the excess of its
stated redemption price at maturity over its issue price. The issue price of a
particular class of Notes will be the first cash price at which a substantial
amount of Notes of that class is sold (excluding sales to bond houses, brokers
and underwriters) on the date of their initial issuance (the 'CLOSING DATE'). If
less than a substantial amount of a particular class of Notes is sold for cash
on or prior to the Closing Date, the issue price of such class will be treated
as the fair market value of such class on the Closing Date. Under the OID
Regulations, the stated redemption price of a Note is equal to the total of all
payments to be made on such Note other than 'qualified stated interest.'
'Qualified stated interest' includes interest that is unconditionally payable at
least annually at a single fixed rate, or in the case of a variable rate debt
instrument, at a 'qualified floating rate,' an 'objective rate,' a combination
of a single fixed rate and one or more 'qualified floating rates' or one
'qualified inverse floating rate,' or a combination of 'qualified floating
rates' that generally does not operate in a manner that accelerates or defers
interest payments on such Note.
In the case of Notes bearing adjustable interest rates, the determination
of the total amount of original issue discount and the timing of the inclusion
thereof will vary according to the characteristics of such Notes. In general
terms original issue discount is accrued by treating the interest rate of the
Notes as fixed and making adjustments to reflect actual interest rate payments.
Certain classes of the Notes may provide for the first interest payment
with respect to such Notes to be made more than one month after the date of
issuance, a period which is longer than the subsequent monthly intervals between
interest payments. Assuming the 'accrual period' (as defined below) for original
issue discount is each monthly period that ends on a Distribution Date, in some
cases, as a consequence of this 'long first accrual period,' some or all
interest payments may be required to be included in the stated redemption price
of the Note and accounted for as original issue discount.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a Note will reflect such accrued
interest. In such cases, information returns to the Noteholders and the IRS will
be based on the position that the portion of the purchase price paid for the
interest accrued with respect to periods prior to the Closing Date is treated as
part of the overall purchase price of such Note (and not as a separate asset the
purchase price of which is recovered entirely out of interest received on the
next Distribution Date) and that portion of the interest paid on the first
Distribution Date in excess of interest accrued for a number of days
corresponding to the number of days from the Closing Date to the first
Distribution Date should be included in the stated redemption price of such
Note. However, the OID Regulations state that all or some portion of such
accrued interest may be treated as a separate asset the cost of which is
recovered entirely out of interest paid on the first Distribution Date. It is
unclear how an election to do so would be made under the OID Regulations and
whether such an election could be made unilaterally by a Noteholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a Note will be considered to be de minimis if it is less than
0.25% of the stated redemption price of the Note multiplied by its weighted
average maturity. For this purpose, the weighted average maturity of the Note is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such Note, by
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multiplying (i) the number of complete years (rounding down for partial years)
from the issue date until such payment is expected to be made (possibly taking
into account a prepayment assumption) by (ii) a fraction, the numerator of which
is the amount of the payment, and the denominator of which is the stated
redemption price at maturity of such Note. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original issue
discount attributable to a so-called 'teaser' interest rate or an initial
interest holiday) will be included in income as each payment of stated principal
is made, based on the product of the total amount of such de minimis original
issue discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding stated
principal amount of the Note. The OID Regulations also would permit a Noteholder
to elect to accrue de minimis original issue discount into income currently
based on a constant yield method. See ' -- Market Discount' for a description of
such election under the OID Regulations.
If original issue discount on a Note is in excess of a de minimis amount,
the holder of such Note must include in ordinary gross income the sum of the
'daily portions' of original issue discount for each day during its taxable year
on which it held such Note, including the purchase date but excluding the
disposition date. In the case of an original holder of a Note, the daily
portions of original issue discount will be determined as follows.
As to each 'accrual period,' that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to a Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original issue
discount that accrues in any accrual period will equal the excess, if any, of
(i) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the Note, if any, in future
periods and (B) the distributions made on such Note during the accrual period of
amounts included in the stated redemption price, over (ii) the adjusted issue
price of such Note at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated using a discount rate equal to the original yield to maturity of the
Notes, and possibly assuming that distributions on the Note will be received in
future periods based on the Trust Assets being prepaid at a rate equal to a
prepayment assumption. For these purposes, the original yield to maturity of the
Note would be calculated based on its issue price and possibly assuming that
distributions on the Note will be made in all accrual periods based on the Trust
Assets being prepaid at a rate equal to a prepayment assumption. The adjusted
issue price of a Note at the beginning of any accrual period will equal the
issue price of such Note, increased by the aggregate amount of original issue
discount that accrued with respect to such Note in prior accrual periods, and
reduced by the amount of any distributions made on such Note in prior accrual
periods of amounts included in its stated redemption price. The original issue
discount accruing during any accrual period, computed as described above, will
be allocated ratably to each day during the accrual period to determine the
daily portion of original issue discount for such day. Although the Issuer will
calculate original issue discount, if any, based on its determination of the
accrual periods, a Noteholder may, subject to certain restrictions, elect other
accrual periods.
A subsequent purchaser of a Note that purchases such Note at a price
(excluding any portion of such price attributable to accrued qualified stated
interest) less than its remaining stated redemption price will also be required
to include in gross income the daily portions of any original issue discount
with respect to such Note. However, each such daily portion will be reduced, if
such cost is in excess of its 'adjusted issue price,' in proportion to the ratio
such excess bears to the aggregate original issue discount remaining to be
accrued on such Note. The adjusted issue price of a Note on any given day equals
(i) the adjusted issue price (or, in the case of the first accrual period, the
issue price) of such Note at the beginning of the accrual period which includes
such day plus (ii) the daily portions of original issue discount for all days
during such accrual period prior to such day less (iii) any principal payments
made during such accrual period with respect to such Note.
Market Discount
A Noteholder that purchases a Note at a market discount, that is, assuming
the Note is issued without original issue discount, at a purchase price less
than its remaining stated principal amount, will recognize gain upon receipt of
each distribution representing stated principal. In particular, under Code
section 1276 such a Noteholder generally will be required to allocate the
portion of each such distribution representing stated
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principal first to accrued market discount not previously included in income,
and to recognize ordinary income to that extent. A Noteholder may elect to
include market discount in income currently as it accrues rather than including
it on a deferred basis in accordance with the foregoing. If made, such election
will apply to all market discount bonds acquired by such Noteholder on or after
the first day of the first taxable year to which such election applies. In
addition, the OID Regulations permit a Noteholder to elect to accrue all
interest, discount (including de minimis market or original issue discount) and
premium in income as interest, based on a constant yield method. If such an
election were made with respect to a Note with market discount, the Noteholder
would be deemed to have made an election to include currently market discount in
income with respect to all other debt instruments having market discount that
such Noteholder acquires during the taxable year of the election or thereafter,
and possibly previously acquired instruments. Similarly, a Noteholder that made
this election for a Note that is acquired at a premium would be deemed to have
made an election to amortize bond premium with respect to all debt instruments
having amortizable bond premium that such Noteholder owns or acquires. See
' -- Premium' below. Each of these elections to accrue interest, discount and
premium with respect to a Note on a constant yield method would be irrevocable.
However, market discount with respect to a Note will be considered to be de
minimis for purposes Code section 1276 if such market discount is less than
0.25% of the remaining principal amount of such Note multiplied by the number of
complete years to maturity remaining after the date of its purchase. In
interpreting a similar rule with respect to original issue discount on
obligations payable in installments, the OID Regulations refer to the weighted
average maturity of obligations, and it is likely that the same rule will be
applied with respect to market discount, possibly taking into account a
prepayment assumption. If market discount is treated as de minimis under this
rule, it appears that the actual discount would be treated in a manner similar
to original issue discount of a de minimis amount. See ' -- Original Issue
Discount' above.
Code section 1276(b)(3) specifically authorizes the Treasury Department to
issue regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until regulations are issued by the Treasury Department, certain rules described
in the legislative history to the Code section 1276 (the 'COMMITTEE REPORT')
apply. The Committee Report indicates that in each accrual period market
discount on Notes should accrue, at the Noteholder's option: (i) on the basis of
a constant yield method, or (ii) in the case of a Note issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the Notes as of the
beginning of the accrual period. Moreover, any prepayment assumption used in
calculating the accrual of original issue discount is also used in calculating
the accrual of market discount. Because the regulations referred to in this
paragraph have not been issued, it is not possible to predict what effect such
regulations might have on the tax treatment of a Note purchased at a discount in
the secondary market. Further, it is uncertain whether a prepayment assumption
would be required to be used for the Notes if they were issued with original
issue discount.
To the extent that Notes provide for monthly or other periodic
distributions throughout their term, the effect of these rules may be to require
market discount to be includible in income at a rate that is not significantly
slower than the rate at which such discount would accrue if it were original
issue discount. Moreover, in any event a holder of a Note generally will be
required to treat a portion of any gain on the sale or exchange of such Note as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income.
Further, under Code section 1277 a holder of a Note may be required to
defer a portion of its interest deductions for the taxable year attributable to
any indebtedness incurred or continued to purchase or carry a Note purchased
with market discount. For these purposes, the de minimis rule referred to above
applies. Any such deferred interest expense would not exceed the market discount
that accrues during such taxable year and is, in general, allowed as a deduction
not later than the year in which such market discount is includible in income.
If such holder elects to include market discount in income currently as it
accrues on all market discount instruments acquired by such holder in that
taxable year or thereafter, the interest deferral rule described above will not
apply.
Premium
If a holder purchases a Note for an amount greater than its remaining
principal amount, such holder will be considered to have purchased such Note
with amortizable bond premium equal in amount to such excess, and
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may elect to amortize such premium using a constant yield method over the
remaining term of the Note and to offset interest otherwise to be required to be
included in income in respect of such Note by the premium amortized in such
taxable year. If such an election is made, it will apply to all debt instruments
having amortizable bond premium that the holder owns or subsequently acquires.
The OID Regulations also permit Noteholders to elect to include all interest,
discount and premium in income based on a constant yield method. See ' -- Market
Discount' above. The Committee Report states that the same rules that apply to
accrual of market discount (which rules may require use of a prepayment
assumption in accruing market discount with respect to Notes without regard to
whether such Notes have original issue discount) would also apply in amortizing
bond premium under Code section 171.
Realized Losses
Under Code section 166 both corporate and noncorporate holders of the Notes
that acquire such Notes in connection with a trade or business should be allowed
to deduct, as ordinary losses, any losses sustained during a taxable year in
which their Notes become wholly or partially worthless as the result of one or
more realized losses on the Trust Assets. However, it appears that a
noncorporate holder that does not acquire a Note in connection with a trade or
business will not be entitled to deduct a loss under Section 166 of the Code
until such holder's Note becomes wholly worthless (i.e., until its outstanding
principal balance has been reduced to zero) and that the loss will be
characterized as a short-term capital loss.
Each holder of a Note will be required to accrue interest and original
issue discount with respect to such Note, without giving effect to any
reductions in distributions attributable to defaults or delinquencies on the
Trust Assets until it can be established that any such reduction ultimately will
not be recoverable. As a result, the amount of taxable income reported in any
period by the holder of a Note could exceed the amount of economic income
actually realized by the holder in such period. Although the holder of a Note
eventually will recognize a loss or reduction in income attributable to
previously accrued and included income that, as the result of a realized loss,
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
Sales of Notes
If a Note is sold, the selling Noteholder will recognize gain or loss equal
to the difference between the amount realized on the sale and its adjusted basis
in the Note. The adjusted basis of a Note generally will equal the cost of such
Note to such Noteholder, increased by the amount of any original issue discount
or market discount previously reported by such Noteholder with respect to such
Note and reduced by any amortized premium and any principal payment received by
such Noteholder. Except as provided in the following three paragraphs, any such
gain or loss will be capital gain or loss, provided such Note is held as a
capital asset (generally, property held for investment) within the meaning of
Code section 1221.
Gain recognized on the sale of a Note by a seller who purchased such Note
at a market discount will be taxable as ordinary income in an amount not
exceeding the portion of such discount that accrued during the period such Note
was held by such holder, reduced by any market discount included in income under
the rules described above under ' -- Market Discount' and ' -- Premium.'
Backup Withholding
Payments of interest and principal, as well as payments of proceeds from
the sale of Notes, may be subject to the 'backup withholding tax' under Section
3406 of the Code at a rate of 31% if recipients of such payments fail to furnish
to the payor certain information, including their taxpayer identification
numbers, or otherwise fail to establish an exemption from such tax. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's federal income tax. Furthermore, certain
penalties may be imposed by the IRS on a recipient of payments that is required
to supply information but that does not do so in the proper manner.
The Issuer will report to the Holders and to the IRS for each calendar year
the amount of any 'reportable payments' during such year and the amount of tax
withheld, if any, with respect to payments on the Notes.
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Tax Treatment of Foreign Investors
Interest paid on a Note to a nonresident alien individual, foreign
partnership or foreign corporation that has no connection with the United States
other than holding Notes ('NONRESIDENTS') will normally qualify as portfolio
interest (except, in general, where (i) the recipient is a holder, directly or
by attribution, of 10% or more of the capital or profits interest in the Issuer,
or (ii) the recipient is a controlled foreign corporation to which the Issuer is
a related person) and will be exempt from federal income tax. Upon receipt of
appropriate ownership statements, the Issuer normally will be relieved of
obligations to withhold tax from such interest payments. These provisions
supersede the generally applicable provisions of United States law that would
otherwise require the issuer to withhold at a 30% rate (unless such rate were
reduced or eliminated by an applicable tax treaty) on, among other things,
interest and other fixed or determinable, annual or periodic income paid to
Nonresidents. For these purposes a Noteholder may be considered to be related to
the Issuer by holding a Certificate or by having common ownership with any other
holder of a Certificate or any affiliate thereof.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in 'Certain
Federal Income Tax Consequences,' potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Notes offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their tax advisors with respect
to the various tax consequences of investments in the Notes offered hereunder.
ERISA CONSIDERATIONS
Sections 404 and 406 of ERISA impose certain fiduciary and prohibited
transaction restrictions on employee pension and welfare benefit plans subject
to ERISA ('ERISA PLANS') and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans, bank
collective investment funds and insurance company general and separate accounts
in which such ERISA Plans are invested. Section 4975 of the Code imposes
essentially the same prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code and on Individual
Retirement Accounts described in Section 408 of the Code (collectively, 'TAX
FAVORED PLANS').
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA), are not
subject to the ERISA requirements discussed herein. Accordingly, assets of such
plans may be invested in Notes without regard to the ERISA considerations
described below, subject to the provisions of applicable federal and state law.
Any such plan that is qualified and exempt from taxation under Sections 401(a)
and 501(a) of the Code, however, is subject to the prohibited transaction rules
set forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving assets of ERISA Plans and Tax-Favored Plans (collectively, 'PLANS')
and persons ('PARTIES IN INTEREST' under ERISA or 'DISQUALIFIED PERSONS' under
the Code, collectively 'PARTIES IN INTEREST') who have certain specified
relationships to the Plans, unless a statutory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to a penalty (or an excise tax) imposed pursuant to
Section 502(i) of ERISA or Section 4975 of the Code, unless a statutory or
administrative exemption is available with respect to any such transaction.
PLAN ASSET REGULATIONS
An investment of the assets of a Plan in Notes may cause the underlying
Trust Assets and other assets included in the Trust Fund to be deemed 'Plan
Assets' of such Plan. The U.S. Department of Labor (the 'DOL') has promulgated
regulations at 29 C.F.R. Section 2510.3-101 (the 'DOL REGULATIONS') defining the
term 'Plan Assets' for purposes of applying the general fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA and
Section 4975 of the Code. Under the DOL Regulations,
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generally, when a Plan acquires an 'equity interest' in another entity (such as
the Trust Fund), the underlying assets of that entity may be considered to be
Plan Assets unless certain exceptions apply. Exceptions contained in the DOL
Regulations provide that a Plan's assets will not include an undivided interest
in each asset of an entity in which it makes an equity investment if: (1) the
entity is an operating company; or (2) the equity investment made by the Plan is
either a 'publicly-offered security' that is 'widely held' (both as defined in
the DOL Regulations) or a security issued by an investment company registered
under the Investment Company Act of 1940, as amended; or (3) Benefit Plan
Investors do not own 25% or more in value of any class of equity interests
issued by the entity. For this purpose, the term 'Benefit Plan Investors'
include Plans, as well as any 'employee benefit plan' (as defined in Section
3(3) or ERISA) which is not subject to Title I of ERISA, such as governmental
plans (as defined in Section 3(32) of ERISA), church plans (as defined in
Section 3(33) of ERISA) which have not made an election under Section 410(d) of
the Code, foreign plans and any entity whose underlying assets include Plan
Assets by reason of a Plan's investment in the entity. The DOL Regulations
provide that the term 'equity interest' means any interest in an entity other
than an instrument which is treated as indebtedness under applicable local law
and which has no 'substantial equity features.' Because of the factual nature of
certain of the rules governing the applicability of the above-described
exceptions under the DOL Regulations, Plans or persons investing Plan Assets
should not acquire any Note which may be deemed in the respective Prospectus
Supplement to have 'substantial equity features' in reliance upon the
availability of any such exception. For purposes of this section 'ERISA
Considerations,' the term 'PLAN ASSETS' or 'assets of a Plan' has the meaning
specified in the DOL Regulations and includes an undivided interest in the
underlying assets of certain entities in which a Plan invests.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Fund and cause the Company, the Master
Servicer, any Subservicer, any Administrator, the Indenture Trustee, the Owner
Trustee, the obligor under any credit enhancement mechanism or certain
affiliates thereof to be considered or become Parties in Interest with respect
to an investing Plan (or of a Plan holding an interest in an investing entity).
If so, the acquisition or holding of Notes by or on behalf of the investing Plan
could also give rise to a prohibited transaction under ERISA and Section 4975 of
the Code, unless a statutory or administrative exemption is available. Notes
acquired by a Plan may be assets of that Plan. Under the DOL Regulations, the
Trust Fund, including the Trust Assets and the other assets held in the Trust
Fund, may also be deemed to be assets of each Plan that acquires Notes. Special
caution should be exercised before Plan Assets are used to acquire a Note in
such circumstances, especially if, with respect to such assets, the Company, the
Master Servicer, any Subservicer, any Administrator, the Indenture Trustee, the
Owner Trustee, the obligor under any credit enhancement mechanism or an
affiliate thereof either (i) has investment discretion with respect to the
investment of Plan Assets or (ii) has authority or responsibility to give (or
regularly gives) investment advice with respect to Plan Assets for a fee
pursuant to an agreement or understanding that such advice will serve as a
primary basis for investment decisions with respect to such Plan Assets.
Any person who has discretionary authority or control with respect to the
management or disposition of Plan Assets and any person who provides investment
advice with respect to such Plan Assets for a fee (in the manner described
above) is a fiduciary of the investing Plan. If the Trust Assets or other assets
in a Trust Fund were to constitute Plan Assets, then any party exercising
management or discretionary control with respect to those Plan Assets may be
deemed to be a Plan 'fiduciary,' and thus subject to the fiduciary
responsibility requirements of ERISA and the prohibited transaction provisions
of ERISA and Section 4975 of the Code with respect to any investing Plan.
Therefore, if the Trust Assets and other assets included in a Trust Fund were to
constitute Plan Assets, then the acquisition or holding of Notes by or on behalf
of a Plan or with Plan Assets, as well as the operation of such Trust Fund, may
constitute or involve a prohibited transaction under ERISA and Section 4975 of
the Code, unless a statutory or administrative exemption is available.
PROHIBITED TRANSACTION EXEMPTIONS
A Plan fiduciary or other Plan Asset investor should consider the
availability of certain class exemptions granted by the DOL, which provide
relief from certain of the prohibited transaction provisions of ERISA and the
related excise tax provisions of the Code, including Prohibited Transaction
Class Exemption ('PTCE') 95-60, regarding transactions by insurance company
general accounts; PTCE 84-14, regarding transactions effected by a 'qualified
professional asset manager'; PTCE 90-1, regarding transactions by insurance
company pooled separate accounts; PTCE 91-38, regarding investments by bank
collective investment funds; and
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PTCE 96-23, regarding transactions effected by an 'in-house asset manager.' The
respective Prospectus Supplement may contain additional information regarding
the application of PTCE 95-60 or other DOL class exemptions with respect to the
Notes offered thereby.
INSURANCE COMPANY GENERAL ACCOUNTS
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Notes by an insurance company general account, the
Small Business Job Protection Act of 1996 added a new Section 401(c) to ERISA,
which provides certain exemptive relief from the provisions of Part 4 of Title I
of ERISA and Section 4975 of the Code, including the prohibited transaction
restrictions imposed by ERISA and the related excise taxes imposed by Section
4975 of the Code, for transactions involving an insurance company general
account. Pursuant to Section 401(c) of ERISA, the DOL is required to issue final
regulations ('401(C) REGULATIONS') no later than December 31, 1997 which are to
provide guidance for the purpose of determining, in cases where insurance
policies supported by an insurer's general account are issued to or for the
benefit of a Plan on or before December 31, 1998, which general account assets
constitute Plan Assets. Section 401(c) of ERISA generally provides that, until
the date which is 18 months after the 401(c) Regulations become final, no person
shall be subject to liability under Part 4 of Title I of ERISA and Section 4975
of the Code on the basis of a claim that the assets of an insurance company
general account constitute Plan Assets, unless (i) as otherwise provided by the
Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan Assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan Assets of any Plan invested in
such separate account. Insurance companies contemplating the investment of
general account assets in the Notes should consult with their legal counsel with
respect to the applicability of PTCE 95-60 and Section 401(c) of ERISA,
including the general account's ability to continue to hold the Notes after the
date which is 18 months after the date the 401(c) Regulations become final.
REPRESENTATION FROM PLANS INVESTING IN NOTES WITH 'SUBSTANTIAL EQUITY FEATURES'
If the related Prospectus Supplement provides that any of the Notes being
issued have 'substantial equity features' within the meaning of the DOL
Regulations, transfers of such Notes to a Plan, to a trustee or other person
acting on behalf of any Plan, or to any other person using the assets of any
Plan to effect such acquisition will not be registered by the Indenture Trustee
unless the transferee provides the Company, the Indenture Trustee and the Master
Servicer with an opinion of counsel satisfactory to the Company, the Indenture
Trustee and the Master Servicer, which opinion will not be at the expense of the
Company, the Indenture Trustee or the Master Servicer, that the purchase of such
Notes by or on behalf of such Plan is permissible under applicable law and will
not subject the Company, the Indenture Trustee or the Master Servicer to any
obligation in addition to those undertaken in the Trust Agreement. In lieu of
such opinion of counsel, the transferee may provide a certification of facts
substantially to the effect that (x) the purchase of Notes by or on behalf of
such Plan is permissible under applicable law, will not constitute or result in
any non-exempt prohibited transaction under ERISA or Section 4975 of the Code
and will not subject the Company, the Indenture Trustee or the Master Servicer
to any obligation in addition to those undertaken in the Trust Agreement, and
(y) the following statements are correct: (i) the transferee is an insurance
company, (ii) the source of funds used to purchase such Notes is an 'insurance
company general account' (as such term is defined in PTCE 95-60) and (iii) the
conditions set forth in Section I of PTCE 95-60 have been satisfied as of the
date of the acquisition of such Notes.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a 'TAX-EXEMPT INVESTOR') nonetheless will be subject to federal
income taxation to the extent that its income is 'unrelated business taxable
income' ('UBTI') within the meaning of Section 512 of the Code.
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CONSULTATION WITH COUNSEL
There can be no assurance that any DOL exemption will apply with respect to
any particular Plan that acquires the Notes or, even if all the conditions
specified therein were satisfied, that the exemption would apply to transactions
involving the Trust Fund. Prospective Plan investors should consult with their
legal counsel concerning the impact of ERISA and Section 4975 of the Code and
the potential consequences to their specific circumstances prior to making an
investment in the Notes.
Before purchasing a Note in reliance on any DOL exemption or Section 401(c)
of ERISA, a fiduciary of a Plan or other Plan Asset investor should itself
confirm that all of the specific and general conditions set forth in such
exemption or Section 401(c) of ERISA would be satisfied. In addition to making
its own determination as to the availability of the exemptive relief provided in
such exemption, a Plan fiduciary should consider its general fiduciary
obligations under ERISA in determining whether to purchase a Note on behalf of a
Plan.
LEGAL INVESTMENT MATTERS
Each class of Notes offered hereby and by the related Prospectus Supplement
will be rated at the date of issuance in one of the four highest rating
categories by at least one Rating Agency. Unless otherwise specified in the
related Prospectus Supplement, each class of Notes will evidence an interest in
Trust Assets primarily secured by second or more junior liens, and therefore
will not constitute 'mortgage related securities' for purposes of SMMEA.
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their legal advisors to determine whether and to
what extent the Notes constitute legal investments for them.
All depository institutions considering an investment in the Notes should
review the Federal Financial Institutions Examination Council's Supervisory
Policy Statement on the Selection of Securities Dealers and Unsuitable
Investment Practices (to the extent adopted by their respective regulators),
setting forth, in relevant part, certain investment practices deemed to be
unsuitable for an institution's investment portfolio, as well as guidelines for
investing in certain types of mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, 'prudent investor' provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not 'interest
bearing' or 'income paying.'
There may be other restrictions on the ability of certain investors either
to purchase certain classes of Notes or to purchase any class of Notes
representing more than a specified percentage of the investors' assets. The
Company will make no representations as to the proper characterization of any
class of Notes for legal investment or other purposes, or as to the ability of
particular investors to purchase any class of Notes under applicable legal
investment restrictions. These uncertainties may adversely affect the liquidity
of any class of Notes. Accordingly, all investors whose investment activities
are subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent the Notes of any class
constitute legal investments or are subject to investment, capital or other
restrictions.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of Notes will
be applied by the Company to finance the purchase of, or to repay short-term
loans incurred to finance the purchase of, the Trust Assets underlying the Notes
or will be used by the Company for general corporate purposes. The Company
expects that it will make additional sales of securities similar to the Notes
from time to time, but the timing and amount of any such additional offerings
will be dependent upon a number of factors, including the volume of mortgage
loans purchased by the Company, prevailing interest rates, availability of funds
and general market conditions.
METHODS OF DISTRIBUTION
The Notes offered hereby and by the related Prospectus Supplements will be
offered in series through one or more of the methods described below. The
Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the net proceeds to the
Company from such sale.
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The Company intends that Notes will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular series of
Notes may be made through a combination of two or more of these methods. Such
methods are as follows:
1. by negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. by placements by the Company with institutional investors through
dealers; and
3. by direct placements by the Company with institutional investors.
In addition, if specified in the related Prospectus Supplement, a series of
Notes may be offered in whole or in part to the Seller of the related Trust
Assets (and other assets, if applicable) that would comprise the Pool in respect
of such Notes.
If underwriters are used in a sale of any Notes (other than in connection
with an underwriting on a best efforts basis), such Notes will be acquired by
the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at fixed public
offering prices or at varying prices to be determined at the time of sale or at
the time of commitment therefor. Such underwriters may be broker-dealers
affiliated with the Company whose identities and relationships to the Company
will be as set forth in the related Prospectus Supplement. The managing
underwriter or underwriters with respect to the offer and sale of a particular
series of Notes will be set forth on the cover of the Prospectus Supplement
relating to such series and the members of the underwriting syndicate, if any,
will be named in such Prospectus Supplement.
In connection with the sale of the Notes, underwriters may receive
compensation from the Company or from purchasers of the Notes in the form of
discounts, concessions or commissions. Underwriters and dealers participating in
the distribution of the Notes may be deemed to be underwriters in connection
with such Notes, and any discounts or commissions received by them from the
Company and any profit on the resale of Notes by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933, as
amended.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of Notes will provide that the obligations of the underwriters will
be subject to certain conditions precedent, that the underwriters will be
obligated to purchase all such Notes if any are purchased (other than in
connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the Company will indemnify the several underwriters and the
underwriters will indemnify the Company against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to distribution required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Company and purchasers of
Notes of such series.
The Company anticipates that the Notes offered hereby will be sold
primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Notes, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be 'underwriters' within the
meaning of the Securities Act of 1933, as amended, in connection with reoffers
and sales by them of Notes. Holders of Notes should consult with their legal
advisors in this regard prior to any such reoffer or sale.
LEGAL MATTERS
Certain legal matters, including certain federal income tax matters, will
be passed upon for the Company by Thacher Proffitt & Wood, New York, New York,
or by Orrick, Herrington & Sutcliffe LLP, New York, New York, as specified in
the Prospectus Supplement.
FINANCIAL INFORMATION
The Company has determined that its financial statements are not material
to the offering made hereby. The Notes do not represent an interest in or an
obligation of the Company. The Company's only obligations with respect to a
series of Notes will be to repurchase Trust Assets upon any breach of certain
limited representations and warranties made by the Company, or as otherwise
provided in the applicable Prospectus Supplement.
81
<PAGE>
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
401(c) Regulations............................. 111
Account Balance................................ 18
Accrual Notes.................................. 5
Additional Balance............................. 17
Additional Charges............................. 18
Administrator.................................. 4
Affiliated Sellers............................. 15
Agreement...................................... 47
Agreements..................................... 47
Audit Guide.................................... 46
Bankruptcy Loss................................ 36
Beneficial Owner............................... 27
Book-Entry Notes............................... 26
CEDEL.......................................... 26
CEDEL Participants............................. 27
CERCLA......................................... 64
Certificates................................... 4
Clearance Cooperative.......................... 27
Closing Date................................... 73
CLTV........................................... 16
Code........................................... 8
Commission..................................... 2
Committee Report............................... 75
Conservation Act............................... 64
Contracts...................................... 1
Cooperative.................................... 56
Cooperative Loans.............................. 15
Cooperative Note............................... 56
Cooperative Notes.............................. 15
Credit Enhancer................................ 36
Credit Line Agreements......................... 17
Credit Utilization Rate........................ 17
Crime Control Act.............................. 71
Custodial Account.............................. 30
Custodian...................................... 29
Defaulted Loan Loss............................ 36
Deleted Loan................................... 24
Depositaries................................... 26
Designated Seller.............................. 15
Designated Seller Transaction.................. 15
Determination Date............................. 33
Disqualified Persons........................... 77
DOL............................................ 77
DOL Regulations................................ 77
Draw........................................... 17
Draw Period.................................... 17
DTC............................................ 26
DTC Participants............................... 26
Eligible Account............................... 31
Eligible Substitute Loan....................... 24
Environmental Lien............................. 64
<CAPTION>
PAGE
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<S> <C>
ERISA.......................................... 8
ERISA Plans.................................... 77
Euroclear...................................... 26
Euroclear Operator............................. 27
Euroclear Participants......................... 27
Event of Default............................... 48
Excess Interest................................ 38
Excess Spread.................................. 30
Exchange Act................................... 2
Excluded Spread................................ 30
Extraordinary Losses........................... 36
FDIC........................................... 22
FHA............................................ 1
FHA Claims Administration Agreement............ 11
FHA Claims Administrator....................... 11
FHA Insurance Amount........................... 41
FHA Regulations................................ 40
FHA Reserve.................................... 41
Finance Charge................................. 18
Financial Guaranty Insurance Policy............ 37
Fraud Loss..................................... 36
FTC Rule....................................... 65
Funding Account................................ 33
Garn-St Germain Act............................ 66
GMAC Mortgage.................................. 1
Gross Margin................................... 17
Guide.......................................... 19
High Cost Loans................................ 64
Holder-in-Due-Course........................... 65
Home Equity Loans.............................. 1
Home Equity Program............................ 19
Home Improvement Contracts..................... 1
Home Improvements.............................. 1
HUD............................................ 40
Indenture...................................... 1
Indenture Trustee.............................. 4
Index.......................................... 17
Indirect Participants.......................... 27
Installment Contract........................... 68
Insurance Proceeds............................. 30
Insurer........................................ 37
Interest Rate.................................. 4
Issuer......................................... 4
Junior Ratio................................... 16
Letter of Credit............................... 37
Letter of Credit Bank.......................... 37
Liquidated Loan................................ 44
Liquidation Proceeds........................... 30
Manufactured Homes............................. 19
Manufactured Housing Contracts................. 1
Master Commitments............................. 20
</TABLE>
82
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Mortgages...................................... 15
Mortgage Notes................................. 15
Mortgage Rate.................................. 17
Mortgaged Properties........................... 5
Mortgagor...................................... 9
National Housing Act........................... 5
Net Mortgage Rate.............................. 51
Nonresidents................................... 77
Note Registrar................................. 26
Noteholder..................................... 26
Notes.......................................... 1
OID Regulations................................ 72
Overcollateralization.......................... 38
Owner Trustee.................................. 4
Ownership Interest............................. 16
Participants................................... 26
Parties in Interest............................ 77
Paying Agent................................... 32
Payment Account................................ 31
Payment Date................................... 6
Percentage Interest............................ 33
Permitted Investments.......................... 31
Plan Assets.................................... 78
Plans.......................................... 77
Pool........................................... 1
Private Securities............................. 6
PTCE........................................... 78
Purchase Obligation............................ 40
Purchase Price................................. 24
Qualified Insurer.............................. 39
Rating Agency.................................. 8
Realized Loss.................................. 36
Record Date.................................... 32
Registration Statement......................... 2
Relief Act..................................... 70
REO Loan....................................... 44
Reserve Fund................................... 38
Residential Funding............................ 4
Revolving Credit Loans......................... 1
<CAPTION>
PAGE
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<S> <C>
RICO........................................... 71
Securities..................................... 1
Securityholders................................ 29
Sellers........................................ 15
Senior/Subordinate Series...................... 26
Servicing Advances............................. 32
Servicing Agreement............................ 42
Servicing Default.............................. 47
Single Note.................................... 34
SMMEA.......................................... 8
Special Hazard Loss............................ 36
Special Purpose Entity......................... 16
Spread Account................................. 38
Stated Principal Balance....................... 36
Strip Note..................................... 5
Subordinate Securities......................... 5
Subservicers................................... 16
Subservicing Account........................... 30
Subservicing Agreement......................... 25
Tax Counsel.................................... 72
Tax-Exempt Investor............................ 79
Tax Favored Plans.............................. 77
Terms and Conditions........................... 28
Title I........................................ 5
Title I Contracts.............................. 1
Title I Lenders................................ 40
Title I Loans.................................. 40
Title V........................................ 68
Title VIII..................................... 69
Transfer Report................................ 41
Trust Agreement................................ 1
Trust Assets................................... 1
Trust Fund..................................... 1
UBTI........................................... 79
UCC............................................ 61
Unaffiliated Sellers........................... 15
Unsecured Contract............................. 12
401(c) Regulations............................. 79
</TABLE>
83
<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
DEPOSITOR OR BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................................................... S-4
Risk Factors............................................................................................... S-13
Description of the Home Loan Pool.......................................................................... S-16
The Grantor Trust.......................................................................................... S-25
The Issuer................................................................................................. S-25
The Owner Trustee.......................................................................................... S-25
The Indenture Trustee and the Grantor Trustee.............................................................. S-25
Description of the Securities.............................................................................. S-25
Certain Yield and Prepayment Considerations................................................................ S-39
Description of the Home Loan Purchase Agreement............................................................ S-45
Description of the Servicing Agreement..................................................................... S-46
Description of the Grantor Trust Agreement, Owner Trust Agreement and Indenture............................ S-47
Certain Federal Income Tax Consequences.................................................................... S-50
ERISA Considerations....................................................................................... S-50
Legal Investment........................................................................................... S-50
Method of Distribution..................................................................................... S-50
Legal Matters.............................................................................................. S-52
Ratings.................................................................................................... S-52
Global Clearance, Settlement and Tax Documentation Procedures.............................................. I-1
PROSPECTUS
Additional Information..................................................................................... 2
Reports to Noteholders..................................................................................... 2
Incorporation of Certain Information by Reference.......................................................... 2
Summary of Prospectus...................................................................................... 4
Risk Factors............................................................................................... 9
The Pools.................................................................................................. 15
Trust Asset Program........................................................................................ 19
Description of the Notes................................................................................... 26
Description of Credit Enhancement.......................................................................... 36
Purchase Obligations....................................................................................... 40
Description of FHA Insurance Under Title I................................................................. 40
The Company................................................................................................ 42
Residential Funding Corporation............................................................................ 42
Servicing of Trust Assets.................................................................................. 42
The Agreements............................................................................................. 47
Yield and Prepayment Considerations........................................................................ 50
Certain Legal Aspects of the Trust Assets and Related Matters.............................................. 56
Certain Federal Income Tax Consequences.................................................................... 72
State and Other Tax Consequences........................................................................... 77
ERISA Considerations....................................................................................... 77
Legal Investment Matters................................................................................... 80
Use of Proceeds............................................................................................ 80
Methods of Distribution.................................................................................... 80
Legal Matters.............................................................................................. 81
Financial Information...................................................................................... 81
Index of Principal Definitions............................................................................. 82
</TABLE>
$391,880,000
RESIDENTIAL FUNDING
MORTGAGE SECURITIES II, INC.
HOME LOAN-BACKED NOTES,
SERIES 1998-HI2
------------------------
PROSPECTUS SUPPLEMENT
------------------------
BEAR, STEARNS & CO. INC.
PRUDENTIAL SECURITIES
INCORPORATED
RESIDENTIAL FUNDING SECURITIES
CORPORATION
JUNE 16, 1998
_____________________________________ _____________________________________
