[Thacher Proffitt & Wood Letterhead]
Direct Dial: (212) 912-7450
April 30, 1999
BY EDGAR
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Attention: Filing Desk
Re: Residential Funding Mortgage Securities II, Inc.
Registration Statement on Form S-3 relating to Home Equity Loan-
Backed Certificates and Asset-Backed Notes, to be combined with
Registration Statement 333-28025 pursuant to Rule 429
Ladies and Gentlemen:
Our client, Residential Funding Mortgage Securities II, Inc., has
advised us that they have filed with you, under EDGAR, the captioned
registration statement on Form S-3 and that they have paid the filing fee, in
the amount of $834,000.00, to you by wire transfer.
The primary objectives of this filing are to register an additional
$3,000,000,000 of securities, to be combined with the remaining amount
registered under the registrant's existing registration statement No. 333-28025,
and to make minor changes to the descriptions of the registrant's programs as
well as the tax and legal matters disclosure. In addition, we revised the forms
of base prospectus and prospectus supplement to comply with plain English
requirements. Separate hard copies of the filing, with base prospectuses marked
to show changes from the versions most recently filed, have been sent to Mr.
John White.
We would like to call to your attention the fact that the
registrant's affiliate, Residential Funding Mortgage Securities I, Inc., has a
similar registration statement (File No. 333- 72493) that is currently under
review by the staff. We have received a comment letter in connection with that
registration statement and have subsequently filed Amendment No. 1, which
endeavors to conform to the requests of the staff. Most of the changes in that
amendment have already been reflected in the enclosed filing. Upon completion of
the staff's review of the other registration statement, we will conform the
enclosed registration statement to reflect all applicable
<PAGE>
Securities and Exchange Commission
April 30, 1999
changes made to the other filing. In light of our commitment to conform the
enclosed registration statement, we respectfully request that the enclosed
filing not be given a full review.
If you need any additional information, please call me at the above
number, or call Lynn Mesuk at 212-912-7829 or Ravind Karamsingh at 212-912-7523.
Please acknowledge receipt of this letter and the enclosures by date-stamping
the enclosed copy of this letter and returning it in the self addressed stamped
envelope.
Very truly yours,
/s/Stephen S. Kudenholdt
Stephen S. Kudenholdt
Enclosures
cc:
John White
Branch Chief
Division of Corporation Finance
Branch 11
Mail Stop 3-10
Washington, D.C. 20549
<PAGE>
REGISTRATION NO. 333-____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
(Exact name of registrant as specified in governing instruments)
Delaware
(State of Incorporation)
41-1808858
(I.R.S. Employer Identification Number)
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
(612) 832-7000
(Address and telephone number of Registrant's principal executive offices)
Christopher J. Nordeen, President
Residential Funding Mortgage Securities II, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
(612) 832-7000
(Name, address and telephone number of agent for service)
Copies to:
Robert L. Schwartz, Esq.
GMAC Mortgage Corporation
3031 West Grand Boulevard
Detroit, Michigan 48232
Stephen S. Kudenholdt, Esq. Katherine I. Crost, Esq.
Paul D. Tvetenstrand, Esq. Orrick, Herrington & Sutcliffe
Thacher Proffitt & Wood 666 Fifth Avenue
Two World Trade Center New York, New York 10103-0001
New York, New York 10048
Robert C. Wipperman, Esq.
Stroock & Stroock & Lavan
180 Maiden Lane
New York, New York 10038
Approximate date of commencement of proposed sale to the public: From time
to time on or after the effective date of this Registration Statement, as
determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate Amount of
Title of Securities Being to be Registered Price Offering Registration
Registered (1) Per Unit (2) Price (2) Fee (1)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Home Equity Loan Pass-Through $3,000,000,000 100% $3,000,000,000 $834,000
Certificates and Asset-Backed
Notes (Issuable in Series)
======================= ================= ============= ================= ================
</TABLE>
(1) $75,489,846.57 aggregate principal amount of securities registered by the
Registrant under Registration Statement No. 333-28025 referred to below and not
previously sold are consolidated in this Registration Statement pursuant to Rule
429. All registration fees in connection with such unsold amount of securities
have been previously paid by the Registrant under the foregoing Registration
Statement. Accordingly, the total amount registered under the Registration
Statement as so consolidated as of the date of this filing is 3,075,489,846.57.
(2) Estimated solely for the purpose of calculating the registration fee.
-----------------------------
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 of the Securities Act of 1933, the prospectus which is part
of this Registration Statement is a combined prospectus and includes all the
information currently required in a prospectus relating to the securities
covered by Registration Statement No. 333-28025 previously filed by the
Registrant. This Registration Statement which relates to $3,075,489,846.57
aggregate principal amount of securities, constitutes Post-Effective Amendment
No. 1 to Registration Statement 333-28025.
<PAGE>
EXPLANATORY NOTE
This Registration Statement includes (i) a basic prospectus relating to Home
Equity Loan Pass-Through Certificates, (ii) an illustrative form of prospectus
supplement for use in an offering of Home Equity Loan Pass-Through Certificates,
(iii) a basic prospectus relating to Asset-Backed Notes, and (iv) an
illustrative form of prospectus supplement for use in an offering of
Asset-Backed Notes.
<PAGE>
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION April 30, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Prospectus
Home Equity Loan Pass-Through Certificates
Residential Funding Mortgage Securities II, Inc.
Depositor
You should carefully consider the risk factors discussed in the accompanying
prospectus supplement under the heading "Risk Factors."
The certificates of any series offered by this prospectus and the accompanying
prospectus supplement will represent ownership interests only in the trust
created for the related series and will not represent ownership interests in or
obligations of Residential Funding Mortgage Securities, II, Inc., Residential
Funding Corporation or any of their affiliates.
This prospectus may be used to offer and sell the certificates only if
accompanied by the related prospectus supplement.
The depositor may periodically issue certificates representing interests in a
specific trust and the certificates will be paid only from the assets of that
trust. Each trust will consist primarily of mortgage collateral as described in
this prospectus and in the accompanying prospectus supplement. The certificates
will be issued in series and each series of certificates will represent
interests in a different trust established by the depositor.
Offered Certificates
The certificates for any series may consist of multiple classes and each class
may:
o receive a specified fixed or variable rate of interest;
o have a higher or lower priority relative to other classes in the
series with respect to distributions of principal and/or interest from
the trust and/or allocations of any losses;
o represent the right to receive payments from a part or all of the
trust assets;
o receive distributions of principal and/or interest at specified times;
and
o have a specified form of credit enhancement.
You can find specific information regarding each class of offered certificates
in the accompanying prospectus supplement.
Mortgage Collateral
Each trust will consist primarily of one of the following types of mortgage
collateral grouped into one or more mortgage pools that are described in detail
in the accompanying prospectus supplement. The types of mortgage collateral
include:
o home equity mortgage loans or other similar security interests secured
by first or junior liens on one- to four-family properties acquired
under the home equity program; and
o interests in mortgage securities and whole or partial participations
in mortgage loans as described above.
Credit Enhancement
Credit enhancement for a series of securities may include any one or any
combination of one or more classes of subordinate certificates, financial
guaranty insurance policy products, mortgage pool insurance policy, letter of
credit, bankruptcy bond, special hazard insurance policy, derivative products or
reserve fund. In addition to or in lieu of the foregoing, credit enhancement may
be provided by means of over collateralization of the certificates to the extent
the principal balance of the mortgage loans is greater than the principal
balance of the certificates.
Underwriting
The certificates may be offered to the public through different methods as
described in "Methods of Distribution" in this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these certificates or determined that
this prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
______________, 1999
<PAGE>
Important notice about information presented in this
prospectus and the accompanying prospectus supplement
We provide information to you about the certificates in two separate documents
that provide progressively more detail:
o this prospectus, which provides general information, some of which may
not apply to your series of certificates; and
o the accompanying prospectus supplement, which describes the specific
terms of your series of certificates.
If the description of your certificates in the accompanying prospectus
supplement differs from the related description in this prospectus, you should
rely on the information in that prospectus supplement.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. See "Additional Information," "Reports to Certificateholders" and
"Incorporation of Certain Information by Reference" in this Prospectus. You can
request information incorporated by reference from Residential Funding Mortgage
Securities II, Inc. by calling us at (612) 832-7000 or writing to us at 8400
Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437. We have not
authorized anyone to provide you with different information. We are not offering
the certificates in any state where the offer is not permitted.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Principal Definitions"
beginning on page ____.
2
<PAGE>
TABLE OF CONTENTS
INTRODUCTION..................................................................4
THE TRUSTS....................................................................4
General.....................................................................4
Closed-End Loans............................................................8
Revolving Credit Loans.....................................................10
ALLOCATION OF REVOLVING CREDIT LOAN BALANCES
.............................................................................11
MORTGAGE LOAN PROGRAM........................................................12
Underwriting Standards.....................................................12
Qualifications of Sellers..................................................15
Representations Relating to Mortgage Loans.................................16
Subservicing...............................................................19
DESCRIPTION OF THE CERTIFICATES..............................................20
General....................................................................20
Form of Certificates.......................................................21
Assignment of Trust Assets.................................................23
Review of Mortgage Loans...................................................24
Excess Spread and Excluded Spread..........................................25
Payments on Mortgage Loans; Deposits to Certificate Account
........................................................................25
Withdrawals from the Custodial Account.....................................27
Distributions..............................................................28
Principal and Interest on the Certificates.................................29
Advances on Closed-End Loans...............................................30
Funding Account............................................................30
Reports to Certificateholders..............................................31
Collection and Other Servicing Procedures..................................32
Special Servicing and Special Servicing Agreements.........................33
Realization Upon Defaulted Mortgage Loans..................................34
Hazard Insurance and Related Claims........................................35
DESCRIPTION OF CREDIT ENHANCEMENT............................................36
Financial Guaranty Insurance Policy........................................38
Letter of Credit...........................................................38
Special Hazard Insurance Policies..........................................38
Bankruptcy Bonds...........................................................39
Overcollateralization......................................................40
Reserve Funds..............................................................40
Maintenance of Credit Enhancement..........................................41
Reduction or Substitution of Credit Enhancement............................42
OTHER FINANCIAL OBLIGATIONS RELATED TO THE
CERTIFICATES.................................................................42
Swaps and Yield Supplement Agreements......................................42
Purchase Obligations.....................................................43
THE DEPOSITOR................................................................43
RESIDENTIAL FUNDING CORPORATION..............................................43
THE POOLING AND SERVICING AGREEMENT..........................................44
Servicing and Administration...............................................44
Evidence as to Compliance..................................................44
Certain Matters Regarding the Master Servicer and the Depositor
........................................................................45
Events of Default..........................................................46
Rights Upon Event of Default...............................................46
Amendment..................................................................47
Termination; Retirement of Certificates....................................48
The Trustee................................................................49
YIELD AND PREPAYMENT CONSIDERATIONS..........................................49
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND
RELATED MATTERS
.............................................................................54
General....................................................................54
Cooperative Loans..........................................................55
Tax Aspects of Cooperative Ownership.......................................56
Foreclosure on Shares of Cooperatives......................................57
Anti-Deficiency Legislation and Other Limitations on Lenders
........................................................................59
Environmental Legislation..................................................60
Enforceability of Certain Provisions.......................................61
Applicability of Usury Laws................................................62
Alternative Mortgage Instruments...........................................63
Soldiers' and Sailors' Civil Relief Act of 1940............................63
Forfeitures in Drug and RICO Proceedings...................................63
Junior Mortgages; Rights of Senior Mortgagees..............................64
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
.............................................................................65
General....................................................................65
REMICS.....................................................................66
STATE AND OTHER TAX CONSEQUENCES.............................................80
ERISA CONSIDERATIONS.........................................................81
Plan Asset Regulations.....................................................81
Prohibited Transaction Exemptions..........................................82
Representation from Investing Plans........................................85
Tax Exempt Investors.......................................................85
Consultation with Counsel..................................................85
LEGAL INVESTMENT MATTERS.....................................................86
USE OF PROCEEDS..............................................................86
METHODS OF DISTRIBUTION......................................................87
LEGAL MATTERS................................................................88
FINANCIAL INFORMATION......................................................88
ADDITIONAL INFORMATION.......................................................88
REPORTS TO CERTIFICATEHOLDERS................................................88
INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE....................................................................88
INDEX OF PRINCIPAL DEFINITIONS...............................................89
3
<PAGE>
INTRODUCTION
The Home Equity Loan Pass-Through Certificates (the "Certificates")
offered by this Prospectus may be sold from time to time in series, as described
in the related supplement to this Prospectus (each, a "Prospectus Supplement").
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest, excluding any interest retained by Residential
Funding Mortgage Securities II, Inc. (the "Depositor") or any other entity
specified in the related Prospectus Supplement, in a trust consisting primarily
of a segregated pool of one-to four-family, first or junior lien home equity
mortgage loans (the "Mortgage Loans"), acquired by the Depositor from one or
more affiliated or unaffiliated institutions. Each series of Certificates will
be issued under a pooling and servicing agreement (each, a "Pooling and
Servicing Agreement") among the Depositor and the trustee (the "Trustee") and
master servicer (the "Master Servicer") specified in the related Prospectus
Supplement.
THE TRUSTS
General
The Mortgage Loans and other assets described below and in the related
Prospectus Supplement will be held in a trust (each a "Trust") for the benefit
of the holders of the related series of Certificates and the Excess Spread, if
any, under a Pooling and Servicing Agreement as described in this section and in
the related Prospectus Supplement. As specified in the accompanying Prospectus
Supplement, each series of Certificates in the aggregate will represent the
entire beneficial ownership interest in a pool of loans (the "Mortgage Pool").
The Mortgage Pool will consist primarily of the Mortgage Loans, or certain
balances thereof, excluding any interest retained by the Depositor or any other
entity specified in the related Prospectus Supplement, evidenced by promissory
notes (the "Mortgage Notes") secured by mortgages or deeds of trust or other
similar security instruments creating a first or junior lien on one- to
four-family properties, or interests in the Mortgage Loans, which may include
mortgage pass-through certificates evidencing interests in Mortgage Loans
("Mortgage Securities").
The Mortgage Loans will either be (i) loans where the principal amount is
advanced in full at origination ("Closed-End Loans") or (ii) home equity
revolving lines of credit ("Revolving Credit Loans"). As specified in the
related Prospectus Supplement, each Trust 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 modular pre-cut/panelized housing ("Modular
Housing") and manufactured homes which are permanently affixed to the real
property on which they are located ("Manufactured Homes"), and the fee,
leasehold or other interests in the underlying real property (the "Mortgaged
Properties"). The Mortgaged Properties will be located in any of the fifty
states, the District of Columbia or the commonwealth of Puerto Rico (the "Puerto
Rico Mortgage Loans") and may include vacation, second and non-owner-occupied
homes. As specified in the related Prospectus Supplement relating to a series of
Certificates, a Mortgage Pool may contain cooperative apartment loans
("Cooperative Loans") evidenced by promissory notes ("Cooperative Notes")
secured by security interests in shares issued by Cooperatives and in the
related proprietary leases or occupancy agreements granting exclusive rights to
occupy specific dwelling units in the related buildings. As used in this
Prospectus, unless the context indicates otherwise, "Mortgage Loans" includes
Cooperative Loans, "Mortgaged Properties" includes shares in the related
Cooperative and the related proprietary leases or occupancy agreements securing
Cooperative Notes, "Mortgage Notes" includes Cooperative Notes and "Mortgages"
includes a security agreement with respect to a Cooperative Note. In connection
with a series of Certificates backed by Revolving Credit Loans, if the related
Prospectus Supplement indicates that the Mortgage Pool consists of certain
balances of the Revolving Credit Loans, then the term "Mortgage Loans" in this
Prospectus refers only to those balances.
The Prospectus Supplement for a series will describe the specific manner
in which Certificates of that series issued under a particular Pooling and
Servicing Agreement will evidence specified beneficial ownership interests in a
separate Trust created under that Pooling and Servicing Agreement. A Trust will
consist of, to the extent provided in the related Pooling and Servicing
Agreement:
4
<PAGE>
o the Mortgage Loans, and the related mortgage documents, or interests
therein, including any Mortgage Securities, underlying a particular
series of Certificates are subject to the Pooling and Servicing
Agreement, exclusive of, if specified in the related Prospectus
Supplement, any Excluded Spread (as defined in this Prospectus) or
other interest retained by the Depositor or any of its affiliates with
respect to each Mortgage Loan;
o assets including, without limitation, all payments and collections
derived from the Mortgage Loans or Mortgage Securities due after the
related cut-off date, as described in the related Prospectus
Supplement (the "Cut-off Date"), as from time to time are identified
as deposited in the Custodial Account and in the related Certificate
Account (each as defined in this Prospectus);
o property acquired by foreclosure of the Mortgage Loans or deed in lieu
of foreclosure;
o hazard insurance policies as described in this Prospectus, if any, and
portions of the related proceeds; and
o any combination, as and to the extent specified in the related
Prospectus Supplement, of a Letter of Credit, Financial Guaranty
Insurance Policy, Special Hazard Insurance Policy, Bankruptcy Bond,
Certificate Insurance Policy, derivative products, Surety Bond or
other type of credit enhancement as described under "Description of
Credit Enhancement."
The related Prospectus Supplement will describe the material terms and
conditions of certificates of interest or participations in Mortgage Loans to
the extent they are included in the related Trust.
Each Mortgage Loan will be selected by the Depositor for inclusion in a
Mortgage Pool from among those purchased by the Depositor, either directly or
through its affiliates, including Residential Funding Corporation (the "Master
Servicer" or "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 Depositor ("Unaffiliated Sellers," Unaffiliated
Sellers and Affiliated Sellers are collectively referred to in this Prospectus
as "Sellers"), all as described below under "Mortgage Loan Program." If a
Mortgage Pool is composed of Mortgage Loans acquired by the Depositor directly
from Sellers other than Residential Funding, the related Prospectus Supplement
will specify the extent of Mortgage Loans so acquired. The characteristics of
the Mortgage Loans are as described in the related Prospectus Supplement. No
more than five percent (5%) of the Mortgage Loans (as they are constituted as of
the Cut-off Date) by aggregate principal balance as of the Cut-off Date will
have characteristics that deviate from those characteristics described in the
accompanying Prospectus Supplement. Other Mortgage Loans available for purchase
by the Depositor may have characteristics which would make them eligible for
inclusion in a Mortgage Pool but were not selected for inclusion in a Mortgage
Pool at that time.
The Mortgage Loans may be delivered either directly or indirectly to the
Depositor by one or more Sellers identified in the related Prospectus
Supplement, concurrently with the issuance of the related series of Certificates
(a "Designated Seller Transaction"). These Certificates may be sold in whole or
in part to any Seller identified in the related Prospectus Supplement in
exchange for the related Mortgage Loans, or may be offered under any of the
other methods described in this Prospectus under "Methods of Distribution." The
related Prospectus Supplement for a Designated Seller Transaction will include
information, provided by the related Seller (the "Designated Seller"), about the
Designated Seller, the Mortgage Loans and the underwriting standards applicable
to the Mortgage Loans. None of the Depositor, Residential Funding, GMAC Mortgage
Group, Inc. ("GMAC Mortgage") or any of their affiliates will make any
representation or warranty with respect to these Mortgage Loans, or any
representation as to the accuracy or completeness of the information provided by
the Designated Seller.
Any Seller, including any Designated Seller, or Residential Funding may
retain or acquire any Excluded Balances with respect to any related Revolving
Credit Loans, or any loan secured by a mortgage senior or subordinate to any
Mortgage Loan included in any Mortgage Pool.
5
<PAGE>
If specified in the related Prospectus Supplement, the Trust underlying a
series of Certificates may include Mortgage Securities. The Mortgage Securities
may have been issued previously by the Depositor or an affiliate, a financial
institution or other entity engaged 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 trusts, and selling beneficial
interests in trusts. Except as described in the related Prospectus Supplement,
the Mortgage Securities will be generally similar to Certificates offered
hereunder. As to any series of Certificates, the related Prospectus Supplement
will include a description of any Mortgage Securities and any related credit
enhancement, and the Mortgage Loans underlying the Mortgage Securities will be
described together with any other Mortgage Loans included in the Mortgage Pool
relating to the series. As to any series of Certificates, as used in this
Prospectus the term "Mortgage Pool" includes the Mortgage Loans underlying the
Mortgage Securities. Notwithstanding any other reference in this Prospectus to
the Master Servicer, with respect to a series of Certificates as to which the
Trust includes Mortgage Securities, the entity that services and administers the
Mortgage Securities on behalf of the holders of the Certificates may be referred
to as the "Manager," if so specified in the related Prospectus Supplement. The
Manager, if any, will be identified in the related Prospectus Supplement.
References in this Prospectus to advances to be made and other actions to be
taken by the Master Servicer in connection with the Mortgage Loans may include
advances made and other actions taken under the terms of the Mortgage
Securities.
The Prospectus Supplement for each series of Certificates will contain
information appropriate to describe the type of Mortgage Loans which will be
included in the related Mortgage Pool. Each Prospectus Supplement applicable to
a series of Certificates will include information, to the extent then available
to the Depositor, as of the Cut-off Date, on an approximate basis. The
information may include, if applicable, (i) the aggregate principal balance of
the Mortgage Loans, (ii) the type of property securing the Mortgage Loans and
related lien priority, (iii) the original or modified and/or remaining terms to
maturity of the Mortgage Loans, (iv) the range of principal balances of the
Closed-End Loans at origination or modification, (v) the earliest origination or
modification date and latest maturity date of the Mortgage Loans, (vi) the
Loan-to-Value Ratios or Combined Loan-to-Value Ratios (as defined in this
Prospectus) of the Mortgage Loans, as applicable, (vii) the interest rate (the
"Mortgage Rate") or range of Mortgage Rates borne by the Mortgage Loans, (viii)
if the Mortgage Loans are ARM Loans or Revolving Credit Loans, the applicable
Index (as defined in this Prospectus), the range of Gross Margins (as defined in
this Prospectus), the weighted average Gross Margin, the frequency of
adjustments and maximum loan rate, (ix) the geographical distribution of the
Mortgaged Properties, (x) the percent of ARM Loans (as defined in this
Prospectus), (xi) if the Mortgage Loans are Revolving Credit Loans, the
aggregate Credit Limits of the related Credit Line Agreements, (xii) the
weighted average Junior Ratio and Credit Utilization Rate and (xiii) the range
of debt-to-income ratios, and (xiv) Credit Scores (as defined in this
Prospectus). A Current Report on Form 8-K will be available upon request to
holders of the related series of Certificates and will be filed, together with
the related Pooling and Servicing Agreement, with the Securities and Exchange
Commission (the "Commission") within fifteen days after the initial issuance of
the Certificates. The composition and characteristics of a Mortgage Pool
containing Revolving Credit Loans may change from time to time as a result of
any Draws made after the related Cut-off Date under the related Credit Line
Agreements that are included in the Mortgage Pool. If Mortgage Loans are added
to or deleted from the Trust after the date of the related Prospectus Supplement
other than as a result of any Draws, the addition or deletion will be noted in
the Current Report on Form 8-K. Additions or deletions of this type, if any,
will be made prior to the Closing Date.
As to each Mortgage Loan, the "Combined Loan-to-Value Ratio" or "CLTV"
generally will be the ratio, expressed as a percentage, of (A) the sum of (i)
the original principal balance or the Credit Limit, as applicable, and (ii) the
principal balance of any related senior mortgage loan at origination of the
Mortgage Loan together with any mortgage loan subordinate thereto, to (B) the
Appraised Value (as defined in this Prospectus) of the related Mortgaged
Property, or, if permitted by the Guide (as defined in this Prospectus), a
Statistical Valuation (as defined in this Prospectus) or the Stated Value (as
defined in this Prospectus). The "Appraised Value" for any Mortgage Loan will be
the appraised value of the related Mortgaged Property determined in the
appraisal used in the origination of the Mortgage Loan, which may have been
obtained at an earlier time; provided that if the Mortgage Loan was originated
simultaneously with or not more than 12 months after a senior lien on the
related Mortgaged Property, the Appraised Value will be the lesser of the
appraised value at the origination of the senior lien and the sales price for
the Mortgaged Property. The "Statistical Valuation" will be the value of the
property as determined
6
<PAGE>
by a form of appraisal which uses a statistical model to estimate the value of a
property. The "Stated Value" will be value of the property as stated by the
related Mortgagor in his or her application.
As to each Mortgage Loan, the "Junior Ratio" will be the ratio, expressed
as a percentage, of the original principal balance or the Credit Limit, as
applicable, of the Mortgage Loan to the sum of (i) the original principal
balance or the Credit Limit, as applicable, of the Mortgage Loan and (ii) the
principal balance of any related senior mortgage Mortgage Loan at origination of
the Mortgage Loan. As to each Contract, the CLTV and Junior Ratio will be
computed in the manner described in the related Prospectus Supplement. The
"Credit Utilization Rate" for any Reducing Credit Loan is determined by dividing
the Cut-off Date Principal Balance of the Revolving Credit Mortgage Loan by the
Credit Limit of the related Credit Line Agreement.
As to each Mortgage Loan, the "Loan-to-Value Ratio" or "LTV" generally
will be the ratio, expressed as a percentage, of (A) the original principal
balance or the Credit Limit, as applicable, to (B) the Appraised Value of the
related Mortgaged Property Mortgage Loan, or, if permitted by the Guide, a
Statistical Valuation or the Stated Value.
Mortgage Properties consisting of Modular Housing (also known as
pre-assembled, pre-fabricated, sectional or pre-built homes) are factory built
and constructed in two or more three dimensional sections, including interior
and exterior finish, plumbing, wiring and mechanical systems. Upon completion,
the modular home is transported to the property site to be joined together on a
permanent foundation.
Mortgage Properties consisting of Manufactured Homes must be legally
classified as real estate, have the wheels and axles removed and be attached to
a permanent foundation and may not be located in a mobile home park. The
Manufactured Homes will also have certain other characteristics as specified in
the Prospectus Supplement.
A Mortgage Pool may include Mortgage Loans that have been modified (each,
a "Modified Mortgage Loan"). The modifications may include conversions from an
adjustable to a fixed Mortgage Rate (discussed below) or other changes in the
related mortgage note. If a Mortgage Loan is a Modified Mortgage Loan,
references to origination shall be deemed to be references to the date of
modification.
The Depositor will cause the Mortgage Loans or Trust Balances thereof
constituting each Mortgage Pool (or Mortgage Securities evidencing interests
therein) to be assigned to the Trustee named in the related Prospectus
Supplement, for the benefit of the holders of all of the Certificates of a
series. The Master Servicer named in the related Prospectus Supplement will
service the Mortgage Loans, either directly or through other mortgage servicing
institutions ("Subservicers"), under a Pooling and Servicing Agreement and will
receive a fee for its services. See "Mortgage Loan Program" and "Description of
the Certificates." As to those Mortgage Loans serviced by the Master Servicer
through a Subservicer, the Master Servicer will remain liable for its servicing
obligations under the related Pooling and Servicing Agreement as if the Master
Servicer alone were servicing the Mortgage Loans. In addition to or in place of
the Master Servicer for a series of Certificates, the related Prospectus
Supplement may identify a certificate administrator (the "Certificate
Administrator") for the Trust. The Certificate Administrator may be an affiliate
of the Depositor. All references in this Prospectus to "Master Servicer" and any
discussions of the servicing and administration functions of the Master Servicer
will also apply to the Certificate Administrator to the extent applicable.
The Depositor's assignment of the Mortgage Loans or the Trust Balances to
the Trustee will be without recourse. See "Description of the Certificates --
Assignment of Trust Assets." The Master Servicer's obligations with respect to
the Mortgage Loans will consist principally of its contractual servicing
obligations under the related Pooling and Servicing Agreement (including its
obligation to enforce purchase obligations of Residential Funding or any
Designated Seller and other obligations of Subservicers, as described in this
Prospectus under "Mortgage Loan Program -- Representations Relating to Mortgage
Loans," and " -- Subservicing" and "Description of the Certificates --
Assignment of Trust Assets," and its obligation to make certain Advances, if
applicable, in the event of delinquencies in payments on or with respect to the
Mortgage Loans in amounts described in this Prospectus under "Description of the
Certificates -- Advances on Closed-End Loans") or under the terms of any
Mortgage Securities. With respect to Revolving Credit Loans, Residential Funding
(or any other entity specified in the related
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Prospectus Supplement) will be obligated to advance funds to Mortgagors in
respect of Draws made after the related Cut-off Date. The obligation of the
Master Servicer to make principal and interest advances on the Closed-End Loans
will be limited to amounts which the Master Servicer believes ultimately would
be reimbursable out of the proceeds of liquidation of the Mortgage Loans or any
applicable form of credit support. See "Description of the Certificates --
Advances on Closed-End Loans."
The proceeds of the Mortgage Loans may be used by the borrower to purchase
or improve the related Mortgaged Properties, may be retained by the related
Mortgagors or may be used for purposes unrelated to the Mortgaged Properties.
A Mortgaged Property securing a Mortgage Loan may be subject to the senior
liens of one or more conventional mortgage loans at the time of origination and
may be subject to one or more junior liens at the time of origination or
thereafter. A mortgage loan secured by any junior lien or senior lien will
likely not be included in the related Mortgage Pool, but the Depositor, an
affiliate of the Depositor or an Unaffiliated Seller may have an interest in the
mortgage loan. Revolving Credit Loans and Closed-End Loans that are secured by
junior liens, will not be required by the Depositor to be covered by a primary
mortgage guaranty insurance policy insuring against default on the Mortgage
Loan.
Closed-End Loans
Unless specified below or in the related Prospectus Supplement, all of the
Closed-End Loans in a Mortgage Pool will (i) be secured by Mortgaged Properties
located in any of the 50 states, the District of Columbia or the Commonwealth of
Puerto Rico and (ii) be of one or more types of the following types of mortgage
loans described below:
o fixed-rate, fully-amortizing Closed-End Loans providing for level
monthly payments of principal and interest and terms to maturity of
generally 5, 10, 15, 20 or 25 years at origination or modification as
specified in the related Prospectus Supplement;
o Fully-amortizing adjustable-rate Closed-End Loans ("ARM Loans") having
an original or modified term to maturity of not more than 30 years
with a related interest rate (a "Mortgage Rate") which usually adjusts
initially after a specified period subsequent to the initial payment
date and thereafter at either one-month, six-month, one-year or other
intervals, with corresponding adjustments in the amount of monthly
payments, over the term of the mortgage loan to equal the sum of a
fixed percentage described in the related Mortgage Note (the "Gross
Margin") and an index. The related Prospectus Supplement will describe
the relevant index and the highest, lowest and weighted average Gross
Margin with respect to the ARM Loans in the related Mortgage Pool. The
related Prospectus Supplement will also indicate any periodic or
lifetime limitations on changes in any per annum Mortgage Rate at the
time of any adjustment. If specified in the related Prospectus
Supplement, an ARM Loan may include a provision that allows the
Mortgagor to convert the adjustable Mortgage Rate to a fixed rate at
specified times during the term of the ARM Loan. The index (the
"Index") for a particular Mortgage Pool will be specified in the
related Prospectus Supplement and may include one of the following
indexes: (i) the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of either six months or one year, (ii)
the weekly auction average investment yield of U.S. Treasury bills of
six months, (iii) the daily Bank Prime Loan rate made available by the
Federal Reserve Board, (iv) the cost of funds of member institutions
for the Federal Home Loan Bank of San Francisco, (v) the interbank
offered rates for U.S. dollar deposits in the London market, each
calculated as of a date prior to each scheduled interest rate
adjustment date which will be specified in the related Prospectus
Supplement or (vi) the weekly average of secondary market interest
rates on six-month negotiable certificates of deposit.
o Balloon mortgage loans ("Balloon Loans"), which are fixed-rate
Closed-End Loans having original or modified terms to maturity of
generally 15 years as described in the related Prospectus Supplement,
with level monthly payments of principal and interest based on a
30-year amortization
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schedule. The amount of the monthly payment will remain constant
until the maturity date, upon which the remaining outstanding
principal balance on the Balloon Loan will be due and payable (the
"Balloon Amount");
o Convertible Mortgage Loans, Cooperative Loans or Modified Mortgage
Loans; or
o Similar Mortgage Loans with other payment characteristics as described
in the related Prospectus Supplement.
As specified in the related Prospectus Supplement, a portion of the
Closed-End Loans underlying a series of Certificates may provide for payments
that are allocated to principal and interest according to the daily simple
interest method (a "Simple Interest Mortgage Loan"). Other Closed-End Loans may
provide for payments in monthly installments including interest equal to
one-twelfth of the applicable Mortgage Rate times the unpaid principal balance,
with any remainder of the payment applied to principal (an "Actuarial Mortgage
Loan").
A Simple Interest Mortgage Loan provides the amortization of the amount
financed under the Mortgage Loan over a series of equal monthly payments,
except, in the case of a Balloon Loan, the final payment. Each monthly payment
consists of an installment of interest which is calculated on the basis of the
outstanding principal balance of the Mortgage Loan multiplied by the stated
Mortgage Rate and further multiplied by a fraction, with the numerator equal to
the number of days in the period elapsed since the preceding payment of interest
was made and the denominator equal to the number of days in the annual period
for which interest accrues on the Mortgage Loan. As payments are received under
a Simple Interest Mortgage Loan, the amount received is applied first to
interest accrued to the date of payment and then the remaining amount is applied
to pay any unpaid fees and then to reduce the unpaid principal balance.
Accordingly, if a borrower pays a fixed monthly installment on a Simple Interest
Mortgage Loan before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a fixed monthly
installment after its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be greater
than it would have been had the payment been made as scheduled, and the
remaining portion, if any, of the payment applied to reduce the unpaid principal
balance will be correspondingly less. If each scheduled payment under a Simple
Interest Mortgage Loan is made on or prior to its scheduled due date, the
principal balance of the Mortgage Loan will amortize more quickly than
scheduled. However, if the borrower consistently makes scheduled payments after
the scheduled due date, the Mortgage Loan will amortize more slowly than
scheduled. If a Simple Interest Mortgage Loan is prepaid, the borrower is
required to pay interest only to the date of prepayment. The variable
allocations among principal and interest of a Simple Interest Mortgage Loan may
effect the distributions of principal and interest on the Certificates, as
described in the related Prospectus Supplement.
If provided for in the related Prospectus Supplement, a Mortgage Pool may
contain ARM Loans which allow the Mortgagors to convert the adjustable rates on
the Mortgage Loans to a fixed rate at some point during the life of such
Mortgage Loans (a "Convertible Mortgage Loan"), usually, not later than six to
ten years subsequent to the date of origination, depending upon the length of
the initial adjustment period. If specified in the related Prospectus
Supplement, upon any conversion, the Depositor will repurchase or Residential
Funding, the applicable Designated Seller or a third party will purchase the
converted Mortgage Loan as and to the extent described in the related Prospectus
Supplement. Alternatively, if specified in the related Prospectus Supplement,
the Depositor or Residential Funding, or another party specified therein, may
agree to act as remarketing agent with respect to the converted Mortgage Loans
and, in its capacity, to use its best efforts to arrange for the sale of
converted Mortgage Loans under specified conditions. Upon the failure of any
party so obligated to purchase any converted Mortgage Loan, the inability of any
remarketing agent to arrange for the sale of the converted Mortgage Loan and the
unwillingness of the remarketing agent to exercise any election to purchase the
converted Mortgage Loan for its own account, the related Mortgage Pool will
thereafter include both fixed rate and adjustable rate Mortgage Loans. If so
specified in the related Prospectus Supplement, the inclusion of a converted
Mortgage Loan in a Mortgage Pool may adversely affect the holders of the
Certificates by restricting the ability of the related Pass-Through Rate or
Rates to adjust to the extent intended by the adjustable Pass-Through Rate.
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The Closed-End Loans may provide for payment of a prepayment charge if the
related Mortgagor prepays the Closed-End Loan within a specified time
period.
Revolving Credit Loans
The Revolving Credit Loans will be originated under loan agreements (the
"Credit Line Agreements") subject to a maximum amount (the "Credit Limit").
Interest on each Revolving Credit Loan will be calculated based on the average
daily balance outstanding during the billing cycle and the billing cycle
generally will be the calendar month preceding a Due Date. Each Revolving Credit
Loan will have a Mortgage Rate that is subject to adjustment on the day
specified in the related Mortgage Note, which may be daily or monthly, equal to
the sum of (a) the Index on the day specified in the related Prospectus
Supplement, and (b) the Gross Margin specified in the related Mortgage Note,
which may vary under circumstances if so specified in the related Prospectus
Supplement, subject to the Maximum Rate specified in the Mortgage Note and the
maximum rate permitted by applicable law. Notwithstanding the foregoing, if so
specified in the related Prospectus Supplement, a Mortgage Loan may have an
introductory rate that is lower than the rate that would be in effect if the
applicable Index and Gross Margin were used to determine the Mortgage Rate
("Teaser Loans") and as a result of the introductory rate, interest
distributions on the Certificates may initially be lower than expected.
Commencing on their first adjustment date, the Mortgage Rates on the Teaser
Loans will be based on the applicable Index and Gross Margin.
Unless 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 in the Credit Line Agreement
[the "Draw Period"). Unless specified in the related Prospectus Supplement, the
Draw Period will not be more than 15 years. Unless specified in the related
Prospectus Supplement, with respect to each Revolving Credit Loan, if the Draw
Period is less than the full term of the Revolving Credit Loan, 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 "Repayment
Period"). The Mortgagor for each Revolving Credit Loan will be obligated to make
monthly payments on the Revolving Credit Loan in a minimum amount as specified
in the related Mortgage Note, which usually will be the greater of (i) 1% of the
outstanding principal balance of the Mortgage Loan, (ii) the accrued interest or
(iii) $100. The Mortgagor for each Mortgage Loan will be obligated to pay off
the remaining Account Balance on the related maturity date, which may be a
substantial principal amount. The maximum amount of any Draw with respect to any
Revolving Credit Loan is equal to the excess, if any, of the Credit Limit over
the principal balance outstanding under the Mortgage Note at the time of the
Draw. Unless provided in the related Prospectus Supplement, Draws made after the
related Cut-off Date will be excluded from the Mortgage Pool.
Unless specified in the related Prospectus Supplement, with respect to
each Revolving Credit Loan, (a) the Finance Charge (the "Finance Charge") for
any billing cycle generally will be equal to interest accrued on the average
daily principal balance of the Mortgage Loan for the 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 the day, plus all related Draws
funded on that day and outstanding at the beginning of such day, plus the sum of
any unpaid Finance Charges and any unpaid fees, insurance premiums and other
charges (collectively, "Additional Charges") that are due on the Mortgage Loan
minus the aggregate of all payments and credits that are applied to the
repayment of any Draws on such day, and (c) the "principal balance" on any day
usually will be the related Account Balance minus the sum of any unpaid Finance
Charges and Additional Charges that are due on the Revolving Credit Loan.
Payments made by or on behalf of the Mortgagor for each Mortgage Loan generally
will be applied, first, to any unpaid Finance Charges that are due on the
Revolving Credit Loan, second, to any unpaid Additional Charges that are due
thereon, and third, to any related Draws outstanding.
The Mortgaged Property securing each Revolving Credit Loan will be subject
to the lien created by the related mortgage (the "Mortgage") in respect of the
outstanding principal balance of each related Draw or portion thereof that is
not included in the related Mortgage Pool, whether made on or prior to the
related Cut-off Date or thereafter. The lien will be the same rank as the lien
created by the Mortgage in respect of the Revolving Credit
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Loan, and monthly payments, collections and other recoveries under the Credit
Line Agreement related to the Revolving Credit Loan will be allocated as
described in the related Prospectus Supplement among the Revolving Credit Loan
and the outstanding principal balance of each Draw or portion thereof excluded
from the Mortgage Pool. The Depositor, an affiliate of the Depositor or an
Unaffiliated Seller may have an interest in any Draw or portion thereof excluded
from the Mortgage Pool.
In most cases, each Revolving Credit Loan may be prepaid in full or in
part at any time and without penalty, and the related Mortgagor will have the
right during the related Draw Period to make a Draw in the amount of any
prepayment made with respect to the Mortgage Loan. The Mortgage Note or Mortgage
related to each Revolving Credit Loan will usually contain a customary
"due-on-sale" clause.
As to each Mortgage Loan, the Mortgagor's rights to receive Draws during
the Draw Period may be suspended, or the Credit Limit may be reduced, for cause
under a limited number of circumstances, including, but not limited to: a
materially adverse change in the Mortgagor's financial circumstances or a
non-payment default by the Mortgagor. However, as to each Mortgage Loan,
generally the suspension or reduction will not affect the payment terms for
previously drawn balances. In the event of default under a Mortgage Loan, at the
discretion of the Master Servicer, the Mortgage Loan may be terminated and
declared immediately due and payable in full. For this purpose, a default
includes, but is not limited to: the Mortgagor's failure to make any payment as
required; any action or inaction by the Mortgagor that materially and adversely
affects the Mortgaged Property or the rights in the Mortgaged Property; or fraud
or material misrepresentation by a Mortgagor in connection with the Loan.
The proceeds of the Revolving Credit Loans may be used by the borrower to
improve the related Mortgaged Properties, may be retained by the related
Mortgagors or may be used for purposes unrelated to the Mortgaged Properties.
ALLOCATION OF REVOLVING CREDIT LOAN BALANCES
With respect to any series of Certificates backed by Revolving Credit
Loans, the related Trust may include either (i) the entire principal balance of
each Revolving Credit Loan outstanding at any time, including balances
attributable to Draws made after the related Cut-off Date, or (ii) only a
specified portion (the "Trust Balance") of the total principal balance of each
Revolving Credit Loan outstanding at any time, which except as described in the
related Prospectus Supplement will consist of the principal balance thereof as
of the Cut-off Date minus the portion of all payments and losses thereafter that
are allocated to the Trust Balance, and will not include any portion of the
principal balance attributable to Draws made after the Cut-off Date.
In the latter case, that portion of the principal balance of any Revolving
Credit Loan not included in the Trust Balance at any time is referred to as the
"Excluded Balance," which will include balances attributable to Draws after the
Cut-off Date and may include, as specified in the related Prospectus Supplement,
a portion of the principal balance outstanding as of the Cut-off Date. The
related Prospectus Supplement will describe the specific provisions by which
payments and losses on any Revolving Credit Loan will be allocated as between
the Trust Balance and any Excluded Balance. Generally, except as so specified,
the provisions (i) may provide that principal payments made by the Mortgagor
will be allocated as between the Trust Balance and any Excluded Balance either
(a) on a pro rata basis, (b) first to the Trust Balance until reduced to zero,
then to the Excluded Balance, or (c) in accordance with other specified
priorities, and (ii) will provide that interest payments, as well as liquidation
proceeds or similar proceeds following a default and any Realized Losses, will
be allocated as between the Trust Balance and any Excluded Balance on a pro rata
basis.
Even where a Trust initially includes the entire principal balance of the
Revolving Credit Loans, the Pooling and Servicing Agreement may provide that
after a specified date or upon the occurrence of specified events, the Trust may
not include balances attributable to additional Draws made thereafter. The
related Prospectus Supplement will describe the provisions as well as the
allocation provisions that would be applicable thereto.
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MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor, either
directly or indirectly through Residential Funding from Sellers. The Mortgage
Loans will generally have been originated in accordance with the Depositor's
underwriting standards or alternative underwriting criteria as described below
under "Underwriting Standards" or as described in the related Prospectus
Supplement.
Underwriting Standards
General Standards
The Depositor's underwriting standards with respect to the Mortgage Loans
will generally conform to those published in Residential Funding's Client 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
Depositor's Home Equity Program (the "Home Equity Program"). The underwriting
standards as contained in the Guide are continuously revised based on
opportunities and prevailing conditions in the residential mortgage market, the
consumer lending market and the market for mortgage securities. The Mortgage
Loans may be underwritten by Residential Funding or by a designated third party.
In some circumstances, however, the Mortgage Loans may be underwritten only by
the Seller with little or no review performed by Residential Funding. See
"Underwriting Standards -- Guide Standards" and "Qualifications of Sellers."
Residential Funding or a designated third party may perform only sample quality
assurance reviews to determine whether the Mortgage Loans in any Mortgage Pool
were underwritten in accordance with applicable standards.
The Depositor's underwriting standards, as well as any other underwriting
standards that may be applicable to any Mortgage Loans, generally include a set
of specific criteria under which the underwriting evaluation is made. However,
the application of the underwriting standards does not imply that each specific
criterion was satisfied individually. Rather, a Revolving Mortgage Loan will be
considered to be originated in accordance with a given set of underwriting
standards if, based on an overall qualitative evaluation, the loan is in
substantial compliance with the underwriting standards. For example, a Mortgage
Loan may be considered to comply with a set of underwriting standards, even if
one or more specific criteria included in the underwriting standards were not
satisfied, if other factors compensated for the criteria that were not
satisfied.
In addition, the Depositor purchases Mortgage Loans which do not conform
to the underwriting standards contained in the Guide. A portion of the Mortgage
Loans may be purchased in negotiated transactions, and those negotiated
transactions may be governed by agreements ("Master Commitments") relating to
ongoing purchases of Mortgage Loans by Residential Funding, from Sellers who
will represent that the Mortgage Loans have been originated in accordance with
underwriting standards agreed to by Residential Funding. Residential Funding, on
behalf of the Depositor or a designated third party, will normally review only a
limited portion of the Mortgage Loans in any delivery of Mortgage Loans from the
related Seller for conformity with the applicable underwriting standards. A
portion of the Mortgage Loans may be purchased from Sellers who will represent
that the Mortgage Loans were originated under underwriting standards acceptable
to Residential Funding.
The level of review, if any, by Residential Funding or the Depositor of
any Mortgage Loan for conformity with the applicable underwriting standards will
vary depending on any one of a number of factors, including (i) factors relating
to the experience and status of the Seller, and (ii) factors relating to the
specific Mortgage Loan, including the original principal balance or Credit
Limit, as applicable, the Combined Loan-to-Value Ratio, the loan type or loan
program, and the applicable Credit Score of the related Mortgagor used in
connection with the origination of the Mortgage Loan, as determined based on a
credit scoring model acceptable to the Depositor. 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 various loan features, including maximum loan amount,
maximum Loan-to-Value Ratio, property type and use, and documentation level, may
depend on the mortgagor's Credit Score.
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The underwriting standards utilized in negotiated transactions and Master
Commitments and the underwriting standards applicable to Mortgage Loans
underlying Mortgage Securities may vary substantially from the underwriting
standards contained in the Guide. Those underwriting standards are generally
intended to provide an underwriter with information to evaluate the borrower's
repayment ability and the value of the Mortgaged Property as collateral. Due to
the variety of underwriting standards and review procedures that may be
applicable to the Mortgage Loans included in any Mortgage Pool, the related
Prospectus Supplement generally will not distinguish among the various
underwriting standards applicable to the Mortgage Loans nor describe any review
for compliance with applicable underwriting standards performed by the Depositor
or Residential Funding. Moreover, there can be no assurance that every Mortgage
Loan was originated in conformity with the applicable underwriting standards in
all material respects, or that the quality or performance of Mortgage Loans
underwritten under varying standards as described above will be equivalent under
all circumstances. In the case of a Designated Seller Transaction, the
applicable underwriting standards will be those of the Designated Seller or of
the originator of the Mortgage Loans, and will be described in the related
Prospectus Supplement.
The Depositor, either directly or indirectly through Residential Funding,
will also purchase Mortgage Loans from its affiliates, including GMAC Mortgage
Corporation, Residential Money Centers, Inc. and HomeComings Financial Network,
Inc., with underwriting standards in accordance with the Guide or as otherwise
agreed to by the Depositor. However, in some limited circumstances, the Mortgage
Loans may be employee or preferred customer loans with respect to which, in
accordance with the affiliate's mortgage loan programs, income, asset and
employment verifications and appraisals may not have been required. With respect
to Mortgage Loans made under any employee loan program maintained by Residential
Funding, or its affiliates, in limited circumstances preferential interest rates
may be allowed. Neither the Depositor nor Residential Funding will review any
affiliate's mortgage loans for conformity with the underwriting standards
contained in the Guide.
Guide Standards
The following is a brief description of the underwriting standards
contained in the Guide for full documentation loan programs. Initially, a
prospective borrower, other than a trust if the trust is the borrower, is
required to fill out a detailed application providing pertinent credit
information. As part of the application, the borrower is required to provide a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with merchants and
lenders and any record of bankruptcy. Under the Home Equity Program, the
borrower normally must show, among other things, a minimum of two years' 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 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 that 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 Mortgage Loan secured by a property owned by a
trust, the foregoing procedures may be waived where the Mortgage Note is
executed on behalf of the trust.
As specified in the related Prospectus Supplement, the value of the
Mortgaged Property securing each Mortgage Loan will be determined by either an
appraisal, or if permitted by the Guide, a Statistical Valuation, or the Stated
Value. An appraisal is made of the Mortgaged Property securing each Mortgage
Loan. Appraisals may be performed by appraisers independent from or affiliated
with the Depositor, Residential Funding or their affiliates. 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 some 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. Under the Home
Equity Program, each appraisal is required to be dated no more than 360 days
prior to the date of origination of the Mortgage Loan; provided, that depending
on the original principal amount or Credit Limit, as applicable, an earlier
appraisal may be used if the appraisal was made not
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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 Valuation is obtained. However, appraisals, Statistical
Valuations, or Stated Values will not establish that the Mortgage Properties
provide assurance of repayment of the Loans. Title searches are undertaken in
most cases, and title insurance is required on all Mortgage Loans with original
principal balances or Credit Limits, as applicable, in excess of $100,000.
Certain information, including the "Credit Scores" for a portion of the
Mortgages of the Mortgage Loans underlying each series of Certificates will be
supplied in the related Prospectus Supplement. Credit Scores are obtained by
many mortgage lenders in connection with mortgage loan applications to help
assess a borrower's credit-worthiness. In addition, Credit Scores may be
obtained by Residential Funding after the origination of a mortgage loan if the
Seller does not provide to Residential Funding a Credit Score. 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 utilized 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. Credit Scores range from approximately 350 to
approximately 840, 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 mortgage
loans, but for consumer loans in general, and assess only the borrower's past
credit history. Therefore, in general, a Credit Score does not take into
consideration the differences between mortgage loans and consumer loans
generally, or the specific characteristics of the related mortgage loan (for
example, the Loan-to-Value Ratio, the collateral for the mortgage 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 Mortgage Loans or that any Mortgagor's Credit Score would not be lower
if obtained as of the date of the related Prospectus Supplement.
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 if
applicable, such as property taxes and hazard insurance, as well as other
financial obligations, including debt service on any mortgage loan secured by a
senior lien on the related Mortgaged Property. In most cases, the monthly
payment used to qualify borrowers for a Revolving Credit Loan will be assumed to
be an amount equal to 1.00% times the applicable Credit Limit. The Mortgage Rate
in effect from the origination date of an ARM Loan or 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. If the
borrowers' incomes do not increase in an amount commensurate with the increases
in monthly payments, the likelihood of default will increase. The monthly
payment used to qualify borrowers for a Closed End Loan is a fully amortized
fixed payment which is added to the housing expenses and other monthly debt to
calculate the debt-to-income ratio. Unless specified in the related Prospectus
Supplement, the Mortgage Loans will not provide for negative amortization. With
respect to Balloon Loans and Revolving Credit Loans, payment of the full
outstanding principal balance at maturity may depend on the borrower's ability
to obtain refinancing or to sell the Mortgaged Property prior to the maturity of
the Mortgage Loan, and there can be no assurance that refinancing will be
available to the borrower or that a sale will be possible.
The underwriting standards set forth in the Guide also allow for Mortgage
Loans to be supported by alternative documentation. For alternatively documented
Mortgage Loans, a borrower may demonstrate income and employment directly by
providing alternative documentation in the form of copies of the borrower's own
records relating thereto, rather than by having originator obtain independent
verifications from third parties, such as the borrower's employer or mortgage
servicer.
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The underwriting standards contained in the Guide may be varied in
appropriate cases, including in "limited" or "reduced loan documentation"
mortgage loan programs. Limited documentation programs normally permit fewer
supporting documents to be obtained or waive income, asset and employment
documentation requirements, and normally compensate for increased credit risk by
placing greater emphasis on either the review of the property to be financed or
the borrower's ability to repay the Mortgage Loan. For example, under
Residential Funding's Stated Income limited mortgage loan documentation program,
some 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. Normally, 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, must be present. The borrower's eligibility for the program
may further be determined by use of a credit scoring model.
The Home Equity Program sets forth some limitations with respect to the
CLTV for the Mortgage Loans and restrictions with respect to any related
underlying first mortgage loan. The underwriting guidelines for the Home Equity
Program normally 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 various 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 conditions described above, an evaluation of the
prospective borrower's credit quality will be made based on a credit scoring
model approved by Residential Funding. The Home Equity Program underwriting
guidelines include minimum credit score levels that may apply depending on
certain factors of the Mortgage Loan. The required yields for fixed-rate
Closed-End Loans and required Gross Margins for Revolving Credit Loans purchased
under the Home Equity Program, as announced from time to time, vary based on a
number of factors including CLTV, original principal balance or 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, 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 will consider, among other things, the financial status (including the
net worth) of the seller, the previous experience of the seller in originating
home equity or first mortgage loans, the prior delinquency and loss experience
of the seller, the underwriting standards employed by the seller and the quality
control and, if applicable, servicing operations established by the seller.
There can be no assurance that any Seller presently meets any qualifications or
will continue to meet any qualifications at the time of inclusion of mortgage
loans sold by it in the Trust for a series of Certificates, or thereafter. If a
Seller becomes subject to the direct or indirect control of the FDIC, or if a
Seller's net worth, financial performance or delinquency and foreclosure rates
deteriorate, that institution may continue to be treated as a Seller. Any event
of this type may adversely affect the ability of any Seller to repurchase the
Mortgage Loans in the event of a breach of a representation or warranty which
has not been cured.
Residential Funding monitors Sellers that it knows to be under control of
the FDIC or are insolvent, otherwise in receivership or conservatorship or
financially distressed. Any Seller that is under control of the FDIC or
insolvent may make no representations and warranties with respect to Mortgage
Loans sold by it. The FDIC (either in its corporate capacity or as receiver for
a depository institution) may also be a Seller of the Mortgage Loans, in which
event neither the FDIC nor the related depository institution may make
representations and warranties with respect to the Mortgage Loans sold, or only
limited representations and warranties may be made (for example, that the
related legal documents are enforceable). The FDIC may have no obligation to
repurchase any Mortgage Loan for a breach of a representation and warranty.
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Unless otherwise specified in the related Prospectus Supplement, the
qualifications required of Sellers for approval by Residential Funding as
participants in its loan purchase programs may not apply to Designated Sellers.
To the extent the Designated Seller fails to or is unable to repurchase the
Mortgage Loan due to a breach of representation and warranty, neither the
Depositor, Residential Funding nor any other entity will have assumed the
representations and warranties, and any related losses will be borne by the
Certificateholders or by the credit enhancement, if any.
Representations Relating to Mortgage Loans
Except as described above, each Seller will have made representations and
warranties to Residential Funding with respect to the Mortgage Loans sold by it.
However, except in the case of a Designated Seller Transaction or as otherwise
provided in the related Prospectus Supplement, the representations and
warranties of the Seller will not be assigned to the Trustee for the benefit of
the holders of the related series of Certificates, and therefore a breach of the
representations and warranties of the Seller generally will not be enforceable
on behalf of the Trust.
In the case of a Mortgage Pool consisting of Mortgage Loans purchased by
the Depositor from Sellers through Residential Funding, Residential Funding,
except in the case of a Designated Seller Transaction or as to Mortgage Loans
underlying any Mortgage Securities or unless otherwise specified in the related
Prospectus Supplement, will have made certain limited representations and
warranties regarding the Mortgage Loans to the Depositor at the time, just prior
to the initial issuance of the related series of Certificates, that they are
sold to the Depositor. The representations and warranties will generally
include, among other things, that:
o as of the Cut-off Date, the information contained in a listing of the
related Mortgage Loans is true and correct in all material respects;
o Residential Funding was the sole holder and owner of the Mortgage Loan
free and clear of any and all liens and security interests;
o each Mortgage Loan complied in all material respects with all
applicable local, state and federal laws;
o except as otherwise indicated in the related Prospectus Supplement, no
Mortgage Loan is one month or more delinquent in payment of principal
and interest; and
o there is no delinquent tax or, to the best of the Residential
Funding's knowledge, assessment lien against any Mortgaged Property.
In the event of a breach of a representation or warranty made by
Residential Funding that materially adversely affects the interests of the
Certificateholders in a Mortgage Loan, Residential Funding will be obligated to
repurchase or substitute for the Mortgage Loan as described below. In addition,
Residential Funding will be obligated to repurchase or substitute for any
Mortgage Loan as to which it is discovered that the related Mortgage is not a
valid lien on the related Mortgaged Property having at least the priority
described with respect to the Mortgage Loan in the listing of related Mortgage
Loans, subject only to (a) liens of real property taxes and assessments not yet
due and payable, (b) covenants, conditions and restrictions, rights of way,
easements and other matters of public record as of the date of recording of the
Mortgage and certain other permissible title exceptions, (c) other matters to
which like properties are commonly subject which do not materially adversely
affect the value, use, enjoyment or marketability of the Mortgaged Property, and
(d) if applicable, the liens of the related senior mortgage loans. In addition,
with respect to any Mortgage Loan as to which the Depositor delivers to the
Trustee or the custodian an affidavit certifying that the original Mortgage Note
has been lost or destroyed, if the Mortgage Loan subsequently is in default and
the enforcement thereof or of the related Mortgage is materially adversely
affected by the absence of the original Mortgage Note, Residential Funding will
be obligated to repurchase or substitute for the Mortgage Loan, in the manner
described below. However, Residential Funding will not be required to repurchase
or substitute for any Mortgage Loan as described above if the circumstances
giving rise to the requirement also constitute fraud in the origination of the
related Mortgage Loan. Furthermore, because the listing
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of the related Mortgage Loans generally contains information with respect to the
Mortgage Loans as of the Cut-off Date, prepayments and, in some limited
circumstances, modifications to the interest rate and principal and interest
payments may have been made with respect to one or more of the related Mortgage
Loans between the Cut-off Date and the date of the initial issuance of the
Certificates (the "Closing Date"). Residential Funding will not be required to
purchase or substitute for any Mortgage Loan as a result of the 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 Mortgage Loans to the Depositor
generally similar to those made in the preceding paragraph by Residential
Funding.
The Depositor will assign to the Trustee for the benefit of the holders of
the related series of Certificates all of its right, title and interest in each
agreement by which it purchased a Mortgage Loan from Residential Funding or a
Designated Seller, insofar as the agreement relates to the representations and
warranties made by a Designated Seller or Residential Funding, as the case may
be, in respect of the Mortgage Loan and any remedies provided for with respect
to any breach of the representations and warranties. If a Designated Seller or
Residential Funding, as the case may be, cannot cure a breach of any
representation or warranty made by it in respect of a Mortgage Loan which
materially and adversely affects the interests of the Certificateholders in the
Mortgage Loan, within 90 days after notice from the Master Servicer, such
Designated Seller or Residential Funding, as the case may be, will be obligated
to purchase such Mortgage Loan at a price (the "Purchase Price") contained in
the related Pooling and Servicing Agreement, which Purchase Price generally will
be equal to the principal balance thereof as of the date of purchase plus
accrued and unpaid interest to the first day of the month following the month of
repurchase at the Mortgage Rate (less the amount, expressed as a percentage per
annum, payable in respect of master servicing compensation or subservicing
compensation, as applicable, and, if applicable, the Excluded Spread (as defined
in this Prospectus)).
Unless otherwise specified in the related Prospectus Supplement, as to any
such Mortgage Loan required to be purchased by Residential Funding as provided
above, rather than purchase the Mortgage Loan, Residential Funding may, at its
sole option, remove the Mortgage Loan (a "Deleted Mortgage Loan") from the Trust
and cause the Depositor to substitute in its place another Mortgage Loan of like
kind (a "Qualified Substitute Mortgage Loan"); however, such substitution must
be effected within 120 days of the date of the initial issuance of the
Certificates with respect to a Trust treated as a grantor trust for federal
income tax purposes. With respect to a Trust for which a REMIC election is to be
made, except as otherwise provided in the Prospectus Supplement relating to a
series of Certificates, such substitution of a defective Mortgage Loan must be
effected within three years of the date of the initial issuance of the
Certificates, and may not be made if such substitution would cause the Trust to
not qualify as a REMIC or result in a prohibited transaction tax under the Code.
Except as otherwise provided in the related Prospectus Supplement, any Qualified
Substitute Mortgage Loan generally will, on the date of substitution:
o have an outstanding principal balance, after deduction of the
principal portion of the monthly payment due in the month of
substitution, not in excess of the outstanding principal balance of
the Deleted Mortgage Loan (the amount of any shortfall to be deposited
in a custodial account (the "Custodial Account") in the month of
substitution for distribution to the Certificateholders);
o have a Mortgage Rate and a Net Mortgage Rate not less than (and not
more than one percentage point greater than) the Mortgage Rate and Net
Mortgage Rate, respectively, of the Deleted Mortgage Loan as of the
date of substitution;
o have a Combined Loan-to-Value Ratio at the time of substitution no
higher than that of the Deleted Mortgage Loan at the time of
substitution;
o have a remaining term to maturity not greater than (and not more than
one year less than) that of the Deleted Mortgage Loan; and
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o comply with all of the representations and warranties contained in the
related Pooling and Servicing Agreement as of the date of
substitution. The related Pooling and Servicing Agreement may include
additional requirements relating to ARM Loans, Revolving Credit Loans
or other specific types of Mortgage Loans, or additional provisions
relating to meeting the foregoing requirements on an aggregate basis
where a number of substitutions occur contemporaneously. Unless
otherwise specified in the related Prospectus Supplement, a Designated
Seller will have no option to substitute for a Mortgage Loan that it
is obligated to repurchase in connection with a breach of a
representation and warranty.
The Master Servicer will be required under the applicable Pooling and
Servicing Agreement to use its best reasonable efforts to enforce this purchase
or substitution obligation for the benefit of the Trustee and the
Certificateholders, using practices it would employ in its good faith business
judgment and which are normal and usual in its general mortgage servicing
activities; provided, however, that this purchase or substitution obligation
will not become an obligation of the Master Servicer in the event the Designated
Seller or Residential Funding, as the case may be, fails to honor its
obligation. The Master Servicer will be entitled to reimbursement for any costs
and expenses incurred in pursuing such a purchase or substitution obligation,
including but not limited to any costs or expenses associated with litigation.
In instances where a Designated Seller is unable, or disputes its obligation, to
purchase affected Mortgage Loans, the Master Servicer, employing the standards
described in the preceding sentence, may negotiate and enter into one or more
settlement agreements with such Designated Seller that may provide for, among
other things, the purchase of only a portion of the affected Mortgage Loans or
coverage of only certain loss amounts. Any such settlement could lead to losses
on the Mortgage Loans which would be borne by the related credit enhancement
supporting the related series of Certificates, and to the extent not available,
by the Certificateholders of the series. Furthermore, if applicable, the Master
Servicer may pursue foreclosure (or similar remedies) concurrently with pursuing
any remedy for a breach of a representation and warranty. However, the Master
Servicer is not required to continue to pursue both such remedies if it
determines that one such remedy is more likely to result in a greater recovery.
In accordance with the above described practices, the Master Servicer will not
be required to enforce any purchase of a Designated Seller arising from any
misrepresentation by the Designated Seller, if the Master Servicer determines in
the reasonable exercise of its business judgment that the matters related to
such misrepresentation did not directly cause or are not likely to directly
cause a loss on the related Mortgage Loan. If the Designated Seller fails to
repurchase and no breach of either the Depositor's or Residential Funding's
representations has occurred, the Designated Seller's purchase obligation will
not become an obligation of the Depositor or Residential Funding. Unless
specified in the related Prospectus Supplement, the foregoing obligations will
constitute the sole remedies available to Certificateholders or the Trustee for
a breach of any representation by a Designated Seller or by Residential Funding
in its capacity as a seller of Mortgage Loans to the Depositor, or for any other
event giving rise to such obligations as described above.
Neither the Depositor nor the Master Servicer will be obligated to
purchase a Mortgage Loan if a Designated Seller defaults on its obligation to do
so, and no assurance can be given that the Designated Sellers will carry out its
obligations with respect to Mortgage Loans. A default by a Designated Seller is
not a default by the Depositor or by the Master Servicer. Any Mortgage Loan not
so purchased or substituted for shall remain in the related Trust and any losses
related thereto shall be allocated to the related credit enhancement, and to the
extent not available, to the related Certificates.
However, if any Designated Seller requests Residential Funding's consent
to transfer subservicing rights for any related Mortgage Loans to a successor
servicer, Residential Funding may release the Designated Seller from liability
under its representations and warranties described above, upon the assumption of
the successor servicer of the Designated Seller's liability for its
representations and warranties as of the date they were made. In that event,
Residential Funding's rights under the instrument by which the successor
servicer assumes the Designated Seller's liability will be assigned to the
Trustee, and the successor servicer will be deemed to be the "Designated Seller"
for purposes of the foregoing provisions.
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Subservicing
The servicing for each Mortgage Loan will generally either be retained by
the Seller (or its designee approved by the Master Servicer) as Subservicer, or
will be released by the Seller to the Master Servicer and will be subsequently
transferred to a Subservicer approved by the Master Servicer, and in either case
will then be serviced by the Subservicer under an agreement between the Master
Servicer and the Subservicer (a "Subservicing Agreement"). The Master Servicer
may, but is not obligated to, assign the subservicing to designated subservicers
which will be qualified Sellers and which may include GMAC Mortgage Corporation
or its affiliates. While the Subservicing Agreement will be a contract solely
between the Master Servicer and the Subservicer, the Pooling and Servicing
Agreement under which a series of Certificates is issued will provide that, if
for any reason the Master Servicer for the series of Certificates is no longer
the master servicer of the related Mortgage Loans, the Trustee or any successor
Master Servicer must recognize the Subservicer's rights and obligations under
the Subservicing Agreement.
Each Subservicer generally will be required to perform the customary
functions of a servicer, including but not limited to, collection of payments
from Mortgagors and remittance of such collections to the Master Servicer;
maintenance of escrow or impoundment accounts of Mortgagors for payment of
taxes, insurance and other items required to be paid by the Mortgagor under the
Mortgage Loan, if applicable; processing of assumptions or substitutions
(although, unless otherwise specified in the related Prospectus Supplement, the
Master Servicer is generally required to exercise due-on-sale clauses to the
extent such exercise is permitted by law and would not adversely affect
insurance coverage); attempting to cure delinquencies; supervising foreclosures;
inspection and management of Mortgaged Properties under certain circumstances;
and maintaining accounting records relating to the Mortgage Loans. The
Subservicer may be required to make advances to the holder of any related first
mortgage loan to avoid or cure any delinquencies to the extent that doing so
would be prudent and necessary to protect the interests of the
Certificateholders. A Subservicer also may be obligated to make advances to the
Master Servicer in respect of delinquent installments of principal and interest
(net of any subservicing or other compensation) on Closed-End Loans, as
described under "Description of the Certificates -- Advances on Closed-End
Loans," and in respect of certain taxes and insurance premiums not paid on a
timely basis by Mortgagors. The Subservicer generally shall be responsible for
performing all collection and other servicing functions with respect to any
delinquent loan or foreclosure proceeding. In addition, the Subservicer is
required to advance funds to cover any Draws made on a Revolving Credit Loan
subject to reimbursement by the entity specified in the related Prospectus
Supplement. No assurance can be given that the Subservicers will carry out their
advance or payment obligations with respect to the Mortgage Loans.
A Subservicer may, subject to any limitation in the related Prospectus
Supplement, transfer its servicing obligations to another entity that has been
approved for participation in Residential Funding's loan purchase programs, but
only with the approval of the Master Servicer.
As compensation for its servicing duties, the Subservicer will be entitled
to a monthly servicing fee, to the extent the related Mortgage Loan payment has
been collected, in a minimum amount described in the related Prospectus
Supplement. The Subservicer or Master Servicer may also be entitled to collect
and retain, as part of its servicing compensation, all or a portion of any late
charges, if any, provided in the Mortgage Note or related instruments and in the
case of the Master Servicer, any penalties enforced against a Subservicer. The
remaining portion of the late charges will be remitted to the Master Servicer.
The Subservicer will be reimbursed by the Master Servicer for some expenditures
which it makes, in most cases to the same extent that the Master Servicer would
be reimbursed under the applicable Pooling and Servicing Agreement. See "The
Pooling and Servicing Agreement --Servicing and Administration."
Each Subservicer will be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Subservicer in its servicing
capacity. Each Subservicer is required to maintain a fidelity bond and an errors
and omissions policy with respect to its employees and other persons acting on
its behalf or on behalf of the Master Servicer.
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Each Subservicer will be required to service each Mortgage Loan under the
terms of the Subservicing Agreement for the entire term of that mortgage Loan,
unless the Subservicing Agreement is earlier terminated by the Master Servicer
or unless servicing is released to the Master Servicer. Subject to applicable
law, the Master Servicer may have the right to terminate a Subservicing
Agreement immediately upon giving notice upon specified 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 specified amounts
set forth in the Subservicing Agreement. Upon termination of a Subservicing
Agreement, the Master Servicer may act as servicer of the related Mortgage Loans
or enter into one or more new Subservicing Agreements. The Master Servicer may
agree with a Subservicer to amend a Subservicing Agreement. Any amendments to a
Subservicing Agreement or to a new Subservicing Agreement may contain provisions
different from those described above which are in effect in the original
Subservicing Agreements. However, the Pooling and Servicing Agreement for each
Trust will provide that any amendment or new agreement may not be inconsistent
with or violate the Pooling and Servicing Agreement in a manner which would
materially and adversely affect the interests of the Certificateholders.
The Master Servicer may either assume the primary servicing responsibility
form the related Subservicer, and may perform all collections, loss mitigation
and other servicing functions with respect to any delinquent loan or foreclosure
proceeding, or may review the loss mitigation procedures conducted with respect
to any delinquent loan, as well as the management and liquidation of any
delinquent mortgaged properties acquired by foreclosure or deed-in-lieu of
foreclosure.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued in series. Each series of Certificates,
or, in certain instances, two or more series of Certificates, will be issued
under a Pooling and Servicing Agreement, similar to one of the forms filed as an
exhibit to the registration statement under the Securities Act of 1933, as
amended, with respect to the Certificates ( the "Registration Statement") of
which this Prospectus is a part. Each Pooling and Servicing Agreement will be
filed with the Commission as an exhibit to a Form 8-K. The following summaries,
together with additional summaries under "The Pooling and Servicing Agreement"
below as well as other pertinent information included elsewhere in this
Prospectus, and subject to the related Prospectus Supplement, do not describe
all terms thereof but reflect the material provisions relating to the
Certificates common to each Pooling and Servicing Agreement.
Each series of Certificates may consist of a single class of Certificates
or any combination of the following:
o a single class of Certificates;
o two or more classes of Certificates, of which one or more classes of
Certificates (collectively, the "Senior Certificates") may be senior
in right of payment to any other class or classes of Certificates
(collectively, the "Subordinate Certificates"), and as to which some
classes of Senior (or Subordinate) Certificates may be senior to
other classes of Senior (or Subordinate) Certificates, as described
in the related Prospectus Supplement (any of these series, a
"Senior/Subordinate Series");
o one or more classes of Certificates (collectively, the "Mezzanine
Certificates") which are Subordinate Certificates but which are
senior to certain other classes of Subordinate Certificates in
respect of distributions or losses;
o one or more classes of Certificates which will be entitled to (a)
principal distributions, with disproportionate, nominal or no
interest distributions or (b) interest distributions, with
disproportionate, nominal or no principal distributions (each, a
"Strip Certificate");
o two or more classes of Certificates which differ as to the timing,
sequential order, rate, pass-through rate or amount of distributions
of principal or interest or both, or as to which distributions of
principal
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or interest or both on any class may be made upon the occurrence of
specified events, in accordance with a schedule or formula
(including "planned amortization classes" and "targeted amortization
classes" and "very accurately defined maturity classes"), or on the
basis of collections from designated portions of the Mortgage Pool,
which series may include one or more classes of Certificates with
respect to which certain accrued interest will not be distributed
but rather will be added to the principal balance thereof (the
"Accrual Certificates") on the day of the month specified in the
accompanying Prospectus Supplement for distributions to occur (or,
if that day is not a business day, the next business day) of each
month, commencing in the month following the month in which the
Cut-off Date (as defined in the applicable Prospectus Supplement)
occurs (each, a "Distribution Date"); or
o other types of classes of Certificates, as described in the related
Prospectus Supplement.
Credit support for each series of Certificates will be provided by a
Financial Guaranty Insurance Policy, derivative products, Special Hazard
Insurance Policy, Bankruptcy Bond, Letter of Credit, Reserve Fund, Surety Bond,
by the subordination of one or more classes of Certificates,
Overcollateralization or other credit enhancement as described under
"Description of Credit Enhancement," or by any combination of the foregoing.
Form of Certificates
As specified in the related Prospectus Supplement, the Certificates of
each series will be issued either as physical certificates or in book-entry
form. If issued as physical certificates, the Certificates will be in fully
registered form only in the denominations specified in the related Prospectus
Supplement, and will be transferrable and exchangeable at the corporate trust
office of the person appointed under the related Pooling and Servicing Agreement
to register the Certificates (the "Certificate Registrar"). No service charge
will be made for any registration of exchange or transfer of Certificates, but
the Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. The term "Certificateholder" as used in this Prospectus
refers to the entity whose name appears on the records of the Certificate
Registrar (or, if applicable, a transfer agent) as the registered holder of a
Certificate.
If issued in book-entry form the classes of a series of Certificates will
be initially issued through the book-entry facilities of The Depository Trust
Depositor ("DTC"), or Cedelbank, societe anonyme ("Cedel") or the Euroclear
System ("Euroclear") (in Europe). Certificateholders may hold Book-Entry
Certificates directly through these facilities if they are participants of those
systems, or indirectly through organizations which are participants in those
systems, or through any other depository or facility as may be specified in the
related Prospectus Supplement. Any class of Certificates issued in book-entry
form via one of the facilities described above ("Book-Entry Certificates"), will
list DTC's nominee as the record holder. 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 those positions in customers'
securities accounts in the depositaries' names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, which holds securities for its participating organizations
("DTC Participants," and together with the Cedel and Euroclear participating
organizations "Participants") and facilitates the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in the accounts of Participants. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
other organizations. Other institutions that are not Participants but clear
through or maintain a custodial relationship with Participants (those
institutions, "Indirect Participants") have indirect access to DTC's clearance
system.
Unless specified in the related Prospectus Supplement, no person acquiring
an interest in any Book-Entry Certificate (each person, a "Beneficial Owner")
will be entitled to receive a Certificate representing that interest in
registered, certificated form, unless either (i) DTC ceases to act as depository
for that Certificate and a successor depository is not obtained or (ii) the
Trustee elects in its sole discretion to discontinue the registration of the
Certificates through DTC. Prior to any such event, Beneficial Owners will not be
recognized by the Trustee or the
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Master Servicer as holders of the related Certificates for purposes of the
Pooling and Servicing Agreement, and Beneficial Owners will be able to exercise
their rights as owners of their Certificates only indirectly through DTC,
Participants and Indirect Participants. Any Beneficial Owner that desires to
purchase, sell or otherwise transfer any interest in Book-Entry Certificates may
do so only through DTC, either directly if the Beneficial Owner is a Participant
or indirectly through Participants and, if applicable, Indirect Participants.
Under the procedures of DTC, transfers of the beneficial ownership of any
Book-Entry Certificates will be required to be made in minimum denominations
specified in the related Prospectus Supplement. The ability of a Beneficial
Owner to pledge Book-Entry Certificates to persons or entities that are not
Participants in the DTC system, or to otherwise act with respect to the
Certificates, may be limited because of the lack of physical certificates
evidencing the Certificates and because DTC may act only on behalf of
Participants.
Because of time zone differences, the securities account of a Cedel or
Euroclear participant as a result of a transaction with a DTC Participant (other
than a depositary holding on behalf of Cedel or Euroclear) will be credited
during subsequent securities settlement processing day immediately following the
DTC settlement, date which must be a business day for Cedel or Euroclear, as the
case may be. Credits or any transactions in those securities settled during this
processing will be reported to the relevant Euroclear Participant or Cedel
Participants on that 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, these cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that 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 Depositor of New York (the "Euroclear Operator"), under contract with
Euroclear Clearance Systems S.C., a Belgian co-operative corporation (the
"Clearance Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Clearance
Cooperative. The Clearance Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. The Euroclear Operator is the Belgian branch
of a New York banking corporation which is a member bank of the Federal Reserve
System. As a result, 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
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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.
Distributions on the Book-Entry Certificates will be forwarded by the
Trustee to DTC, and DTC will be responsible for forwarding those payments to
Participants, each of which will be responsible for disbursing the payments to
the Beneficial Owners it represents or, if applicable, to Indirect Participants.
Accordingly, Beneficial Owners may experience delays in the receipt of payments
in respect of their Certificates. Under DTC's procedures, DTC will take actions
permitted to be taken by holders of any class of Book-Entry Certificates under
the Pooling and Servicing Agreement only at the direction of one or more
Participants to whose account the Book-Entry Certificates are credited and whose
aggregate holdings represent no less than any minimum amount of Percentage
Interests or voting rights required therefor. DTC may take conflicting actions
with respect to any action of Certificateholders of any class to the extent that
Participants authorize those actions. None of the Master Servicer, the
Depositor, the Trustee or any of their respective affiliates will have any
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Book-Entry Certificates, or for
maintaining, supervising or reviewing any records relating to those beneficial
ownership interests.
Assignment of Trust Assets
At the time of issuance of a series of Certificates, the Depositor will
cause the Mortgage Loans ,or Trust Balances thereof, if applicable, or Mortgage
Securities and any other assets being included in the related Trust to be
assigned without recourse to the Trustee or its nominee, which may be the
Custodian (as defined in this Prospectus). If specified in the related
Prospectus Supplement, all principal and interest received on or with respect to
the Mortgage Loans, or Trust Balances thereof, if applicable, or Mortgage
Securities after the Cut-off Date (other than principal and interest due on or
before the Cut-off Date and any Excluded Spread will also be assigned. The
Trustee will, concurrently with the assignment, deliver a series of Certificates
to the Depositor in exchange for the Mortgage Loans, or Trust Balances thereof,
if applicable, or Mortgage Securities. Each Mortgage Loan, Trust Balance or
Mortgage Security will be identified in a schedule appearing as an exhibit to
the related Pooling and Servicing Agreement. The schedule will include, among
other things, information as to the principal balance of each Mortgage Loan as
of the Cut-off Date, as well as information respecting the Mortgage Rate, the
currently scheduled monthly payment of principal and interest, the maturity of
the Mortgage Note and the Combined Loan-to-Value Ratio at origination or
modification.
If so specified in the related Prospectus Supplement, and subject to the
rules of membership of Merscorp, Inc. and/or Mortgage Electronic Registration
Systems, Inc. (together, "MERS"), assignments of the mortgages for the Mortgage
Loans in the related Trust will be registered electronically through Mortgage
Electronic Registration Systems, Inc. (the "MERS(R) System"). With respect to
Mortgage Loans registered through the MERS(R) System, MERS shall serve as
mortgagee of record solely as a nominee in an administrative capacity on behalf
of the Trustee and shall not have any interest in any of those Mortgage Loans.
In addition, except as provided below with respect to some series of
Certificates backed by Trust Balances of Revolving Credit Loans, the Depositor
will, as to each Mortgage Loan other than Mortgage Loans underlying any Mortgage
Securities, deliver to the Trustee (or to the Custodian) the legal documents
relating to the Mortgage Loan that are in possession of the Depositor, which may
include:
o the Mortgage Note, and any modification or amendment made to the
Mortgage Note, endorsed without recourse either in blank or to the
order of the Trustee or its nominee;
o 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;
o an assignment in recordable form of the Mortgage, or evidence that the
Mortgage is held for the Trustee through the MERS(R) System or, with
respect to a Cooperative Loan, an assignment of the
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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; and
o if applicable, any riders or modifications to the Mortgage Note and
Mortgage, together with any other documents at such times as
described in the related Pooling and Servicing Agreement.
o The 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 Depositor may not be required to deliver one or more
of the documents if the documents are missing from the files of the
party from whom the Mortgage Loans were purchased.
In the event that, with respect to any Mortgage Loan (except as provided
below), the Depositor cannot deliver the Mortgage or any assignment with
evidence of recording thereon concurrently with the execution and delivery of
the related Pooling and Servicing Agreement because of a delay caused by the
public recording office, the Depositor will deliver or cause to be delivered to
the Trustee or the Custodian a true and correct photocopy of the Mortgage or
assignment. The Depositor will deliver or cause to be delivered to the Trustee
or the Custodian the Mortgage or assignment with evidence of recording indicated
thereon after receipt thereof from the public recording office or from the
related Subservicer.
With respect to any Puerto Rico Mortgage Loans, the Mortgages with respect
to those Mortgage Loans either (i) secure a specific obligation for the benefit
of a specified person (a "Direct Puerto Rico Mortgage") or (ii) secure an
instrument transferable by endorsement (an "Endorsable Puerto Rico Mortgage").
Endorsable Puerto Rico Mortgages do not require an assignment to transfer the
related lien. Rather, transfer of those mortgages follows an effective
endorsement of the related Mortgage Note and, therefore, delivery of an
assignment of mortgage would be inapplicable. Direct Puerto Rico Mortgages,
however, require an assignment to be recorded with respect to any transfer of
the related lien and the assignment would be delivered to the Trustee (or the
Custodian).
Assignments of the Mortgage Loans to the Trustee will be recorded in the
appropriate public recording office, except for Mortgages held under the MERS(R)
System or in states where, in the opinion of counsel acceptable to the Trustee,
the recording is not required to protect the Trustee's interests in the Mortgage
Loan against the claim of any subsequent transferee or any successor to or
creditor of the Depositor or the originator of the Mortgage Loan, or except as
otherwise specified in the related Prospectus Supplement.
Notwithstanding the preceding three paragraphs, with respect to any series
of Certificates backed by Trust Balances of Revolving Credit Loans, the
foregoing documents generally will have been delivered to an entity specified in
the related Prospectus Supplement which may be the Trustee, a Custodian or
another entity appointed by the Trustee, and such entity shall hold such
documents as or on behalf of the Trustee for the benefit of the
Certificateholders, with respect to the Trust Balances thereof, and on behalf of
any other applicable entity with respect to any Excluded Balance thereof, as
their respective interests may appear.
Review of Mortgage Loans
The Trustee will be authorized to appoint one or more custodians (each, a
"Custodian") under a custodial agreement to maintain possession of and review
documents relating to the Mortgage Loans as the agent of the Trustee (except as
provided below). The identity of such Custodian, if any, will be described in
the related Prospectus Supplement.
The Trustee or the Custodian will hold the documents in trust for the
benefit of the certificateholders and, normally will review the documents within
90 days after receipt. If any document is found to be defective in any material
respect, the Trustee or the Custodian shall notify the Master Servicer and the
Depositor, and the Master Servicer, the Servicer or the Trustee shall notify
Residential Funding or the Designated Seller. If Residential Funding or, in a
Designated Seller Transaction, the Designated Seller cannot cure the defect
within 60 days or within the other period specified in the related Prospectus
Supplement, after notice of the defect is given to Residential Funding (or,
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if applicable, the Designated Seller), Residential Funding (or, if applicable,
the Designated Seller) is required to, not later than 90 days after such notice
(or within the other period specified in the related Prospectus Supplement),
either repurchase the related Mortgage Loan or any property acquired in respect
of it from the Trustee, or if permitted substitute for such Mortgage Loan a new
Mortgage Loan in accordance with the standards described herein. The Master
Servicer will be obligated to enforce this obligation of Residential Funding or
the Designated Seller to the extent described above under "Mortgage Loan Program
- -- Representations Relating to Mortgage Loans," but such obligation is subject
to the provisions described below under " -- Realization Upon Defaulted Mortgage
Loans." There can be no assurance that the applicable Designated Seller will
fulfill its obligation to purchase any Mortgage Loan as described above. Unless
specified in the accompanying Prospectus Supplement, neither Residential
Funding, the Master Servicer nor the Depositor will be obligated to purchase or
substitute for the Mortgage Loan if the Designated Seller defaults on its
obligation to do so. The obligation to repurchase or substitute for a Mortgage
Loan constitutes the sole remedy available to the Certificateholders or the
Trustee for a material defect in a constituent document. Any Mortgage Loan not
so purchased or substituted for shall remain in the related Trust.
Notwithstanding the foregoing, with respect to the Trust Balance of a
Revolving Credit Loan, the review of the related documents need not be performed
if a similar review has previously been performed by the entity holding the
documents with respect to an Excluded Balance and such review covered all
documentation with respect to any Trust Balance.
The Master Servicer will make representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
Pooling and Servicing Agreement. Upon a breach of any of these representations
of the Master Servicer which materially adversely affect the interests of the
Certificateholders in a Mortgage Loan, the Master Servicer will be obligated
either to cure the breach in all material respects or to purchase the Mortgage
Loan at its Purchase Price, less unreimbursed advances, if applicable, made by
the Master Servicer with respect to the Mortgage Loan, or, unless otherwise
specified in the related Prospectus Supplement, to substitute for such Mortgage
Loan a Qualified Substitute Mortgage Loan in accordance with the provisions for
such substitution described above under "Mortgage Loan Program --
Representations Relating to Mortgage Loans." This purchase obligation will
constitute the sole remedy available to Certificateholders or the Trustee for a
breach of this type of representation by the Master Servicer. Any Mortgage Loan
not so purchased or substituted for shall remain in the related Trust.
Excess Spread and Excluded Spread
The Depositor, the Master Servicer or any of their affiliates, or any
other entity as may be specified in the related Prospectus Supplement may retain
or be paid a portion of interest due with respect to the related Mortgage Loans
or Mortgage Securities. The payment of any portion of interest in this manner
will be disclosed in the related Prospectus Supplement. This payment may be in
addition to any other payment, including a servicing fee, that any specified
entity is otherwise entitled to receive with respect to the Mortgage Loans or
Mortgage Securities. Any of these payments generated from the Mortgage Loans or
Mortgage Securities will represent a specified portion of the interest payable
on the Mortgage Loans and as specified in the related Prospectus Supplement,
will either be part of the assets transferred to the related Trust (the "Excess
Spread") or will be excluded from the assets transferred to the related Trust
(the "Excluded Spread"). The interest portion of a Realized Loss or
Extraordinary Loss and any partial recovery of interest in respect of the
Mortgage Loans or Mortgage Securities will be allocated between the owners of
any Excess Spread or Excluded Spread and the Certificateholders entitled to
payments of interest as provided in the applicable Pooling and Servicing
Agreement.
Payments on Mortgage Loans; Deposits to Certificate Account
Each Subservicer servicing a Mortgage Loan under a Subservicing Agreement
will establish and maintain an account (the "Subservicing Account") which
materially meets the requirements described in the Guide from time to time or is
approved by Residential Funding. A Subservicer is required to deposit into its
Subservicing Account on a daily basis all amounts that are received by it in
respect of the Mortgage Loans, less its servicing or other compensation. As
specified in the Subservicing Agreement, the Subservicer must remit or cause to
be remitted to the Master Servicer all funds held in the Subservicing Account
with respect to Mortgage Loans that are required to
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be so remitted on a periodic basis not less frequently than monthly. If so
specified in the related Prospectus Supplement, the Subservicer may also be
required to advance on the scheduled date of remittance any monthly installment
of principal and interest, or interest only, with respect to Simple Interest
Mortgage Loans, less its servicing or other compensation, on any Mortgage Loan
for which payment was not received from the Mortgagor.
The Master Servicer will deposit or will cause to be deposited into the
Custodial Account certain payments and collections received by it subsequent to
the Cut-off Date, other than payments due on or before the Cut-off Date, as
specifically contained in the related Pooling and Servicing Agreement, which
generally will include the following:
o payments on account of principal of the Mortgage Loans or on the
Mortgage Securities comprising a Trust;
o payments on account of interest on the Mortgage Loans or on the
Mortgage Securities comprising the Trust, net of the portion of each
payment thereof retained by the Subservicer, if any, as its servicing
or other compensation;
o amounts, net of unreimbursed liquidation expenses and insured expenses
incurred, and unreimbursed Servicing Advances, if any, made by the
related Subservicer, received and retained in connection with the
liquidation of any defaulted Mortgage Loan, by foreclosure or
otherwise ("Liquidation Proceeds"), including all proceeds of any
Special Hazard Insurance Policy, Bankruptcy Bond, hazard or other
insurance policy or guaranty covering any Mortgage Loan in such
Mortgage Pool (together with any payments under any Letter of Credit,
"Insurance Proceeds") or proceeds from any alternative arrangements
established in lieu of any insurance and described in the applicable
Prospectus Supplement, other than proceeds to be applied to the
restoration of the related property or released to the Mortgagor in
accordance with the Master Servicer's normal servicing procedures;
o proceeds of any Mortgage Loan in the Trust purchased (or, in the case
of a substitution, certain amounts representing a principal
adjustment) by the Master Servicer, the Depositor, Residential
Funding, any Subservicer or Seller or any other person under the terms
of the Pooling and Servicing Agreement. See "Mortgage Loan Program --
Representations Relating to Mortgage Loans," and "Description of the
Certificates -- Assignment of Trust Assets" above;
o 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
o any amounts required to be transferred from the Certificate Account to
the Custodial Account.
In addition to the Custodial Account, the Master Servicer will establish
and maintain, in the name of the Trustee for the benefit of the holders of each
series of Certificates, an account for the disbursement of payments on the
Mortgage Loans evidenced by each series of Certificates (the "Certificate
Account"). Both the Custodial Account and the Certificate Account must be
either:
o maintained with a depository institution whose debt obligations at
the time of any deposit in the account are rated by any Rating
Agency that rated any Certificates of the related series not less
than a specified level comparable to the rating category of such
Certificates;
o an account or accounts the deposits in which are fully insured to
the limits established by the FDIC, provided that any deposits not
so insured shall be otherwise maintained such that, as evidenced by
an opinion of counsel, the Certificateholders have a claim with
respect to the funds in such accounts or a perfected first priority
security interest in any collateral securing such funds that is
superior to the claims of any other depositors or creditors of the
depository institution with which such accounts are maintained;
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o 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;
o in the case of the Certificate Account, a trust account or accounts
maintained with the Trustee; and
o any 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 Pooling
and Servicing Agreement ("Permitted Investments").
Unless otherwise set forth in the related Prospectus Supplement, not later
than the business day preceding each Distribution Date, the Master Servicer will
withdraw from the Custodial Account and deposit into the applicable Certificate
Account, in immediately available funds, the amount to be distributed therefrom
to Certificateholders on the Distribution Date. The Master Servicer or the
Trustee will also deposit or cause to be deposited into the Certificate Account:
(i) the amount of any Advances on Closed-End Loans, if applicable, made by the
Master Servicer as described in this Prospectus under " -- Advances on
Closed-End Loans," (ii) any payments under any Letter of Credit, Financial
Guaranty Insurance Policy, credit derivative and any amounts required to be
transferred to the Certificate Account from a Reserve Fund, as described under
"Credit Enhancement" below or (iii) any amounts required to be paid by the
Master Servicer out of its own funds due to the operation of a deductible clause
in any blanket policy maintained by the Master Servicer to cover hazard losses
on the Mortgage Loans as described under "Description of the Certificates --
Hazard Insurance and Related Claims" below, (iv) any distributions received on
any Mortgage Securities included in the Trust and (v) any other amounts as
described in the related Pooling and Servicing Agreement.
The portion of any payment received by the Master Servicer in respect of a
Mortgage Loan that is allocable to Excess Spread or Excluded Spread, as
applicable, will generally be deposited into the Custodial Account, but any
Excluded Spread will not be deposited in the Certificate Account for the related
series of Certificates and will be distributed as provided in the related
Pooling and Servicing Agreement.
Funds on deposit in the Custodial Account may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next Distribution Date, and funds on deposit in the related Certificate Account
may be invested in Permitted Investments maturing, in general, no later than the
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, all income and gain realized from any investment will be for the
account of the Master Servicer as additional servicing compensation. The amount
of any loss incurred in connection with any investment must be deposited in the
Custodial Account or in the Certificate Account, as the case may be, by the
Master Servicer out of its own funds upon realization of the loss.
Withdrawals from the Custodial Account
The Master Servicer may, from time to time, make withdrawals from the
Custodial Account for certain purposes, as specifically contained in the related
Pooling and Servicing Agreement, which generally will include the following:
o to make deposits to the Certificate Account in the amounts and in
the manner provided in the Pooling and Servicing Agreement and
described above under " -- Payments on Mortgage Loans; Deposits to
Certificate Account;"
o to reimburse itself or any Subservicer for Advances, if applicable,
or for amounts advanced in respect of taxes, insurance premiums or
similar expenses ("Servicing Advances") as to any Mortgaged
Property, out of late payments, Insurance Proceeds, Liquidation
Proceeds or collections on the Mortgage Loan with respect to which
such Advances or Servicing Advances were made;
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o to pay to itself or any Subservicer unpaid Servicing Fees and
Subservicing Fees, out of payments or collections of interest on each
Mortgage Loan;
o to pay to itself as additional servicing compensation any investment
income on funds deposited in the Custodial Account, any amounts
remitted by Subservicers as interest in respect of partial prepayments
on the Mortgage Loans, and, if so provided in the Pooling and
Servicing Agreement, any profits realized upon disposition of a
Mortgaged Property acquired by deed in lieu of foreclosure or
repossession or otherwise allowed under the Pooling and Servicing
Agreement;
o to pay to itself, a Subservicer, Residential Funding, the Depositor or
the Seller all amounts received with respect to each Mortgage Loan
purchased, repurchased or removed under the terms of the Pooling and
Servicing Agreement and not required to be distributed as of the date
on which the related Purchase Price is determined;
o to pay the Depositor or its assignee, or any other party named in the
related Prospectus Supplement all amounts allocable to the Excluded
Spread, if any, out of collections or payments which represent
interest on each Mortgage Loan (including any Mortgage Loan as to
which title to the underlying Mortgaged Property was acquired);
o to reimburse itself or any Subservicer for any Advance, if applicable,
previously made which the Master Servicer has determined to not be
ultimately recoverable from Liquidation Proceeds, Insurance Proceeds
or otherwise (a "Nonrecoverable Advance"), subject to any limitations
set forth in the Pooling and Servicing Agreement as described in the
related Prospectus Supplement;
o to reimburse itself or the Depositor for certain other expenses
incurred for which it or the Depositor is entitled to reimbursement,
including reimbursement in connection with enforcing any repurchase,
substitution or indemnification obligation of any Designated Seller,
or against which it or the Depositor is indemnified under the Pooling
and Servicing Agreement;
o to withdraw any amount deposited in the Custodial Account that was not
required to be deposited therein;
o to pay to itself or any Subservicer for the funding of any Draws made
on the Mortgage Loans, if applicable;
o to make deposits to the Funding Account in the amounts and in the
manner provided in the Pooling and Servicing Agreement, if applicable;
and
o to clear the Custodial Account of amounts relating to the
corresponding Mortgage Loans in connection with the termination of the
Trust under the Pooling and Servicing Agreement.
Distributions
Distributions of principal and/or interest, as applicable, on each class
of Certificates entitled thereto will be made on each Distribution Date either
by the Trustee, the Master Servicer acting on behalf of the Trustee or a paying
agent appointed by the Trustee (the "Paying Agent"). Payments will be made to
the persons who are registered as the holders of the Certificates at the close
of business on the day prior to each Payment Date or, if the Certificates are no
longer Book-Entry, to the persons in whose names the Certificates are registered
at the close of business on the last business day of the preceding month (the
"Record Date"). Distributions will be made in immediately available funds, by
wire transfer or otherwise, to the account of a Certificateholder at a bank or
other entity having appropriate facilities therefor, if the Certificateholder
has so notified the Trustee, the Master Servicer or the Paying Agent, as the
case may be, and the applicable Pooling and Servicing Agreement provides for
such form of payment, or by check mailed to the address of the person entitled
thereto as it appears on the Certificate Register. The final distribution in
retirement of the Certificates will be made only upon presentation and surrender
of the Certificates
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at the office or agency of the Trustee specified in the notice to
Certificateholders. Distributions will be made to each Certificateholder in
accordance with the holder's Percentage Interest in a particular class. The
("Percentage Interest") represented by a Certificate of a particular class will
be equal to the percentage obtained by dividing the initial principal balance or
notional amount of the Certificate by the aggregate initial amount or notional
balance of all the Certificates of such class.
Principal and Interest on the Certificates
The method of determining, and the amount of, distributions of principal
and interest, or, where applicable, of principal only or interest only, on a
particular series of Certificates will be described in the related Prospectus
Supplement. Distributions of interest on each class of Certificates will be made
prior to distributions of principal thereon. Each class of Certificates, other
than certain classes of Strip Certificates, may have a different specified
interest rate (each, a "Pass-Through Rate"), which may be a fixed, variable or
adjustable Pass-Through Rate, or any combination of two or more such
Pass-Through Rates. The related Prospectus Supplement will specify the
Pass-Through Rate or Rates for each class, or the initial Pass-Through Rate or
Rates and the method for determining the Pass-Through Rate or Rates. Unless
otherwise specified in the related Prospectus Supplement, interest on the
Certificates will be calculated on the basis of either a 360-day year consisting
of twelve 30-day months or the actual number of days in the related interest
period and a 360-day year.
On each Distribution Date for a series of Certificates, the Trustee or the
Master Servicer on behalf of the Trustee will distribute or cause the Paying
Agent to distribute, as the case may be, to each holder of record on the Record
Date of a class of Certificates, an amount equal to the Percentage Interest
represented by the Certificate held by the holder multiplied by such class's
Distribution Amount. The "Distribution Amount" for a class of Certificates for
any Distribution Date will be the portion, if any, of the Principal Distribution
Amount (as defined in the related Prospectus Supplement) allocable to such class
for the Distribution Date, plus, if such class is entitled to payments of
interest on the Distribution Date, one month's interest at the applicable
Pass-Through Rate on the principal balance or notional amount of such class
specified in the applicable Prospectus Supplement, less certain interest
shortfalls, which generally will include (i) any Deferred Interest added to the
principal balance of the Mortgage Loans and/or the outstanding balance of one or
more classes of Certificates on the related Due Date, (ii) any other interest
shortfalls (including, without limitation, shortfalls resulting from application
of the Relief Act or similar legislation or regulations as in effect from time
to time) allocable to Certificateholders which are not covered by advances or
the applicable credit enhancement and (iii) if so specified in the related
Prospectus Supplement, Prepayment Interest Shortfalls (as defined in this
Prospectus) in collections of interest on Closed-End Loans resulting from
Mortgagor prepayments during the month preceding the month of distribution, in
each case in the amount that is allocated to the class on the basis contained in
the Prospectus Supplement.
In the case of a series of Certificates which includes two or more classes
of Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of Senior Certificates or Subordinate Certificates) shall
be as described in the related Prospectus Supplement. Distributions in respect
of principal of any class of Certificates will be made on a pro rata basis among
all of the Certificates of such class unless otherwise described in the related
Prospectus Supplement. In addition, unless otherwise specified in the related
Prospectus Supplement, distributions of principal on the Certificates will be
limited to monthly principal payments on the Mortgage Loans, any Excess
Interest, if applicable, applied as principal distributions on the Certificates
and any amount distributed as a payment of principal under the related form of
Credit Enhancement. To the extent the Trust contains Balloon Loans that require
no monthly payments and non-amortizing Mortgage Loans that require only small
principal payments in proportion to the principal balance of the Mortgage Loan,
the amount of principal distributions on the Certificates generally will be less
than the amount that would otherwise be distributable on a similar pool of
conventional loans.
On the day of the month specified in the related Prospectus Supplement as
the determination date (the "Determination Date"), the Master Servicer will
determine the amounts of principal and interest which will be passed through to
Certificateholders on the succeeding Distribution Date. Prior to the close of
business on the business day succeeding each Determination Date, the Master
Servicer will furnish a statement to the Trustee (the
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information in such statement to be made available to Certificateholders by the
Master Servicer on request) setting forth, among other things, the amount to be
distributed on the next succeeding Distribution Date.
Advances on Closed-End Loans
In connection with Closed-End Loans, the Master Servicer will agree to
advance, either out of its own funds, funds advanced to it by Subservicers or
funds being held in the Custodial Account for future distribution, for the
benefit of the Certificateholders, on or before each Distribution Date, an
amount equal to the aggregate of all scheduled payments of principal (except
with respect to Simple Interest Mortgage Loans and other than any Balloon Amount
in the case of a Balloon Loan) and interest at the applicable Pass-Through Rate
or Net Mortgage Rate, as the case may be (an "Advance"), which were delinquent
as of the close of business on the business day preceding the Determination Date
on the Mortgage Loans in the related Mortgage Pool, but only to the extent that
the Advances would, in the judgment of the Master Servicer, be recoverable out
of late payments by the Mortgagors, Liquidation Proceeds, Insurance Proceeds or
otherwise. Advances will not be made in connection with Revolving Credit Loans,
except as otherwise provided in the related Prospectus Supplement. As specified
in the related Prospectus Supplement with respect to any series of Certificates
as to which the Trust includes Mortgage Securities, the Master Servicer's
advancing obligations will be under the terms of the Mortgage Securities, as may
be supplemented by the terms of the applicable Pooling and Servicing Agreement,
and may differ from the provisions relating to Advances described in this
Prospectus. Unless specified in the related Prospectus Supplement, the Master
Servicer will not make any advance with respect to principal on any Simple
Interest Mortgage Loan.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to related Certificateholders. Such advances does not
represent an obligation of the Master Servicer to guarantee or insure against
losses. If Advances have been made by the Master Servicer from cash being held
for future distribution to Certificateholders, those funds will be required to
be replaced on or before any future Distribution Date to the extent that funds
in the Certificate Account on that Distribution Date would be less than payments
required to be made to Certificateholders. Any Advance will be reimbursable to
the Master Servicer out of recoveries on the related Mortgage Loans for which
those amounts were advanced (e.g., late payments made by the related Mortgagor,
any related Liquidation Proceeds and Insurance Proceeds, proceeds of any
applicable form of credit enhancement or proceeds of any Mortgage Loan purchased
by the Depositor, Residential Funding, a Subservicer or a Seller under the
circumstances described above). Such Advances will also be reimbursable from
cash otherwise distributable to Certificateholders (including the holders of
Senior Certificates, if applicable) to the extent that the Master Servicer shall
determine that any Advances previously made are not ultimately recoverable as
described above. With respect to any Senior/Subordinate Series, so long as the
related Subordinate Certificates remain outstanding and subject to limitations
with respect to Special Hazard Losses, Fraud Losses, Bankruptcy Losses and
Extraordinary Losses, the Advances may also be reimbursable out of amounts
otherwise distributable to holders of the Subordinate Certificates, if any. The
Master Servicer generally will also be obligated to make Servicing Advances, to
the extent recoverable out of Liquidation Proceeds or otherwise, in respect of
certain taxes and insurance premiums not paid by Mortgagors on a timely basis.
Funds so advanced will be reimbursable to the Master Servicer to the extent
permitted by the Pooling and Servicing Agreement.
The Master Servicer's obligation to make Advances may be supported by
another entity, the Trustee, a Financial Guaranty Insurance Policy, a letter of
credit or other method as may be described in the related Pooling and Servicing
Agreement. In the event that the short-term or long-term obligations of the
provider of the support are downgraded by a Rating Agency rating the related
Certificates or if any collateral supporting such obligation is not performing
or is removed under the terms of any agreement described in the related
Prospectus Supplement, the Certificates may also be downgraded.
Funding Account
If so specified in the related Prospectus Supplement, a Pooling and
Servicing Agreement or other agreement may provide for the transfer by the
Sellers of additional Mortgage Loans to the related Trust after the Closing Date
for the related Certificates. Additional Mortgage Loans will be required to
conform to the requirements contained in the related Pooling and Servicing
Agreement or other agreement providing for such transfer. As specified in the
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related Prospectus Supplement, such transfer may be funded by the establishment
of a Funding Account (a "Funding Account"). If a Funding Account is established,
all or a portion of the proceeds of the sale of one or more classes of
Certificates of the related series or a portion of collections on the Mortgage
Loans in respect of principal will be deposited in the Funding Account to be
released as additional Mortgage Loans are transferred. Unless otherwise
specified in the related Prospectus Supplement, a Funding Account will be
required to be maintained as an Eligible Account, all amounts therein will be
required to be invested in Permitted Investments and the amount held therein
shall at no time exceed 25% of the aggregate outstanding principal balance of
the Certificates. Unless otherwise specified in the related Prospectus
Supplement, the related Pooling and Servicing Agreement or other agreement
providing for the transfer of additional Mortgage Loans will provide that all
such transfers must be made within 9 months (as to amounts representing proceeds
of the sale of the Certificates) or 12 months (as to amounts representing
principal collections on the Mortgage Loans) after the Closing Date, and that
amounts set aside to fund such transfers (whether in a Funding Account or
otherwise) and not so applied within the required period of time will be deemed
to be principal prepayments and applied in the manner described in the
Prospectus Supplement.
Reports to Certificateholders
On each Distribution Date, the Master Servicer will forward or cause to be
forwarded to each Certificateholder of record a statement or statements with
respect to the related Trust setting forth the information described in the
related Pooling and Servicing Agreement. Except as otherwise provided in the
related Pooling and Servicing Agreement, such information generally will include
the following, as applicable:
o the aggregate amount of interest collections and principal
collections;
o the amount, if any, of the distribution allocable to principal;
o the amount, if any, of the distribution allocable to interest, and the
amount, if any, of any shortfall in the amount of interest and
principal;
o the aggregate unpaid principal balance of the Mortgage Loans or, if
applicable, the Trust Balances thereof after giving effect to the
distribution of principal on the Distribution Date;
o the outstanding principal balance or notional amount of each class of
Certificates after giving effect to the distribution of principal on
the Distribution Date;
o based on the most recent reports furnished by Subservicers, the number
of Mortgage Loans in the related Mortgage Pool that are delinquent (a)
one month, (b) two months and (c) three months, and that are in
foreclosure, and the aggregate principal balances of these groups of
Mortgage Loans or, if applicable, the Trust Balances thereof;
o the book value of any property acquired by the Trust through
foreclosure or grant of a deed in lieu of
foreclosure;
o the balance of the Reserve Fund, if any, at the close of business on
the Distribution Date;
o the percentage of the outstanding principal balance of the Senior
Certificates, if applicable, after giving effect to the distributions
on the Distribution Date;
o 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;
o if applicable, the Special Hazard Amount, Fraud Loss Amount and
Bankruptcy Amount as of the close of business on the applicable
Distribution Date and a description of any change in the calculation
of those amounts, as well as the aggregate amount of each type of
loss;
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o in the case of Certificates benefitting from alternative credit
enhancement arrangements described in a Prospectus Supplement, the
amount of coverage under such alternative arrangements as of the
close of business on the applicable Determination Date; and
o with respect to any series of Certificates as to which the Trust
includes Mortgage Securities, any additional information as required
under the related Pooling and Servicing Agreement.
Each amount set forth in the first two items in the list above will be
expressed as a dollar amount per Single Certificate. As to a particular class of
Certificates, a "Single Certificate" generally will evidence a Percentage
Interest obtained by dividing $1,000 by the initial principal balance or
notional balance of all the Certificates of that class, except as otherwise
provided in the related Pooling and Servicing Agreement. In addition to the
information described above, reports to Certificateholders will contain any
other information as is described in the applicable Pooling and Servicing
Agreement, which may include, without limitation, information as to Advances,
reimbursements to Subservicers and the Master Servicer and losses borne by the
related Trust.
In addition, to the extent described in the Pooling and Servicing
Agreement, within a reasonable period of time after the end of each calendar
year, the Master Servicer will furnish a report to each person that was a holder
of record of any class of Certificates at any time during that calendar year.
The report will include information as to the aggregate of amounts reported
under the first two items in the list above for that calendar year or, in the
event the person was a holder of record of a class of Certificates during a
portion of that calendar year, for the applicable portion of that year.
Collection and Other Servicing Procedures
The Master Servicer will have the option to allow an increase in the
Credit Limit applicable to any Revolving Credit Loan (a "Credit Limit Increase")
in certain limited circumstances. The Master Servicer will have an unlimited
ability to obtain increases provided that the following conditions are met: (i)
a new appraisal is obtained, (ii) the new CLTV is less than or equal to the
original CLTV, (iii) verbal verification of employment is obtained and (iv) the
payment history of the related borrower is within the underwriting parameters as
specified in the Guide. If a new appraisal is not obtained and the other
conditions in the preceding sentence are met, the Master Servicer will have the
option to allow a Credit Limit Increase for any Revolving Credit Loan, provided
that the CLTV of the Revolving Credit Loan following the Credit Limit Increase
will be limited to 100% and at no time shall the aggregate Principal Balance of
such Revolving Credit Loans exceed 10% of the current Pool Balance; provided
further, however, that for Revolving Credit Loans with original CLTV's in excess
of 80%, the CLTV resulting from such Credit Limit Increase must be less than or
equal to the original CLTV and at no time shall the aggregate Principal Balance
of the Revolving Credit Loans exceed 5% of the current Pool Balance.
The Master Servicer, directly or through Subservicers, as the case may be,
will make reasonable efforts to collect all payments called for under the
Mortgage Loans and will, consistent with the related Pooling and Servicing
Agreement and any applicable insurance policy or other credit enhancement,
follow the collection procedures which shall be normal and usual in its general
mortgage servicing activities with respect to mortgage loans comparable to the
Mortgage Loans. Consistent with the foregoing, the Master Servicer may in its
discretion waive any prepayment charge in connection with the prepayment of a
Mortgage Loan or extend the Due Dates for payments due on a Mortgage Note,
provided that the insurance coverage for the Mortgage Loan or any coverage
provided by any alternative credit enhancement will not be adversely affected
thereby. With respect to any series of Certificates as to which the Trust
includes Mortgage Securities, the Master Servicer's servicing and administration
obligations will be governed by the terms of those Mortgage Securities.
The Master Servicer, in its discretion, may, or may allow a Subservicer to
extend relief to Mortgagors whose payments become delinquent. The Master
Servicer or Subservicer, without the prior approval of the Master Servicer, may
grant a period of temporary indulgence, in most cases 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. Most
other types of
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forbearance require Master Servicer approval. Neither indulgence nor forbearance
with respect to a Mortgage Loan will affect the Pass-Through Rate or Rates used
in calculating distributions to Certificateholders. See " -- Distributions."
In instances in which a Mortgage Loan is in default (or if default is
reasonably foreseeable), and if determined by the Master Servicer to be in the
best interests of the related Certificateholders, the Master Servicer may engage
in a wide variety of loss mitigation practices including waivers, modifications,
payment forbearances, partial forgiveness, entering into repayment schedule
arrangements, and capitalization of arrearages rather than proceeding with
foreclosure. In making such determination, the estimated Realized Loss that
might result if the Mortgage Loan were liquidated would be taken into account.
These modifications may have the effect of reducing the Mortgage Rate or
extending the final maturity date of the Mortgage Loan. Any modified Mortgage
Loan may remain in the related Trust, and the reduction in collections resulting
from a modification may result in reduced distributions of interest or other
amounts on, or may extend the final maturity of, one or more classes of the
related Certificates.
In connection with any significant partial prepayment of a Mortgage Loan,
the Master Servicer, to the extent not inconsistent with the terms of the
Mortgage Note and local law and practice, may permit the Mortgage Loan to be
re-amortized so that the monthly payment is recalculated as an amount that will
fully amortize its remaining principal amount by the original maturity date
based on the original Mortgage Rate, provided that the re-amortization shall not
be permitted if it would constitute a modification of the Mortgage Loan for
federal income tax purposes.
In any case in which property subject to a Mortgage Loan (other than an
ARM Loan described below) is being conveyed by the Mortgagor, the Master
Servicer, directly or through a Subservicer, shall in general be obligated, to
the extent it has knowledge of the conveyance, to exercise its rights to
accelerate the maturity of the Mortgage Loan under any due-on-sale clause
applicable thereto, but only if the exercise of the 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 the 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 the 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, under
which that person becomes liable under the Mortgage Note subject to certain
specified conditions. The original Mortgagor may be released from liability on a
Mortgage Loan if the Master Servicer or Subservicer shall have determined in
good faith that the release will not adversely affect the collectability of the
Mortgage Loan. An ARM Loan may be assumed if such ARM Loan is by its terms
assumable and if, in the reasonable judgment of the Master Servicer or the
Subservicer, the proposed transferee of the related Mortgaged Property
establishes its ability to repay the loan and the security for the ARM Loan
would not be impaired by the assumption. If a Mortgagor transfers the Mortgaged
Property subject to an ARM Loan without consent, such ARM Loan may be declared
due and payable. Any fee collected by the Master Servicer or Subservicer for
entering into an assumption or substitution of liability agreement will be
retained by the Master Servicer or Subservicer as additional servicing
compensation unless otherwise set forth in the related Prospectus Supplement.
See "Certain Legal Aspects of Mortgage Loans and Related Matters --
Enforceability of Certain Provisions" in this Prospectus. 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 this
type of request if it has determined, exercising its good faith business
judgment in the same manner as it would if it were the owner of the related
Mortgage Loan, that such approval will not adversely affect the security for,
and the timely and full collectability of, the related Mortgage Loan. Any fee
collected by the Master Servicer or the Subservicer for processing this type of
request will be retained by the Master Servicer or Subservicer as additional
servicing compensation.
Special Servicing and Special Servicing Agreements
The Pooling and Servicing Agreement for a series of Certificates may name a
special servicer (a "Special Servicer"), which will be responsible for the
servicing of certain delinquent Mortgage Loans. The Special Servicer
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may have discretion to extend relief to certain Mortgagors whose payments become
delinquent. The Special Servicer may be permitted to grant a period of temporary
indulgence to a Mortgagor or may enter into a repayment plan providing for
repayment of arrearages by the Mortgagor, in each case without the prior
approval of the Master Servicer or the Subservicer. Other types of forbearance
may require the approval of the Master Servicer or Subservicer, as applicable.
In addition, the Master Servicer may enter into various agreements with
holders of one or more classes of Subordinate Certificates or of a class of
securities representing interests in one or more classes of Subordinate
Certificates. Under the terms of these agreements, the holder may, with respect
to certain delinquent Mortgage Loans:
o instruct the Master Servicer to commence or delay foreclosure
proceedings, provided that the holder deposits a specified amount of
cash with the Master Servicer which will be available for distribution
to Certificateholders in the event that liquidation proceeds are less
than they otherwise may have been had the Master Servicer acted under
its normal servicing procedures;
o instruct the Master Servicer to purchase the Mortgage Loans from the
Trust prior to the commencement of foreclosure proceedings at the
Purchase Price and to resell the Mortgage Loans to the holder, in
which case any subsequent loss with respect to the Mortgage Loans will
not be allocated to the Certificateholders;
o become, or designate a third party to become, a Subservicer with
respect to the Mortgage Loans so long as (i) the Master Servicer has
the right to transfer the subservicing rights and obligations of the
Mortgage Loans to another Subservicer at any time or (ii) the holder
or its servicing designee is required to service the Mortgage Loans
according to the Master Servicer's servicing guidelines; or
o the related Prospectus Supplement may provide for the other types of
special servicing arrangements.
Realization Upon Defaulted Mortgage Loans
With respect to a Mortgage Loan in default, the Master Servicer or the
related Subservicer may take a variety of actions including foreclosing upon the
Mortgaged Property, write off the balance of the Mortgage Loan or the Trust
Balance as bad debt, take a deed in lieu of foreclosure, accept a short sale,
permit a short refinancing, arrange for a repayment plan or a modification as
described above. In connection with such decision, the Master Servicer or the
related Subservicer will, following usual practices in connection with senior
and junior mortgage servicing activities, estimate the proceeds expected to be
received and the expenses expected to be incurred in connection with such
foreclosure to determine whether a foreclosure proceeding is appropriate. To the
extent that a Mortgage Loan is a junior Mortgage Loan, following any default
thereon, unless foreclosure proceeds for such Mortgage Loan are expected to at
least satisfy the related senior mortgage loan in full and to pay foreclosure
costs, it is likely that such Mortgage Loan will be written off as bad debt with
no foreclosure proceeding. In the event that title to any Mortgaged Property is
acquired in foreclosure or by deed in lieu of foreclosure, the deed or
certificate of sale will be issued to the Trustee or to its nominee on behalf of
Certificateholders and, if applicable, the holders of any Excluded Balances.
Notwithstanding any such acquisition of title and cancellation of the related
Mortgage Loan, the Mortgage Loan (an "REO Mortgage Loan") will be considered for
most purposes to be an outstanding Mortgage Loan or an outstanding Trust Balance
of the related Revolving Credit Loan, held in the Trust until that time as the
Mortgaged Property is sold and all recoverable Liquidation Proceeds and
Insurance Proceeds have been received with respect to the defaulted Mortgage
Loan (a "Liquidated Mortgage Loan").
For purposes of calculations of amounts distributable to
Certificateholders in respect of an REO Mortgage Loan, the amortization schedule
in effect at the time of any acquisition of title, before any adjustment thereto
by reason of any bankruptcy or any similar proceeding or any moratorium or
similar waiver or grace period, will be deemed to have continued in effect (and,
in the case of an ARM Loan, such amortization schedule will be deemed to have
adjusted in accordance with any interest rate changes occurring on any
adjustment date therefor) so long as the REO Mortgage Loan is considered to
remain in the Trust. If a REMIC election has been made, any Mortgaged
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Property so acquired by the Trust must be disposed of in accordance with
applicable federal income tax regulations and consistent with the status of the
Trust as a REMIC. To the extent provided in the related Pooling and Servicing
Agreement, any income, net of expenses and other than gains described below
received by the Subservicer or the Master Servicer on such Mortgaged Property
prior to its disposition will be deposited in the Custodial Account upon receipt
and will be available at such time to the extent provided in the related Pooling
and Servicing Agreement, for making payments to Certificateholders.
With respect to a Mortgage Loan in default, the Master Servicer may pursue
foreclosure or similar remedies subject to any senior loan positions and certain
other restrictions pertaining to junior loans as described under "Certain Legal
Aspects of Mortgage Loans and Related Matters -- Foreclosure on Mortgage Loans"
concurrently with pursuing any remedy for a breach of a representation and
warranty. However, the Master Servicer is not required to continue to pursue
both such remedies if it determines that one such remedy is more likely to
result in a greater recovery. Upon the first to occur of final liquidation and a
repurchase or substitution under a breach of a representation and warranty, the
Mortgage Loan will be removed from the related Trust. The Master Servicer may
elect to treat a defaulted Mortgage Loan as having been finally liquidated if
substantially all amounts expected to be received in connection therewith have
been received. Any additional liquidation expenses relating to such Mortgage
Loan thereafter incurred will be reimbursable to the Master Servicer, or any
Subservicer, from any amounts otherwise distributable to the related
Certificateholders, or may be offset by any subsequent recovery related to the
Mortgage Loan. Alternatively, for purposes of determining the amount of related
Liquidation Proceeds to be distributed to Certificateholders, the amount of any
Realized Loss or the amount required to be drawn under any applicable form of
credit enhancement, the Master Servicer may take into account minimal amounts of
additional receipts expected to be received, as well as estimated additional
liquidation expenses expected to be incurred in connection with the defaulted
Mortgage Loan. Upon foreclosure of a Revolving Credit Loan, the related
Liquidation Proceeds will be allocated among the Trust Balances and Excluded
Balances as described in the Prospectus Supplement.
If so provided in the related Prospectus Supplement, the applicable form
of credit enhancement may provide, to the extent of coverage thereunder, that a
defaulted Mortgage Loan or REO Mortgage Loan will be removed from the Trust
prior to the final liquidation thereof in which case any estimated loss may be
covered by any applicable form of credit enhancement or other insurance or the
Certificateholders may bear the loss. If a defaulted Mortgage Loan or REO
Mortgage Loan is not so removed from the Trust, then, upon the final liquidation
thereof, if a loss is realized which is not covered by any applicable form of
credit enhancement or other insurance, the Certificateholders will bear the
loss. However, if a gain results from the final liquidation of an REO Mortgage
Loan which is not required by law to be remitted to the related Mortgagor, the
Master Servicer will be entitled to retain such gain as additional servicing
compensation unless the related Prospectus Supplement provides otherwise. For a
description of the Master Servicer's obligations to maintain and make claims
under applicable forms of credit enhancement and insurance relating to the
Mortgage Loans, see "Description of Credit Enhancement" and "Description of the
Certificates -- Hazard Insurance and Related Claims."
The Master Servicer is required to maintain a fidelity bond and errors and
omissions policy with respect to its employees and other persons acting on
behalf of the Master Servicer in connection with its activities under the
Pooling and Servicing Agreement. The Master Servicer may be subject to
restrictions under the Pooling and Servicing Agreement with respect to the
refinancing of a lien senior to a Mortgage Loan on the related Mortgaged
Property.
Hazard Insurance and Related Claims
Unless specified in the related Prospectus Supplement, each Mortgage Loan,
other than a Cooperative Loan, will be required to be covered by a hazard
insurance policy, as described below. The following summary, as well as other
pertinent information included elsewhere in this Prospectus, does not describe
all terms of a hazard insurance policy but will reflect all material terms
thereof relevant to an investment in the Certificates. The insurance is subject
to underwriting and approval of individual Mortgage Loans by the respective
insurers. The descriptions of any insurance policies described in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
forms of policies.
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Unless otherwise specified in the related Prospectus Supplement, the
Pooling and Servicing Agreement will require the Master Servicer to cause to be
maintained for each Mortgaged Property a hazard insurance policy providing for
no less than the coverage of the standard form of fire insurance policy with
extended coverage customary in the state in which the property is located. Such
coverage generally will be in an amount equal to the lesser of (i) 100% of the
insurable value of the improvements (guaranteed replacement) or (ii) the sum of
the outstanding balance of the Mortgage Loan plus the outstanding balance on any
mortgage loan senior to the Mortgage Loan. The ability of the Master Servicer to
ensure that hazard insurance proceeds are appropriately applied may be dependent
on its being named as an additional insured under any hazard insurance policy or
upon the extent to which information in this regard is furnished to the Master
Servicer by Mortgagors or Subservicers.
As described above, all amounts collected by the Master Servicer under any
hazard policy, except for amounts to be applied to the restoration or repair of
the Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures, will be deposited initially in
the Custodial Account and ultimately in the Certificate Account. The Pooling and
Servicing Agreement provides that the Master Servicer may satisfy its obligation
to cause hazard policies to be maintained by maintaining a blanket policy
insuring against losses on the Mortgage Loans. If the blanket policy contains a
deductible clause, the Master Servicer will deposit in the Custodial Account or
the applicable Certificate Account all amounts which would have been deposited
therein but for such clause.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer shall also cause to be maintained on property acquired upon
foreclosure, or deed in lieu of foreclosure, of any Mortgage Loan, fire
insurance with extended coverage in an amount which is at least equal to the
amount necessary to avoid the application of any co-insurance clause contained
in the related hazard insurance policy.
Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the Mortgage Loans may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss. See "Description of Credit Enhancement -- Special Hazard Insurance
Policies" for a description of the limited protection afforded by any Special
Hazard Insurance Policy against losses occasioned by hazards which are otherwise
uninsured against, including losses caused by the application of the
co-insurance clause described in the preceding paragraph.
DESCRIPTION OF CREDIT ENHANCEMENT
Credit support with respect to each series of Certificates may be
comprised of one or more of the components described below. Each component may
have a dollar limit and will generally provide coverage with respect to Realized
Losses that are, as applicable:
o 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 (a "Defaulted Mortgage Loss");
o of a type generally covered by a Special Hazard Insurance Policy ( a
"Special Hazard Loss");
o attributable to some actions which may be taken by a bankruptcy court
in connection with a Mortgage Loan, including a reduction by a
bankruptcy court of the principal balance of or the Mortgage Rate on a
Mortgage Loan or an extension of its maturity (any type of loss, a
"Bankruptcy Loss"); and
o incurred on defaulted Mortgage Loans as to which there was fraud in
the origination of the Mortgage Loans (a "Fraud Loss").
Most forms of credit support will not provide protection against all risks
of loss and will not guarantee repayment of the entire outstanding principal
balance of the Certificates and interest thereon. If losses occur which
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exceed the amount covered by credit support or which are not covered by the
credit support, Certificateholders will bear their allocable share of
deficiencies. In particular, Defaulted Mortgage Losses, Special Hazard Losses,
Bankruptcy Losses and Fraud Losses in excess of the amount of coverage provided
therefor and losses occasioned by war, civil insurrection, some governmental
actions, nuclear reaction and certain other risks ("Extraordinary Losses") will
not be covered. To the extent that the credit enhancement for any series of
Certificates is exhausted, the Certificateholders will bear all further risks of
loss not otherwise insured against.
As described below and in the related Prospectus Supplement, (i) coverage
with respect to Defaulted Mortgage Losses may be provided by one or more Letters
of Credit, (ii) coverage with respect to Special Hazard Losses may be provided
by one or more Letters of Credit or a Special Hazard Insurance Policies (any
instrument, to the extent providing that type of coverage, a "Special Hazard
Instrument"), (iii) coverage with respect to Bankruptcy Losses may be provided
by one or more Letters of Credit or a Bankruptcy Bond and (iv) coverage with
respect to Fraud Losses may be provided by one or more Letters of Credit or
mortgage repurchase bonds. In addition, if so specified in the applicable
Prospectus Supplement, in lieu of or in addition to any or all of the foregoing
arrangements, credit enhancement may be in the form of (i) a Reserve Fund to
cover the losses, (ii) subordination of one or more classes of Subordinate
Certificates to provide credit support to one or more classes of Senior
Certificates or (iii) Overcollateralization, Letters of Credit, surety bonds,
Financial Guaranty Insurance Policies, derivative products or other types of
insurance policies, certain other secured or unsecured corporate guarantees or
in such other form as may be described in the related Prospectus Supplement, or
in the form of a combination of two or more of the foregoing. The credit support
may be provided by an assignment of the right to receive cash amounts, a deposit
of cash into a Reserve Fund or other pledged assets, or by banks, insurance
companies, guarantees or any combination thereof identified in the related
Prospectus Supplement.
With respect to any defaulted Mortgage Loan that is finally liquidated,
the amount of loss realized, if any (as described in the related Pooling and
Servicing Agreement, a "Realized Loss"), will equal the portion of the Stated
Principal Balance remaining after application of all amounts recovered, net of
amounts reimbursable to the Master Servicer for related Advances, if applicable,
and expenses allocable to the Trust, towards interest and principal owing on the
Mortgage Loan. With respect to a Mortgage Loan the principal balance of which
has been reduced in connection with bankruptcy proceedings, the amount of the
reduction will be treated as a Realized Loss. The "Stated Principal Balance" of
any Mortgage Loan as of any date of determination is equal to the principal
balance thereof as of the Cut-off Date, after application of all scheduled
principal payments due on or before the Cut-off Date whether received or not,
reduced by all amounts allocable to principal that are distributed to
Certificateholders on or before the date of determination, and as further
reduced to the extent that any Realized Loss thereon has been allocated to any
Certificates on or before that date.
For any series of Certificates backed by Trust Balances of Revolving
Credit Loans, the credit enhancement provided with respect to the Certificates
will cover any portion of any Realized Losses allocated to the Trust Balances,
subject to any limitations described in this Prospectus and in the related
Prospectus Supplement. See "Allocation of Revolving Credit Loan Balances" in
this Prospectus.
Each Prospectus Supplement will include a description of:
o the amount payable under the credit enhancement arrangement, if any,
provided with respect to a series;
o any conditions to payment thereunder not otherwise described in this
Prospectus;
o the conditions under which the amount payable under the credit support
may be reduced and under which the credit support may be terminated or
replaced; and
o the material provisions of any agreement relating to the credit
support.
Additionally, the accompanying Prospectus Supplement will describe
information with respect to the Issuer of any third-party credit enhancement
(the "Credit Enhancer"). The Pooling and Servicing Agreement or other
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documents may provide for reimbursement rights, control rights or other
provisions that may be required by the Credit Enhancer.
The descriptions of any insurance policies, bonds or other instruments
described in this Prospectus or any Prospectus Supplement and the coverage
thereunder do not describe all terms thereof but will reflect all relevant terms
thereof material to an investment in the Certificates. Copies of the instruments
will be included as exhibits to the Form 8-K to be filed with the Commission in
connection with the issuance of the related series of Certificates.
Financial Guaranty Insurance Policy
If so specified in the related Prospectus Supplement, a financial guaranty
insurance policy (a "Financial Guaranty Insurance Policy") may be obtained and
maintained for a class or series of Certificates. The issuer of the Financial
Guaranty Insurance Policy (the "Insurer") will be 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 specified in the related Prospectus Supplement, a Financial
Guaranty Insurance Policy will be unconditional and irrevocable and will
guarantee to holders of the applicable Certificates that an amount equal to the
full amount of distributions due to these holders will be received by the
Trustee or its agent on behalf of the holders for distribution on each
Distribution Date. The specific terms of any Financial Guaranty Insurance Policy
will be described in the related Prospectus Supplement. A Financial Guaranty
Insurance Policy may have limitations and generally will not insure the
obligation of the Sellers or the Master Servicer to purchase or substitute for a
defective Mortgage Loan and will not guarantee any specific rate of principal
prepayments or cover specific interest shortfalls. Unless specified in the
related Prospectus Supplement, the Insurer will be subrogated to the rights of
each holder to the extent the Insurer makes payments under the Financial
Guaranty Insurance Policy.
Letter of Credit
If any component of credit enhancement as to any series of Certificates is
to be provided by a letter of credit (the "Letter of Credit"), a bank (the
"Letter of Credit Bank") will deliver to the Trustee an irrevocable Letter of
Credit. The Letter of Credit may provide direct coverage with respect to the
Mortgage Loans. The Letter of Credit Bank, the amount available under the Letter
of Credit with respect to each component of credit enhancement, the expiration
date of the Letter of Credit, and a more detailed description of the Letter of
Credit will be specified in the related Prospectus Supplement. On or before each
Distribution Date, the Letter of Credit Bank will be required to make payments
after notification from the Trustee, to be deposited in the related Certificate
Account with respect to the coverage provided thereby. The Letter of Credit may
also provide for the payment of Advances.
Special Hazard Insurance Policies
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained by the Depositor for a Trust will be issued by the
insurer named in the related Prospectus Supplement. Each Special Hazard
Insurance Policy generally will, subject to limitations described in the related
Prospectus Supplement, if any, will protect the related Certificateholders from
Special Hazard Losses which are (i) losses due to direct physical damage to a
Mortgaged Property other than any loss of a type covered by a hazard insurance
policy or a flood insurance policy, if applicable, and (ii) losses from partial
damage caused by reason of the application of the co-insurance clauses contained
in hazard insurance policies. See "Description of the Certificates -- Hazard
Insurance and Related Claims." A Special Hazard Insurance Policy will not cover
losses occasioned by war, civil insurrection, certain governmental actions,
errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, chemical contamination or waste by the
Mortgagor. Aggregate claims under a Special Hazard Insurance Policy will be
limited to the amount contained in the related Pooling and Servicing Agreement
and will be subject to reduction as contained in such related Pooling and
Servicing Agreement. A Special Hazard Insurance Policy will provide that no
claim may be paid unless hazard and, if applicable, flood insurance on the
property securing the Mortgage Loan has been kept in force and other protection
and preservation expenses have been paid by the Master Servicer.
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To the extent described in the related Prospectus Supplement, coverage in
respect of Special Hazard Losses for a series of Certificates may be provided,
in whole or in part, by a type of special hazard coverage other than a Special
Hazard Insurance Policy or by means of a representation of the Depositor or
Residential Funding.
Bankruptcy Bonds
In the event of a personal bankruptcy of a Mortgagor, a bankruptcy court
may establish the value of the Mortgaged Property of such Mortgagor at an amount
less than the then outstanding principal balance of the first and junior loans
secured by such Mortgaged Property (such difference, a "Deficient Valuation").
The amount of the secured debt could then be reduced to such value, and, thus,
the holder of such first and junior loans would become unsecured creditors to
the extent the outstanding principal balance of such loans exceeds the value
assigned to the Mortgaged Property by the bankruptcy court. In addition, certain
other modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including a reduction in the amount of the Monthly Payment on the
related Mortgage Loan, but not any permanent forgiveness of principal (a "Debt
Service Reduction;" Debt Service Reductions and Deficient Valuations,
collectively referred to in this Prospectus as "Bankruptcy Losses"). See
"Certain Legal Aspects of Mortgage Loans and Related Matters -- Anti-Deficiency
Legislation and Other Limitations on Lenders." Any Bankruptcy Bond to provide
coverage for Bankruptcy Losses resulting from proceedings under the federal
Bankruptcy Code obtained by the Depositor for a Trust will be issued by an
insurer named in the related Prospectus Supplement. The level of coverage under
each Bankruptcy Bond will be set forth in the related Prospectus Supplement.
Subordination
A Senior/Subordinate Series of Certificates will consist of one or more
classes of Senior Certificates and one or more classes of Subordinate
Certificates, as described in the related Prospectus Supplement. With respect to
any Senior/Subordinate Series, the total amount available for distribution on
each Distribution Date, as well as the method for allocating the available
amount among the various classes of Certificates included in the series, will be
described in the related Prospectus Supplement. Generally, with respect to any
Senior/Subordinate Series, the amount available for distribution will be
allocated first to interest on the Senior Certificates of the series, and then
to principal of the Senior Certificates up to the amounts described in the
related Prospectus Supplement, prior to allocation of any amounts to the
Subordinate Certificates of the series.
Realized Losses will be allocated to the Subordinate Certificates of the
related series in the order specified in the related Prospectus Supplement until
the outstanding principal balance of each specified class has been reduced to
zero. Additional Realized Losses, if any, will be allocated to the Senior
Certificates. If the series includes more than one class of Senior Certificates,
the additional Realized Losses will be allocated either on a pro rata basis
among all of the Senior Certificates in proportion to their respective
outstanding principal balances or as otherwise described in the related
Prospectus Supplement. The respective amounts of specified types of losses,
including certain Special Hazard Losses, Fraud Losses and Bankruptcy Losses,
that may be borne solely by the Subordinate Certificates may be limited to an
amount described in the related Prospectus Supplement. In this case, losses in
excess of these amounts would be allocated on a pro rata basis among all
outstanding classes of Certificates. Generally, any allocation of a Realized
Loss to a Certificate will be made by reducing the outstanding principal balance
thereof as of the Distribution Date following the calendar month in which the
Realized Loss was incurred. At any given time, the percentage of the outstanding
principal balances of all of the Certificates evidenced by the Senior
Certificates is the "Senior Percentage," determined in the manner described in
the related Prospectus Supplement.
As described above, the rights of holders of the various classes of
Certificates of any series to receive distributions of principal and interest is
determined by the aggregate outstanding principal balance of each such class or,
if applicable, the related notional amount. The outstanding principal balance of
any Certificate will be reduced by all amounts previously distributed on such
Certificate in respect of principal and by any Realized Losses allocated
thereto. If there are no Realized Losses or prepayments of principal on any of
the Mortgage Loans, the respective rights of the holders of Certificates of any
series to future distributions generally would not change. However, to the
extent described in the related Prospectus Supplement, holders of Senior
Certificates may be entitled to receive a disproportionately larger amount of
prepayments received during specified periods, which will have the effect
(absent
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offsetting losses) of accelerating the amortization of the Senior Certificates
and increasing the respective percentage ownership interest evidenced by the
Subordinate Certificates in the related Trust (with a corresponding decrease in
the Senior Percentage), thereby preserving the availability of the subordination
provided by the Subordinate Certificates. In addition, as described above,
certain Realized Losses generally will be allocated first to Subordinate
Certificates by reduction of the outstanding principal balance thereof, which
will have the effect of increasing the respective ownership interest evidenced
by the Senior Certificates in the related Trust.
If so provided in the Pooling and Servicing Agreement, the Master Servicer
may be permitted, under some circumstances, to purchase any Mortgage Loan or the
Trust Balance thereof, if applicable that is three or more months delinquent in
payments of principal and interest, at the Purchase Price. The Purchase Price
will be advanced by the Master Servicer to the Trust, subject to the right of
the Master Servicer to reimbursement from the Trust for any Realized Losses
subsequently incurred. Any Realized Loss so incurred in connection with any such
Mortgage Loan or the Trust Balance thereof, if applicable will be allocated
among the then outstanding Certificateholders of the related series in the same
manner as Realized Losses on Mortgage Loans that have not been so purchased.
To the extent provided in the related Prospectus Supplement, certain
amounts otherwise payable on any Distribution Date to holders of Subordinate
Certificates may be deposited into a 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 variation and any
additional credit enhancement will be described in the related Prospectus
Supplement.
Overcollateralization
If so specified in the related Prospectus Supplement, interest collections
on the Mortgage Loans, or the Trust Balances of the related Revolving Credit
Loans, as applicable, may exceed interest distributions on the Certificates for
the related Distribution Date (the excess referred to as "Excess Interest").
Such Excess Interest may be deposited into a Reserve Fund or applied as a
distribution of principal on the Certificates. To the extent Excess Interest is
applied as principal distributions on the Certificates, the effect will be to
reduce the principal balance of the Certificates relative to the outstanding
balance of the Mortgage Loans, thereby creating "Overcollateralization" and
additional protection to the Certificateholders, as specified in the related
Prospectus Supplement.
Reserve Funds
If so specified in the related Prospectus Supplement, the Depositor will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash or Permitted Investments in specified amounts, or any other
instrument satisfactory to the Rating Agency or Agencies, which will be applied
and maintained in the manner and under the conditions specified in the related
Prospectus Supplement and related Pooling and Servicing Agreement. In the
alternative or in addition to that deposit, to the extent described in the
related Prospectus Supplement, a Reserve Fund may be funded through application
of all or a portion of amounts otherwise payable on any related Certificates,
from the Excess Spread, Excluded Spread or otherwise. A Reserve Fund for a
series of Certificates which is funded over time by depositing therein a portion
of the interest payment on each Mortgage Loan may be referred to as a "Spread
Account" in the related Prospectus Supplement and Pooling and Servicing
Agreement. To the extent that the funding of the Reserve Fund is dependent on
amounts otherwise payable on related Certificates, Excess Spread, Excluded
Spread or other cash flows attributable to the related Mortgage Loans or on
reinvestment income, the Reserve Fund may provide less coverage than initially
expected if the cash flows or reinvestment income on which the funding is
dependent are lower than anticipated. With respect to any series of Certificates
as to which credit enhancement includes a Letter of Credit, if so specified in
the related Prospectus Supplement, under specified circumstances the remaining
amount of the Letter of Credit may be drawn by the Trustee and deposited in a
Reserve Fund.
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Amounts in a Reserve Fund may be distributed to Certificateholders, or
applied to reimburse the Master Servicer for outstanding advances, or may be
used for other purposes, in the manner and to the extent specified in the
related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, any such Reserve Fund will not be deemed to be part of
the related Trust. A Reserve Fund may provide coverage to more than one series
of Certificates if described in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, Reserve Funds may be established
to provide limited protection against only certain types of losses and
shortfalls. Following each Distribution Date amounts in a Reserve Fund in excess
of any amount required to be maintained therein may be released from the Reserve
Fund under the conditions and to the extent specified in the related Prospectus
Supplement and will not be available for further application to the
Certificates.
The Trustee will have a perfected security interest for the benefit of the
Certificateholders in the assets in the Reserve Fund. However, to the extent
that the Depositor, any affiliate thereof or any other entity has an interest in
any Reserve Fund, in the event of the bankruptcy, receivership or insolvency of
such entity, there could be delays in withdrawals from the Reserve Fund and the
corresponding payments to the Certificateholders. These delays could adversely
affect the yield to investors on the related Certificates.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
Master Servicer or any other person named in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited to the
related Reserve Fund for the series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, the reinvestment
income may be payable to the Master Servicer or another service provider as
additional compensation.
Maintenance of Credit Enhancement
If credit enhancement has been obtained for a series of Certificates, the
Master Servicer will be obligated to exercise its best reasonable efforts to
keep or cause to be kept the credit enhancement in full force and effect
throughout the term of the applicable Pooling and Servicing Agreement, unless
coverage thereunder has been exhausted through payment of claims or otherwise,
or substitution therefor is made, or as otherwise described below under " --
Reduction or Substitution of Credit Enhancement." The Master Servicer, on behalf
of itself, the Trustee and Certificateholders, will provide the Trustee
information required for the Trustee to draw any applicable credit enhancement.
The Master Servicer or other entity specified in the accompanying
Prospectus Supplement will agree to pay the premiums for each Financial Guaranty
Insurance Policy, Special Hazard Insurance Policy or Bankruptcy Bond, as
applicable, on a timely basis. In the event the related insurer ceases to be a
"Qualified Insurer" because it ceases to be qualified under applicable law to
transact the insurance business or coverage is terminated for any reason other
than exhaustion of that 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 the original policy or bond. If the cost of the
replacement policy is greater than the cost of the policy or bond, the coverage
of the replacement policy or bond will, unless otherwise agreed to by the
Depositor, be reduced to a level so that its premium rate does not exceed the
premium rate on the original insurance policy. Any losses in market value of the
Certificates associated with any reduction or withdrawal in rating by an
applicable Rating Agency shall be borne by the Certificateholders.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
Special Hazard Insurance Policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any Letter of Credit, the
Master Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that restoration will increase the proceeds to
one or more classes of Certificateholders on liquidation of the Mortgage Loan
after reimbursement of the Master Servicer for its expenses and (ii) that the
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 the determinations incorrectly or recovery is not
available for any other reason, the Master Servicer is nevertheless obligated to
follow whatever
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normal practices and procedures, subject to the preceding sentence, as it deems
necessary or advisable to realize upon the defaulted Mortgage Loan and in the
event this determination has been incorrectly made, is entitled to reimbursement
of its expenses in connection with such restoration.
Reduction or Substitution of Credit Enhancement
The amount of credit support provided with respect to any series of
Certificates and relating to various types of losses incurred may be reduced
under 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 described in the related Pooling and
Servicing Agreement. Additionally, in most cases, the credit support may be
replaced, reduced or terminated, and the formula used in calculating the amount
of coverage with respect to Bankruptcy Losses, Special Hazard Losses or Fraud
Losses may be changed, without the consent of the Certificateholders, upon the
written assurance from each applicable Rating Agency that the then-current
rating of the related series of Certificates will not be adversely affected
thereby. Furthermore, in the event that the credit rating of any obligor under
any applicable credit enhancement is downgraded, the credit rating of each class
of the related Certificates may be downgraded to a corresponding level, and,
unless specified in the related Prospectus Supplement, neither the Master
Servicer nor the Depositor will be obligated to obtain replacement credit
support in order to restore the rating of the Certificates. The Master Servicer
will also be permitted to replace any credit support with other credit
enhancement instruments issued by obligors whose credit ratings are equivalent
to the downgraded level and in lower amounts which would satisfy the downgraded
level, provided that the then-current rating of each class of the related series
of Certificates is maintained. Where the credit support is in the form of a
Reserve Fund, a permitted reduction in the amount of credit enhancement will
result in a release of all or a portion of the assets in the Reserve Fund to the
Depositor, the Master Servicer or any 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 distributions in future periods.
OTHER FINANCIAL OBLIGATIONS RELATED TO THE CERTIFICATES
Swaps and Yield Supplement Agreements
The Trustee on behalf of the Trust may enter into interest rate swaps and
related caps, floors and collars to minimize the risk of Certificateholders from
adverse changes in interest rates (collectively, "Swaps"), and other yield
supplement agreements or similar yield maintenance arrangements that do not
involve swap agreements or other notional principal contracts (collectively,
"Yield Supplement Agreements").
An interest rate Swap is an agreement between two parties
("Counterparties") to exchange a stream of interest payments on an agreed
hypothetical or "notional" principal amount. No principal amount is exchanged
between the Counterparties to an interest rate Swap. In the typical Swap, one
party agrees to pay a fixed rate on a notional principal amount, while the
Counterparty pays a floating rate based on one or more reference interest rates
including the London Interbank Offered Rate ("LIBOR"), a specified bank's prime
rate or U.S. Treasury Bill rates. Interest rate Swaps also permit Counterparties
to exchange a floating rate obligation based upon one reference interest rate
(such as LIBOR) for a floating rate obligation based upon another referenced
interest rate (such as U.S. Treasury Bill rates).
Yield Supplement Agreements may be entered into to supplement the interest
rate or other rates on one or more classes of the Certificates of any series.
Additionally, agreements relating to other types of derivative products that are
designed to provide credit enhancement to the related series may be entered into
by a Trust and one or more counterparties. The terms of any derivative product
agreement and any counterparties will be described in the related Prospectus
Supplement.
There can be no assurance that the Trust will be able to enter into or
offset Swaps or enter into Yield Supplement Agreements or derivative product
agreements at any specific time or at prices or on other terms that are
advantageous. In addition, although the terms of the Swaps and Yield Supplement
Agreements may provide for
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termination under certain circumstances, there can be no assurance that the
Trust will be able to terminate a Swap or Yield Supplement Agreement when it
would be economically advantageous to the Trust to do so.
Purchase Obligations
Some types of Mortgage Loans and some classes of Certificates of any
series, as specified in the related Prospectus Supplement, may be subject to a
purchase obligation (a "Purchase Obligation") that would become applicable on
one or more specified dates, or upon the occurrence of one or more specified
events, or on demand made by or on behalf of the applicable Certificateholders.
A Purchase Obligation may be in the form of a conditional or unconditional
purchase commitment, liquidity facility, remarketing agreement, maturity
guaranty, put option or demand feature. The terms and conditions of each
Purchase Obligation, including the purchase price, timing and payment procedure,
will be described in the related Prospectus Supplement. A Purchase Obligation
with respect to Mortgage Loans may apply to those Mortgage Loans or to the
related Certificates. Each Purchase Obligation may be a secured or unsecured
obligation of the provider thereof, which may include a bank or other financial
institution or an insurance company. Each Purchase Obligation will be evidenced
by an instrument delivered to the Trustee for the benefit of the applicable
Certificateholders of the related series. Unless otherwise specified in the
related Prospectus Supplement, each Purchase Obligation with respect to Mortgage
Loans will be payable solely to the Trustee for the benefit of the
Certificateholders of the related series. Other Purchase Obligations may be
payable to the Trustee or directly to the holders of the Certificates to which
such obligation relate.
THE DEPOSITOR
The Depositor is an indirect wholly-owned subsidiary of GMAC Mortgage,
which is a wholly-owned subsidiary of General Motors Acceptance Corporation. The
Depositor was incorporated in the State of Delaware on May 5, 1995. The
Depositor was organized for the purpose of acquiring first or junior lien home
equity mortgage loans and mortgage securities and issuing securities backed by
these mortgage loans and mortgage securities. The Depositor anticipates that it
will in many cases have acquired Mortgage Loans indirectly through Residential
Funding, which is also an indirect wholly-owned subsidiary of GMAC Mortgage. The
Depositor does not have, nor is it expected in the future to have, any
significant assets.
The Certificates do not represent an interest in or an obligation of the
Depositor. The Depositor's only obligations with respect to a series of
Certificates will be limited to certain representations and warranties made by
the Depositor or as otherwise provided in the related Prospectus Supplement.
The Depositor 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 specified in the related Prospectus Supplement, Residential Funding, an
affiliate of the Depositor, will act as the Master Servicer or Manager for a
series of Certificates.
Residential Funding, either directly or through affiliates, 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 Jersey, New York, North
Carolina, Pennsylvania, Rhode Island and Texas. At December 31, 1998 Residential
Funding was master servicing a first lien loan portfolio of approximately $55.0
billion and a second lien loan portfolio of approximately $2.9 billion.
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Residential Funding's delinquency, foreclosure and loan loss experience as
of the end of the most recent calendar quarter for which information is
available on the portfolio of loans for which it acts as master servicer,
including loans that were originated under its modified loan purchase criteria
will be summarized in each Prospectus Supplement relating to a Mortgage Pool for
which Residential Funding will act as Master Servicer. There can be no assurance
that this experience will be representative of the results that may be
experienced with respect to any particular series of Certificates.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Certificates -- General,"
each series of Certificates will be issued under a Pooling and Servicing
Agreement. The following summaries describe certain additional provisions common
to each Pooling and Servicing Agreement and are qualified entirely by reference
to the actual terms of the Pooling and Servicing Agreement for a series of
Certificates.
Servicing and Administration
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each series of Certificates will
be equal to the percentage per annum described in the related Prospectus
Supplement. As compensation for its servicing duties, a Subservicer or, if there
is no Subservicer, the Master Servicer will be entitled to a monthly servicing
fee as described in the related Prospectus Supplement, which may vary under
certain circumstances from the amounts described in the Prospectus Supplement.
Certain Subservicers may also receive additional compensation in the amount of
all or a portion of the interest due and payable on the applicable Mortgage Loan
which is over and above the interest rate specified at the time the Depositor or
Residential Funding, as the case may be, committed to purchase the Mortgage
Loan. See "Mortgage Loan Program -- Subservicing." Subservicers will be required
to pay to the Master Servicer an amount equal to one month's interest (net of
its servicing or other compensation) on the amount of any partial Principal
Prepayment. Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will retain such amounts to the extent collected from
Subservicers. In addition, the Master Servicer or a Subservicer will retain all
prepayment charges, assumption fees and late payment charges, to the extent
collected from Mortgagors, and any benefit which may accrue as a result of the
investment of funds in the Custodial Account or the applicable Certificate
Account, unless specified in the related Prospectus Supplement or in a
Subservicing Account, as the case may be. In addition, certain reasonable duties
of the Master Servicer may be performed by an affiliate of the Master Servicer
who will be entitled to reasonable compensation therefor from the Trust.
The Master Servicer, or, if specified in the related Pooling and Servicing
Agreement, the Trustee on behalf of the applicable Trust, will pay or cause to
be paid certain ongoing expenses associated with each Trust and incurred by it
in connection with its responsibilities under the Pooling and Servicing
Agreement, including, without limitation, payment of any fee or other amount
payable in respect of certain credit enhancement arrangements, payment of the
fees and disbursements of the Trustee, any custodian appointed by the Trustee,
the Certificate Registrar and any Paying Agent, and payment of expenses incurred
in enforcing the obligations of Subservicers and Designated Sellers. The Master
Servicer will be entitled to reimbursement of expenses incurred in enforcing the
obligations of Subservicers and Designated Sellers under certain limited
circumstances. In addition, as indicated in the preceding section, the Master
Servicer will be entitled to reimbursements for certain expenses incurred by it
in connection with Liquidated Mortgage Loans and in connection with the
restoration of Mortgaged Properties, such right of reimbursement being prior to
the rights of Certificateholders to receive any related Liquidation Proceeds
including Insurance Proceeds.
Evidence as to Compliance
Each Pooling and Servicing Agreement will provide for delivery, on or
before a specified date in each year, to the Trustee of an annual statement
signed by an officer of the Master Servicer to the effect that the Master
Servicer has fulfilled in all material respects the minimum servicing standards
described 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
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Mortgages serviced for Federal Home Mortgage Corporation (each, an "Audit
Guide") throughout the preceding year or, if there has been a material default
in the fulfillment of any obligation, the statement shall specify each known
default and the nature and status thereof. The statement may be provided as a
single form making the required statements as to more than one Pooling and
Servicing Agreement.
Each Pooling and Servicing Agreement will also provide that on or before a
specified date in each year, beginning the first 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 Depositor and the Trustee to the
effect that, on the basis of an examination by such firm conducted substantially
in compliance with the standards established by the American Institute of
Certified Public Accountants, the servicing of mortgage loans under agreements
(including the related Pooling and Servicing Agreement) was conducted
substantially in compliance with the minimum servicing standards described in
the related Audit Guide (to the extent that procedures in such Audit Guide are
applicable to the servicing obligations described in such agreements) except for
such significant exceptions or errors in records that shall be reported in such
statement. In rendering its statement such firm may rely, as to the matters
relating to the direct servicing of mortgage loans by Subservicers, upon
comparable statements for examinations conducted substantially in compliance
with the related Audit Guide described above (rendered within one year of such
statement) of firms of independent public accountants with respect to those
Subservicers which also have been the subject of such an examination.
Copies of the annual statement of an officer of the Master Servicer may be
obtained by Certificateholders without charge upon written request to the Master
Servicer, at the address indicated in the monthly statement to
Certificateholders.
Certain Matters Regarding the Master Servicer and the Depositor
The Pooling and Servicing Agreement for each series of Certificates will
provide that the Master Servicer may not resign from its obligations and duties
thereunder except upon a determination that performance of its duties is no
longer permissible under applicable law or except in connection with a permitted
transfer of servicing. No such resignation will become effective until the
Trustee or a successor servicer has assumed the Master Servicer's obligations
and duties under the Pooling and Servicing Agreement.
Each Pooling and Servicing Agreement will also provide that, except as
described below, neither the Master Servicer, the Depositor nor any director,
officer, employee or agent of the Master Servicer or the Depositor will be under
any liability to the Trust or the Certificateholders for any action taken or for
refraining from the taking of any action in good faith under the Pooling and
Servicing Agreement, or for errors in judgment; provided, however, that neither
the Master Servicer, the Depositor, nor any such person will be protected
against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties or by
reason of reckless disregard of obligations and duties thereunder. Each Pooling
and Servicing Agreement will further provide that the Master Servicer, the
Depositor and any director, officer, employee or agent of the Master Servicer or
the Depositor is entitled to indemnification by the Trust and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Pooling and Servicing Agreement or the related
series of Certificates, other than any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. In addition, each Pooling and Servicing Agreement will
provide that the Master Servicer and the Depositor will not be under any
obligation to appear in, prosecute or defend any legal or administrative action
that is not incidental to its respective duties under the Pooling and Servicing
Agreement and which in its opinion may involve it in any expense or liability.
The Master Servicer or the Depositor may, however, in its discretion undertake
any such action which it may deem necessary or desirable with respect to the
Pooling and Servicing Agreement and the rights and duties of the parties thereto
and the interests of the Certificateholders thereunder. In such event, the legal
expenses and costs of an action and any liability resulting therefrom will be
expenses, costs and liabilities of the Trust and the Master Servicer or the
Depositor, as the case may be, will be entitled to be reimbursed therefor out of
funds otherwise distributable to Certificateholders.
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Any person into which the Master Servicer may be merged or consolidated,
any person resulting from any merger or consolidation to which the Master
Servicer is a party or any person succeeding to the business of the Master
Servicer will be the successor of the Master Servicer under the Pooling and
Servicing Agreement, provided that such person meets the requirements set forth
in the Pooling and Servicing Agreement. In addition, notwithstanding the
prohibition on its resignation, the Master Servicer may assign its rights and
delegate its duties and obligations under a Pooling and Servicing Agreement to
any person reasonably satisfactory to the Depositor and the Trustee and meeting
the requirements set forth in the related Pooling and Servicing Agreement. In
the case of any assignment, the Master Servicer will be released from its
obligations under such Pooling and Servicing Agreement, exclusive of liabilities
and obligations incurred by it prior to the time of such assignment.
Events of Default
Events of Default under the Pooling and Servicing Agreement in respect of
a series of Certificates, unless specified in the Prospectus Supplement,
generally will include:
o any failure by the Master Servicer to make a required deposit to the
Custodial Account or the Certificate Account or, if the Master
Servicer is the Paying Agent, to distribute to the holders of any
class of Certificates of the series any required payment which
continues unremedied for five business days after the giving of
written notice of such failure to the Master Servicer by the Trustee
or the Depositor, or to the Master Servicer, the Depositor and the
Trustee by the holders of Certificates of such class evidencing not
less than 25% of the aggregate Percentage Interests constituting such
class;
o any failure by the Master Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
Pooling and Servicing Agreement with respect to such series of
Certificates which continues unremedied for 30 days (15 days in the
case of a failure to pay the premium for any insurance policy which is
required to be maintained under the Pooling and Servicing Agreement)
after the giving of written notice of such failure to the Master
Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of any class of
Certificates of such series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class;
o some 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
o any other Event of Default as contained in the Pooling and Servicing
Agreement.
A default under the terms of any Mortgage Securities included in any Trust
will not constitute an Event of Default under the related Pooling and Servicing
Agreement.
Rights Upon Event of Default
So long as an Event of Default remains unremedied, either the Depositor or
the Trustee may (except as otherwise provided for in the related Pooling and
Servicing Agreement with respect to the Credit Enhancer, if applicable), and, at
the direction of the holders of Certificates evidencing not less than 51% of the
aggregate voting rights in the related Trust, the Trustee shall, except as
otherwise provided for in the related Pooling and Servicing Agreement with
respect to the Credit Enhancer), by written notification to the Master Servicer
and to the Depositor or the Trustee, as applicable, terminate all of the rights
and obligations of the Master Servicer under the Pooling and Servicing Agreement
(other than any right of the Master Servicer as Certificateholder and other than
the right to receive servicing compensation, expenses for servicing the Mortgage
Loans during any period prior to the date of such termination and such other
reimbursements, of amounts the Master Servicer is entitled to withdraw from the
Custodial Account) covering the Trust and in and to the Mortgage Loans and the
proceeds thereof, whereupon the Trustee will succeed to all responsibilities,
duties and liabilities of the Master Servicer under the Pooling and Servicing
Agreement (other than the obligation to purchase Mortgage Loans under some
circumstances) and will be
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entitled to similar compensation arrangements. In the event that the Trustee
would be obligated to succeed the Master Servicer but is unwilling so to act, it
may appoint (or if it is unable so to act, it shall appoint) or petition a court
of competent jurisdiction for the appointment of an approved mortgage servicing
institution with a net worth of at least $10,000,000 to act as successor to the
Master Servicer under the Pooling and Servicing Agreement (unless otherwise set
forth in the Pooling and Servicing Agreement). Pending such appointment, the
Trustee is obligated to act in such capacity. The Trustee and its successor may
agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the initial Master Servicer under the Pooling
and Servicing Agreement.
No Certificateholder will have any right under a Pooling and Servicing
Agreement to institute any proceeding with respect to the Pooling and Servicing
Agreement unless (a) such holder previously has given to the Trustee written
notice of default and the continuance thereof, (b) the holders of Certificates
of any class evidencing not less than 25% of the aggregate Percentage Interests
constituting such class (i) have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and (ii) have
offered to the Trustee reasonable indemnity and (c) the Trustee has neglected or
refused to institute any such proceeding for 60 days after receipt of such
request and indemnity (except as otherwise provided for in the related Pooling
and Servicing Agreement with respect to the Credit Enhancer). However, the
Trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the Pooling and Servicing Agreement or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of Certificates covered by such Pooling and
Servicing Agreement, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
Amendment
Each Pooling and Servicing Agreement may be amended by the Depositor, the
Master Servicer and the Trustee, without the consent of the related
Certificateholders:
o to cure any ambiguity;
o to correct or supplement any provision therein which may be
inconsistent with any other provision therein or to correct any error;
o to change the timing and/or nature of deposits in the Custodial
Account or the Certificate Account or to change the name in which the
Custodial Account is maintained (except that (a) deposits to the
Certificate Account may not occur later than the related Distribution
Date, (b) such change may not adversely affect in any material respect
the interests of any Certificateholder, as evidenced by an opinion of
counsel, and (c) such change may not adversely affect the then-current
rating of any rated classes of Certificates, as evidenced by a letter
from each applicable Rating Agency) as specified in the related
Prospectus Supplement;
o if an election to treat the related Trust as a "real estate mortgage
investment conduit" (a "REMIC") has been made, to modify, eliminate or
add to any of its provisions (a) to the extent necessary to maintain
the qualification of the Trust as a REMIC or to avoid or minimize the
risk of imposition of any tax on the related Trust, provided that the
Trustee has received an opinion of counsel to the effect that (1) such
action is necessary or desirable to maintain the qualification or to
avoid or minimize the risk, and (2) such action will not adversely
affect in any material respect the interests of any related
Certificateholder or (b) to restrict the transfer of the REMIC
Residual Certificates, provided that the Depositor has determined that
such change would not adversely affect the applicable ratings of any
classes of the Certificates, as evidenced by a letter from each
applicable Rating Agency as specified in the related Prospectus
Supplement, and that any amendment will not give rise to any tax with
respect to the transfer of the REMIC Residual Certificates to a
non-permitted transferee;
o to make any other provisions with respect to matters or questions
arising under the Pooling and Servicing Agreement which are not
materially inconsistent with the provisions thereof, so long as such
action will not adversely affect in any material respect the interests
of any Certificateholder; or
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o to amend any provision that is not material to holders of any class of
related Certificates.
The Pooling and Servicing Agreement may also be amended by the Depositor,
the Master Servicer and the Trustee, except as otherwise provided for in the
related Pooling and Servicing Agreement with respect to the Credit Enhancer,
with the consent of the holders of Certificates of each class affected thereby
evidencing, in each case, not less than 66% of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Pooling and
Servicing Agreement or of modifying in any manner the rights of the related
Certificateholders, except that no such amendment may (i) reduce in any manner
the amount of, or delay the timing of, payments received on Mortgage Loans which
are required to be distributed on a Certificate of any class without the consent
of the holder of such Certificate, (ii) impair the right of any
Certificateholder to institute suit for the enforcement of the provisions of the
Pooling and Servicing Agreement or (iii) reduce the percentage of Certificates
of any class the holders of which are required to consent to any such amendment
unless the holders of all Certificates of such class have consented to the
change in such percentage.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust, the Trustee will not be entitled to consent to any
amendment to a Pooling and Servicing Agreement without having first received an
opinion of counsel to the effect that such amendment or the exercise of any
power granted to the Master Servicer, the Depositor or the Trustee in accordance
with the amendment will not result in the imposition of a tax on the related
Trust or cause the Trust to fail to qualify as a REMIC.
Termination; Retirement of Certificates
The primary obligations created by the Pooling and Servicing Agreement for
each series of Certificates, other than certain limited payment and notice
obligations of the Trustee and the Depositor, respectively, will terminate upon
the payment to the related Certificateholders of all amounts held in the
Certificate Account or by the Master Servicer and required to be paid to these
Certificateholders following the earlier of:
o the final payment or other liquidation or disposition (or any advance
with respect thereto) of the last Mortgage Loan subject thereto and
all property acquired upon foreclosure or deed in lieu of foreclosure
of any Mortgage Loan; and
o the purchase by the Master Servicer or the Depositor or, if specified
in the related Prospectus Supplement, by the holder of the REMIC
Residual Certificates (see "Certain Federal Income Tax Consequences"
below) from the Trust for a series of all remaining Mortgage Loans and
all property acquired in respect of the Mortgage Loans. In addition to
the foregoing, the Master Servicer or the Depositor may have the
option to purchase, in whole but not in part, the Certificates
specified in the related Prospectus Supplement in the manner described
in the related Prospectus Supplement. Upon the purchase of the
Certificates or at any time thereafter, at the option of the Master
Servicer or the Depositor, the Mortgage Loans may be sold, thereby
effecting a retirement of the Certificates and the termination of the
Trust, or the Certificates so purchased may be held or resold by the
Master Servicer or the Depositor. Written notice of termination of the
Pooling and Servicing Agreement will be given to each
Certificateholder, and the final distribution will be made only upon
surrender and cancellation of the Certificates at an office or agency
appointed by the Trustee which will be specified in the notice of
termination. If the Certificateholders are permitted to terminate the
trust under the applicable Pooling and Servicing Agreement, a penalty
may be imposed upon the Certificateholders based upon the fee that
would be foregone by the Master Servicer because of such termination.
Any option to purchase described in the second item above will be limited
to cases in which the aggregate Stated Principal Balance of the remaining
Mortgage Loans is less than or equal to ten percent (10%) of the initial
aggregate Stated Principal Balance of the Mortgage Loans.
Any purchase of Mortgage Loans and property acquired from the Mortgage
Loans evidenced by a series of Certificates shall be made at the option of the
Master Servicer, the Depositor or, if applicable, the holder of the
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REMIC Residual Certificates at the price specified in the related Prospectus
Supplement. The exercise of such right will effect early retirement of the
Certificates of that series, but the right of any such entity to purchase the
Mortgage Loans and related property will be subject to the criteria, and will be
at the price set forth in the related Prospectus Supplement. Such early
termination may adversely affect the yield to holders of certain classes of such
Certificates. If a REMIC election has been made, the termination of the related
Trust will be effected in a manner consistent with applicable federal income tax
regulations and its status as a REMIC.
The Trustee
The Trustee under each Pooling and Servicing Agreement will be named in
the related Prospectus Supplement. The commercial bank or trust company serving
as Trustee may have normal banking relationships with the Depositor and/or its
affiliates, including Residential Funding.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor trustee. The Depositor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement or if the Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Depositor will be obligated to appoint
a successor Trustee. The Trustee may also be removed at any time by the holders
of Certificates evidencing not less than 51% of the aggregate voting rights in
the related Trust. Any resignation or removal of the Trustee and appointment of
a successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a Certificate will depend on the price paid by
the holder for the Certificate, the Pass-Through Rate on any Certificate
entitled to payments of interest, which Pass-Through Rate may vary if so
specified in the related Prospectus Supplement, and the rate and timing of
principal payments (including payments in excess of required installments,
prepayments or terminations, liquidations and repurchases) on the Mortgage Loans
and the rate and timing of Draws in the case of Revolving Credit Loans and the
allocation of principal payments to reduce the principal balance of the
Certificate (or notional amount thereof, if applicable).
The amount of interest payments on a Mortgage Loan distributed (or accrued
in the case of Deferred Interest or Accrual Certificates) monthly to holders of
a class of Certificates entitled to payments of interest will be calculated on
the basis of such class's specified percentage of each such payment of interest
(or accrual in the case of Accrual Certificates) and will be expressed as a
fixed, adjustable or variable Pass-Through Rate payable on the outstanding
principal balance or notional amount of such Certificate, or any combination of
such Pass-Through Rates, calculated as described in this Prospectus and in the
related Prospectus Supplement. See "Description of the Certificates
- --Distributions." Holders of Strip Certificates or a class of Certificates
having a Pass-Through Rate that varies based on the weighted average Mortgage
Rate of the underlying Mortgage Loans will be affected by disproportionate
prepayments and repurchases of Mortgage Loans having higher Net Mortgage Rates
or rates applicable to the Strip Certificates, as applicable.
The effective yield to maturity to each holder of Certificates entitled to
payments of interest will be below that otherwise produced by the applicable
Pass-Through Rate and purchase price of the Certificate to the extent that
interest accrues on each Mortgage Loan during the calendar month or a period
preceding a Distribution Date instead of through the day immediately preceding
the Distribution Date.
A class of Certificates may be entitled to payments of interest at a
variable or adjustable Pass-Through Rate, or any combination of such
Pass-Through Rates, as specified in the related Prospectus Supplement. A
variable Pass-Through Rate may be calculated based on the weighted average of
the Mortgage Rates, net of Servicing Fees and any Excess Spread or Excluded
Spread, of the related Mortgage Loans (the "Net Mortgage Rate") or certain
balances thereof for the month preceding the Distribution Date, by reference to
an index or otherwise. The aggregate payments of interest on a class of
Certificates, and the yield to maturity thereon, will be affected by the rate of
payment of principal on the Certificates, or the rate of reduction in the
notional amount of Certificates entitled to payments of interest only and, in
the case of Certificates evidencing interests in ARM Loans, by changes in the
Net
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Mortgage Rates on the ARM Loans. The yield on the Certificates will also be
affected by liquidations of Mortgage Loans following Mortgagor defaults and by
purchases of Mortgage Loans in the event of certain breaches of representations
made in respect of such Mortgage Loans, or conversions of ARM Loans to a fixed
interest rate. See "Mortgage Loan Program -- Representations Relating to
Mortgage Loans" and "Description of the Certificates --Assignment of Trust
Assets" above. In addition, if the index used to determine the Pass-Through Rate
for the Certificates is different than the Index applicable to the Mortgage
Rates, the yield on the Certificates will be sensitive to changes in the index
related to the Pass-Through Rate and the yield on the Certificates may be
reduced by application of a cap on the Pass-Through Rate based on the weighted
average of the Net Mortgage Rates or such other formulas as may be described in
the related Prospectus Supplement.
In general, if a Certificate is purchased at a premium over its face
amount and distributions of principal on the Certificate occur at a rate faster
than anticipated at the time of purchase, the purchaser's actual yield to
maturity will be lower than that assumed at the time of purchase. Conversely, if
a Certificate is purchased at a discount from its face amount and distributions
of principal on the Certificate occur at a rate slower than that assumed at the
time of purchase, the purchaser's actual yield to maturity will be lower than
that originally anticipated. If Strip Certificates are issued evidencing a right
to payments of interest only or disproportionate payments of interest, a faster
than expected rate of principal payments on the Mortgage Loans (net of Draws if
applicable) will negatively affect the total return to investors in any
Certificates. The yield on a class of Strip Certificates that is entitled to
receive payments of interest only will nevertheless be affected by any losses on
the related Mortgage Loans because of the effect on the timing and amount of
payments. In some circumstances, rapid principal payments on the Mortgage Loans
(net of Draws if applicable) may result in the failure of such holders to recoup
their original investment. If Strip Certificates are issued evidencing a right
to payments of principal only or disproportionate payments of principal, a
slower than expected rate of principal payments on the Mortgage Loans (net of
Draws if applicable) could negatively affect the anticipated yield on such Strip
Certificates. In addition, the total return to investors of Certificates
evidencing a right to distributions of interest at a rate that is based on the
weighted average Net Mortgage Rate of the Mortgage Loans from time to time will
be adversely affected by principal payments on Mortgage Loans with Mortgage
Rates higher than the weighted average Mortgage Rate on the Mortgage Loans. In
general, mortgage loans with higher Mortgage Rates or Gross Margins are likely
to prepay at a faster rate than mortgage loans with lower Mortgage Rates or
Gross Margins. In addition, the yield to maturity on certain other types of
classes of Certificates, including Accrual Certificates, Certificates with a
Pass-Through Rate that fluctuates inversely with or at a multiple of an index or
certain other classes in a series including more than one class of Certificates,
may be relatively more sensitive to the rate of principal payments on the
related Mortgage Loans (net of Draws if applicable) than other classes of
Certificates.
The timing of changes in the rate of principal distributions on a
Certificate may significantly affect an investor's actual yield to maturity,
even if the average rate of principal distributions experienced over time is
consistent with an investor's expectation. In general, the earlier a
distribution of principal on a Certificate, the greater will be the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal distributions occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of a series of Certificates would not be fully offset by a subsequent like
reduction (or increase) in the rate of principal distributions.
Unless otherwise specified in the related Prospectus Supplement,
prepayments in full or final liquidations of Closed-End Loans will reduce the
amount of interest distributed in the following month to holders of Certificates
entitled to distribution of interest because the resulting Prepayment Interest
Shortfall will not be covered by Compensating Interest. See "Description of the
Certificates -- Principal and Interest on the Certificates." Unless otherwise
specified in the related Prospectus Supplement, a partial prepayment of
principal of a Closed-End Loan is applied so as to reduce the outstanding
principal balance thereof as of the first day of the month in which such partial
prepayment is received. As a result, the effect of a partial prepayment on a
Closed-End Loan generally will be to reduce the amount of interest distributed
to holders of Certificates in the month following the receipt of such partial
prepayment by an amount equal to one month's interest at the applicable
Pass-Through Rate or Net Mortgage Rate, as the case may be, on the prepaid
amount. See "Description of the Certificates -- Payment on Mortgage Loans;
Deposits to Certificate Account." Neither full nor partial principal prepayments
on Closed-End Loans will be distributed until the Distribution Date in the month
following receipt.
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The rate and timing of defaults on the Mortgage Loans will also affect the
rate and timing of principal payments on the Mortgage Loans and thus the yield
on the related Certificates. There can be no assurance as to the rate of losses
or delinquencies on any of the Mortgage Loans, however, such losses and
delinquencies may be expected to be higher than those of traditional first lien
mortgage loans. To the extent that any losses are incurred on any of the
Mortgage Loans that are not covered by the applicable credit enhancement,
holders of Certificates of the series evidencing interests in the related
Mortgage Pool (or certain classes thereof) will bear all risk of such losses
resulting from default by Mortgagors. Even where the applicable credit
enhancement covers all losses incurred on the Mortgage Loans, the effect of
losses may be to increase prepayment experience on the Mortgage Loans, thus
reducing average weighted life and affecting yield to maturity.
With respect to some Mortgage Loans (including ARM Loans and Revolving
Credit Loans), the Mortgage Rate at origination may be below the rate that would
result from the sum of the then-applicable Index and Gross Margin. Under the
applicable underwriting standards, Mortgagors under Closed-End Loans generally
will be qualified on the basis of the Mortgage Rate in effect at origination,
and Mortgagors under Revolving Credit Loans are generally qualified based on an
assumed payment which reflects a rate significantly lower than the maximum rate.
The repayment of any Mortgage Loan may thus be dependent on the ability of the
mortgagor to make larger interest payments following the adjustment of the
Mortgage Rate.
With respect to some Closed-End Loans that permit negative amortization,
during a period of rising interest rates as well as immediately after
origination, that portion of the interest currently accruing thereon but not
currently payable will become Deferred Interest which will be added to the
principal balance thereof and will bear interest at the applicable Mortgage
Rate. The addition of any Deferred Interest to the principal balance of any
related class of Certificates will lengthen the weighted average life thereof
and may adversely affect yield to holders thereof. Unless otherwise specified in
the related Prospectus Supplement, Revolving Credit Loans will not be subject to
negative amortization.
Except for certain programs under which the Draw Period is less than the
full term thereof, required minimum monthly payments are generally equal to or
not significantly larger than the amount of interest currently accruing thereon,
and therefore are not expected to significantly amortize the outstanding
principal amounts of such Mortgage Loans prior to maturity, which amounts may
include substantial Draws recently made. As a result, a borrower will generally
be required to pay a substantial principal amount at the maturity of a Revolving
Credit Loan. Alternatively, a pool of Closed-End Loans may include Balloon Loans
which require a single payment at maturity. Such Mortgage Loans pose a greater
risk of default than fully-amortizing Mortgage Loans, because the Mortgagor's
ability to make such a substantial payment at maturity will generally depend on
the Mortgagor's ability to obtain refinancing of such Mortgage Loans or to sell
the Mortgaged Property prior to the maturity of the Balloon Loan. The ability to
obtain refinancing will depend on a number of factors prevailing at the time
refinancing or sale is required, including, without limitation, the Mortgagor's
personal economic circumstances, the Mortgagor's equity in the related Mortgaged
Property, real estate values, prevailing market interest rates, tax laws and
national and regional economic conditions. Neither the Depositor, Residential
Funding, GMAC Mortgage nor any of their affiliates will be obligated to
refinance or repurchase any Mortgage Loan or to sell any Mortgaged Property,
unless such obligation is specified in the Prospectus Supplement.
For any Mortgage Loans secured by junior mortgages, any inability of the
Mortgagor to pay off the balance thereof may also affect the ability of the
Mortgagor to obtain refinancing at any time of any related senior mortgage loan,
thereby preventing a potential improvement in the Mortgagor's circumstances.
Furthermore, if so specified in the related Prospectus Supplement, under the
applicable Pooling and Servicing Agreement the Master Servicer may be restricted
or prohibited from consenting to any refinancing of any related senior mortgage
loan, which in turn could adversely affect the Mortgagor's circumstances or
result in a prepayment or default under the corresponding junior Mortgage Loan.
In addition to the Mortgagor's personal economic circumstances, a number
of factors, including homeowner mobility, job transfers, changes in the
Mortgagor's housing needs, the Mortgagor's net equity in the Mortgaged Property,
changes in the value of the Mortgaged Property, national and regional economic
conditions, enforceability
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of due-on-sale clauses, prevailing market interest rates, servicing decisions,
solicitations and the availability of mortgage funds, seasonal purchasing and
payment habits of borrowers or changes in the deductibility for federal income
tax purposes of interest payments on home equity loans, may affect the rate and
timing of principal payments or Draws, if applicable, on the Mortgage Loans.
There can be no assurance as to the rate of principal payments on the Mortgage
Loans, and there can be no assurance of the rate of Draws on Revolving Credit
Loans. The rate of principal payments and the rate of Draws, if applicable, may
fluctuate substantially from time to time. Generally, home equity loans are not
viewed by mortgagors as permanent financing. Accordingly, Closed-End Loans may
experience a higher rate of prepayment than typical first lien mortgage loans.
On the other hand, for Revolving Credit Loans, due to the unpredictable nature
of both principal payments and Draws, the rates of principal payments net of
Draws for such loans may be much more volatile than for typical first lien
mortgage loans.
The yield to maturity of the Certificates of any series, or the rate and
timing of principal payments or Draws, if applicable, on the related Mortgage
Loans, may also be affected by a wide variety of specific terms and conditions
applicable to the respective programs under which the Mortgage Loans were
originated. For example, Revolving Credit Loans may provide for future Draws to
be made only in specified minimum amounts, or alternatively may permit Draws to
be made by check or through a credit card in any amount. A pool of Revolving
Credit Loans subject to the latter provisions may be likely to remain
outstanding longer with a higher aggregate principal balance than a pool of
Revolving Credit Loans with the former provisions, because of the relative ease
of making new Draws. Furthermore, Revolving Credit Loans may provide for
interest rate changes on a daily or monthly basis, or may have Gross Margins
that may vary under certain circumstances over the term of the loan. In
extremely high market interest rate scenarios, Certificates backed by Revolving
Credit Loans with adjustable rates subject to substantially higher maximum rates
than typically apply to adjustable rate first mortgage loans may experience
rates of default and liquidation substantially higher than those that have been
experienced on other adjustable rate mortgage loan pools.
The yield to maturity of the Certificates of any series, or the rate and
timing of principal payments, or Draws if applicable, on the related Mortgage
Loans and corresponding distributions on the Certificates, will also be affected
by the specific terms and conditions applicable to the Certificates. For
example, if the index used to determine the Pass-Through Rates for a series of
Certificates is different from the Index applicable to the Mortgage Rates of the
underlying Mortgage Loans, the yield on the Certificates may be reduced by
application of a cap on the Pass-Through Rates based on the weighted average of
the Mortgage Rates. Depending on applicable cash flow allocation provisions,
changes in the relationship between the two indexes may also affect the timing
of certain principal distributions on the Certificates, or may affect the amount
of any Overcollateralization (or the amount on deposit in any Reserve Fund)
which could in turn accelerate the distribution of principal on the Certificates
if so provided in the Prospectus Supplement. For any series of Certificates
backed by Revolving Credit Loans, provisions governing whether future Draws on
the Revolving Credit Loans will be included in the Trust will have a significant
effect on the rate and timing of principal distributions on the Certificates.
For a series of Certificates backed by the Trust Balances of Revolving Credit
Loans, the specific provisions applicable to the allocation of payments, Draws
and losses on the Revolving Credit Loans between the Trust Balances and the
Excluded Balances thereof will also have a significant effect on the rate and
timing of principal distributions on the Certificates. See "Allocation of
Revolving Credit Loan Balances" in this Prospectus.
For a series of Certificates backed by Revolving Credit Loans, as a result
of the payment terms of the Mortgage Loans or of the Certificate provisions
relating to future Draws, there may be no principal distributions on such
Certificates in any given month. In addition, it is possible that the aggregate
Draws on Revolving Credit Loans included in a Mortgage Pool may exceed the
aggregate payments with respect to principal on such Revolving Credit Loans for
the related period.
Unless otherwise specified in the related Prospectus Supplement, all
Revolving Credit Loans and all Closed-End Loans (other than ARM Loans) will
contain due-on-sale provisions permitting the mortgagee to accelerate the
maturity of the Mortgage Loan upon sale or certain transfers by the Mortgagor of
the underlying Mortgaged Property. Unless the related Prospectus Supplement
indicates otherwise, the Master Servicer will generally enforce any due-on-sale
clause to the extent it has knowledge of the conveyance or proposed conveyance
of the underlying Mortgaged Property and it is entitled to do so under
applicable law, provided, however, that the Master Servicer will not take any
action in relation to the enforcement of any due-on-sale provision which would
adversely affect or jeopardize
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coverage under any applicable insurance policy. An ARM Loan is generally
assumable under certain conditions if the proposed transferee of the related
Mortgaged Property establishes its ability to repay the Mortgage Loan and, in
the reasonable judgment of the Master Servicer or the related Subservicer, the
security for the ARM Loan would not be impaired by the assumption. The extent to
which ARM Loans are assumed by purchasers of the Mortgaged Properties rather
than prepaid by the related Mortgagors in connection with the sales of the
Mortgaged Properties may affect the weighted average life of the related series
of Certificates. See "Description of the Certificates --Collection and Other
Servicing Procedures" and "Certain Legal Aspects of the Mortgage Loans and
Related Matters -- Enforceability of Certain Provisions" for a description of
certain provisions of the Pooling and Servicing Agreement and certain legal
developments that may affect the prepayment experience on the Mortgage Loans.
In addition, certain Mortgage Securities included in a Mortgage Pool may
be backed by underlying Mortgage Loans having differing interest rates.
Accordingly, the rate at which principal payments are received on the related
Certificates will, to a certain extent, depend on the interest rates on such
underlying Mortgage Loans.
A Subservicer or the Master Servicer may, from time to time, implement
refinancing or modification programs designed to encourage refinancing. A
Subservicer or the Master Servicer, including an affiliate of the Master
Servicer, may also aggressively pursue refinancing or loan modification programs
that could require little or no cost and significantly decreased documentation
from the borrower. Such programs may include, without limitation, 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, the location of the mortgaged property, or the Subservicer's or Master
Servicer's judgment as to the likelihood of a borrower refinancing. In addition,
Subservicers or the Master Servicer may encourage assumptions of Mortgage Loans,
including defaulted Mortgage Loans, under which creditworthy borrowers assume
the outstanding indebtedness of such Mortgage Loans which may be removed from
the related Mortgage Pool. As a result of these programs, with respect to the
Mortgage Pool underlying any Trust (i) the rate of principal prepayments of the
Mortgage Loans in the Mortgage Pool may be higher than would otherwise be the
case, (ii) the average credit or collateral quality of the Mortgage Loans
remaining in the Mortgage Pool may decline and (iii) weighted average interest
rate on the Mortgage Loans that remain in the Trust may be lower, thus reducing
the rate of prepayments on the Mortgage Loans in the future. In addition, a
Subservicer may allow the refinancing of a Mortgage Loan by accepting prepayment
thereon and permitting a new loan or contract 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 or contract would not be included in the
related Trust and, therefore, the refinancing would have the same effect as a
prepayment in full of the related Mortgage Loan.
If the Pooling and Servicing Agreement for a series of Certificates
provides for a Funding Account or other means of funding the transfer of
additional Mortgage Loans to the related Trust, as described under "Description
of the Certificates; Funding Account" in this Prospectus, and the Trust is
unable to acquire such additional Mortgage Loans within any applicable time
limit, the amounts set aside for such purpose may be applied as principal
distributions on one or more classes of Certificates of such series.
Although the Mortgage Rates on Revolving Credit Loans and ARM Loans will
be subject to periodic adjustments, such adjustments generally (i) as to ARM
Loans will not increase or decrease the Mortgage Rates by more than a fixed
percentage amount on each adjustment date, (ii) will not increase the Mortgage
Rates over a fixed maximum rate during the life of any Revolving Credit Loan or
ARM Loan and (iii) will be based on an Index (which may not rise and fall
consistently with prevailing market interest rates) plus the related Gross
Margin (which may vary under certain circumstances, and which may be different
from margins being used at the time for newly originated adjustable rate
mortgage loans). As a result, the Mortgage Rates on the Revolving Credit Loans
or ARM Loans in any Mortgage Pool at any time may not equal the prevailing rates
for similar, newly originated adjustable rate home equity mortgage loans or
lines of credit, and accordingly the rate of principal payments (and Draws if
applicable) may be lower or higher that would otherwise be anticipated. In
certain rate environments, the prevailing rates on fixed-rate mortgage loans may
be sufficiently low in relation to the then-current Mortgage Rates on Revolving
Credit Loans or ARM Loans that the rate of prepayment may increase as a result
of refinancings. There
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can be no certainty as to the rate of principal payments (or Draws if
applicable) on the Mortgage Loans during any period or over the life of any
series of Certificates.
With respect to any index used in determining the Pass-Through Rates for a
series of Certificates or Mortgage Rates of the underlying Mortgage Loans, a
number of factors affect the performance of the index and may cause the index to
move in a manner different from other indices. To the extent that the index may
reflect changes in the general level of interest rates less quickly than other
indices, in a period of rising interest rates, increases in the yield to
Certificateholders due to the rising interest rates may occur later than that
which would be produced by other indices, and in a period of declining rates,
the index may remain higher than other market interest rates which may result in
a higher level prepayments of the Mortgage Loans, which adjust in accordance
with the index, than of mortgage loans which adjust in accordance with other
indices.
Under some circumstances, the Master Servicer, the Depositor or, if
specified in the related Prospectus Supplement, the holders of the REMIC
Residual Certificates may have the option to purchase the Mortgage Loans in a
Trust, thus resulting in the early retirement of the related Certificates. See
"The Pooling and Servicing Agreement -- Termination; Retirement of
Certificates."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS
The following discussion contains summaries of various legal aspects of
mortgage loans that are general in nature. Because those legal aspects are
governed in part by state law, and laws may differ substantially from state to
state, the summaries do not purport to be complete, to reflect the laws of any
particular state or to encompass the laws of all states in which the Mortgaged
Properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
General
The Mortgage Loans, other than Cooperative Loans, will be secured by 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. In
some states, a mortgage, deed of trust or deed to secure debt creates a lien
upon the real property encumbered by the mortgage, deed of trust or deed to
secure debt. Those instruments are not prior to the lien for real estate taxes
and assessments and other charges imposed under governmental police powers.
Priority with respect to those instruments depends on their terms and in some
cases on the terms of separate subordination or inter-creditor agreements, and
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 some
states, three parties may be involved in a mortgage financing when title to the
property is held by a land trustee who is the land trustee under a land trust
agreement of which the borrower is the beneficiary; at origination of a mortgage
loan, the land trustee, as fee owner of the property, executes the mortgage and
the borrower executes (1) a separate undertaking to make payments on the
mortgage note and (2) an assignment of leases and rents. 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, typically
with a power of sale, to the trustee to secure payment of the obligation. A deed
to secure debt typically has two parties, under which the borrower, or grantor,
conveys title to the real property to the grantee, or lender, typically with a
power of sale, until the time when the debt is repaid. 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, mortgage or deed to secure debt and, in certain deed of trust,
transactions, the directions of the beneficiary.
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Cooperative Loans
If specified in the Prospectus Supplement relating to a series of
Certificates, the Mortgage Loans may include Cooperative Loans. Each debt
instrument (a "Cooperative Note") evidencing a Cooperative Loan will be secured
by a security interest in shares issued by the related corporation (a
"Cooperative") that owns the related apartment building, which is a corporation
entitled to be treated as a housing cooperative under federal tax law, and in
the related proprietary lease or occupancy agreement granting exclusive rights
to occupy a specific dwelling unit in the Cooperative's building. The security
agreement will create a lien upon, or grant a security interest in, the
Cooperative shares and proprietary leases or occupancy agreements, 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 the filing of the financing statements related thereto, in the
appropriate recording office or the taking of possession of the Cooperative
shares, depending on the law of the state in which the Cooperative is located.
This type of lien or security interest is not, in general, prior to liens in
favor of the cooperative corporation for unpaid assessments or common charges.
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 in the building. 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 typically the case, or an underlying lease of the land, as is the
case in some instances, the Cooperative, as mortgagor or lessee, as the case may
be, is also responsible for fulfilling the 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 the 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 lender who financed the purchase by an
individual tenant-stockholder of shares of the Cooperative or, in the case of
the Mortgage Loans, the collateral securing the Cooperative Loans.
Each Cooperative is owned by shareholders, referred to as
tenant-stockholders, who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. Generally, a tenant-stockholder
of a Cooperative must make a monthly rental payment to the Cooperative under the
proprietary lease, which rental payment represents the 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 lender typically 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 lender'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
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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 various interest expenses and 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 those items
are allowable as a deduction to the corporation, the 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 this section
for any particular year. In the event that this type of 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 this type of failure would be permitted to
continue over a period of years appears remote.
Foreclosure on Mortgage Loans
Although a deed of trust or a deed to secure debt may also be foreclosed
by judicial action, foreclosure of a deed of trust or a deed to secure debt is
typically accomplished by a non-judicial trustee's or grantee's, as applicable,
sale under a specific provision in the deed of trust or a deed to secure debt
which authorizes the trustee or grantee, as applicable, to sell the property
upon any default by the borrower under the terms of the note or deed of trust or
deed to secure debt. In addition to any notice requirements contained in a deed
of trust or a deed to secure debt, in some states, prior to a sale the trustee,
or grantee, as applicable, 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 the
sale, the trustee or grantee, as applicable, 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 or deed to secure debt 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 those states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
Foreclosure of a mortgage generally is accomplished by judicial action. In
most cases, 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 and
serving necessary parties, including borrowers located outside the jurisdiction
in which the mortgaged property is located. 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 a mortgage, a deed of trust or a deed to
secure debt, the sale by the referee or other designated officer or by the
trustee or grantee, as applicable, is 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, or grantee,
as applicable, for a credit bid less than or equal to the unpaid principal
amount
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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 the 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 in most
cases, 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 repairs at its own
expense that are necessary to render the property suitable for sale. In most
cases, 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. In some cases, a deficiency judgment
may be pursued in lieu of foreclosure. Any loss may be reduced by the receipt of
any mortgage insurance proceeds or other forms of credit enhancement for a
series of Certificates. See "Description of Credit Enhancement."
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure by a junior
mortgagee triggers the enforcement of a "due-on-sale" clause in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees to avoid foreclosure. Accordingly,
with respect to those Mortgage Loans which are junior mortgage loans, if the
lender purchases the property, the lender's title will be subject to all senior
liens and claims and some 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 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 payable to the mortgagor or trustor.
The payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee or may require the institution of
separate legal proceedings. See "Risk Factors -- Special Features of the
Mortgage Loans" and "Description of the Certificates -- Realization Upon
Defaulted Mortgage Loans" in this Prospectus.
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 described 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 canceled by the Cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by the tenant-stockholder, including
mechanics' liens against the Cooperative's building incurred by the
tenant-stockholder.
In most cases, rent and other obligations and charges arising under a
proprietary lease or occupancy agreement which are owed to the Cooperative are
made liens upon the shares to which the proprietary lease or occupancy agreement
relates. In addition, the proprietary lease or occupancy agreement generally
permits the Cooperative to terminate the 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.
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The recognition agreement 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 the 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 the 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 typically 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 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 and/or assigning the proprietary lease. This 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. In most cases, 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, 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
responsible for the deficiency. See " -- Anti-Deficiency Legislation and Other
Limitations on Lenders' below.
Rights of Redemption
In some states, after sale under a deed of trust or a deed to secure debt
or foreclosure of a mortgage, the borrower and foreclosed junior lienors or
other parties are given a statutory period, typically 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 or a deed to secure debt. 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.
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Anti-Deficiency Legislation and Other Limitations on Lenders
Some states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust, a mortgagee under a mortgage or a
grantee under a deed to secure debt. In some states, including California,
statutes limit the right of the beneficiary, mortgagee or grantee to obtain a
deficiency judgment against the borrower following foreclosure. A deficiency
judgment is a personal judgment against the former borrower equal in most cases
to the difference between the net amount realized upon the public sale of the
real property and the amount due to the lender. In the case of a Mortgage Loan
secured by a property owned by a trust where the Mortgage Note is executed on
behalf of the trust, a deficiency judgment against the trust following
foreclosure or sale under a deed of trust or deed to secure debt, even if
obtainable under applicable law, may be of little value to the beneficiary,
grantee or mortgagee, if there are no trust assets against which the deficiency
judgment may be executed. Some state statutes require the beneficiary, grantee
or mortgagee to exhaust the security afforded under a deed of trust, deed to
secure debt or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower.
In other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting the security; however,
in some of these states, the lender, following judgment on the 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 this election, is that lenders
will usually proceed against the security first rather than bringing a personal
action against the borrower.
Finally, in 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, grantee, 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 various
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 relating to a
mortgage loan on the 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 arrearages 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. In most
cases, 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 under a
plan confirmed under 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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A number of tax liens arising under the Code may, in some circumstances,
have priority over the lien of a mortgage, deed to secure debt, or deed of
trust. This may have the effect of delaying or interfering with the enforcement
of rights with respect to a defaulted Mortgage Loan. In addition, substantive
requirements are imposed upon mortgage lenders in connection with the
origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
Some of the Mortgage Loans may be subject to special rules, disclosure
requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Homeownership and Equity Protection Act of 1994
(those Mortgage Loans, "High Cost Loans"), if those Mortgage Loans were
originated on or after October 1, 1995, are not mortgage loans made to finance
the purchase of the mortgaged property and have interest rates or origination
costs in excess of prescribed levels. Purchasers or assignees of any High Cost
Loan, including any Trust, could be liable for all claims and subject to all
defenses arising under these provisions that the borrower could assert against
the originator of the High Cost Loan. 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 some 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 some 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 evidence 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 some 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. These cleanup costs may be substantial. It is possible that
these cleanup costs could become a liability of a Trust and reduce the amounts
otherwise distributable to the holders of the related series of Certificates.
Moreover, a number of federal statutes and some states by statute
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impose a lien for any cleanup costs incurred by that state on the property that
is the subject of the cleanup costs (an "Environmental Lien"). All subsequent
liens on that property usually are subordinated to this type of 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 this type of
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 Depositor has not made
and will not make any of these evaluations prior to the origination of the
Secured Contracts. Neither the Depositor nor any replacement Servicer will be
required by any Agreement to undertake any of these evaluations prior to
foreclosure or accepting a deed-in-lieu of foreclosure. The Depositor 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
Depositor 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 the property. A failure so to foreclose may
reduce the amounts otherwise available to Certificateholders of the related
series.
Enforceability of Certain Provisions
The Mortgage Loans in most cases contain due-on-sale clauses. These
clauses permit the lender 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 a
number of exceptions, preempts state constitutional, statutory and case 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, various 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 under a
due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, which may have an impact upon the
average life of the Mortgage Loans and the number of Mortgage Loans which may be
outstanding until maturity.
Forms of notes and mortgages used by lenders may contain provisions
obligating the borrower to pay a late charge or additional interest if payments
are not timely made, and in some circumstances may provide for prepayment fees
or yield maintenance penalties if the obligation is paid prior to maturity. In a
number of states, there are or may be specific limitations upon the late charges
which a lender may collect from a borrower for delinquent payments. Some states
also limit the amounts that a lender may collect from a borrower as an
additional charge if the loan is prepaid. In addition, the enforceability of
provisions that provide for prepayment fees or penalties upon an involuntary
prepayment is unclear under the laws of many states. Most conventional
single-family mortgage loans may be prepaid in full or in part without penalty.
The regulations of the Federal Home Loan Bank Board, as succeeded by the Office
of Thrift Supervision ("OTS"), prohibit the imposition of a prepayment penalty
or equivalent fee for or in connection with the acceleration of a loan by
exercise of a due-on-sale clause. A mortgagee to whom a prepayment in full has
been tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly with respect to Mortgage Loans having higher mortgage
rates, may increase the likelihood of refinancing or other early retirements of
the Mortgage Loans.
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In foreclosure actions, courts have imposed general equitable principles.
These equitable principles are 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, deed to secure
debt, 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 a grantee under a deed to secure debt or a mortgagee having a power of sale,
does not involve sufficient state action to afford constitutional protections to
the borrower.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V"), provides that state usury limitations shall not apply
to various types of residential first mortgage loans, including cooperative
loans originated by various 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 OTS 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. Some states have taken action to
reimpose interest rate limits or to limit discount points or other charges.
Usury limits apply to junior mortgage loans in many states. Any applicable
usury limits in effect at origination will be reflected in the maximum Mortgage
Rates for Revolving Credit Loans and ARM Loans, as set forth in the related
Prospectus Supplement.
Unless otherwise described in the related Prospectus Supplement, each
Seller of a Mortgage Loan will have represented that the Mortgage Loan was
originated in compliance with then applicable state laws, including usury laws,
in all material respects. However, the Mortgage Rates on the Mortgage Loans will
be subject to applicable usury laws as in effect from time to time.
Alternative Mortgage Instruments
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. These restrictions differed from state to state,
resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act ("Title VIII").
Title VIII provides that, notwithstanding any state law to the contrary, (i)
state-chartered banks may originate alternative mortgage instruments in
accordance with regulations promulgated by the Comptroller of the Currency with
respect to the origination of alternative mortgage instruments by national
banks, (ii) state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions and (iii) all other non-federally chartered
housing creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor to the
OTS, with respect to origination of alternative mortgage instruments by federal
savings and loan associations. Title VIII also provides that any state may
reject applicability
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of the provisions of Title VIII by adopting, prior to October 15, 1985, a law or
constitutional provision expressly rejecting the applicability of these
provisions. Some states have taken this action.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of the Mortgagor's Mortgage Loan, including a Mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan, may not be charged interest, including fees and charges, above an annual
rate of 6% during the period of the Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
Mortgagors who are members of the Air Force, Army, Marines, Navy, National
Guard, Reserves, Coast Guard, and officers of the U.S.
Public Health Service assigned to duty with the military.
Because the Relief Act applies to Mortgagors who enter military service,
including reservists who are called to active duty, after origination of the
related Mortgage Loan, no information can be provided as to the number of loans
that may be affected by the Relief Act. Application of the Relief Act would
adversely affect, for an indeterminate period of time, the ability of the Master
Servicer to collect full amounts of interest on those Mortgage Loans. Any
shortfall in interest collections resulting from the application of the Relief
Act or similar legislation or regulations, which would not be recoverable from
the related Mortgage Loans, would result in a reduction of the amounts
distributable to the holders of the related Certificates, and would not be
covered by Advances and may not be covered by the applicable form of credit
enhancement provided in connection with the related series of Certificates. In
addition, the Relief Act imposes limitations that would impair the ability of
the Master Servicer to foreclose on an affected Mortgage Loan during the
Mortgagor's period of active duty status, and, under a number of circumstances,
during an additional three month period thereafter. Thus, in the event that the
Relief Act or similar legislation or regulations applies to any Mortgage Loan
which goes into default, there may be delays in payment and losses on the
related Certificates in connection therewith. Any other interest shortfalls,
deferrals or forgiveness of payments on the Mortgage Loans resulting from
similar legislation or regulations may result in delays in payments or losses to
Certificateholders of the related series.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
Junior Mortgages; Rights of Senior Mortgagees
The Mortgage Loans or Mortgage Securities included in the Trust for a
series will be secured by mortgages or deeds of trust which are Revolving Credit
Loans or Closed-End Loans which may be junior to other mortgages or deeds of
trust held by other lenders or institutional investors. The rights of the Trust,
and therefore the Certificateholders, as mortgagee under a junior mortgage, are
subordinate to those of the mortgagee under the senior mortgage, including the
prior rights of the senior mortgagee to receive hazard insurance and
condemnation proceeds and to cause the property securing the Mortgage Loan to be
sold upon default of the mortgagor, which may extinguish the junior mortgagee's
lien unless the junior mortgagee asserts its subordinate interest in the
property in foreclosure litigation and, in a number of 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 the default and
bring the senior loan
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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 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 the proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in the 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 some mortgages or deeds of trust to perform the
obligation itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All
sums so expended by a senior mortgagee become part of the indebtedness secured
by the senior mortgage.
The form of credit line trust deed or mortgage used by most institutional
lenders which make Revolving Credit Loans typically contains a "future advance"
clause, which provides, in essence, that additional amounts advanced to or on
behalf of the borrower by the beneficiary or lender are to be secured by the
deed of trust or mortgage. The priority of the lien securing any advance made
under the clause may depend in most states on whether the deed of trust or
mortgage is designated as a credit line deed of trust or mortgage. If the
beneficiary or lender advances additional amounts, the advance is entitled to
receive the same priority as amounts initially advanced under the trust deed or
mortgage, notwithstanding the fact that there may be junior trust deeds or
mortgages and other liens which intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and notwithstanding
that the beneficiary or lender had actual knowledge of these 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.
Negative Amortization Loans
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980 ("DIDMC") and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The holding was limited to the effect of DIDMC on state laws regarding
the compounding of interest and the court did not address the applicability of
the Alternative Mortgage Transaction Parity Act of 1982, which authorizes a
lender to make residential mortgage loans that provide for negative
amortization. As a result, the enforceability of compound interest on mortgage
loans that provide for negative amortization is unclear. The First
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Circuit's decision is binding authority only on Federal District Courts in
Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Certificates offered by this Prospectus. This discussion has been prepared with
the advice of Thacher Proffitt & Wood, Orrick, Herrington & Sutcliffe LLP and
Stroock & Stroock & Lavan, counsel to the Depositor. This discussion is directed
solely to Certificateholders that hold the Certificates as capital assets within
the meaning of Section 1221 of the Code and does not purport to discuss all
federal income tax consequences that may be applicable to particular categories
of investors, some of which, including banks, insurance companies and foreign
investors, may be subject to special rules. Further, the authorities on which
this discussion, and the opinion referred to below, are based are subject to
change or differing interpretations, which could apply retroactively. Taxpayers
and preparers of tax returns, including those filed by any REMIC or other
issuer, should be aware that under applicable Treasury regulations a provider of
advice on specific issues of law is not considered an income tax return preparer
unless the advice (i) is given with respect to events that have occurred at the
time the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (ii) is directly relevant to the determination of an
entry on a tax return. Accordingly, taxpayers should consult their tax advisors
and tax return preparers regarding the preparation of any item on a tax return,
even where the anticipated tax treatment has been discussed in this Prospectus.
In addition to the federal income tax consequences described in this Prospectus,
potential investors should consider the state and local tax consequences, if
any, of the purchase, ownership and disposition of the Certificates. See "State
and Other Tax Consequences." Certificateholders are advised to consult their tax
advisors concerning the federal, state, local or other tax consequences to them
of the purchase, ownership and disposition of the Certificates offered by this
Prospectus.
Unless otherwise specified in the related Prospectus Supplement, as to
each series of Certificates, the Master Servicer will cause an election to be
made to have the related Trust treated as a REMIC under Sections 860A through
860G (the "REMIC Provisions") of the Code. If a REMIC election (or elections)
will be made for the related Trust, the related Prospectus Supplement for each
series of Certificates will identify all "regular interests" and "residual
interests" in the REMIC. If a REMIC election will not be made for a Trust, the
federal income tax consequences of the purchase, ownership and disposition of
the related Certificates will be described in the related Prospectus Supplement.
For purposes of this tax discussion, references to a "Certificateholder" or a
"holder" are to the beneficial owner of a Certificate.
The following discussion is based in part upon the rules governing
original issue discount that are described in Sections 1271-1273 and 1275 of the
Code and in the Treasury regulations issued thereunder (the "OID Regulations"),
and in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations, which are effective
with respect to debt instruments issued on or after April 4, 1994, do not
adequately address various issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
REMICS
Classification of REMICS
Upon the issuance of each series of REMIC Certificates, either Thacher
Proffitt & Wood, Orrick, Herrington & Sutcliffe LLP or Stroock & Stroock &
Lavan, counsel to the Depositor, will deliver its opinion to the effect that,
assuming compliance with all provisions of the related Pooling and Servicing
Agreement, the related Trust, or each applicable portion thereof, will qualify
as a REMIC and the REMIC Certificates offered with respect thereto will be
considered to evidence ownership of "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual Certificates") in that
REMIC within the meaning of the REMIC Provisions.
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If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for this status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for that
year and thereafter. In that event, the entity may be taxable as a separate
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described below. Although
the Code authorizes the Treasury Department to issue regulations providing
relief in the event of an inadvertent termination of REMIC status, no
regulations have been issued. Any relief, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
Trust's income for the period in which the requirements for that status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC will
include provisions designed to maintain the Trust's status as a REMIC under the
REMIC Provisions. It is not anticipated that the status of any Trust as a REMIC
will be terminated.
In general, a Swap or Yield Supplement Agreement may not be an asset of a
REMIC. If a Trust of a particular series contains a Swap or Yield Supplement
Agreement, the related Prospectus Supplement will disclose the tax treatment of
such an arrangement.
Characterization of Investments in REMIC Certificates
In general, the REMIC Certificates will be "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
underlying the Certificates would be so treated. Moreover, if 95% or more of the
assets of the REMIC qualify for any of the foregoing treatments at all times
during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and income
allocated to the class of REMIC Residual Certificates will be interest described
in Section 856(c)(3)(B) of the Code to the extent that those Certificates are
treated as "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code. In addition, the REMIC Regular Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code if transferred
to another REMIC on its startup day in exchange for regular or residual
interests in that REMIC. The determination as to the percentage of the REMIC's
assets that constitute assets described in the foregoing sections of the Code
will be made with respect to each calendar quarter based on the average adjusted
basis of each category of the assets held by the REMIC during that calendar
quarter. The Master Servicer will report those determinations to
Certificateholders in the manner and at the times required by applicable
Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale, and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether the assets, to the extent not invested in assets
described in the foregoing sections, otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. In
addition, in some instances Mortgage Loans may not be treated entirely as assets
described in the foregoing sections. The REMIC Regulations do provide, however,
that payments on Mortgage Loans held pending distribution are considered part of
the Mortgage Loans for purposes of Section 856(c)(4)(A) of the Code.
Furthermore, foreclosure property will qualify as "real estate assets" under
Section 856(c)(4)(A) of the Code.
Tiered REMIC Structures
For some series of REMIC Certificates, two or more separate elections may
be made to treat designated portions of the related Trust as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of this type of
series of REMIC Certificates, Thacher Proffitt & Wood, Orrick, Herrington &
Sutcliffe LLP, or Stroock & Stroock & Lavan, counsel to the Depositor, will
deliver their opinion to the effect that, assuming compliance with all
provisions of the related Pooling and Servicing Agreement, the Tiered REMICs
will each qualify as a REMIC and the REMIC Certificates issued by the Tiered
REMICs, respectively, will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
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Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on the Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of REMIC Regular Certificates
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Some REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount typically will be
required to include original issue discount in income as it accrues, in
accordance with the method described below, in advance of the receipt of the
cash attributable to that income. In addition, Section 1272 (a)(6) of the Code
provides special rules applicable to REMIC Regular Certificates and various
other debt instruments issued with original issue discount. Regulations have not
been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of the discount to reflect
differences between the actual prepayment rate and the prepayment assumption.
The prepayment assumption is to be determined in a manner prescribed in Treasury
regulations; as noted above, those regulations have not been issued. The
Conference Committee Report (the "Committee Report") accompanying the Tax Reform
Act of 1986, indicates that the regulations will provide that the prepayment
assumption used with respect to a REMIC Regular Certificate must be the same as
that used in pricing the initial offering of the REMIC Regular Certificate. The
prepayment assumption used by the Master Servicer in reporting original issue
discount for each series of REMIC Regular Certificates (the "Prepayment
Assumption") will be consistent with this standard and will be disclosed in the
related Prospectus Supplement. However, neither the Depositor nor the Master
Servicer will make any representation that the Mortgage Loans will in fact
prepay at a rate conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will
be the excess of its stated redemption price at maturity over its issue price.
The issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for the class will be treated as the fair
market value of that class on the Closing Date. Under the OID Regulations, the
stated redemption price of a REMIC Regular Certificate is equal to the total of
all payments to be made on that Certificate other than "qualified stated
interest." "Qualified stated interest" includes interest that is unconditionally
payable at least annually at a single fixed rate, or in the case of a variable
rate debt instrument, at a "qualified floating rate," an "objective rate," a
combination of a single fixed rate and one or more "qualified floating rates" or
one "qualified inverse floating rate," or a combination of "qualified floating
rates" that generally does not operate in a manner that accelerates or defers
interest payments on a REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion of the original issue discount will vary according to
the characteristics of the REMIC Regular Certificates. In general terms,
original issue discount is accrued by treating the interest rate of the
Certificates as fixed and making adjustments to reflect actual interest rate
adjustments.
Some classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to their Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" 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
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period," some or all interest payments may be required to be included in the
stated redemption price of the REMIC Regular Certificate and accounted for as
original issue discount. Because interest on REMIC Regular Certificates must in
any event be accounted for under an accrual method, applying this analysis would
result in only a slight difference in the timing of the inclusion in income of
the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect the accrued interest. In these cases, information returns to the
Certificateholders and the IRS will be based on the position that the portion of
the purchase price paid for the interest accrued with respect to periods prior
to the Closing Date is treated as part of the overall purchase price of the
REMIC Regular Certificate, and not as a separate asset the purchase price of
which is recovered entirely out of interest received on the next Distribution
Date, and that portion of the interest paid on the first Distribution Date in
excess of 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 the REMIC Regular Certificate. However, the OID
Regulations state that all or some portion of the 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 that election could be
made unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC Regular Certificate will be considered to be
de minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average maturity. For this
purpose, the weighted average maturity of the REMIC Regular Certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of the REMIC Regular Certificate, by multiplying (i)
the number of complete years, rounding down for partial years, from the issue
date until the payment is expected to be made, presumably taking into account
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of the payment, and the denominator of which is the stated redemption
price at maturity of the REMIC Regular Certificate. Under the OID Regulations,
original issue discount of only a de minimis amount, other than de minimis
original issue discount attributable to a so-called "teaser" interest rate or an
initial interest holiday, will be included in income as each payment of stated
principal is made, based on the product of the total amount of the de minimis
original issue discount and a fraction, the numerator of which is the amount of
the principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "Taxation
of Owners of REMIC Regular Certificates -- Market Discount" for a description of
that election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of
a de minimis amount, the holder of the Certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for each
day during its taxable year on which it held the REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to a Distribution Date and begins on the first day following the immediately
preceding accrual period, or in the case of the first accrued period, begins on
the Closing Date, a calculation will be made of the portion of the original
issue discount that accrued during that accrual period. The portion of original
issue discount that accrues in any accrual period will equal the excess, if any,
of (i) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the REMIC Regular Certificate,
if any, in future periods and (B) the distributions made on the REMIC Regular
Certificate during the accrual period of amounts included in the stated
redemption price, over (ii) the adjusted issue price of the REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
(i) assuming that distributions on the REMIC Regular Certificate will be
received in future periods based on the Mortgage Loans being prepaid at a rate
equal to the Prepayment Assumption and (ii) using a discount rate equal to the
original yield to maturity of the Certificate. For these purposes, the original
yield to maturity of the Certificate will be calculated based on its issue price
and assuming that distributions on the
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Certificate will be made in all accrual periods based on the Mortgage Loans
being prepaid at a rate equal to the Prepayment Assumption. The adjusted issue
price of a REMIC Regular Certificate at the beginning of any accrual period will
equal the issue price of the Certificate, increased by the aggregate amount of
original issue discount that accrued with respect to that Certificate in prior
accrual periods, and reduced by the amount of any distributions made on that
REMIC Regular Certificate in prior accrual periods of amounts included in its
stated redemption price. The original issue discount accruing during any accrual
period, computed as described above, will be allocated ratably to each day
during the accrual period to determine the daily portion of original issue
discount for that day.
A subsequent purchaser of a REMIC Regular Certificate that purchases the
Certificate at a price, excluding any portion of that 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 that Certificate. However, each daily
portion will be reduced, if the cost is in excess of its "adjusted issue price,"
in proportion to the ratio excess bears to the aggregate original issue discount
remaining to be accrued on the REMIC Regular Certificate. The adjusted issue
price of a REMIC Regular Certificate on any given day equals the sum of (i) the
adjusted issue price, or, in the case of the first accrual period, the issue
price, of the Certificate at the beginning of the accrual period which includes
that day and (ii) the daily portions of original issue discount for all days
during the accrual period prior to that day.
Market Discount
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, in the case of a REMIC Regular Certificate issued without
original issue discount, at a purchase price less than its remaining stated
principal amount, or in the case of a REMIC Regular Certificate issued with
original issue discount, at a purchase price less than its adjusted issue price
will recognize income upon receipt of each distribution representing stated
redemption price. In particular, under Section 1276 of the Code the
Certificateholder will be required to allocate the portion of each distribution
representing stated redemption price first to accrued market discount not
previously included in income, and to recognize ordinary income to that extent.
A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, the election will apply to all market
discount bonds acquired by Certificateholder on or after the first day of the
first taxable year to which the election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest,
discount, including de minimis market or original issue discount, and premium in
income as interest, based on a constant yield method. If the election were made
with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include market
discount in income currently with respect to all other debt instruments having
market discount that the Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that the Certificateholder owns or acquires. See "Taxation of Owners of REMIC
Regular Certificates -- Premium." Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if the
market discount is less than 0.25% of the remaining stated redemption price of
the REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular Certificates --
Original Issue Discount." This treatment would result in discount being included
in income at a slower rate than discount would be required to be included in
income using the method described above.
Code Section 1276(b)(3) specifically authorizes the Treasury Department to
issue regulations providing for
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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, a number of rules described in the Committee Report
apply. The Committee Report indicates that in each accrual period market
discount on REMIC Regular Certificates should accrue, at the Certificateholder's
option: (i) on the basis of a constant yield method, (ii) in the case of a REMIC
Regular Certificate issued without original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total amount of stated interest
remaining to be paid on the REMIC Regular Certificate as of the beginning of the
accrual period, or (iii) in the case of a REMIC Regular Certificate issued with
original issue discount, in an amount that bears the same ratio to the total
remaining market discount as the original issue discount accrued in the accrual
period bears to the total original issue discount remaining on the REMIC Regular
Certificate at the beginning of the accrual period. Moreover, the Prepayment
Assumption used in calculating the accrual of original issue discount is to be
used in calculating the accrual of market discount. Because the regulations
referred to in this paragraph have not been issued, it is not possible to
predict what effect those regulations might have on the tax treatment of a REMIC
Regular Certificate purchased at a discount in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which the discount would accrue if it were
original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of that Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any deferred
interest expense would not exceed the market discount that accrues during that
taxable year and is, in general, allowed as a deduction not later than the year
in which the market discount is includible in income. If the holder elects to
include market discount in income currently as it accrues on all market discount
instruments acquired by that holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
Premium
A REMIC Regular Certificate purchased at a cost, excluding any portion of
that cost attributable to accrued qualified stated interest, greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of a REMIC Regular Certificate may elect under Section 171
of the Code to amortize that premium under the constant yield method over the
life of the Certificate. If this election is made, it will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related REMIC Regular Certificate, rather than as a separate interest
deduction. The OID Regulations also permit Certificateholders to elect to
include all interest, discount and premium in income based on a constant yield
method, further treating the Certificateholder as having made the election to
amortize premium generally. See "Taxation of Owners of REMIC Regular
Certificates --Market Discount." The Committee Report states that the same rules
that apply to accrual of market discount, which rules will require use of a
Prepayment Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether those Certificates have original issue
discount, will also apply in amortizing bond premium under Section 171 of the
Code.
Realized Losses
Under Code Section 166 both corporate holders of the REMIC Regular
Certificates and noncorporate holders of the REMIC Regular Certificates that
acquire those Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their Certificates become wholly or partially worthless as the
result of one or more realized losses on the Mortgage Loans. However, it appears
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that a noncorporate holder that does not acquire a REMIC Regular Certificate in
connection with a trade or business will not be entitled to deduct a loss under
Section 166 of the Code until the holder's Certificate becomes wholly worthless
(i.e., until its outstanding principal balance has been reduced to zero) and
that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to that Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it can
be established that any reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in that period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that, as the result of a realized
loss, ultimately will not be realized, the law is unclear with respect to the
timing and character of the loss or reduction in income.
Taxation of Owners of REMIC Residual Certificates
General. As residual interests, the REMIC Residual Certificates will be
subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the Mortgage Loans or as debt instruments issued
by the REMIC.
A holder of a REMIC Residual Certificate typically will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that the holder owned the REMIC Residual Certificate. For this
purpose, the taxable income or net loss of the REMIC will be allocated to each
day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts will then be allocated among the REMIC
Residual Certificateholders in proportion to their respective ownership
interests on that day. Any amount included in the gross income or allowed as a
loss of any REMIC Residual Certificateholder by virtue of this allocation will
be treated as ordinary income or loss. The taxable income of the REMIC will be
determined under the rules described below in "Taxable Income of the REMIC" and
will be taxable to the REMIC Residual Certificateholders without regard to the
timing or amount of cash distributions by the REMIC. Ordinary income derived
from REMIC Residual Certificates will be "portfolio income" for purposes of the
taxation of taxpayers subject to limitations under Section 469 of the Code on
the deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased the Certificate
from a prior holder of that Certificate also will be required to report on its
federal income tax return amounts representing its daily portion of the taxable
income (or net loss) of the REMIC for each day that it holds the REMIC Residual
Certificate. These daily portions will equal the amounts of taxable income or
net loss determined as described above. The Committee Report indicates that
modifications of the general rules may be made, by regulations, legislation or
otherwise, to reduce, or increase, the income or loss of a holder of a REMIC
Residual Certificateholder that purchased the REMIC Residual Certificate from a
prior holder of the Certificate at a price greater than, or less than, the
adjusted basis, the REMIC Residual Certificate would have had in the hands of an
original holder of the Certificate. The REMIC Regulations, however, do not
provide for any modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of that REMIC Residual Certificate will be taken
into account in determining the income of the holder for federal income tax
purposes. Although it appears likely that the payment would be includible in
income immediately upon its receipt, the Internal Revenue Service (the "IRS")
might assert that the payment should be included in income over time according
to an amortization schedule or according to some other method. Because of the
uncertainty concerning the treatment of these payments, holders of REMIC
Residual Certificates should consult their tax advisors concerning the treatment
of these payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report, or the tax liability associated with that income, may exceed the amount
of cash distributions received from the REMIC for the
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corresponding period. Consequently, REMIC Residual Certificateholders should
have other sources of funds sufficient to pay any federal income taxes due as a
result of their ownership of REMIC Residual Certificates or unrelated deductions
against which income may be offset, subject to the rules relating to "excess
inclusions," residual interests without "significant value" and "noneconomic"
residual interests discussed below. The fact that the tax liability associated
with the income allocated to REMIC Residual Certificateholders may exceed the
cash distributions received by the REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect the REMIC Residual
Certificateholders' after-tax rate of return.
Taxable Income of the REMIC. The taxable income of the REMIC will equal
the income from the Mortgage Loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest, including original issue discount and reduced by the amortization of
any premium received on issuance, on the REMIC Regular Certificates, and any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered by this Prospectus, amortization of any premium on the Mortgage
Loans, bad debt deductions with respect to the Mortgage Loans and, except as
described below, for servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to their fair market value
immediately after their transfer to the REMIC. For this purpose, the Master
Servicer intends to treat the fair market value of the Mortgage Loans as being
equal to the aggregate issue prices of the REMIC Regular Certificates and REMIC
Residual Certificates. The aggregate basis will be allocated among the Mortgage
Loans collectively and the other assets of the REMIC in proportion to their
respective fair market values. The issue price of any REMIC Certificates offered
by this Prospectus will be determined in the manner described above under " --
Taxation of Owners of REMIC Regular Certificates -- Original Issue Discount."
Accordingly, if one or more classes of REMIC Certificates are retained initially
rather than sold, the Master Servicer may be required to estimate the fair
market value of those interests in order to determine the basis of the REMIC in
the Mortgage Loans and other property held by the REMIC.
Subject to the possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method of accruing original issue discount income for REMIC Regular
Certificateholders, that is, under the constant yield method taking into account
the Prepayment Assumption. However, a REMIC that acquires loans at a market
discount must include the discount in income currently, as it accrues, on a
constant interest basis. See " --Taxation of Owners of REMIC Regular
Certificates" above, which describes a method of accruing discount income that
is analogous to that required to be used by a REMIC as to Mortgage Loans with
market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount, or
premium, to the extent that the REMIC's basis in the Mortgage Loan, determined
as described in the preceding paragraph, is less than, or greater than, its
stated redemption price. Any discount will be includible in the income of the
REMIC as it accrues, in advance of receipt of the cash attributable to that
income, under a method similar to the method described above for accruing
original issue discount on the REMIC Regular Certificates. It is anticipated
that each REMIC will elect under Section 171 of the Code to amortize any premium
on the Mortgage Loans. Premium on any Mortgage Loan to which the election
applies may be amortized under a constant yield method, presumably taking into
account a Prepayment Assumption.
A REMIC will be allowed deductions for interest, including original issue
discount, on the REMIC Regular Certificates, including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered by this
Prospectus, equal to the deductions that would be allowed if the REMIC Regular
Certificates, including any other class of REMIC Certificates constituting
"regular interests" in the REMIC not offered by this Prospectus, were
indebtedness of the REMIC. Original issue discount will be considered to accrue
for this purpose as described above under " -- Taxation of Owners of REMIC
Regular Certificates -- Original Issue Discount," except that the de minimis
rule and the adjustments for subsequent holders of REMIC Regular Certificates,
including any other class of Certificates constituting "regular interests" in
the REMIC not offered by this Prospectus, described in that section will not
apply.
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If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of that class (the excess, "Issue Premium"), the
REMIC will have an additional item of income in an amount equal to the portion
of the Issue Premium that is considered to be amortized or repaid in that year.
Although the matter is not entirely certain, it is likely that Issue Premium
would be amortized under a constant yield method in a manner analogous to the
method of accruing original issue discount described above under " -- Taxation
of Owners of REMIC Regular Certificates -- Original Issue Discount."
As a general rule, the taxable income of the REMIC is required to be
determined in the same manner as if the REMIC were an individual having the
calendar year as its taxable year and using the accrual method of accounting.
However, no item of income, gain, loss or deduction allocable to a prohibited
transaction will be taken into account. See " -- Prohibited Transactions and
Other Possible REMIC Taxes" below. Further, the limitation on miscellaneous
itemized deductions imposed on individuals by Section 67 of the Code, which
allows those deductions only to the extent they exceed in the aggregate two
percent of the taxpayer's adjusted gross income, will not be applied at the
REMIC level so that the REMIC will be allowed deductions for servicing,
administrative and other non-interest expenses in determining its taxable
income. All of these expenses will be allocated as a separate item to the
holders of REMIC Certificates, subject to the limitation of Section 67 of the
Code and the rules relating to the alternative minimum tax. See " -- Possible
Pass-Through of Miscellaneous Itemized Deductions." If the deductions allowed to
the REMIC exceed its gross income for a calendar quarter, the excess will be the
net loss for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for that REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased (but not below zero) by distributions made, and
by net losses allocated, to the REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent the net loss exceeds the REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of that calendar quarter, determined without regard to the net
loss. Any loss that is not currently deductible by reason of this limitation may
be carried forward indefinitely to future calendar quarters and, subject to the
same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds the adjusted basis, it will be treated
as gain from the sale of the REMIC Residual Certificate. Holders of REMIC
Residual Certificates may be entitled to distributions early in the term of the
related REMIC under circumstances in which their bases in the REMIC Residual
Certificates will not be sufficiently large that distributions will be treated
as nontaxable returns of capital. Their bases in the REMIC Residual Certificates
will initially equal the amount paid for the REMIC Residual Certificates and
will be increased by their allocable shares of taxable income of the Trust.
However, their basis increases may not occur until the end of the calendar
quarter, or perhaps the end of the calendar year, with respect to which the
REMIC taxable income is allocated to the REMIC Residual Certificateholders. To
the extent the REMIC Residual Certificateholders' initial bases are less than
the distributions to the REMIC Residual Certificateholders, and increases in the
initial bases either occur after the distributions or, together with their
initial bases, are less than the amount of the distributions, gain will be
recognized to the REMIC Residual Certificateholders on those distributions and
will be treated as gain from the sale of their REMIC Residual Certificates.
The effect of these rules is that a Residual Certificateholder may not
amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of its share of any net
losses of the REMIC or upon the sale of its REMIC Residual Certificate. See " --
Sales of REMIC Certificates." For a discussion of possible modifications of
these rules that may require adjustments to income of a holder of a REMIC
Residual Certificate other than an original holder in order to reflect any
difference between the cost of the REMIC Residual Certificate to the holder and
the adjusted basis the REMIC Residual Certificate would have had in the hands
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of the original holder, see " -- Taxation of Owners of REMIC Residual
Certificates -- General."
Excess Inclusions. Any "excess inclusions" with respect to a REMIC Residual
Certificate will be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the sum
of the daily portions of REMIC taxable income allocable to the REMIC Residual
Certificate over (ii) the sum of the "daily accruals" for each day during that
quarter that the REMIC Residual Certificate was held by the REMIC Residual
Certificateholder. The daily accruals of a REMIC Residual Certificateholder will
be determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC Residual
Certificate at the beginning of the calendar quarter and 120% of the "long-term
Federal rate" in effect on the Closing Date. For this purpose, the adjusted
issue price of a REMIC Residual Certificate as of the beginning of any calendar
quarter will be equal to the issue price of the REMIC Residual Certificate,
increased by the sum of the daily accruals for all prior quarters and decreased,
but not below zero, by any distributions made with respect to the REMIC Residual
Certificate before the beginning of that quarter. The issue price of a REMIC
Residual Certificate is the initial offering price to the public (excluding bond
houses, brokers and underwriters) at which a substantial amount of the REMIC
Residual Certificates were sold. If less than a substantial amount of REMIC
Residual Certificates is sold for cash on or prior to the Closing Date, the
issue price for those REMIC Residual Certificates will be treated as the fair
market value of those REMIC Residual Certificates on the Closing Date. The
"long-term Federal rate" is an average of current yields on Treasury securities
with a remaining term of greater than nine years, computed and published monthly
by the IRS. Although it has not done so, the Treasury has authority to issue
regulations that would treat the entire amount of income accruing on a REMIC
Residual Certificate as an excess inclusion if the REMIC Residual Certificates
are considered not to have "significant value."
For REMIC Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, " -- Foreign
Investors in REMIC Certificates," below. Furthermore, for purposes of the
alternative minimum tax, (i) excess inclusions will not be permitted to be
offset by the alternative tax net operating loss deduction and (ii) alternative
minimum taxable income may not be less than the taxpayer's excess inclusions;
provided, however, that for purposes of (ii), alternative minimum taxable income
is determined without regard to the special rule that taxable income cannot be
less than excess inclusions. The latter rule has the effect of preventing
nonrefundable tax credits from reducing the taxpayer's income tax to an amount
lower than the alternative minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to the REMIC
Residual Certificates, reduced, but not below zero, by the real estate
investment trust taxable income, within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain, will be allocated among the shareholders
of the trust in proportion to the dividends received by the shareholders from
the trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by the
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and a number of cooperatives;
the REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If the
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on the "noneconomic" REMIC Residual
Certificate. The REMIC Regulations provide that a REMIC Residual Certificate is
noneconomic unless, based on the Prepayment Assumption and on any required or
permitted clean up calls, or required qualified liquidation provided for in the
REMIC's organizational documents, (1) the present value of the expected future
distributions (discounted using the "applicable Federal rate" for obligations
whose term ends on the close of the last
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quarter in which excess inclusions are expected to accrue with respect to the
REMIC Residual Certificate, which rate is computed and published monthly by the
IRS) on the REMIC Residual Certificate equals at least the present value of the
expected tax on the anticipated excess inclusions, and (2) the transferor
reasonably expects that the transferee will receive distributions with respect
to the REMIC Residual Certificate at or after the time the taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes. Accordingly, all transfers of REMIC Residual Certificates that may
constitute noneconomic residual interests will be subject to restrictions under
the terms of the related Pooling and Servicing Agreement that are intended to
reduce the possibility of any transfer being disregarded. The restrictions will
require each party to a transfer to provide an affidavit that no purpose of the
transfer is to impede the assessment or collection of tax, including
representations as to the financial condition of the prospective transferee, as
to which the transferor also is required to make a reasonable investigation to
determine the transferee's historic payment of its debts and ability to continue
to pay its debts as they come due in the future. Prior to purchasing a REMIC
Residual Certificate, prospective purchasers should consider the possibility
that a purported transfer of the REMIC Residual Certificate by this type of a
purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention of
tax liability by that purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations. Any disclosure that a REMIC Residual Certificate will not
be considered "noneconomic" will be based upon a number of assumptions, and the
Depositor will make no representation that a REMIC Residual Certificate will not
be considered "noneconomic" for purposes of the above-described rules. See " --
Foreign Investors in REMIC Certificates -- REMIC Residual Certificates" below
for additional restrictions applicable to transfers of REMIC Residual
Certificates to foreign persons.
Mark-to-Market Rules. On December 24, 1996, the IRS released final
regulations (the "Mark-to-Market Regulations") relating to the requirement that
a securities dealer mark-to-market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held for
investment. The Mark-to-Market Regulations provide that for purposes of this
mark-to-market requirement, a REMIC Residual Certificate acquired after January
4, 1995 is not treated as a security and thus may not be marked to market.
Prospective purchasers of a REMIC Residual Certificate should consult their tax
advisors regarding the possible application of the mark-to-market requirement to
REMIC Residual Certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
expenses of a REMIC typically will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of those fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Unless otherwise stated in
the related Prospectus Supplement, fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to the individual's, estate's or trust's
share of fees and expenses will be added to the gross income of that holder and
(ii) the individual's, estate's or trust's share of fees and expenses will be
treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits those deductions only to the
extent they exceed in the aggregate two percent of a taxpayer's adjusted gross
income. In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over that amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by REMIC Certificateholders that
are subject to the limitations of either Section 67 or Section 68 of the Code
may be substantial. Furthermore, in determining the alternative minimum taxable
income of this type of holder of a REMIC Certificate that is an individual,
estate or trust, or a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts, no deduction will be allowed for the holder's
allocable portion of servicing fees and other miscellaneous itemized deductions
of the
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REMIC, even though an amount equal to the amount of fees and other deductions
will be included in the holder's gross income. Accordingly, the REMIC
Certificates may not be appropriate investments for individuals, estates, or
trusts, or pass-through entities beneficially owned by one or more individuals,
estates or trusts. Any prospective investors should consult with their tax
advisors prior to making an investment in these Certificates.
Sales of REMIC Certificates
If a REMIC Certificate is sold, the selling Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Certificate. The adjusted basis of
a REMIC Regular Certificate typically will equal the cost of that REMIC Regular
Certificate to that Certificateholder, increased by income reported by the
Certificateholder with respect to that REMIC Regular Certificate, including
original issue discount and market discount income, and reduced, but not below
zero, by distributions on the REMIC Regular Certificate received by the
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under " -- Taxation of
Owners of REMIC Residual Certificates -- Basis Rules, Net Losses and
Distributions." Except as described below, any gain or loss in most cases will
be capital gain or loss.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent the gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to the REMIC Regular Certificate had income
accrued thereon at a rate equal to 110% of the "applicable Federal rate", which
is typically a rate based on an average of current yields on Treasury securities
having a maturity comparable to that of the Certificate, which rate is computed
and published monthly by the IRS, determined as of the date of purchase of the
REMIC Regular Certificate, over (ii) the amount of ordinary income actually
includible in the seller's income prior to the sale. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
the REMIC Regular Certificate at a market discount will be taxable as ordinary
income to the extent of any accrued and previously unrecognized market discount
that accrued during the period the Certificate was held. See " -- Taxation of
Owners of REMIC Regular Certificates -- Market Discount."
REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which that section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that the Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in Certificates or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in the transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income in most cases will not
exceed the amount of interest that would have accrued on the taxpayer's net
investment at 120% of the appropriate "applicable Federal rate", which rate is
computed and published monthly by the IRS, at the time the taxpayer enters into
the conversion transaction, subject to appropriate reduction for prior inclusion
of interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include any net capital
gain in total net investment income for the taxable year, for purposes of the
limitation on the deduction of interest on indebtedness incurred to purchase or
carry property held for investment to a taxpayer's net investment income.
If the seller of a REMIC Residual Certificate reacquires the Certificate,
any other residual interest in a REMIC or any similar interest in a "taxable
mortgage pool" (as defined in Section 7701(i) of the Code) within six months of
the date of the sale, the sale will be subject to the "wash sale" rules of
Section 1091 of the Code. In that event, any loss realized by the REMIC Residual
Certificateholder on the sale will not be deductible, but instead will be added
to the REMIC Residual Certificateholder's adjusted basis in the newly-acquired
asset.
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Prohibited Transactions and Other Possible REMIC Taxes
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (a "Prohibited Transactions Tax"). In general,
subject to specified exceptions a prohibited transaction means the disposition
of a Mortgage Loan, the receipt of income from a source other than a Mortgage
Loan or other permitted investments, the receipt of compensation for services,
or gain from the disposition of an asset purchased with the payments on the
Mortgage Loans for temporary investment pending distribution on the REMIC
Certificates. It is not anticipated that any REMIC will engage in any prohibited
transactions in which it would recognize a material amount of net income.
In addition, some types of contributions to a REMIC made after the day on
which the REMIC issues all of its interests could result in the imposition of a
tax on the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to the tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer or Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that the tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement and relating to compliance
with applicable laws and regulations. Any tax not borne by the Master Servicer
or the Trustee will be payable out of the related Trust resulting in a reduction
in amounts payable to holders of the related REMIC Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations
If a REMIC Residual Certificate is transferred to a "disqualified
organization", a tax would be imposed in an amount, determined under the REMIC
Regulations, equal to the product of (i) the present value, discounted using the
"applicable Federal rate" for obligations whose term ends on the close of the
last quarter in which excess inclusions are expected to accrue with respect to
the Certificate, which rate is computed and published monthly by the IRS, of the
total anticipated excess inclusions with respect to the REMIC Residual
Certificate for periods after the transfer and (ii) the highest marginal federal
income tax rate applicable to corporations. The anticipated excess inclusions
must be determined as of the date that the REMIC Residual Certificate is
transferred and must be based on events that have occurred up to the time of
transfer, the Prepayment Assumption and any required or permitted clean up calls
or required liquidation provided for in the REMIC's organizational documents.
This tax generally would be imposed on the transferor of the REMIC Residual
Certificate, except that where the transfer is through an agent for a
disqualified organization, the tax would instead be imposed on that agent.
However, a transferor of a REMIC Residual Certificate would in no event be
liable for the tax with respect to a transfer if the transferee furnishes to the
transferor an affidavit that the transferee is not a disqualified organization
and, as of the time of the transfer, the transferor does not have actual
knowledge that the affidavit is false. Moreover, an entity will not qualify as a
REMIC unless there are reasonable arrangements designed to ensure that (i)
residual interests in the entity are not held by disqualified organizations and
(ii) information necessary for the application of the tax described in this
Prospectus will be made available. Restrictions on the transfer of REMIC
Residual Certificates and a number of other provisions that are intended to meet
this requirement will be included in the Pooling and Servicing Agreement, and
will be discussed more fully in any Prospectus Supplement relating to the
offering of any REMIC Residual
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Certificate.
In addition, if a "pass-through entity" includes in income excess
inclusions with respect to a REMIC Residual Certificate, and a disqualified
organization is the record holder of an interest in that entity, then a tax will
be imposed on it equal to the product of (i) the amount of excess inclusions on
the REMIC Residual Certificate that are allocable to the interest in the
pass-through entity held by the disqualified organization and (ii) the highest
marginal federal income tax rate imposed on corporations. A pass-through entity
will not be subject to this tax for any period, however, if each record holder
of an interest in that pass-through entity furnishes to that pass-through entity
(i) the holder's social security number and a statement under penalties of
perjury that the social security number is that of the record holder or (ii) a
statement under penalties of perjury that the record holder is not a
disqualified organization.
For these purposes, a "disqualified organization" means
o the United States, any State or political subdivision thereof, any
foreign government, any international organization, or any agency or
instrumentality of the foregoing, but would not include
instrumentalities described in Section 168(h)(2)(D) of the Code or
the Federal Home Loan Mortgage Corporation
o any organization, other than a cooperative described in Section 521
of the Code, that is exempt from federal income tax, unless it is
subject to the tax imposed by Section 511 of the Code or
o any organization described in Section 1381 (a)(2)(C) of the Code.
For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or other entities
described in Section 860E (e)(6) of the Code. In addition, a person holding an
interest in a pass-through entity as a nominee for another person will, with
respect to that interest, be treated as a pass-through entity.
Termination
A REMIC will terminate immediately after the Distribution Date following
receipt by the REMIC of the final payment from of the Mortgage Loans or upon a
sale of the REMIC's assets following the adoption by the REMIC of a plan of
complete liquidation. The last distribution on a REMIC Regular Certificate will
be treated as a payment in retirement of a debt instrument. In the case of a
REMIC Residual Certificate, if the last distribution on the REMIC Residual
Certificate is less than the REMIC Residual Certificateholder's adjusted basis
in the Certificate, the REMIC Residual Certificateholder should be treated as
realizing a loss equal to the amount of the difference. The loss may be subject
to the "wash sale" rules of Section 1091 of the Code. See " -- Sales of REMIC
Certificates." The character of this loss as ordinary or capital is uncertain.
Reporting and Other Administrative Matters
Solely for purposes of the administrative provisions of the Code, the
REMIC will be treated as a partnership and Residual Certificateholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Master Servicer will file REMIC federal income tax returns on
behalf of the related REMIC, will be designated as and will act as the "tax
matters person" with respect to the REMIC in all respects, and will hold at
least a nominal amount of REMIC Residual Certificates.
As the tax matters person, the Master Servicer will have the authority to
act on behalf of the REMIC and the REMIC Residual Certificateholders in
connection with the administrative and judicial review of items of income,
deduction, gain or loss of the REMIC, as well as the REMIC's classification.
REMIC Residual Certificateholders will be required to report the REMIC items
consistently with their treatment on the related REMIC's tax return and may in
some circumstances be bound by a settlement agreement between the Master
Servicer, as tax matters person, and the IRS concerning the REMIC item.
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Adjustments made to the REMIC tax return may require a REMIC Residual
Certificateholder to make corresponding adjustments on its return, and an audit
of the REMIC's tax return, or the adjustments resulting from an audit, could
result in an audit of a REMIC Residual Certificateholder's return. No REMIC will
be registered as a tax shelter under Section 6111 of the Code because it is not
anticipated that any REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish to the
related REMIC, in a manner to be provided in Treasury regulations, the name and
address of that person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports are
required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and other non-individuals will be provided interest and
original issue discount income information and the information set forth in the
following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face information including the amount of original issue discount
and the issue date, and requiring this information to be reported to the IRS.
Reporting with respect to the REMIC Residual Certificates, including income,
excess inclusions, investment expenses and relevant information regarding
qualification of the REMIC's assets will be made as required under the Treasury
regulations, typically on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method requires information relating to the holder's purchase
price that the Master Servicer will not have, the regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "Taxation of Owners of REMIC Regular
Certificates -- Market Discount."
The responsibility for complying with the foregoing reporting rules will
be borne by the Master Servicer. Certificateholders may request any information
with respect to the returns described in Section 1.6049-7(e)(2) of the Treasury
regulations. Any request should be directed to the Master Servicer at
Residential Funding Corporation, 8400 Normandale Lake Boulevard, Suite 600,
Minneapolis, Minnesota 55437.
Backup Withholding With Respect to REMIC Certificates
Payments of interest and principal, as well as payments of proceeds from
the sale of REMIC Certificates, may be subject to the "backup withholding tax"
under Section 3406 of the Code at a rate of 31% if recipients of payments fail
to furnish to the payor information, including their taxpayer identification
numbers, or otherwise fail to establish an exemption from the tax. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against the recipient's federal income tax. Furthermore, penalties may be
imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner.
Foreign Investors in REMIC Certificates
A REMIC Regular Certificateholder that is not a "United States person" (as
defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not be subject to United States federal
income or withholding tax on a distribution on a REMIC Regular Certificate,
provided that the holder complies to the extent necessary with identification
requirements, including delivery of a statement, signed by the Certificateholder
under penalties of perjury, certifying that the Certificateholder is not a
United States person and providing the name and address of the
Certificateholder. For these purposes, "United States person" means a citizen or
resident of the United States, a corporation, partnership, including an entity
treated as a corporation or partnership for federal income tax purposes, created
or organized in, or under the laws of, the United States or any state thereof or
the District of Columbia except,
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in the case of a partnership, to the extent provided in regulations, or an
estate whose income is subject to United States federal income tax regardless of
its source, or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the
trust. To the extent prescribed in regulations by the Secretary of the Treasury,
which have not yet been issued, a trust which was in existence on August 20,
1996, other than a trust treated as owned by the grantor under subpart E of part
I of subchapter J of chapter 1 of the Code, and which was treated as a United
States person on August 20, 1996 may elect to continue to be treated as a United
States person notwithstanding the previous sentence. It is possible that the IRS
may assert that the foregoing tax exemption should not apply with respect to a
REMIC Regular Certificate held by a REMIC Residual Certificateholder that owns
directly or indirectly a 10% or greater interest in the REMIC Residual
Certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions of accrued original issue discount, to the
holder may be subject to a tax rate of 30%, subject to reduction under any
applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on the United
States shareholder's allocable portion of the interest income received by the
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States Persons will
be prohibited under the related Pooling and Servicing Agreement.
New Withholding Regulations
The Treasury Department has issued new regulations (the "New Withholding
Regulations") which make modifications to the withholding, backup withholding
and information reporting rules described above. The New Withholding Regulations
attempt to unify certification requirements and modify reliance standards. The
New Withholding Regulations will generally be effective for payments made after
December 31, 1999, subject to transition rules. Prospective investors are urged
to consult their tax advisors regarding the New Withholding Regulations.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "United
States Federal Income Tax Consequences," potential investors should consider the
state and local tax consequences of the acquisition, ownership, and disposition
of the Certificates offered hereunder. State tax law may differ substantially
from the corresponding federal tax law, and the discussion above does not
purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their tax advisors
with respect to the various tax consequences of investments in the certificates
offered hereunder.
ERISA CONSIDERATIONS
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") impose fiduciary and prohibited transaction
restrictions on employee pension and welfare benefit plans subject to ERISA
("ERISA Plans") and on various 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 those 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").
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Some employee benefit plans, including 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 in this Prospectus. Accordingly,
assets of these plans may be invested in Certificates without regard to the
ERISA considerations described below, subject to the provisions of applicable
federal and state law. Any 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 in Section 503(b) 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 specified relationships
to the Plans, unless a statutory or administrative exemption is available. Some
Parties in Interest that participate in a prohibited transaction may be subject
to a penalty, or an excise tax, imposed under Section 502(i) of ERISA or Section
4975 of the Code, unless a statutory or administrative exemption is available
with respect to any transaction of this sort.
Plan Asset Regulations
An investment of the assets of a Plan in Certificates may cause the
underlying Mortgage Loans, Mortgage Securities or any other assets included in a
Trust to be deemed plan assets of the Plan. The U.S. Department of Labor (the
"DOL") has promulgated regulations at 29 C.F.R. ss. 2510.3-101 (the "DOL
Regulations") concerning whether or not a Plan's assets would be deemed to
include an interest in the underlying assets of an entity, including a Trust,
for purposes of applying the general fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and the Code, when a
Plan acquires an "equity interest", such as a Certificate, in that entity.
Exceptions contained in the DOL Regulations provide that a Plan's assets will
not include an undivided interest in each asset of an entity in which it makes
an equity investment if: (1) the entity is an operating company; or (2) the
equity investment made by the Plan is either a "publicly-offered security" that
is "widely held," both as defined in the DOL Regulations, or a security issued
by an investment company registered under the Investment Company Act of 1940, as
amended; or (3) Benefit Plan Investors do not own 25% or more in value of any
class of equity securities issued by the entity. For this purpose, "Benefit Plan
Investors" include Plans, as well as any "employee benefit plan" as defined in
Section 3(3) or ERISA which is not subject to Title I of ERISA, such as
governmental plans (as defined in Section 3(32) of ERISA) and church plans (as
defined in Section 3(33) of ERISA) which have not made an election under Section
410(d) of the Code, foreign plans and any entity whose underlying assets include
Plan Assets by reason of a Plan's investment in the entity. Because of the
factual nature of the rules described in the DOL Regulations, Plan Assets either
may be deemed to include an interest in the assets of an entity, such as a
Trust, or may be deemed merely to include its interest in the instrument
evidencing the equity interest, such as a Certificate. Therefore, neither Plans
nor the entities should acquire or hold Certificates in reliance upon the
availability of any exception under the DOL Regulations. For purposes of this
section "ERISA Considerations," the term "Plan Assets" or "assets of a Plan" has
the meaning specified in the DOL Regulations and includes an undivided interest
in the underlying assets of 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 and cause the Depositor, the Master
Servicer, any Subservicer, the Trustee, the obligor under any credit enhancement
mechanism or affiliates of those entities to be considered or become Parties in
Interest with respect to an investing Plan, or of a Plan holding an interest in
that entity. If so, the acquisition or holding of Certificates by or on behalf
of the investing Plan could also give rise to a prohibited transaction under
ERISA and the Code, unless some statutory or administrative exemption is
available. Certificates acquired by a Plan would be assets of that Plan. Under
the DOL Regulations, a Trust, including the Mortgage Loans, Mortgage Securities
or any other assets held in the Trust, may also be deemed to be assets of each
Plan that acquires Certificates. Special caution should be exercised before Plan
Assets are used to acquire a Certificate in those circumstances, especially if,
with respect to the assets, the Depositor, the Master Servicer, any Subservicer,
the Trustee, the obligor under any credit enhancement mechanism or an affiliate
thereof either (i) has investment discretion with respect to the investment of
Plan Assets; or (ii) has authority or responsibility to give, or regularly
gives, investment advice with respect to Plan Assets for a
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fee under an agreement or understanding that this advice will serve as a primary
basis for investment decisions with respect to the 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 the Plan Assets for a fee (in the manner described above)
is a fiduciary of the investing Plan. If the Mortgage Loans, the Mortgage
Securities or any other assets in a Trust were to constitute Plan Assets, then
any party exercising management or discretionary control with respect to those
Plan Assets may be deemed to be a Plan "fiduciary," and thus subject to the
fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to any investing Plan. In
addition, if the Mortgage Loans, Mortgage Securities or any other assets in a
Trust were to constitute Plan Assets, then the acquisition or holding of
Certificates by or on behalf of a Plan or with Plan Assets, as well as the
operation of the Trust, may constitute or involve a prohibited transaction under
ERISA and the Code.
Prohibited Transaction Exemptions
The DOL issued an individual exemption, Prohibited Transaction Exemption
94-29 (59 Fed. Reg. 14674, March 29, 1994) as amended by PTE 97-34, 62 Fed. Reg.
39021 (July 21, 1997) (the "Exemption"), to Residential Funding and a number of
its affiliates, which exempts from the application of some of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
the prohibited transactions under Section 4975(a) and (b) of the Code, various
transactions, among others, relating to the servicing and operation of mortgage
pools and the purchase, sale and holding of pass-through certificates issued by
that trust as to which (i) the Depositor or any of its affiliates is the
sponsor, and any entity which has received from the DOL an individual prohibited
transaction exemption which is similar to the Exemption is the sole underwriter,
or manager or co-manager of the underwriting syndicate or a seller or placement
agent, or (ii) the Depositor or an affiliate is the underwriter, provided that
conditions described in the Exemption are satisfied. For purposes of this
section, the term "Underwriter" shall include (a) the Depositor and a number of
its affiliates, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with the
Depositor and a number of its affiliates, (c) any member of the underwriting
syndicate or selling group of which a person described in (a) or (b) is a
manager or co-manager with respect to a class of Certificates, or (d) any entity
which has received an exemption from the DOL relating to Certificates which is
similar to the Exemption.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by a Plan or with Plan Assets must be on terms that are at least as favorable to
the Plan as they would be in an arm's-length transaction with an unrelated
party. Second, the Exemption only applies to Certificates evidencing rights and
interests that are not subordinated to the rights and interests evidenced by the
other Certificates of the same trust. Third, the Certificates at the time of
acquisition by a Plan or with Plan Assets must be rated in one of the three
highest generic rating categories by Standard & Poor's Ratings Services, Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors
Service, L.P. (collectively, the "Exemption Rating Agencies"). Fourth, the
Trustee cannot be an affiliate of any member of the "Restricted Group" which
consists of any Underwriter, the Depositor, the Master Servicer, any Subservicer
and any mortgagor with respect to assets of a Trust constituting more than 5% of
the aggregate unamortized principal balance of the assets in the related Trust
as of the date of initial issuance of the Certificates. Fifth, the sum of all
payments made to and retained by the Underwriters must represent not more than
reasonable compensation for underwriting the Certificates; the sum of all
payments made to and retained by the Depositor under the assignment of the
assets to the related Trust must represent not more than the fair market value
of those obligations; and the sum of all payments made to and retained by the
Master Servicer and any Subservicer must represent not more than reasonable
compensation for that person's services under the related Pooling and Servicing
Agreement and reimbursement of that person's reasonable expenses in connection
therewith. Sixth, the Exemption states that the investing Plan or Plan-Asset
Investor must be an accredited investor as defined in Rule 501(a)(1) of
Regulation D of the Commission under the Securities Act of 1933, as amended. In
addition, except as otherwise specified in the related Prospectus Supplement,
the exemptive relief afforded by the Exemption may not apply to any Certificates
where the related Trust Fund contains a Swap.
The Exemption also requires that each Trust meet the following
requirements:
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o the Trust must consist solely of assets of the type that have been
included in other investment pools;
o certificates evidencing interests in those other investment pools must
have been rated in one of the three highest categories of one of the
Exemption Rating Agencies for at least one year prior to the
acquisition of Certificates by or on behalf of a Plan or with Plan
Assets; and
o certificates in the other investment pools must have been purchased by
investors other than Plans for at least one year prior to any
acquisition of Certificates by or on behalf of a Plan or with Plan
Assets.
A fiduciary or other investor of Plan Assets contemplating purchasing a
Certificate must make its own determination that the general conditions
described above will be satisfied with respect to that Certificate.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA, as well as the excise taxes imposed by Sections 4975(a) and (b)
of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code, in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of
Certificates by a Plan or with Plan Assets. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E) and 406(a)(2) of ERISA for the
acquisition or holding of a Certificate by an Excluded Plan or with Plan Assets
of an Excluded Plan by any person who has discretionary authority or renders
investment advice with respect to Plan Assets of the Excluded Plan. For purposes
of the Certificates, an "Excluded Plan" is a Plan sponsored by any member of the
Restricted Group.
If specific conditions of the Exemption are also satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(b)(1) and
(b)(2) of ERISA, as well as the excise taxes imposed by Section 4975(a) and (b)
of the Code by reason of Section 4975(c)(1)(E) of the Code, in connection with
(1) the direct or indirect sale, exchange or transfer of Certificates in the
initial issuance of Certificates between the Depositor or an Underwriter and a
Plan when the person who has discretionary authority or renders investment
advice with respect to the investment of the relevant Plan Assets in the
Certificates is (a) a mortgagor with respect to 5% or less of the fair market
value of the assets of a Trust or (b) an affiliate of such a person, provided
that, with respect to the acquisition of certificates in connection with the
initial issuance of the certificates, a number of quantitative restrictions
described in the Exemption are met, (2) the direct or indirect acquisition or
disposition in the secondary market of Certificates by a Plan or with Plan
Assets and (3) the holding of Certificates by a Plan or with Plan Assets.
Additionally, if specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, as well as the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code, for
transactions in connection with the servicing, management and operation of the
Mortgage Pools. Unless otherwise described in the related Prospectus Supplement,
the Depositor expects that the specific conditions of the Exemption required for
this purpose will be satisfied with respect to the Certificates so that the
Exemption would provide an exemption from the restrictions imposed by Sections
406(a) and (b) of ERISA, as well as the excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code, for transactions
in connection with the servicing, management and operation of the Mortgage
Pools, provided that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, as well as the taxes imposed by Section
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code, if those restrictions are deemed to otherwise apply merely because a
person is deemed to be a Party In Interest with respect to an investing Plan, or
the investing entity holding Plan Assets, by virtue of providing services to the
Plan or by virtue of having specified relationships to such a person, solely as
a result of the Plan's ownership of Certificates.
Before purchasing a Certificate, a fiduciary or other investor of Plan
Assets should itself confirm that (a) the Certificates constitute "certificates"
for purposes of the Exemption and (b) the specific and general conditions
described in the Exemption and the other requirements described in the Exemption
would be satisfied. In addition to making its own determination as to the
availability of the exemptive relief provided in the Exemption, the fiduciary
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or other Plan Asset investor should consider its general fiduciary obligations
under ERISA in determining whether to purchase any Certificates with Plan
Assets.
Any fiduciary or other Plan Asset investor that proposes to purchase
Certificates on behalf of a Plan or with Plan Assets should consult with its
counsel with respect to the potential applicability of ERISA and the Code to
that investment and the availability of the Exemption or any other DOL
prohibited transaction exemption in connection therewith. In particular, in
connection with a contemplated purchase of Certificates representing a
beneficial ownership interest in a pool of single-family residential first
Mortgage Loans, the fiduciary or other Plan Asset investor should consider the
availability of the Exemption or Prohibited Transaction Class Exemption ("PTCE")
83-1 ("PTCE 83-1") for various transactions involving mortgage pool investment
trusts. However, PTCE 83-1 does not provide exemptive relief with respect to
Certificates evidencing interests in Trust Funds which include Cooperative Loans
or some types of Mortgage Securities. In addition, the fiduciary or other Plan
Asset investor should consider the availability of other class exemptions
granted by the DOL, which provide relief from a number of the prohibited
transaction provisions of ERISA and the related excise tax provisions of Section
4975 of the Code, including Sections I and III of PTCE 95-60, regarding
transactions by insurance company general accounts. The related Prospectus
Supplement may contain additional information regarding the application of the
Exemption, PTCE 83-1, PTCE 95-60 or other DOL class exemption with respect to
the Certificates offered thereby. There can be no assurance that any of these
exemptions will apply with respect to any particular Plan's or other Plan Asset
investor's investment in the Certificates or, even if an exemption were deemed
to apply, that any exemption would apply to all prohibited transactions that may
occur in connection with this form of an investment.
Insurance Company General Accounts
In addition to any exemptive relief that may be available under PTCE 95-60
for the purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides 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. Under Section 401(c) of ERISA, the DOL published proposed
regulations on December 22, 1997, but the required final regulations (the
"401(c) Regulations") have not been issued as of the date hereof. The 401(c)
Regulations are to provide guidance for the purpose of determining, in cases
where insurance policies or annuity contracts 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 or 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 various 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 or annuity
contracts 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 the
separate account. Insurance companies contemplating the investment of general
account assets in the Certificates should consult with their legal counsel with
respect to the applicability of Sections I and III of PTCE 95-60 and Section
401(c) of ERISA, including the general account's ability to continue to hold the
Certificates after the date which is 18 months after the date the 401(c)
Regulations become final.
Representation from Investing Plans
It is not clear whether Certificates backed by Revolving Credit Loans with
respect to which a number of Trust Balances of Revolving Credit Loans are
included in the related Trust would constitute "certificates" for purposes of
the Exemption. In promulgating the Exemption, the DOL did not have under
consideration interests in mortgage pools of the exact nature described in this
paragraph and accordingly, unless otherwise provided in the related Prospectus
Supplement, Certificates representing interests as described in this paragraph
should not be purchased
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by or on behalf of a Plan or with Plan Assets based solely upon the Exemption.
In addition, the exemptive relief afforded by the Exemption will not apply to
the purchase, sale or holding of any class of Subordinate Certificates and may
not apply to any Certificates where the related Trust contains a Funding Account
during the period in which additional Mortgage Loans are permitted to be
transferred to the Trust.
To the extent Certificates are backed by Revolving Credit Loans or are
Subordinate Certificates or the related Trust contains a Funding Account, except
as otherwise specified in the respective Prospectus Supplement, transfers of the
Certificates to a Plan, to a trustee or other person acting on behalf of any
Plan, or to any other person using the Plan Assets to effect the acquisition
will not be registered by the Trustee unless the transferee provides the
Depositor, the Trustee and the Master Servicer with an opinion of counsel
satisfactory to the Depositor, the Trustee and the Master Servicer, which
opinion will not be at the expense of the Depositor, the Trustee or the Master
Servicer that the purchase of the Certificates by or on behalf of the 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 Depositor, the Trustee and the Master Servicer to any
obligation in addition to those undertaken in the Pooling and Servicing
Agreement. In lieu of an opinion of counsel, the transferee may provide a
certification of facts substantially to the effect that the purchase of
Certificates by or on behalf of Plan is permissible under applicable law, will
not constitute or result in a non-exempt prohibited transaction under ERISA or
Section 4975 of the Code, will not subject the Depositor, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the Pooling
and Servicing Agreement, and the following conditions are met: (a) the source of
funds used to purchase that Certificates is an "insurance company general
account" (as that term is defined in PTCE 95-60) and (b) the conditions
described in Section I and Section III of PTCE 95-60 have been satisfied as of
the date of the acquisition of the Certificates.
Tax Exempt Investors
A Plan that is exempt from federal income taxation under Section 501 of
the Code (a "Tax-Exempt Investor") nonetheless will be subject to federal income
taxation to the extent that its income is "unrelated business taxable income"
("UBTI") within the meaning of Section 512 of the Code. All "excess inclusions"
of a REMIC allocated to a REMIC Residual Certificate held by a Tax-Exempt
Investor will be considered UBTI and thus will be subject to federal income tax.
See "United States Federal Income Tax Consequences -- Taxation of Owners of
REMIC Residual Certificates -- Excess Inclusions."
Consultation with Counsel
There can be no assurance that the Exemption or any other DOL exemption
will apply with respect to any particular Plan that acquires the Certificates
or, even if all the conditions specified in the Exemption were satisfied, that
the exemption would apply to transactions involving a Trust. Prospective Plan
investors should consult with their legal counsel concerning the impact of ERISA
and the Code and the potential consequences to their specific circumstances
prior to making an investment in the Certificates.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm that (a) all the specific and general conditions described in the
Exemption or in one of the Class Exemptions would be satisfied and (b) in the
case of a Certificate purchased under the Exemption, the Certificate constitutes
a "certificate" for purposes of the Exemption. In addition to making its own
determination as to the availability of the exemptive relief provided in the
Exemption or in any of the Class Exemptions, the Plan fiduciary should consider
its general fiduciary obligations under ERISA in determining whether to purchase
a Certificate on behalf of a Plan.
LEGAL INVESTMENT MATTERS
Each class of Certificates offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. Unless otherwise specified in
the related Prospectus Supplement, each class of Certificates will evidence an
interest in Mortgage Loans primarily secured by second or more junior liens, and
therefore will not constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended ("SMMEA").
Accordingly, investors
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whose investment authority is subject to legal restrictions should consult their
legal advisors to determine whether and to what extent the Certificates
constitute legal investments for them.
All depository institutions considering an investment in the Certificates
should review the Federal Financial Institutions Examination Council's
Supervisory Policy Statement on the Selection of Securities Dealers and
Unsuitable Investment Practices (to the extent adopted by their respective
regulators), setting forth, in relevant part, a number investment practices
deemed to be unsuitable for an institution's investment portfolio, as well as
guidelines for investing in various types of mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements 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 some investors either to
purchase some classes of Certificates or to purchase any class of Certificates
representing more than a specified percentage of the investors' assets. The
Depositor will make no representations as to the proper characterization of any
class of Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase any class of Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of any class of Certificates. Accordingly, all investors
whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their legal advisors in determining whether and to what
extent the Certificates of any class constitute legal investments or are subject
to investment, capital or other restrictions.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
Certificates will be applied by the Depositor to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the Mortgage Loans
or Mortgage Securities underlying the Certificates or will be used by the
Depositor for general corporate purposes. The Depositor expects that it will
make additional sales of securities similar to the Certificates from time to
time, but the timing and amount of any additional offerings will be dependent
upon a number of factors, including the volume of mortgage loans purchased by
the Depositor, prevailing interest rates, availability of funds and general
market conditions.
METHODS OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the net proceeds to the
Depositor from that sale.
The Depositor intends that Certificates will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of Certificates may be made through a combination of two or more of the
following methods:
o by negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
o by placements by the Depositor with institutional investors through
dealers; and
o by direct placements by the Depositor with institutional investors.
In addition, if specified in the related Prospectus Supplement, a series
of Certificates may be offered in whole or in part to the Seller of the related
Mortgage Loans (and other assets, if applicable) that would comprise the
Mortgage Pool securing the Certificates.
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If underwriters are used in a sale of any Certificates, other than in
connection with an underwriting on a best efforts basis, the Certificates will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. These underwriters may be
broker-dealers affiliated with the Depositor whose identities and relationships
to the Depositor will be as described in the related Prospectus Supplement. The
managing underwriter or underwriters with respect to the offer and sale of a
particular series of Certificates will be described on the cover of the
Prospectus Supplement relating to that series and the members of the
underwriting syndicate, if any, will be named in the related Prospectus
Supplement.
In connection with the sale of the Certificates, underwriters may receive
compensation from the Depositor or from purchasers of the Certificates in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with the Certificates, and any discounts or
commissions received by them from the Depositor and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale
of any series of Certificates will provide that the obligations of the
underwriters will be subject to conditions precedent, that the underwriters will
be obligated to purchase all of the Certificates if any are purchased (other
than in connection with an underwriting on a best efforts basis) and that, in
limited circumstances, the Depositor will indemnify the several underwriters and
the underwriters will indemnify the Depositor against a number of civil
liabilities, including liabilities under the Securities Act of 1933, as amended,
or will contribute to payments required to be made.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of the offering
and any agreements to be entered into between the Depositor and purchasers of
Certificates of that series.
The Depositor anticipates that the Certificates offered hereby will be
sold primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Certificates, including dealers, may, depending on the
facts and circumstances of the purchases, be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended, in connection with
reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any reoffer or sale.
LEGAL MATTERS
Certain legal matters, including a number of federal income tax matters,
will be passed upon for the Depositor by Thacher Proffitt & Wood, New York, New
York, Orrick, Herrington & Sutcliffe LLP, New York, New York, or by Stroock &
Stroock & Lavan, as specified in the Prospectus Supplement.
FINANCIAL INFORMATION
The Depositor has determined that its financial statements are not
material to the offering made hereby. The Certificates do not represent an
interest in or an obligation of the Depositor. The Depositor's only obligations
with respect to a series of Certificates will be to repurchase Mortgage Loans or
Mortgage Securities upon any breach of the limited representations and
warranties made by the Depositor, or as otherwise provided in the applicable
Prospectus Supplement.
ADDITIONAL INFORMATION
The Depositor has filed the Registration Statement with the Commission.
The Depositor is also subject to some 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 its exhibits, and reports and other information filed by the
Depositor under 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
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at some of its Regional Offices located as follows: Chicago 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 Securities and Exchange
Commission's Web Site (http://www.sec.gov).
REPORTS TO CERTIFICATEHOLDERS
Monthly reports which contain information concerning the trust for a
series of certificates will be sent by or on behalf of the master servicer or
the trustee to each holder of record of the certificates of the related series.
See "Description of the Certificates--Reports to Certificateholders." Reports
forwarded to holders will contain financial information that has not been
examined or reported upon by an independent certified public accountant. The
depositor will file with the Commission the periodic reports with respect to the
trust for a series of certificates as are required under the Exchange Act.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each series of certificates offered by this Prospectus,
there are incorporated in this Prospectus and in the related prospectus
supplement by reference all documents and reports filed or caused to be filed by
the Depositor under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior
to the termination of the offering of the related series of certificates, that
relate specifically to the related series of certificates. The depositor 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 that series of certificates, upon written or
oral request of the person, a copy of any or all reports incorporated in this
Prospectus by reference, in each case to the extent those reports relate to one
or more of those classes of that series of certificates, other than the exhibits
to the documents, unless the exhibits are specifically incorporated by reference
in the 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.
88
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Page Page
401(C) Regulations..........................................................84
Account Balance.............................................................10
Accrual Certificates........................................................21
Additional Balance..........................................................10
Additional Charges..........................................................10
Advance ................................................................30
Affiliated Sellers...........................................................5
Appraised Value..............................................................6
ARM Loans .................................................................8
Audit Guide ................................................................45
Balloon Amount...............................................................9
Balloon Loans................................................................8
Bankruptcy Loss.............................................................36
Bankruptcy Losses...........................................................39
Beneficial Owner............................................................21
Book-Entry Certificates.....................................................21
Call Class ................................................................49
Call Price ................................................................49
CEDEL ................................................................21
CEDEL Participants..........................................................22
CERCLA ................................................................60
Certificate Account.........................................................26
Certificate Administrator....................................................7
Certificate Registrar.......................................................21
Certificateholder...........................................................21
Certificates.................................................................4
Clearance Cooperative.......................................................22
Closed-End Loans.............................................................4
Closing Date................................................................67
CLTV .................................................................6
Combined Loan-to-Value Ratio.................................................6
Commission .................................................................6
Committee Report............................................................67
Conservation Act............................................................60
Contributions Tax...........................................................77
Convertible Mortgage Loan....................................................9
Cooperative ................................................................55
Cooperative Loans............................................................4
Cooperative Note............................................................55
Cooperative Notes............................................................4
Counterparties..............................................................42
Credit Enhancer.............................................................37
Credit Limit................................................................10
Credit Line Agreements......................................................10
Credit Scores...............................................................14
Credit Utilization Rate......................................................7
Crime Control Act...........................................................63
Custodial Account...........................................................17
Custodian ................................................................24
Cut-off Date.................................................................5
Debt Service Reduction......................................................39
Defaulted Mortgage Loss.....................................................36
Deficient Valuation.........................................................39
Deleted Mortgage Loan.......................................................17
Depositaries................................................................21
Depositor .................................................................4
Designated Seller............................................................5
Designated Seller Transaction................................................5
Determination Date..........................................................29
DIDMC ................................................................65
Direct Puerto Rico Mortgage.................................................24
Disqualified Persons........................................................81
Distribution Amount.........................................................29
Distribution Date...........................................................21
DOL ................................................................81
DOL Regulations.............................................................81
Draw ................................................................10
Draw Period ................................................................10
DTC ................................................................21
DTC Participants............................................................21
Eligible Account............................................................27
Endorsable Puerto Rico Mortgage.............................................24
Environmental Lien..........................................................61
ERISA ................................................................81
ERISA Plans ................................................................81
Euroclear ................................................................21
Euroclear Operator..........................................................22
Euroclear Participants......................................................22
Excess Interest.............................................................40
Excess Spread...............................................................25
Exchange Act................................................................88
Excluded Balance............................................................11
Excluded Plan...............................................................83
Excluded Spread.............................................................25
Exemption ................................................................82
Exemption Rating Agencies...................................................82
Extraordinary Losses........................................................37
FDIC ................................................................15
Finance Charge..............................................................10
Financial Guaranty Insurance Policy.........................................38
Fraud Loss ................................................................36
Funding Account.............................................................31
Garn-St Germain Act.........................................................61
Gross Margin.................................................................8
Guide ................................................................12
High Cost Loans.............................................................60
Home Equity Program.........................................................12
Indirect Participants.......................................................21
Insurance Proceeds..........................................................26
Insurer ................................................................38
Issue Premium...............................................................73
Junior Ratio.................................................................7
Letter of Credit............................................................38
Letter of Credit Bank.......................................................38
LIBOR ................................................................42
Liquidated Mortgage Loan....................................................34
Liquidation Proceeds........................................................26
Manager .................................................................6
Manufactured Homes...........................................................4
Mark-to-Market Regulations..................................................75
Master Commitments..........................................................12
Master Servicer............................................................. 5
MERS ................................................................23
MERS(R) System................................................................23
Mezzanine Certificates......................................................20
Modified Mortgage Loan.......................................................7
Modular Housing..............................................................4
Mortgage ................................................................10
Mortgage Loans...............................................................4
Mortgage Notes...............................................................4
Mortgage Pool............................................................... 6
Mortgage Rate................................................................8
Mortgage Securities..........................................................4
Mortgaged Properties.........................................................4
89
<PAGE>
Net Mortgage Rate...........................................................50
Nonrecoverable Advance......................................................28
OID Regulations.............................................................65
Overcollateralization.......................................................40
Participants................................................................21
Parties in Interest.........................................................81
Pass- Through Rate..........................................................29
Paying Agent................................................................28
Percentage Interest.........................................................29
Permitted Investments.......................................................27
Plan Assets ................................................................81
Plans ................................................................81
Pooling and Servicing Agreement..............................................4
Prepayment Assumption.......................................................67
Prohibited Transactions Tax.................................................77
Prospectus Supplement........................................................4
PTCE ................................................................84
PTCE 83-1 ................................................................84
Puerto Rico Mortgage Loans...................................................4
Purchase Obligation.........................................................43
Purchase Price..............................................................17
Qualified Insurer...........................................................41
Qualified Substitute Mortgage Loan..........................................17
Realized Loss...............................................................37
Record Date ................................................................28
Registration Statement......................................................20
Relief Act ................................................................63
REMIC ................................................................47
REMIC Provisions............................................................65
REMIC Regular Certificates..................................................66
REMIC Regulations...........................................................66
REMIC Residual Certificates.................................................66
REO Mortgage Loan...........................................................34
Reserve Fund................................................................40
Residential Funding..........................................................5
Revolving Credit Loans.......................................................4
RICO ................................................................63
Sellers .................................................................5
Senior Certificates.........................................................20
Senior Percentage...........................................................39
Senior/Subordinate Series...................................................20
Servicing Advances..........................................................27
Simple Interest Mortgage Loan................................................9
Single Certificate..........................................................32
SMMEA ................................................................86
Special Hazard Instrument...................................................37
Special Hazard Insurance Policy.............................................38
Special Hazard Loss.........................................................36
Special Servicer............................................................33
Spread Account..............................................................40
Stated Principal Balance....................................................37
Stated Value.................................................................7
Statistical Valuation........................................................6
Strip Certificate...........................................................20
Subordinate Certificates....................................................20
Subservicers.................................................................7
Subservicing Account........................................................25
Subservicing Agreement......................................................19
Swaps ................................................................42
Tax Favored Plans...........................................................81
Tax-Exempt Investor.........................................................85
Terms and Conditions........................................................22
Tiered REMICs...............................................................67
Title V ................................................................62
Title VIII ................................................................63
Trust .................................................................4
Trust Balance...............................................................11
UBTI ................................................................85
UCC ................................................................58
Unaffiliated Sellers.........................................................5
Yield Supplement Agreements.................................................42
90
<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED April 30, 1999
Prospectus Supplement dated _______, ___ (to prospectus dated ____________)
$_____________
Residential Funding Mortgage Securities II, Inc.
Depositor
Residential Funding Corporation
Master Servicer
Home Equity Loan Pass-Through Certificates, Series ____________
You should consider carefully the risk factors beginning on page S-__ in this
prospectus supplement and page __ in the prospectus.
The certificates will represent ownership interests only in the trust created
for Series ____________. The certificates will also have the benefit of a
certificate guaranty insurance policy. None of the certificates represent
ownership interests in or obligations of Residential Funding Mortgage Securities
II, Inc., Residential Funding Corporation or any of their affiliates.
This prospectus supplement may be used to offer and sell the certificates only
if accompanied by the prospectus.
Offered Certificates
The trust created for the Series ____________ Certificates will hold a pool of
home equity mortgage loans, which are closed-end, fixed-rate and either
fully-amortizing or balloon payment mortgage loans. The mortgage loans are
secured primarily by second liens on one- to four-family residential properties.
The trust will issue [eight] classes of offered certificates. You can find a
list of these classes, together with their principal balances, pass-through
rates and some other characteristics, on page S-__ of this prospectus
supplement.
Credit Enhancement
Credit enhancement for the offered certificates consists of:
o a portion of interest paid by the borrowers in excess of what is necessary
to pay interest on the certificates;
o overcollateralization consisting of the excess of the balance of the
mortgage loans over the balance of the offered certificates; and
o an irrevocable and unconditional certificate guaranty insurance policy
issued by _________________.
[Insurer's logo]
Underwriting
_________________ will offer to the public the [Class A-I-1] Certificates
through [Class A-I-6] Certificates, the [Class A-II] Certificates and the [Class
IO] Certificates at varying prices to be determined at the time of sale.
_________________'s commission will be the difference between the price it pays
to the depositor for the certificates and the amount it receives from the sale
of the certificates to the public. The proceeds to the depositor from the sale
of the offered certificates to _________________ will be approximately ___% of
the principal balance of the offered certificates plus accrued interest, before
deducting expenses. See "Method of Distribution" in this prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the offered certificates or determined
that this prospectus supplement or the prospectus is accurate or complete. 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.
[Name of Underwriter]
Underwriter
<PAGE>
Important notice about information presented in this prospectus supplement and
the accompanying prospectus
We provide information to you about the offered certificates in two separate
documents that provide progressively more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to your series of certificates; and
o this prospectus supplement, which describes the specific terms of your
series of certificates.
If the description of your certificates in this prospectus supplement differs
from the related description in the accompanying prospectus, you should rely on
the information in this prospectus supplement.
The depositor's principal offices are located at 8400 Normandale Lake Boulevard,
Suite 600, Minneapolis, Minnesota 55437 and its telephone number is (612)
832-7000.
<PAGE>
Table of Contents
Summary.....................................................................S-
Risk Factors................................................................S-
Risks Associated with the Mortgage Loans................................S-
Limited Obligations.....................................................S-
Liquidity Risks.........................................................S-
Special Yield and Prepayment Considerations.............................S-
Introduction................................................................S-
Description of the Mortgage Pool............................................S-
General.................................................................S-
Payments on the Simple Interest Mortgage Loans..........................S-
Balloon Loans...........................................................S-
Mortgage Pool Characteristics...........................................S-
Underwriting Standards..................................................S-
Optional Repurchase of Defaulted Mortgage
Loans.................................................................S-
The Initial Subservicer.................................................S-
Residential Funding.....................................................S-
Delinquency and Loss Experience of the
Master Servicer's Portfolio...........................................S-
Additional Information..................................................S-
Description of the Certificates ............................................S-
General.................................................................S-
Book-Entry Registration of the Offered
Certificates..........................................................S-
Distributions...........................................................S-
Available Distribution Amount...........................................S-
Interest Distributions..................................................S-
Principal Distributions.................................................S-
Overcollateralization Provisions........................................S-
Excess Loss Amounts.....................................................S-
Certificate Guaranty Insurance Policy...................................S-
The Credit Enhancer.........................................................S-
Year 2000 Considerations....................................................S-
Overview of the Year 2000 Issue.........................................S-
Overview of Residential Funding's Y2K
Project...............................................................S-
Y2K Project Status......................................................S-
Risks Related to Y2K....................................................S-
Certain Yield and Prepayment Considerations.................................S-
General.................................................................S-
Fixed Strip Certificate Yield Considerations............................S-
Pooling and Servicing Agreement.............................................S-
General.................................................................S-
The Master Servicer.....................................................S-
Servicing and Other Compensation and
Payment of Expenses...................................................S-
Refinancing of Senior Lien .............................................S-
Collection and Liquidation Practices; Loss
Mitigation............................................................S-
Voting Rights...........................................................S-
Termination.............................................................S-
Certain Federal Income Tax Consequences.....................................S-
Method of Distribution......................................................S-
Legal Opinions..............................................................S-
Experts.....................................................................S-
Ratings.....................................................................S-
Legal Investment............................................................S-
ERISA Considerations........................................................S-
Annex I: Global Clearance, Settlement
and Tax Documentation Procedures.................................I-1
S-2
<PAGE>
SUMMARY
The following summary is a general overview of the offered certificates and does
not contain all of the information that you should consider in making your
investment decision. To understand the terms of the offered certificates, you
should read carefully this entire document and the accompanying prospectus.
Issuer......................... RFMSII Series _______ Trust.
Title of securities............ Home Equity Loan Pass-Through Certificates,
Series _______.
Depositor..................... Residential Funding Mortgage Securities II, Inc.,
an affiliate of Residential Funding Corporation.
Master servicer................ Residential Funding Corporation.
Trustee........................ ______________.
Credit enhancer................ ______________.
Mortgage pool.......___ closed end, fixed-rate, fully-amortizing and balloon
payment home equity mortgage loans with an aggregate
principal balance of approximately $_______ as of the
close of business on day prior to the cut-off date. The
mortgage loans are secured primarily by second liens on
one- to four-family residential properties.
Cut-off date................... _______.
Closing date................... On or about _______.
Distribution dates..... ..........Beginning in _______ on the 25th of each month
or, if the 25th is not a business day,
on the next business day.
Scheduled final distribution date ..._______. The actual
final distribution date could be substantially
earlier.
Form of certificates........... Book-entry.
See "Description of the
Certificates--Book-Entry Registration of the
Offered Certificates" in this prospectus
supplement.
Minimum denominations.......... [Class A] Certificates: $25,000.
[Class IO] Certificates: $2,000,000 (notional
balance).
Legal investment............... The certificates will not be "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984.
See "Legal Investment" in this prospectus
supplement and "Legal Investment Matters" in
the prospectus.
S-3
<PAGE>
Offered Certificates
Pass-
Class Through Initial Principal Initial Rating
Rate Balance _____/_____ Designation
- --------------------------- ------------------------------ ---------------------
[Class A-I] Certificates:
- --------------------------- ------------------------------ ---------------------
[A-I-1 _____% $ AAA/AAA Senior/Fixed Rate]
- --------------------------- ------------------------------ ---------------------
[A-I-2 _____% $ AAA/AAA Senior/Fixed Rate]
- --------------------------- ------------------------------ ---------------------
[A-I-3 _____% $ AAA/AAA Senior/Fixed Rate]
- --------------------------- ------------------------------ ---------------------
[A-I-4 _____% $ AAA/AAA Senior/Fixed Rate]
- --------------------------- ------------------------------ ---------------------
[A-I-5 _____% $ AAA/AAA Senior/Fixed Rate]
- --------------------------- ------------------------------ ---------------------
[A-I-6 _____% $ AAA/AAA Senior/Lockout/Fixed
Rate
- --------------------------- ------------------------------ ---------------------
Total [Class A-I]
Certificates: $ __________
- --------------------------- ------------------------------ ---------------------
[Class A-II] Certificates:
- --------------------------- ------------------------------ ---------------------
Senior/Fixed Rate/Pass-
[A-II _____% $___________ AAA/AAA Through]
- --------------------------- ------------------------------ ---------------------
Total Class A
Certificates: $__________
- --------------------------- ------------------------------ ---------------------
[Class IO] Certificates:
- --------------------------- ------------------------------ ---------------------
Senior/Interest Only/Fixed
[IO _____% $ _____ AAA/AAAr Rate]
- --------------------------- ------------------------------ ---------------------
Total offered
certificates: $__________
- --------------------------- ------------------------------ ---------------------
Non-offered Certificates
- --------------------------------------------------------------------------------
Class R Certificates:
- --------------------------- ------------------------------ ---------------------
R[-I] _____% $0 NA/NA Subordinate/Residual
- --------------------------- ------------------------------ ---------------------
[R-II _____% $0 NA/NA Subordinate/Residual]
- --------------------------- ------------------------------ ---------------------
Total offered and non- $__________
offered certificates:
- --------------------------- ------------------------------ ---------------------
S-4
<PAGE>
The Trust
The depositor will establish a trust with respect to the Series ________
Certificates, under a pooling and servicing agreement. On the closing date, the
depositor will deposit the pool of mortgage loans described below into the
trust.
Each certificate will represent a partial ownership interest in the trust. The
trust will also include a certificate guaranty insurance policy issued by
________.
The Mortgage Pool
The mortgage loans to be deposited in the trust consist of two groups, group I
and group II, of which ________% and ________%, respectively, are secured by
second mortgages or deeds of trust. The remainder of the mortgage loans are
secured by first mortgages or deeds of trust. The group I loans have the
following aggregate characteristics as of the cut-off date:
Weighted
Range Average
Principal balance $ to $ $ *
Mortgage rate % to % %
Original term to
maturity (months) to
Remaining term to
maturity (months) to
Combined loan-to- % to % %
value ratio
*Indicates average principal balance.
The group II loans have the following aggregate characteristics as of the
cut-off date:
Weighted
Range Average
Principal balance $ to $ $ *
Mortgage rate % to % %
Original term to
maturity (months) to
Remaining term to
maturity (months) to
Combined loan-to- % to % %
value ratio
See "Description of the Mortgage Pool" in this prospectus
supplement.
Distributions on the offered certificates
Amounts available for monthly distribution. On each monthly payment date, the
trustee will make distribu tions to investors. The amount available for distribu
tion will include:
o collections of monthly payments on the mort
gage loans, including prepayments and other
unscheduled collections minus
o the fees and expenses of the subservicer and
the master servicer.
The aggregate amount of monthly collections is described under the heading
"Description of the Certificates--Available Distribution Amount" in this
prospectus supplement.
Priority of distributions. Distributions to the offered certificates and the
credit enhancer will be made from available amounts as follows:
o Distribution of interest to the offered certificates
o Distribution of principal to the Class A Certificates(1)
o Distribution of principal to the Class A Certificates in
respect of specified losses
o Payment to the credit enhancer of its premium for the
certificate guaranty insurance policy and any previously
unpaid premiums with interest
o Reimbursement to the credit enhancer for
prior draws made on the certificate guaranty
insurance policy with interest
o Distribution of additional principal to the
Class A Certificates if the overcollateralization falls
below the required level
o Payment to the credit enhancer for other
amounts owed
o Distribution of any remaining funds to the
Class R Certificates
(1) Each of Class A-I Certificates and Class A-II Certificates represents rights
to receive principal primarily from its respective loan group. Not all
outstanding classes of Class A-I Certificates will receive distributions of
principal on each distribution date.
S-5
<PAGE>
Interest distributions. The amount of interest owed to each class of offered
certificates on each distribution date will equal:
o the pass-through rate for that class of certificates
multiplied by
o the principal balance, or notional amount, of that class of certificates
as of the day immediately prior to the related distribution date
multiplied by
o 1/12th minus
o the share of some interest shortfalls allocated to that class to the
extent not covered by the certifi cate guaranty insurance policy as
described in this prospectus supplement.
See "Description of the Certificates--Interest Distributions" in this
prospectus supplement.
Allocation of principal. Principal distributions on the [Class A-I] Certificates
will be based primarily on principal received with respect to the group I loans.
These distribu tions will be allocated among the various classes of [Class A-I]
Certificates as described in this prospectus supple ment. Not all outstanding
[Class A-I] Certificates will receive principal on each distribution date.
Principal distributions on the [Class A-II] Certificates will be based primarily
on principal received with respect to the group II loans.
Principal distributions on the Class A Certificates may be adjusted in order to
maintain the required overcollateralization amount, as described under "Descrip
tion of the Certificates -- Overcollateralization Provisions" in this prospectus
supplement. These provisions may shorten the weighted average life of the Class
A Certifi cates by increasing the rate at which principal is distributed to the
Class A Certificates.
The Class IO Certificates are not entitled to receive any principal
distributions.
In addition, payments to holders of the offered certificates may be made on each
distribution date from draws on the certificate guaranty insurance policy. These
draws will cover shortfalls in amounts available to pay interest on the offered
certificates at the applicable pass-through rate plus any losses allocated to
the offered certificates.
Credit Enhancement
The credit enhancement for the benefit of the offered certificates consists of:
Excess Interest. Mortgagors are generally required to pay more interest on their
mortgage loans than is necessary to pay the interest earned on the certificates.
Therefore, there will generally be excess interest. Any excess interest will be
available to cover interest shortfalls, except for some interest shortfalls that
are covered by the certificate guaranty insurance policy, and will be used to
pay principal on the certificates up to specified amounts of some losses. In
addition, if the level of overcollateralization described below is less than
what is required, any remaining excess interest will be paid to the certificates
as principal. This will reduce the principal balance of the certificates faster
than the principal balance of the mortgage loans so that the required level of
overcollateralization is reached.
Overcollateralization. On the cut-off date, the aggregate principal balance of
the mortgage loans will be approximately $______ less than the aggregate
principal balance of the certificates. On each distribution date, excess
interest, if available, will be used to make payments with respect to principal
on the Class A Certificates to reduce this undercollateralization amount and
then to build up overcollateralization, until the aggregate principal balance of
the mortgage loans exceeds the aggregate principal balance of the Class A
Certificates by the amount specified in this prospectus supplement. Once the
required level of overcollateralization is reached, the acceleration feature
will cease, unless necessary to maintain the required level of
overcollateralization. Any loss amounts not covered by excess interest or
overcollateralization will be covered by the policy as described below.
See "Description of the Certificates--Overcollateralization Provisions" in this
prospectus supplement.
Certificate Guaranty Insurance Policy. On the closing date, the credit enhancer
will issue the certificate guaranty insurance policy in favor of the trustee.
This policy will unconditionally and irrevocably guarantee interest on the
offered certificates at the pass-through rates shown on page S- __ of this
prospectus supplement, any losses allocated to the offered certificates and any
unpaid principal on the offered certificates on the final distribution date.
See "Description of the Certificates--Certificate Guaranty Insurance Policy" in
this prospectus supplement and "Description of Credit
S-6
<PAGE>
Enhancement--Certificate Guaranty Insurance Policy" in the prospectus.
Optional Termination
On any distribution date on which the principal balances of the mortgage loans,
after applying payments received in the related collection period, is less than
10% of their principal balances as of the cut-off date, the master servicer or
the depositor will have the option to:
o purchase from the trust all remaining mortgage loans,
causing an early retirement of the certificates; or
o purchase all the certificates.
Under either type of optional purchase, holders of the outstanding certificates
will receive the outstanding principal balance of the certificates in full with
accrued interest. Any optional purchase of the remaining mortgage loans may
result in a shortfall to the holders of the most subordinate classes of
certificates outstanding, if the trust then holds properties acquired from
foreclosing upon defaulted loans.
See "Pooling and Servicing Agreement--Termination" in this prospectus supplement
and "The Pooling and Servicing Agreement--Termination; Retirement of
Certificates" in the prospectus.
Ratings
When issued, the certificates will receive ratings which are not lower than
those listed in the table on page __ of this prospectus supplement. The ratings
on the certificates address the likelihood that the holders of the certificates
will receive all distributions on the underlying mortgage loans to which they
are entitled. A security rating is not a recommendation to buy, sell or hold a
security and is subject to change or withdrawal at any time by the assigning
rating agency. The ratings also do not address the rate of principal prepayments
on the mortgage loans. For example, the rate of prepayments, if different than
originally anticipated, could adversely affect the yield realized by holders of
the certificates.
See "Ratings" in this prospectus supplement.
Legal Investment
The offered certificates will not be "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984. You should consult
your legal advisors in determining whether and to what extent the certificates
constitute legal investments for you.
See "Legal Investment" in this prospectus supplement and "Legal Investment
Matters" in the prospectus for important information concerning possible
restrictions on ownership of the certificates by regulated institutions.
ERISA Considerations
Subject to important considerations, the offered certificates may be eligible
for purchase by persons investing assets of employee benefit plans or individual
retirement accounts. Plans should consult with their legal advisors before
investing in the offered certificates.
See "ERISA Considerations" in this prospectus supplement and in the prospectus.
Tax Status
For federal income tax purposes, the depositor will elect to treat the trust as
two real estate mortgage investment conduits. The offered certificates will
represent ownership of regular interests in the trust and will be treated as
representing ownership of debt for federal income tax purposes. You will be
required to include in income all interest and original issue discount, if any,
on the certificates in accordance with the accrual method of accounting
regardless of your usual methods of accounting.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Certain Federal Income Tax
Consequences" in this prospectus supplement and in the prospectus.
S-7
<PAGE>
RISK FACTORS
The offered certificates are not suitable investments for all investors. In
particular, you should not purchase any class of offered certificates unless you
understand the prepayment, credit, liquidity and market risks associated with
that class.
The offered certificates are complex securities. You should possess, either
alone or together with an investment advisor, the expertise necessary to
evaluate the information contained in this prospectus supplement and the
accompanying prospectus in the context of your financial situation and tolerance
for risk.
You should carefully consider, among other things, the following factors in
connection with the purchase of the offered certificates:
Risks Associated with the Mortgage Loans
The return on your certificates may be affected by losses on the mortgage loans,
which are more likely because they are junior liens.
_____% of the mortgage loans are secured by second mortgages
or deeds of trust. Accordingly, the proceeds from any
liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding balance of the mortgage
loans only if the claims of any senior mortgages have been
satisfied in full. 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 the
mortgage loan as a bad debt. The foregoing risks are
particularly applicable to mortgage loans secured by second
liens that have high loan-to-value ratios, when combined
with the first lien mortgage, or low ratios of the principal
amount of the mortgage loan to the sum of the principal
amounts of the mortgage loans secured by the first and
second liens, because the master servicer is more likely to
determine that foreclosure is uneconomical.
Delay in payment on your certificates may result because the master servicer is
not required to advance delinquent monthly payments on the mortgage loans.
The master servicer is not obligated to advance scheduled
monthly payments of principal or interest on mortgage loans
that are delinquent or in default. 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.
Some of the mortgage loans do not require principal payments until maturity.
____% of the mortgage loans are balloon loans, which will
require substantial principal payments, known as balloon
payments, at their stated maturity. Balloon payments
increase the risk associated with mortgage loans because a
mortgagor's ability to make a balloon payment typically
depends on the mortgagor's ability either to refinance the
loan or to sell the related mortgaged property in a timely
manner.
See "Description of the Mortgage Pool--Balloon Loans" in
this prospectus supplement.
S-8
<PAGE>
The return on your certificates may be particularly sensitive to changes in real
estate markets in specific areas.
One risk associated with investing in mortgage-backed securities
is created by any concentration of the related properties in one
or more geographic regions. If the regional economy or housing
market of any state, or other region, having a significant
concentration of the properties underlying the mortgage loans
weakens, the mortgage loans in that region may experience high
rates of loss and delinquency, resulting in losses to
certificateholders. A region's economic condition and housing
market may be adversely affected by a variety of events,
including natural disasters such as earthquakes, hurricanes,
floods and eruptions, and civil disturbances such as riots. The
economic impact of these events may also be felt in areas beyond
the region immediately affected by the disaster or disturbance.
The properties underlying the mortgage loans may be concentrated
in these regions. Concentration may result in greater losses to
certificateholders than those generally present for similar
mortgage-backed securities without this concentration.
Concentrations material to an individual offering will be
disclosed.
See "Description of the Mortgage Pool--Mortgage Pool
Characteristics" in this prospectus supplement.
The origination disclosure practices of the mortgage loans could create
liabilities that may affect your interest in your certificates.
____% of the mortgage loans are subject to special rules,
disclosure requirements and other regulatory provisions because
they:
o were originated on or after October 1, 1995,
o were not made to finance the purchase of the mortgaged
property, and
o have interest rates or origination costs in excess of
some levels.
Purchasers or assignees of these type of mortgage loans,
including the trust, could be liable for all claims and subject
to all defenses arising under the provisions that the mortgagors
could assert against the originators of the mortgage loans.
Remedies available to a mortgagor include monetary penalties, as
well as rescission rights if the appropriate disclosures were not
given as required. Any federal and state law violations that
would result in liability to the trust would be a breach of
Residential Funding Corporation's representations and warranties,
and Residential Funding Corporation would be obligated to cure,
repurchase or, if permitted by the pooling and servicing
agreement, substitute another mortgage loan for the mortgage loan
in question. Residential Funding Corporation's obligation to
repurchase or substitute for any mortgage loan will be the only
remedy available to the certificateholders if any breach occurs.
See "Certain Legal Aspects of Mortgage Loans and Related
Matters--Anti-Deficiency Legislation and Other Limitations on
Lenders" in the Prospectus.
The return on your certificates may be affected by an economic downturn.
The type of mortgage loans included in the mortgage pool has been
available to mortgagors 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 adversely affect the ability and
willingness of mortgagors to repay their loans. 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 mortgage loans.
S-9
<PAGE>
Your interest in the notes may be adversely affected by changes in bankruptcy
laws.
The Bankruptcy Reform Act of 1994 established the National
Bankruptcy Review Commission for purposes of analyzing the
nation's bankruptcy laws and making recommendations to Congress
for legislative changes to the bankruptcy laws. This Commission
delivered a report on October 20, 1997 recommending that Congress
amend the Bankruptcy Code in some respects with respect to
mortgage loans such as the mortgage loans in the trust.
Congress adjourned in 1998 without passing any significant
bankruptcy reform legislation addressing the report or the
Truth-in-Lending Act with respect to claims secured by a debtor's
principal residence. Congress continues to debate possible
changes to the Bankruptcy Code. These bills may result in
bankruptcy law changes that may affect future bankruptcies and
therefore could affect the rate and timing of payments on the
mortgage loans. Any of these changes to the Bankruptcy Code could
have a negative effect on the mortgage loans and the enforcement
of the rights of the trust in the mortgage loans.
Limited Obligations
Payments on the mortgage loans, together with the certificate guaranty insurance
policy, are the sole source of payments on your certificates.
Credit enhancement will be provided for the offered certificates
in the form of excess interest collections, if available,
overcollateralization, and by the certificate guaranty insurance
policy. None of the depositor, the master servicer, the trustee,
the sellers, the subservicers, the credit enhancer, GMAC Mortgage
or any of their affiliates will have any obligation to replace or
supplement the credit enhancement, or to take any other action to
maintain any rating on the certificates. If losses incurred on
the mortgage loans are not covered by the credit enhancement
described above, the holders of the certificates will bear all
risk of the losses resulting from default by mortgagors.
Liquidity Risks
You may have to hold your certificates to maturity if their marketability is
limited.
A secondary market for your certificates may not develop. Even if
a secondary market does develop, it may not continue or it may be
illiquid. Illiquidity means you may not be able to find a buyer
to buy your securities readily or at prices that will enable you
to realize a desired yield. Illiquidity can have an adverse
effect on the market value of your offered certificates.
Any class of offered certificates may experience illiquidity,
although generally illiquidity is more likely for classes that
are especially sensitive to prepayment, credit or interest rate
risk, or that have been structured to meet the investment
requirements of limited categories of investors.
Special Yield and Prepayment Considerations
S-10
<PAGE>
The yield on your certificates will vary depending on the rate of prepayment.
The yield to maturity on each class of offered certificates will
depend on a variety of factors, including:
o the rate and timing of principal payments on the
mortgage loans, including prepayments, defaults and
liquidations, and repurchases due to breaches of
representations or warranties;
o the pass-through rate for that class; and
o the purchase price of that class.
The rate of prepayments is one of the most important and least
predictable of these factors.
In general, if you purchase a certificate at a price higher than
its outstanding principal balance and principal distributions on
your certificate occur faster than you assumed at the time of
purchase, your yield will be lower than you anticipated.
Conversely, if you purchase a certificate at a price lower than
its outstanding principal balance and principal distributions on
that class occur more slowly than you assumed at the time of
purchase, your yield will be lower than you anticipated.
The rate of prepayments on the mortgage loans will vary depending on future
market conditions, and other factors.
Since mortgagors can generally prepay their mortgage loans
at any time, the rate and timing of principal distributions
on the offered certificate are highly uncertain. Generally,
when market interest rates increase, borrowers are less
likely to prepay their mortgage loans. This could result in
a slower return of principal to you at a time when you might
have been able to reinvest your funds at a higher rate of
interest than the pass-through rate on your class of
certificates. On the other hand, when market interest rates
decrease, borrowers are generally more likely to prepay
their mortgage loans. This could result in a faster return
of principal to you at a time when you might not be able to
reinvest your funds at an interest rate as high as the
pass-through rate on your class of certificates. Refinancing
programs, which may involve soliciting all or some of the
mortgagors to refinance their mortgage loans, may increase
the rate of prepayments on the mortgage loans.
See "Certain Yield and Prepayment Considerations" in this
prospectus
supplement.
____% of the mortgage loans provide for payment of a
prepayment charge. Prepayment charges may reduce the rate of
prepayment on the mortgage loans until the end of the
related prepayment period. See "Description of the Mortgage
Pool--Mortgage Pool Characteristics" in this prospectus
supplement.
The yield on your certificates will be affected by the specific forms that apply
to that class discussed below.
The offered certificates of each class have different yield
considerations and different sensitivities to the rate and
timing of principal distributions. The following is a
general discussion of some yield considerations and
prepayment sensitivities of each class.
See "Certain Yield and Prepayment Considerations" in this
prospectus supplement.
S-11
<PAGE>
[Class A-I Certificates and Class A-II Certificates
The Class A-I Certificates will receive principal payments
primarily from the group I mortgage loans. The Class A-II
Certificates will receive principal payments primarily from
the group II loans. Therefore, the yields on the Class A-I
Certificates and Class A-II Certificates will be sensitive
to the rate and timing of principal prepayments and defaults
on the mortgage loans in their respective loan groups.]
[Class A-I Certificates
The Class A-I Certificates are subject to various priorities
for payment of principal as described in this Prospectus
Supplement. Distributions of principal on the Class A-I
Certificates having an earlier priority of payment will be
affected by the rates of prepayment of the group I loans
early in the life of the mortgage pool. Those classes of
Class A-I Certificates with a later priority of payment will
be affected by the rates of prepayment of the group I loans
experienced both before and after the commencement of
principal distributions on those classes.]
See "Description of the Certificates--Principal
Distributions" in this prospectus supplement.
[Class A-I-6 Certificates
It is not expected that the Class A-I-6 Certificates will
receive any distributions of principal until the
distribution date in __________. Until the distribution date
in ____________, the Class A-I-6 Certificates may receive a
portion of principal prepayments that is smaller than its
pro rata share of principal payments from the mortgage
loans.]
[Class IO Certificates
An extremely rapid rate of principal prepayments on the
mortgage loans could result in the failure of investors in
the Class IO Certificates to fully recover their initial
investments.]
See "Certain Yield and Prepayment Considerations" and
especially "--Fixed Strip Certificate Yield Considerations"
in this prospectus supplement.
S-12
<PAGE>
INTRODUCTION
The Depositor will establish a trust (the "Trust") with respect to the
Series _______ Certificates the Closing Date, under a pooling and servicing
agreement (the "Pooling and Servicing Agreement") among the Depositor, the
Master Servicer and the Trustee, dated as of the Cut-off Date. On the Closing
Date, the Depositor will deposit into the Trust a pool of mortgage loans (the
"Mortgage Pool") secured by closed end, fixed-rate, fully amortizing and balloon
payment mortgage loans.
You can find a listing of the pages where capitalized terms used both in
the prospectus and this prospectus supplement are defined under the caption
"Index" beginning on page __ in the prospectus.
DESCRIPTION OF THE MORTGAGE POOL
General
The Mortgage Pool will consist of approximately _______ mortgage loans
(the "Mortgage Loans") having an aggregate principal balance outstanding as of
the close of business on the day prior to the Cut-off Date (the "Cut-off Date
Balance") of $_______. The Mortgage Pool will consist of two groups of Mortgage
Loans ("Loan Group I" and "Loan Group II," and each, a "Loan Group"), designated
as the "Group I Loans" and "Group II Loans." _______% of the Mortgage Loans are
secured by second liens on fee simple or leasehold interests in one- to
four-family residential real properties (each, a "Mortgaged Property") and the
remainder are secured by first liens. The Mortgage Loans will consist of
fixed-rate, fully-amortizing and balloon payment Mortgage Loans with terms to
maturity of approximately five, ten, fifteen, twenty or twenty-five years with
respect to __%, __%, __%, __% and __% of the Mortgage Loans, respectively, from
the date of origination or modification. With respect to Mortgage Loans which
have been modified, references in this Prospectus Supplement to the date of
origination shall be deemed to be the date of the most recent modification. All
percentages of the Mortgage Loans described in this Prospectus Supplement are
approximate percentages by aggregate Cut-off Date Balance unless otherwise
indicated.
All of the Mortgage Loans were acquired by Residential Funding (in that
capacity, the "Seller") from banks, savings and loan associations, mortgage
bankers, investment banking firms and other home equity loan originators and
sellers (the "Program Sellers"), under the Seller's Home Equity Program (the
"Home Equity Program"), on a servicing released basis. __% of the Mortgage Loans
were acquired by the Seller from HomeComings Financial Network, Inc., an
affiliate of the Seller. No Unaffiliated Seller sold more than __% of the
Mortgage Loans to Residential Funding. All of the Mortgage Loans will be
serviced by GMAC Mortgage Corporation. See "--The Initial Subservicer" below.
All of the Mortgage Loans were generally underwritten in conformity with
or in a manner generally consistent with the Home Equity Program. See
"--Underwriting Standards" below.
The Depositor and Residential Funding will make some limited
representations and warranties regarding the Mortgage Loans as of the Closing
Date. The Depositor and Residential Funding will be required to repurchase or
substitute for any Mortgage Loan as to which a breach of its representations and
warranties with respect to that Mortgage Loan occurs if the breach materially
adversely affects the interests of the Certificateholders or the Credit Enhancer
(as defined in this Prospectus Supplement) under "Description of the
Certificates-Certificate Guaranty Insurance Policy" in that Mortgage Loan. Each
Seller has made or will make some limited representations and warranties
regarding the related Mortgage Loans, as of the date of their purchase by
Residential Funding. However, the representations and warranties will not be
assigned to the Trustee for the benefit of the holders of the Certificates, and
therefore a breach of the representations and warranties will not be enforceable
on behalf of the Trust. See "Mortgage Loan Program--Qualifications of Sellers"
and "--Representations Relating to Mortgage Loans" and "Description of the
Certificates--Review of Mortgage Loans" in the Prospectus.
Payments on the Simple Interest Mortgage Loans
__% and __% of the Group I Loans and Group II Loans, respectively, are
Simple Interest Mortgage Loans, which require that each monthly payment consist
of an installment of interest which is calculated according to the simple
S-13
<PAGE>
interest method on the basis of the outstanding principal balance of that
Mortgage Loan multiplied by the Mortgage Rate and further multiplied by a
fraction, the numerator of which is the number of days in the period elapsed
since the preceding payment of interest was made and the denominator of which is
the number of days in the annual period for which interest accrues on that
Mortgage Loan. As payments are received, the amount received is applied first to
interest accrued to the date of payment and the balance is applied to reduce the
unpaid principal balance.
Accordingly, if a Mortgagor pays a fixed monthly installment before its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have been
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly greater. However,
the next succeeding payment will result in an allocation of a greater portion of
the payment allocated to interest if that payment is made on its scheduled due
date.
On the other hand, if a Mortgagor pays a fixed monthly installment after
its scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment is made on or prior to its
scheduled due date, the principal balance of the Mortgage Loan will amortize in
the manner described in the preceding paragraph. However, if the Mortgagor
consistently makes scheduled payments after the scheduled due date the Mortgage
Loan will amortize more slowly than scheduled. Any remaining unpaid principal is
payable on the final maturity date of the Mortgage Loan.
The remaining __% and __% of the Group I Loans and Group II Loans,
respectively, are Actuarial Mortgage Loans, on which 30 days of interest is owed
each month irrespective of the day on which the payment is received.
Balloon Loans
__% and __% of the Group I Loans and Group II Loans, respectively, are
Balloon Loans, which require monthly payments of principal based on a 30-year
amortization schedule and have scheduled maturity dates of approximately fifteen
years from the due date of the first monthly payment, in each case leaving a
substantial portion of the original principal amount due and payable on the
respective scheduled maturity date (a "Balloon Payment"). The existence of a
Balloon Payment will require the related Mortgagor to refinance the Mortgage
Loan or to sell the Mortgaged Property on or prior to the scheduled maturity
date. The ability of a Mortgagor to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage rates
at the time of sale or refinancing, the Mortgagor's equity in the related
Mortgaged Property, the financial condition of the Mortgagor, tax laws,
prevailing general economic conditions and the terms of any related first lien
mortgage loan. None of the Depositor, the Master Servicer or the Trustee is
obligated to refinance any Balloon Loan. The Policy (as defined in this
Prospectus Supplement under "Description of the Certificates-Certificate
Guaranty Insurance Policy) issued by the Credit Enhancer will provide coverage
on any losses incurred upon liquidation of a Balloon Loan arising out of or in
connection with the failure of a Mortgagor to make its Balloon Payment.
Mortgage Pool Characteristics
All of the Mortgage Loans have principal and interest payable monthly on
various days of each month as specified in the Mortgage Note (the "Due Date").
In connection with each Mortgage Loan that is secured by a leasehold
interest, the related Seller will have represented to Residential Funding that,
among other things: (i) the use of leasehold estates for residential properties
is an accepted practice in the area where the related Mortgaged Property is
located; (ii) residential property in the 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 the lease; (iv) the leasehold is in full force and
effect and is not subject to any prior lien or encumbrance by which the
leasehold could be terminated or subject to any charge or penalty; and (v) the
remaining term of the lease does not terminate less than ten years after the
maturity date of that Mortgage Loan.
__% of the Group I Loans and __% of the Group II Loans provide for payment
of a prepayment charge, if these loans prepay within a specified time period.
The prepayment charge generally is the maximum amount permitted under
S-14
<PAGE>
applicable state law. __% of the Group I Loans and __% of the Group II Loans
provide for payment of a prepayment charge for full prepayments made within
approximately three years of the origination of the Mortgage Loans in an amount
calculated in accordance with the terms of the related Mortgage Note. With
respect to the remainder of the Mortgage Loans with a prepayment charge, the
prepayment charge is calculated in a different manner. No prepayment charges or
late payment charges received on the Mortgage Loans will be available for
payment on the Certificates.
As of the Cut-off Date, no Mortgage Loan will be 30 days or more
delinquent in payment of principal and interest. For a description of the
methodology used to categorize mortgage loans as delinquent, see "--Delinquency
and Loss Experience of the Master Servicer's Portfolio," below.
As of the Cut-off Date, __% and __% of the Group I Loans and Group II
Loans, respectively, 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 of the loan.
Remedies available to the borrower include monetary penalties, as well as
rescission rights if appropriate disclosures were not given as required. See
"Risk Factors--Risk of Loss" in this Prospectus Supplement and "Certain Legal
Aspects of Mortgage Loans and Related Matters--Anti-Deficiency Legislation and
Other Limitations on Lenders" in the Prospectus.
No Mortgage Loan provides for deferred interest, negative amortization or
future advances.
With respect to each Mortgage Loan, the "Combined Loan-to-Value Ratio" or
"CLTV" generally will be the ratio, expressed as a percentage, of (A) the sum of
(i) the original principal balance of the Mortgage Loan and (ii) any outstanding
principal balance, at the time of origination of the Mortgage Loan, of all other
mortgage loans, if any, secured by senior or subordinate liens on the related
Mortgaged Property, to (B) the Appraised Value, or, to the extent permitted by
the Guide (as defined in this Prospectus Supplement), the Stated Value. The
"Appraised Value" for any Mortgage Loan will be the appraised value of the
related Mortgaged Property determined in the appraisal used in the origination
of the Mortgage Loan, which may have been obtained at an earlier time; provided
that if the Mortgage 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 the Mortgaged Property. However, with
respect to not more than __% and __% of the Group I Loans and Group II Loans,
respectively, the "Stated Value" will be the value of the Mortgaged Property as
stated by the related Mortgagor in his or her loan application. With respect to
each Mortgage Loan, the "Junior Mortgage Ratio" is the ratio, expressed as a
percentage, of the original principal balance of the Mortgage Loan to the sum of
(A) the original principal balance of the Mortgage Loan, and (B) the unpaid
principal balance at the time of origination of the Mortgage Loan of any
mortgage loan secured by a senior lien on the related Mortgaged Property. See
"Mortgage Loan Program--Underwriting Standards" in the Prospectus and
"Description of the Mortgage Pool--Underwriting Standards" in this Prospectus
Supplement.
__% and __% of the Group I Loans and Group II Loans, respectively, were
originated under full documentation underwriting programs.
Group I Loans
None of the Group I Loans were originated prior to ____________ or has a
maturity date later than ____________. No Group I Loan has a remaining term to
stated maturity as of the Cut-off Date of less than __ months. The weighted
average remaining term to stated maturity of the Group I Loans as of the Cut-off
Date is approximately __ months. The weighted average original term to stated
maturity of the Group I Loans as of the Cut-off Date is approximately __ months.
__% of the Group I Loans are fully amortizing and have original terms to
maturity of approximately five years, with a weighted average remaining term to
stated maturity of these Group I Loans of __ months. __% of the Group I Loans
are fully amortizing and have original terms of maturity of approximately ten
years, with a weighted average remaining term to stated maturity of these Group
I Loans of __ months. __% of the Group I Loans are fully amortizing and have
original terms to maturity of approximately fifteen years, with a weighted
average remaining term to stated maturity of these Group I Loans of __ months.
__% of the Group I Loans are fully amortizing and have original terms to
maturity of approximately twenty years, with a weighted average remaining term
to stated maturity of these Group I Loans of __ months. __% of the Group I Loans
are fully amortizing and have original terms to maturity of approximately
twenty-five years, with a weighted average remaining term to stated maturity of
these
S-15
<PAGE>
Group I Loans of __ months. The Balloon Loans in Loan Group I have original
terms to maturity of approximately fifteen years based on 30-year amortization
schedules, with a weighted average remaining term to stated maturity of __
months.
Below is a description of some additional characteristics of the Group I
Loans as of the Cut-off Date, unless otherwise indicated. Unless otherwise
specified, all principal balances of the Group I Loans are approximate
percentages by aggregate principal balance of the Group I Loans as of the
Cut-off Date and are rounded to the nearest dollar.
<TABLE>
Original Mortgage Loan Principal Balances of the Group I Loans
<CAPTION>
Number of Cut-off Date Percent of
Original Mortgage Loan Principal Balances Mortgage Loans Balance Group-I-Loans
- --------------------------------------------------- ___________________________
<S> <C> <C> <C>
$ - $ $ %
$ - $ %
$ - $ %
$ - $ %
$ - $ %
$ - $ %
$ - $ %
$ - $ %
$ - $ %
$ - $ %
Greater than $ $ %
---------- ------------------------
Total........................ $ %
========== ========= =========
</TABLE>
As of the Cut-off Date, the average unpaid principal balance of the Group
I Loans was approximately $_____.
<TABLE>
Mortgage Rates of the Group I Loans
<CAPTION>
Number of Cut-off Date Percent of
Mortgage Rate (%) Mortgage-Loans Balance Group-I-Loans
- --------------------------------------------------- _____________________________
<S> <C> <C>
- $ %
- %
- %
- %
- %
- %
- %
- %
- %
- %
- %
- %
- %
- %
Total................. $ %
======= ======================
</TABLE>
S-16
<PAGE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Group I
Loans was approximately _____% per annum.
<TABLE>
Original Combined Loan-to-Value Ratios of the Group I Loans
<CAPTION>
Number of Cut-off Date Percent of
Combined Loan-to-Value Ratio(%) Mortgage-Loans Balance Group-I-Loans
- -------------------------------------------------- ---------------- ------------
<S> <C> <C>
- $ %
- %
- %
- %
- %
- %
- %
- %
- %
- %
- %
Total................. $ %
======= ======================
</TABLE>
The weighted average original Combined Loan-to-Value Ratio of the Group I
Loans was approximately __% as of the Cut-off Date.
Junior Mortgage Ratios of the Group I Loans
Number of Cut-off Date Percent of
Junior Mortgage Ratio(%)(1) Mortgage-Loans Balance Group-I-Loans
- -------------------------------------------------------------------------------
- $ %
- %
- %
- %
- %
- %
- %
- %
- %
- %
Total................... $ %
======= ======= =======
(1) Excludes Mortgage Loans secured by first liens on the related Mortgaged
Property. With respect to each Mortgage Loan secured by a second lien on
the related Mortgaged Property, the Junior Mortgage Ratio is the ratio of
the original principal balance of the the Mortgage Loan to the sum of (i)
the original principal balance of that Mortgage Loan, and (ii) the unpaid
principal balance of any senior lien at the time of the origination of
that Mortgage Loan.
S-17
<PAGE>
The weighted average Junior Mortgage Ratio as of the Cut-off Date was
approximately __%.
Geographic Distribution of Mortgaged Properties of the Group I Loans
Number of Cut-off Date Percent of
State Mortgage-Loans Balance Group-I-Loans
- -------------------------------------------------------------------------------
California.......................... $ %
Virginia............................ %
Maryland............................ %
New Jersey.......................... %
Colorado............................ %
Other(1)............................ %
--- --- ---
Total............................ $ %
=== === ===
(1) "Other" includes states and the District of Columbia that contain less than
2.00% of the Group I Loans.
Mortgaged Property Types of the Group I Loans
Number of Cut-off Date Percent of
Property Mortgage-Loans Balance Group-I Loans
- --------------------------------------------------------------------------------
Single Family Residence............. $ %
PUD Detached........................ %
PUD Attached........................ %
Condominium......................... %
Multifamily (2-4 Units)............. %
Townhouse/Rowhouse Attached......... %
Townhouse/Rowhouse Detached......... %
Manufactured Home................... %
--- --- ---
Total............................... $ %
=== === ===========
Occupancy Types of the Group I Loans
Number of Cut-off Date Percent of
Occupancy (as indicated by Mortgagor)Mortgage-Loans Balance Group-I Loans
- -------------------------------------------------------------------------------
Primary Residence................... $ %
--- --- ---
Total............................... $ %
=== === ===
S-18
<PAGE>
Lien Priority of the Group I Loans
Number of Cut-off Date Percent of
Lien Priority Mortgage-Loans Balance Group-I-Loans
- -------------------------------------------------------------------------------
Second Lien......................... $ %
--- --- ---
Total......................... $ %
=== === ===
Remaining Term of Scheduled Maturity of the Group I Loans
Number of Cut-off Date Percent of
Months Remaining to Scheduled Maturity Mortgage-Loans Balance Group-I-Loans
- -------------------------------------------------------------------------------
$ %
%
%
%
%
%
%
Total......................... $ %
===============================
The weighted average remaining term to maturity of the Group I Loans as of
the Cut-off Date was approximately ___ months.
Year of Origination of the Group I Loans
Number of Cut-off Date Percent of
Year of Origination Mortgage-Loans Balance Group-I Loans
- --------------------------------------------------------------------------------
$ %
%
%
%
Total......................... $ %
=== === ==========
Group II Loans
None of the Group II Loans were originated prior to _______ or has a
maturity date later than _______. No Group II Loan has a remaining term to
stated maturity as of the Cut-off Date of less than __ months. The weighted
average remaining term to stated maturity of the Group II Loans as of the
Cut-off Date is approximately __ months. The weighted average original term to
stated maturity of the Group II Loans as of the Cut-off Date is approximately __
S-19
<PAGE>
months. __% of the Group II Loans are fully amortizing and have original terms
to maturity of approximately five years, with a weighted average remaining term
to stated maturity of these Group II Loans of __ months. __% of the Group II
Loans are fully amortizing and have original terms of maturity of approximately
ten years, with a weighted average remaining term to stated maturity of these
Group II Loans of __ months. __% of the Group II Loans are fully amortizing and
have original terms to maturity of approximately fifteen years, with a weighted
average remaining term to stated maturity of these Group II Loans of __ months.
__% of the Group II Loans are fully amortizing and have original terms to
maturity of approximately twenty years, with a weighted average remaining term
to stated maturity of these Group II Loans of __ months. __% of the Group II
Loans are fully amortizing have original terms to maturity of approximately
twenty-five years, with a weighted average remaining term to stated maturity of
these Group II Loans of __ months. The Balloon Loans in Loan Group II have
original terms to maturity of approximately fifteen years based on 30-year
amortization schedules, with a weighted average remaining term to stated
maturity of __ months.
Below is a description of some additional characteristics of the Group II
Loans as of the Cut-off Date unless otherwise indicated. Unless otherwise
specified, all principal balances of the Group II Loans are approximate
percentages by aggregate principal balance of the Group II Loans as of the
Cut-off Date and are rounded to the nearest dollar.
<TABLE>
Original Mortgage Loan Principal Balances of the Group II Loans
<CAPTION>
Number of Cut-off Date Percent of
Original Mortgage Loan Principal Balances Loans Mortgage Loans Balance Group II Loans
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ - $ $ %
$ - $
$ - $
$ - $
$ - $
$ - $
$ - $
$ - $
$ - $
$ - $
Greater than $
Total....................... $ %
======= ======= -------
</TABLE>
As of the Cut-off Date, the average unpaid principal balance of the Group
II Loans was approximately $____.
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<PAGE>
Mortgage Rates of the Group II Loans
Number of Mortgage Cut-off Date Percent of
Mortgage Rate (%) Loans Balance Group-II-Loans
- -------------------------------------------------------------------------------
$ %
Total..................... $ %
===========================
As of the Cut-off Date, the weighted average Mortgage Rate of the Group II
Loans was approximately ___% per annum.
Original Combined Loan-to-Value Ratios of the Group II Loans
Number of Mortgage Cut-off Date Percent of
Combined Loan-to-Value Ratio(%) Loans Balance Group-II Loans
- -------------------------------------------------------------------------------
$ %
Total...................... $ %
=============================
The weighted average original Combined Loan-to-Value Ratio of the Group II
Loans was approximately ___% as of the Cut-off Date.
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<PAGE>
Junior Mortgage Ratios of the Group II Loans
Number of Cut-off Date Percent of
Junior Mortgage Ratio(%)(1) Mortgage-Loans Balance Group-II-Loans
- --------------------------------------------------------------------------------
$ %
Total...................... $ %
===========================
- ------------------
(1)Excludes Mortgage Loans secured by first liens on the related Mortgaged
Property. With respect to each Mortgage Loan secured by a second lien on the
related Mortgaged Property, the Junior Mortgage Ratio is the ratio of the
original principal balance of the Mortgage Loan to the sum of (i) the
original principal balance of that Mortgage Loan, and (ii) the unpaid
principal balance of any senior lien at the time of the origination of that
Mortgage Loan.
The weighted average Junior Mortgage Ratio of the Group II Loans as of the
Cut-off Date was approximately
- ---%.
Geographic Distribution of Mortgaged Properties of the Group II Loans
Percent of
State Number of Cut-off Date Group-II
Mortgage Loans Balance Loans
- ------------------------------------------------------------------------
California.............. $ %
Virginia................
Maryland................
Washington..............
Florida.................
Colorado................
Michigan................
Georgia.................
Other(1)................
Total............... $ %
=================================================
(1) "Other" includes states and the District of Columbia that contain less than
___% of the Group II Loans.
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<PAGE>
Mortgaged Property Types of the Group II Loans
Percent of
Property Number of Cut-off Date Group-II
Mortgage Loans Balance Loans
-------------------------------------------
Single Family Residence............. $ %
PUD Detached........................
Condominium.........................
PUD Attached........................
Townhouse/Rowhouse Attached.........
Manufactured Home...................
Total............................... $ %
=====================================
Occupancy Types of the Group II Loans
Percent of
Occupancy (as indicated by Mortgagor) Number of Cut-off Date Group-II
Mortgage Loans Balance Loans
------------------------------------------
Primary............................. $ %
Second/Vacation.....................
Total........................... $ %
======================================
Lien Priority of the Group II Loans
Percent of
Number of Cut-off Date Group-II
Lien Priority Mortgage Loans Balance Loans
- -------------------------------------------------------------------------------
First Lien.......................... $ %
Second Lien.........................
Total........................... $ %
=======================================
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<PAGE>
Remaining Term of Scheduled Maturity of the Group II Loans
Percent of
Number of Cut-off Date Group-II
Months Remaining to Scheduled Maturity Mortgage-Loans Balance Loans
- -------------------------------------------------------------------------------
$ %
Total......................... $ %
=============================
The weighted average remaining term to maturity of the Group II Loans of
the Cut-off Date was approximately ___ months.
Year of Origination of the Group II Loans
Percent of
Number of Cut-off Date Group-II
Year of Origination Mortgage-Loans Balance Loans
- ------------------------------------------------------------------------------
$ %
Total............................... $ %
=============================
Credit Scores are obtained by many mortgage lenders in connection with
mortgage loan applications to help assess a borrower's credit-worthiness. In
addition, Credit Scores may be obtained by Residential Funding after the
origination of a mortgage loan if the Seller does not provide to Residential
Funding a Credit Score. 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 utilized 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. Credit Scores range from approximately 350 to approximately 840,
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
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<PAGE>
not correspond to the life of a mortgage loan. Furthermore, Credit Scores were
not developed specifically for use in connection with mortgage 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 mortgage loans and consumer loans generally, or the specific
characteristics of the related mortgage loan, for example, the Combined
Loan-to-Value Ratio, the collateral for the mortgage 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 Mortgage
Loans or that any Mortgagor's Credit Score would not be lower if obtained as of
the date of this Prospectus Supplement.
The following tables described information as to the Credit Scores of the
related Mortgagors as used in the origination of the Group I Loans and Group II
Loans.
Credit Score Distribution of the Group I Loans
Number of Cut-off Date Percent of
Credit Score Range Mortgage-Loans Balance Group-I-Loans
- -------------------------------------------------------------------------------
$ %
%
Total for Loan Group I.............. $ %
================================
Credit Score Distribution of the Group II Loans
Number of Cut-off Date Percent of
Credit Score Range Mortgage-Loans Balance Group-II Loans
- -------------------------------------------------------------------------------
$ %
Total for Loan Group II........ $ %
=================================== ==
S-25
<PAGE>
Underwriting Standards
The following is a brief description of the various underwriting standards
and procedures applicable to the Mortgage Loans. For a more detailed description
of the underwriting standards and procedures applicable to the Mortgage Loans,
see "Mortgage Loan Program--Underwriting Standards" in the Prospectus.
Residential Funding's underwriting standards with respect to the Mortgage
Loans generally will conform to those published in the Client Guide (together
with its Servicer Guide, the "Guide," as modified from time to time), including
the provisions of the Guide applicable to the Home Equity Program. The
underwriting standards as described in the Guide are continuously revised based
on prevailing conditions in the residential mortgage market and the market for
mortgage securities. Under the Guide, the Mortgage Loans are generally
underwritten by the related Seller or by a designated third party, and
Residential Funding or a designated third party may perform only sample quality
assurance reviews to determine whether Mortgage Loans purchased by it were
underwritten in accordance with applicable standards.
Each Seller is an entity approved by Residential Funding for participation
in the Home Equity Program. Each Seller was required at the time of its approval
to meet eligibility requirements, including minimum origination and net worth
levels determined by Residential Funding. However, there can be no assurance
that any Seller currently meets these standards. Generally, the Seller will have
originated the Mortgage Loans sold by it to Residential Funding either directly
or through correspondents or loan brokers, and will have underwritten each
Mortgage Loan prior to funding.
The underwriting standards described in the Guide with respect to Mortgage
Loans originated under the Home Equity Program generally require that the
Mortgage Loans be fully documented or that the Mortgage Loans be supported by
alternative documentation. For fully documented loans, a prospective borrower is
required to fill out a detailed application providing pertinent credit
information. For alternatively documented loans, a borrower may demonstrate
income and employment directly by providing alternative documentation in the
form of copies of the borrower's own records relating thereto, rather than by
having the originator obtain independent verifications from third parties, such
as the borrower's employer or mortgage servicer.
In determining the adequacy of the mortgaged property as collateral for a
Mortgage Loan originated under the Home Equity Program, an appraisal is made of
each property considered for financing. Mortgage Loans included in the Mortgage
Pool generally were originated subject to a maximum CLTV of 100%. The Mortgage
Loans were also subject to 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
Mortgage Loans will not increase from the levels established at origination.
The underwriting standards described in the Guide with respect to Mortgage
Loans originated under the Home Equity Program may be varied in appropriate
cases. There can be no assurance that every Mortgage Loan was originated in
conformity with the applicable underwriting standards in all material respects,
or that the quality or performance of the Mortgage Loans will be equivalent
under all circumstances.
Optional Repurchase of Defaulted Mortgage Loans
Under the Pooling and Servicing Agreement, the Master Servicer will have
the option to purchase from the Trust any Mortgage Loan that is 60 days or more
delinquent at a purchase price equal to the unpaid principal balance of the
Mortgage Loan plus its accrued interest.
The Initial Subservicer
GMAC Mortgage Corporation (the "Initial Subservicer" or "GMACMC"), an
affiliate of the Depositor and the Master Servicer, is the Initial Subservicer
of the Mortgage Loans. GMACMC will act as Initial Subservicer for the Mortgage
Loans under a Subservicing Agreement with the Master Servicer. GMACMC is a
wholly-owned indirect subsidiary of General Motors Acceptance Corporation.
GMACMC is engaged in the mortgage banking business, including the origination,
purchase, sale and servicing of residential loans.
S-26
<PAGE>
GMACMC's executive offices are located at 100 Witmer Road, Horsham,
Pennsylvania 19044-0963.
Residential Funding
Residential Funding will be responsible for master servicing the Mortgage
Loans. Responsibilities of Residential Funding will include the receipt of funds
from Subservicers, the reconciliation of servicing activity, investor reporting
and remittances to the Trustee to accommodate distributions to
Certificateholders. In addition, Residential Funding will take over the primary
servicing of any Mortgage Loans currently subserviced by GMACMC, if the Mortgage
Loans become delinquent. Residential Funding is not required to make advances
relating to delinquent payments of principal and interest on the Mortgage Loans.
For information regarding foreclosure procedures, see "Description of the
Certificates--Realization Upon Defaulted Mortgage Loans" in the Prospectus.
Servicing and charge-off policies and collection practices may change over time
in accordance with the Residential Funding's business judgment, changes in
Residential Funding's portfolio of real estate secured home equity mortgage
loans that it services for its clients and applicable laws and regulations, and
other considerations.
Delinquency and Loss Experience of the Master Servicer's Portfolio
The following tables summarize the delinquency and loss experience for all
closed-end home equity loans ("Closed-End Home Equity Loans") originated or
acquired by the Master Servicer. The data presented in the following tables are
for illustrative purposes only, and there is no assurance that the delinquency
and loss experience of the Mortgage Loans will be similar to that described
below.
As used in this Prospectus Supplement, a loan is considered to be "30 to
59 days" or "30 or more days" delinquent when a payment due on any due date
remains unpaid as of the close of business on the next following monthly due
date. However, since the determination as to whether a loan falls into this
category is made as of the close of business on the last business day of each
month, a loan with a payment due on July 1 that remained unpaid as of the close
of business on July 31 would still be considered current as of July 31. If that
payment remained unpaid as of the close of business on August 31, the loan would
then be considered to be 30 to 59 days delinquent. Delinquency information
presented in this Prospectus Supplement as of the Cut-off Date is determined and
prepared as of the close of business on the last business day immediately prior
to the Cut-off Date.
The information in the tables below has not been adjusted to eliminate the
effect of the significant growth in the size of the Master Servicer's home
equity mortgage loan portfolio during the periods shown. Accordingly, loss and
delinquency as percentages of aggregate principal balance of these home equity
mortgage loans serviced for each period would be higher than those shown if some
of the home equity mortgage loans were artificially isolated at a point in time
and the information showed the activity only with respect to the home equity
mortgage loans.
There can be no assurance that the delinquency experience described below
will be representative of the results that may be experienced with respect to
the Mortgage Loans serviced by the Initial Subservicer.
[INSERT DELINQUENCY TABLES HERE]
Additional Information
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date. Prior to the issuance of the Offered
Certificates Mortgage Loans may be removed from the Mortgage Pool as a result of
incomplete documentation or otherwise, if the Depositor deems the removal
necessary or appropriate. A limited number of other mortgage loans may be added
to the Mortgage Pool prior to the issuance of the Offered Certificates. The
Depositor believes that the information in this Prospectus Supplement will be
substantially representative of the characteristics of the Mortgage Pool as it
will be constituted at the time the Offered Certificates are issued although the
range of Mortgage Rates and maturities and some other characteristics of the
Mortgage Loans in the Mortgage Pool may vary.
S-27
<PAGE>
A Current Report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed, together with the Pooling and Servicing
Agreement, with the Securities and Exchange Commission within fifteen days after
the initial issuance of the Offered Certificates. In the event Mortgage Loans
are removed from or added to the Mortgage Pool as described in the preceding
paragraph, that removal or addition will be noted in the Current Report on Form
8-K.
DESCRIPTION OF THE CERTIFICATES
General
The Series _______ Home Equity Loan Pass-Through Certificates will include
the following eight classes (the "Offered Certificates"):
[ o Class A-I-1 Certificates
o Class A-I-2 Certificates
o Class A-I-3 Certificates
o Class A-I-4 Certificates
o Class A-I-5 Certificates
o Class A-I-6 Certificates (the "Lockout Certificates"); and
together with the Class A-I-1 Certificates, Class A-I-2
Certificates, Class A-I-3 Certificates, Class A-I-4
Certificates and Class A-I-5 Certificates, the "Class A-I
Certificates")
o Class A-II Certificates; and
o Class IO Certificates (the "Fixed Strip Certificates")].
In addition to the Offered Certificates, the Series _______ Home Equity
Loan Pass-Through Certificates will include two classes of subordinate
certificates which are designated as the Class R-I Certificates and Class R-II
Certificates (together, the "Class R Certificates" or "Residual Certificates"
and, together with the Class A-I, Class A-II and Class IO Certificates, the
"Certificates"). The Class A-I Certificates and Class A-II Certificates are
referred to in this Prospectus Supplement together as the "Class A
Certificates." Only the Offered Certificates are offered by this Prospectus
Supplement.
The Certificates will evidence the entire beneficial ownership interest in the
Trust. The Trust will consist of:
o the Mortgage Loans
o the assets as from time to time that are identified as
deposited in respect of the Mortgage Loans in the
Custodial Account and in the Certificate Account and
belonging to the Trust
o property acquired by foreclosure of the Mortgage Loans
or deed in lieu of foreclosure
o any applicable insurance policies
o the Policy; and
o all proceeds of the foregoing.
The Class A-I Certificates and Class A-II Certificates correspond to the
Group I Loans and Group II Loans, respectively, as described in the tables in
this Prospectus Supplement under "Description of the Mortgage Pool--Mortgage
Pool Characteristics."
The Offered Certificates will be issued in minimum denominations of
$25,000, or a $2,000,000 Notional Amount, in the case of the Fixed Strip
Certificates, and integral multiples of $1 in excess thereof.
Book-Entry Registration of the Offered Certificates
General. Holders of the Offered Certificates (so long as the Offered
Certificates are registered in the name of Cede & Co., the "DTC Registered
Certificates" and the holders, "DTC Registered Certificateholders") may elect to
hold their DTC Registered Certificates through DTC in the United States, or
Cedelbank, formerly Cedel Bank, societe anonyme, a professional depository which
holds securities for its participating organizations ("Cedel
S-29
<PAGE>
Customers") or Euroclear in Europe, if they are Euroclear Participants or Cedel
Customers, as applicable, of their systems, or indirectly through organizations
which are Participants or Customers, as applicable, in their systems.
The DTC Registered Certificates will be issued in one or more securities
which equal the aggregate Certificate Principal Balance (or Notional Amount) of
the DTC Registered Certificates and will initially be registered in the name of
Cede & Co. ("Cede"), the nominee of DTC. Cedelbank and Euroclear will hold
omnibus positions on behalf of their Participants through Customers' securities
accounts in Cedelbank's and Euroclear's names on the books of their respective
depositaries (in those capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries") which in turn will hold these
positions in Customers' securities accounts in the depositories' names on the
books of DTC. Except as described below, no DTC Registered Certificateholder
will be entitled to receive a physical certificate representing that security (a
"Definitive Certificate"). Unless and until Definitive Certificates are issued
for the DTC Registered Certificates under the limited circumstances described in
this Prospectus Supplement, all references to actions by Certificateholders with
respect to the DTC Registered Certificates shall refer to actions taken by DTC
upon instructions from its Participants, and all references in this Prospectus
Supplement to distributions, notices, reports and statements to
Certificateholders with respect to the DTC Registered Certificates shall refer
to distributions, notices, reports and statements to DTC or Cede, as the
registered holder of the DTC Registered Certificates, for distribution to
Beneficial Owners by DTC in accordance with DTC procedures. DTC Registered
Certificateholders will not be "Holders" as that term is used in the Pooling and
Servicing Agreement.
The DTC Registered Certificateholder's ownership of a DTC Registered
Certificate will be recorded on the records of the brokerage firm, bank, thrift
institution or other financial intermediary (each, a "Financial Intermediary")
that maintains the DTC Registered Certificateholder's account for that purpose.
In turn, the Financial Intermediary's ownership of the DTC Registered
Certificates will be recorded on the records of DTC, or of a firm that is a
Participant and acts as agent for the Financial Intermediary, whose interest
will in turn be recorded on the records of DTC, if the DTC Registered
Certificateholder's Financial Intermediary is not a DTC Participant and on the
records of Cedelbank or Euroclear, as appropriate.
DTC Registered Certificateholders will receive all payments of principal
and interest on the DTC Registered Certificates from the Trustee through DTC and
DTC Participants. While the DTC Registered Certificates are outstanding , except
under the circumstances described below, under the rules, regulations and
procedures creating and affecting DTC and its operations (the "Rules"), DTC is
required to make book-entry transfers among Participants on whose behalf it acts
with respect to the DTC Registered Certificates and is required to receive and
transmit payments of principal and interest on the DTC Registered Certificates.
Participants and Indirect Participants with whom DTC Registered
Certificateholders have accounts with respect to DTC Registered Certificates are
similarly required to make book-entry transfers and receive and transmit the
payments on behalf of their respective DTC Registered Certificateholders.
Accordingly, although DTC Registered Certificateholders will not possess
physical certificates, the Rules provide a mechanism by which DTC Registered
Certificateholders will receive payments and will be able to transfer their
interest.
Unless and until Definitive Certificates are issued, DTC Registered
Certificateholders who are not Participants may transfer ownership of DTC
Registered Certificates only through Participants and Indirect Participants by
instructing the Participants and Indirect Participants to transfer the DTC
Registered Certificates, by book-entry transfer, through DTC for the account of
the purchasers of the DTC Registered Certificates, which account is maintained
with their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of DTC Registered Certificates will be
executed through DTC and the accounts of the respective Participants at DTC will
be debited and credited. Similarly, the Participants and Indirect Participants
will make debits or credits, as the case may be, on their records on behalf of
the selling and purchasing DTC Registered Certificateholders.
Under a book-entry format, DTC Registered Certificateholders of the DTC
Registered Certificates may experience some delay in their receipt of payments,
since the payments will be forwarded by the Trustee to Cede. Payments with
respect to DTC Registered Certificates held through Cedelbank or Euroclear will
be credited to the cash accounts of Cedelbank Customer or Euroclear Participants
in accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. The payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Because DTC can only act on behalf of Financial Intermediaries, the ability of a
DTC Registered Certificateholder to pledge DTC Registered Certificates to
persons or
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<PAGE>
entities that do not participate in the Depositary system, or otherwise take
actions relating to the DTC Registered Certificates, may be limited due to the
lack of physical certificates for the DTC Registered Certificates. In addition,
issuance of the DTC Registered Certificates in book-entry form may reduce the
liquidity of the DTC Registered Certificates in the secondary market since some
potential investors may be unwilling to purchase securities for which they
cannot obtain physical certificates.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
DTC Registered Certificates under the Pooling and Servicing Agreement only at
the direction of one or more Financial Intermediaries to whose DTC accounts the
DTC Registered Certificates are credited, to the extent that the actions are
taken on behalf of Financial Intermediaries whose holdings include the DTC
Registered Certificates. Cedelbank or the Euroclear Operator, as the case may
be, will take any other action permitted to be taken by holders of DTC
Registered Certificates under the Pooling and Servicing Agreement on behalf of a
Cedelbank Customer or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to the ability of the Relevant Depositary to
effect the actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some DTC Registered
Certificates which conflict with actions taken with respect to other DTC
Registered Certificates.
Definitive Certificates will be issued to DTC Registered
Certificateholders of the DTC Registered Certificates, or their nominees, rather
than to DTC, if (a) the Trustee determines that the DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the DTC Registered Certificates and the Trustee is
unable to locate a qualified successor, (b) the Trustee elects to terminate a
book-entry system through DTC or (c) after the occurrence of an Event of
Default, under the Pooling and Servicing Agreement, DTC Registered
Certificateholders of any class aggregating at least a majority of the
outstanding Voting Rights, as defined in this Prospectus Supplement, of the DTC
Registered Certificates advise the DTC through the Financial Intermediaries and
the DTC Participants in writing that the continuation of a book-entry system
through DTC, or a successor thereto, is no longer in the best interests of the
DTC Registered Certificateholders.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all DTC Registered
Certificateholders of the occurrence of the event and the availability through
DTC of Definitive Certificates. Upon surrender by DTC of the global certificate
or certificates representing the DTC Registered Certificates and instructions
for re-registration, the Trustee will issue and authenticate Definitive
Certificates, and thereafter the Trustee will recognize the holders of the
Definitive Certificates as Holders under the Pooling and Servicing Agreement.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of DTC Registered Certificates among
Participants of DTC, Cedelbank and Euroclear, they are under no obligation to
perform or continue to perform the procedures and the procedures may be
discontinued at any time. See Annex I hereto and "Description of the
Certificates--Form of Certificates" in the Prospectus.
DTC has advised the Depositor that management of DTC is aware that some
computer applications, systems and the like for processing data ("Systems") that
are dependent upon calendar dates, including dates before, on and after January
1, 2000, may encounter "Year 2000" problems. DTC has informed its Participants
and other members of the financial community (the "Industry") that it has
developed and is implementing a program so that its Systems, as they relate to
the timely payment of distributions, including principal and income payments, to
securityholders, book-entry deliveries and settlement of trades with DTC ("DTC
Services") continue to function appropriately. This program includes a technical
assessment and a remediation plan, each of which is complete. Additionally,
DTC's plan includes a testing phase, which, DTC has advised the Industry, is
expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as DTC's Participants and third party vendors from whom DTC licenses
software and hardware, and third party vendors on whom DTC relies for
information or the provision of services, including telecommunication and
electrical utility service providers, among others. DTC has informed the
Industry that it is contacting and will continue to contact third party vendors
from whom DTC acquires services to (i) impress upon them the importance of those
services being Year 2000 compliant; and (ii) determine the extent of their
efforts for Year
S-31
<PAGE>
2000 remediation and, as appropriate, testing of their services. In addition,
DTC is in the process of developing any contingency plans as it deems
appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty or contract modification of any kind.
None of the Depositor, the Master Servicer or the Trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the DTC Registered Certificates
held by Cede, as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to the beneficial ownership interests.
For additional information regarding DTC and the DTC Registered
Certificates, see "Description of the Certificates--Form of Certificates" in the
Prospectus.
Distributions
Distributions on the Certificates will be made by the Trustee on the 25th
day of each month or, if that day is not a Business Day, then the next
succeeding Business Day, commencing in April 1999. Distributions on the
Certificates will be made to the persons in whose names the Certificates are
registered at the close of business on the day prior to each Distribution Date
or, if the Certificates are no longer DTC Registered Certificates, on the Record
Date. See "Description of the Certificates--Distributions" in the Prospectus.
Distributions will be made by check or money order mailed, or upon the request
of a Certificateholder owning Certificates having denominations, by principal
balance or notional amount, aggregating at least $1,000,000, by wire transfer or
otherwise, to the address of the person entitled to the distribution, which, in
the case of DTC Registered Certificates, will be DTC or its nominee, as it
appears on the Trustee's register in amounts calculated as described in this
Prospectus Supplement on the Determination Date. However, the final distribution
relating to the Certificates will be made only upon presentation and surrender
thereof at the office or the agency of the Trustee specified in the notice to
Certificateholders of the final distribution. 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.
Available Distribution Amount
The "Available Distribution Amount" for any Distribution Date is equal to:
o the aggregate amount of actual payments on the Mortgage Loans
received during the related Collection Period after deduction
of the related servicing fees and any subservicing fees
(collectively, the "Servicing Fees")
o some unscheduled collections, including Mortgagor prepayments
on the Mortgage Loans, Insurance Proceeds, Liquidation
Proceeds and proceeds from repurchases of, and some amounts
received in connection with any substitutions for, the
Mortgage Loans, received during the related Collection Period.
In addition to the foregoing amounts, with respect to unscheduled
collections, not including Mortgagor prepayments, the Master Servicer may elect
to treat these amounts as included in the Available Distribution Amount for the
Distribution Date in the month of receipt, but is not obligated to do so. As
described in this Prospectus Supplement, under "--Principal Distributions," any
amount with respect to which this election is so made shall be treated as having
been received on the last day of the related Collection Period for the purposes
of calculating the amount of principal and interest distributions to any class
of Certificates. With respect to any Distribution Date, the "Collection Period"
is the calendar month preceding the month in which that Distribution Date
occurs.
Interest Distributions
Holders of each class of Offered Certificates will be entitled to receive
interest distributions in an amount equal to the Accrued Certificate Interest on
that class on each Distribution Date to the extent described in this Prospectus
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Supplement. The aggregate amount of the Accrued Certificate Interest to be
distributed to the holders of the Offered Certificates on any Distribution Date
is referred to in this Prospectus Supplement as the "Senior Interest
Distribution Amount" for that Distribution Date.
With respect to any Distribution Date, "Accrued Certificate Interest" will
be equal to (a) in the case of each class of Offered Certificates (other than
the Fixed Strip Certificates), interest accrued during the related Interest
Accrual Period on the Certificate Principal Balance of the Certificates of that
class immediately prior to that Distribution Date at the per annum rate at which
interest accrues on that class (the "Pass-Through Rate"); and (b) in the case of
the Fixed Strip Certificates, interest accrued during the related Interest
Accrual Period on the Notional Amount thereof for that Distribution Date at the
Pass-Through Rate on that class for that Distribution Date, in each case less
interest shortfalls from the Mortgage Loans, if any, allocated thereto for that
Distribution Date, including:
(i) any Prepayment Interest Shortfall to the extent not covered by Excess
Cash Flow;
(ii) the interest portions of Realized Losses; and
(iii) any other interest shortfalls on the Mortgage Loans, including
interest shortfalls relating to the Relief Act or similar legislation or
regulations, all allocated as described below;
provided, however, that in the event that any shortfall described in clauses
(i), (ii) and (iii) above is allocated to the Offered Certificates, or the
Available Distribution Amount on any Distribution Date is less than the Senior
Interest Distribution Amount for that date, the amount of any shortfall will be
drawn under the Policy and distributed to the holders of the Offered
Certificates. Notwithstanding the foregoing, if payments are not made as
required under the Policy, any interest shortfalls may be allocated to the
Certificates as described above. See "--Certificate Guaranty Insurance Policy"
below. Accrued Certificate Interest on each class of Offered Certificates will
be distributed on a pro rata basis. Accrued Certificate Interest on each class
of Certificates is calculated on the basis of a 360-day year consisting of
twelve 30-day months.
The "Interest Accrual Period" for all classes of Certificates is the
calendar month preceding the month in which the Distribution Date occurs.
The "Prepayment Interest Shortfall" for any Distribution Date is equal to
the aggregate shortfall, if any, in collections of interest, adjusted to the
related Net Mortgage Rates, resulting from Mortgagor prepayments on the Mortgage
Loans during the related Collection Period. These shortfalls will result because
interest on prepayments in full is distributed only to the date of prepayment,
and because no interest is distributed on prepayments in part, as these
prepayments in part are applied to reduce the outstanding principal balance of
the related Mortgage Loans as of the Due Date in the month of prepayment.
However, with respect to any Distribution Date, any Prepayment Interest
Shortfalls during the related Collection Period will be offset first by Excess
Cash Flow to the extent available and then by the Policy.
The Pass-Through Rates on all classes of Offered Certificates are fixed
and are listed on page S-__ hereof. The Pass-Through Rates on all classes of the
Class A Certificates will increase by __% per annum for each Distribution Date
after the first Distribution Date on which the Master Servicer and the Depositor
are permitted to exercise their option to purchase the Mortgage Loans from the
Trust as described under "Pooling and Servicing Agreement--Termination," in this
Prospectus Supplement. Notwithstanding the foregoing, the Pass-Through Rates on
the Class A Certificates will not increase as described above if proceeds for
optional termination are available for payment to the Certificateholders on or
prior to any Distribution Date. The holders of the Fixed Strip Certificates will
not be entitled to any distributions of principal and will not be entitled to
any distributions of interest after the Distribution Date in _________.
The "Certificate Principal Balance" of any class of Class A Certificates
as of any date of determination is equal to the initial Certificate Principal
Balance of that Certificate, reduced by the aggregate of (a) all amounts
allocable to principal previously distributed with respect to that Certificate
and (b) any reductions in the Certificate Principal Balance thereof deemed to
have occurred in connection with allocations of Realized Losses in the manner
described in this Prospectus Supplement, unless these amounts have been paid
under the Policy. The Certificate Principal Balance of the Class R-II
Certificates in the aggregate, as of any date of determination, is equal to the
excess, if any, of (a) the
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<PAGE>
then aggregate Stated Principal Balance of the Mortgage Loans over (b) the then
aggregate Certificate Principal Balance of the Class A Certificates. The Class
R[-I] Certificates will have no Certificate Principal Balance. The "Notional
Amount" of the Fixed Strip Certificates as of any Distribution Date prior to the
Distribution Date in _______ will be equal to the sum of (i) the lesser of (a)
$________ and (b) the aggregate Certificate Principal Balance of the Class A-I
Certificates on that Distribution Date and (ii) the lesser of (a) $_________ and
(b) the aggregate Certificate Principal Balance of the [Class A-II] Certificates
on that Distribution Date. The Notional Amount of the Fixed Strip Certificates
as of any Distribution Date after the Distribution Date in ________ will be
equal to $0. References in this Prospectus Supplement to the Notional Amount are
used solely for some calculations and do not represent the right of the Fixed
Strip Certificates to receive distributions allocable to principal.
Principal Distributions
Holders of the Class A Certificates will be entitled to receive on each
Distribution Date, in the priority described in this Prospectus Supplement and
to the extent of the portion of the Available Distribution Amount remaining
after the Senior Interest Distribution Amount for that Distribution Date is
distributed, a distribution allocable to principal (the "Class A Principal
Distribution Amount") equal to the lesser of:
(a) the excess of (i) the Available Distribution Amount over (ii)
the Senior Interest Distribution Amount; and
(b) the sum of:
(i) the portion allocable to principal of all scheduled monthly
payments on the Mortgage Loans received with respect to the related Collection
Period;
(ii) the principal portion of all proceeds of the repurchase of any
Mortgage Loans,or, in the case of a substitution, some amounts representing a
principal adjustment, as required by the Pooling and Servicing Agreement during
the related Collection Period;
(iii) the principal portion of all other unscheduled collections
received on the Mortgage Loans during the related Collection Period, or deemed
to be received during the related Collection Period, including, without
limitation, full and partial principal prepayments made by the respective
Mortgagors, to the extent not previously distributed;
(iv) to the extent covered by Excess Cash Flow for that Distribution
Date, as described under "--Overcollateralization Provisions" below, (A) 100% of
the principal portion of any Realized Losses, other than Excess Loss Amounts,
incurred, or deemed to have been incurred, on any Mortgage Loans in the related
Collection Period, plus (B) any Realized Losses, other than any Excess Loss
Amounts, remaining undistributed from any preceding Distribution Date, together
with interest from the date initially distributable to the date paid, provided,
that any Realized Losses shall not be required to be paid to the extent that the
Realized Losses were paid on the Class A Certificates by means of a draw on the
Policy or were reflected in the reduction of the Outstanding Reserve Amount, the
aggregate amount so distributed under this clause (iv) on any Distribution Date,
a "Realized Loss Distribution Amount"); and
(v) the amount of any Reserve Increase Amount for that Distribution
Date;
minus
(vi) the amount of any Reserve Reduction Amount for that
Distribution Date.
In no event will the Class A Principal Distribution Amount with respect to
any Distribution Date be (x) less than zero or (y) greater than the then
outstanding Certificate Principal Balances of the Class A Certificates.
On any Distribution Date, if (a) Realized Losses, other than Excess Loss
Amounts, have occurred during the related Collection Period that are not covered
by the Realized Loss Distribution Amount described in clause (b)(iv) above or
the Outstanding Reserve Amount, as defined under "--Overcollateralization
Provisions" below, or (b) there
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<PAGE>
is an Excess Loss Amount with respect to that Distribution Date, a draw will be
made on the Policy and these amounts will be distributed to the Class A
Certificateholders on that Distribution Date, in reduction of the Certificate
Principal Balances thereof, in the manner described below. In addition, if on
the Distribution Date in _______, the aggregate Stated Principal Balance of the
Mortgage Loans is less than the aggregate Certificate Principal Balance of the
Certificates, after giving effect to distributions to be made on that
Distribution Date, the amount of the deficiency (the "Undercollateralization
Amount") will be drawn on the Policy and will be distributed to the Class A
Certificateholders on that Distribution Date, in reduction of its Certificate
Principal Balances, in the manner described below.
On each Distribution Date, the Credit Enhancer shall be entitled to
receive, after payment to the Senior Certificateholders of the Senior Interest
Distribution Amount and the Class A Principal Distribution Amount for the
Certificates, as applicable, for that Distribution Date ,but before application
of any Reserve Increase Amount, from the Excess Cash Flow after Prepayment
Interest Shortfalls and some Realized Losses are allocated thereto, the sum of
(i) the premium payable to the Credit Enhancer with respect to the Policy on
that Distribution Date and any previously unpaid premiums with respect to the
Policy, together with its interest, and (ii) the aggregate of any payment made
with respect to the Offered Certificates ("Cumulative Insurance Payments") by
the Credit Enhancer under the Policy to the extent not previously reimbursed,
plus its interest. On each Distribution Date, the amount of the premium (the
"Premium Fee") payable to the Credit Enhancer with respect to the Policy is
equal to one-twelfth of the product of a percentage specified in the Insurance
and Indemnity Agreement, dated ________, among the Credit Enhancer, the
Depositor, the Master Servicer and the Trustee (the "Insurance Agreement") and
the Certificate Principal Balance of the Class A Certificates.
Distributions of principal on the Class A Certificates on each
Distribution Date will be made after distribution of the Senior Interest
Distribution Amount as described under "--Interest Distributions" above. The
Class A Principal Distribution Amount plus any amount drawn on the Policy
relating to principal shall be distributed concurrently to the Class A-I
Certificates and Class A-II Certificates, in each case in accordance with the
percentage of the amounts described in clauses (b)(i) through (iii) in the
definition of the Class A Principal Distribution Amount derived from the related
Loan Group, until the Certificate Principal Balances of the Class A-I
Certificates or Class A-II Certificates have been reduced to zero. Thereafter,
the Class A Principal Distribution Amount shall be distributed to the remaining
class or classes of Class A Certificates, and in the case of the Class A-I
Certificates, in accordance with the priorities described below, until its
Certificate Principal Balances have been reduced to zero.
The Class A Principal Distribution Amount plus any amount drawn on the
Policy relating to principal distributable to the Class A-I Certificates shall
be distributed as follows:
(a) first, to the Lockout Certificates, in reduction of its
Certificate Principal Balance, an amount equal to the Lockout Distribution
Percentage of the Class A Principal Distribution Amount distributable to the
Class A-I Certificates, until its Certificate Principal Balance has been reduced
to zero;
(b) second, the balance of the Class A Principal Distribution Amount
distributable to the Class A-I Certificates remaining after the distribution, if
any, described in clause (A) above, shall be distributed as follows:
(i) first, to the Class A-I-1 Certificates, until its Certificate
Principal Balance has been reduced to zero;
(ii) second, to the Class A-I-2 Certificates, until its Certificate
Principal Balance has been reduced to zero;
(iii) third, to the Class A-I-3 Certificates, until its Certificate
Principal Balance has been reduced to zero;
(iv) fourth, to the Class A-I-4 Certificates, until its Certificate
Principal Balance has been reduced to zero;
(v) fifth, to the Class A-I-5 Certificates, until its Certificate
Principal Balance has been reduced to zero; and
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<PAGE>
(vi) sixth, to the Lockout Certificates, until its Certificate
Principal Balance has been reduced to zero.
The Class A Principal Distribution Amount distributable to the Class A-II
Certificates shall be distributed to the Class A-II Certificates, until its
Certificate Principal Balance has been reduced to zero.
The "Lockout Distribution Percentage" for any Distribution Date occurring
prior to the Distribution Date in _________ will be equal to 0%. The Lockout
Distribution Percentage for any Distribution Date occurring after the first
three years following the Closing Date will be as follows:
o for any Distribution Date during the fourth and fifth years after
the Closing Date, 45%
o for any Distribution Date during the sixth year after the Closing
Date, 80%
o for any Distribution Date during the seventh year after the
Closing Date, 100%
o for any Distribution Date thereafter, the
lesser of (x) 300% of the Lockout Certificate Percentage and (y)
100%.
Notwithstanding the foregoing, if the Certificate Principal Balances of the
Class A-I Certificates, other than the Lockout Certificates, have been reduced
to zero, the Lockout Distribution Percentage will be equal to 100%. The "Lockout
Certificate Percentage" will be calculated for each Distribution Date to be the
percentage equal to the aggregate Certificate Principal Balance of the Lockout
Certificates divided by the sum of the aggregate Certificate Principal Balances
of the Class A-I Certificates.
The Master Servicer may elect to treat Insurance Proceeds, Liquidation
Proceeds and other unscheduled collections, not including prepayments by the
Mortgagors, received in any calendar month as included in the Available
Distribution Amount and the Class A Principal Distribution Amount for the
Distribution Date in the month of receipt, but is not obligated to do so. If the
Master Servicer so elects, these amounts will be deemed to have been received,
and any related Realized Loss shall be deemed to have occurred, on the last day
of the month prior to its receipt.
Overcollateralization Provisions
On each Distribution Date, Excess Cash Flow, if any, is applied on that
Distribution Date as an accelerated payment of principal on the Class A
Certificates, but only in the manner and to the extent hereafter described.
"Excess Cash Flow" for a Distribution Date is equal to the excess of (x) the
Available Distribution Amount for the Distribution Date over (y) the sum of (i)
the Senior Interest Distribution Amount payable to the Class A
Certificateholders on that Distribution Date and (ii) the sum of the amounts
relating to the Mortgage Loans described in clauses (b)(i)-(iii) of the
definition of Class A Principal Distribution Amount. The Excess Cash Flow for
any Distribution Date will derive primarily from the amount of interest
collected on the Mortgage Loans in excess of the sum of (a) the Senior Interest
Distribution Amount, (b) the premium payable on the Policy and (c) accrued
Servicing Fees, in each case relating to that Distribution Date. Excess Cash
Flow will be applied on any Distribution Date; first, to pay Prepayment Interest
Shortfalls; second, to pay the Realized Loss Distribution Amount for that
Distribution Date; third, to the payment of the Premium Fee with respect to that
Distribution Date and any previous Distribution Date, to the extent not
previously paid, together with its interest; fourth, to the payment of
Cumulative Insurance Payments plus its interest; fifth, to pay any Reserve
Increase Amount; sixth, to pay some other reimbursement amounts owed to the
Credit Enhancer; and last, to pay to the holder of the Class R-II Certificates.
With respect to any Distribution Date, the excess, if any, of (a) the
aggregate Stated Principal Balances of the Mortgage Loans immediately following
that Distribution Date over (b) the Certificate Principal Balance of the Class A
Certificates as of that date, after taking into account the payment to the Class
A Certificates of the amounts described in clauses (b)(i)-(iv) of the definition
of Class A Principal Distribution Amount on that Distribution Date, is the
"Outstanding Reserve Amount" as of that Distribution Date. The Excess Cash Flow,
to the extent available as described above, will be applied as an accelerated
payment of principal on the Class A Certificates to the extent that the Reserve
Amount Target exceeds the Outstanding Reserve Amount as of that Distribution
Date. Any amount of Excess Cash Flow actually applied as an accelerated payment
of principal on the Class A Certificates is a "Reserve Increase Amount."
The required level of the Outstanding Reserve Amount with respect to a
Distribution Date is the "Reserve Amount Target" with respect to that
Distribution Date. As to any Distribution Date prior to the Distribution Date in
________, the Reserve Amount Target will be __% of the aggregate Cut-off Date
Balance. As to any Distribution Date
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<PAGE>
on or after the Distribution Date in _________, the Reserve Amount Target will
be equal to the lesser of (a) the Reserve Amount Target as of the Cut-off Date
and (b) __% of the aggregate Stated Principal Balance of the Mortgage Loans
immediately preceding that Distribution Date, but not lower than $________, __%
of the aggregate Cut-off Date Balance, plus __% of the outstanding Stated
Principal Balance of all of the Mortgage Loans that are 90 or more days
delinquent as of that Distribution Date; provided, however, that any scheduled
reduction to the Reserve Amount Target described above shall not be made as of
any Distribution Date unless (i) the outstanding Stated Principal Balance of the
Mortgage Loans delinquent 90 days or more averaged over the last six months as a
percentage of the aggregate outstanding Stated Principal Balance of all the
Mortgage Loans averaged over the last six months does not exceed __%, (ii) the
aggregate cumulative Realized Losses on the Mortgage Loans prior to any
Distribution Date occurring during the first year and the second year, or any
year thereafter, after the Distribution Date in ______ are less than __% and
__%, respectively, of the aggregate Cut-Off Date Balance and (iii) there has
been no draw on the Policy on that Distribution Date that remains unreimbursed.
In addition, the Reserve Amount Target may be reduced with the prior written
consent of the Credit Enhancer and the Rating Agencies.
In the event that the Reserve Amount Target is permitted to decrease or
"step down" on a Distribution Date in the future, a portion of the principal
which would otherwise be distributed to the holders of the Class A Certificates
on that Distribution Date shall not be distributed to the holders of the Class A
Certificates on that Distribution Date. This has the effect of decelerating the
amortization of the Class A Certificates relative to the amortization of the
Mortgage Loans, and of reducing the Outstanding Reserve Amount. With respect to
any Distribution Date, the excess, if any, of (a) the Outstanding Reserve Amount
on that Distribution Date over (b) the Reserve Amount Target is the "Excess
Reserve Amount" with respect to that Distribution Date. If, on any Distribution
Date, the Excess Reserve Amount is, or, after taking into account all other
distributions to be made on that Distribution Date would be, greater than zero,
i.e., the Outstanding Reserve Amount is or would be greater than the related
Reserve Amount Target, then any amounts relating to principal which would
otherwise be distributed to the holders of the Class A Certificates on that
Distribution Date shall instead be distributed to the holders of the Class R-II
Certificates in an amount equal to the lesser of (x) the Excess Reserve Amount
and (y) the amount available for distribution specified in clauses (b)(i)-(iii)
of the definition of Class A Principal Distribution Amount on that Distribution
Date; that amount being the "Reserve Reduction Amount" for that Distribution
Date.
The aggregate Cut-off Date Balance will be $_______ less than the
aggregate Certificate Principal Balance of the Certificates. If, on the
Distribution Date in _____, after application of the Class A Principal
Distribution Amount and any amounts drawn on the Policy to be distributed on
that Distribution Date, the Stated Principal Balance of the Mortgage Loans would
be less than the Certificate Principal Balance of the Class A Certificates, the
Credit Enhancer will be required to deposit in the Certificate Account the
amount of that difference, unless available funds are on deposit in the
Certificate Account. These funds will be distributed to the Class A
Certificateholders entitled to receive a distribution of principal on that
Distribution Date, in proportion to the amount of the Class A Principal
Distribution Amount payable to the Certificateholders on that Distribution Date,
in reduction of the their Certificate Principal Balances.
Excess Loss Amounts
On any Distribution Date, the "Excess Loss Amount" will be equal to the
sum of (i) any Realized Losses, other than as described in clauses (ii)-(v)
below, for the related Collection Period which, when added to the aggregate of
the Realized Losses for all preceding Collection Periods exceed $________, (ii)
any Special Hazard Losses in excess of the Special Hazard Amount, (iii) any
Fraud Losses in excess of the Fraud Loss Amount, (iv) any Bankruptcy Losses in
excess of the Bankruptcy Loss Amount, and (v) some losses occasioned by war,
civil insurrection, some governmental actions, nuclear reaction and some other
risks as described in the Pooling and Servicing Agreement ("Extraordinary
Losses"). Excess Loss Amounts will not be covered by any Realized Loss
Distribution Amount or by a reduction in the Outstanding Reserve Amount. Any
Excess Loss Amounts, however, will be covered by the Policy, and in the event
payments are not made as required under the Policy, these losses will be
allocated to the Certificates pro rata based on their outstanding Certificate
Principal Balances.
The "Special Hazard Amount" shall initially be equal to $________. As of
any date of determination following the Cut-off Date, the Special Hazard Amount
shall equal $________ less the sum of (A) the aggregate of any
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<PAGE>
Realized Losses on the Mortgage Loans due to Special Hazard Losses and (B) the
Adjustment Amount. The Adjustment Amount will be equal to an amount calculated
under the terms of the Pooling and Servicing Agreement.
The "Fraud Loss Amount" shall initially be equal to $________. 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 __%
of the aggregate Stated Principal Balance of the Mortgage Loans as of the
Cut-off Date minus the aggregate of any Realized Losses on the Mortgage Loans
due to Fraud Losses up to that 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) __% of the aggregate Stated Principal Balance of the Mortgage Loans as of
the most recent anniversary of the Cut-off Date minus (2) the aggregate of any
Realized Losses on the Mortgage Loans due to Fraud Losses since the most recent
anniversary of the Cut-off Date up to that 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) __% of the aggregate Stated Principal Balance of the
Mortgage Loans as of the most recent anniversary of the Cut-off Date minus (2)
the aggregate of any Realized Losses on the Mortgage Loans due to Fraud Losses
since the most recent anniversary of the Cut-off Date up to thatdate of
determination. On and after the fifth anniversary of the Cut-off Date, the Fraud
Loss Amount shall be zero.
The "Bankruptcy Amount" will initially be equal to $________. As of any
date of determination, the Bankruptcy Amount shall equal $________ less the sum
of any Realized Losses on the Mortgage Loans due to Bankruptcy Losses up to that
date of determination.
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining, if any, plus its interest through the last
day of the month in which that Mortgage Loan was finally liquidated, after
application of all amounts recovered, net of amounts reimbursable to the Master
Servicer or the Subservicer for expenses, including attorneys' fees, towards
interest and principal owing on the Mortgage Loan. The Master Servicer will
treat any Mortgage Loan that is 180 days or more delinquent as having been
finally liquidated. The amount of loss realized and any Special Hazard Losses,
Fraud Losses, Bankruptcy Losses, except for Bankruptcy Losses that result from
an extension of the maturity of a Mortgage Loan, and Extraordinary Losses are
referred to in this Prospectus Supplement as "Realized Losses."
Certificate Guaranty Insurance Policy
On the Closing Date, __________ (the "Credit Enhancer") will issue its
Certificate Guaranty Insurance Policy (the "Policy") in favor of the Trustee on
behalf of the Certificateholders. The Policy will unconditionally and
irrevocably guarantee some payments on the Certificates. On each Distribution
Date, a draw will be made on the Policy equal to the sum of (a) the amount by
which accrued interest on the Certificates at the respective Pass-Through Rates
for that Distribution Date exceeds the amount on deposit in the Certificate
Account available for interest distributions on that Distribution Date, (b) any
Realized Losses, other than any Excess Loss Amount, for that Distribution Date,
to the extent not currently covered by a Realized Loss Distribution Amount or a
reduction in the Outstanding Reserve Amount and (c) any Excess Loss Amount for
that Distribution Date. In addition, on the Distribution Date in _______, a draw
will be made on the Policy to cover the Undercollateralization Amount, if any,
if that amount is not otherwise available in the Certificate Account. In
addition, the Policy will guarantee the payment of the outstanding Certificate
Principal Balance of the Certificates on the final Distribution Date. In the
absence of payments under the Policy, Certificateholders will directly bear the
credit risks associated with their investment to the extent these risks are not
covered by the Outstanding Reserve Amount or otherwise.
The Policy is being issued under and pursuant to and shall be construed
under, the laws of the State of New York, without giving effect to its conflict
of laws principles.
The Policy is not cancelable for any reason. The premium on the Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to maturity of the Offered Certificates.
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<PAGE>
THE CREDIT ENHANCER
The following information has been supplied by the Credit Enhancer for
inclusion in this Prospectus Supplement. No representation is made by the
Depositor, ________ or any of their affiliates as to the accuracy or
completeness of this information.
The Credit Enhancer is a ________-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of _______
and licensed to do business in 50 states, the District of Columbia, the
Commonwealth of Puerto Rico and the Territory of Guam. The Credit Enhancer
primarily insures newly issued municipal and structured finance obligations. The
Credit Enhancer is a wholly owned subsidiary of ___________, a 100% publicly
held company. Moody's Investors Service, Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. and Fitch IBCA, Inc. have each assigned a triple-A
financial strength rating to the Credit Enhancer.
The consolidated financial statements of the Credit Enhancer and its
subsidiaries as of December 31, 1998 and 1997, and for each of the years in the
three-year period ended December 31, 1998, prepared in accordance with generally
accepted accounting principles, included in the Current Report on Form 8-K of
___________ (which was filed with the Commission on _________; Commission File
Number _________), are hereby incorporated by reference into this Prospectus
Supplement and shall be deemed to be a part of this Prospectus Supplement. Any
statement contained in a document incorporated in this Prospectus Supplement by
reference shall be modified or superseded for the purposes of this Prospectus
Supplement to the extent that a statement contained in this Prospectus
Supplement by reference in this Prospectus Supplement also modifies or
supersedes that statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus Supplement.
All financial statements of the Credit Enhancer and its subsidiaries
included in documents filed ____________ with the Commission under Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part of
this Prospectus Supplement from the respective dates of filing those documents.
The following table describe the Credit Enhancer's capitalization as of
December 31, 1996, December 31, 1997 and December 31, 1998, respectively, in
conformity with generally accepted accounting principles.
Consolidated Capitalization Table
(Dollars in Millions)
December 31, December 31, December 31,
1996 1997 1998
-----------------------------------------
Unearned premiums.................. $ $ $
Other liabilities..................
Total liabilities..................
Stockholder's equity:(1)...........
Common Stock....................
Additional paid-in capital......
Accumulated other comprehensive income
Retained earnings...............
Total stockholder's equity.........
Total liabilities and stockholder's equity $ $
===================================
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<PAGE>
(1)Components of stockholder's equity have been restated for all periods
presented to reflect "Accumulated other comprehensive income" in accordance
with the Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" adopted by the Credit Enhancer effective January 1,
1998. As this new standard only requires additional information on the
financial statements, it does not affect the Credit Enhancer's financial
position or results of operations.
For additional financial information concerning the Credit Enhancer, see
the audited financial statements of the Credit Enhancer incorporated by
reference in this Prospectus Supplement. Copies of the financial statements of
the Credit Enhancer incorporated in this Prospectus Supplement by reference and
copies of the Credit Enhancer's annual statement for the year ended December 31,
1998 prepared in accordance with statutory accounting standards are available,
without charge, from the Credit Enhancer. The address of the Credit Enhancer's
administrative offices and its telephone number are ______________________.
The Credit Enhancer makes no representation regarding the Certificates or
the advisability of investing in the Certificates and makes no representation
regarding, nor has it participated in the preparation of, this Prospectus
Supplement other than the information supplied by the Credit Enhancer and
presented under the headings "The Credit Enhancer" and "Description of the
Certificates--Certificate Guaranty Insurance Policy" and in the financial
statements incorporated in this Prospectus Supplement by reference.
YEAR 2000 CONSIDERATIONS
Overview of the Year 2000 Issue
The Year 2000 ("Y2K") issue is the term generally used to describe the
potential failure of information technology components on or after January 1,
2000 because existing computer programs, applications and microprocessors
frequently use only two digits to identify a year. Since the Year 2000 is also a
leap year, there could be additional business disruptions as a result of the
inability of many computer systems to recognize February 29, 2000.
The failure to correct or replace computer programs, applications and
microprocessors with Y2K-ready alternatives may adversely impact the operations
of Residential Funding on or after January 1, 2000. The responsibilities of
Residential Funding as the Master Servicer include collecting payments from the
Subservicers relating to the Mortgage Loans, calculating the Available
Distribution Amount for each Distribution Date, remitting that amount to the
Trustee prior to each Distribution Date, calculating the amount of principal and
interest payments to be made to the Certificateholders on each Distribution
Date, and preparing the monthly statement to be sent to Certificateholders on
each Distribution Date.
Overview of Residential Funding's Y2K Project
In January 1997, Residential Funding commenced activities to determine the
impact of Y2K on its critical computer systems. In April 1998, Residential
Funding established a formal Y2K project team (the "Y2K Project Team") to
address Y2K issues. The Y2K Project Team remains in place and continues to work
on solving problems related to the Year 2000. In addition, the Y2K Project Team
coordinates its efforts with the Y2K programs established by General Motors
Acceptance Corporation and General Motors Corporation.
Members of the Y2K Project Team, together with relevant personnel from
Residential Funding's business units have developed and implemented a six-phase
management strategy, as discussed below, which is being applied to information
technology and non-information technology components ("Components") throughout
the organization.
Residential Funding's Components primarily consist of the following:
o hardware, including mainframe computers, desktop computers and network
devices;
o facilities equipment, including elevators, telephone systems, heating
systems and security systems;
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o software applications, including vendor purchased applications,
in-house developed applications and end-user developed applications;
o business partner communication links, which primarily provide data
transmissions to and from business partners; and
o business partners data systems, which primarily process data for
Residential Funding.
The six phases by which the Y2K Project Team will seek to achieve Y2K
readiness throughout Residential Funding are as follows:
Phase Objective
- ------------------------------------------------------------------------------
Phase I - Awareness To promote Y2K awareness throughout
Residential Funding. Emphasis has been placed on
ensuring that Components recently purchased, or to be
purchased, by business units are Y2K-ready prior to
the implementation of those Components.
Phase II - Inventory To (i) create an inventory of all
Components and (ii) assess the Y2K risks associated
with those Components. To (i) determine which
Components are not Y2K-
Phase III - Assessment ready and (ii) decide whether those
Components should be replaced, retired or repaired.
Phase IV - Renovation To execute Component replacement,
retirement or repair to ensure Y2K readiness.
Phase V - Validation To test Components that have been
repaired to ensure Y2K readiness and validate "mission
critical" Components that were assessed as Y2K-ready
in Phase III.
Phase VI - Implementation To deploy repaired and validated Components.
In order to execute the six-phase plan, a combination of internal
resources and external contractors have been, and will be, employed by the Y2K
Project Team.
Y2K Project Status
As of November 30, 1998, the Y2K Project Team had substantially completed
the six phases for internal "mission critical" Components. However, several
software applications used by Residential Funding in its role as Master Servicer
are still in the final three phases of the six-phase management plan described
above. Residential Funding expects that all phases with respect to those
applications will be substantially completed by March 31, 1999.
The Y2K Project Team anticipates that its efforts with respect to all
internal Components will be substantially complete by March 31, 1999. This
includes substantial completion of (i) renovation and validation of any
non-mission critical Components that the Y2K Project Team and related business
units determine to be necessary, (ii) validation of any remaining "mission
critical" Components that are either completing in-house remediation or waiting
for a vendor upgrade, and (iii) Y2K business continuity planning activities
discussed below.
The potential impact on Residential Funding of problems related to Y2K,
however, will not depend solely on the corrective measures undertaken by the Y2K
Project Team. The manner in which Y2K issues are addressed by business partners,
governmental agencies and other entities that provide data to, or receive data
from, Residential
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Funding, or whose financial condition or operational capability is important to
Residential Funding and its ability to act as Master Servicer, will have a
significant impact upon Residential Funding. These entities include, among
others, Subservicers, the Trustee, the Custodian and some depositary
institutions, as well as their respective suppliers and vendors. Accordingly,
Residential Funding is communicating with some of these parties to assess their
Y2K readiness and evaluate any potential impact on Residential Funding.
Due to the various dates by which Residential Funding's business partners
anticipate being Y2K-ready, it is expected that the Y2K Project Team will
continue to spend significant time assessing Y2K business partner issues
throughout 1999. Any business partner, including any Subservicer, the Trustee
and the Custodian, that (i) has not provided Residential Funding appropriate
documentation supporting its Y2K efforts, (ii) has not responded in a timely
manner to Residential Funding's inquiries regarding their Y2K efforts or (iii)
does not expect to be Y2K-ready until after June 30, 1999, has been, and will
be, placed in an "at risk" category. Residential Funding will carefully monitor
the efforts and progress of its "at risk" business partners, and if additional
steps are necessary Residential Funding will reassess the risk and act
accordingly.
During 1998, Residential Funding also commenced a formal business
continuity plan that is designed to address potential Y2K problems and other
possible disruptions. Residential Funding's business continuity plan has the
following four phases:
Phase Objective
- -----------------------------------------------------------------------------
Phase I - Business Impact Assessment To assess
the impact upon Residential Funding
business units if "mission critical"
Components were suddenly not available or
significantly impaired as a result of a
natural disaster or other type of
disruption, including as a result of Y2K.
Phase II - Strategic Development To develop
broad, strategic plans regarding the
manner in which Residential Funding will
operate in the aftermath of a natural
disaster or other type of disruption,
including as a result of Y2K.
Phase III - Business Continuity Planning To develop
detailed procedures on how Residential
Funding and individual business units will
continue to operate in the aftermath of a
natural disaster or other type of
disruption, including as a result of Y2K.
Phase IV - Validation To test the plans
developed in Phases II and III above.
As of December 15, 1998, Residential Funding had substantially completed
Phases I and II of its business continuity plan. Residential Funding anticipates
that Phase III will be substantially complete by March 31, 1999 and Phase IV
will be substantially complete by June 30, 1999.
Risks Related to Y2K
Although Residential Funding's remediation efforts are directed at
eliminating its Y2K exposure, there can be no assurance that these efforts will
fully mitigate the effect of all Y2K problems. If Residential Funding fails to
identify or correct any material Y2K problem, there could be significant
disruptions in its normal business operations. These disruptions could have a
material adverse effect on Residential Funding's ability to (i) collect, and
monitor any Subservicer's collection of, payments on the Mortgage Loans, (ii)
distribute those collections to the Trustee and (iii) provide reports to
Certificateholders as described in this Prospectus Supplement. Furthermore, if
any Subservicer, the
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Trustee or any other business partner or any of their respective vendors or
third party service providers are not Y2K- ready, the ability to (a) service the
Mortgage Loans, in the case of any Subservicer or any of their respective
vendors or third party service providers, and (b) make distributions to
Certificateholders, in the case of the Trustee or any of its vendors or third
party service providers, may be materially and adversely affected.
This section entitled "Year 2000 Considerations" contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act. All statements in this section that are not statements of historical fact
are forward-looking statements. Forward-looking statements made in this Y2K
discussion are subject to some risks and uncertainties. Important factors that
could cause results to differ materially from the forward-looking statements
include, among other things, the ability of Residential Funding to successfully
identify Components that may pose Y2K problems, the nature and amount of
programming required to fix the affected Components, the costs of labor and
consultants related to these efforts, the continued availability of resources,
both personnel and technology, and the ability of business partners that
interface with Residential Funding to successfully address their Y2K issues.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
General
The yields to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans and the amount and timing of Mortgagor defaults
resulting in Realized Losses. 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, the yields may be adversely affected by a higher or lower than
anticipated rate of principal payments on the Mortgage Loans in the Trust. The
rate of principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans, the rate and timing of principal
prepayments on the Mortgage Loans by the Mortgagors, liquidations of defaulted
Mortgage Loans and repurchases of Mortgage Loans due to some breaches of
representations.
The timing of changes in the rate of prepayments, liquidations and
repurchases of the Mortgage Loans may, and the timing of Realized Losses will,
significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Since the rate and timing of principal payments on the Mortgage
Loans will depend on future events and on a variety of factors, as described
more fully in this Prospectus Supplement and in the Prospectus under "Yield and
Prepayment Considerations", no assurance can be given as to the rate or the
timing of principal payments on the Class A Certificates.
A Subservicer may allow the refinancing of a Mortgage Loan by accepting
prepayments on the Mortgage Loan and permitting a new loan 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 Trust
and, therefore, the refinancing would have the same effect as a prepayment in
full of the related Mortgage Loan. A Subservicer or the Master Servicer may,
from time to time, implement refinancing or modification programs designed to
encourage refinancing. The 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 Mortgage Loans, including defaulted Mortgage Loans, under which
creditworthy borrowers assume the outstanding indebtedness of those Mortgage
Loans which may be removed from the Trust. As a result of these programs (i) the
rate of principal prepayments of the Mortgage Loans may be higher than would
otherwise be the case, and (ii) in some cases, the average credit or collateral
quality of the Mortgage Loans remaining in the Trust may decline.
The Mortgage Loans in most cases may be prepaid by the Mortgagors at any
time. However, in some circumstances the prepayment of some of the Mortgage
Loans will be subject to a prepayment penalty, which may discourage Mortgagors
from prepaying their Mortgage Loans during the period during which the
prepayment penalty applies.
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Most of the Mortgage Loans contain due-on-sale clauses. As described
under "Description of the Certificates--Principal Distributions" in this
Prospectus Supplement, during specified periods all or a disproportionately
large percentage of principal collections on the Mortgage Loans will be
allocated among the Class A Certificates, other than the Lockout Certificates,
and during some periods no principal collections or a disproportionately small
portion of principal collections will be distributed on the Lockout
Certificates. Prepayments, liquidations and purchases of the Mortgage Loans will
result in distributions to holders of the Class A Certificates of principal
amounts which would otherwise be distributed over the remaining terms of the
Mortgage Loans. Factors affecting prepayment, including defaults and
liquidations, of mortgage loans include changes in Mortgagors' housing needs,
job transfers, unemployment, Mortgagors' net equity in the mortgaged properties,
changes in the value of the mortgaged properties, mortgage market interest
rates, solicitations and servicing decisions. In addition, if prevailing
mortgage rates fell significantly below the Mortgage Rates on the Mortgage
Loans, the rate of prepayments, including refinancings, would be expected to
increase. On the other hand, if prevailing mortgage rates rose significantly
above the Mortgage Rates on the Mortgage Loans, the rate of prepayments on the
Mortgage Loans would be expected to decrease. Furthermore, since mortgage loans
secured by second liens are not generally viewed by borrowers as permanent
financing and generally carry a high rate of interest, the Mortgage Loans may
experience a higher rate of prepayments than traditional first lien mortgage
loans. Prepayment of the related first lien may also affect the rate of
prepayments on the Mortgage Loans.
The Class A Certificates are subject to various priorities for payment of
principal as described in this Prospectus Supplement. Distributions of principal
on classes of Class A Certificates having an earlier priority of payment will be
affected by the rates of prepayment of the Mortgage Loans early in the life of
the Mortgage Pool. The timing of commencement of principal distributions and the
weighted average lives of classes of Class A Certificates with a later priority
of payment will be affected by the rates of prepayment of the Mortgage Loans
both before and after the commencement of principal distributions on those
classes. In addition, the yield to maturity of the Class A Certificates will
depend on whether, to what extent, and the timing with respect to which, Excess
Cash Flow is used to accelerate payments of principal on the Class A
Certificates or any Reserve Reduction Amount is released. See "Description of
the Certificates--Overcollateralization Provisions" in this Prospectus
Supplement.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default of mortgage loans secured by second liens is likely
to be greater than that of mortgage loans secured by traditional first lien
mortgage loans, particularly in the case of Mortgage Loans with high CLTVs or
low Junior Mortgage Ratios. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans will be affected by the general
economic condition of the region of the country in which the related Mortgaged
Properties are located. The risk of delinquencies and loss is greater and
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values. See "Yield and Prepayment Considerations" and "Risk
Factors" in the Prospectus. In addition, because borrowers of Balloon Loans are
required to make a relatively large single payment upon maturity, it is possible
that the default risk associated with Balloon Loans is greater than that
associated with fully-amortizing mortgage loans.
See "Risk Factors" in this Prospectus Supplement.
To the extent that any losses are incurred on any of the Mortgage Loans
that are not covered by the Realized Loss Distribution Amount, a reduction in
the Outstanding Reserve Amount or the Policy, holders of the Certificates will
bear all risk of the losses resulting from default by Mortgagors. See "Risk
Factors--Limitations, Reduction and Substitution of Credit Enhancement" in the
Prospectus. Even where the Policy covers all losses incurred on the Mortgage
Loans, this coverage may accelerate principal payments on the Class A
Certificates, thus reducing the weighted average life of the Class A
Certificates.
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through
Rates on the Offered Certificates are fixed, the rates will not change in
response to changes in market interest rates. Accordingly, if market interest
rates or market yields for securities similar to the Offered Certificates were
to rise, the market value of the Offered Certificates may decline.
Class A-I Certificates and Class A-II Certificates: The rate and timing
of principal payments on and the weighted average lives of the Class A-I
Certificates and Class A-II Certificates will be affected primarily by the rate
and timing of principal payments, including prepayments, defaults, liquidations
and purchases, on the Mortgage Loans in the related Loan Group.
Sequentially Paying Classes: The Class A-I Certificates, other than the
Fixed Strip Certificates, are subject to various priorities for payment of
principal as described in this Prospectus Supplement. Distributions of principal
on
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<PAGE>
classes of Class A-I Certificates having an earlier priority of payment will be
affected by the rates of prepayment of the Group I Loans early in the life of
the Mortgage Pool. The timing of commencement of principal distributions and the
weighted average lives of classes of Class A-I Certificates with a later
priority of payment will be affected by the rates of prepayment of the Group I
Loans experienced both before and after the commencement of principal
distributions on these classes.
Lockout Certificates: Investors in the Lockout Certificates should be
aware that because the Lockout Certificates do not receive any payments of
principal prior to the Distribution Date occurring in ________ and prior to the
Distribution Date occurring in ________ will receive a disproportionately small
portion of payments of principal, unless the Certificate Principal Balances of
the Class A-I Certificates, other than the Lockout Certificates, have been
reduced to zero, the weighted average lives of the Lockout Certificates will be
longer than would otherwise be the case, and the effect on the market value of
the Lockout Certificates of changes in market interest rates or market yields
for similar securities will be greater than for other classes of Certificates
entitled to these distributions. However, beginning with the Distribution Date
occurring in _______, the Lockout Certificates may receive a disproportionately
large percentage of principal collections until their Certificate Principal
Balance is reduced to zero.
In addition, the yield to maturity on each class of the Offered
Certificates will depend on, among other things, the price paid by the holders
of the Offered Certificates and the related Pass-Through Rate. The extent to
which the yield to maturity of an Offered Certificate is sensitive to
prepayments will depend, in part, upon the degree to which it is purchased at a
discount or premium. In general, if a class of Offered Certificates is purchased
at a premium and its principal distributions 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. On the other hand, if a class of
Offered Certificates is purchased at a discount and principal distributions on
that class of Offered Certificates 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 Certificates, see "Yield and Prepayment Considerations" in
the Prospectus.
Assumed Final Distribution Date: The assumed final Distribution Date with
respect to the Class A Certificates is __________, which date is six months
after the Distribution Date immediately following the latest scheduled maturity
date for any Mortgage Loan. No event of default, change in the priorities for
distribution among the various classes or other provisions under the Pooling and
Servicing Agreement will arise or become applicable solely by reason of the
failure to retire the entire Certificate Principal Balance of any class of
Certificates on or before its assumed final Distribution Date.
The actual final Distribution Date with respect to each class of Class A
Certificates could occur significantly earlier than the assumed final
Distribution Date for that class because (i) Excess Cash Flow will be used to
make accelerated payments of principal, i.e. Reserve Increase Amounts, to the
holders of the Class A Certificates, which payments will have the effect of
shortening the weighted average lives of the Class A Certificates of each class,
(ii) prepayments are likely to occur, which will also have the effect of
shortening the weighted average lives of the Class A Certificates and (iii) the
Master Servicer or the Depositor may cause a termination of the Trust when the
aggregate Stated Principal Balance of the Mortgage Loans in the Trust is less
than 10% of the aggregate Cut-off Date Balance.
Weighted Average Life: Weighted average life refers to the average amount
of time that will elapse from the date of issuance of a security to the date of
distribution to the investor of each dollar distributed in reduction of
principal of that security, assuming no losses. The weighted average life of the
Offered Certificates will be influenced by, among other things, the rate at
which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
The prepayment model used in this Prospectus Supplement (the "Prepayment
Assumption") represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of mortgage loans. A 100%
Prepayment Assumption assumes a constant prepayment rate ("CPR") of 4% per annum
of the then outstanding principal balance of the mortgage loans in the first
month of the life of the mortgage loans and an additional 2.1818182% per annum
in each month thereafter until the twelfth month. Beginning in the twelfth month
and in each month thereafter during the life of the mortgage loans, a 100%
Prepayment Assumption assumes a CPR of 28% per annum each month. As used in the
table below, a 50% Prepayment Assumption assumes prepayment rates equal to 50%
of the Prepayment Assumption. Correspondingly, a 150% Prepayment Assumption
assumes prepayment rates equal to 150% of the Prepayment Assumption, and so
forth. The Prepayment Assumption does not purport to be a historical description
of prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of mortgage loans, including the Mortgage Loans.
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<PAGE>
The tables below entitled "Percent of Initial Principal Balance
Outstanding of the Class A-I Certificates at the Following Percentages of the
Prepayment Assumption" and "Percent of Initial Certificate Principal Balance
Outstanding of the Class A-II Certificates at the Following Percentages of the
Prepayment Assumption" have been prepared on the basis of some assumptions as
described below regarding the weighted average characteristics of the Mortgage
Loans that are expected to be included in the Trust as described under
"Description of the Mortgage Pool" in this Prospectus Supplement and their
performance. The tables assume, among other things, that: (i) as of the date of
issuance of the Class A Certificates, the Mortgage Loans have the following
characteristics:
Group I Loans
<TABLE>
<CAPTION>
Original Remaining
Term to Term to
Range of Original Terms to Maturity Aggregate Maturity Maturity
(in years) Principal Balance Mortgage Rate (in months) (in months)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
$ %
$ %
$ %
$ %
$ %
$ %
Original Remaining
Term to Term to
Range of Original Terms to Maturity Aggregate Maturity Maturity
(in years) Principal Balance Mortgage Rate (in months) (in months)
- ------------------------------------------------------------------------------------------------
$ %
$ %
$ %
$ %
$ %
$ %
</TABLE>
(ii) with respect to each Mortgage Loan, the aggregate Servicing Fee rate
and policy premium rate will be __% per annum; (iii) except with respect
to the Balloon Loans, the scheduled monthly payment for each Mortgage Loan
has been based on its outstanding balance, interest rate and remaining
term to maturity, so that the Mortgage Loan will amortize in amounts
sufficient for its repayment over its remaining term to maturity; (iv)
none of the Sellers, the Master Servicer or the Depositor will repurchase
any Mortgage Loan, as described under "Mortgage Loan
Program--Representations Relating to Mortgage Loans" and "Description of
the Certificates--Assignment of Trust Fund Assets" in the Prospectus, and
neither the Master Servicer nor the Depositor exercises any option to
purchase the Mortgage Loans and thereby cause a termination of the Trust;
(v) there are no delinquencies or Realized Losses on the Mortgage Loans,
and principal payments on the Mortgage Loans will be timely received
together with prepayments, if any, at the respective constant percentages
of the Prepayment Assumption described in the table; (vi) there is no
Prepayment Interest Shortfall or any other interest shortfall in any
month; (vii) payments on the Certificates will be received on the 25th day
of each month, commencing ____________; (viii) payments on the Mortgage
Loans earn no reinvestment return; (ix) there are no additional ongoing
Trust expenses payable out of the Trust; and (x) the Certificates will be
purchased on ____________ (collectively, the "Structuring Assumptions").
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The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the tables below, which are
hypothetical in nature and is provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the Mortgage Loans will prepay at a constant
level of the Prepayment Assumption until maturity or that all of the Mortgage
Loans will prepay at the same level of the Prepayment Assumption. Moreover, the
diverse remaining terms to maturity of the Mortgage Loans could produce slower
or faster principal distributions than indicated in the tables at the various
constant percentages of the Prepayment Assumption specified, even if the
weighted average remaining term to maturity of the Mortgage Loans is as assumed.
Any difference between the assumptions and the actual characteristics and
performance of the Mortgage Loans, or actual prepayment or loss experience, will
affect the percentages of initial Certificate Principal Balances outstanding
over time and the weighted average lives of the classes of Class A Certificates.
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average life of each class of Class A Certificates, and
describe the percentages of the initial Certificate Principal Balance of each
class of Class A Certificates that would be outstanding after each of the dates
shown at various percentages of the Prepayment Assumption.
[Insert DEC Tables here]
Fixed Strip Certificate Yield Considerations
Investors should note that the Fixed Strip Certificates are only entitled
to distributions prior to the Distribution Date in _________. The yield to
investors on the Fixed Strip Certificates will be extremely sensitive to the
rate and timing of principal payments on the Mortgage Loans, including
prepayments, defaults and liquidations, under some extremely rapid rate of
prepayment scenarios. In addition, if prior to the Distribution Date in
_________, the Master Servicer or the Depositor effects an optional termination
of the Mortgage Loans, the Fixed Strip Certificates will receive no further
distributions. Investors in the Fixed Strip Certificates should fully consider
the risk that an extremely rapid rate of prepayments on the Mortgage Loans could
result in the failure of these investors to fully recover their investments.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Fixed Strip Certificates to various constant rates of prepayment
on the Mortgage Loans by projecting the monthly aggregate payments of interest
on the Fixed Strip Certificates and computing the corresponding pre-tax yields
to maturity on a corporate bond equivalent basis, based on the Structuring
Assumptions, including the assumptions regarding the characteristics and
performance of the Mortgage Loans which differ from the actual characteristics
and performance thereof and assuming the aggregate purchase price described
below. Any differences between the assumptions and the actual characteristics
and performance of the Mortgage Loans and of the Fixed Strip Certificates may
result in yields being different from those shown in the table. Discrepancies
between assumed and actual characteristics and performance underscore the
hypothetical nature of the table, which is provided only to give a general sense
of the sensitivity of yields in varying prepayment scenarios.
Pre-Tax Yield to Maturity of the Fixed Strip Certificates
at the Following Percentages of the Prepayment Assumption
Assumed Purchase Price % % % %
- ------------------------------------------------------------------------------
% % % %
Each pre-tax yield to maturity described in the preceding table was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Fixed Strip Certificates, would
cause the discounted present value of that assumed stream of cash flows to equal
the assumed purchase price listed in the table. Accrued interest is included in
the assumed purchase price and is used in computing the corporate bond
equivalent yields shown. These yields do not take into account the different
interest rates at which investors may be able to reinvest funds received by them
as distributions on the Fixed Strip Certificates, and thus do not reflect the
return on any investment in the Fixed Strip Certificates when any reinvestment
rates other than the discount rates are considered.
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<PAGE>
Notwithstanding the assumed prepayment rates reflected in the preceding
table, it is highly unlikely that the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yield to maturity on the Fixed
Strip Certificates may differ from those shown in the table, even if all of the
Mortgage Loans prepay at the indicated constant percentages of the Prepayment
Assumption over any given time period or over the entire life of the
Certificates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Fixed Strip Certificates will conform
to the yields described in this Prospectus Supplement. Moreover, the various
remaining terms to maturity of the Mortgage Loans could produce slower or faster
principal distributions than indicated in the preceding table at the various
constant percentages of the Prepayment Assumption specified, even if the
weighted average remaining term to maturity of the Mortgage Loans is as assumed.
Investors are urged to make their investment decisions based on their
determinations as to anticipated rates of prepayment under a variety of
scenarios. Investors in the Fixed Strip Certificates should fully consider the
risk that an extremely rapid rate of prepayments on the Mortgage Loans could
result in the failure of the investors to fully recover their investments.
For additional considerations relating to the yield on the Certificates,
see "Yield and Prepayment Considerations" in the Prospectus.
POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued under a Pooling and Servicing Agreement
dated as of ________, among the Depositor, the Master Servicer and the Trustee.
Reference is made to the Prospectus for important information in addition to
that described in this Prospectus Supplement regarding the terms and conditions
of the Pooling and Servicing Agreement and the Certificates. The Trustee, or any
of its affiliates, in its individual or any other capacity, may become the owner
or pledgee of Certificates with the same rights as it would have if it were not
Trustee. The Trustee will appoint _____________ to serve as Custodian in
connection with the Certificates. The Certificates will be transferable and
exchangeable at the corporate trust office of the Trustee, which will serve as
Certificate Registrar and Paying Agent. The Depositor will provide a prospective
or actual Certificateholder, without charge, on written request, a copy, without
exhibits, of the Pooling and Servicing Agreement. Requests should be addressed
to the President, Residential Funding Mortgage Securities II, Inc., 8400
Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437. In addition
to the circumstances described in the Prospectus, the Depositor may terminate
the Trustee for cause under some circumstances. See "The Pooling and Servicing
Agreement--The Trustee" in the Prospectus.
The Master Servicer
Residential Funding, an indirect wholly-owned subsidiary of GMAC Mortgage
and an affiliate of the Depositor, will act as Master Servicer for the
Certificates under the Pooling and Servicing Agreement. For a general
description of Residential Funding and its activities, see "Residential Funding
Corporation" in the Prospectus and "Description of the Mortgage
Pool--Residential Funding" in this Prospectus Supplement.
Servicing and Other Compensation and Payment of Expenses
The Servicing Fees for each Mortgage Loan are payable out of the interest
payments on that Mortgage Loan. The weighted average Servicing Fee as of the
Cut-off Date will be approximately __% per annum. The Servicing Fees consist of
(a) servicing compensation payable to the Master Servicer relating to its master
servicing activities, and (b) subservicing and other related compensation
payable to the Subservicer. The Master Servicer is obligated to pay somen
ongoing expenses associated with the Trust and incurred by the Master Servicer
in connection with its responsibilities under the Pooling and Servicing
Agreement. See "The Pooling and Servicing Agreement--Servicing and
Administration" in the Prospectus for information regarding other possible
compensation to the Master Servicer and the Subservicers and for information
regarding expenses payable by the Master Servicer.
Refinancing of Senior Lien
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The Master Servicer may permit the refinancing of any existing lien senior
to a Mortgage Loan, provided that some conditions described in the Pooling and
Servicing Agreement are satisfied and the resulting Combined Loan-to-Value Ratio
does not exceed 100%.
Collection and Liquidation Practices; Loss Mitigation
The Master 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 the action is not materially
adverse to the interests of the holder of the Offered Certificates or the Credit
Enhancer and is generally consistent with the Master Servicer's policies with
respect to similar loans; and provided further that some of the modifications,
including reductions in the Mortgage Rate, partial forgiveness or a maturity
extension, may only be taken if the Mortgage Loan is in default or if default is
reasonably foreseeable. With respect to Mortgage Loans that come into and
continue in default, the Master Servicer may take a variety of actions including
foreclosure on the Mortgaged Property, writing off the balance of the Mortgage
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 "Description of the
Certificates--Collection and Other Servicing Procedures" and "--Realization Upon
Defaulted Mortgage Loans" in the Prospectus.
Voting Rights
Some actions specified in the Prospectus that may be taken by holders of
Certificates evidencing a specified percentage of all undivided interests in the
Trust may be taken by holders of Certificates entitled in the aggregate to that
percentage of the outstanding voting rights ("Voting Rights"). __% of all Voting
Rights will be allocated among all holders of the Class A Certificates in
proportion to their then outstanding Certificate Principal Balances, and __%,
__% and __% of all Voting Rights will be allocated among holders of the Fixed
Strip Certificates, the Class R-I Certificates and the Class R-II Certificates,
respectively, in proportion to the Percentage Interests evidenced by their
respective Certificates. So long as there does not exist a failure by the Credit
Enhancer to make a required payment under the Policy (this event, a "Credit
Enhancer Default"), the Credit Enhancer shall have the right to exercise all
rights of the holders of the Offered Certificates under the Pooling and
Servicing Agreement without any consent of the holders, and the holders may
exercise their rights only with the prior written consent of the Credit Enhancer
except as provided in the Pooling and Servicing Agreement.
Termination
The circumstances under which the obligations created by the Pooling and
Servicing Agreement will terminate relating to the Offered Certificates are
described in "The Pooling and Servicing Agreement--Termination; Retirement of
Certificates" in the Prospectus. The Master Servicer or the Depositor will have
the option on any Distribution Date on which the aggregate Stated Principal
Balance of the Mortgage Loans is less than 10% of the aggregate Cut-off Date
Balance (i) to purchase all remaining Mortgage Loans and other assets in the
Trust, except for the Policy, thereby effecting early retirement of the Offered
Certificates, or (ii) to purchase in whole, but not in part, the Certificates.
Any purchase of Mortgage Loans and other assets of the Trust shall be made at a
price equal to the sum of (a) 100% of the unpaid principal balance of each
Mortgage Loan, or the fair market value of the related underlying Mortgaged
Properties with respect to defaulted Mortgage Loans as to which title to the
Mortgaged Properties has been acquired if the fair market value is less than the
unpaid principal balance, as of the date of repurchase plus (b) its accrued
interest at the Net Mortgage Rate to, but not including, the first day of the
month in which the repurchase price is distributed and (c) any amounts due to
the Credit Enhancer under the Insurance Agreement. Distributions on the
Certificates relating to any optional termination will be paid, first, to the
Offered Certificates, in an amount equal to the Certificate Principal Balance of
each class plus one month's interest accrued on those Offered Certificates at
the related Pass-Through Rate, plus any previously unpaid Accrued Certificate
Interest and second, except as described in the Pooling and Servicing Agreement,
to the Residual Certificates. Any purchase of Mortgage Loans and termination of
the Trust requires the consent of the Credit Enhancer if it would result in a
draw on the Policy. Any purchase of the Certificates, will be made at a price
equal to 100% of its Certificate Principal Balance plus the sum of one month's
interest accrued on those Certificates at the applicable Pass-Through Rate and
any previously unpaid Accrued Certificate Interest. Upon the purchase of the
Certificates or at any time thereafter, at the option of the Master Servicer or
the Depositor, the Mortgage Loans may be sold, thereby effecting a retirement of
the Certificates and the termination of the Trust, or the Certificates so
purchased may be held or resold by the Master Servicer or the Depositor.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, ____________, counsel to
the Depositor, will deliver an opinion to the effect that, assuming compliance
with all provisions of the Pooling and Servicing Agreement, for federal income
tax purposes, REMIC I and REMIC II will each qualify as a REMIC under the Code.
For federal income tax purposes:
o the Class R-I Certificates will constitute the sole class of "residual
interests" in REMIC I
o each class of Offered Certificates will represent ownership of
"regular interests" in REMIC II and will generally be treated as debt
instruments of REMIC II and
o the Class R-II Certificates will constitute the sole class of
"residual certificates" in REMIC II.
See "United States Federal Income Tax Consequences--REMICS" in the Prospectus.
For federal income tax reporting purposes, the Offered Certificates, other
than the [Class A-I-1 Certificates and Fixed Strip Certificates], will not and
the [Class A-I-1 Certificates and Fixed Strip Certificates] will be treated as
having been issued with original issue discount. The Prepayment Assumption that
will be used in determining the rate of accrual of original issue discount,
market discount and premium, if any, for federal income tax purposes will be
based on the assumption that, subsequent to the date of any determination the
Mortgage Loans will prepay at a rate equal to __% of the Prepayment Assumption.
No representation is made that the Mortgage Loans will prepay at that rate or at
any other rate. See "United States Federal Income Tax Consequences--General" and
"--REMICS--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount" in the Prospectus.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder, in particular the Fixed Strip Certificates, the amount of
original issue discount allocable to that period would be zero and the
Certificateholder will be permitted to offset that negative amount only against
future original issue discount, if any, attributable to those Certificates.
In some circumstances OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, it is possible that the holder of a
Certificate may be able to select a method for recognizing original issue
discount that differs from that used by the Master Servicer in preparing reports
to the Certificateholders and the IRS.
Some classes of the Offered Certificates may be treated for federal income
tax purposes as having been issued at a premium. Whether any holder of one of
those classes of Certificates will be treated as holding a certificate with
amortizable bond premium will depend on the Certificateholder's purchase price
and the distributions remaining to be made on the Certificate at the time of its
acquisition by the Certificateholder. Holders of those classes of Certificates
should consult their tax advisors regarding the possibility of making an
election to amortize the premium. See "United States Federal Income Tax
Consequences--REMICS--Taxation of Owners of REMIC Regular Certificates" and
"--Premium" in the Prospectus.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A),
formerly Section 856(c)(5)(A), of the Code generally in the same proportion that
the assets of the Trust would be so treated. In addition, interest on the
Offered Certificates will be treated as "interest on obligations secured by
mortgages on real property" under Section 856(c)(3)(B) of the Code generally to
the extent that the Offered Certificates are treated as "real estate assets"
under Section 856(c)(4)(A) of the Code. Moreover, the Offered Certificates will
be "qualified mortgages" within the meaning of Section 860G(a)(3) of the Code if
transferred to another REMIC on its startup day in exchange for a regular or
residual interest therein. However, prospective investors in Offered
Certificates that will be generally treated as assets described in Section
860G(a)(3) of the Code should note that, notwithstanding that treatment, any
repurchase of Certificate under the right of the Master Servicer or the
Depositor to repurchase the Offered Certificates may adversely affect any REMIC
that holds the Offered Certificates if the repurchase is made under
circumstances giving rise to a Prohibited Transaction Tax. See "The Pooling and
Servicing Agreement--Termination" in this Prospectus Supplement and "Certain
Federal Income Tax Consequences--REMICS--Characterization of Investments in
REMIC Certificates" in the Prospectus.
Residential Funding will be designated as the "tax matters person" with
respect to REMIC I and REMIC II as defined in the REMIC Provisions, and in
connection therewith will be required to hold not less than 0.01% of each of the
Class R-I Certificates and Class R-II Certificates.
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New Withholding Regulations
The Treasury Department has issued new regulations (the "New Regulations")
which make some modifications to the withholding, backup withholding and
information reporting rules described above. The New Regulations attempt to
unify certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
1999, subject to some transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
For further information regarding federal income tax consequences of
investing in the Offered Certificates, see "United States Federal Income Tax
Consequences--REMICS" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement, dated
________ (the "Underwriting Agreement"), __________ (the "Underwriter") has
agreed to purchase and the Depositor has agreed to sell the Offered
Certificates. It is expected that delivery of the Offered Certificates will be
made only in book-entry form through the Same Day Funds Settlement System of DTC
on or about _____________, against payment therefor in immediately available
funds.
In connection with the Offered Certificates, the Underwriter has agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
all of the Offered Certificates if any of its Offered Certificates are purchased
thereby.
The Underwriting Agreement provides that the obligations of the
Underwriter to pay for and accept delivery of the Offered Certificates is
subject to, among other things, the receipt of legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
Depositor's Registration Statement shall be in effect, and that no proceedings
for that purpose shall be pending before or threatened by the Securities and
Exchange Commission.
The distribution of the Offered Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the
Depositor from the sale of the Offered Certificates, before deducting expenses
payable by the Depositor, will be approximately __% of the aggregate Certificate
Principal Balance of the Offered Certificates plus its accrued interest from the
Cut-off Date.
The Underwriter may effect these transactions by selling the Offered
Certificates to or through dealers, and those dealers may receive compensation
in the form of underwriting discounts, concessions or commissions from the
Underwriter for whom they act as agent. In connection with the sale of the
Offered Certificates, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting compensation. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any profit on the resale of the Offered Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter, and that under limited circumstances the Underwriter will indemnify
the Depositor, against some civil liabilities under the Securities Act of 1933,
as amended, or contribute to payments required to be made in respect thereof.
There is currently no secondary market for the Offered Certificates. The
Underwriter intends to make a secondary market in the Offered Certificates but
is not obligated to do so. There can be no assurance that a secondary market for
the Offered Certificates will develop or, if it does develop, that it will
continue. The Offered Certificates will not be listed on any securities
exchange.
The primary source of information available to investors concerning the
Offered Certificates will be the monthly statements discussed in the Prospectus
under "Description of the Certificates--Reports to Certificateholders," which
will include information as to the outstanding principal balance of the Offered
Certificates. There can be no assurance that any additional information
regarding the Offered Certificates will be available through any other source.
In addition, the Depositor is not aware of any source through which price
information about the Offered Certificates
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will be available on an ongoing basis. The limited nature of this information
regarding the Offered Certificates may adversely affect the liquidity of the
Offered Certificates, even if a secondary market for the Offered Certificates
becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be passed
upon for the Depositor by ________________ and for the Underwriter by
_________________.
EXPERTS
The consolidated financial statements of ____________ and subsidiaries, as
of December 31, 1998 and 1997 and for each of the years in the three-year period
ended December 31, 1998 are incorporated by reference in this Prospectus
Supplement and in the registration statement in reliance upon the report of
__________, independent certified public accountants, incorporated by reference
in this Prospectus Supplement, and upon the authority of said firm as experts in
accounting and auditing.
RATINGS
It is a condition to the issuance of the Class A Certificates that they be
rated "AAA" by _______________. and _________________. It is a condition to the
issuance of the Fixed Strip Certificates that they be rated "AAAr" by
_____________ and "AAA" by ______________.
[The ratings assigned by _____________ to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of
payments required under the Pooling and Servicing Agreement. ____________'s
ratings take into consideration the credit quality of the mortgage pool,
structural and legal aspects associated with the Offered Certificates, and the
extent to which the payment stream in the mortgage pool is adequate to make
payments required under the Offered Certificates. ___________'s rating on the
Offered Certificates does not, however, constitute a statement regarding
frequency of prepayments on the mortgages. See "Certain Yield and Prepayment
Considerations" in this Prospectus Supplement. The "r" of the "AAAr" rating of
the Fixed Strip Certificates by ___________ is attached to highlight derivative,
hybrid, and some other obligations that _____________ believes may experience
high volatility or high variability in expected returns due to non-credit risks.
Examples of these obligations are:
o securities whose principal or interest return is indexed to equities,
commodities, or currencies; certain swaps and options; and
o interest only and principal only mortgage securities.
The absence of an "r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.]
[The ratings assigned by _____________ to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which they are entitled under the transaction structure.
__________'s ratings reflect its analysis of the riskiness of the underlying
mortgage loans and the structure of the transaction described in the operative
documents. ___________'s ratings do not address the effect on the certificates'
yield attributable to prepayments or recoveries on the underlying mortgage
loans. Further, the rating on the Fixed Strip Certificates does not address
whether investors therein will recoup their initial investments.]
The Depositor has not requested a rating on the Offered Certificates by
any rating agency other than________ and ___________. However, there can be no
assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any other rating
agency. A rating on the Offered Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Offered
Certificates by ___________ and ____________.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. The ratings of the Fixed Strip Certificates do not
address the possibility that the holders of
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those Certificates may fail to recover fully their initial investments. In the
event that the ratings initially assigned to the Offered Certificates are
subsequently lowered for any reason, no person or entity is obligated to provide
any additional support or credit enhancement with respect to the Offered
Certificates.
LEGAL INVESTMENT
The Offered Certificates will not constitute "mortgage related securities"
for purposes of SMMEA because the Mortgage Pool includes Mortgage Loans that are
secured by subordinate liens on the related Mortgaged Properties. Institutions
whose investment activities are subject to legal investment laws and regulations
or to review by regulatory authorities should consult with their own legal
advisors in determining whether and to what extent the Offered Certificates are
subject to restrictions on investment, capital requirements or otherwise. See
"Legal Investment Matters" in the Prospectus.
One or more classes of the Offered Certificates may be viewed as 'complex
securities" under TB 13a, which applies to thrift institutions regulated by the
OTS.
The Depositor makes no representations as to the proper characterization
of any class of the Offered Certificates for legal investment or other purposes,
or as to the ability of particular investors to purchase any class of the
Offered Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions 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 any class of the Offered
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
See "Legal Investment Matters" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA, or Section 4975 of the Code (a "Plan") or any insurance
company, whether through its general or separate accounts, or any other person
investing "Plan Assets" of any Plan, as defined under "ERISA Considerations-Plan
Asset Regulations" in the Prospectus, should carefully review with its legal
advisors whether the purchase or holding of Offered Certificates could give rise
to a transaction prohibited or not otherwise permissible under ERISA or Section
4975 of the Code. The purchase or holding of the Offered Certificates by, on
behalf of or with "Plan Assets" of, a Plan may qualify for exemptive relief
under the Exemption, as described under "ERISA Considerations-Prohibited
Transaction Exemptions" in the Prospectus. However, the Exemption contains a
number of conditions which must be met for the Exemption to apply, including the
requirement that any Plan must be an "accredited investor" as defined in Rule
501(a)(1) of Regulation D of the Securities and Exchange Commission under the
Securities Act of 1933, as amended. See "ERISA Considerations" in the
Prospectus.
Insurance companies contemplating the investment of general account assets
in the Offered Certificates should consult with their legal advisors with
respect to the applicability of Section 401(c) of ERISA, as described under
"ERISA Considerations--Insurance Company General Accounts" in the Prospectus.
The DOL issued proposed regulations under Section 401(c) on December 22, 1997,
but the required final regulations have not been issued as of the date of this
Prospectus Supplement.
Any fiduciary or other investor of Plan Assets that proposes to acquire or
hold the Offered Certificates on behalf of or with Plan Assets of any Plan
should consult with its counsel with respect to: (i) whether the specific and
general conditions and the other requirements in the Exemption would be
satisfied, or whether any other prohibited transaction exemption would apply,
and (ii) the potential applicability of the general fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA and
Section 4975 of the Code to the proposed investment.
The sale of any of the Offered Certificates to a Plan is in no respect a
representation by the Depositor or the Underwriter that such an investment meets
all relevant legal requirements relating to investments by Plans generally or
any particular Plan, or that such an investment is appropriate for Plans
generally or any particular Plan.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES
Except in some limited circumstances, the globally offered Residential
Funding Mortgage Securities II, Inc., Home Equity Loan Pass-Through
Certificates, Series _______: [Class A-I-1, Class A-I-2, Class A-I-3, Class
A-I-4, Class A-I-5, Class A-I-6, Class A-II and Class IO] Certificates (the
"Global Securities") will be available only in book-entry form. Investors in the
Global Securities may hold these Global Securities through any of DTC, Cedelbank
or Euroclear. The Global Securities will be tradable 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 Cedelbank and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedelbank 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 Cedelbank Customers or Euroclear
and DTC Participants holding the Global Securities will be effected on a
delivery-against-payment basis through the respective Depositaries of Cedelbank
and Euroclear, in that capacity, and as DTC Participants.
Beneficial Owners of Global Securities that are Non-U.S. Persons will be
subject to U.S. withholding taxes unless the Beneficial Owners meet some
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
Participants and Indirect Participants in DTC. As a result, Cedelbank and
Euroclear will hold positions on behalf of their Customers and Participants,
respectively, through their Relevant Depositary which in turn will hold these
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 Cedelbank 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
Because the purchaser determines the place of delivery, it is important to
establish at the time of the trading of any Global Securities where both the
purchaser's and the 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 Cedelbank Customers and/or Euroclear Participants.
Secondary market trading between Cedelbank Customers and/or Euroclear
Participants will be settled using the procedures applicable to conventional
eurobonds in same-day funds.
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Trading between DTC Participant Sellers and Cedelbank Customer Purchasers
or Euroclear Participant Purchasers. When Global Securities are to be
transferred from the account of a DTC Participant to the account of a Cedelbank
Customer or a Euroclear Participant, the purchaser must send instructions to
Cedelbank or Euroclear through a Cedelbank Customer or Euroclear Participant at
least one business day prior to settlement. Cedelbank or Euroclear, as the case
may be, will instruct the Relevant Depositary, to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date, on the basis of the actual number of days in the 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 Cedelbank Customer'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 Cedelbank or Euroclear cash debt will be valued
instead as of the actual settlement date.
Cedelbank Customers and Euroclear Participants will need to provide the
funds necessary to process same-day funds settlement to the respective clearing
systems. The most direct means of providing the funds is to pre-position funds
for settlement, either from cash on hand or from existing lines of credit, as
would be done for any settlement occurring within Cedelbank or Euroclear. Under
this approach, a Purchaser may take on credit exposure to Cedelbank or Euroclear
until the Global Securities are credited to its account one day later.
Alternatively, if Cedelbank or Euroclear has extended a line of credit to a
Purchaser, Cedelbank Customers or Euroclear Participants can elect not to
pre-position funds and instead to finance settlement by drawing upon that line
of credit. Under this procedure, Cedelbank Customers 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 the overdraft charges, although the result will depend on each Cedelbank
Customer's or Euroclear Participant's particular cost of funds. Because
settlements occur during New York business hours, DTC Participants can employ
their usual procedures for crediting Global Securities to the applicable
European Depositary for the benefit of Cedelbank Customers 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 Cedelbank Customer Sellers or Euroclear Participant
Sellers and DTC Participant Purchasers. Due to time zone differences in their
favor, Cedelbank Customers and Euroclear Participants may employ their customary
procedures for transactions in which Global Securities are to be transferred by
the applicable clearing system, through the applicable Depositary, to a DTC
Participant. The Seller must send instructions to Cedelbank or Euroclear through
a Cedelbank Customer or Euroclear Participant at least one business day prior to
settlement. Cedelbank or Euroclear will instruct the applicable Depositary, 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 the accrual period and a year assumed to
consist to 360 days. For transactions settling on the 31st of a given month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will be reflected in the account of the Cedelbank
Customer or Euroclear Participant the following business day, and receipt of the
cash proceeds in the Cedelbank Customer's or Euroclear Participant's account
will be back-valued to the value date, which would be the preceding day, when
settlement occurred in New York. If the Cedelbank Customer or Euroclear
Participant has a line of credit with its clearing system and elects to draw on
that line of credit in anticipation of receipt of the sale proceeds in its
account, the back-valuation may be substantially reduce or offset any overdraft
charges incurred during that one-day period. If settlement is not completed on
the intended value date, receipt of the cash proceeds in the Cedelbank
Customer's or Euroclear Participant's account would instead be valued as of the
actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and purchase Global
Securities from DTC Participants for delivery to Cedelbank Customers or
Euroclear Participants should note that these trades will 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 Cedelbank or Euroclear for one day, until the
purchase side of the trade is reflected in their Cedelbank or Euroclear
accounts, in accordance with the clearing system's customary procedures;
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(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 the Cedelbank 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 Cedelbank Customer or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding these securities through
Cedelbank 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, 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 the beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) the 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 Owners of Global
Securities that are Non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status) or
any successor form. If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of the change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person, 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) or any successor form.
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) or any successor form. 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 or any successor form. Form 1001 may be filed by
Certificateholders 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 or her 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 created or organized in, or under the
laws of, the United States, any state thereof, or the District of Columbia
(except in the case of a partnership, to the extent provided in Treasury
regulations) or any political subdivision thereof, (iii) an estate that is
described in Section 7701(a)(30)(D) of the Code, or a trust that is described in
Section 7701(a)(30)(E) of the Code. The term "Non-U.S. Person" means any person
who is not a U.S. Person. This summary does not address all aspects of U.S.
Federal income tax withholding that may be relevant to foreign Beneficial Owners
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>
Residential Funding Mortgage Securities II, Inc.
$_____________
Home Equity Loan Pass-Through Certificates,
Series _______
Prospectus Supplement
---------------------
[Underwriter]
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the certificates offered in this prospectus supplement in
any state where the offer is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
certificates, whether or not participating in this offering, may be required to
deliver a prospectus supplement and prospectus until _____________.
<PAGE>
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION April 30, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Prospectus
Asset-Backed Notes
Residential Funding Mortgage Securities II, Inc.
Depositor
You should carefully consider the risk factors discussed in the accompanying
prospectus supplement under the heading "Risk Factors."
The notes of any series offered by this prospectus and the accompanying
prospectus supplement will represent indebtedness in the trust created for the
related series and will not represent interests in or obligations of Residential
Funding Mortgage Securities, II, Inc., Residential Funding Corporation or any of
their affiliates.
This prospectus may be used to offer and sell the notes only if accompanied by
the related prospectus supplement.
The depositor may periodically issue notes representing indebtedness in a
specific trust and the notes will be paid only from the assets of that trust.
Each trust will consist primarily of assets as described in this prospectus and
in the accompanying prospectus supplement. The notes will be issued in series
and each series of notes will represent indebtedness in a different trust
established by the depositor.
Offered Notes
The notes for any series may consist of multiple classes and each class may:
o receive a specified fixed or variable rate of interest;
o have a higher or lower priority relative to other classes in the
series with respect to distributions of principal and/or interest
from the trust and/or allocations of any losses;
o represent the right to receive payments from a part or all of the
trust assets;
o receive distributions of principal and/or interest at specified
times; and
o have a specified form of credit enhancement.
You can find specific information regarding each class of offered notes in the
accompanying prospectus supplement.
Trust Assets
Each trust will consist primarily of one of the following types of assets
grouped into one or more pools that are described in detail in the accompanying
prospectus supplement. The types of assets include:
o one- to four-family first or junior lien home equity revolving lines
of credit acquired under the home equity program;
o one- to four-family first or junior lien closed end home equity loans
acquired under the home equity program;
o one- to four-family first or junior lien closed end home loans
acquired under the 125 loan program;
o home improvement installment sales contracts and installment loan
agreements, 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;
o manufactured housing installment sales contracts and installment loan
agreements secured by security interests in manufactured homes;
o partial balances of any of the assets described above; and
o interests in securities and whole or partial participations in assets.
Credit Enhancement
Credit enhancement for a series of securities may include any one or any
combination of one or more classes of subordinate securities, financial guaranty
insurance policy, derivative products, letter of credit, bankruptcy bond,
special hazard insurance policy or reserve fund. In addition to or in lieu of
the foregoing, credit enhancement may be provided by means of
overcollateralization of the notes to the extent the principal balance of the
assets is greater than the principal balance of the notes.
Underwriting
The notes may be offered to the public through different methods as described in
"Methods of Distribution" in this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these notes or determined that this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
______________, 1999
<PAGE>
Important notice about information presented in this
prospectus and the accompanying prospectus supplement
We provide information to you about the notes in two separate documents that
provide progressively more detail:
o this prospectus, which provides general information, some of which
may not apply to your series of notes; and
o the accompanying prospectus supplement, which describes the
specific terms of your series of notes.
If the description of your notes in the accompanying prospectus supplement
differs from the related description in this prospectus, you should rely on the
information in that prospectus supplement.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. See "Additional Information," "Reports to Noteholders" and
"Incorporation of Certain Information by Reference" in this Prospectus. You can
request information incorporated by reference from Residential Funding Mortgage
Securities II, Inc. by calling us at (612) 832-7000 or writing to us at 8400
Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437. We have not
authorized anyone to provide you with different information. We are not offering
the notes in any state where the offer is not permitted.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Principal Definitions"
beginning on page ____.
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<PAGE>
TABLE OF CONTENTS
INTRODUCTION.................................................................1
THE TRUSTS...................................................................1
General......................................................................1
Revolving Credit Loans.......................................................4
The Closed-End Loans.........................................................5
TRUST ASSET PROGRAM..........................................................6
Qualifications of Sellers....................................................9
Representations Relating to Trust Assets.....................................9
Subservicing................................................................11
DESCRIPTION OF THE NOTES....................................................12
General.....................................................................12
Form of Notes...............................................................12
Assignment of the Trust Assets..............................................14
Review of Trust Assets......................................................15
Excess Spread and Excluded Spread...........................................16
Payments on Trust Assets; Deposits to Payment Account.......................16
Withdrawals from the Custodial Account......................................18
Payments....................................................................18
Funding Account.............................................................19
Reports to Noteholders......................................................19
Hazard Insurance and Related Claims.........................................20
DESCRIPTION OF CREDIT ENHANCEMENT...........................................21
Financial Guaranty Insurance Policy.........................................22
Letter of Credit............................................................22
Subordination...............................................................23
Overcollateralization.......................................................23
Reserve Funds...............................................................23
Maintenance of Credit Enhancement...........................................24
Reduction or Substitution of Credit Enhancement.............................24
OTHER FINANCIAL OBLIGATIONS RELATED TO THE NOTES............................25
Swaps and Yield Supplement Agreements.......................................25
Purchase Obligations........................................................25
DESCRIPTION OF FHA INSURANCE UNDER TITLE I..................................26
THE DEPOSITOR...............................................................27
RESIDENTIAL FUNDING CORPORATION.............................................27
SERVICING OF TRUST ASSETS...................................................28
Subservicing................................................................28
Collection and Other Servicing Procedures...................................28
Special Servicing and Special Servicing Agreements..........................30
Realization Upon Defaulted Loans............................................30
Servicing Compensation and Payment of Expenses..............................31
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Evidence as to Compliance...................................................31
Certain Matters Regarding the Master Servicer and the Depositor.............32
THE AGREEMENTS..............................................................32
Events of Default; Rights Upon Event of Default.............................32
Amendment...................................................................34
Termination; Redemption of Notes............................................35
The Owner Trustee...........................................................35
The Indenture Trustee.......................................................35
YIELD AND PREPAYMENT CONSIDERATIONS.........................................36
CERTAIN LEGAL ASPECTS OF THE TRUST ASSETS
AND RELATED MATTERS...................................................40
General; Trust Assets Secured by Mortgages on Mortgaged Property............40
Cooperative Loans...........................................................40
Tax Aspects of Cooperative Ownership........................................41
Manufactured Housing Contracts..............................................41
Foreclosure on Loans and Certain Contracts .................................43
Foreclosure on Shares of Cooperatives.......................................44
Repossession with Respect to Manufactured Housing Contracts ................45
Rights of Redemption........................................................46
Notice of Sale; Redemption Rights with Respect to Manufactured Homes .......46
Anti-Deficiency Legislation and Other Limitations on Lenders................46
Environmental Legislation...................................................47
Consumer Protection Laws with Respect to Manufactured Housing Contracts.....48
Enforceability of Certain Provisions........................................49
Transfer of Manufactured Homes..............................................50
The Home Improvement Contracts..............................................50
Security Interests in Home Improvements.....................................50
Applicability of Usury Laws.................................................52
Alternative Mortgage Instruments............................................52
Formaldehyde Litigation with Respect to Manufactured Housing Contracts .....52
Soldiers' and Sailors' Civil Relief Act of 1940.............................53
Forfeitures in Drug and RICO Proceedings....................................53
Junior Mortgages; Rights of Senior Mortgagees...............................53
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES...............................54
General.....................................................................54
STATE AND OTHER TAX CONSEQUENCES............................................59
ERISA CONSIDERATIONS........................................................59
Plan Asset Regulations......................................................59
Prohibited Transaction Exemptions...........................................60
Insurance Company General Accounts..........................................60
Representation from Plans Investing in Notes with "Substantial Equity
Features" ........................................................61
Tax Exempt Investors........................................................61
Consultation with Counsel...................................................61
LEGAL INVESTMENT MATTERS....................................................61
USE OF PROCEEDS.............................................................62
METHODS OF DISTRIBUTION.....................................................62
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LEGAL MATTERS...............................................................63
FINANCIAL INFORMATION.......................................................63
ADDITIONAL INFORMATION......................................................63
REPORTS TO NOTEHOLDERS......................................................63
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE...........................63
INDEX OF PRINCIPAL DEFINITIONS..............................................65
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INTRODUCTION
The Asset-Backed Notes (the "Notes") offered by this Prospectus may be
sold from time to time in series, as described in the related supplement to this
Prospectus (each, a "Prospectus Supplement"). Each series of Notes in the
aggregate will represent indebtedness, excluding any interest retained by
Residential Funding Mortgage Securities II, Inc. (the "Depositor") or any other
entity specified in the accompanying Prospectus Supplement, in a trust
consisting primarily of assets (the "Trust Assets") described below, which were
acquired by the Depositor from one or more affiliated or unaffiliated
institutions. The Trust Assets will be held in a trust (each, a "Trust") under a
trust agreement (the "Trust Agreement") and pledged under an indenture (the
"Indenture") to secure a series of Notes as described in this Prospectus and in
the accompanying Prospectus Supplement. The ownership of the Trust Fund will be
evidenced by certificates (the "Certificates") issued under the Trust Agreement,
which are not offered by this Prospectus.
THE TRUSTS
General
As specified in the accompanying Prospectus Supplement, the Trust for a
series of Notes and the related Certificates (together with the Notes, "the
Securities") will consist primarily of a segregated pool of assets (a "Pool").
The Trust Assets will primarily include:
o one- to four-family first or junior lien home equity revolving lines
of credit acquired under the home equity program (the "Revolving
Credit Loans");
o one- to four-family first or junior lien closed end home equity
loans acquired under the home equity program (the "Home Equity
Loans");
o one -to four-family first or junior lien closed end home loans
acquired under the 125 loan program (the "Home Loans", and together
with the Home Equity Loans, the "Closed-End Loans");
o 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");
o manufactured housing installment sales contracts and installment
loan agreements (the "Manufactured Housing Contracts" and together
with the Home Improvement Contracts, the "Contracts") secured by
security interests in manufactured homes (the "Manufactured Homes");
o partial balances of any of the assets described above; and/or
o interests in any of the assets described above (which may include
pass-through certificates or other instruments evidencing interests
in or secured by Revolving Credit Loans, Closed-End Loans, Home
Improvement Contracts and Manufactured Housing Contracts, or all or
a portion of balances of any of the assets described above ("Private
Securities").
The Revolving Credit Loans and the Closed-End Loans are sometimes referred
to in this Prospectus as the "Loans." The home equity program and the 125 loan
program are described in this Prospectus under "Trust Asset
Program--Underwriting Standard Applicable to the Loans."
To the extent specified in the accompanying prospectus supplement, the
Contracts may be partially insured by the Federal Housing Administration (the
"FHA") under Title I (as defined in this Prospectus) (the "Title I Contracts").
The 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. 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, modular pre-cut/panelized housing
("Modular Housing"), Manufactured Homes which are permanently affixed to the
real property on which they are located and the fee, leasehold or other
interests in the underlying real property. The underlying real property (the
"Mortgaged Properties") will be located in any of the fifty states, the District
of Columbia or the commonwealth of Puerto Rico (the "Puerto Rico Trust Assets")
and may include vacation, second and non-owner-occupied homes. If specified in
the accompanying 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 in this Prospectus, unless otherwise specified,
"Revolving Credit Loans," "Home Loans," "Home Equity Loans" and, if applicable,
"Contracts" include Cooperative Loans, "Mortgaged
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<PAGE>
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 Depositor for inclusion in a Pool
from among those purchased by the Depositor, either directly or through its
affiliates, including Residential Funding Corporation (the "Master Servicer" or
"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 Depositor ("Unaffiliated Sellers"); (Unaffiliated Sellers and
Affiliated Sellers are collectively referred to in this Prospectus as
"Sellers"), all as described below under "Trust Asset Program." If a Pool is
composed of Trust Assets acquired by the Depositor directly from Sellers other
than Residential Funding, the accompanying prospectus supplement will specify
the extent of Trust Assets so acquired. The characteristics of the Trust Assets
are as described in the accompanying prospectus supplement. No more than five
percent (5%) of the Trust Assets (as they are constituted as of the Cut-off
Date) by aggregate principal balance as of the Cut-off Date will have
characteristics that deviate from those characteristics described in the
accompanying prospectus supplement. Other Trust Assets available for purchase by
the Depositor may have characteristics which would make them eligible for
inclusion in a Pool but were not selected for inclusion in a Pool at that time.
The Trust Assets may be delivered either directly or indirectly to the
Depositor by one or more Sellers identified in the accompanying prospectus
supplement, concurrently with the issuance of the series of Notes (a "Designated
Seller Transaction"). These Notes may be sold in whole or in part to any Seller
identified in the accompanying prospectus supplement in exchange for the related
Trust Assets, or may be offered under any of the other methods described in this
Prospectus under "Methods of Distribution." The accompanying prospectus
supplement for a Designated Seller Transaction will include information,
provided by the related Seller (the "Designated Seller"), about the Designated
Seller, the Trust Assets and the underwriting standards applicable to these
Trust Assets. None of the Depositor, Residential Funding, GMAC Mortgage Group,
Inc. ("GMAC Mortgage") or any of their affiliates will make any representation
or warranty with respect to these Trust Assets, or any representation as to the
accuracy or completeness of the information provided by the Designated Seller.
If specified in the accompanying prospectus supplement, the Trust securing
a series of Notes may include Private Securities. The Private Securities may
have been issued previously by the Depositor or an affiliate, a financial
institution or other entity engaged 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 trusts, and selling beneficial
interests in trusts. In this case, the accompanying prospectus supplement will
include a description of any Private Securities and any related credit
enhancement, and the assets underlying the Private Securities will be described
together with any other Trust Assets included in the Pool relating to the
series.
In addition, as to any series of Notes secured by Private Securities, the
Private Securities may consist of an ownership interest (an "Ownership
Interest") in a structuring entity formed by the Depositor for the limited
purpose of holding the Trust Assets relating to the 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 Depositor, and will be
structured in a manner that will insulate the holders of Notes from liabilities
of the Special Purpose Entity. The provisions governing the Special Purpose
Entity 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 the Trust Assets and some incidental
activities. Any Ownership Interest will evidence an ownership interest in the
related Trust Assets as well as the right to receive specified cash flows
derived from the Trust Assets, as described in the accompanying prospectus
supplement. The obligations of the depositor as to any Ownership Interest will
be limited to some representations and warranties with respect to the Trust
Assets, as described in this Prospectus. Credit support of any of the types
described in this Prospectus under "Description of Credit Enhancement" may be
provided for the benefit of any Ownership Interest, if so specified in the
accompanying prospectus supplement. As to any series of Notes, the term "Pool"
includes the Trust Assets underlying the Private Securities.
The Prospectus Supplement for each series of Notes will contain information
appropriate to describe the type of Trust Assets which will be included in the
related Pool. Each Prospectus Supplement applicable to a series of Notes will
include information to the extent then available to the Depositor, as of the
related cut-off date ("Cut-off Date"), if appropriate, on an approximate basis.
The information may include, if applicable, (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 and/or remaining
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 (as defined in this
Prospectus) of the Trust Assets, as applicable, (vi) the interest rate (the
"Loan Rate") or range of Loan Rates borne by the Trust Assets, (vii) the
applicable Index (as defined in this Prospectus), the range of Gross Margins (as
defined in this Prospectus), 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 (as defined in this
Prospectus) of the related Credit Line Agreements, (x) the number and percentage
of Contracts that are partially insured
2
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by the FHA under Title I, (xi) the weighted average Junior Ratio and Credit
Utilization Rate, (xii) the range of debt-to-income ratios, (xiii) the
distribution of loan purposes and (xiv) the range of Credit Scores (as defined
in this Prospectus). 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 Securities and Exchange Commission (the
"Commission") within fifteen days after the initial issuance of the 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 the
Pool. If Trust Assets are added to or deleted from the Trust after the date of
the accompanying Prospectus Supplement other than as a result of any Draws with
respect to the Revolving Credit Loans, the addition or deletion will be noted in
the Current Report on Form 8-K. Additions or deletions of this type, if any,
will be made prior to the Closing Date.
As to each Loan, the "Combined Loan-to-Value Ratio" or "CLTV" generally
will be the ratio, expressed as a percentage, of (A) the sum of (i) the original
principal balance or the Credit Limit, as applicable, and (ii) the principal
balance of any related senior mortgage loan at origination of the Loan together
with any mortgage loan subordinate to it, to (B) the Appraised Value (as defined
in this Prospectus) of the related Mortgaged Property, or, if permitted by the
Guide (as defined in this Prospectus), a Statistical Valuation (as defined in
this Prospectus) or the Stated Value (as defined in this Prospectus). The
"Appraised Value" for any Loan will be the appraised value of the related
Mortgaged Property determined in the appraisal used in the origination of the
Loan, which may have been obtained at an earlier time; provided that if the Loan
was originated simultaneously with or not more than 12 months after a senior
lien on the related Mortgaged Property, the Appraised Value will be the lesser
of the appraised value at the origination of the senior lien and the sales price
for the Mortgaged Property. The "Statistical Valuation" will be the value of the
property as determined by a form of appraisal which uses a statistical model to
estimate the value of a property. The "Stated Value" will be value of the
property as stated by the related Mortgagor in his or her application.
As to each Loan, the "Junior Ratio" will be the ratio, expressed as a
percentage, of the original principal balance or the Credit Limit, as
applicable, of the Loan to the sum of (i) the original principal balance or the
Credit Limit, as applicable, of the Loan and (ii) the principal balance of any
related senior mortgage loan at origination of the Loan. As to each Contract,
the CLTV and Junior Ratio will be computed in the manner described in the
accompanying Prospectus Supplement. The "Credit Utilization Rate" for any
Revolving Credit Loan is determined by dividing the Cut-off Date Principal
Balance of the Revolving Credit Loan by the Credit Limit of the related Credit
Line Agreement.
As to each Loan, the "Loan-to-Value Ratio" or "LTV" generally will be the
ratio, expressed as a percentage, of (A) the original principal balance or the
Credit Limit, as applicable, to (B) the Appraised Value of the related Mortgaged
Property Loan, or, if permitted by the Guide, a Statistical Valuation or the
Stated Value.
As specified in the Prospectus Supplement, a Pool may include Balloon
loans ("Balloon Loans"), which are fixed-rate loans having original or modified
terms to maturity of 15 years in most cases as described in the accompanying
Prospectus Supplement, with level monthly payments of principal and interest
based on a 30-year amortization schedule. The amount of the monthly payment will
remain constant until the maturity date, upon which the remaining outstanding
principal balance on the Balloon Loan will be due and payable (the "Balloon
Amount").
Mortgaged Properties consisting of Modular Housing (also known as
pre-assembled, pre-fabricated, sectional or pre-built homes) are factory built
and constructed in two or more three dimensional sections, including interior
and exterior finish, plumbing, wiring and mechanical systems. Upon completion,
the modular home is transported to the property site to be joined together on a
permanent foundation.
Mortgaged Properties consisting of Manufactured Homes must be legally
classified as real estate, have the wheels and axles removed and be attached to
a permanent foundation and may not be located in a mobile home park. The
Manufactured Homes will also have certain other characteristics as specified in
the Prospectus Supplement.
A Pool may include Trust Assets that have been modified (each, a "Modified
Trust Asset"). The modifications may include conversions from an adjustable to a
fixed Loan Rate (discussed below) or other changes in the related mortgage note.
If a Trust Asset is a Modified Trust Asset, references to origination shall be
deemed to be references to the date of modification.
The Depositor will cause the Trust Assets constituting each Pool (or
Private Securities evidencing interests therein) to be assigned to the Owner
Trustee named in the accompanying Prospectus Supplement, for the benefit of the
holders of all of the Securities of a series. The Master Servicer named in the
accompanying Prospectus Supplement will service the Trust Assets, either
directly or through other mortgage servicing institutions ("Subservicers"),
under a Servicing Agreement (as defined in this Prospectus) and will receive a
fee for its services. See "Trust Asset Program" and "Description of the Notes."
As to those Trust Assets serviced by the Master Servicer through a Subservicer,
the Master Servicer will remain liable for its servicing obligations under the
related Servicing Agreement as if the Master Servicer alone were servicing the
Trust Assets. In addition to or in place of the Master Servicer for a series of
Notes, the accompanying Prospectus Supplement may identify an Administrator for
the Trust. The Administrator may be
3
<PAGE>
an affiliate of the Depositor. All
references in this Prospectus 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 Depositor'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 purchase obligations of Residential Funding or any
Designated Seller and other obligations of Subservicers, as described in this
Prospectus under "Trust Asset Program--Representations Relating to Trust
Assets," and "--Subservicing" and "Description of the Notes--Assignment of Trust
Assets" or under the terms of any Private Securities. Residential Funding (or
other entity specified in the accompanying 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 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 junior lien or
senior lien will likely not be included in the related Pool, but the Depositor,
an affiliate of the Depositor or an Unaffiliated Seller may have an interest in
the mortgage loan. Loans and Contracts that are secured by junior liens will not
be required by the Depositor to be covered by a primary mortgage guaranty
insurance policy insuring against default on the Trust Assets.
Revolving Credit Loans
The Revolving Credit Loans will be originated under loan agreements (the
"Credit Line Agreements") subject to a maximum amount (the "Credit Limit").
Interest on each Revolving Credit Loan will be calculated based on the average
daily balance outstanding during the billing cycle and the billing cycle
generally will be the calendar month preceding a Due Date. Each Revolving Credit
Loan will have a Loan 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 the day specified in the accompanying Prospectus Supplement,
and (b) a fixed percentage specified in the related Mortgage Note (the "Gross
Margin"), subject to the maximum rate specified in the Mortgage Note and
permitted by applicable law. Notwithstanding the forgoing, if so specified in
the accompanying 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 Loan Rate ("Teaser
Loans") and as a result of the introductory rate, interest payments on the Notes
may initially be lower than expected. Commencing on their first adjustment date,
the Loan Rates on the Teaser Loans will be based on the applicable Index and
Gross Margin.
The "Index" for a particular Pool will be specified in the accompanying
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 Note Rate adjustment date which will be
specified in the accompanying Prospectus Supplement or (vi) the weekly average
of secondary market Note Rates on six-month negotiable certificates of deposit.
Unless specified in the accompanying 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 in the Credit Line Agreement
(the "Draw Period"). Unless specified in the accompanying Prospectus Supplement,
the Draw Period will not be more than 15 years. If the Draw Period is less than
the full term of the Revolving Credit Loan, 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 "Repayment Period"). The Mortgagor for
each Revolving Credit Loan will be obligated to make monthly payments on the
Revolving Credit Loan in a minimum amount as specified in the related Mortgage
Note, which usually will not be less than the Finance Charge for the related
billing cycle. The Mortgagor for each Revolving Credit Loan will be obligated to
payoff the remaining Account Balance on the related 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
the Mortgage Note at the time of the Draw.
Unless specified in the accompanying 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 the Revolving Credit
Loan for the billing cycle at the related Loan 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 the 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 the Revolving Credit Loan minus the
aggregate of all payments and credits that are applied to the repayment of any
Draws on such day, and (c) the "principal balance" on any day usually will be
the related Account Balance minus the sum of any unpaid Finance Charges and
Additional Charges that are due on the 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
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Charges that are due on the Revolving Credit Loan, second, to any unpaid
Additional Charges that are due on the Revolving Credit Loan, and third, to any
related Draws outstanding.
In most cases, each Revolving Credit Loan may be prepaid in full or in
part at any time and without penalty, and the related Mortgagor will have the
right during the related Draw Period to make a Draw in the amount of any
prepayment made with respect to the Revolving Credit Loan. The Mortgage Note or
Mortgage related to each Revolving Credit Loan will usually 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, as to each Revolving Credit Loan,
generally the 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 the Mortgaged Properties.
The Closed-End Loans
As specified in the accompanying Prospectus Supplement, the Closed-End
Loans will be secured by first or junior liens on the related Mortgaged
Properties and may be mortgage loans for property improvement, debt
consolidation and/or home equity purposes. The Closed-End Loans will be either
fully amortizing or Balloon Loans and may have fixed Loan Rates or adjustable
Loan Rates and may provide for other payment characteristics as described in the
accompanying Prospectus Supplement.
A portion of the Closed-End Loans underlying a series of Certificates may
provide for payments that are allocated to principal and interest according to
the daily simple interest method (a "Simple Interest Loan"). Other Closed-End
Loans may provide for payments in monthly installments including interest equal
to one-twelfth of the applicable Loan Rate times the unpaid principal balance,
with any remainder of the payment applied to principal (an "Actuarial Loan").
A Simple Interest Loan provides the amortization of the amount financed
under the Loan over a series of equal monthly payments except, in the case of a
Balloon Loan, the final payment. Each monthly payment consists of an installment
of interest which is calculated on the basis of the outstanding principal
balance of the Loan multiplied by the stated Loan Rate and further multiplied by
a fraction, with the numerator equal to the number of days in the period elapsed
since the preceding payment of interest was made and the denominator equal to
the number of days in the annual period for which interest accrues on the Loan.
As payments are received under a Simple Interest Loan, the amount received is
applied first to interest accrued to the date of payment and then the remaining
amount is applied to pay any unpaid fees and then to reduce the unpaid principal
balance. Accordingly, if a borrower pays a fixed monthly installment on a Simple
Interest Loan before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a fixed monthly
installment after its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be greater
than it would have been had the payment been made as scheduled, and the
remaining portion, if any, of the payment applied to reduce the unpaid principal
balance will be correspondingly less. If each scheduled payment under a Simple
Interest Loan is made on or prior to its scheduled due date, the principal
balance of the Loan will amortize more quickly than scheduled. However, if the
borrower consistently makes scheduled payments after the scheduled due date, the
Loan will amortize more slowly than scheduled. If a Simple Interest Loan is
prepaid, the borrower is required to pay interest only to the date of
prepayment. Such variable allocations among principal and interest of a Simple
Interest Loan may affect the distributions of principal and interest on the
Notes, as described in the accompanying Prospectus Supplement.
The Closed-End Loans may provide for payment of a prepayment charge if the
related Mortgagor prepays the Closed-End Loan within a specified time period.
The Contracts
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Unless specified in the accompanying Prospectus Supplement, the Contracts
will be fully amortizing and may have fixed Loan Rates or adjustable Loan Rates
and may provide for other payment characteristics as described in the
accompanying Prospectus Supplement.
The Manufactured Housing Contracts will be secured by Manufactured Homes,
located in any of the fifty states, the District of Columbia or the Commonwealth
of Puerto Rico. As specified in the accompanying 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 under Title I.
The Home Improvements securing the Home Improvement Contracts may 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 and/or
lot on which to place such home, or cooperative interest in the home and/or lot.
As specified in the accompanying Prospectus Supplement, 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 Depositor, either
directly or indirectly through Residential Funding from Sellers. The Loans will
generally have been originated in accordance with the Depositor's underwriting
standards or alternative underwriting criteria as described below under
"Underwriting Standards Applicable to the Loans" or as described in the
accompanying Prospectus Supplement. The Contracts generally will have been
originated in accordance with the underwriting standards described in the
accompanying Prospectus Supplement.
Underwriting Standards Applicable to the Loans
General Standards
The Depositor's underwriting standards for the Loans will generally
conform to those published in Residential Funding's Client 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 Depositor's Home
Equity Program (the "Home Equity Program") or the 125 loan program (the "125
Loan Program"), as applicable. The Home Equity Program may include Revolving
Credit Loans and Home Equity Loans. The 125 Loan Program may include Home Loans
and Home Improvement Contracts. The underwriting standards contained 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 Loans may be underwritten by Residential Funding or
by a designated third party. In some circumstances, however, the Loans may be
underwritten only by the Seller with little or no review performed by
Residential Funding. See "Underwriting Standards Applicable to the 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 Loans in any Pool were underwritten in accordance with applicable
standards.
The Depositor's underwriting standards, as well as any other underwriting
standards that may be applicable to any Loans, generally include a set of
specific criteria under which the underwriting evaluation is made. However, the
application of the underwriting standards does not imply that each specific
criterion was satisfied individually. Rather, a 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
the underwriting standards. For example, a Loan
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may be considered to comply with a set of underwriting standards, even if one or
more specific criteria included in the underwriting standards were not
satisfied, if other factors compensated for the criteria that were not
satisfied.
In addition, the Depositor purchases Loans which do not conform to the
underwriting standards contained in the Guide. A portion of the Loans may be
purchased in negotiated transactions, and those negotiated transactions may be
governed by agreements ("Master Commitments") relating to ongoing purchases of
Loans by Residential Funding, from Sellers who will represent that the Loans
have been originated in accordance with underwriting standards agreed to by
Residential Funding. Residential Funding, on behalf of the Depositor or a
designated third party, will normally review only a limited portion of the Loans
in any delivery from the related Seller for conformity with the applicable
underwriting standards. A portion of Loans may be purchased from Sellers who may
represent that the Loans were originated under underwriting standards acceptable
to Residential Funding.
The level of review, if any, by Residential Funding or the Depositor of
any 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
Loan, including the original principal balance or Credit Limit, as applicable,
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 Loan, as determined based on a credit scoring model
acceptable to the Depositor. 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 Loans may be originated may provide that qualification for the
loan, the level of review of the loan's documentation, or the availability of
various loan features, including 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 Loans underlying
Private Securities may vary substantially from the underwriting standards
contained in the Guide. Those 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 Loans included in any Pool, the accompanying Prospectus Supplement
generally will not distinguish among the various underwriting standards
applicable to the Loans nor describe any review for compliance with applicable
underwriting standards performed by the Depositor or Residential Funding.
Moreover, there can be no assurance that every Loan was originated in conformity
with the applicable underwriting standards in all material respects, or that the
quality or performance of Loans underwritten under 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 Loans, and will be
described in the accompanying Prospectus Supplement.
The Depositor, either directly or indirectly through Residential Funding,
will also purchase Loans from its affiliates, including GMAC Mortgage
Corporation, Residential Money Centers, Inc. and HomeComings Financial Network,
Inc., with underwriting standards in accordance with the Guide or as otherwise
agreed to by the Depositor. However, in some limited circumstances, the Loans
may be employee or preferred customer loans with respect to which, in accordance
with the affiliate's mortgage loan programs, income, asset and employment
verifications and appraisals may not have been required. With respect to Loans
made under any employee loan program maintained by Residential Funding, or its
affiliates, in limited circumstances preferential Note Rates may be allowed.
Neither the Depositor nor Residential Funding will review any affiliate's loans
for conformity with the underwriting standards contained in the Guide.
Guide Standards
The following is a brief description of the underwriting standards under
both the Home Equity Program and the 125 Loan Program described in the Guide for
full documentation loan programs. Initially, a prospective borrower, other than
a trust if the trust is the borrower, is required to fill out a detailed
application providing pertinent credit information. As part of the application,
the borrower is required to provide a statement of income and expenses, as well
as an authorization to apply for a credit report which summarizes the borrower's
credit history with merchants and lenders and any record of bankruptcy. Under
the Home Equity Program, the borrower normally must show, among other things, a
minimum of two years' credit history reported on the credit report and under the
125 Loan Program, the borrower normally must show a minimum of three years'
credit history. Under both programs, the borrower normally must show that no
mortgage delinquencies (thirty days or greater) in the past 12 months existed.
Under both programs, borrowers who have less than a 12 month first mortgage
payment history may be subject to additional lending restrictions. In addition,
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 that
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
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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 specified in the accompanying Prospectus Supplement, the value of
the Mortgaged Property securing each Loan will be determined by either an
appraisal, or if permitted by the Guide, a Statistical Valuation or the Stated
Value. Appraisals may be performed by appraisers independent from or affiliated
with the Depositor, Residential Funding or their affiliates. 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 some 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. Under both
programs, each appraisal is required to be dated no more than 360 days prior to
the date of origination of the Loan; provided, that depending on the original
principal balance or the Credit Limit, as applicable, an earlier appraisal may
be used if the appraisal was made not earlier than two years prior to the date
of origination of the 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 Valuation is obtained. However,
appraisals, Statistical Valuations, or Stated Values will not establish that the
Mortgaged Properties provide assurance of repayment of the Loans. Title searches
are undertaken in most cases, and title insurance is required on all Loans with
an original principal balance or Credit Limit in excess of $100,000.
The "Credit Scores" for a portion of the Loans underlying each series of
Notes will be supplied in the accompanying Prospectus Supplement. Credit Scores
are obtained by many lenders in connection with loan applications to help assess
a borrower's credit-worthiness. In addition, Credit Scores may be obtained by
Residential Funding after the origination of a loan if the Seller does not
provide to Residential Funding a Credit Score. 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 utilized 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. Credit Scores range from approximately 350 to
approximately 840, 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 mortgage
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 mortgage loans and consumer loans in general, or the
specific characteristics of the related loan (for example, the Loan-to-Value
Ratio, the collateral for the mortgage 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 Loans or that any
Mortgagor's Credit Score would not be lower if obtained as of the date of the
accompanying Prospectus Supplement.
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 if
applicable, such as property taxes and hazard insurance, as well as other
financial obligations, including debt service on any mortgage loan secured by a
senior lien on the related Mortgaged Property. In most cases, the monthly
payment used to qualify borrowers for a Revolving Credit Loan will be assumed to
be an amount equal to 1.00% times the applicable Credit Limit. The Loan 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. The monthly payment used
to qualify borrowers for a Closed End Loan is a fully amortized fixed payment
which is added to the housing expenses and other monthly debt to calculate the
debt-to-income ratio. The Loans generally do not, but may provide for negative
amortization. Payment of the full outstanding principal balance, if any, at
maturity may depend on the borrower's ability to obtain refinancing or to sell
the Mortgaged Property prior to the maturity of the Loan, and there can be no
assurance that refinancing will be available to the borrower or that a sale will
be possible.
The underwriting standards set forth in the Guide also allow for Loans to
be supported by alternative documentation. For alternatively documented Loans, a
borrower may demonstrate income and employment directly by providing alternative
documentation in the form of copies of the borrower's own records relating
thereto, rather than by having the originator obtain independent verifications
from third parties, such as the borrower's employer or mortgage servicer.
The underwriting standards contained in the Guide may be varied in
appropriate cases, including in "limited" or "reduced loan documentation"
mortgage loan programs. Limited documentation programs normally permit fewer
supporting documents to be obtained or waive income, asset and employment
documentation requirements, and normally compensate for increased credit risk by
placing greater emphasis on either the review of the property to be financed or
the borrower's ability to repay the Loan. For example, under Residential
Funding's Stated Income limited mortgage loan
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documentation program, some 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.
Normally, in order to be eligible for a reduced loan documentation program, a
Mortgagor must have a good credit history, and other compensating factors,
including a relatively low Combined Loan-to-Value Ratio, or other favorable
underwriting factors, must be present. The borrower's eligibility for the
program may also be determined by use of a credit scoring model.
The Home Equity Program sets forth some limitations with respect to the
CLTV for the Revolving Credit Loans and the Home Equity Loans and restrictions
with respect to any related underlying first mortgage loan. The underwriting
guidelines for the Home Equity Program normally permit CLTV's as high as 100%;
however, the maximum permitted CLTV may be reduced due to various underwriting
criteria. In areas where property values are considered to be declining, the
maximum permitted CLTV is 75%. The underwriting guidelines for the 125 Loan
Program normally permit CLTV's as high as 125%; however, the maximum permitted
CLTV may be reduced due to various underwriting criteria. The underwriting
guidelines for both programs also include restrictions based on the borrower's
debt-to-income ratio. In addition to the conditions described above, an
evaluation of the prospective borrower's credit quality will be made based on a
credit scoring model approved by Residential Funding. Underwriting guidelines
for both programs include minimum credit score levels that may apply depending
on certain factors relating to the Loan. The required yields for fixed-rate
Closed-End Loans and required Gross Margins for Revolving Credit Loans purchased
under the Home Equity Program, as announced from time to time, vary based on a
number of factors including CLTV, original principal balance or 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 as specified in
the accompanying 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 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,
revolving credit, 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 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, that institution
may continue to be treated as a Seller. Any event of this type may adversely
affect the ability of any Seller to repurchase the Trust Asset in the event of a
breach of a representation or warranty which has not been cured.
Residential Funding monitors Sellers that it knows to be under control of
the FDIC or are insolvent, otherwise in receivership or conservatorship or
financially distressed. Any Seller that is under control of the FDIC or
insolvent 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.
As specified in the accompanying 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 Depositor, Residential
Funding nor any other entity will have assumed the representations and
warranties, and any related losses will be borne by the Noteholders or by the
credit enhancement, if any.
Representations Relating to Trust Assets
Except as described above, each Seller will have made representations and
warranties to Residential Funding with respect to the Trust Assets sold by it.
However, unless provided in the accompanying 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.
In the case of a Pool consisting of Trust Assets purchased by the Depositor
from Sellers through Residential Funding, Residential Funding, except in the
case of a Designated Seller Transaction or as to Trust Assets underlying
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any Private Securities or as specified in the accompanying Prospectus
Supplement, will have made certain limited representations and warranties
regarding the Trust Assets to the Depositor at the time that they are sold to
the Depositor. The representations and warranties will generally include, among
other things, that:
o as of the Cut-off Date, the information contained in a listing of the
related Trust Assets is true and correct in all material respects;
o Residential Funding was the sole holder and owner of the Trust Assets
free and clear of any and all liens and security interests;
o each Trust Asset complied in all material respects with all applicable
local, state and federal laws;
o except as otherwise indicated in the accompanying Prospectus
Supplement, no Trust Asset is one month or more delinquent in payment
of principal and interest;
o there is no delinquent tax, or to the best of Residential Funding's
knowledge, assessment lien against any Mortgaged Property; and
o to the best of Residential Funding's knowledge, any Contract that is
partially insured by the FHA under 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 the affected Trust Asset as described below. In
addition, Residential Funding will be obligated to repurchase or substitute for
any Trust Asset 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 the
Trust Asset, 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 the 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
Trust Asset as to which the Depositor delivers to the Indenture Trustee or the
custodian an affidavit certifying that the original Mortgage Note has been lost
or destroyed, if the 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 the 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 the
requirement also constitute fraud in the origination of the related Trust Asset.
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 some limited circumstances, modifications to the Note 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 date of the initial
issuance of the Notes (the "Closing Date"). Residential Funding will not be
required to purchase or substitute for any Trust Asset as a result of the
prepayment or modification.
In a Designated Seller Transaction, as specified in the accompanying
Prospectus Supplement, the Designated Seller will have made certain
representations and warranties regarding the Trust Assets to the Depositor
generally similar to those made in the preceding paragraph by Residential
Funding.
The Depositor will assign to the Owner Trustee, or the Special Purpose
Entity, if applicable, all of its right, title and interest in each agreement by
which it purchased a Trust Asset from Residential Funding or a Designated
Seller, insofar as the agreement relates to the representations and warranties
made by a Designated Seller or Residential Funding, as the case may be, in
respect of the Trust Asset and any remedies provided for with respect to any
breach of the 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 the Trust
Asset, within 90 days after notice from the Master Servicer, the Designated
Seller or Residential Funding, as the case may be, will be obligated to purchase
the Trust Asset at a price (the "Purchase Price") contained 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 Loan 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 in this Prospectus)).
Unless specified in the accompanying Prospectus Supplement, as to any Trust
Asset required to be purchased by Residential Funding as provided above, rather
than purchase the Trust Asset, Residential Funding may, at its sole
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option, remove the Trust Asset (a "Deleted Loan") from the Trust (or from the
assets underlying any Private Securities, if applicable) and cause the Depositor
to substitute in its place another Trust Asset of like kind (an "Eligible
Substitute Loan"). The accompanying Prospectus Supplement will describe the
conditions 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.
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 its obligation. The Master Servicer will be entitled to
reimbursement for any costs and expenses incurred in pursuing 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 contained in the preceding sentence, may negotiate and
enter into one or more settlement
agreements with the Designated Seller that may provide for, among other things,
the purchase of only a portion of the affected Trust Assets or coverage of only
certain loss amounts. Any 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 the 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 remedies if it determines that one 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 the 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
Depositor's or Residential Funding's representations has occurred, the
Designated Seller's purchase obligation will not become an obligation of the
Depositor or Residential Funding. Unless otherwise specified in the accompanying
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 Depositor, or for any other event giving rise
to the obligations as described above.
Neither the Depositor 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 a Designated Seller will carry out its
obligations with respect to Trust Assets. The default by a Designated Seller is
not a default by the Depositor or by the Master Servicer. Any Trust Asset not so
purchased or substituted for shall remain in the related Trust and any losses
related thereto shall be allocated to the related credit enhancement, and to the
extent not available to the related Notes.
However, if any Designated Seller requests Residential Funding's consent
to transfer subservicing rights for any related Trust Assets to a successor
servicer, Residential Funding may release the Designated Seller from liability
under its representations and warranties described above, upon the assumption of
the successor servicer of the Designated Seller's liability for the
representations and warranties as of the date they were made. In that event,
Residential Funding's rights under the instrument by which the successor
servicer assumes the Designated Seller's liability will be assigned to the Owner
Trustee, or the Special Purpose Entity, if applicable, and the successor
servicer will 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 then be serviced by the Subservicer under an agreement between the Master
Servicer and the Subservicer (a "Subservicing Agreement"). The Master Servicer
may, but is not obligated to, assign the subservicing to designated subservicers
which will be qualified Sellers and which may include GMAC Mortgage Corporation
or its affiliates. While the 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 the 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 the Subservicing Agreement. For
further information relating to subservicing see "Servicing of Trust
Assets--Subservicing" in this Prospectus.
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DESCRIPTION OF THE NOTES
General
The Notes will be issued in series. Each series of Notes will be issued
under an Indenture between the related Trust and the entity named in the
accompanying Prospectus Supplement as Indenture Trustee with respect to the
series. A form of Indenture has been filed as an exhibit to the registration
statement under the Securities Act of 1933, as amended, with respect to the
Notes (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 accompanying 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 a single class of Notes or any
combination of the following:
o two or more classes of Notes, of which one or more classes of Notes
(collectively, the "Senior Notes") may be senior in right of payment
to any class or classes of Notes (collectively the "Subordinate
Securities"), and as to which some classes of Senior (or
Subordinate) Notes may be senior to other classes of Senior (or
Subordinate) Notes, as described in the accompanying Prospectus
Supplement (any of these series, a "Senior/Subordinate Series");
o one or more classes of Notes (collectively, the "Mezzanine Notes")
which are Subordinate Notes but which are senior to certain other
classes of Subordinate Notes in respect of distributions or losses;
o one or more classes of Notes which will be entitled to (a) principal
distributions, with disproportionate, nominal or no interest
distributions or (b) interest distributions, with disproportionate,
nominal or no principal distributions (each, a "Strip Note");
o two or more classes of Notes which differ as to the timing, sequential
order, rate, pass-through rate or amount of distributions of principal
or interest or both, or as to which distributions of principal or
interest or both on any class may be made upon the occurrence of
specified events, in accordance with a schedule or formula (including
"planned amortization classes" and "targeted amortization classes" and
"very accurately defined maturity classes"), or on the basis of
collections from designated portions of the Pool, which series may
include one or more classes of Notes with respect to which certain
accrued interest will not be distributed but rather will be added to
the principal balance thereof (the "Accrual Notes") on the day of the
month specified in the accompanying Prospectus Supplement for
distributions to occur (or, if that day is not a business day, the
next business day) of each month, commencing in the month following
the month in which the Cut-off Date occurs (each, a "Distribution
Date"); or
o other types of classes of Notes, as described in the accompanying
Prospectus Supplement.
Credit support for each series of Notes will be provided by a Financial
Guaranty Insurance Policy, derivative products, Special Hazard Insurance Policy,
Bankruptcy Bond, Letter of Credit, Reserve Fund, Surety Bond, by the
subordination of one or more classes of Notes, Overcollateralization or other
credit enhancement as described under "Description of Credit Enhancement," or by
any combination of the foregoing.
Form of Notes
As specified in the accompanying 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 accompanying 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 in this Prospectus refers to the entity whose name appears on the
records of the Note Registrar or, if applicable, a transfer agent, as the
registered holder of a Note.
If issued in book-entry form, the classes of a series of Notes will be
initially issued through the book-entry facilities of The Depository Trust
Depositor ("DTC"), or Cedelbank, societe anonyme ("Cedel") or the Euroclear
System ("Euroclear") (in Europe). Noteholders may hold Book Entry Notes directly
through these facilities if they are participants of those systems, or
indirectly through organizations which are participants in those systems, or
through any other depository or facility as may be specified in the accompanying
Prospectus Supplement. Any class of Notes issued in book-entry form via one of
the facilities described above ("Book-Entry Notes"), will list DTC's nominee as
the record holder. Cedel and Euroclear will hold omnibus positions on behalf of
their participants through customers'
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securities accounts in Cedel's and Euroclear's names on the books of their
respective depositaries (the "Depositaries"), which in turn will hold those
positions in customers' securities accounts in the depositaries' names on the
books of DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, which holds securities for its participating organizations
("DTC Participants," and together with the Cedel and Euroclear participating
organizations "Participants") and facilitates the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in the accounts of Participants. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
other organizations. Other institutions that are not Participants but clear
through or maintain a custodial relationship with Participants (those
institutions, "Indirect Participants") have indirect access to DTC's clearance
system.
Unless specified in the accompanying Prospectus Supplement, no person
acquiring an interest in any Book-Entry Notes (each person, a "Beneficial
Owner") will be entitled to receive a Note representing that interest in
registered, certificated form, unless either (i) DTC ceases to act as depository
for that Note and a successor depository is not obtained or (ii) the Indenture
Trustee elects in its sole discretion to discontinue the registration of the
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 their 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 the Beneficial Owner is a
Participant or indirectly through Participants and, if applicable, Indirect
Participants. Under 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 accompanying 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 the Notes,
may be limited because of the lack of physical certificates evidencing the 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, immediately following
the DTC settlement date, which must be a business day for Cedel or Euroclear, as
the case may be. Credits or any transactions in those securities settled during
this processing will be reported to the relevant Euroclear Participant or Cedel
Participants on that 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, these cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC. Cedel
Participants and Euroclear Participants may not deliver instructions directly to
the Depositaries.
Cedel, as a professional depository, holds securities for its
participating organizations ("Cedel Participants") and facilitates the clearance
and settlement of securities transactions between Cedel Participants through
electronic book-entry changes in accounts of Cedel Participants, thereby
eliminating the need for physical movement of certificates. As a professional
depository, Cedel is subject to regulation by the Luxembourg Monetary Institute.
Euroclear was created to hold securities for participants of Euroclear
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty
Trust Company of New York (the "Euroclear Operator"), under contract with
Euroclear Clearance Systems S.C., a Belgian co-operative corporation (the
"Clearance Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Clearance
Cooperative. The Clearance Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. The Euroclear Operator is the Belgian branch
of a New York banking corporation which is a member bank of the Federal Reserve
System. As a result, it is regulated and examined by the Board of Governors of
the Federal
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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 on the Book-Entry Notes will be forwarded by the Indenture
Trustee to DTC, and DTC will be responsible for forwarding those payments to
Participants, each of which will be responsible for disbursing the 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 those
actions. None of the Master Servicer, the Depositor, 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 those beneficial ownership interests.
Assignment of the Trust Assets
At the time of issuance of a series of Notes, the Depositor will cause the
Trust Assets and any other assets being included in the related Trust to be
assigned without recourse to the Owner Trustee or its nominee, which may be the
Custodian (as defined in this Prospectus), on behalf of the related Trust,
together with, unless specified in the accompanying Prospectus Supplement, all
principal and interest received on or with respect to the 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 that
assignment, grant a security interest in the related Trust to the Indenture
Trustee to secure the Notes. Each Trust Asset will be identified in a schedule
appearing as an exhibit to the related Agreement. The 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 Loan 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.
If so specified in the accompanying Prospectus Supplement, and subject to
the rules of membership of Merscorp, Inc. and/or Mortgage Electronic
Registration Systems, Inc. (together, "MERS"), assignments of the mortgages for
any Trust Asset in the related Trust will be registered electronically through
Mortgage Electronic Registration Systems, Inc. (the "MERS(R) System"). With
respect to Trust Assets registered through the MERS(R) System, MERS shall serve
as mortgagee of record solely as a nominee in an administrative capacity on
behalf of the Trustee and shall not have any interest in any of those Trust
Assets.
The Depositor will, as to each Trust Asset other than Trust Assets
underlying any Private Securities, deliver to an entity specified in the
accompanying 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 Depositor.
The legal documents may include, as applicable, depending upon whether such
Trust Asset is secured by a lien on Mortgaged Property:
o the Mortgage Note and any modification or amendment made to the
Mortgage Note, endorsed without recourse either in blank or to the
order of the Owner Trustee or the Indenture Trustee or a nominee;
o 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;
o an assignment in recordable form of the Mortgage, or evidence that
the Mortgage is held for the Trustee through the MERS(R) System 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;
o if applicable, any riders or modifications to the Mortgage Note and
Mortgage, together with any other documents at such times as described
in the related Agreement; and
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o if applicable, 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
the Contract.
The 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 accompanying Prospectus Supplement, the Depositor may not be
required to deliver one or more of the documents if those documents are missing
from the files of the party from whom the 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 Depositor 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 Depositor 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 the Mortgage or assignment. The Depositor will deliver or cause to be
delivered to the Indenture Trustee or the Custodian the Mortgage or assignment
with evidence of recording indicated thereon after receipt thereof from the
public recording office or from the related Subservicer.
With respect to any Puerto Rico Trust Assets, the Mortgages with respect
to those Trust Assets either (i) secure a specific obligation for the benefit of
a specified person (a "Direct Puerto Rico Mortgage") or (ii) secure an
instrument transferable by endorsement (an "Endorsable Puerto Rico Mortgage").
Endorsable Puerto Rico Mortgages do not require an assignment to transfer the
related lien. Rather, transfer of those mortgages follows an effective
endorsement of the related Mortgage Note and, therefore, delivery of an
assignment of mortgage would be inapplicable. Direct Puerto Rico Mortgages,
however, require an assignment to be recorded with respect to any transfer of
the related lien and the assignment would be delivered to the Trustee (or the
Custodian).
Assignments of the Loans and Contracts secured by a lien on Mortgaged
Property will be recorded in the appropriate public recording office, except for
Mortgages held under the MERS(R) System or in states where, in the opinion of
counsel acceptable to the Indenture Trustee or Owner Trustee, the recording is
not required to protect the Indenture Trustee's or Owner Trustee's interests in
the Loans and Contracts against the claim of any subsequent transferee or any
successor to or creditor of the Depositor or the originator of the Loans or
Contracts, or except as otherwise specified in the accompanying Prospectus
Supplement.
Under certain circumstances, as to any series of Notes, the Depositor may
have the option to repurchase Trust Assets from the Trust for cash, or in
exchange for other Trust Assets or Permitted Investments. Alternatively, for any
series of Notes secured by Private Securities, the Depositor may have the right
to repurchase Loans and/or Contracts from the entity that issued the Private
Securities. All provisions relating to these optional repurchase provisions will
be described in the accompanying Prospectus Supplement.
Review of Trust Assets
The Indenture Trustee will be authorized to appoint one or more custodians
(each, a "Custodian") under 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
described in the accompanying 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,
normally will review such documents within 90 days after receipt. If any
document is found to be defective in any material respect, the Indenture Trustee
or the Custodian shall notify the Master Servicer and the Depositor, and the
Master Servicer, the Depositor 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 the defect within the
period specified in the accompanying 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 the period specified in the accompanying Prospectus Supplement, either
repurchase the related Trust Asset or any property acquired in respect of it
from the Indenture Trustee, or if permitted substitute for the Trust Asset a new
Trust Asset in accordance with the standards described in this Prospectus. 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 specified in accompanying Prospectus
Supplement, neither Residential Funding, the Master Servicer nor the Depositor
will be obligated to purchase or substitute for such Trust Asset if the
Designated Seller defaults on its obligation to do so. 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.
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The Master Servicer will make 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 of these representations 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 the Trust Asset or, as specified in the accompanying 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." This purchase
obligation will constitute the sole remedy available to Noteholders or the
Indenture Trustee for a breach of this type of representation by the Master
Servicer. Any Trust Asset not so purchased or substituted for shall remain in
the related Trust.
Excess Spread and Excluded Spread
The Depositor, the Master Servicer or any of their affiliates, or any
other entity specified in the accompanying Prospectus Supplement may retain or
be paid a portion of interest due with respect to the related Trust Assets. The
payment of any portion of interest in this manner will be disclosed in the
accompanying Prospectus Supplement. This payment may be in addition to any other
payment, including a servicing fee, that any specified entity is otherwise
entitled to receive with respect to the Trust Assets. Any of these payments
generated from the Trust Assets will represent a specified portion of the
interest payable on the Trust Assets and as specified in the accompanying
Prospectus Supplement, will either be part of the assets transferred to the
related Trust (the "Excess Spread") or will be excluded from the assets
transferred to the related Trust (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 under a Subservicing Agreement
will establish and maintain an account (the "Subservicing Account") which
materially meets the requirements described 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
accompanying Prospectus Supplement, the Subservicer may also be required to
advance on the scheduled date of remittance any monthly installment of principal
and interest, or interest only, with respect to Simple Interest Mortgage Loans,
less its servicing or other compensation, on any 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 described in the related Agreement, which generally will
include the following:
o payments on account of principal on the Trust Assets comprising a
Trust;
o payments on account of interest on the Trust Assets comprising that
Trust, net of the portion of each payment thereof retained by the
Subservicer, if any, as its servicing or other compensation;
o 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 (together with any payments
under any Letter of Credit, "Insurance Proceeds") or proceeds from any
alternative arrangements established in lieu of any such insurance and
described in the applicable Prospectus Supplement, other than proceeds
to be applied to the restoration of the related property or released
to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures;
o proceeds of any Trust Asset in the Trust purchased, or, in the case of
a substitution, certain amounts representing a principal adjustment,
by the Master Servicer, the Depositor, Residential Funding, any
Subservicer or Seller or any other person under the terms of the
related Agreement. See "Trust Asset Program--Representations Relating
to Trust Assets," and "--Assignment of Trust Assets" above;
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o 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
o 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:
o maintained with a depository institution whose debt obligations at
the time of any deposit to the account 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 the Notes,
o 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,
o 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,
o in the case of the Payment Account, a trust account or accounts
maintained with the Indenture Trustee, or
o any 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 described in the accompanying 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 the Payment Date, except as otherwise provided
in the accompanying 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,
derivative product, 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 and Related Claims"
below, any payments received on any Private Securities included in the Trust and
any other amounts as described 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 specified in the accompanying Prospectus Supplement, all
income and gain realized from any investment will be for the account of the
Master Servicer as additional servicing compensation. The amount of any loss
incurred in connection with any 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 the 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 described in the related
Agreement, which generally will include the following:
o 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
accompanying Prospectus Supplement;
o 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;
o to pay to itself or any Subservicer unpaid Servicing Fees and
Subservicing Fees, out of payments or collections of interest on each
Trust Asset;
o 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;
o to pay to itself, a Subservicer, Residential Funding, the Depositor
or the Seller all amounts received with respect to each Trust Asset
purchased, repurchased or removed under the terms of the related
Agreement and not required to be paid as of the date on which the
related Purchase Price is determined;
o to pay the Depositor or its assignee, or any other party named in
the accompanying 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;
o to reimburse itself or the Depositor for certain other expenses
incurred for which it or the Depositor is entitled to reimbursement,
including reimbursement in connection with enforcing any repurchase,
substitution or indemnification obligation of any Designated
Seller);
o to reimburse itself or the Depositor for payment of FHA insurance
premiums, if applicable, or against which it or the Depositor is
indemnified under the related Agreement;
o to withdraw any amount deposited in the Custodial Account that was not
required to be deposited therein;
o to pay to itself or any Subservicer for the funding of any Draws made
on the Revolving Credit Loans, if applicable;
o to make deposits to the Funding Account in the amounts and in the
manner provided in the related Agreement, if applicable; and
o to clear the Custodial Account of amounts relating to the
corresponding Trust Assets in connection with the termination of the
Trust.
Payments
On each Payment Date, payments of principal and/or interest, as
applicable, 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"). Payments will be made to
the persons who are registered as the holders of such Notes at the close of
business on the day prior to each Payment Date or, if the Notes are no longer
Book-Entry, to the persons in whose names the Notes are registered 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
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register. The final payment in redemption of the Notes will be made only upon
presentation and surrender of the Notes at the office or agency of the Indenture
Trustee specified in the notice to Noteholders. Payments will be made to each
Noteholder in accordance with the 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 the Note by the aggregate initial amount or
notional balance of all the Notes of the related class. In addition, amounts
remaining in the Payment Account on each Payment Date after payments on the
Notes will be applied for the purposes described in the Agreements, as described
in the accompanying 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 accompanying 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 specified interest rate (each, a "Note
Rate"), which may be a fixed, variable or adjustable Note Rate, or any
combination of two or more such Note Rates. The accompanying Prospectus
Supplement will specify the Note Rate or Rates for each class, or the initial
Note Rate or Rates and the method for determining the Note Rate or Rates. As
specified in the accompanying Prospectus Supplement, interest on the Notes will
be calculated on the basis of either a 360-day year consisting of twelve 30-day
months or the actual number of days in the related interest period and a 360-day
year.
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.
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 described in the
accompanying Prospectus Supplement. Payments 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 described in the accompanying Prospectus Supplement. In addition, as
specified in the accompanying 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 accompanying Prospectus Supplement, a series
of Notes may provide for a revolving 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 accompanying Prospectus Supplement or the occurrence of
certain events specified in the accompanying Prospectus Supplement.
On the day of the month specified in the accompanying 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 accompanying 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 the transfer. As
specified in the accompanying Prospectus Supplement, the 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 the Funding Account to
be released as additional Trust Assets are transferred. As specified in the
accompanying Prospectus Supplement, a Funding Account will be required to be
maintained as an Eligible Account, all amounts therein will be required to be
invested in Permitted Investments and the amount held therein shall at no time
exceed 25% of the aggregate outstanding principal balance of the Notes. As
specified in the accompanying Prospectus Supplement, the related Agreement or
other agreement providing for the transfer of additional Trust Assets will
provide that all the 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 all or a portion of 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 described in the Prospectus Supplement.
Reports to Noteholders
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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 listing the information described in the related Agreement.
Except as otherwise provided in the related Agreement, such information
generally will include the following, as applicable:
o the aggregate amount of interest collections and principal
collections;
o the amount, if any, of the payment allocable to principal;
o the amount, if any, of the payment allocable to interest, and the
amount, of any shortfall in the amount of interest and principal;
o the aggregate unpaid principal balance of the Trust Assets after
giving effect to the payment of principal on the Payment Date;
o the outstanding principal balance or notional amount of each class of
Notes after giving effect to the payment of principal on the Payment
Date;
o 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 these groups of Trust Assets;
o the book value of any property acquired by the Trust through
foreclosure or grant of a deed in lieu of foreclosure;
o the balance of the Reserve Fund, if any, at the close of business on
the Payment Date;
o the amount of credit enhancement remaining or credit enhancement
payments made to cover default risk as of the close of business on the
applicable Determination Date and a description of any credit
enhancement substituted therefor;
o 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, as well as the aggregate amount of each type of loss;
o in the case of Notes benefiting from alternative credit enhancement
arrangements described in a Prospectus Supplement, the amount of
coverage under alternative arrangements as of the close of business on
the applicable Determination Date;
o the aggregate amount of Draws;
o with respect to any series of Notes as to which the Trust includes
Private Securities, certain additional information as required under
the related Agreement; and
o the FHA Insurance Amount.
Each amount listed under the first and second clauses 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 a class, except as otherwise provided in the related Agreement. In
addition to the information described above, reports to Noteholders will contain
other information as is listed in the applicable Agreement, which may include,
without limitation, reimbursements to Subservicers and the Master Servicer and
losses borne by the related Trust.
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. The report will include information as to
the aggregate of amounts reported under the first and second clauses above for
the calendar year or, in the event such person was a holder of record of a class
of Notes during a portion of the calendar year, for the applicable portion of
the year.
Hazard Insurance and Related Claims
Unless specified in the accompanying Prospectus Supplement, each 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
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insurance policy, as described below. The following summary, as well as other
pertinent information included elsewhere in this Prospectus, does not describe
all terms of a hazard insurance policy but will reflect all material terms
thereof relevant to an investment in the Notes. The 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 the forms of policies.
The Servicing Agreement will generally 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 Loan or Contract plus the outstanding balance on any
mortgage loan senior to such 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 described 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.
Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the 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.
DESCRIPTION OF CREDIT ENHANCEMENT
As described in the accompanying 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 a series of Notes;
Overcollateralization; a Reserve Fund; a Financial Guaranty Insurance Policy;
derivatives products; 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 accompanying Prospectus Supplement; or in such other form as
may be described in the accompanying Prospectus Supplement. If so specified in
the accompanying Prospectus Supplement, the Contracts may be partially insured
by the FHA under Title I.
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
accompanying Prospectus Supplement and at the times as described therein. If so
provided in the accompanying 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 accompanying 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:
o 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 (a "Defaulted Loan Loss");
o of a type generally covered by a special hazard insurance policy (a
"Special Hazard Loss") as described in the accompanying Prospectus
Supplement;
o 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 Loan Rate on a
Trust Asset or an extension of its maturity (a "Bankruptcy Loss"); and
o incurred on defaulted Trust Assets as to which there was fraud in the
origination of the Trust Assets (a "Fraud Loss").
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Most forms of 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 accompanying 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) 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:
o the amount payable under the credit enhancement arrangement, if any,
provided with respect to a series;
o any conditions to payment thereunder not otherwise described in this
Prospectus;
o the conditions under which the amount payable under the credit support
may be reduced and under which the credit support may be terminated or
replaced; and
o the material provisions of any agreement relating to the credit
support.
Additionally, the accompanying Prospectus Supplement will describe 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 in this Prospectus 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 the 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 accompanying 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
accompanying 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 specified in the accompanying 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 these holders will be received by the Indenture
Trustee or its agent on behalf of the holders for payment on each Payment Date.
The specific terms of any Financial Guaranty Insurance Policy will be described
in the accompanying 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 or cover specific
interest shortfalls. Unless specified in the accompanying 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
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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 accompanying Prospectus Supplement. On or before
each Payment Date, the Letter of Credit Bank will be required to make 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 Senior
Notes and one or more classes of Subordinate Securities, as described in the
accompanying 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 the available amount among the various classes of
Notes included in the series, will be described in the accompanying Prospectus
Supplement. Generally, with respect to any Senior/Subordinate series the amount
available for payment will be allocated first to interest on the Senior Notes of
the series, and then to principal of the Senior Notes up to the amounts
described in the accompanying Prospectus Supplement, prior to allocation of any
amounts to the Subordinate Securities of the series.
Realized Losses will be allocated to the Subordinate Securities of the
related series in the order specified in the accompanying Prospectus Supplement
until the outstanding principal balance of each specified class has been reduced
to zero. Additional Realized Losses, if any, will be allocated to the Senior
Notes. If the series includes more than one class of Notes, the additional
Realized Losses will be allocated either on a pro rata basis among all of the
Senior Notes in proportion to their respective outstanding principal balances or
as otherwise described in the accompanying 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 accompanying Prospectus
Supplement. In this case, losses in excess of these amounts would be 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 the Realized Loss was incurred.
To the extent provided in the accompanying 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 accompanying Prospectus Supplement.
With respect to any Senior/Subordinate Series, the terms and provisions of
the subordination may vary from those described above. Any variation and any
additional credit enhancement will be described in the accompanying Prospectus
Supplement.
Overcollateralization
If so specified in the accompanying Prospectus Supplement, interest
collections on the Trust Assets may exceed interest payments on the Securities
for the related Payment Date (the excess referred to as "Excess Interest"). The
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 accompanying Prospectus Supplement.
Reserve Funds
If so specified in the accompanying Prospectus Supplement, the Depositor
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
accompanying Prospectus Supplement and related Agreement. In the alternative or
in addition to that deposit, to the extent described in the accompanying
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
accompanying 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 the 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
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specified in the accompanying Prospectus Supplement, under specified
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 accompanying
Prospectus Supplement. Unless otherwise provided in the accompanying Prospectus
Supplement, any such Reserve Fund will not be deemed to be part of the related
Trust. A Reserve Fund may provide coverage to more than one series of Notes if
described in the accompanying Prospectus Supplement. If so specified in the
accompanying 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 accompanying Prospectus
Supplement and will not be available for further application to the Notes.
The Indenture Trustee will have a perfected security interest for the
benefit of the Noteholders in the assets in the Reserve Fund, unless the assets
are owned by the related Trust. However, to the extent that the Depositor, any
affiliate of the Depositor or any other entity has an interest in any Reserve
Fund, in the event of the bankruptcy, receivership or insolvency of that entity,
there could be delays in withdrawals from the Reserve Fund and the corresponding
payments to the Noteholders. These delays could adversely affect the yield to
investors on the related Notes.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
Master Servicer or any other person named in the accompanying Prospectus
Supplement. As specified in the accompanying Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited to the
related Reserve Fund for the series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, the reinvestment
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 specified in the related Agreement,
will be obligated to exercise its best reasonable efforts to keep or cause to be
kept the 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, or as
otherwise 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.
The Master Servicer or any other entity specified in the accompanying
Prospectus Supplement 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 the insurance business or coverage is terminated for any reason
other than exhaustion of that 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 the original policy or bond. If the cost of the
replacement policy is greater than the cost of the original policy or bond, the
coverage of the replacement policy or bond will, unless otherwise agreed to by
the Depositor, be reduced to a level so 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 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 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 the 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 the determinations incorrectly or recovery is not available for any
other reason, the Master Servicer is nevertheless obligated to follow whatever
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 this 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 specified
circumstances. In most cases, the amount available as credit support will be
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subject to periodic reduction on a non-discretionary basis in accordance with a
schedule or formula described in the related Agreement. Additionally, in most
cases, the 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 specified in the accompanying Prospectus
Supplement, neither the Master Servicer nor the Depositor 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 any credit support with
other credit enhancement instruments issued by obligors whose credit ratings are
equivalent to the downgraded level and in lower amounts which would satisfy the
downgraded level, provided that the then-current rating of each class of the
related series of Notes is maintained. Where the credit support is in the form
of a Reserve Fund, a permitted reduction in the amount of credit enhancement
will result in a release of all or a portion of the assets in the Reserve Fund
to the Depositor, the Master Servicer or any 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.
OTHER FINANCIAL OBLIGATIONS RELATED TO THE NOTES
Swaps and Yield Supplement Agreements
The Trustee on behalf of the Trust may enter into interest rate swaps and
related caps, floors and collars to minimize the risk of Noteholders from
adverse changes in interest rates (collectively, "Swaps"), and other yield
supplement agreements or similar yield maintenance arrangements that do not
involve swap agreements or other notional principal contracts (collectively,
"Yield Supplement Agreements").
An Interest rate Swap is an agreement between two parties
("Counterparties") to exchange a stream of interest payments on an agreed
hypothetical or "notional" principal amount. No principal amount is exchanged
between the Counterparties to an interest rate Swap. In the typical Swap, one
party agrees to pay a fixed rate on a notional principal amount, while the
Counterparty pays a floating rate based on one or more reference interest rates
including the London Interbank Offered Rate ("LIBOR"), a specified bank's prime
rate or U.S. Treasury Bill rates. Interest rate Swaps also permit Counterparties
to exchange a floating rate obligation based upon one reference interest rate
(such as LIBOR) for a floating rate obligation based upon another referenced
interest rate (such as U.S. Treasury Bill rates).
Yield Supplement Agreements may be entered into to supplement the interest
rate or other rates on one or more classes of the Notes of any series.
Additionally, agreements relating to other types of derivative products that are
designed to provide credit enhancement to the related series may be entered into
by a Trust and one or more counterparties. The terms of any derivative product
agreement and any counterparties will be described in the accompanying
Prospectus Supplement.
There can be no assurance that the Trust will be able to enter into or
offset Swaps or enter into Yield Supplement Agreements or derivative product
agreements at any specific time or at prices or on other terms that are
advantageous. In addition, although the terms of the Swaps and Yield Supplement
Agreements may provide for termination under certain circumstances, there can be
no assurance that the Trust will be able to terminate a Swap or Yield Supplement
Agreement when it would be economically advantageous to the Trust to do so.
Purchase Obligations
Some types of Trust Assets and some classes of Notes of any series, as
specified in the accompanying 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, remarketing agreement, 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 accompanying 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. As specified in the accompanying Prospectus
Supplement, 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 obligation relate.
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DESCRIPTION OF FHA INSURANCE UNDER TITLE I
Certain of the Contracts contained in a Trust may be loans insured under
the Title I Program (the "Title I Loans") as described below and in the
accompanying 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
accompanying 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 and/or
lot (or cooperative interest in a manufactured home and/or lot) on which to
place such home.
Subject to certain limitations described below, eligible Title I Loans are
generally insured by the FHA for 90% of an amount equal to the sum of (i) the
net unpaid principal amount and the uncollected interest earned to the date of
default, (ii) interest on the unpaid loan obligation from the date of default to
the date of the initial submission of the insurance claim, plus 15 calendar days
(the total period not to exceed nine months) at a rate of 7% per annum, (iii)
uncollected court costs, (iv) title examination costs, (v) fees for required
inspections by the lenders or its agents, up to $75, and (vi) origination fees
up to a maximum of 5% of the loan amount. However, the insurance coverage
provided by the FHA is limited to the extent of the balance in the Title I
Lender's FHA Reserve maintained by the FHA. Accordingly if sufficient insurance
coverage is available in such FHA Reserve, then the Title I Lender bears the
risk of losses on a Title I Loan for which a claim for reimbursement is paid by
the FHA of at least 10% of the unpaid principal, uncollected interest earned to
the date of default, interest from the date of default to the date of the
initial claim submission and certain expenses. Unlike most other FHA insurance
programs, the obligation of the FHA to reimburse a Title I Lender for losses in
the portfolio of insured loans held by such Title I Lender is limited to the
amount in an FHA Reserve maintained on a lender-by-lender basis and not on a
loan-by-loan basis.
Under Title I, the FHA maintains an FHA insurance coverage reserve account
(a "FHA Reserve") for each Title I Lender. The amount in each Title I Lender's
FHA Reserve is a maximum of 10% of the amounts disbursed, advanced or expended
by a Title I Lender in originating or purchasing eligible loans registered with
the FHA for Title I insurance, with certain adjustments permitted or required by
FHA Regulations. The balance of such FHA 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 acknowledgment by the FHA of the Transfer Report for such loans. The
insurance available to any Trust 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 accompanying 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. This
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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 accompanying Prospectus Supplement will seek to obtain payment
by or a judgment against the borrower, and may resubmit the claim to FHA
following such a judgment.
THE DEPOSITOR
The Depositor is an indirect wholly-owned subsidiary of GMAC Mortgage,
which is a wholly-owned subsidiary of General Motors Acceptance Corporation. The
Depositor was incorporated in the State of Delaware on May 5, 1995. The
Depositor was organized for the purpose of acquiring first or junior lien home
equity mortgage loans, home improvement contracts, home loans, manufactured
housing contracts and mortgage securities and issuing securities backed by these
mortgage loans, contracts and mortgage securities. The Depositor 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 Depositor 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
Depositor. The Depositor's only obligations with respect to a series of Notes
will be limited to certain representations and warranties made by the Depositor
or as otherwise provided in the accompanying Prospectus Supplement.
The Depositor 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 specified in the accompanying Prospectus Supplement, Residential
Funding, an affiliate of the Depositor, will act as the Master Servicer or
Administrator for a series of Notes.
Residential Funding, either directly or through affiliates, 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 Jersey, New York, North
Carolina, Pennsylvania, Rhode Island and Texas. At December 31, 1998,
Residential Funding was master servicing a first lien loan portfolio of
approximately $55.0 billion and a second lien loan portfolio of approximately
$2.9 billion.
Residential Funding's delinquency, foreclosure and loan loss experience as
of the end of the most recent calendar quarter for which information is
available on the portfolio of loans for which it acts as master servicer,
including loans that were originated under its modified loan purchase criteria,
will be summarized in each Prospectus Supplement relating to a Mortgage Pool for
which Residential Funding will act as Master Servicer. There can be no assurance
that this experience will be representative of the results that may be
experienced with respect to any particular series of Certificates.
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SERVICING OF TRUST ASSETS
The Master Servicer will be required to service and administer the Trust
Assets in a manner generally consistent with the terms of the servicing
agreement entered into by the Master Servicer with the Depositor, an affiliate
of the Depositor or other applicable entity (each, a "Servicing Agreement") and
the Guide with respect to the Loans or with respect to a Designated Seller
Transaction, as specified in the accompanying Prospectus Supplement.
As to any series of Notes secured by Private Securities, the applicable
procedures for servicing of the related Loans, Home Improvement Contracts and
Manufactured Housing Contracts will be described in the accompanying 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
under the Trust Asset, if applicable; processing of assumptions or substitutions
(although, as specified in the accompanying Prospectus Supplement, the Master
Servicer is generally required to exercise due-on-sale clauses to the extent
such exercise is permitted by law and would not adversely affect insurance
coverage); attempting to cure delinquencies; supervising foreclosures;
inspection and management of Mortgaged Properties under certain circumstances;
and maintaining accounting records relating to the Trust Assets. The Subservicer
may be required to make advances to the holder of any related first mortgage
loan to avoid or cure any delinquencies to the extent that doing so would be
prudent and necessary to protect the interests of the Securityholders. A
Subservicer also may be obligated to make advances to the Master Servicer in
respect of certain taxes and insurance premiums not paid on a timely basis by
Mortgagors. 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 accompanying 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 specified in the accompanying 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 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 under 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 giving notice upon specified 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 specified 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.
The Master Servicer may either assume the primary servicing responsibility
from the related Subservicer, and may perform all collections, loss mitigation
and other servicing functions with respect to any delinquent loan or foreclosure
proceeding, or may review the loss mitigation procedures conducted with respect
to any delinquent loan, as well as the management and liquidation of any
delinquent mortgaged properties acquired by foreclosure or deed-in-lieu of
foreclosure.
Collection and Other Servicing Procedures
The Master Servicer will have the option to allow an increase in the Credit
Limit applicable to any Revolving Credit Loan (a "Credit Limit Increase") in
certain limited circumstances. The Master Servicer will have an unlimited
ability to obtain increases provided that the following conditions are met: (i)
a new appraisal is obtained, (ii) the new CLTV is less than or equal to the
original CLTV, (iii) verbal verification of employment is obtained and (iv) the
payment history of the related borrower is within the underwriting parameters as
specified in the Guide. If a new appraisal is not obtained and the other
conditions in the preceding sentence are met, the Master Servicer will have the
option to allow a Credit Limit Increase for any Revolving Credit Loan, provided
that the CLTV of the Revolving Credit Loan
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following the Credit Limit Increase will be limited to 100% and at no time shall
the aggregate Principal Balance of such Revolving Credit Loans exceed 10% of the
current Pool Balance: provided further, however, that for Revolving Credit Loans
with original CLTV's in excess of 80%, the CLTV resulting from such Credit Limit
Increase must be less than or equal to the original CLTV and at no time shall
the aggregate Principal Balance of the Revolving Credit Loans exceed 5% of the
current Pool Balance.
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
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 includes Private
Securities, the Master Servicer's servicing and administration obligations will
be governed by the terms of such Private Securities.
The Master Servicer, in its discretion, may, or may allow a Subservicer to,
extend relief to Mortgagors whose payments become delinquent. The Master
Servicer or Subservicer, without the prior approval of the Master Servicer, 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. Other types of forbearance generally require Master Servicer approval.
Neither indulgence nor forbearance with respect to a Trust Asset will affect the
Note 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 engage in a
wide variety of loss mitigation practices including waivers, modifications,
payment forbearances, partial forgiveness, entering into repayment schedule
arrangements, and capitalization of arrearages rather than proceeding with
foreclosure or repossession, if applicable. In making such determination, the
estimated Realized Loss that might result if the Trust Asset were liquidated
would be taken into account. Modifications may have the effect of reducing the
Loan Rate or extending the final maturity date of the Trust Asset. Any modified
Trust Asset may remain in the related Trust, and the reduction in collections
resulting from a modification may result in reduced distributions of interest or
other amounts on, or may extend the final maturity of, one or more classes of
the related Notes.
In any case in which property subject to a Trust Asset is being conveyed
by the Mortgagor, the Master Servicer, directly or through a Subservicer, shall
in general be obligated, to the extent it has knowledge of the 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
the 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 the due-on-sale
clause, the Master Servicer or Subservicer will enter into an assumption and
modification agreement with the person to whom the property has been or is about
to be conveyed, under which the person will become liable under the Mortgage
Note subject to 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 the release will not adversely affect the
likelihood of 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 described
in the accompanying Prospectus Supplement. See "Certain Legal Aspects of Trust
Assets and Related Matters--Enforceability of Certain Provisions" in this
Prospectus. In connection with any assumption, the Loan 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 the 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 for 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 restrictions under
the Servicing Agreement with respect to the refinancing of a lien senior to a
Loan or a Contract secured by a lien on the related Mortgaged Property.
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Special Servicing and Special Servicing Agreements
The Servicing Agreement for a series of Notes may name a special servicer
(a "Special Servicer"), which will be responsible for the servicing of certain
delinquent Trust Assets. The Special Servicer may have discretion to extend
relief to certain Mortgagors whose payments become delinquent. The Special
Servicer may be permitted to grant a period of temporary indulgence to a
Mortgagor or may enter into a repayment plan providing for repayment of
arrearages by such Mortgagor, in each case without the prior approval of the
Master Servicer or the Subservicer. Other types of forbearance generally may
require the approval of the Master Servicer or Subservicer, as applicable.
In addition, the Master Servicer may enter into various agreements with
holders of one or more classes of Subordinate Notes or of a class of securities
representing interests in one or more classes of Subordinate Notes. Under the
terms of these agreements, the holder may, with respect to certain delinquent
Trust Assets:
o instruct the Master Servicer to commence or delay foreclosure
proceedings, provided that the holder deposits a specified amount of
cash with the Master Servicer which will be available for
distribution to Noteholders in the event that liquidation proceeds
are less than they otherwise may have been had the Master Servicer
acted under its normal servicing procedures;
o instruct the Master Servicer to purchase such Trust Assets from the
Trust prior to the commencement of foreclosure proceedings at the
Purchase Price and to resell such Trust Assets to such holder, in
which case any subsequent loss with respect to such Trust Assets will
not be allocated to the Noteholders;
o become, or designate a third party to become, a Subservicer with
respect to such Trust Assets so long as (i) the Master Servicer has
the right to transfer the subservicing rights and obligations of
such Trust Assets to another Subservicer at any time or (ii) such
holder (or its servicing designee) is required to service the Trust
Assets according to the Master Servicer's servicing guidelines; or
o the accompanying Prospectus Supplement may provide for the other types
of special servicing arrangements.
Realization Upon Defaulted Loans
With respect to a Loan or a Contract secured by a lien on a Mortgaged
Property in default, the Master Servicer or the related Subservicer may take a
variety of actions including foreclosing 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, take a deed in lieu of foreclosure, accept a short sale,
permit a short refinancing, arrange for a repayment plan or modification as
described above, 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
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. 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, the 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 until such time as the Mortgaged
Property is sold and all recoverable Liquidation Proceeds and Insurance Proceeds
have been received with respect to such defaulted Trust Asset (a "Liquidated
Loan"). To the extent provided in the related Agreement and related Servicing
Agreement, any income, net of expenses and other than gains described below,
received by the Subservicer or the Master Servicer on such Mortgaged Property,
prior to its disposition will be deposited in the Custodial Account upon receipt
and will be available at such time for making payments to Noteholders.
With respect to a 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 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 under a breach of a representation and warranty, such
Trust Asset will be removed from the related Trust. The Master
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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
accompanying 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 prior to the final liquidation
thereof. In addition, the Master Servicer will generally have the option to
purchase from the Trust 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, 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 accompanying 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 and Related Claims."
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 accompanying Prospectus
Supplement. 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 accompanying 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 Note Rate specified at the time the Depositor 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. As specified in the accompanying 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, as specified in the accompanying
Prospectus Supplement, or in a Subservicing Account, as the case may be. In
addition, certain duties of the Master Servicer may be performed by an affiliate
of the Master Servicer who will be entitled to reasonable compensation therefor
from the Trust.
The Master Servicer or, if specified in the related Agreement, the
Indenture Trustee on behalf of the applicable Trust, will pay or cause to be
paid certain ongoing expenses associated with each Trust 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
described 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 obligation, the statement shall
specify each known default and the nature and status thereof. The statement may
be provided as a single form making the required statements as to more than one
Servicing Agreement.
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Each Servicing Agreement will also provide that on or before a specified
date in each year, beginning the first 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 Depositor 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 described in the related Audit Guide (to the
extent that procedures in such Audit Guide are applicable to the servicing
obligations described 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 Depositor
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 its 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 described
below, neither the Master Servicer, the Depositor nor any director, officer,
employee or agent of the Master Servicer or the Depositor will be under any
liability to the Trust or the Noteholders for any action taken or for refraining
from the taking of any action in good faith under the Servicing Agreement, or
for errors in judgment; described however, that neither the Master Servicer, the
Depositor 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 Depositor and any director, officer, employee or
agent of the Master Servicer or the Depositor is entitled to indemnification by
the Trust, 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 Depositor 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 Depositor
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 an action and any
liability resulting therefrom will be expenses, costs and liabilities of the
Trust, or the Special Purpose Entity, if applicable, and the Master Servicer or
the Depositor, 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 the person meets the requirements described 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 Depositor and the Indenture Trustee and meeting the
requirements described in the related Servicing Agreement. In the case of an
assignment, the Master Servicer will be released from its obligations under the
Servicing Agreement, exclusive of liabilities and obligations incurred by it
prior to the time of the assignment.
THE AGREEMENTS
The following summaries describe 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
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A "Servicing Default" under the Servicing Agreement in respect of a series
of Securities, generally will include:
o 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 a 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;
o 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 a series of Securities which
continues unremedied for 45 days after the giving of written notice
of 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;
o 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
o any other Servicing Default as described in the Servicing Agreement.
A default under the terms of any Servicing Agreement relating to any
Private Securities included in any Trust will not constitute an
Event of Default under the related Trust Agreement or Indenture.
So long as a Servicing Default remains unremedied, either the Depositor 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, 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). 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
described in the Servicing Agreement. Pending any appointment, the Indenture
Trustee is obligated to act in that capacity. The Indenture Trustee and any
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 generally will include:
o a default for five days or more in the payment of any principal of or
interest on any Note of the series;
o failure to perform any other covenant of the Depositor or the Trust
in the Indenture which continues for a period of thirty days after
notice thereof is given in accordance with the procedures described
in the accompanying Prospectus Supplement;
o any representation or warranty made by the Depositor or the Trust in
the Indenture or in any certificate or other writing delivered
pursuant thereto or in connection therewith with respect to or
affecting the series having been incorrect in a material respect as
of the time made, and the breach is not cured within thirty days
after notice thereof is given in accordance with the procedures
described in the accompanying Prospectus Supplement;
o some events of bankruptcy, insolvency, receivership or liquidation of
the Depositor or the Trust; or
o 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 the series may declare the principal amount
(or, if the Notes of that series are
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Accrual Notes, such portion of the principal amount as may be specified in the
terms of that series, as provided in the accompanying Prospectus Supplement) of
all the Notes of the 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 the 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 the series as they would have become
due if there had not been 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 the series consent to such sale,
(b) the proceeds of the sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding Notes of
the series (and to reimburse the Credit Enhancer, if applicable) at the date of
such sale or (c) the Indenture Trustee determines that such collateral would not
be sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such Notes had not been declared due and
payable, and the Indenture Trustee obtains the consent of the holders of 66 2/3%
of the then aggregate outstanding amount of the Notes of the 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 an Event of Default.
If so specified in the accompanying 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 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 the discount that is unamortized.
No Securityholder generally will have any right under a Trust Agreement or
Indenture to institute any proceeding with respect to the Agreement unless (a)
the 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
the 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 the Agreement, unless the 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 accompanying 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 to:
o cure any ambiguity;
o correct or supplement any provision therein which may be inconsistent
with any other provision therein or to correct any error;
o 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) unless specified in the accompanying Prospectus Supplement;
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o 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; or
o amend any provision that is not material to holders of any class of
related Notes.
Unless otherwise stated in the accompanying 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 the class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Agreement or
of modifying in any manner the rights of the related Securityholders, except
that no 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 the Security, (ii)
impair the right of any Securityholder to institute suit for the enforcement of
the provisions of the Agreements or (iii) reduce the percentage of Securities of
any class the holders of which are required to consent to any amendment unless
the holders of all Securities of such class have consented to the change in the
percentage.
Termination; Redemption of Notes
Trust Agreement
The primary 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 Depositor, respectively, will terminate upon the payment
to the related Securityholders, including the Notes issued under the related
Indenture, of all amounts held by the Master Servicer and required to be paid to
such Securityholders following the earlier of:
o 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
o the purchase by the Master Servicer or the Depositor from the Trust
(or from the Special Purpose Entity, if applicable) for a series of
all remaining Trust Assets and all property acquired in respect of
the Trust Assets.
Any option to purchase described in the second item above will be limited
to cases in which the aggregate Stated Principal Balance of the remaining Trust
Assets is less than or equal to ten percent (10%) of the initial aggregate
Stated Principal Balance of the 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 under the
Indenture.
The Owner Trustee
The Owner Trustee under the Trust Agreement will be named in the
accompanying Prospectus Supplement. The commercial bank or trust company serving
as Owner Trustee may have normal banking relationships with the Depositor and/or
its affiliates, including Residential Funding.
The Owner Trustee may resign at any time, in which case the Administrator
or the Indenture Trustee will be obligated to appoint a successor owner trustee
as described 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
accompanying Prospectus Supplement. The commercial bank or trust company serving
as Indenture Trustee may have normal banking relationships with the Depositor
and/or its affiliates, including Residential Funding.
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The Indenture Trustee may resign at any time, in which case the Depositor,
the Owner Trustee or the Administrator will be obligated to appoint a successor
indenture trustee as described in the Indenture. The Depositor, the Owner
Trustee or the Administrator as described 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 Depositor, 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 by 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 the Note, the Note Rate on any such Note entitled to payments of
interest, the rate, 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 (if applicable),
and the allocation of principal payments to reduce the principal balance of the
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 Note Rate payable on the outstanding principal balance or
notional amount of such Note, or any combination of such Note Rates, calculated
as described in this Prospectus and in the accompanying Prospectus Supplement.
See "Description of the Notes --Payments." Holders of Strip Notes or a class of
Notes having a Note Rate that varies based on the weighted average Loan Rate of
the underlying Trust Assets will be affected by disproportionate prepayments and
repurchases of Trust Assets having higher Net Loan 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
Note Rate and purchase price of the 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 the Payment Date.
A class of Notes may be entitled to payments of interest at a variable or
adjustable Note Rate, or any combination of such Note Rates, as specified in the
accompanying Prospectus Supplement. A variable Note Rate may be calculated based
on the weighted average of the Loan Rates (net of Servicing Fees and any Excess
Spread or Excluded Spread) of the related Trust Assets (the "Net Loan 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 Note Rate for the Notes is different than the Index applicable to
the Loan Rates, the yield on the Notes will be sensitive to changes in the index
related to the Note Rate and the yield on the Notes may be reduced by
application of a cap on the Note Rate based on the weighted average of the Net
Loan Rates or such other formulas as may be described in the accompanying
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 Loan Rate of the Trust Assets from time to time will be adversely affected
by principal payments on Trust Assets with Loan Rates higher than the weighted
average Loan Rate on the Trust Assets. In general, mortgage loans with higher
Loan Rates or Gross Margins are likely to prepay at a faster rate than mortgage
loans with lower Loan Rates or Gross Margins. In addition, the yield to maturity
on certain other types of classes of Notes, including Accrual Notes, Notes with
a Note Rate that
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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.
The outstanding principal balances of manufactured housing contracts, home
equity loans, revolving credit loans, home improvement 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 loans and
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 such loans or contracts to the same degree that changes in mortgage
interest rates will affect the monthly payments on traditional first lien
mortgage loans. Consequently, the effect of changes in prevailing interest rates
on the prepayment rates on shorter-term, smaller balance loans and contracts may
not be similar to the effects of such changes on traditional first lien 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. 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 of the
series, will bear all risk of such losses resulting from default by Mortgagors.
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 Loan 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 Trust Asset may
thus be dependent on the ability of the mortgagor to make larger interest
payments following the adjustment of the Loan Rate.
Some of 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. Neither the
Depositor, 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, unless such obligation is specified in the accompanying Prospectus
Supplement.
For any 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 accompanying Prospectus
Supplement, under the Servicing Agreement the Master Servicer may be restricted
or prohibited from consenting to any refinancing of any related senior mortgage
loan, which in turn could adversely affect the Mortgagor's circumstances or
result in a prepayment or default under the corresponding junior 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. There can be no assurance as to
the rate of principal payments or Draws on the Revolving Credit Loans. The
Revolving Credit Loans generally may be prepaid in full or in part without
penalty. The Closed-End Loans may provide for a prepayment charge. The
Prospectus Supplement will specify whether Trust
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Assets may not be prepaid in full or in part without penalty. The Depositor 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 Depositor
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 Note Rates for a series of Notes is different from
the Index applicable to the Loan Rates of the underlying Trust Assets, the yield
on the Notes may be reduced by application of a cap on the Note Rates based on
the weighted average of the Loan 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 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.
As a result of the payment terms of the Revolving Credit Loans or of the
Note provisions relating to future Draws, there may be no principal payments on
such Notes in any given month. In addition, it is possible that the aggregate
Draws on Revolving Credit Loans included in a Pool may exceed the aggregate
payments with respect to principal on such Revolving Credit Loans for the
related period. If specified in the accompanying 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.
Revolving Credit Loans generally will and Closed-End Loans and 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 accompanying 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 Loans and 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 may 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.
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A Subservicer or the Master Servicer may, from time to time, implement
refinancing or modification programs designed to encourage refinancing. A
Subservicer or the Master Servicer, including an affiliate of the Master
Servicer, may also aggressively pursue refinancing or loan modification programs
that could require little or no cost and significantly decreased documentation
from the borrower. Such programs may include, without limitation, 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, the location of the mortgaged property, or the Subservicer's or Master
Servicer's judgment as to the likelihood of a borrower refinancing. 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 these programs, with respect to the Pool underlying
any Trust (i) the rate of principal prepayments of the Trust Assets in the Pool
may be higher than would otherwise be the case, (ii) the average credit or
collateral quality of the Trust Assets remaining in the Pool may decline and
(iii) weighted average interest rate on the Trust Assets that remain in the
Trust may be lower, thus reducing the rate of prepayments on the Trust Assets in
the future. In addition, a Subservicer may allow the refinancing of a Trust
Asset by accepting prepayments thereon and permitting a new loan or contract
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 or
contract would not be included in the related Trust and, therefore, the
refinancing would have the same effect as a prepayment in full of the related
Trust Assets.
If the applicable Agreement for a series of Notes provides for a Funding
Account or other means of funding the transfer of additional Trust Assets to the
related Trust, as described under "Description of the Notes--Funding Account" in
this Prospectus, 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 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.
Although the Loan Rates on Revolving Credit Loans will and some other Trust
Assets may be subject to periodic adjustments, such adjustments generally (i)
will not increase such Loan Rates over a fixed maximum rate during the life of
any Trust Asset and (ii) will be based on an Index (which may not rise and fall
consistently with prevailing market interest rates) plus the related Gross
Margin (which may vary under certain circumstances, and which may be different
from margins being used at the time for newly originated adjustable rate
mortgage loans). As a result, the Loan 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 than 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 Loan
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 Note Rates for a series
of Notes or Loan 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 Depositor or, if
specified in the accompanying Prospectus Supplement, another person may have the
option to purchase the Trust Assets in a Trust, 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 legal aspects of the Trust
Assets that are general in nature. Because these legal aspects are governed in
part by state law, and laws may differ substantially 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" in this
Prospectus and in the accompanying Prospectus Supplement with respect to the
Contracts partially insured by FHA under 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 Loans, Home Improvement
Contracts and Manufactured Housing Contracts.
General; Trust Assets Secured by Mortgages on Mortgaged Property
The 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 referred to in this Prospectus
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 the 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 some 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 some states, three parties may be involved in a mortgage financing
when title to the property is held by a land trustee who is the land trustee
under a land trust agreement of which the borrower is the beneficiary; at
origination of a mortgage loan, the land trustee, as fee owner of the property,
executes the mortgage and the borrower executes (1) a separate undertaking to
make payments on the mortgage note and (2) an assignment of leases and rents.
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. A deed to secure debt typically has two parties, under which the
borrower, or grantor, conveys title to the real property to the grantee, or
lender, typically with a power of sale, until the time when the debt is repaid.
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, mortgage, or deed to secure debt, and, in some
deed of trust transactions, the directions of the beneficiary.
Cooperative Loans
If specified in the Prospectus Supplement relating to a series of Notes,
the 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, or grant a security interest in, the Cooperative shares and
proprietary leases or occupancy agreements, 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 the filing of
related financing statements, in the appropriate recording office or the taking
of possession of the Cooperative shares, depending on the law of the state in
which the Cooperative is located. This type of lien or security interest is not,
in general, prior to liens in favor of the cooperative corporation for unpaid
assessments or common charges.
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 in the building. 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 typically the case, or an underlying lease of the land, as is
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the
case in some instances, the Cooperative, as mortgagor or lessee, as the case may
be, is also responsible for fulfilling the 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 the 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 lender 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 rental payment to the Cooperative under the
proprietary lease, which rental payment represents the 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 lender 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 lender'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 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 those items
are allowable as a deduction to the corporation, the 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 this section
for any particular year. In the event that 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 this type of failure would be permitted to
continue over a period of years appears remote.
Manufactured Housing Contracts
Except as described 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. Those 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 the 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 the
interest
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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 the office, depending on state law.
The Master Servicer will be required under the related agreement to effect
the 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 the 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 some 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. Substantially all of the 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 specified in the accompanying Prospectus Supplement,
neither the Depositor, the Master Servicer nor the Indenture Trustee will amend
the certificates of title (or file UCC-3 statements) to identify the Indenture
Trustee, on behalf of the Securityholders, as the new secured party, and neither
the Depositor nor the Master Servicer will deliver the certificates of title to
the Indenture Trustee or note thereon the interest of the Indenture Trustee.
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, the assignment is an effective conveyance of the 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, or the filing of a UCC-3 statement, the
assignment of the security interest in the Manufactured Home might not be held
to be effective or the security interest may not be perfected and in the absence
of the notation or delivery to the Indenture Trustee, the assignment of the
security interest in the Manufactured Home may not be effective against
creditors of the Depositor or Seller or a trustee in bankruptcy of the Depositor
or Seller.
In the absence of fraud, forgery, permanent affixation of the Manufactured
Home to its site, or administrative error by state recording officials, the
notation of the lien of the Depositor on the certificate of title or delivery of
the required documents and fees would be sufficient to protect the Indenture
Trustee against the rights of subsequent purchasers of a Manufactured Home or
subsequent lenders who take a security interest in the Manufactured Home. If
there are any Manufactured Homes as to which the Depositor has failed to perfect
or cause to be perfected the security interest assigned to the Trust Fund, the
security interest would be subordinate to, among others, subsequent purchasers
for value of the Manufactured Home and holders of perfected security interests
in the 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 the house to a
state other than the state in which the 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 the relocation and
thereafter only if and after 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 that state, and if the Depositor did
not take steps to re-perfect its security interest in that 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 the 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. In the ordinary course of servicing the manufactured
housing contracts, the Master Servicer takes steps to effect the re-perfection
upon receipt of notice of re-registration or information from the obligor as to
relocation. 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
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the lien. Under each related agreement, the Master Servicer will be obligated to
take steps, at the Master Servicer's expense, 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 and liens for personal property taxes take priority even over
a prior perfected security interest in the Manufactured Home. The Depositor will
obtain the representation of the Seller that it has no knowledge of any liens
with respect to any Manufactured Home securing a Manufactured Housing Contract.
However, these 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 this type of lien arises.
Foreclosure on Loans and Certain Contracts
Although a deed of trust or deed to secure debt may also be foreclosed by
judicial action, foreclosure of a deed of trust or deed to secure debt is
typically accomplished by a non-judicial trustee's or grantee's, as applicable,
sale under a specific provision in the deed of trust or deed to secure debt
which authorizes the trustee or grantee, as applicable, to sell the property
upon any default by the borrower under the terms of the note or deed of trust or
deed to secure debt. In addition to any notice requirements contained in a deed
of trust or deed to secure debt, in some states, prior to a sale the trustee or
grantee, as applicable, 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 the
sale, the trustee or grantee, as applicable, 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 or deed to secure deed 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 those states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
Foreclosure of a mortgage generally is accomplished by judicial action. In
most cases, 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 and
serving necessary parties, including borrowers located outside the jurisdiction
in which the mortgaged property is located. 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 a mortgage, a deed of trust, or a deed to
secure debt the sale by the referee or other designated officer or by the
trustee or grantee, as applicable, is 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, or grantee,
as applicable, 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 the 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 repairs at its own
expense that 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. In some cases, a deficiency judgment may be
pursued in lieu of foreclosure. 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
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the property, the lender's title will be subject to all senior liens and claims
and some 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 in most cases
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 typically 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" in this Prospectus.
Foreclosure on Mortgaged Properties Located in the Commonwealth of Puerto Rico
Under the laws of the Commonwealth of Puerto Rico the foreclosure of a
real estate mortgage usually follows an ordinary "civil action" filed in the
Superior Court for the district where the mortgage property is located. If the
defendant does not contest the action filed, a default judgment is rendered for
the plaintiff and the mortgaged property is sold at public auction, after
publication of the sale for two weeks, by posting written notice in three public
places in the municipality where the auction will be held, in the tax collection
office and in the public school of the municipality where the mortgagor resides,
if known. If the residence of the mortgagor is not known, publication in one of
the newspapers of general circulation in the Commonwealth of Puerto Rico must be
made at least once a week for two weeks. There may be as many as three public
sales of the mortgaged property. If the defendant contests the foreclosure, the
case may be tried and judgment rendered based on the merits of the case.
There are no redemption rights after the public sale of a foreclosed
property under the laws of the Commonwealth of Puerto Rico. Commonwealth of
Puerto Rico law provides for a summary proceeding for the foreclosure of a
mortgage, but it is very seldom used because of concerns regarding the validity
of those actions. The process may be expedited if the mortgagee can obtain the
consent of the defendant to the execution of a deed in lieu of foreclosure.
Under Commonwealth of Puerto Rico law, in the case of the public sale upon
foreclosure of a mortgaged property that (a) is subject to a mortgage loan that
was obtained for a purpose other than the financing or refinancing of the
acquisition, construction or improvement of the property and (b) is occupied by
the mortgagor as his principal residence, the mortgagor of the property has a
right to be paid the first $1,500 from the proceeds obtained on the public sale
of the property. The mortgagor can claim this sum of money from the mortgagee at
any time prior to the public sale or up to one year after the sale. This payment
would reduce the amount of sales proceeds available to satisfy the Loan and/or
Contract and may increase the amount of the loss.
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 described 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 canceled by the Cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by the tenant-stockholder, including
mechanics' liens against the Cooperative's building incurred by the
tenant-stockholder.
Generally, rent and other obligations and charges arising under a
proprietary lease or occupancy agreement which are owed to the Cooperative are
made liens upon the shares to which the proprietary lease or occupancy agreement
relates. In addition, the proprietary lease or occupancy agreement generally
permits the Cooperative to terminate the 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 the 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 the 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 its accrued and unpaid interest.
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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 and/or assigning the proprietary lease. This 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 the home in the
event of a default by the obligor will generally be governed by the UCC, except
in Louisiana. Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing units. While the UCC as adopted by the
various states may vary in some 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, which is peaceable retaking without court order, voluntary
repossession or through judicial process, which is repossession under
court-issued order. 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 disposition of the manufactured home can commence. This
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, preparing for sale,
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 those judgments. The deficiency
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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 this 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.
Louisiana Law. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently affixed
to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process, repossession proceedings which must be
initiated through the courts but which involve minimal court supervision, or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale without court
supervision is permitted, unless the obligor brings suit to enjoin the sale, and
the lender is prohibited from seeking a deficiency judgment against the obligor
unless the lender obtained an appraisal of the manufactured home prior to the
sale and the property was sold for at least two-thirds of its appraised value.
Rights of Redemption
In some states, after sale under a deed of trust or deed to secure debt or
foreclosure of a mortgage, the borrower and foreclosed junior lienors or other
parties are given a statutory period, typically 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 or deed to secure debt. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired.
Notice of Sale; Redemption Rights with Respect to Manufactured Homes
While state laws do not usually require notice to be given to debtors
prior to repossession, many states require delivery of a notice of default and
notice of the debtor's right to cure defaults before repossession. The law in
most states also requires that the debtor be given notice of sale prior to the
resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC.
Anti-Deficiency Legislation and Other Limitations on Lenders
Some states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage or a
grantee under a deed to secure debt. In some states, including California,
statutes limit the right of the beneficiary, mortgagee or grantee 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 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 or deed to secure debt, even
if obtainable under applicable law, may be of little value to the beneficiary,
grantee or mortgagee if there are no trust assets against which the deficiency
judgment may be executed. Some state statutes require the beneficiary, grantee
or mortgagee to exhaust the security afforded under a deed of trust, deed to
secure debt or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower.
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In other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting the security; however,
in some of these states, the lender, following judgment on the 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 this election, is that lenders
will usually proceed against the security first rather than bringing a personal
action against the borrower.
Finally, in 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, grantee 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 some
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 relating to a
mortgage loan on the 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 arrearages 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 under a
plan confirmed under Chapter 13 except with respect to mortgage payment
arrearages, which may be cured within a reasonable time period. Courts with
federal bankruptcy jurisdiction similarly may be able to modify the terms of a
Cooperative Loan.
Certain tax liens arising under the Code may, in some circumstances, have
priority over the lien of a mortgage, deed to secure debt 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 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
(these Loans and Contracts, "High Cost Loans"), if those 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 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 these provisions that the borrower could assert against
the originator of the High Cost Loan. Remedies available to the borrower include
monetary penalties, as well as recission rights if the appropriate disclosures
were not given as required.
Environmental Legislation
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), and under state law in some
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 some circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the
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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 evidence 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 some 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. These cleanup costs may be substantial. It is possible that
the cleanup costs could become a liability of a Trust Fund and reduce the
amounts otherwise distributable to the holders of the related series of Notes.
Moreover, some federal statutes and some states by statute impose a lien for any
cleanup costs incurred by that state on the property that is the subject of the
cleanup costs (an "Environmental Lien"). All subsequent liens on that property
usually are subordinated to 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 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 these 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 of these 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 the 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, some 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 some cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Unless otherwise provided in the accompanying 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
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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 some 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 claim or defense, and if the Seller had or should
have had knowledge of the claim or defense, the Master Servicer will have the
right to require the Seller to repurchase the Manufactured Housing Contract
because of a breach of its Seller's representation and warranty that no claims
or defenses exist that would affect the obligor's obligation to make the
required payments under the Manufactured Housing Contract. The Seller would then
have the right to require the originating dealer to repurchase the Manufactured
Housing Contract from it and might also have the right to recover from the
dealer any losses suffered by the Seller with respect to which the dealer would
have been primarily liable to the obligor.
Enforceability of Certain Provisions
The Loans and, as applicable, Contracts typically contain due-on-sale
clauses. These clauses permit the lender 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 some exceptions, preempts state constitutional, statutory and case 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 describes 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, some 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 under 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 or additional interest if payments
are not timely made, and in some circumstances may provide for prepayment fees
or yield maintenance 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 under Title I, in some states, there are or may be
specific limitations upon the late charges that a lender may collect from a
borrower for delinquent payments. Some states also limit the amounts that a
lender may collect from a borrower as an additional charge if the loan is
prepaid. In addition, the enforceability of provisions that provide for
prepayment fees or penalties upon an involuntary prepayment is unclear under the
laws of many states. Most conventional single-family mortgage loans may be
prepaid in full or in part without penalty. The regulations of the Federal Home
Loan Bank Board, as succeeded by the Office of Thrift Supervision ("OTS"),
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
Loans and/or Contracts having higher interest rates, may increase the likelihood
of refinancing or other early retirements of the Revolving Credit Loans, Home
Equity Loans and/or Contracts.
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
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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, deeds
to secure debt, 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 grantee under a deed to secure debt, or a mortgagee 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
the contracts by the obligee on the contract upon any sale or transfer to which
consent has not been given. Unless otherwise provided in the accompanying
Prospectus Supplement, the Master Servicer will, to the extent it has knowledge
of the conveyance or proposed conveyance, exercise or cause to be exercised its
rights to accelerate the maturity of the related Manufactured Housing Contracts
through enforcement of due-on-sale clauses, subject to applicable state law. In
some 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
some 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
relating to some 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 referred to in this section as "contracts") generally
are "chattel paper" or constitute "purchase money security interests" each as
defined in the UCC. Under 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 specified in the accompanying 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 the 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 the contracts a purchase money security interest in
the Home Improvements to secure all or part of the purchase price of the 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. These 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 the 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 the 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 this characterization, upon incorporation of these
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
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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 this type of 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 the resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Some 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 some related lenders and assignees, to transfer the contract
free of notice of claims by the debtor thereunder. The effect of this rule is to
subject the assignee of this type of 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 the obligor. Numerous other
federal and state consumer protections laws impose requirements applicable to
the origination and lending under 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 some kinds of consumer goods. The contracts would be covered if
they satisfy some 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 this type of 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
some kinds of manufactured housing. The contracts would be covered if they
satisfy some 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 (referred to in this
section as the "lender") retains legal title to the property and enters into an
agreement with the purchaser (referred to in this section as the "borrower") for
the payment of the purchase price, plus interest, over the term of the contract.
Only after full performance by the borrower of the Installment Contract is the
lender obligated to convey title to the property to the purchaser. As with
mortgage or deed of trust financing, during the effective period of the
Installment Contract, the borrower is in most cases 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 under 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
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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 this 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 those 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 some
types of residential first mortgage loans, including cooperative loans
originated by some 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 OTS 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. Some 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 interest
rates for the Trust Assets, as described in the accompanying Prospectus
Supplement.
Unless otherwise described in the accompanying Prospectus Supplement, each
Seller of a Loan and a Contract will have represented that the Loan or Contract
was originated in compliance with then applicable state laws, including usury
laws, in all material respects. However, the interest rates on the 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. These restrictions differed from state to state,
resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act ("Title VIII").
Title VIII provides that, notwithstanding any state law to the contrary, (i)
state-chartered banks may originate alternative mortgage instruments in
accordance with regulations promulgated by the Comptroller of the Currency with
respect to the origination of alternative mortgage instruments by national
banks, (ii) state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions and (iii) all other non-federally chartered
housing creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor to the
OTS, 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 these provisions.
Some states have taken this 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 components of manufactured housing such 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.
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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 this type of 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 this
type of 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 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 the Mortgagor's Loan and some Contracts, including a Mortgagor
who was in reserve status and is called to active duty after origination of the
Loan and some Contracts, may not be charged interest, including fees and
charges, above an annual rate of 6% during the period of the 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 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 some of the 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 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 Loan or
Contract during the Mortgagor's period of active duty status, and, under some
circumstances, during an additional three month period thereafter. Thus, in the
event that the Relief Act or similar legislation or regulations applies to any
Loan and Contract which goes into default, there may be delays in payment and
losses on the related Notes in connection therewith. Any other interest
shortfalls, deferrals or forgiveness of payments on the 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, those 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 Loans, as well as some Contracts or Private Securities, included in the
Trust Fund for a series will be secured by mortgages or deeds of trust which in
most cases 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 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 some 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 the 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
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of the senior mortgage or deed of trust do not require notice of default to the
junior mortgagee, the lack of any 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 the proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in the 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 of the
property, 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 some mortgages or deeds of trust to perform
the obligation itself, at its election, with the mortgagor agreeing to reimburse
the mortgagee for any sums expended by the mortgagee on behalf of the mortgagor.
All sums so expended by a senior mortgagee become part of the indebtedness
secured by the senior mortgage.
The form of credit line trust deed or mortgage used by most institutional
lenders which make Revolving Credit Loans typically contains a "future advance"
clause, which provides, in essence, that additional amounts advanced to or on
behalf of the borrower by the beneficiary or lender are to be secured by the
deed of trust or mortgage. The priority of the lien securing any advance made
under the clause may depend in most states on whether the deed of trust or
mortgage is designated as a credit line deed of trust or mortgage. If the
beneficiary or lender advances additional amounts, the advance is entitled to
receive the same priority as amounts initially advanced under the trust deed or
mortgage, notwithstanding the fact that there may be junior trust deeds or
mortgages and other liens which intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and notwithstanding
that the beneficiary or lender had actual knowledge of these 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.
Negative Amortization Loans
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980 ("DIDMC") and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The holding was limited to the effect of DIDMC on state laws regarding
the compounding of interest and the court did not address the applicability of
the Alternative Mortgage Transaction Parity Act of 1982, which authorizes a
lender to make residential mortgage loans that provide for negative
amortization. As a result, the enforceability of compound interest on mortgage
loans that provide for negative amortization is unclear. The First Circuit's
decision is binding authority only on Federal District Courts in Maine, New
Hampshire, Massachusetts, Rhode Island and Puerto Rico.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of 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, Orrick, Herrington & Sutcliffe LLP and Stroock & Stroock &
Lavan counsel to the Depositor. 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, including 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,
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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 in this Prospectus. In addition to
the federal income tax consequences described in this Prospectus, 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, Orrick,
Herrington & Sutcliffe LLP or Stroock & Stroock & Lavan ("Tax Counsel"), counsel
to the Depositor, 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 related documents, (i) the Notes will be treated
as indebtedness and (ii) the Issuer, as created under 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 described in Code sections 1271-1273 and 1275 and in the
Treasury regulations issued under these sections (the "OID Regulations"). The
OID Regulations do not adequately address certain issues relevant to, and in
some instances provide that they are not applicable to, securities such as the
Notes. For purposes of this tax discussion, references to a "Noteholder" or a
"holder" are to the beneficial owner of a Note.
Status as Real Property Loans
(i) Notes held by a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Code section 7701(a)(19)(C)(v); and (ii) Notes held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code section 856(c)(4)(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 the 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 the 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 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 the class will be treated as the fair market value of that 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 the 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 typically does not operate in a
manner that accelerates or defers interest payments on the Note.
In the case of Notes bearing adjustable Note Rates, the determination of
the total amount of original issue discount and the timing of the inclusion of
original issue discount will vary according to the characteristics of the Notes.
In general terms original issue discount is accrued by treating the Note Rate of
the Notes as fixed and making adjustments to reflect actual Note Rate payments.
Some classes of the Notes may provide for the first interest payment with
respect to these 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.
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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 the accrued
interest. In those 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 the 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 the Note.
However, the OID Regulations state that all or some portion of the 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 the
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 the Note, by multiplying (i) the number of
complete years, rounding down for partial years, from the issue date until the
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 the 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 the de minimis original issue discount and a
fraction, the numerator of which is the amount of the 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 the election under the OID
Regulations.
If original issue discount on a Note is in excess of a de minimis amount,
the holder of the 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 the 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
accompanying 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 period, begins
on the Closing Date, a calculation will be made of the portion of the original
issue discount that accrued during this 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 the Note during the accrual period of
amounts included in the stated redemption price, over (ii) the adjusted issue
price of the 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 the Note, increased by the aggregate amount of original issue
discount that accrued with respect to the Note in prior accrual periods, and
reduced by the amount of any distributions made on the 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 that day. Although the Issuer will
calculate original issue discount, if any, based on its determination of the
accrual periods, a Noteholder may, subject to some restrictions, elect other
accrual periods.
A subsequent purchaser of a Note that purchases the Note at a price,
excluding any portion of the 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 the Note. However, each daily portion will be reduced, if the
cost is in excess of its "adjusted issue price," in proportion to the ratio that
excess bears to the aggregate original issue discount remaining to be accrued on
the 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 the Note at the beginning of the accrual period which includes that
day plus (ii) the daily portions of original issue discount for all days during
the accrual period prior to that day less (iii) any principal payments made
during the accrual period with respect to the Note.
Market Discount
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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 the Noteholder generally will be required to allocate the portion
of each distribution representing stated principal first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent.
A Noteholder may elect to include market discount in income currently as
it accrues rather than including it on a deferred basis in accordance with the
foregoing. If made, the election will apply to all market discount bonds
acquired by the Noteholder on or after the first day of the first taxable year
to which the 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 this 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 the 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 the 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 the market discount is less than 0.25%
of the remaining principal amount of the 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, some 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 these 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 the discount would accrue if it were original
issue discount. Moreover, in any event a holder of a Note typically will be
required to treat a portion of any gain on the sale or exchange of the 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 deferred interest expense would not exceed the market discount that
accrues during that taxable year and is, in general, allowed as a deduction not
later than the year in which the market discount is includible in income. If the
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by that 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, the holder will be considered to have purchased the Note with
amortizable bond premium equal in amount to the excess, and may elect to
amortize the 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 relating to that Note by the premium amortized in that taxable year. If
this 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
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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 the
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 those 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 the 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 that 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 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 that 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 the
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
that Note to that Noteholder, increased by the amount of any original issue
discount or market discount previously reported by the Noteholder with respect
to that Note and reduced by any amortized premium and any principal payment
received by the Noteholder. Except as provided in the following three
paragraphs, any gain or loss will be capital gain or loss, provided the 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 the Note
at a market discount will be taxable as ordinary income in an amount not
exceeding the portion of the discount that accrued during the period the Note
was held by the holder, reduced by any market discount included in income under
the rules described above under " --Market Discount" and "--Premium."
A portion of any gain from the sale of a Note that might otherwise be
capital gain may be treated as ordinary income to the extent that the Note is
held as part of a "conversion transaction" within the meaning of Section 1258 of
the Code. A conversion transaction generally is one in which the taxpayer has
taken two or more positions in the same or similar property that reduce or
eliminate market risk, if substantially all of the taxpayer's return is
attributable to the time value of the taxpayer's net investment in the
transaction. The amount of gain so realized in a conversion transaction that is
recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment at 120% of the
appropriate "applicable Federal rate", which rate is computed and published
monthly by the IRS, at the time the taxpayer enters into the conversion
transaction, subject to appropriate reduction for prior inclusion of interest
and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include any net capital
gain in total net investment income for the taxable year, for purposes of the
rule that limits the deduction of interest on indebtedness incurred to purchase
or carry property held for investment to a taxpayer's net investment income.
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 the payments fail to furnish
to the payor information, including their taxpayer identification numbers, or
otherwise fail to establish an exemption from the tax. Any amounts deducted and
withheld from a distribution to a recipient would be allowed as a credit against
the recipient's federal income tax. Furthermore, 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 that 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 and will be exempt from federal income tax, 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. Upon receipt of
appropriate ownership statements, the Issuer normally will be relieved of
obligations to withhold tax from the 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 this 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 of that holder.
New Withholding Regulations
The Treasury Department has issued new regulations (the "New Withholding
Regulations") which make modifications to the withholding, backup withholding
and information reporting rules described above. The New Withholding Regulations
attempt to unify certification requirements and modify reliance standards. The
New Withholding Regulations will generally be effective for payments made after
December 31, 1999, subject to transition rules. Prospective investors are urged
to consult their tax advisors regarding the New Withholding Regulations.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "United
States Federal Income Tax Consequences," potential investors should consider the
state and local tax consequences of the acquisition, ownership, and disposition
of the Notes offered by this Prospectus. 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
by this Prospectus.
ERISA CONSIDERATIONS
Sections 404 and 406 of ERISA impose 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 those 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").
Some employee benefit plans, including 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 in this Prospectus. Accordingly,
assets of these 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 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 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 specified relationships
to the Plans, unless a statutory or administrative exemption is available. Some
Parties in Interest that participate in a prohibited transaction may be subject
to a penalty (or an excise tax) imposed under Section 502(i) of ERISA or Section
4975 of the Code, unless a statutory or administrative exemption is available
with respect to any transaction of this sort.
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 to be deemed "Plan Assets"
of the Plan. The U.S. Department of Labor (the "DOL") has promulgated
regulations at 29 C.F.R. Section 2510.3-101 (the "DOL Regulations") defining the
term "Plan Assets" for purposes of applying the general fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA and
Section 4975 of the Code. Under the DOL Regulations, generally, when a Plan
acquires an "equity interest" in
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another entity, including a Trust, the underlying assets of that entity may be
considered to be Plan Assets unless some 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 some 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 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 some 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 and cause the Depositor, the Master
Servicer, any Subservicer, any Administrator, the Indenture Trustee, the Owner
Trustee, the obligor under any credit enhancement mechanism or some affiliates
of those entities 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, including the Trust Assets and the other assets held in the Trust, 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 those
circumstances, especially if, with respect to the assets, the Depositor, the
Master Servicer, any Subservicer, any Administrator, the Indenture Trustee, the
Owner Trustee, the obligor under any credit enhancement mechanism or an
affiliate of those entities 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
under an agreement or understanding that any advice will serve as a primary
basis for investment decisions with respect to the 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 the 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 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 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 the Trust, 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 some class exemptions granted by the DOL, which provide relief
from some of the prohibited transaction provisions of ERISA and the related
excise tax provisions of the Code, including Prohibited Transaction Class
Exemption ("PTCE") 95-60, regarding transactions by insurance company general
accounts; PTCE 84-14, regarding transactions effected by a "qualified
professional asset manager"; PTCE 90-1, regarding transactions by insurance
company pooled separate accounts; PTCE 91-38, regarding investments by bank
collective investment funds; and PTCE 96-23, regarding transactions effected by
an "in-house asset manager." The respective Prospectus Supplement may contain
additional information regarding the application of PTCE 95-60 or other DOL
class exemptions with respect to the Notes offered by this Prospectus.
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 some 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. Under Section 401(c) of ERISA, the DOL published proposed regulations
on December 22, 1997, but the required final regulations
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(the "401(c) Regulations") have not been issued as of the date of this
Prospectus. The 401(c) Regulations are to provide guidance for the purpose of
determining, in cases where insurance policies or annuity contracts 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 some 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 the
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 accompanying Prospectus Supplement provides that any of the Notes
being issued have "substantial equity features" within the meaning of the DOL
Regulations, transfers of the 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 the acquisition will not be registered by the Indenture Trustee
unless the transferee provides the Depositor, the Indenture Trustee and the
Master Servicer with an opinion of counsel satisfactory to the Depositor, the
Indenture Trustee and the Master Servicer, which opinion will not be at the
expense of the Depositor, the Indenture Trustee or the Master Servicer, that the
purchase of the Notes by or on behalf of the Plan is permissible under
applicable law and will not subject the Depositor, the Indenture Trustee or the
Master Servicer to any obligation in addition to those undertaken in the Trust
Agreement. In lieu of the 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 the 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 Depositor, 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
the Notes is an "insurance company general account" (as the term is defined in
PTCE 95-60) and (iii) the conditions described in Section I and Section III of
PTCE 95-60 have been satisfied as of the date of the acquisition of the Notes.
Tax Exempt Investors
A Plan that is exempt from federal income taxation under 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.
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 in the DOL exemption were satisfied, that the exemption would apply to
transactions involving the Trust. 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 described in the
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
the 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 by this Prospectus and by the accompanying
Prospectus Supplement will be rated at the date of issuance in one of the four
highest rating categories by at least one Rating Agency. As specified in the
accompanying 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 the
Secondary Mortgage Market Enhancement Act of 1984, as amended ("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.
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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, some investment practices deemed to be
unsuitable for an institution's investment portfolio, as well as guidelines for
investing in some 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 some investors either to
purchase some classes of Notes or to purchase any class of Notes representing
more than a specified percentage of the investors' assets. The Depositor 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
Substantially all of the net proceeds to be received from the sale of
Notes will be applied by the Depositor 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 Depositor for general corporate
purposes. The Depositor expects that it will make additional sales of securities
similar to the Notes from time to time, but the timing and amount of any
additional offerings will be dependent upon a number of factors, including the
volume of mortgage loans purchased by the Depositor, prevailing Note Rates,
availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The Notes offered by this Prospectus and by the accompanying 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 Depositor from that sale.
The Depositor 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 the following methods:
o by negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
o by placements by the Depositor with institutional investors through
dealers; and
o by direct placements by the Depositor with institutional investors.
In addition, if specified in the accompanying 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
securing the Notes.
If underwriters are used in a sale of any Notes, other than in connection
with an underwriting on a best efforts basis, the 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. These underwriters may be broker-dealers affiliated with
the Depositor whose identities and relationships to the Depositor will be as
described in the accompanying Prospectus Supplement. The managing underwriter or
underwriters with respect to the offer and sale of a particular series of Notes
will be described on the cover of the Prospectus Supplement relating to that
series and the members of the underwriting syndicate, if any, will be named in
the accompanying Prospectus Supplement.
In connection with the sale of the Notes, underwriters may receive
compensation from the Depositor 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 the Notes, and any discounts or commissions received by them from the
Depositor 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.
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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 some conditions precedent, that the underwriters will be obligated
to purchase all of the Notes if any are purchased, other than in connection with
an underwriting on a best efforts basis, and that, in limited circumstances, the
Depositor will indemnify the several underwriters and the underwriters will
indemnify the Depositor against some civil liabilities, including liabilities
under the Securities Act of 1933, as amended, or will contribute to distribution
required to be made in respect of these liabilities.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of the offering
and any agreements to be entered into between the Depositor and purchasers of
Notes of that series.
The Depositor 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 the 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 reoffer or sale.
LEGAL MATTERS
Certain legal matters, including a number of federal income tax matters,
will be passed upon for the Depositor by Thacher Proffitt & Wood, New York, New
York, by Orrick, Herrington & Sutcliffe LLP, New York, New York or by Stroock &
Stroock & Lavan, as specified in the Prospectus Supplement.
FINANCIAL INFORMATION
The Depositor 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 Depositor. The Depositor's only obligations with respect
to a series of Notes will be to repurchase Trust Assets upon any breach of the
limited representations and warranties made by the Depositor, or as otherwise
provided in the applicable Prospectus Supplement.
ADDITIONAL INFORMATION
The Depositor has filed the Registration Statement with the Commission.
The Depositor 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 Depositor under 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: Chicago 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
Securities and Exchange Commission's Web Site (http://www.sec.gov).
REPORTS TO NOTEHOLDERS
Monthly reports which contain information concerning the trust for a
series of notes will be sent by or on behalf of 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." Reports forwarded to
holders will contain financial information that has not been examined or
reported upon by an independent certified public accountant. The depositor will
file with the Commission those periodic reports relating to the trust for a
series of notes as are required under the Exchange Act.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows the depositor to "incorporate by reference" the information
filed with the SEC by the Depositor, under Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act, that relates to the Trust Fund for the Notes. This means that
the Depositor can disclose important information to any investor by referring
the investor to these documents. The information incorporated by reference is an
important part of this Prospectus, and information filed by the Depositor with
the SEC that relates to the Trust Fund for the Notes will automatically update
and supersede this information.
The Depositor will provide or cause to be provided without charge to each
person to whom this prospectus and accompanying Prospectus Supplement is
delivered in connection with the offering of one or more classes of the related
series of notes, upon written or oral request of that person, a copy of any or
all the reports incorporated in this Prospectus by reference, in each case to
the extent the reports relate to one or more of the classes of the series of
notes, other than the exhibits to those documents, unless the exhibits are
specifically incorporated by reference in the
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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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INDEX OF PRINCIPAL DEFINITIONS
401(C) Regulations................................................1, 5, 26, 61
Account Balance..............................................................4
Accrual Certificates........................................................12
Actuarial Loan...............................................................4
Additional Balance...........................................................4
Additional Charges...........................................................4
Affiliated Sellers...........................................................2
Agreement ................................................................32
Appraised Value..............................................................3
Audit Guide ................................................................31
Bankruptcy Loss.............................................................21
Beneficial Owner............................................................13
Book-Entry Notes............................................................12
CEDEL ................................................................12
CEDEL Participants..........................................................13
Certificates.................................................................1
Clearance Cooperative.......................................................13
Closed End Loans.............................................................1
Closing Date................................................................10
CLTV .................................................................3
Combined Loan-to-Value Ratio.................................................3
Commission .................................................................3
Committee Report............................................................57
Contracts .................................................................1
Cooperative ................................................................40
Cooperative Loans............................................................1
Cooperative Note............................................................40
Cooperative Notes............................................................1
Counterparties..............................................................25
Credit Enhancer.............................................................22
Credit Limit.................................................................4
Credit Limit Increase.......................................................28
Credit Line Agreements.......................................................4
Credit Scores................................................................8
Credit Utilization Rate......................................................3
Crime Control Act...........................................................53
Custodial Account...........................................................16
Custodian ................................................................15
Cut-off Date.................................................................2
Defaulted Loan Loss.........................................................21
Deleted Loan................................................................11
Depositaries................................................................13
Depositor .................................................................1
Designated Seller............................................................2
Designated Seller Transaction................................................2
Determination Date..........................................................19
DIDMC ................................................................54
Direct Puerto Rico Mortgage.................................................15
Disqualified Persons........................................................59
Distribution Date...........................................................12
DOL ................................................................59
DOL Regulations.............................................................59
Draw .................................................................4
Draw Period .................................................................4
DTC ................................................................12
DTC Participants............................................................13
Eligible Account............................................................17
Eligible Substitute Loan....................................................11
Endorsable Puerto Rico Mortgage.............................................15
ERISA Plans ................................................................59
Euroclear ................................................................12
Euroclear Operator..........................................................13
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Euroclear Participants......................................................13
Event of Default............................................................33
Excess Interest.............................................................23
Excess Spread...............................................................16
Exchange Act................................................................63
Excluded Spread.............................................................16
Extraordinary Losses........................................................22
FDIC .................................................................9
FHA .................................................................1
FHA Insurance Amount........................................................26
FHA Regulations.............................................................26
FHA Reserve ................................................................26
Finance Charge...............................................................4
Financial Guaranty Insurance Policy.........................................22
Fraud Loss ................................................................21
FTC Rule ................................................................49
Funding Account.............................................................19
Garn-St Germain Act.........................................................49
GMAC Mortgage................................................................2
Gross Margin.................................................................4
Guide .................................................................6
High Cost Loans.............................................................47
Home Equity Loans............................................................1
Home Equity Program..........................................................6
Home Improvement Contracts...................................................1
Home Improvements............................................................1
Home Loans .................................................................1
HUD ................................................................26
Indenture .................................................................1
Index .................................................................4
Indirect Participants.......................................................13
Installment Contract........................................................51
Insurance Proceeds..........................................................16
Insurer ................................................................22
Junior Ratio.................................................................3
Letter of Credit............................................................22
Letter of Credit Bank.......................................................22
LIBOR ................................................................25
Liquidated Loan.............................................................30
Liquidation Proceeds........................................................16
Loans .................................................................1
Manufactured Homes...........................................................1
Manufactured Housing Contracts...............................................1
Master Commitments...........................................................7
MERS ................................................................14
MERS(R) System................................................................14
Mezzanine Certificates......................................................12
Modified Trust Asset.........................................................3
Modular Housing..............................................................1
Mortgage Loans...............................................................1
Mortgage Notes...............................................................1
Mortgaged Properties.........................................................1
Mortgages .................................................................1
Net Loan Rate...............................................................36
Nonresidents................................................................59
Note Rate .............................................................4, 19
Note Registrar..............................................................12
Noteholder ................................................................12
OID Regulations.............................................................55
Overcollateralization.......................................................23
Ownership Interest...........................................................2
Participants................................................................13
Parties in Interest.........................................................59
Paying Agent................................................................18
Payment Account.............................................................17
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Percentage Interest.........................................................19
Permitted Investments.......................................................17
Plan Assets ................................................................60
Plans ................................................................59
Pool .................................................................1
Private Securities...........................................................1
Prospectus Supplement........................................................1
PTCE ................................................................60
Puerto Rico Trust Assets.....................................................1
Purchase Obligation.........................................................25
Purchase Price..............................................................10
Qualified Insurer...........................................................24
Rating Agency ..............................................................17
Realized Loss...............................................................22
Record Date ................................................................18
Registration Statement......................................................12
Relief Act ................................................................53
REO Loan ................................................................30
Repayment Period.............................................................4
Reserve Fund................................................................23
Residential Funding..........................................................2
Revolving Credit Loans.......................................................1
RICO ................................................................53
Securities .................................................................1
Securityholders.............................................................15
Sellers .................................................................2
Senior/Subordinate Series...................................................12
Servicing Advances..........................................................18
Servicing Agreement.........................................................28
Servicing Default...........................................................33
Simple Interest Loan.........................................................5
Single Note ................................................................20
SMMEA ................................................................61
Special Hazard Loss.........................................................21
Special Purpose Entity.......................................................2
Special Servicer............................................................30
Spread Account..............................................................23
Stated Principal Balance....................................................22
Stated Value.................................................................3
Statistical Valuation........................................................3
Strip Certificate...........................................................12
Subservicers.................................................................3
Subservicing Account........................................................16
Subservicing Agreement......................................................11
Swaps ................................................................25
Tax Counsel ................................................................55
Tax Favored Plans...........................................................59
Tax-Exempt Investor.........................................................61
Teaser Loans.................................................................4
Terms and Conditions........................................................14
Title I Contracts............................................................1
Title I Lenders.............................................................26
Title V ................................................................51
Title VIII ................................................................52
Transfer Report.............................................................26
Trust Agreement..............................................................1
UBTI ................................................................61
UCC ................................................................45
Unaffiliated Sellers.........................................................2
Yield Supplement Agreements.................................................25
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The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED APRIL 30, 1999
Prospectus Supplement dated _____________ (To Prospectus dated _____________)
$_____________
Residential Funding Mortgage Securities II, Inc.
Depositor
Home Loan Trust _______
Residential Funding Corporation
Master Servicer
Home Loan-Backed Notes, Series _______
You should consider carefully the risk factors beginning on page S-_ in this
prospectus supplement and page _ in the prospectus.
The notes will represent obligations of the trust created for Series _______ and
will not represent ownership interests
in or obligations of Residential Funding Mortgage Securities, II, Inc.,
Residential Funding Corporation or any of their affiliates. This prospectus
supplement may be used to offer and sell the notes only if accompanied by the
prospectus.
- ---------------------------------------------------------------------------
Notes
The Home Loan Trust _______ will issue notes backed by a pool of closed-end,
primarily second lien fixed rate home loans. The notes are offered by this
Prospectus Supplement.
Credit Enhancement
Credit enhancement for the notes consists of:
o the portion of interest paid by the borrowers in excess of what is
necessary to pay interest earned on the notes;
o overcollateralization consisting of the excess of the balance of the
home loans over the balance of the notes; and
o an irrevocable and unconditional financial guaranty insurance policy
issued by _____________.
[Insurer's logo]
Underwriting
__________ will offer the notes from time to time to the public, at varying
prices to be determined at the time of sale. ________________________'s
commission will be the difference between the price it pays to the depositor for
the underwritten notes and the amount it receives from the sale of the
underwritten notes to the public. The proceeds to the depositor from the sale of
the underwritten notes to ________________________will be approximately _____%
of the principal balance of the underwritten notes plus accrued interest, before
deducting expenses. See "Method of Distribution" in this prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes or determined that this
prospectus supplement or the prospectus is accurate or complete. 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.
[Name of Underwriter]
Underwriter
<PAGE>
Important notice about information presented in this prospectus supplement and
the accompanying prospectus
We provide information to you about the Notes in two separate documents that
provide progressively more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to your series of notes; and
o this prospectus supplement, which describes the specific terms of your
series of notes.
If the description of your notes in this prospectus supplement differs from the
related description in the accompanying prospectus, you should rely on the
information in this prospectus supplement.
The Depositor's principal offices are located at 8400 Normandale Lake Boulevard,
Suite 600, Minneapolis, Minnesota 55437 and its phone number is (612) 832-7000.
TABLE OF CONTENTS
SUMMARY...................................................................S-__
RISK FACTORS..............................................................S-__
INTRODUCTION..............................................................S-__
DESCRIPTION OF THE HOME LOAN POOL.........................................S-__
General ............................................................S-__
Payments on the Simple Interest
Home Loans........................................................S-__
Home Loan Pool Characteristics......................................S-__
Credit Scores.......................................................S-__
Underwriting Standards..............................................S-__
The Initial Subservicers............................................S-__
Residential Funding.................................................S-__
Additional Information .............................................S-__
THE ISSUER................................................................S-__
THE OWNER TRUSTEE ........................................................S-__
THE INDENTURE TRUSTEE.....................................................S-__
THE CREDIT ENHANCER.......................................................S-__
DESCRIPTION OF THE SECURITIES.............................................S-__
General.............................................................S-__
Book-Entry Notes....................................................S-__
Payments............................................................S-__
Interest Payments on the Notes......................................S-__
Principal Payments on the
Notes ............................................................S-__
Allocation of Payments on the
Home Loans .......................................................S-__
Outstanding Reserve Amount..........................................S-__
Excess Loss Amount .................................................S-__
The Paying Agent ...................................................S-__
Maturity and Optional
Redemption .......................................................S-__
DESCRIPTION OF THE POLICY ................................................S-__
CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS .....................................................S-__
DESCRIPTION OF THE HOME LOAN
PURCHASE AGREEMENT .................................................S-__
DESCRIPTION OF THE SERVICING
AGREEMENT ..........................................................S-__
DESCRIPTION OF THE TRUST
AGREEMENT AND INDENTURE.............................................S-__
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES .......................................................S-__
ERISA CONSIDERATIONS .....................................................S-__
LEGAL INVESTMENT .........................................................S-__
METHOD OF DISTRIBUTION ...................................................S-__
EXPERTS...................................................................S-__
LEGAL MATTERS.............................................................S-__
RATINGS...................................................................S-__
ANNEX I...................................................................I-__
S-2
<PAGE>
SUMMARY
The following summary is a general overview of the offered notes and does
not contain all of the information that you should consider in making your
investment decision. To understand the terms of the notes, you should read
carefully this entire document and the accompanying prospectus.
Issuer or Trust ..............Home Loan Trust ________.
Title of the
offered securities........Home Loan-Backed Notes, Series ________.
Initial principal balance.....$__________.
Note interest rate............____% per annum.
Ratings.......................When issued, the notes will be rated "____" by
____________ and "____" by ______________.
Depositor ....................Residential Funding Mortgage Securities II, Inc.,
an affiliate of Residential Funding Corporation.
Master servicer ..............Residential Funding Corporation.
Owner trustee.................______________.
Indenture trustee ............______________.
Credit enhancer ..............______________.
Home loan pool ..............._____ fixed rate home loans with an
aggregate principal balance of approximately
______________ as of the close of business on the
day prior to the cut-off date, secured primarily
by second liens on one- to four-family residential
properties.
Cut-off date .................______________.
Closing date .................On or about ______________.
Payment dates ................Beginning in ______________ on the ___ of each
month or, if the ___ is not a business day, on
the next business day.
Scheduled final payment date .______________. The actual
final payment date could be substantially earlier.
Form of notes ................Book-entry.
See "Description of the Notes--Book-Entry
Registration" in this prospectus supplement.
Minimum denominations ........$______________.
Legal investment .............The notes will not be "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984. See "Legal
Investment" in this prospectus supplement and the
prospectus.
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<PAGE>
The Trust
The depositor will establish Home Loan Trust _____, a Delaware business trust to
issue the Home Loan Backed Notes, Series _____. The Trust will be established
under a trust agreement. The trust will issue the notes under an indenture. The
assets of the trust will consist of the home loans and related assets.
The Home Loan Pool
______% of the home loans are secured by second mortgages or deeds of trust and
the remainder are secured by first mortgages or deeds of trust. In addition, the
home loans have the following characteristics as of the cut-off date:
Minimum principal
balance $_____
Maximum principal
balance $_____
Average principal balance _____
Range of loan rates _____% to _____%
Weighted Average loan rate _____%
Range of original terms to _____ to _____ months
maturity
Weighted average original
term to maturity _____ months
Range of remaining terms _____ to _____ monyhd
to maturity
Weighted average
remaining term to
maturity _____ months
Range of combined loan-
to-value ratios _____% to _____%
Weighted average
combined loan-to-value
ratios _____%
See "Description of the Home Loan Pool" in this prospectus supplement.
The Certificates
The trust will also issue Home Loan-Backed Certificates, Series _____, which are
not offered by this prospectus supplement.
Payments on the Notes
Amount available for monthly distribution. On each monthly payment date, the
trustee will make distributions to investors. The amounts available for
distribution include:
o collections of monthly payments on the
home loans, including prepayments and
other unscheduled collections minus
o fees and expenses of the subservicers and
the master servicer.
The aggregate amount of monthly collections is
described under the heading "Description of the
Servicing Agreement--P&I Collections" in this
prospectus supplement.
Payments. Payments to noteholders will be made
from principal and interest collections as follows:
o Distribution of interest to the notes
o Distribution of principal to the notes
o Distribution of principal to the notes in
respect of specified amounts of some losses
o Payment to the credit enhancer its premium
for the guaranty insurance policy and any
previously unpaid premiums, with interest
o Reimbursement to the credit enhancer for
some prior draws made on the guaranty
insurance policy, with interest
o Distribution of additional principal to the
notes if the level of overcollateralization
falls below what is required
o Payment to pay the credit enhancer for any
other amounts owed
o Distribution of any remaining funds to the
certificates
Principal payments on the notes will be as described under "Description of the
Securities--Principal Payments on the Notes" in this prospectus
supplement.
In addition, payments on the notes will be made on each payment date from draws
on the guaranty insurance policy, if necessary. Draws will cover shortfalls in
amounts available to pay interest on the notes at the note rate plus any losses
allocated to the notes.
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<PAGE>
Credit Enhancement
The credit enhancement for the benefit of the notes consists of:
Liquidation Loss Distribution Amounts. If the master servicer disposes of a home
loan for less than its scheduled principal balance plus accrued interest, the
trust will incur a loss. However, because more interest is paid by the
mortgagors than is necessary to pay the interest earned on the notes each month,
there will be excess interest. Some of this excess interest, if available, will
be used to protect the notes against specified amounts of some losses, by making
an additional payment of principal up to an amount equal to the losses.
Overcollateralization. Although the aggregate principal balance of the home
loans is $__________, the trust is issuing only $__________ aggregate principal
amount of notes. The excess amount of the aggregate principal balance of the
home loans represents overcollateralization, which may absorb specified amounts
of some losses on the home loans, if not covered by excess interest. Any loss
amounts not covered by overcollateralization will be covered by the guaranty
insurance policy. If the level of overcollateralization falls below what is
required, the excess interest described above will also be paid to the notes as
principal. This will reduce the principal balance of the notes faster than the
principal balance of the home loans so that the required level of
overcollateralization is reached.
Policy. On the closing date, the credit enhancer will issue the guaranty
insurance policy in favor of the indenture trustee. The policy will
unconditionally and irrevocably guarantee interest on the notes at the note rate
shown on page S-__ of this prospectus supplement plus any losses allocated to
the notes.
See "Description of the Policy" in this prospectus supplement and "Description
of Credit Enhancement" in the Prospectus.
Optional Termination
On any payment date on which the aggregate outstanding principal balance of the
home loans after applying payments received in the related collection period is
less than __% of the aggregate principal balance as of the cut-off date, the
master servicer will have the option to repurchase all or a portion of the
remaining home loans.
An optional redemption will cause the outstanding principal balance of the notes
to be paid in full with accrued interest sooner than they otherwise would have
been paid.
See "Description of the Securities--Maturity and Optional Redemption" in this
prospectus supplement and "The Agreements--Termination; Redemption of Notes" in
the Prospectus.
Ratings
When issued, the notes will receive the ratings listed on page S-__ of this
prospectus supplement. A security rating is not a recommendation to buy, sell or
hold a security and is subject to change or withdrawal at any time by the
assigning rating agency. The ratings also do not address the rate of principal
prepayments on the home loans. The rate of prepayments, if different than
originally anticipated, could adversely affect the yield realized by holders of
the notes.
See "Ratings" in this prospectus supplement.
Legal Investment
The notes will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984. You should consult your legal
advisors in determining whether and to what extent the notes constitute legal
investments for you.
See "Legal Investment" in this prospectus supplement for important information
concerning possible restrictions on ownership of the notes by regulated
institutions.
ERISA Considerations
Subject to important considerations, the notes may be eligible for purchase by
persons investing assets of employee benefit plans or individual retirement
S-5
<PAGE>
accounts. Plans should consult with their legal advisors before investing in the
notes.
See "ERISA Considerations" in this prospectus supplement and in the accompanying
prospectus.
Tax Status
For federal income tax purposes, the notes will be treated as debt. The trust
itself will not be subject to tax.
See "Certain Federal Income Tax Consequences" in this prospectus supplement and
in the accompanying prospectus.
S-6
<PAGE>
RISK FACTORS
The notes are not suitable investments for all investors. In particular,
you should not purchase the notes unless you understand the prepayment, credit,
liquidity and market risks associated with the notes.
The notes are complex securities. You should possess, either alone or
together with an investment advisor, the expertise necessary to evaluate the
information contained in this prospectus supplement and the accompanying
prospectus in the context of your financial situation and tolerance for risk.
You should carefully consider, among other things, the following factors
in connection with the purchase of the Notes:
Risks Associated with the Home Loans
The return on your notes may be affected by losses on the home loans, which are
more likely because they are junior liens.
______% of the home loans included in the home loan pool are
secured by second mortgages or deeds of trust. Accordingly, the
proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the outstanding balance
of the home loans only if the claims of any senior mortgages have
been satisfied in full. 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 the home loan as a
bad debt. The foregoing risks are particularly applicable to home
loans secured by second 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. As of the cut-off date,
the weighted average combined loan-to-value ratio of the home
loans is ______%, and approximately ______% of the home loans
will have combined loan-to-value ratios in excess of ______%.
Because the home loans have been recently originated, the
borrowers will not build equity in the related mortgaged
properties by paying down the balance of the home loans for a
substantial period of time.
Delays in payment on your notes may result because the master servicer is not
required to advance delinquent monthly payments on the home loans.
The Master Servicer is not obligated to advance scheduled monthly
payments of principal and interest on home loans that are
delinquent or in default. Delinquencies and defaults on mortgage
loans are generally expected to occur with greater frequency in
the early years of a loan's life. 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.
S-7
<PAGE>
The return on your notes may be affected by an economic downturn.
Mortgage loans of the type similar to those included in the home
loan pool 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 mortgagors to
repay their loans. 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.
The origination disclosure practices for the home loans could create liabilities
that may affect your interest in your notes.
______% of the home loans included in the home loan pool are
subject to special rules, disclosure requirements and other
regulatory provisions because they were:
o originated on or after October 1, 1995,
o were not made to finance the purchase of the mortgaged
property, and
o have interest rates or origination costs in excess of
some levels.
Purchasers or assignees of these types of home loans,
including the trust, could be liable for all claims and
subject to all defenses arising under the provisions that
the mortgagors could assert against the originators of the
home loans. Remedies available to a mortgagor include
monetary penalties, as well as rescission rights if the
appropriate disclosures were not given as required. Any
federal and state law violations that would result in
liability to the trust would be a breach of Residential
Funding Corporation's representations and warranties, and
Residential Funding Corporation would be obligated to cure,
repurchase or, if permitted by the home loan purchase
agreement, substitute for the home loan in question. See
"Certain Legal Aspects of the Trust Assets and Related
Matters" in the Prospectus.
Your interest in the notes may be adversely affected by changes in bankruptcy
laws.
The Bankruptcy Reform Act of 1994 established the National
Bankruptcy Review Commission for purposes of analyzing the
nation's bankruptcy laws and making recommendations to
Congress for legislative changes to the bankruptcy laws.
This Commission delivered a report on October 20, 1997
recommending that Congress amend the Bankruptcy Code 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 report recommends that a
creditor's secured claim in real property should be
determined by the property's fair
S-8
<PAGE>
market value, less hypothetical costs of sale.
Congress adjourned in 1998 without passing any significant
bankruptcy reform legislation addressing the report or the
Truth-in-Lending Act with respect to claims secured by a
debtor's principal residence. It is expected that bills
will be introduced when Congress reconvenes in 1999. These
bills may result in bankruptcy law changes that may affect
future bankruptcies and therefore could affect the rate and
timing of payments on the home loans. Any changes to the
Bankruptcy Code could have a negative effect on the home
loans and the enforcement of rights.
The underwriting standards for the home loans create greater risk to you,
compared to those for first lien loans.
The underwriting standards under which the home loans were
underwritten are analogous to credit lending, rather than
equity lending, since underwriting decisions were based
primarily on the borrower's credit history and capacity to
repay rather than on the potential value of the collateral
upon foreclosure. Accordingly, the underwriting standards
generally allow loans to be approved with combined
loan-to-value ratios of up to approximately 125%. See
"Description of the Home Loan Pool--Underwriting Standards"
in this prospectus supplement. 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 home loans
underwritten in conformity with first lien mortgage loan
programs which are based on the potential value of the
collateral upon foreclosure.
You may incur losses because the security for home loans with high combined
loan-to-value ratios is limited.
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 mortgagor. If home loans
go into foreclosure and are liquidated, there may be no
amounts 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 the credit
enhancement described in this Prospectus Supplement, you
will bear all risk of losses resulting from default by
borrowers.
S-9
<PAGE>
The return on your notes may be affected by losses on the home loans, which
could occur due to a variety of causes.
Losses on the home loans may occur due to a wide variety of
causes, including a decline in real estate values, and
adverse changes in the borrower's financial condition. A
decline in real estate values or economic conditions
nationally or in the regions where the mortgaged properties
are located may increase the risk of losses on the home
loans. Losses may be increased if the values of the related
mortgaged properties have declined since the origination of
the related home loans and the borrowers' equity in the
mortgaged properties has decreased.
The return on your notes may be particularly sensitive to changes in real estate
markets in specific areas.
One risk of investing in asset-backed notes is created by
any concentration of the related mortgaged properties in one
or more geographic regions. Approximately ____% of the
cut-off date principal balance of the home loans are located
in California. If regional economy or housing market weakens
in California, or other region having a significant
concentration of the properties underlying the home loans,
the home loans related to properties in that region may
experience high rates of loss and delinquency, resulting in
losses to certificateholders. A region's economic condition
and housing market may be adversely affected by a variety of
events, including natural disasters such as earthquakes,
hurricanes, floods and eruptions, and civil disturbances
such as riots. The economic impact of these events may also
be felt in areas beyond the region immediately affected by
the disaster or disturbance. The properties underlying the
home loans may be concentrated in these regions.
Concentration may result in greater losses to
certificateholders than those generally present for similar
asset-backed notes without a concentration.
The reloading of debt could affect your risk.
With respect to home loans 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 borrowers to service their debts, which in turn
could result in higher rates of delinquency and loss on the
home loans.
Loss Mitigation
Practices
The release of a lien may increase your risk.
The master servicer may use a wide variety of practices to
limit losses on the home loans. Under some circumstances the
servicing agreement permits the master servicer to release
the lien on a limited number of mortgaged properties
securing the home loans, if the home
S-10
<PAGE>
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" in this prospectus supplement.
Limited Obligations
Payments on the home loans, together with the guaranty insurance policy, are the
sole source of payments on your notes.
Credit enhancement will be provided for the notes in the
form of excess interest collections, if available, the
initial overcollateralization and any additional
overcollateralization and by the guaranty insurance policy.
None of the depositor, the master servicer or any of their
affiliates will have any obligation to replace or supplement
the credit enhancement, or to take any other action to
maintain any rating of the notes. If any losses are incurred
on the home loans are not covered by notes. the credit
enhancement described above, the holders of the notes will
bear all risk of any losses resulting from default by
mortgagors.
Liquidity Risks
You may have to hold your notes to maturity if their marketability is limited.
A secondary market for your notes may not develop. Even if a
secondary market does develop, it may not continue, or it
may be illiquid. Illiquidity means you may not be able to
find a buyer to buy your securities readily or at prices
that will enable you to realize a desired yield. Illiquidity
can have an adverse effect on the market value of the notes.
Special Yield and Prepayment Considerations
The yield to maturity on your notes will vary depending on the rate of
prepayments.
The yield to maturity of the notes will depend on a variety
of factors, including:
o the rate and timing of principal payments on the home
loans, including prepayments, defaults and
liquidations, and repurchases due to breaches of
representations or warranties;
o the note rate; and
o the purchase price.
The rate of prepayments is one of the most important and
most
S-11
<PAGE>
predictable of these factors.
In general, if a note is purchased at a price higher than
its outstanding principal balance and principal payments
occur faster than assumed at the time of purchase, the
yield will be lower than anticipated. Conversely, if a note
is purchased at a price lower than its outstanding
principal balance and principal payments occur more slowly
than assumed at the time of purchase, the yield will be
lower than anticipated.
The rate of prepayments on the home loans will vary depending on future market
conditions, and other factors.
Since mortgagors can generally prepay their home loans at
any time, the rate and timing of principal payments on the
notes are highly uncertain. Generally, when market interest
rates increase, mortgagors are less likely to prepay their
home loans. This could result in a slower return of
principal to holders of the notes, at a time when they might
have been able to reinvest those funds at a higher rate of
interest than the note rate. On the other hand, when market
interest rates decrease, borrowers are generally more likely
to prepay their home loans. This could result in a faster
return of principal to holders of the notes, at a time when
they might not be able to reinvest those funds at an
interest rate as high as the note rate.
Refinancing programs, which may involve soliciting all or
some of the mortgagors to refinance their home loans, may
increase the rate of prepayments on the home loans.
______% of the home loans provide for payment of a
prepayment charge. Prepayment charges may reduce the rate
of prepayment on the home loans until the end of the
related prepayment period. See "Description of the Home
Loan Pool--Home Loan Pool Characteristics" in this
prospectus supplement and "Maturity and Prepayment
Considerations" in the prospectus.
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<PAGE>
INTRODUCTION
The Trust will be formed under a Trust Agreement (as amended by the
Amended and Restated Trust Agreement (the "Trust Agreement") to be dated as of
the Closing Date, between the Depositor and the Owner Trustee. The Issuer will
issue $___________ aggregate principal amount of Home Loan-Backed Notes, Series
_________ (the "Notes"). The Notes will be issued under an Indenture (the
"Indenture"), to be dated as of the Closing Date between the Issuer and the
Indenture Trustee. Under the Trust Agreement, the Issuer will issue ____
class[es] of Home Loan-Backed Certificates, _____________ (the "Certificates").
The Notes and the Certificates are collectively referred to in this Prospectus
Supplement as the "Securities." Only the Notes are offered by this Prospectus
Supplement. On the Closing Date, the Depositor will transfer to the Issuer a
pool (the "Home Loan Pool") of home loans (the "Home Loans") secured by one- to
four-family residential properties.
You can find a listing of the pages where capitalized terms used both in
the prospectus and this prospectus supplement are defined under the caption
"Index" beginning on page __ in the prospectus.
DESCRIPTION OF THE HOME LOAN POOL
General
The Home Loan Pool will consist of Home Loans with an aggregate unpaid
principal balance of $___________ as of the close of business on the business
day prior to the Cut-off Date. ___% 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 __%, __%, __%, __% and __% 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 a limited amount of cash to the
borrower 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 in this Prospectus Supplement to the date
of origination shall be deemed to be the date of the most recent modification.
All percentages of the Home Loans described in this Prospectus Supplement are
approximate percentages determined by Cut-off Date Balance, unless otherwise
indicated.
All of the Home Loans were acquired by Residential Funding (in that
capacity, the "Seller") under its 125 Loan Program from Unaffiliated Sellers as
described in this Prospectus Supplement and in the Prospectus, except in the
case of __% of the Home Loans which were purchased by the Seller through its
affiliate HomeComings Financial Network, Inc. No Unaffiliated Seller sold more
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than __% of the Home Loans to Residential Funding. __% and __% of the Home Loans
will be subserviced by GMAC Mortgage Corporation ("GMACMC"), an affiliate of the
Depositor and the Master Servicer, and Master Financial, Inc. ("Master
Financial"), a California corporation, respectively. See "--The Initial
Subservicers" below.
All of the Home Loans were generally underwritten as described below under
"--Underwriting Standards".
The Seller will make some representations and warranties regarding the
Home Loans sold by it as of the date of issuance of the 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 that
Home Loan occurs if the breach materially adversely affects the interests of the
Securityholders or the Credit Enhancer in the Home Loan. See "Description of the
Home Loan Purchase Agreement" in this Prospectus Supplement 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.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Home Loans as of that date owned by
the Trust. The "Principal Balance" of a Home Loan, other than a Liquidation Home
Loan, on any day is equal to the Cut-off Date Balance of the Home Loan, minus
all collections credited against the Principal Balance of the Home Loan in
accordance with the related Mortgage Note prior to that day. The Principal
Balance of a Liquidation Home Loan after final recovery of substantially all of
the related Liquidation Proceeds which the Master Servicer reasonably expects to
receive shall be zero.
Payments on the Simple Interest Home Loans
__% 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 the 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 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 the payment allocated to
interest if that payment is made on its scheduled due date.
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<PAGE>
On the other hand, 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.
__% 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
The Home Loans will bear interest at the rate stated in the related
Mortgage Note (the "Loan Rate") which will be at least __% per annum but no more
than __% per annum, with a weighted average Loan Rate of approximately __% per
annum as of the Cut-off Date. None of the Home Loans were originated prior to
_______ or will have a maturity date later than __________. No Home Loan will
have a remaining term from __________ to the stated maturity of the Home Loan (a
"Remaining Term") of less than __ months. The weighted average Remaining Term of
the Home Loans as of the Cut-off Date will be approximately __ months. The
weighted average original term to stated maturity of the Home Loans as of the
Cut-off Date will be approximately __ months. __% of the Home Loans will have
original terms to maturity of approximately five years, with a weighted average
Remaining Term of approximately __ months. __% of the Home Loans will have
original terms to maturity of approximately ten years, with a weighted average
Remaining Term of approximately __ months. __% of the Home Loans will have
original terms of maturity of approximately fifteen years, with a weighted
average Remaining Term of approximately __ months. __% of the Home Loans will
have original terms of maturity of approximately twenty years, with a weighted
average Remaining Term of approximately __ months. __% of the Home Loans will
have original terms to maturity of approximately twenty-five years, with a
weighted average Remaining Term of approximately __ 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"). __% 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) (A) the
original principal balance of the Home Loan, and (B) any outstanding principal
balance, at origination of the 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 by the Guide, 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 the
Home Loan, which may have been obtained at an earlier time; provided that if the
Home Loan was originated simultaneously with or not more than 12 months after
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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 the Mortgaged Property. However, with respect to not more than
__% 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" in this Prospectus Supplement.
In connection with each Home Loan that is secured by a leasehold interest,
the Seller will have represented that, among other things:
o the use of leasehold estates for residential properties is an accepted
practice in the area where the related Mortgaged Property is located;
o residential property in the area consisting of leasehold estates is
readily marketable;
o the lease is recorded and no party is in any way in breach of any
provision of the lease;
o 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
o the remaining term of the lease does not terminate less than five
years after the maturity date of the Home Loan.
Approximately _____% of the Home Loans provide for payment of a prepayment
charge, if the loans prepay within a specified time period. 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 in the following sentence. __%, __%, __% and __% of the Home Loans,
by Cut-off Date Balance of the 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 the 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 these amounts will not be
available for payment on the Notes.
As of the Cut-off Date, no Home Loan will be 30 days or more delinquent in
payment of principal and interest. As used in this Prospectus Supplement, a Home
Loan is considered to be "30 to 59 days" or "30 or more days" delinquent when a
payment due on any due date remains unpaid as of the close of business on the
next following monthly due date. However, since the determination as to whether
a Home Loan falls into this category is made as of the close of business on the
last business day of each month, a Home Loan with a payment due on July 1 that
remained unpaid as of the close of business on July 31 would still be considered
current as of July 31. If that
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payment remained unpaid as of the close of business on August 31, the Home Loan
would then be considered to be 30 to 59 days delinquent. Delinquency information
presented in this Prospectus Supplement as of the Cut-off Date is determined and
prepared as of the close of business on the last business day immediately prior
to the Cut-off Date.
As of the Cut-off Date, __% 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 of the High Cost Loan. Remedies available to the borrower
include monetary penalties, as well as recission rights if appropriate
disclosures were not given as required. See "Risk Factors--Risks Associated with
the Home Loans" in this Prospectus Supplement and "Certain Legal Aspects of the
Trust Assets and Related Matters--Anti-Deficiency Legislation and Other
Limitations on Lenders" in the Prospectus.
As to __% of the Home Loans, during a temporary period the Monthly
Payments received on the Home Loans were applied in a manner that reduced the
rate of principal amortization. As a result, the Home Loan may have an unpaid
principal amount on its scheduled maturity date, assuming no prepayments, of
greater than 1 time and not more than 6 times the related Monthly Payment. It is
not clear whether the related Mortgagor will be legally obligated to pay the
unpaid principal amount.
All of the Home Loans were originated under 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.
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Below is a description of some additional characteristics of the Home
Loans as of the Cut-off Date unless otherwise indicated. All percentages of the
Home Loans are approximate percentages unless 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
Percentage of
Number of Home Loan Pool
Range of Home Cut-off Date by Cut-off Date
Loan Rates(%) Loans Balance Balance
$ %
Totals..................
As of the Cut-off Date, the weighted average Loan Rate of the Home Loans
will be approximately __% per annum.
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Original Home Loan Principal Balances
Percentage of
Number of Home Loan Pool
Range of Original Home Cut-off Date by Cut-off
Principal Balances Loans Balance Balance
- ------------------------ ------- --------- -------
$ %
Total...................
As of the Cut-off Date, the average Cut-off Date Balance of the Home Loans
will be approximately $_________.
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Original Combined Loan-To-Value Ratios
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
- ------------------------- ------- --------- -----------------
$ %
Total...................
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 __%.
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Junior Ratios (1)
Percentage of
Home Loan Pool
Range of Junior Number of Cut-off Date by Cut-off
Mortgage Ratios(%) Home Loans Balance Date Balance
Total...................
- -----------
(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 the Home Loan and (ii) the unpaid principal
balance of any senior lien balance at the time of the Home Loan.
The weighted average Junior Ratio by original loan balance will be
approximately __%.
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Remaining Term to Scheduled Maturity
Percentage of
Number of Home Loan Pool
Range of Months Remaining Home Cut-off Date by Cut-off
to Scheduled Maturity Loans Balance Date Balance
- ------------------------- ------------- -------------- ------------------
Total....................
The weighted average remaining term to maturity as of the Cut-off Date
will be approximately __ months.
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Year of Origination
Percentage of
Home Loan Pool
Number of Cut-off Date by Cut-off
Year of Origination Home Loans Balance Date Balance
- ------------------------- -------------- -------------- ------------------
Total....................
Geographic Distribution of Mortgaged Properties
Percentage of
Home Loan Pool
Number of Cut-off Date by Cut-off
State Home Loans Balance Date Balance
- ------------------------- ------------- --------------- -------------
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Total....................
(1) "Other" includes states and the District of Columbia that contain Mortgaged
Properties for less than __% of the Home Loan Pool.
Mortgaged Property Types
Percentage of
Home Loan Pool
Number of Cut-off Date by Cut-off
Property Type Home Loans Balance Date Balance
Single Family Residence........ ----------- -------------- -------------
PUD Detached...................
Condominium....................
PUD Attached...................
Townhouse/Rowhouse Attached....
Multifamily (2-4 Units)........
Townhouse/Rowhouse Detached....
Manufactured Home..............
Total...................
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Loan Purpose
Percentage of
Home Loan Pool
Number of Cut-off Date by Cut-off
Purpose Home Loans Balance Date Balance
Debt Consolidation............. ------------ ------------ -------------
Cash...........................
Home Improvement/Debt
Other..........................
Rate/Term Refinance............
Home Improvement...............
Convenience....................
Education......................
Purchase Money.................
Medical........................
Total......................
Lien Priority
Percentage of
Home Loan Pool
Number of Cut-off Date by Cut-off
Lien Property Home Loans Balance Date Balance
First Lien..................... ------------ ---------- -------------
Second Lien....................
Total...................
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Debt-to-Income Ratios as of Date of Origination of the Home Loan
Percentage of
Range of Debt-to-Income Home Loan Pool
Ratios as of Date of Number of Cut-off Date by Cut-off
Origination of the Home Loan (%) Home Loans Balance Date Balance
- ------------------------------- ----------- ------------ -------------
Total....................
As of the Cut-off Date, the weighted average debt-to-income ratio as of
the date of origination of the Home Loans will be approximately __%.
Credit Scores
"Credit Scores" are obtained by many lenders in connection with home 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 ___ to approximately ___, 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
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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.
Credit Scores as of the Date of Origination of the Home Loans
Percentage of
Range of Credit Scores Home Loan Pool
as of the Date of Number of Cut-off Date by Cut-off
Origination of the Home Loans Home Loans Balance Date Balance
- ----------------------------- ----------- ------------- --------------
Totals.......
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
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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. The 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 complete 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 by 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 the Home
Loans. In addition, the 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.
The Initial Subservicers
Primary servicing for __% of the Home Loans will be provided by GMACMC
under 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 __% of the Home Loans will be provided by __________
under a Subservicing Agreement with the __________. __________ is a __________
corporation that is
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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.
__________ has its principal offices at __________.
Although _________ is not an affiliate of Residential Funding, _________
has a lending arrangement with Residential Funding, and in connection therewith,
Residential Funding has the right to acquire an equity interest in
_________________ 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 the mortgage
loans.
Residential Funding
Residential Funding will be responsible for master servicing the Home
Loans. Responsibilities of Residential Funding will include the receipt of funds
from Subservicers, the reconciliation of servicing activity, 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 relating to 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 Home 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 the mortgage
loans.
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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, except as otherwise noted. Prior to the
issuance of the Notes, Home Loans may be removed from the Home Loan Pool as a
result of incomplete documentation or otherwise, if the Depositor deems that
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 Notes. The Depositor
believes that the information in this Prospectus Supplement will be
substantially representative of the characteristics of the Home Loan Pool as it
will be constituted at the time the Notes are issued although the range of Loan
Rates and maturities and some 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 Notes
and will be filed, together with the Servicing Agreement, the Indenture, the
Trust Agreement and the Home Loan Purchase Agreement, with the Commission within
fifteen days after the initial issuance of the Notes. In the event Home Loans
are removed from or added to the Home Loan Pool as described in the preceding
paragraph, that removal or addition will be noted in the Current Report on Form
8-K.
THE ISSUER
The Home Loan Trust _______ is a business trust formed under the laws of
the State of Delaware under the Trust Agreement for the purposes described in
this Prospectus Supplement. The Trust Agreement constitutes the "governing
instrument" under the laws of the State of Delaware relating to business trusts.
After its formation, the Issuer will not engage in any activity other than (i)
acquiring and holding the Home Loans and the other assets of the Issuer and
related proceeds, (ii) issuing the Notes and the Certificates, (iii) making
payments on the Notes and the Certificates and (iv) engaging in other activities
that are necessary, suitable or convenient to accomplish the foregoing.
The Issuer's principal offices are in _________, in care of ____________,
as Owner Trustee, at ____________________.
THE OWNER TRUSTEE
____________ is the Owner Trustee under the Trust Agreement. The Owner
Trustee is a _________ banking corporation and its principal offices are located
at _________________.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Securityholders
for any action taken or for refraining from the taking of any action in good
faith under the Trust Agreement or for errors in judgment; provided,
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however, that none of the Owner Trustee and any director, officer or employee of
the Owner Trustee will be protected against any liability which would otherwise
be imposed by reason of willful malfeasance, bad faith or negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties under the Trust Agreement. All persons into which the Owner Trustee may
be merged or with which it may be consolidated or any person resulting from the
merger or consolidation shall be the successor of the Owner Trustee under the
Trust Agreement.
THE INDENTURE TRUSTEE
_________________, is the Indenture Trustee under the Indenture. The
principal offices of the Indenture Trustee are located in _______________.
THE CREDIT ENHANCER
The following information has been supplied by _____________ (the "Credit
Enhancer") for inclusion in this Prospectus Supplement. No representation is
made by the Depositor, the Master Servicer, the Underwriter or any of their
affiliates as to the accuracy or completeness of the information.
[The Credit Enhancer is a __________-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
_________ and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and Guam. The Credit Enhancer primarily insures
newly issued municipal and structured finance obligations. The Credit Enhancer
is a wholly owned subsidiary of __________ (formerly, _________.) a 100%
publicly-held company. _______________________________ have each assigned a
triple-A claims-paying ability rating to the Credit Enhancer.
The consolidated financial statements of the Credit Enhancer and its
subsidiaries as of ______________ and ______________, and for the three years
ended ______________, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of ______________ (which
was filed with the Commission on ______________; Commission File Number
______________) and the consolidated financial statements of the Credit Enhancer
and its subsidiaries as of ______________ and for the periods ending
______________ and ______________ included in the Quarterly Report on Form 10-Q
of ______________ for the period ended ______________ (which was filed with the
Commission on ______________), are hereby incorporated by reference into this
Prospectus Supplement and shall be deemed to be a part hereof. Any statement
contained in a document incorporated in this Prospectus Supplement by reference
shall be modified or superseded for the purposes of this Prospectus Supplement
to the extent that a statement contained in this Prospectus Supplement by
reference in this Prospectus Supplement also modifies or supersedes the
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus
Supplement.
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All financial statements of the Credit Enhancer and its subsidiaries
included in documents filed by ______________ with the Commission under Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Notes shall be deemed to be incorporated by
reference into this Prospectus Supplement and to be a part hereof from the
respective dates of filing the documents.
The following table sets forth the Credit Enhancer's capitalization as of
______________, ______________, ______________ and ______________, respectively,
in conformity with generally accepted accounting principles.
Consolidated Capitalization Table
(Dollars in Millions)
[Date] [Date] [Date] [Date]
(Unaudited)
Unearned premiums.................
Other liabilities.................
Total liabilities.............
Stockholder's equity:
Common Stock..................
Additional paid-in capital....
Accumulated other comprehensive income
Retained earnings.............
Total stockholder's equity....
Total liabilities and stockholder's equity
For additional financial information concerning the Credit Enhancer, see
the audited and unaudited financial statements of the Credit Enhancer
incorporated by reference in this Prospectus Supplement. Copies of the financial
statements of the Credit Enhancer incorporated in this Prospectus Supplement by
reference and copies of the Credit Enhancer's annual statement for the year
ended ___________ prepared in accordance with statutory accounting standards are
available, without charge, from the Credit Enhancer. The address of the Credit
Enhancer's administrative offices and its telephone number are ____________.
The Credit Enhancer makes no representation regarding the Notes or the
advisability of investing in the Notes and makes no representation regarding,
nor has it participated in the preparation of, this Prospectus Supplement other
than the information supplied by the Credit Enhancer and presented under the
headings "The Credit Enhancer" and "Description of the Policy" and in the
financial statements incorporated in this Prospectus Supplement by reference.]
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THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
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DESCRIPTION OF THE SECURITIES
General
The Notes will be issued under to the Indenture. The Certificates will be
issued under the Trust Agreement. The following summaries describe provisions of
the Securities, the Indenture and the Trust Agreement. The summaries do not
purport to be complete and are subject to, and qualified in their entirety by
reference to, the provisions of the applicable agreement.
The Notes will be secured by the assets of the Trust pledged by the Issuer
to the Indenture Trustee under the Indenture which will consist of:
o the Home Loans;
o all amounts on deposit in the Payment Account;
o the Policy; and
o proceeds of the foregoing.
Book-Entry Notes
The Notes will initially be issued as Book-Entry Notes. Persons acquiring
beneficial ownership interests in the Notes ("Note Owners") may elect to hold
their Notes through DTC in the United States, or Cedel or Euroclear, in Europe
if they are Participants of their systems, or indirectly through organizations
which are Participants in their systems. The Book-Entry Notes will be issued in
one or more securities which equal the aggregate principal balance of the Notes
and will initially be registered in the name of Cede & Co., the nominee of DTC.
Cedel and Euroclear will hold omnibus positions on behalf of their Participants
through customers' securities accounts in Cedel's and Euroclear's names on the
books of their respective depositaries (individually the "Relevant Depositary"
and collectively the "European Depositaries") which in turn will hold the
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Investors may hold the beneficial interests in the Book-Entry
Notes in minimum denominations of $25,000 and in integral multiples of $1 in
excess of $25,000.. Except as described below, no Beneficial Owner will be
entitled to receive a physical certificate representing the security (a
"Definitive Note"). Unless and until Definitive Notes are issued, it is
anticipated that the only "Holder" of the Notes will be Cede & Co., as nominee
of DTC. Note Owners will not be Holders as that term is used in the Indenture.
The Beneficial Owner's ownership of a Book-Entry Note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the Beneficial
Owner's account for that purpose. In turn, the Financial
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Intermediary's ownership of the Book-Entry Notes will be recorded on the records
of DTC, or of a Participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of Cedel or Euroclear, as appropriate.
Note Owners will receive all payments of principal 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 Notes and is required to receive and
transmit payments of principal and interest on the Notes.
Participants and Indirect Participants with whom Note Owners have accounts
with respect to Notes are similarly required to make book-entry transfers and
receive and transmit the payments on behalf of their respective Note Owners.
Accordingly, although Note Owners will not possess physical certificates, the
Rules provide a mechanism by which Note Owners will receive payments and will be
able to transfer their interest.
Note Owners 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,
Note Owners who are not Participants may transfer ownership of Notes only
through Participants and Indirect Participants by instructing the Participants
and Indirect Participants to transfer the Notes, by book-entry transfer, through
DTC for the account of the purchasers of the 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 Note Owners.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes may
experience some delay in their receipt of payments, since the payments will be
forwarded by the Indenture Trustee to Cede & Co. 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. The
payments will be subject to tax reporting in accordance with relevant United
States tax laws and regulations. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry Notes to
persons or entities that do not participate in the Depositary system, or
otherwise take actions relating to the Book-Entry Notes, may be limited due to
the lack of physical certificates for the Book-Entry Notes. In addition,
issuance of the Book-Entry Notes in book-entry form may reduce the liquidity of
the Notes in the secondary market since some potential investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
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DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by the holders
of the Book-Entry Notes under the Indenture only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Notes are
credited, to the extent that the actions are taken on behalf of Financial
Intermediaries whose holdings include the Book-Entry Notes. Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by Noteholders under the Indenture on behalf of a Cedel Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to the ability of the Relevant Depositary to effect the 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 Beneficial Owners of the Book-Entry
Notes, or their nominees, rather than to DTC, if (a) the Indenture Trustee
determines that the DTC is no longer willing, qualified or able to discharge
properly its responsibilities as nominee and depository with respect to the
Book-Entry Notes and the Indenture Trustee is unable to locate a qualified
successor, (b) the Indenture Trustee elects to terminate a book-entry system
through DTC or (c) after the occurrence of an Event of Default, under the
Indenture, Beneficial Owners having Percentage Interests aggregating at least a
majority of the Note Balance of the Notes advise the DTC through the Financial
Intermediaries and the DTC Participants in writing that the continuation of a
book-entry system through DTC, or a successor thereto, is no longer in the best
interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all
Beneficial Owners of the occurrence of this event and the availability through
DTC of Definitive Notes. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Notes and instructions for
re-registration, the Indenture Trustee will issue and authenticate Definitive
Notes, and thereafter the Indenture Trustee will recognize the holders of the
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 the
procedures and the procedures may be discontinued at any time. See Annex I
hereto.
DTC has advised the Depositor that management of DTC is aware that some
computer applications, systems and the like for processing data ("Systems") that
are dependent upon calendar dates, including dates before, on and after January
1, 2000, may encounter "Year 2000" problems. DTC has informed its Participants
and other members of the financial community (the "Industry") that it has
developed and is implementing a program so that its Systems, as they relate to
the timely payment of distributions, including principal and income payments, to
securityholders, book-entry deliveries and settlement of trades with DTC ("DTC
Services") continue to function appropriately. This program includes a technical
assessment and a remediation plan, each of which is complete. Additionally,
DTC's plan includes a testing phase, which, DTC has advised the Industry, is
expected to be completed within appropriate time frames.
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However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as DTC's Participants and third party vendors from whom DTC licenses
software and hardware, and third party vendors on whom DTC relies for
information or the provision of services, including telecommunication and
electrical utility service providers, among others. DTC has informed the
Industry that it is contacting and will continue to contact third party vendors
from whom DTC acquires services to (i) impress upon them the importance of those
services being Year 2000 compliant; and (ii) determine the extent of their
efforts for Year 2000 remediation and, as appropriate, testing of their
services. In addition, DTC is in the process of developing any contingency plans
as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty or contract modification of any kind.
None of the Depositor, 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 the beneficial ownership interests.
For additional information regarding DTC, Cedel, Euroclear and the Notes,
see "Description of the Notes--Form of Notes" in the Prospectus.
Payments
Payments on the Notes will be made by the Indenture Trustee or the Paying
Agent on the 25th day of each month or, if not a Business Day, then the next
succeeding Business Day, commencing in _______________ (each, a "Payment Date").
Payments on the Notes will be made to the persons in whose names the Notes are
registered at the close of business on the day prior to each Payment Date or, if
the Notes are no longer Book-Entry Notes, on the Record Date. See "Description
of the Notes--Payments" in the Prospectus. Payments will be made by check or
money order mailed, or upon the request of a Holder owning Notes having
denominations aggregating at least $1,000,000, by wire transfer or otherwise, to
the address of the person which, in the case of Book-Entry Notes, will be DTC or
its nominee as it appears on the Security Register in amounts calculated as
described in this Prospectus Supplement on the Determination Date. However, the
final payment relating to the Notes will be made only upon presentation and
surrender of the Notes at the office or the agency of the Indenture Trustee
specified in the notice to Holders of the 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.
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Interest Payments on the Notes
Interest payments will be made on the Notes on each Payment Date at the
Note Rate. The "Note Rate" for the Notes will be _____% per annum.
Interest on the Notes relating to any Payment Date will accrue for the
related Accrual Period on the Note Balance. The Accrual Period with respect to
any Payment Date will be 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 will be based on a 30-day month and a 360-day year.
Interest payments on the Notes will be funded from payments on the Home Loans
and, if necessary, from draws on the Policy.
Principal Payments on the Notes
On each Payment Date, other than the Payment Date in _____________,
principal payments will be due and payable on the Notes in an amount equal to
the aggregate of the Principal Collection Distribution Amount, together with any
Reserve Increase Amounts and Liquidation Loss Distribution Amounts for the
Payment Date, as and to the extent described below. On the Payment Date in
___________, principal will be due and payable on the Notes in amounts equal to
the Note Balance, if any. In no event will principal payments on the Notes on
any Payment Date exceed the Note Balance on that date.
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Allocation of Payments on the Home Loans
The Master Servicer on behalf of the Trust will establish an account (the
"Payment Account") into which the Master Servicer will deposit P&I Collections
for each Payment Date on the Business Day prior thereto. The Payment Account
will be an Eligible Account and amounts on deposit in the Payment Account will
be invested in Permitted Investments.
On each Payment Date, P&I Collections will be allocated from the Payment
Account in the following order of priority:
(i) to pay accrued interest due on the Note Balance of the Notes;
(ii) to pay principal in an amount equal to the Principal Collection
Distribution Amount for that Payment Date on the Notes;
(iii) to pay as principal on the Notes, an amount equal to (A) 100% of the
Liquidation Loss Amounts, other than any Excess Loss Amounts, on the Payment
Date, plus (B) any Liquidation Loss Amounts, other than any Excess Loss Amounts,
remaining undistributed from any preceding Payment Date, together with its
interest from the date initially distributable to the date paid; provided, that
any Liquidation Loss Amount shall not be required to be paid to the extent that
a Liquidation Loss Amount was paid on the Notes by means of a draw on the Policy
or was reflected in the reduction of the Outstanding Reserve Amount. The
aggregate amount so distributed under this clause (iii) on any Payment Date, a
"Liquidation Loss Distribution Amount", with any amounts paid to the Notes
allocated as described below;
(iv) to pay the Credit Enhancer the premium for the Policy and any
previously unpaid premiums for the Policy, with its interest;
(v) to reimburse the Credit Enhancer for prior draws made on the Policy,
other than those attributable to Excess Loss Amounts, with its interest;
(vi) to pay principal on the Notes, an additional amount to the extent
necessary to bring the Outstanding Reserve Amount up to the Reserve Amount
Target. The aggregate amount so distributed on any Payment Date, the "Reserve
Increase Amount";
(vii) to pay the Credit Enhancer any other amounts owed under the
Insurance Agreement; and
(viii) any remaining amounts to the holders of the Certificates.
For any Payment Date, the "Principal Collection Distribution Amount" will
equal Principal Collections for that Payment Date; provided however, on any
Payment Date with respect to which the Outstanding Reserve Amount that would
result without regard to this proviso exceeds
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the Reserve Amount Target, the Principal Collection Distribution Amount will be
reduced by the amount of the excess until the Outstanding Reserve Amount equals
the Reserve Amount Target.
"Liquidation Loss Amount" means with respect to any Liquidated Home Loan,
the unrecovered Principal Balance of the Liquidated Home Loan and any of its
unpaid accrued interest at the end of the related Collection Period in which the
Home Loan became a Liquidated Home Loan, after giving effect to the Net
Liquidation Proceeds allocable to the Principal Balance.
A "Liquidated Home Loan" means, as to any Payment Date, any Home Loan
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
having been finally liquidated.
As to any Payment Date prior to the Stepdown Date, the "Reserve Amount
Target" will be _____% of the Cut-off Date Balance. The "Stepdown Date" shall be
the later of (i) the Payment Date in ________________ and (ii) the Payment Date
on which the Pool Balance before applying payments received in the related
Collection Period is less than 50% of the Cut-off Date Balance. On or after the
Stepdown Date, the Reserve Amount Target will be equal to the lesser of (a) the
Reserve Amount Target as of the Cut-off Date and (b) _____% of the Pool Balance
before applying payments received in the related Collection Period, but not
lower than $__________, which is _____% of the Cut-off Date Balance; provided
however that any scheduled reduction to the Reserve Amount Target described
above shall not be made as of any Payment Date unless (i) (a) the aggregate
cumulative Liquidation Loss Amounts on the Home Loans prior to any Payment Date
occurring during the first year, the second year or the third year, or any year
thereafter, after the Stepdown Date are less than ____%, ____% and ____%
respectively, of the Cut-off Date Pool Balance or (b) the average Liquidation
Loss Amount on the Home Loans for the current and five previous Payment Dates is
less than half of the amount remaining in the Payment Account on the Payment
Date following distributions under clauses (i) through (v) of the fourth
preceding paragraph above, other than clause (iii), and (ii) there has been no
draw on the Policy on the Payment Date that remains unreimbursed. In addition,
the Reserve Amount Target may be reduced with the prior written consent of the
Credit Enhancer and the Rating Agencies.
To the extent the Reserve Amount Target decreases on any Payment Date, the
amount of the Principal Collection Distribution Amount will be reduced on that
Payment Date and on each subsequent Payment Date to the extent the remaining
Outstanding Reserve Amount is in excess of the reduced Reserve Amount Target
until the Outstanding Reserve Amount equals the Reserve Amount Target.
The "Note Balance" of any Note on any day is the respective initial
balance as of the Closing Date reduced by all payments of principal on the Note
prior to and as of that day.
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A "Credit Enhancer Default" shall have occurred if the Credit Enhancer
fails to make a payment required under the Policy in accordance with its terms.
Outstanding Reserve Amount
The Outstanding Reserve Amount will initially be approximately _____% of
the Cut-off Date Balance. The Outstanding Reserve Amount will be increased by
distributions of the Reserve Increase Amount, if any, to the Notes. On each
Payment Date, the Outstanding Reserve Amount, as in effect immediately prior to
the Payment Date, if any, shall be deemed to be reduced by an amount equal to
any Liquidation Loss Amounts, other than any Excess Loss Amounts, for the
Payment Date, except to the extent that Liquidation Loss Amounts were covered on
the Payment Date by a Liquidation Loss Distribution Amount, which amount would
be so distributed, if available, from any excess interest collections for that
Payment Date. Any Liquidation Loss Amounts not so covered will be covered by
draws on the Policy to the extent provided in this Prospectus Supplement.
However, any Excess Loss Amounts are required to be covered by a draw on the
Policy in all cases, without regard to the availability of the Outstanding
Reserve Amount, and the Outstanding Reserve Amount will not be reduced by any
Excess Loss Amount under any circumstances. The "Outstanding Reserve Amount"
available on any Payment Date is the amount, if any, by which (i) the Pool
Balance after applying payments received in the related Collection Period
exceeds (ii) the aggregate Note Balance of the Notes on the Payment Date, after
application of Principal Collections for that date.
To the extent that the Outstanding Reserve Amount is insufficient or not
available to absorb Liquidation Loss Amounts that are not covered by the
Liquidation Loss Distribution Amount, and if payments are not made under the
Policy as required, a Noteholder may incur a loss.
Excess Loss Amount
On any Payment Date, the "Excess Loss Amount" will be equal to the sum of
(i) any Liquidation Loss Amounts, other than as described in clauses (ii)-(iv)
below, for the related Collection Period which, when added to the aggregate of
the Liquidation Loss Amounts for all preceding Collection Periods exceed
$_________, (ii) any Special Hazard Losses in excess of the Special Hazard
Amount, (iii) any Fraud Losses in excess of the Fraud Loss Amount, and (iv) some
losses occasioned by war, civil insurrection, some governmental actions, nuclear
reaction and some other risks as described in the Indenture. Excess Loss Amounts
will not be covered by any Liquidation Loss Distribution Amount or by a
reduction in the Outstanding Reserve Amount. Any Excess Loss Amounts however,
will be covered by the Policy, and in the event payments are not made as
required under the Policy, the losses will be allocated to the Notes.
The "Special Hazard Amount" shall initially be equal to $________. As of
any date of determination following the Cut-off Date, the Special Hazard Amount
shall equal the initial Special Hazard Amount less the sum of (A) the aggregate
of any Liquidation Loss Amounts on the Home
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Loans due to Special Hazard Losses and (B) the Adjustment Amount. The Adjustment
Amount will be equal to an amount calculated under the terms of the Indenture.
The "Fraud Loss Amount" shall initially be equal to $_________. 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 5% of
the aggregate of the Principal Balances of the Home Loans as of the Cut-off Date
minus the aggregate of any Liquidation Loss Amounts on the Home Loans due to
Fraud Losses up to the 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)
3% of the aggregate of the Principal Balances of the Home Loans as of the most
recent anniversary of the Cut-off Date minus (2) the aggregate of any
Liquidation Loss Amounts on the Home Loans due to Fraud Losses since the most
recent anniversary of the Cut-off Date up to the 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) 2% of the aggregate of the Principal Balances of the
Home Loans as of the most recent anniversary of the Cut-off Date minus (2) the
aggregate of any Liquidation Loss Amounts on the Home Loans due to Fraud Losses
since the most recent anniversary of the Cut-off Date up to the date of
determination. On and after the fifth anniversary of the Cut-off Date, the Fraud
Loss Amount shall be zero.
The Paying Agent
The Paying Agent shall initially be the Indenture Trustee, together with
any successor thereto. The Paying Agent shall have the revocable power to
withdraw funds from the Payment Account for the purpose of making payments to
the Noteholders.
Maturity and Optional Redemption
The Notes will be payable in full on the Payment Date in __________, to
the extent of the outstanding Note Balance on that date, if any. In addition, a
principal payment may be made in partial or full redemption of the Notes after
the aggregate Principal Balance after applying payments received in the related
Collection Period is reduced to an amount less than or equal to $_____________
10% of the Cut-off Date Balance, upon the exercise by the Master Servicer of its
option to purchase all or a portion of the Home Loans and related assets. In the
event that all of the Home Loans are purchased by the Master Servicer, the
purchase price will be equal to the sum of the outstanding Pool Balance and its
accrued and unpaid interest at the weighted average of the Loan Rates through
the day preceding the Payment Date on which the purchase occurs together with
all amounts due and owing to the Credit Enhancer.
In the event that a portion of the Home Loans are purchased by the Master
Servicer, the purchase price will be equal to the sum of the aggregate Principal
Balances of the Home Loans so purchased and its accrued and unpaid interest at
the weighted average of the related Home Rates on the Home Loans through the day
preceding the Payment Date on which the purchase occurs, together
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with all amounts due and owing to the Credit Enhancer with respect to the Home
Loans so purchased. Any purchase will be subject to satisfaction of some
conditions specified in the Servicing Agreement, including: (i) the Master
Servicer shall have delivered to the Indenture Trustee a "Home Loan Schedule"
containing a list of all Home Loans remaining in the Trust after removal; (ii)
the Master Servicer shall represent and warrant that no selection procedures
reasonably believed by the Master Servicer to be adverse to the interests of the
Securityholders or the Credit Enhancer were used by the Master Servicer in
selecting the Home Loans; and (iii) each Rating Agency shall have been notified
of the proposed retransfer and shall not have notified the Master Servicer that
the retransfer would result in a reduction or withdrawal of the ratings of the
Notes without regard to the Policy.
DESCRIPTION OF THE POLICY
On the Closing Date, the Credit Enhancer will issue the Policy in favor of
the Indenture Trustee on behalf of the Issuer. The Policy will unconditionally
and irrevocably guarantee most payments on the Notes. On each Payment Date, a
draw will be made on the Policy equal to the sum of (a) the amount by which
accrued interest on the Notes at the Note Rate on that Payment Date exceeds the
amount on deposit in the Payment Account available for interest distributions on
that Payment Date, (b) any Liquidation Loss Amount, other than any Excess Loss
Amount, for that Payment Date, to the extent not currently covered by a
Liquidation Loss Distribution Amount or a reduction in the Outstanding Reserve
Amount and (c) any Excess Loss Amount for that Payment Date. For purposes of the
foregoing, amounts in the Payment Account available for interest distributions
on any Payment Date shall be deemed to include all amounts available in the
Payment Account for that Payment Date, other than the Principal Collection
Distribution Amount and the Liquidation Loss Distribution Amount, if any. Under
the terms of the Indenture, draws under the Policy relating to any Liquidation
Loss Amount will be paid to the Notes by the Paying Agent, as principal, to the
extent the Notes would have been paid that amount. In addition, a draw will be
made on the Policy to cover some shortfalls in amounts allocable to the
Noteholders following the sale, liquidation or other disposition of the assets
of the Trust in connection with the liquidation of the Trust Fund as permitted
under the Indenture following an Event of Default thereunder. In addition, the
Policy will guarantee the payment of the outstanding Note Balance of each Note
on the Payment Date in ___________. In the absence of payments under the Policy,
Noteholders will directly bear the credit risks associated with their investment
to the extent the risks are not covered by the Outstanding Reserve Amount or
otherwise.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
General
The yields to maturity and the aggregate amount of distributions on the
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 Liquidation
Loss Amounts. The rate of default of Home Loans
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secured by second liens may be greater than that of Home Loans secured by first
liens. In addition, yields may be adversely affected by a higher or lower than
anticipated rate of principal payments on the Home Loans in the Trust Fund. The
rate of principal payments on the Home Loans will in turn be affected by the
amortization schedules of the Home Loans, the rate and timing of its principal
prepayments by the Mortgagors, liquidations of defaulted Home Loans and
repurchases of Home Loans due to breaches of representations.
The timing of changes in the rate of prepayments, liquidations and
repurchases of the Home Loans may, and the timing of Liquidation Loss Amounts
will, significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Since the rate and timing of principal payments on the Home Loans
will depend on future events and on a variety of factors, as described more
fully in this Prospectus Supplement and in the Prospectus under "Yield and
Prepayment Considerations", no assurance can be given as to the rate or the
timing of principal payments on the Notes.
The Home Loans in most cases may be prepaid by the Mortgagors at any time;
however, in some circumstances, some of the Home Loans will be subject to a
prepayment charge. See "Description of the Home Loan Pool" in this Prospectus
Supplement. In addition, as described under "Description of the Home Loans--Home
Loan Pool Characteristics," some of the Home Loans may be assumable under the
terms of the Mortgage Note, and the remainder are subject to customary
due-on-sale provisions. The Master Servicer shall enforce any due-on-sale clause
contained in any Mortgage Note or Mortgage, to the extent permitted under
applicable law and governmental regulations; provided, however, if the Master
Servicer determines that it is reasonably likely that any Mortgagor will bring,
or if any Mortgagor does bring, legal action to declare invalid or otherwise
avoid enforcement of a due-on-sale clause contained in any Mortgage Note or
Mortgage, the Master Servicer shall not be required to enforce the due-on-sale
clause or to contest the action. The extent to which some 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 Notes and may result in a prepayment
experience on the Home Loans that differs from that on other conventional Home
Loans. See "Maturity and Prepayment Considerations" in the Prospectus.
Prepayments, liquidations and purchases of the Home Loans will result in
distributions to holders of the Notes of principal amounts which would otherwise
be distributed over the remaining terms of the Home Loans. Factors affecting
prepayment, including defaults and liquidations, of Home Loans include changes
in Mortgagors' housing needs, job transfers, unemployment, Mortgagors' net
equity in the mortgaged properties, changes in the value of the mortgaged
properties, mortgage market interest rates, solicitations and servicing
decisions. In addition, if prevailing mortgage rates fell significantly below
the Loan Rates on the Home Loans, the rate of prepayments, including
refinancings, would be expected to increase. Conversely, if prevailing mortgage
rates rose significantly above the Loan Rates on the Home Loans, the rate of
prepayments on the Home Loans would be expected to decrease. Prepayment of the
related first lien may also affect the rate of prepayments on the Home Loans.
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The yield to maturity of the Notes will depend, in part, on whether, to
what extent, and the timing with respect to which, any Reserve Amount Increase
is used to accelerate payments of principal on the Notes or the Reserve Amount
Target is reduced. See "Description of the Securities--Allocation of Payments on
the Home Loans" in this Prospectus Supplement.
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 Home
Loans are expected to occur with greater frequency in their early years. The
rate of default of Home Loans secured by second liens is likely to be greater
than that of Home Loans secured by first liens on comparable properties. The
rate of default on Home Loans which are refinance Home Loans, and 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 Rate on the Notes
are fixed, the rate will not change in response to changes in market interest
rates. Accordingly, if market interest rates or market yields for securities
similar to the Notes were to rise, the market value of the Notes may decline.
In addition, the yield to maturity on the Notes will depend on, among
other things, the price paid by the holders of the Notes and the Note Rate. The
extent to which the yield to maturity of a 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 Notes are purchased at a premium and principal
distributions on the 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 Notes are purchased at a
discount and principal distributions on the Notes 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 Notes, see "Yield and Prepayment
Considerations" in the Prospectus.
Weighted Average Life: Weighted average life refers to the average amount
of time that will elapse from the date of issuance of a security to the date of
distribution to the investor of each dollar distributed in reduction of
principal of the security, assuming no losses. The weighted average life of the
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
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prepayment rate ("CPR") of 2% per annum of the then outstanding principal
balance of the home loans in the first month of the life of the Home Loans and
an additional 0.9286% 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 below has been prepared on the basis of 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" in this Prospectus Supplement and the performance of the Home Loans.
The table assumes, among other things, that: (i) the Home Loan Pool consists of
ten groups of Home Loans, with the Home Loans in each group having the following
aggregate characteristics as of the Cut-off Date:
Aggregate Loan Rate Net Loan Original Term Remaining Term
Group Principal Balance Rate to Maturity to Maturity
- ------ --------------- --------- --------- ------------ -------------
(ii) the scheduled monthly payment for each Home Loan has been based on its
outstanding balance, interest rate and remaining term to maturity, so that the
Home Loan will amortize in amounts sufficient for its repayment over its
remaining term to maturity; (iii) none of the Seller, the Master Servicer or the
Depositor will repurchase any Home Loan, as described under "Home Loan
Program--Representations Relating to Home Loans" and "Description of the
Securities--Assignment of the Trust Fund Assets" in the Prospectus, and the
Master Servicer does not exercise its option to purchase the Home Loans and
thereby cause a termination of the Trust except as indicated in the table; (iv)
there are no delinquencies or Liquidation Loss Amounts on the
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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 in the table; (v)
there is no Prepayment Interest Shortfall or any other interest shortfall in any
month; (vi) the Home Loans, including the Simple Interest Home Loans, pay on the
basis on a 30-day month and a 360-day year; (vii) payments on the Notes will be
received on the 25th day of each month, commencing in ______________; (viii)
payments on the Home Loans earn no reinvestment return; (ix) there are no
additional ongoing Trust expenses payable out of the Trust; (x) the Notes will
be purchased on ______________; and (xi) the amount of interest collected on the
Home Loans during the Collection Period for the first Payment Date is
$____________ (collectively, the "Structuring Assumptions").
The actual characteristics and performance of the Home Loans will differ
from the assumptions used in constructing the table 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 to
maturity of the Home Loans could produce slower or faster principal
distributions than indicated in the table at the various constant percentages of
the Prepayment Assumption specified, even if the weighted average remaining term
to maturity of the Home Loans is as assumed. Any difference between the
assumptions and the actual characteristics and performance of the Home Loans, or
actual prepayment or loss experience, will affect the percentage of initial Note
Balance outstanding over time and the weighted average lives of the Notes.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of the Notes, and sets forth the percentage
of the initial Note Balance of the Notes that would be outstanding after each of
the Payment Dates shown at various percentages of the Prepayment Assumption.
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Percent of Initial Principal Balance Outstanding at the
Following Percentages of the Prepayment Assumption
- ------------------------------------------------------------------------------
Payment Date 0% 50% 100% 150% 200%
- ------------ -- --- ---- ---- ----
Initial Percentage.............
__________.....................
__________.....................
__________.....................
__________.....................
__________.....................
__________.....................
__________.....................
__________.....................
__________.....................
__________.....................
__________.....................
__________.....................
__________.....................
__________.....................
Weighted Average Life to Maturity
in Years**.....................
Weighted Average Life Assuming
Optional Repurchase in Years**.
- ----------------
(**) The weighted average life of a Note is determined by (i) multiplying the
net reduction, if any, of the Note Balance by the number of years from the
date of issuance of the Note to the related Payment Date, (ii) adding the
results, and (iii) dividing the sum by the aggregate of the net reductions
of the Note Balance described in (i) above.
This table has been prepared based on the Assumptions described in the third
paragraph preceding this table, including the assumptions regarding the
characteristics and performance of the Home Loans, which differ from their
actual characteristics and performance, and should be read in conjunction
therewith.
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DESCRIPTION OF THE HOME LOAN PURCHASE AGREEMENT
The Home Loans to be deposited in the Trust by the Depositor will be
purchased by the Depositor from the Seller under the Home Loan Purchase
Agreement dated as of ______________ (the "Home Loan Purchase Agreement")
between the Seller and the Depositor. The following summary describes some 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
Under 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 related documents
(collectively, the "Related Documents"). The purchase prices for the Home Loans
are specified percentages of its face amounts 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 in this Prospectus Supplement, the Seller deliver to the Indenture
Trustee, or the Custodian, the Home Loans sold by the Seller and the Related
Documents for the Home Loans. In lieu of delivery of original mortgages, the
Seller may deliver true and correct copies of the mortgages which have been
certified as to authenticity by the appropriate county recording office where
the 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 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 the Home Loans to
the Depositor, the Seller was the sole owner and holder of the 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 of the Home Loans. The benefit of the
representations and warranties made by the Seller will be assigned to the
Indenture Trust.
Within 90 days of the Closing Date, _________________ (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 Indenture Trustee, as pledgee of the
Home Loans, the Securityholders or the Credit Enhancer in the Home Loan and the
defect is not cured within 90 days following notification of the defect to the
Seller and the Trust by the Custodian,
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the Seller will be obligated under the Home Loan Purchase Agreement to deposit
the Repurchase Price into the Custodial Account. In lieu of any deposit, the
Seller may substitute an Eligible Substitute Loan; provided that the
substitution may be subject to the delivery of an opinion of counsel regarding
tax matters. Any purchase or substitution will result in the removal of the Home
Loan required to be removed from the Trust (each Home Loan, a "Deleted Loan").
The obligation of the Seller to remove Deleted Loans sold by it from the Trust
is the sole remedy regarding any defects in the Home Loans sold by the Seller
and Related Documents for the Home Loans available against the Seller.
With respect to any Home Loan, the "Repurchase Price" is equal to the
Principal Balance of the Home Loan at the time of any removal described above
plus its accrued and unpaid interest 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 related Deleted
Loan to be removed from the Trust over the Principal Balance of the 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 the 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 the Deleted Loan; (ii) have a Loan Rate no
lower than and not more than 1% in excess of the Loan Rate of the 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 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 the loan and a proportionate amount of any lien of equal priority from
the value of the 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 the loan; and (vii) satisfy some 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 in the Home Loan
Purchase Agreement and the breach is not cured by the Seller within the time
provided in the Home Loan Purchase Agreement.
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DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes terms of the Servicing Agreement, dated as
of _____________ among the Trust, the Indenture Trustee and the Master Servicer.
The summary does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the Servicing Agreement.
Whenever particular defined terms of the Servicing Agreement are referred to,
the defined terms are incorporated in this Prospectus Supplement by reference.
See "The Agreements" in the Prospectus.
The Master Servicer
Residential Funding, an indirect wholly-owned subsidiary of GMACMC and an
affiliate of the Depositor, will act as Master Servicer for the Home Loans under
the Servicing Agreement. For a general description of Residential Funding and
its activities, see "The Home Loan Pool--Residential Funding" in this Prospectus
Supplement and "Residential Funding Corporation" in the Prospectus.
Servicing and Other Compensation and Payment of Expenses
The Servicing Fee for each Home Loan is payable out of the interest
payments on the Home Loan. The weighted average Servicing Fee as of the Cut-off
Date for each Home Loan will be approximately ____% per annum of the outstanding
principal balance of the Home Loan. The Servicing Fees consist of (a) servicing
compensation payable to the Master Servicer relating to its master servicing
activities, and (b) subservicing and other related compensation payable to the
Subservicer, including the compensation paid to the Master Servicer as the
direct servicer of a Home Loan for which there is no Subservicer. The primary
compensation to be paid to the Master Servicer relating to its master servicing
activities will be _____% per annum of the outstanding principal balance of each
Home Loan. The Master Servicer is obligated to pay some 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 compensation
to the Master Servicer and the Subservicer and for information regarding
expenses payable by the Master Servicer.
P&I Collections
The Master Servicer shall establish and maintain an account (the
"Custodial Account") in which the Master Servicer shall deposit or cause to be
deposited any amounts representing payments on and any collections received
relating to the Home Loans received by it subsequent to the Cut-off Date. The
Custodial Account shall be an Eligible Account. On the 20th day of each month or
if that day is not a Business Day, the next succeeding Business Day (the
"Determination Date"), the Master Servicer will notify the Paying Agent and the
Indenture Trustee of the amount of aggregate amounts required to be withdrawn
from the Custodial Account and deposited into the Payment
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Account prior to the close of business on the Business Day next succeeding each
Determination Date.
"Permitted Investments" are specified in the Servicing Agreement and are
limited to investments which meet the criteria of the Rating Agencies from time
to time as being consistent with their then-current ratings of the Securities.
The Master Servicer will make the following withdrawals from the Custodial
Account and deposit the amounts as follows:
(i) to the Payment Account, an amount equal to the P&I Collections on the
Business Day prior to each Payment Date; and
(ii) to pay to itself or the Seller various reimbursement amounts and
other amounts as provided in the Servicing Agreement.
As to any Payment Date, "P&I Collections" will equal the sum of Interest
Collections and Principal Collections for that Payment Date.
All collections on the Home Loans will generally be allocated in
accordance with the Mortgage Notes between amounts collected relating to
interest and amounts collected relating to principal. As to any Payment Date,
"Interest Collections" will be equal to the sum of (i) the portion allocable to
interest of all scheduled monthly payments on the Home Loans received during the
related Collection Period, minus the Servicing Fees and the fees payable to the
Owner Trustee and the Indenture Trustee (collectively, the "Administrative
Fees"), (ii) the interest portion of all Net Liquidation Proceeds allocated to
interest under the terms of the Mortgage Notes, reduced by the Administrative
Fees for that Collection Period and (iii) the interest portion of the Repurchase
Price for any Deleted Loans and the cash purchase price paid in connection with
any optional purchase of the Home Loans by the Master Servicer, provided,
however, that on the first Payment Date, an amount (the "Excluded Interest
Amount") will be excluded from the Interest Collections equal to the sum of 70%
of clauses (i) and (ii) above. As to any Payment Date, "Principal Collections"
will be equal to the sum of (i) the principal portion of all scheduled monthly
payments on the Home Loans received with respect to the related Collection
Period; and (ii) some unscheduled collections, including full and partial
Mortgagor prepayments on the Home Loans, Insurance Proceeds, Liquidation
Proceeds and proceeds from repurchases of, and some amounts received in
connection with any substitutions for, the Home Loans, received or deemed
received during the related Collection Period, to the extent the amounts are
allocable to principal. With respect to unscheduled collections, the Master
Servicer may elect to treat the amounts as included in Interest Collections and
Principal Collections for the Payment Date in the month of receipt, but is not
obligated to do so. As described in this Prospectus Supplement under
"Description of the Securities--Principal Payments on the Notes," any amount
with respect to which the 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 the Notes.
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As to any Payment Date other than the first Payment Date, the "Collection
Period" is the calendar month preceding the month of that Payment Date.
"Net Liquidation Proceeds" with respect to a Home Loan are the proceeds,
excluding amounts drawn on the Policy, received in connection with the
liquidation of any Home Loan, whether through trustee's sale, foreclosure sale
or otherwise, reduced by related expenses, but not including the portion, if
any, of the amount that exceeds the Principal Balance of the Home Loan at the
end of the Collection Period immediately preceding the Collection Period in
which the Home Loan became a Liquidated Home Loan.
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 some circumstances, if the
Home Loan is current in payment. A release may be made in any case where the
borrower simultaneously delivers a mortgage on a substitute Mortgage 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 some limitations in the Servicing
Agreement. At the time of the release, some terms of the Home Loan may be
modified, including a Loan Rate increase or a maturity extension, and the terms
of the Home Loan may be further modified in the event that the borrower
subsequently delivers a mortgage on a substitute Mortgaged Property.
The Master 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 credit score criteria, 80%.
Collection and Liquidation Practices; Loss Mitigation
The Master Servicer is authorized to engage in a wide variety of loss
mitigation practices with respect to the Home 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 the action is not materially
adverse to the interests of the Indenture Trustee as pledgee of the Mortgage
Loans and is generally consistent with the Master Servicer's policies with
respect to similar loans; and provided further that some 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
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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
Under the Servicing Agreement, the Master Servicer will have the option to
purchase from the Trust any Home Loan which is 60 days or more delinquent at a
purchase price equal to its Principal Balance plus its accrued interest.
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE
The following summary describes terms of the Trust Agreement and the
Indenture. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Trust Agreement
and the Indenture. Whenever particular defined terms of the Indenture are
referred to, the defined terms are incorporated by reference in this Prospectus
Supplement. See "The Agreements" in the Prospectus.
The Trust Fund
Simultaneously with the issuance of the Notes, the Issuer will pledge the
Trust Fund to the Indenture Trustee as collateral for the Notes. As pledgee of
the Home Loans, the Indenture Trustee will be entitled to direct the Trust in
the exercise of all rights and remedies of the Trust against the Seller 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 Notes, at its address
listed on the Security Register maintained with the Indenture Trustee, a report
setting forth amounts relating to the Notes for each Payment Date, among other
things:
(i) the amount of principal payable on the Payment Date to the holders of
Securities;
(ii) the amount of interest payable on the Payment Date to the holders of
Securities;
(iii) the aggregate Note Balance of the Notes after giving effect to the
payment of principal on the Payment Date;
(iv) P&I Collections for the related Collection Period;
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(v) the aggregate Principal Balance of the Home Loans as of the end of the
preceding Collection Period;
(vi) the Outstanding Reserve Amount as of the end of the related
Collection Period; and
(vii) the amount paid, if any, under the Policy for the Payment Date.
In the case of information furnished under clauses (i) and (ii) above with
respect to the Notes, the amounts shall be expressed as a dollar amount per
$1,000 in face amount of Notes.
Certain Covenants
The Indenture will provide that the Issuer may not consolidate with or
merge into any other entity, unless (i) the entity formed by or surviving the
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) the 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 the merger or
consolidation, (iv) the Issuer has received consent of the Credit Enhancer and
has been advised that the ratings of the Securities, without regard to the
Policy, then in effect would not be reduced or withdrawn by any Rating Agency as
a result of the 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 the
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 the consolidation or merger and the supplemental
indenture comply with the Indenture and that all conditions precedent, as
provided in the Indenture, relating to the 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 relating to 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 of its
assets, or any of its interest or the proceeds of its assets. The Issuer may not
engage in any activity other than as specified under "The Issuer" in this
Prospectus Supplement.
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Modification of Indenture
With the consent of the holders of a majority of the outstanding Notes and
the Credit Enhancer, the Issuer and the Indenture Trustee may execute a
supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the Indenture, or modify, except as provided below, in any
manner the rights of the Noteholders. Without the consent of the holder of each
outstanding Note affected thereby and the Credit Enhancer, however, no
supplemental indenture will: (i) change the due date of any installment of
principal of or interest on any Note or reduce its principal amount, its
interest rate specified or change any place of payment where or the coin or
currency in which any Note or any of its interest is payable; (ii) impair the
right to institute suit for the enforcement of some 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 some provisions of the Indenture or of some
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 some
other related agreements; (vi) modify any of the provisions of the Indenture in
a 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 the 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 collateral or deprive the holder of any Note of
the security afforded by the lien of the Indenture.
The Issuer and the Indenture Trustee may also enter into supplemental
indentures, with the consent of the Credit Enhancer and without obtaining the
consent of the Noteholders, for the purpose of, among other things, curing any
ambiguity or correcting or supplementing any provision in the Indenture that may
be inconsistent with any other provision in this Prospectus Supplement.
Certain Matters Regarding the Indenture Trustee and the Issuer
Neither the Indenture Trustee nor any director, officer or employee of the
Indenture Trustee will be under any liability to the Issuer or the related
Noteholders for any action taken or for refraining from the taking of any action
in good faith under the Indenture or for errors in judgment; provided, however,
that none of the Indenture Trustee and any director, officer or employee of the
Indenture Trustee 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 limitations 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
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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 the 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 a merger or consolidation shall be the successor of the
Indenture Trustee under the Indenture.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of ____________________, counsel to the Depositor, for
federal income tax purposes, the Notes will be characterized as indebtedness and
the Issuer, as created under the terms and conditions of the Trust Agreement,
will not be characterized as an association, or publicly traded partnership
within the meaning of section 7704 of the Code, taxable as a corporation or as a
taxable mortgage pool within the meaning of section 7701(i) of the Code.
For federal income tax purposes, the Notes will not be treated as having
been issued with "original issue discount" (as defined in the Prospectus). See
"Certain Federal Income Tax Consequences" in the Prospectus.
The Notes will not be treated as assets described in Section
7701(a)(19)(C) of the Code and will not be treated as "real estate assets" under
Section 856(c)(4)(A) of the Code. In addition, interest on the Notes will not be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code. The Notes also will not be treated as
"qualified mortgages" under Section 860G(a)(3)(C) of the Code.
Prospective investors in the Notes should see "Certain Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the Prospectus for a
discussion of the application of federal income and state and local tax laws to
the Issuer and purchasers of the Notes.
ERISA CONSIDERATIONS
Any fiduciary or other investor of Plan assets that proposes to acquire or
hold the Notes on behalf of or with Plan assets of any Plan should consult with
its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment. See "ERISA Considerations" in the
Prospectus.
Each purchaser of a Note, by its acceptance of the Note, shall be deemed
to have represented that the acquisition of the Note by the purchaser does not
constitute or give rise to a prohibited
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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.
The Notes may not be purchased with the assets of a Plan if the Depositor,
the Master Servicer, the Indenture Trustee, the Owner Trustee or any of their
affiliates (a) has investment or administrative discretion with respect to the
Plan assets; (b) has authority or responsibility to give, or regularly gives,
investment advice with respect to the Plan assets, for a fee and under an
agreement or understanding that the advice (i) will serve as a primary basis for
investment decisions with respect to the Plan assets and (ii) will be based on
the particular investment needs for the Plan; or (c) is an employer maintaining
or contributing to the Plan.
LEGAL INVESTMENT
The Notes will not constitute "mortgage related securities" for purposes
of SMMEA. Accordingly, many institutions with legal authority to invest in
mortgage related securities may not be legally authorized to invest in the
Notes. No representation is made in this Prospectus Supplement as to whether the
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 Notes as legal investments for the
purchasers prior to investing in Notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions of an Underwriting Agreement, dated
_________________ (the "Underwriting Agreement"), ____________________ (the
"Underwriter") has agreed to purchase and the Depositor has agreed to sell the
Notes. It is expected that delivery of the Notes will be made only in book-entry
form through the Same Day Funds Settlement System of DTC on or about
__________________ against payment therefor in immediately available funds.
In connection with the Notes, the Underwriter has agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase all of its Notes
if any of its Notes are purchased thereby.
In addition, the Underwriting Agreement provides that the obligation of
the Underwriter to pay for and accept delivery of the Notes is subject to, among
other things, the receipt of legal opinions and to the conditions, among others,
that no stop order suspending the effectiveness of the Depositor's Registration
Statement shall be in effect, and that no proceedings for that purpose shall be
pending before or threatened by the Securities and Exchange Commission.
The distribution of the Notes by the Underwriter may be effected from time
to time in one or more negotiated transactions, or otherwise, at varying prices
to be determined at the time of sale.
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Proceeds to the Depositor from the sale of the Notes, before deducting expenses
payable by the Depositor, will be approximately _______% of the aggregate
Principal Balance of the Notes plus its accrued interest from the Cut-off Date.
The Underwriter may effect these transactions by selling the Notes to or
through dealers, and those dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter for whom
they act as agent. In connection with the sale of the Notes, the Underwriter may
be deemed to have received compensation from the Depositor in the form of
underwriting compensation. The Underwriter and any dealers that participate with
the Underwriter in the distribution of the related Notes may be deemed to be
underwriters and any profit on the resale of the Notes positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
The Depositor has been advised by the Underwriter that it presently
intends to make a market in the Notes offered hereby; however, it is not
obligated to do so, any market-making may be discontinued at any time, and there
can be no assurance that an active public market for the Notes will develop.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter and that under limited circumstances the Underwriter will indemnify
the Depositor against some liabilities, including liabilities under the
Securities Act of 1933, or contribute to payments the Underwriter may be
required to make in respect of these liabilities.
EXPERTS
The consolidated financial statements of _____________, as of December 31,
1998 and 1997 and for each of the years in the three-year period ended December
31, 1998 are incorporated by reference in this Prospectus Supplement and in the
registration statement in reliance upon the report of ______________,
independent certified public accountants, incorporated by reference in this
Prospectus Supplement, and upon the authority of the firm as experts in
accounting and auditing.
LEGAL MATTERS
Legal matters with respect to the Notes will be passed upon for the
Depositor and the Underwriter by _________________, New York, New York.
RATINGS
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It is a condition to issuance that the Notes be rated "___" by _________
and "____" by __________________. The Depositor has not requested a rating on
the Notes by any rating agency other than ___________ and ___________. However,
there can be no assurance as to whether any other rating agency will rate the
Notes, or, if it does, what rating would be assigned by any other rating agency.
A rating on the Notes by another rating agency, if assigned at all, may be lower
than the ratings assigned to the Notes by ____________ and ____________. A
securities rating addresses the likelihood of the receipt by holders of Notes of
distributions on the Home Loans. The rating takes into consideration the
structural and legal aspects associated with the Notes. The ratings on the Notes
do not, however, constitute statements regarding the possibility that Holders
might realize a lower than anticipated yield. A securities rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating organization. Each securities
rating should be evaluated independently of similar ratings on different
securities.
S-60
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES
Except in limited circumstances, the globally offered Residential Funding
Mortgage Securities II, Inc., Home Loan-Backed Notes, Series ____________ (the
"Global Securities") will be available only in book-entry form. Investors in the
Global Securities may hold the 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 Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedel and Euroclear, in that capacity,
and as DTC Participants.
Non-U.S. holders of Global Securities will be subject to U.S. withholding
taxes unless the holders meet some 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 these 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
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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 notes 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
the basis of the actual number of days in that 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
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<PAGE>
the amount of the 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 that accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date, which would be the preceding day, when settlement occurred in New
York. Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date, i.e., the trade fails, receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day, until the
purchase side of the trade is reflected in their Cedel or cEuroclear
accounts, in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their Cedel or
Euroclear account in order to settle the sale side of the trade; or
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<PAGE>
(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, 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 the beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) the 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 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 the change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person, 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 Note Holders or their agent. Exemption
for U.S. Persons (Form W-9). U.S. Persons can obtain a complete exemption from
the withholding tax by filing Form W-9 (Payer's Request for Taxpayer
Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security, the clearing agency, in the case of persons holding directly on the
books of the clearing agency. Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year. The term "U.S.
Person" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity organized in or under the laws of the
United States or any of its political subdivisions, unless, in the case of a
partnership, future Treasury regulations provide otherwise, (iii) an estate that
is subject to U.S.
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<PAGE>
federal income tax regardless of the source of its income, or (iv) a trust if a
court within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. Some trusts not
described in clause (iv) above in existence on August 20, 1996 that elect to be
treated as a United States Person will also be a U.S. Person. 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.
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<PAGE>
Residential Funding Mortgage Securities II, Inc.
$_____________
Home Loan-Backed Notes,
Series _______
Prospectus Supplement
---------------------
[Underwriter]
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the notes offered in this prospectus supplement in any state
where the offer is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the notes offered hereby and with respect to their
unsold allotments or subscriptions. In addition, all dealers selling the Notes,
whether or not participating in this offering, may be required to deliver a
prospectus supplement and prospectus until _____________.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Other Expenses of Issuance and Distribution (Item 14 of Form S-3).
The expenses expected to be incurred in connection with the issuance and
distribution of the Securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
Filing Fee for Registration Statement............ $834,000
Legal Fees and Expenses.......................... 650,000
Accounting Fees and Expenses..................... 480,000
Trustee's Fees and Expenses
(including counsel fees).................... 90,000
Blue Sky Fees.................................... 18,000
Printing and Engraving Fees...................... 250,000
Rating Agency Fees............................... 1,800,000
Miscellaneous.................................. 30,000
----------
Total............................................$ 4,152,000
------------
Indemnification of Directors and Officers (Item 15 of Form S-3).
Any underwriters who execute one of the Underwriting Agreements in the
form filed as Exhibit 1.1 or Exhibit 1.2 to this Registration Statement will
agree to indemnify the Registrant's directors and its officers who signed this
Registration Statement against certain liabilities which might arise under the
Securities Act of 1933 from certain information furnished to the Registrant by
or on behalf of such indemnifying party.
Subsection (a) of Section 145 of the General Corporation Law of Delaware
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
<PAGE>
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Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification or advancement of expenses provided
for by Section 145 shall not be deemed exclusive of any other rights to which
the indemnified party may be entitled; and empowers the corporation to purchase
and maintain insurance on behalf of a director, officer, employee or agent of
the corporation against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
The By-Laws of the Registrant provide, in effect, that to the extent and
under the circumstances permitted by subsections (a) and (b) of Section 145 of
the General Corporation Law of the State of Delaware, the Registrant (i) shall
indemnify and hold harmless each person who was or is a party or is threatened
to be made a party to any action, suit or proceeding described in subsections
(a) and (b) by reason of the fact that he is or was a director or officer, or
his testator or intestate is or was a director or officer of the Registrant,
against expenses, judgments, fines and amounts paid in settlement, and (ii)
shall indemnify and hold harmless each person who was or is a party or is
threatened to be made a party to any such action, suit or proceeding if such
person is or was serving at the request of the Registrant as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
In addition, the Pooling and Servicing Agreements and the Indentures and
Trust Agreements, as the case may be, will provide that no director, officer,
employee or agent of the Registrant is liable to the Trust Fund or the
Securityholders, except for such person's own willful misfeasance, bad faith,
gross negligence in the performance of duties or reckless disregard of
obligations and duties. The Pooling and Servicing Agreements and the Indentures,
as the case may be, will further provide that, with the exceptions stated above,
a director, officer, employee or agent of the Registrant is entitled to be
indemnified against any loss, liability or expense incurred in connection with
legal action relating to such Pooling and Servicing Agreements and Indentures
and related Securities other than such expenses related to particular Mortgage
Loans.
Certain controlling persons of the Registrant may also be entitled to
indemnification from General Motors Acceptance Corporation, an indirect parent
of the Registrant. Under sections 7015 and 7018-7023 of the New York Banking
Law, General Motors Acceptance Corporation may or
<PAGE>
-3-
shall, subject to various exceptions and limitation, indemnify its directors or
officers and may purchase and maintain insurance as follows:
(a) If the director is made or threatened to be made a party to an
action by or in the right of General Motors Acceptance Corporation to
procure a judgment in its favor, by reason of the fact that such person is
or was a director or officer of General Motors Acceptance Corporation or
is or was servicing at the request of General Motors Acceptance
Corporation as a director or officer of some other enterprise, General
Motors Acceptance Corporation may indemnify such person against amounts
paid in settlement of such action or an appeal therein, if such director
or officer acted, in good faith, for a purpose which such person
reasonably believed to be in (or, in the case of service for any other
enterprise, not opposed to) the best interests of General Motors
Acceptance Corporation, except that no indemnification is available under
such statutory provisions in respect of a threatened action or a pending
action which is settled or otherwise disposed of, or any claim or issue or
matter as to which such person is found liable to General Motors
Acceptance Corporation, unless in each such case a court determined that
such person is fairly and reasonably entitled to indemnity for such amount
as the court deems proper.
(b) With respect to any action or proceeding other than one by or in
the right of General Motors Acceptance Corporation to procure a judgment
in its favor, if a director or officer is made or threatened to be made a
party by reason of the fact that such person was a director or officer of
General Motors Acceptance Corporation, or served some other enterprise at
the request of General Motors Acceptance Corporation, General Motors
Acceptance Corporation may indemnify such person against judgments, fines,
amounts paid in settlement and reasonable expenses, including attorneys'
fees, incurred as a result of such action or proceeding or an appeal
therein, if such person acted in good faith for a purpose which such
person reasonably believed to be in (or, in the case of service for any
other enterprise, not opposed to) the best interests of General Motors
Acceptance Corporation and, in criminal actions or proceedings, in
addition, had no reasonable cause to believe that such person's conduct
was unlawful.
(c) A director or officer who has been wholly successful, on the
merits or otherwise, in the defense of a civil or criminal action or
proceeding of the character described in paragraphs (a) or (b) above,
shall be entitled to indemnification as authorized in such paragraphs.
(d) General Motors Acceptance Corporation may purchase and maintain
insurance to indemnify directors and officers in instances in which they
may not otherwise be indemnified by General Motors Acceptance Corporation
under the provisions of the New York Banking Law, provided hat the
contract of insurance provides for a retention amount and for
co-insurance, except that no such insurance may provide for any payment,
other than cost of defense, to or on behalf of any director or officer if
a judgment or other final adjudication adverse to such director or officer
establishes that such person's acts of active and deliberate dishonesty
were material to the cause of action so adjudicated or that such person
personally gained in fact a financial profit or other advantage to which
such person was not legally entitled.
<PAGE>
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The foregoing statement is subject to the detailed provisions of sections
7015 and 7018-7023 of the New York Banking Law.
As a subsidiary of General Motors Corporation, General Motors Acceptance
Corporation is insured against liabilities which it may incur by reason of the
foregoing provisions of the New York Banking Law and directors and officers of
General Motors Acceptance Corporation are insured against some liabilities which
might arise out of their employment and not be subject to indemnification under
said Banking Law.
Pursuant to resolutions adopted by the Board of Directors of General
Motors Corporation, that company to the fullest extent permissible under law
will indemnify, and has purchased insurance on behalf of, directors or officers
of the company, or any of them, who incur or are threatened with personal
liability, including expenses, under Employee Retirement Income Security Act of
1974 or any amendatory or comparable legislation or regulation thereunder.
<PAGE>
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Exhibits (Item 16 of Form S-3).
Exhibits--
1.1* -- Form of Underwriting Agreement for the Home Equity Loan Pass-Through
Certificates
1.2* -- Form of Underwriting Agreement for the Asset-Backed Notes
3.1* -- Certificate of Incorporation of Residential Funding Mortgage Securities
II, Inc. ("RFMSII")
3.2* -- By-Laws of RFMSII
4.1* -- Form of Pooling and Servicing Agreement for Closed-End Loans
4.2* -- Form of Pooling and Servicing Agreement for Revolving Credit Loans
4.3* -- Form of Servicing Agreement
4.4* -- Form of Trust Agreement
4.5* -- Form of Indenture
5.1 -- Opinion of Thacher Proffitt & Wood with respect to legality relating to
the Home Equity Loan Pass-Through Certificates
5.2 -- Opinion of Thacher Proffitt & Wood with respect to legality relating to
the Asset-Backed Notes
5.3 -- Opinion of Orrick, Herrington & Sutcliffe with respect to legality
relating to the Home Equity Loan Pass-Through Certificates and Asset-Backed
Notes
5.4 -- Opinion of Stroock & Stroock & Lavan with respect to legality relating
to the Home Equity Loan Pass-Through Certificates and Asset-Backed Notes
8.1 -- Opinion of Thacher Proffitt & Wood with respect to certain tax matters
relating to the Home Equity Loan Pass-Through Certificates (included as
part of Exhibit 5.1)
8.2 -- Opinion of Thacher Proffitt & Wood with respect to certain tax matters
relating to the Asset-Backed Notes (included as part of Exhibit 5.2)
8.3 -- Opinion of Orrick, Herrington & Sutcliffe with respect to certain tax
matters relating to the Home Equity Loan Pass-Through Certificates and
Asset-Backed Notes
8.4 -- Opinion of Stroock & Stroock & Lavan with respect to certain tax matters
relating to the Home Equity Loan Pass-Through Certificates and Asset-Backed
Notes (included as part of Exhibit 5.4)
10.1* -- Form of Mortgage Loan Purchase Agreement
23.1 -- Consent of Thacher Proffitt & Wood relating to the Home Equity Loan
Pass-Through Certificates (included as part of Exhibit 5.1)
23.2 -- Consent of Thacher Proffitt & Wood relating to the Asset-Backed Notes
(included as part of Exhibit 5.2)
23.3 -- Consent of Orrick, Herrington & Sutcliffe relating to the Home Equity
Loan Pass-Through Certificates and Asset-Backed Notes (included as part of
Exhibit 5.3)
23.4 Consent of Stroock & Stroock & Lavan relating to the Home Equity Loan
Pass-Through Certificates and Asset-Backed Notes (included as part of
Exhibit 5.4)
24.1 -- Power of Attorney
- -------- * Incorporated by reference from the Registration Statement on Form S-3
(File No. 33-80419.
<PAGE>
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Undertakings (Item 17 of Form S-3).
A. Undertakings Pursuant to Rule 415.
The Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement;
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
(b) The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this Registration Statement shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
B. Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing
<PAGE>
-7-
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933, as amended, and will be
governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Residential Funding
Mortgage Securities II, Inc. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3, reasonably
believes that the security rating requirement contained in Transaction
Requirement B.5 of Form S-3 will be met by the time of the sale of the
securities registered hereunder, and has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Minneapolis, State of Minnesota, as of the 30th day of April, 1999.
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
By:/s/Christopher J. Nordeen
--------------------------
Christopher J. Nordeen
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
SIGNATURE TITLE DATE
/s/Christopher J. Nordeen President and Chief Executive April 30, 1999
- ----------------------------- Officer (Principal Executive
Christopher J. Nordeen Officer)
/s/Davee L. Olson Director and Chief Financial April 30, 1999
- -----------------------------
Davee L. Olson Officer (Principal Financial
Officer)
/s/Bruce J. Paradis Director April 30, 1999
- -----------------------------
Bruce J. Paradis
/s/Jack R. Katzmark Controller (Principal April 30, 1999
- ----------------------------- Accounting Officer)
Jack R. Katzmark
/s/ Dennis W. Sheehan, Jr. Director April 30, 1999
- -----------------------------
Dennis W. Sheehan, Jr.
<PAGE>
EXHIBIT INDEX
Number Description Location of Exhibit in
Sequential
Numbering System
1.1* Form of Underwriting Agreement for the Home Equity Loan
Pass-Through Certificates
1.2* Form of Underwriting Agreement for the Asset-Backed Notes
3.1* Certificate of Incorporation of Residential Funding Mortgage
Securities II, Inc. ("RFMSII")
3.2* By-Laws of RFMSII
4.1* Form of Pooling and Servicing Agreement for Closed-End
Loans
4.2* Form of Pooling and Servicing Agreement for Revolving
Credit Loans
4.3* Form of Servicing Agreement
4.4* Form of Trust Agreement
4.5* Form of Indenture
5.1 Opinion of Thacher Proffitt & Wood with respect to legality relating
to the Home Equity Loan Pass-Through Certificates
5.2 Opinion of Thacher Proffitt & Wood with respect to legality
relating to the Asset-Backed Notes
5.3 Opinion of Orrick, Herrington & Sutcliffe with respect to legality
relating to the Home Equity Loan Pass-Through Certificates and
Asset-Backed Notes
5.4 Opinion of Stroock & Stroock & Lavan with respect to legality
relating to the Home Equity Loan Pass-Through Certificates and
Asset-Backed Notes
8.1 Opinion of Thacher Proffitt & Wood with respect to certain tax
matters relating to the Home Equity Loan Pass-Through Certificates
(included as part of Exhibit 5.1)
8.2 Opinion of Thacher Proffitt & Wood with respect to certain tax
matters relating to the Asset-Backed Notes (included as part of
Exhibit 5.2)
8.3 Opinion of Orrick, Herrington & Sutcliffe with respect to certain tax
matters relating to the Home Equity Loan Pass-Through Certificates
and Asset-Backed Notes
<PAGE>
8.4 Opinion of Stroock & Stroock & Lavan with respect to certain tax
matters relating to the Home Equity Loan Pass-Through Certificates
and Asset-Backed Notes (included as part of Exhibit 5.4)
10.1* Form of Mortgage Loan Purchase Agreement
23.1 Consent of Thacher Proffitt & Wood relating to the Home
Equity Loan Pass-Through Certificates (included as part of
Exhibit 5.1)
23.2 Consent of Thacher Proffitt & Wood relating to the Asset-Backed Notes
(included as part of Exhibit 5.2)
23.3 Consent of Orrick, Herrington & Sutcliffe relating to the Home
Equity Loan Pass-Through Certificates and Asset-Backed
Notes (included as part of Exhibit 5.3)
23.4 Consent of Stroock & Stroock & Lavan relating to the Home
Equity Loan Pass-Through Certificates and Asset-Backed
Notes (included as part of Exhibit 5.4)
24.1 Power of Attorney
* Incorporated by reference from the Registration Statement on Form S-3
(File No. 33-80419).
<PAGE>
April 30, 1999 Page 1.
EXHIBIT 5.1
[Thacher Proffitt & Wood Letterhead]
April 30, 1999
Residential Funding Mortgage Securities II, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Re: Residential Funding Mortgage Securities II, Inc.
Home Equity Loan Pass-Through Certificates
Registration Statement on Form S-3
Ladies and Gentlemen:
We are counsel to Residential Funding Mortgage Securities II, Inc., a
Delaware corporation (the "Registrant"), in connection with the registration
under the Securities Act of 1933, as amended (the "1933 Act"), of Home Equity
Loan Pass-Through Certificates (the "Certificates"), and the related preparation
and filing of a Registration Statement on Form S-3 (the "Registration
Statement"). The Certificates are issuable in series under separate pooling and
servicing agreements (each such agreement, a "Pooling and Servicing Agreement"),
among the Registrant, a master servicer to be identified in the prospectus
supplement for such series of Certificates and a trustee to be identified in the
prospectus supplement for such series of Certificates. Each Pooling and
Servicing Agreement will be substantially in the form filed as an Exhibit to the
Registration Statement.
In rendering this opinion letter, we have examined the forms of the
Pooling and Servicing Agreement contained as Exhibits in the Registration
Statement, the Registration Statement and such other documents as we have deemed
necessary including, where we have deemed appropriate, representations or
certifications of officers of parties thereto or public officials. In rendering
this opinion letter, except for the matters that are specifically addressed in
the opinions expressed below, we have assumed (i) the authenticity of all
documents submitted to us as originals and the conformity to the originals of
all documents submitted to us as copies, (ii) the necessary entity formation and
continuing existence in the jurisdiction of formation, and the necessary
licensing and qualification in all jurisdictions, of all parties to all
documents, (iii) the necessary authorization, execution, delivery and
enforceability of all documents, and the necessary entity power with respect
thereto and (iv) that there is not any other agreement that modifies or
supplements the agreements expressed in the documents to which this opinion
letter relates and that renders any of the opinions expressed below inconsistent
with such documents as so modified or supplemented. In rendering this opinion
letter, we have made no inquiry, have conducted no investigation and assume no
responsibility with respect to (a) the accuracy of and compliance by the parties
thereto with the representations,
<PAGE>
April 30, 1999 Page 2.
warranties and covenants contained in any document or (b) the conformity of the
underlying assets and related documents to the requirements of the agreements to
which this opinion letter relates.
Our opinions set forth below with respect to the enforceability of any
right or obligation under any agreement are subject to (i) general principles of
equity, including concepts of materiality, reasonableness, good faith and fair
dealings and the possible unavailability of specific performance and injunctive
relief, regardless of whether considered in a proceeding in equity or at law,
(ii) the effect of certain laws, regulations and judicial and other decisions
upon the availability and enforceability of certain covenants, remedies and
other provisions, including the remedies of specific performance and self-help
and any provision which purports or is construed to require waiver of the
obligation of good faith, materiality, fair dealing, diligence or reasonableness
or objection to venue or forum, to impose a penalty or forfeiture or to release,
exculpate or exempt a party from, or to require indemnification of a party for,
liability for its own action or inaction to the extent that the action or
inaction includes negligence, recklessness or willful or unlawful conduct, (iii)
bankruptcy, insolvency, receivership, reorganization, liquidation, voidable
preference, fraudulent conveyance and transfer, moratorium and other similar
laws affecting the rights of creditors or secured parties and (iv) public policy
considerations underlying the securities laws, to the extent that such public
policy considerations limit the enforceability of any provision of any agreement
which purports or is construed to provide indemnification with respect to
securities law violations.
In rendering this opinion letter, we do not express any opinion concerning
any law other than the federal laws of the United States including without
limitation the Securities Act of 1933, as amended (the "!933 Act"), the laws of
the State of New York and the General Corporation Law of the State of Delaware.
We do not express any opinion with respect to the securities laws of any
jurisdiction or any other matter not specifically addressed in the opinions
expressed below.
Based upon and subject to the foregoing, it is our opinion that:
1. The Pooling and Servicing Agreement, assuming the necessary
authorization, execution and delivery thereof by the parties
thereto, is a valid and legally binding agreement under the laws of
the State of New York, enforceable thereunder against the Registrant
in accordance with its terms.
2. Each series of Certificates, assuming the authorization, execution
and delivery of the related Pooling and Servicing Agreement, the
execution and authentication of such Certificates in accordance with
that Pooling and Servicing Agreement and the delivery and payment
therefor as contemplated in the Registration Statement and the
prospectus and prospectus supplement delivered in connection
therewith, will be legally and validly issued and outstanding, fully
paid and non-assessable and entitled to the benefits of that Pooling
and Servicing Agreement.
3. The description of federal income tax consequences appearing under
the heading "United States Federal Income Tax Consequences" in the
prospectus contained in the Registration Statement, while not
purporting to discuss all possible federal income
<PAGE>
April 30, 1999 Page 3.
tax consequences of an investment in the Certificates, is accurate
with respect to those tax consequences which are discussed.
4. To the extent that the description referred to in paragraph 3. above
expressly states our opinion, or states that our opinion will be
provided as to any series of Certificates, we hereby confirm and
adopt such opinion herein, as such opinion may be supplemented as
described in the related Prospectus Supplement.
Please note that paragraph 4. above applies only to those series of
Certificates for which our firm is named as counsel to the Depositor in the
related Prospectus Supplement and for which a REMIC election is made.
We hereby consent to the filing of this opinion letter as an Exhibit to
the Registration Statement, and to the use of our name in the prospectus and
prospectus supplement included in the Registration Statement under the headings
"United States Federal Income Tax Consequences" and "Legal Matters", without
admitting that we are "persons" within the meaning of Section 7(a) or 11(a)(4)
of the 1933 Act, or "experts" within the meaning of Section 11 thereof, with
respect to any portion of the Registration Statement.
Very truly yours,
Thacher Proffitt & Wood
By /s/ Stephen S. Kudenholdt
<PAGE>
April 30, 1999 Page 1.
EXHIBIT 5.2
[Thacher Proffitt & Wood Letterhead]
Residential Funding Mortgage Securities II, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Re: Residential Funding Mortgage Securities II, Inc.
Asset-Backed Notes
Registration Statement on Form S-3
Ladies and Gentlemen:
We are counsel to Residential Funding Mortgage Securities II, Inc., a
Delaware corporation (the "Registrant"), in connection with the registration
under the Securities Act of 1933, as amended (the "1933 Act"), of Asset-Backed
Notes (the "Notes"), and the related preparation and filing of a Registration
Statement on Form S-3 (the "Registration Statement"). The Notes are issuable in
series under separate indentures (each such agreement, an "Indenture"), between
an issuer (each, an "Issuer") and an indenture trustee (each, an "Indenture
Trustee') each to be identified in the prospectus supplement for such series of
Notes. Each Indenture will be substantially in the form filed as an Exhibit to
the Registration Statement.
In rendering this opinion letter, we have examined the form of the
Indenture contained as Exhibits in the Registration Statement, the Registration
Statement and such other documents as we have deemed necessary including, where
we have deemed appropriate, representations or certifications of officers of
parties thereto or public officials. In rendering this opinion letter, except
for the matters that are specifically addressed in the opinions expressed below,
we have assumed (i) the authenticity of all documents submitted to us as
originals and the conformity to the originals of all documents submitted to us
as copies, (ii) the necessary entity formation and continuing existence in the
jurisdiction of formation, and the necessary licensing and qualification in all
jurisdictions, of all parties to all documents, (iii) the necessary
authorization, execution, delivery and enforceability of all documents, and the
necessary entity power with respect thereto and (iv) that there is not any other
agreement that modifies or supplements the agreements expressed in the documents
to which this opinion letter relates and that renders any of the opinions
expressed below inconsistent with such documents as so modified or supplemented.
In rendering this opinion letter, we have made no inquiry, have conducted no
investigation and assume no responsibility with respect to (a) the accuracy of
and compliance by the parties thereto with the representations, warranties and
covenants contained in any document or (b) the conformity of the underlying
assets and related documents to the requirements of the agreements to which this
opinion letter relates.
<PAGE>
April 30, 1999 Page 2.
Our opinions set forth below with respect to the enforceability of any
right or obligation under any agreement are subject to (i) general principles of
equity, including concepts of materiality, reasonableness, good faith and fair
dealings and the possible unavailability of specific performance and injunctive
relief, regardless of whether considered in a proceeding in equity or at law,
(ii) the effect of certain laws, regulations and judicial and other decisions
upon the availability and enforceability of certain covenants, remedies and
other provisions, including the remedies of specific performance and self-help
and any provision which purports or is construed to require waiver of the
obligation of good faith, materiality, fair dealing, diligence or reasonableness
or objection to venue or forum, to impose a penalty or forfeiture or to release,
exculpate or exempt a party from, or to require indemnification of a party for,
liability for its own action or inaction to the extent that the action or
inaction includes negligence, recklessness or willful or unlawful conduct, (iii)
bankruptcy, insolvency, receivership, reorganization, liquidation, voidable
preference, fraudulent conveyance and transfer, moratorium and other similar
laws affecting the rights of creditors or secured parties and (iv) public policy
considerations underlying the securities laws, to the extent that such public
policy considerations limit the enforceability of any provision of any agreement
which purports or is construed to provide indemnification with respect to
securities law violations.
In rendering this opinion letter, we do not express any opinion concerning
any law other than the federal laws of the United States including without
limitation the Securities Act of 1933, as amended (the "!933 Act"), the laws of
the State of New York and the General Corporation Law of the State of Delaware.
We do not express any opinion with respect to the securities laws of any
jurisdiction or any other matter not specifically addressed in the opinions
expressed below.
Based upon and subject to the foregoing, it is our opinion that:
1. The Indenture, assuming the necessary authorization, execution and
delivery thereof by the parties thereto, is a valid and legally
binding agreement under the laws of the State of New York,
enforceable thereunder against the Registrant in accordance with its
terms.
2. Each series of Notes, assuming the authorization, execution and
delivery of the related Indenture, the execution and authentication
of such Notes in accordance with that Indenture and the delivery and
payment therefor as contemplated in the Registration Statement and
the prospectus and prospectus supplement delivered in connection
therewith, will be legally and validly issued and outstanding, fully
paid and non-assessable and entitled to the benefits of that
Indenture.
3. The description of federal income tax consequences appearing under
the heading "United States Federal Income Tax Consequences" in the
prospectus contained in the Registration Statement, while not
purporting to discuss all possible federal income tax consequences
of an investment in the Notes, is accurate with respect to those tax
consequences which are discussed.
4. To the extent that the description referred to in paragraph 3. above
expressly states our opinion, or states that our opinion will be
provided as to any series of Notes, we
<PAGE>
April 30, 1999 Page 3.
hereby confirm and adopt such opinion herein, as such opinion may be
supplemented as described in the related Prospectus Supplement.
Please note that paragraph 4. above applies only to those series of
Certificates for which our firm is named as counsel to the Depositor in the
related Prospectus Supplement.
We hereby consent to the filing of this opinion letter as an Exhibit to
the Registration Statement, and to the use of our name in the prospectus and
prospectus supplement included in the Registration Statement under the headings
"United States Federal Income Tax Consequences" and "Legal Matters", without
admitting that we are "persons" within the meaning of Section 7(a) or 11(a)(4)
of the 1933 Act, or "experts" within the meaning of Section 11 thereof, with
respect to any portion of the Registration Statement.
Very truly yours,
Thacher Proffitt & Wood
By /s/ Stephen S. Kudenholdt
<PAGE>
Residential Funding Mortgage Securities II, Inc.
April 30, 1999
Page 1.
EXHIBIT 5.3
[Orrick, Herrington & Sutcliffe LLP Letterhead]
April 30, 1999
Residential Funding Mortgage Securities II, Inc.
8400 Normandale Lake Boulevard, Suite 600
Minneapolis, Minnesota 55437
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-3,
to be filed by Residential Funding Mortgage Securities II, Inc., a Delaware
corporation (the "Registrant"), with the Securities and Exchange Commission on
April 30, 1999 (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended (the "Act"), of
Asset-Backed Notes (the "Notes") and Home Equity Loan Pass-Through Certificates
(the "Certificates," and together with the Notes, the "Securities"). The
Securities are issuable in series (each, a "Series") under a separate Trust
(each, a "Trust"). The Securities of each Trust will be issued pursuant to
documentation more particularly described in the prospectus and the prospectus
supplement relating to such Series, forms of which have been included as part of
the Registration Statement (the "Issuing Documentation"). The Securities of each
Series are to be sold as set forth in the Registration Statement, any amendment
thereto, and the prospectus and prospectus supplement relating to such Series.
We have examined such instruments, documents and records as we deemed
relevant and necessary as a basis of our opinion hereinafter expressed. In such
examination, we have assumed the following: (a) the authenticity of original
documents and the genuineness of all signatures; (b) the conformity to the
originals of all documents submitted to us as copies; and (c) the truth,
accuracy and completeness of the information, representations and warranties
contained in the records, documents, instruments and certificates we have
reviewed.
Based on such examination, we are of the opinion that when the issuance of
each Series of Securities has been duly authorized by appropriate corporate
action and the Securities of such Series have been duly executed, authenticated
and delivered in accordance with the Issuing Documentation relating to such
Series and sold, the Securities will be legally issued, fully paid and
non-assessable and binding obligations of the Trust and the holders of the
Securities will be entitled to the benefits of the related Issuing Documentation
except as enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, arrangement, fraudulent conveyance, moratorium, or
other laws relating to or affecting the rights of creditors generally and
general principles of equity, including without limitation, concepts of
materiality, reasonableness, good faith and fair dealing, and the possible
unavailability of specific performance or injunctive relief, regardless of
whether such enforceability is considered in a proceeding in equity or at law.
<PAGE>
Residential Funding Mortgage Securities II, Inc.
April 30, 1999
Page 2.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever appearing in the
Registration Statement and each prospectus contained therein. In giving such
consent, we do not consider that we are "experts," within the meaning of the
term as used in the Act or the rules and regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, including
this opinion as an exhibit or otherwise.
Very truly yours,
/s/ Orrick, Herrington & Sutcliffe LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP
<PAGE>
April 30, 1999
Page 1
EXHIBIT 5.4
[Stroock & Stroock & Lavan LLP Letterhead]
April 30, 1999
Residential Funding Mortgage Securities II, Inc.
8400 Normandale Lake Boulevard, Suite 600
Minneapolis, Minnesota 55437
Re: Residential Funding Mortgage Securities II, Inc.
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel for Residential Funding Mortgage Securities II,
Inc. a Delaware corporation (the "Company"), in connection with the
authorization and issuance from time to time in one or more series of
Asset-Backed Notes (collectively, the "Notes") or Home Equity Loan Pass-Through
Certificates (the "Certificates," and collectively with the Notes, the
"Securities"). A Registration Statement on Form S-3 relating to the Securities
(the "Registration Statement") is being filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities Act").
As set forth in the Registration Statement, separate Trusts (each, a "Trust")
will be established and will issue the Securities pursuant to either an
indenture or a pooling and servicing agreement (each, an "Issuance Agreement").
We have examined original or reproduced or certified copies of the
Certificate of Incorporation and By-laws of the Company, each as amended to
date, records of actions taken by the Company's Board of Directors, forms of
Issuance Agreements, forms of Notes and Certificates, the prospectus and form of
prospectus supplement relating to Asset-Backed Notes. We also have examined such
other documents, papers, statutes and authorities as we deem necessary as a
basis for the opinions hereinafter set forth. In our examination of such
material, we have assumed the genuineness of all signatures and the conformity
to original documents of all copies submitted to us as certified or reproduced
copies. As to various matters material to such opinions, we have relied upon the
representations and warranties in the forms of Issuance Agreements and
statements and certificates of officers and representatives of the Company and
others.
Based upon the foregoing, we are of the opinion that:
1. When an Issuance Agreement has been duly and validly authorized,
executed and delivered by the parties thereto, and a series of Securities has
been duly and validly authorized by all necessary action on the part of the
Company (subject to the terms thereof being otherwise in compliance with
applicable law at such time), executed as specified in, and delivered pursuant
to, an Issuance Agreement and sold as described in the Registration Statement,
the Securities will be
<PAGE>
April 30, 1999
Page 2
fully paid and non-assessable and will be entitled to the benefits and security
afforded by the Issuance Agreement.
2. The information in the prospectus forming a part of the Registration
Statement under the caption "United States Federal Income Tax Consequences," to
the extent that it constitutes matters of law or legal conclusions, is correct
with respect to the material Federal income tax consequences of an investment in
the Securities.
3. To the extent that the description referred to in paragraph 2 above
expressly states our opinion, or states that our opinion will be provided as to
any series of Securities, we hereby confirm and adopt such opinion herein as
such opinion may be supplemented as described in the related Prospectus
Supplement.
Please note that paragraph 3 above applies only to those series of
Securities for which our firm is named as counsel to the Company in the related
Prospectus Supplement.
In rendering the foregoing opinions, we express no opinion as to laws of
any jurisdiction other than the State of New York and the Federal law of the
United States of America. Our opinion expressed in paragraph 1 is subject to the
effect of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar
laws relating to or affecting creditors' rights generally and court decisions
with respect thereto, and we express no opinion with respect to the application
of equitable principles in any proceeding, whether at law or in equity.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, to the references to us in each prospectus and
prospectus supplement and to the filing of this opinion as an exhibit to any
application made by or on behalf of the Company or any dealer in connection with
the registration of the Securities under the securities or blue sky laws of any
state or jurisdiction. In giving such permission, we do not admit hereby that we
come within the category of persons whose consent is required under Section 7 of
the Securities Act or the General Rules and Regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
/s/ Stroock & Stroock & Lavan LLP
STROOCK & STROOCK & LAVAN LLP
<PAGE>
EXHIBIT 8.1
See Exhibit 5.1
<PAGE>
EXHIBIT 8.2
See Exhibit 5.2
<PAGE>
Residential Funding Mortgage Securities II, Inc.
April 30, 1999
Page 1.
EXHIBIT 8.3
[Orrick, Herrington & Sutcliffe LLP Letterhead]
April 30, 1999
Residential Funding Mortgage Securities II, Inc.
8400 Normandale Lake Boulevard, Suite 600
Minneapolis, Minnesota 55437
Ladies and Gentlemen:
We have advised Residential Funding Mortgage Securities II, Inc. (the
"Registrant") with respect to certain federal income tax aspects of the issuance
by the Registrant of its Home Equity Loan Pass-Through Certificates (the
"Certificates") and Asset-Backed Notes (the "Notes," and together with the
Certificates, the "Securities"), each issuable in series (each, a "Series").
Such advice conforms to the description of selected federal income tax
consequences to holders of the Securities that appears under the heading "United
States Federal Income Tax Consequences" in each of the prospectuses relating to
such Securities (each, a "Prospectus") forming a part of the Registration
Statement on Form S-3 as prepared for filing by the Registrant with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Act"), on April 30, 1999 (the "Registration Statement"). Such description
does not purport to discuss all possible income tax ramifications of the
proposed issuance, but with respect to those tax consequences which are
discussed, in our opinion the description is accurate in all material respects.
To the extent that such description explicitly states our opinion, we hereby
confirm and adopt such opinion herein.
This opinion is based on the facts and circumstances set forth in each
Prospectus and in the other documents reviewed by us. Our opinion as to the
matters set forth herein could change with respect to a particular Series of
Securities as a result of changes in facts and circumstances, changes in the
terms of the documents reviewed by us, or changes in the law subsequent to the
date hereof. As the Registration Statement contemplates Series of Securities
with numerous different characteristics, the particular characteristics of each
Series of Securities must be considered in determining the applicability of this
opinion to a particular Series of Securities.
<PAGE>
Residential Funding Mortgage Securities II, Inc.
April 30, 1999
Page 2.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever appearing in the
Registration Statement and each Prospectus contained therein. In giving such
consent, we do not consider that we are "experts," within the meaning of the
term as used in the Act or the rules and regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, (including
this opinion) as an exhibit or otherwise.
Very truly yours,
/s/ Orrick, Herrington & Sutcliffe LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP
<PAGE>
EXHIBIT 8.4
See Exhibit 5.4
<PAGE>
EXHIBIT 23.1
See Exhibit 5.1
<PAGE>
EXHIBIT 23.2
See Exhibit 5.2
<PAGE>
EXHIBIT 23.3
See Exhibit 5.3
<PAGE>
EXHIBIT 23.4
See Exhibit 5.4
<PAGE>
EXHIBIT 24.1
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints any of Teresa R. Farley, Lisa R. Lundsten and
Diane M. Wold as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities (including his capacity as director and/or
officer of Residential Funding Mortgage Securities II, Inc.), to sign this
Registration Statement on Form S-3 and any or all amendments thereto (including
post-effective amendments) of Residential Funding Mortgage Securities II, Inc.
under the Securities Act of 1933, as amended, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE
/s/Christopher J. Nordeen President and Chief April 30, 1999
- -------------------------- Executive Officer (Principal
Christopher J. Nordeen Executive Officer)
/s/Davee L. Olson Director and Chief April 30,1999
- -------------------------- Financial Officer (Principal
Davee L. Olson Financial Officer)
/s/Bruce J. Paradis Director April 30, 1999
- --------------------------
Bruce J. Paradis
/s/Jack R. Katzmark Controller (Principal April 30, 1999
- ---------------------------- Accounting Officer)
Jack R. Katzmark
/s/ Dennis W. Sheehan, Jr. Director April 30, 1999
- ----------------------------
Dennis W. Sheehan, Jr.
<PAGE>
