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Prospectus supplement dated March 23, 1999 (to prospectus dated
January 22, 1998)
$275,000,000
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
Depositor
HOME EQUITY LOAN TRUST 1999-HS3
RESIDENTIAL FUNDING CORPORATION
Master Servicer
HOME EQUITY LOAN-BACKED TERM NOTES, SERIES 1999-HS3
- ------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-7 IN THIS
PROSPECTUS SUPPLEMENT AND PAGE 9 IN THE PROSPECTUS.
The term notes will represent obligations of the trust created for Series
1999-HS3 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 offered
hereby only if accompanied by the prospectus.
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NOTES
The Home Equity Loan Trust 1999-HS3 will issue notes consisting of term notes
and variable funding notes secured by adjustable rate home equity revolving
credit loans made or to be made in the future. The revolving credit loans are
secured by first or second liens on residential properties. Only the term notes
are offered by this prospectus supplement.
CREDIT ENHANCEMENT
Credit enhancement for the notes consists of:
the portion of interest paid by the borrowers in excess of what is
necessary to pay interest earned on the notes;
overcollateralization consisting of the excess of the balance of the
revolving credit loans over the balance of the notes; and
an irrevocable and unconditional financial guaranty insurance policy
issued by Ambac Assurance Corporation.
[AMBAC Logo]
UNDERWRITING
The underwriter will offer the term notes from time to time to the public, on a
best efforts basis, directly or through dealers, in negotiated transactions or
otherwise, at varying prices to be determined at the time of sale. The offering
will terminate March 29, 2000 or the date on which all of the term notes have
been sold. Proceeds of the offering will not be placed in any escrow, trust or
similar arrangement. The proceeds to the depositor from any sale of the term
notes will be equal to the purchase price paid by the purchaser thereof, net of
any expenses payable by the depositor and any compensation payable to the
underwriter and any dealer. The underwriter's commission will be the difference
between the price it pays to the depositor for such underwritten term notes and
the amount it receives from the sale of the underwritten term notes to the
public. 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.
RESIDENTIAL FUNDING SECURITIES CORPORATION
UNDERWRITER
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We provide information to you about the term notes in two separate documents
that provide progressively more detail.
the accompanying prospectus, which provides general information, some of
which may not apply to your series of term notes; and
this prospectus supplement, which describes the specific terms of your
series of term notes.
IF THE DESCRIPTION OF YOUR TERM NOTES IN THIS PROSPECTUS SUPPLEMENT DIFFERS FROM
THE RELATED DESCRIPTION IN THE ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE
INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
You can find a listing of the pages where capitalized terms used both in the
prospectus and prospectus supplement are defined under the caption 'Index'
beginning on page 86 in the accompanying prospectus.
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
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PAGE
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Summary........................................ S-3
Risk Factors................................... S-7
Introduction................................... S-11
Description of the Mortgage Pool............... S-11
General................................... S-11
Revolving Credit Loan Terms............... S-12
Revolving Credit Loan Characteristics..... S-13
Credit Scores............................. S-20
Underwriting Standards.................... S-20
Representations and Warranties............ S-21
Servicing of Revolving Credit Loans............ S-21
The Issuer..................................... S-24
The Owner Trustee.............................. S-24
The Indenture Trustee.......................... S-24
The Credit Enhancer............................ S-24
Description of the Securities.................. S-27
General................................... S-27
Book-Entry Notes.......................... S-27
Payments on the Notes..................... S-29
Interest Payments on the Notes............ S-29
Principal Payments on the Notes........... S-30
Allocation of Payments on the Revolving
Credit Loans............................ S-30
Outstanding Reserve Amount................ S-32
Excess Loss Amount........................ S-33
The Paying Agent.......................... S-33
Maturity and Optional Redemption.......... S-33
Year 2000 Considerations....................... S-34
Description of the Policy...................... S-36
Certain Yield and Prepayment Considerations.... S-37
Description of the Purchase Agreement.......... S-41
Description of the Servicing Agreement......... S-42
Description of the Trust Agreement and
Indenture.................................... S-43
Certain Federal Income Tax Consequences........ S-45
ERISA Considerations........................... S-45
Legal Investment............................... S-46
Method of Distribution......................... S-46
Experts........................................ S-47
Legal Matters.................................. S-47
Ratings........................................ S-47
Annex I........................................ I-1
</TABLE>
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SUMMARY
The following summary is a general overview of the term notes offered by
this prospectus supplement 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.
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Issuer....................................... Home Equity Loan Trust 1999-HS3.
Title of the offered securities.............. Home Equity Loan-Backed Term Notes, Series 1999-HS3.
Initial principal balance.................... $275,000,000.
Note interest rate........................... LIBOR plus 0.27% per annum, subject to the limits described in
this prospectus supplement under 'Description of the
Securities -- Interest Payments on the Notes.'
Ratings...................................... When issued, the notes will be rated 'Aaa' by Moody's Investors
Service, Inc. and 'AAA' by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc.
Depositor.................................... Residential Funding Mortgage Securities II, Inc., an affiliate of
Residential Funding Corporation.
Master servicer.............................. Residential Funding Corporation.
Owner trustee................................ Wilmington Trust Company.
Indenture trustee............................ The Chase Manhattan Bank.
Credit enhancer.............................. Ambac Assurance Corporation.
Mortgage loan pool........................... 8,364 adjustable rate revolving credit loans with an aggregate
unpaid principal balance of approximately $272,277,228 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................................. March 1, 1999.
Closing date................................. On or about March 29, 1999.
Payment dates................................ Beginning in April 1999 on the 20th of each month or, if the 20th
is not a business day, on the next business day.
Scheduled final payment date................. March 20, 2029. The actual final payment date could be
substantially earlier.
Form of notes................................ Book-entry.
See 'Description of the Securities -- Book-Entry Notes' in this
prospectus supplement.
Minimum denominations........................ $25,000.
Legal investment............................. The term 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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THE TRUST
The depositor will establish Home Equity Loan Trust 1999-HS3, a Delaware
business trust, to issue the term notes. The trust will be established pursuant
to a trust agreement, dated as of March 23, 1999 between the depositor and the
owner trustee. The trust will issue the term notes and the variable funding
notes pursuant to an indenture dated as of the closing date, between the issuer
and the indenture trustee. The assets of the trust will consist of the revolving
credit loans and certain related assets.
Payments of interest and principal on the term notes will be made only from
payments received in connection with the revolving credit loans and the guaranty
insurance policy described below.
THE MORTGAGE POOL
99.3% of the revolving credit 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 revolving credit loans have the following characteristics as of
the cut-off date:
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Range of principal balances $0 to $295,143
Average principal balance $32,553
Range of loan rates 5.99% to 14.00%
Weighted average loan rate 8.8979%
Range of credit limits $8,200 to $500,000
Average credit limit $42,565
Weighted average credit limit 76.48%
utilization rate
</TABLE>
See 'Description of the Mortgage Pool' in this prospectus supplement.
THE VARIABLE FUNDING NOTES
The trust will also issue Home Equity Loan-Backed Variable Funding Notes, Series
1999-HS3, which are not offered by this prospectus supplement. The variable
funding notes will be issued pursuant to the indenture and will have the same
interest rate and payment provisions as the term notes. The principal amount of
the variable funding notes initially will be zero and will change from time to
time based on the amount of new draws on the revolving credit loans.
THE CERTIFICATES
The trust will also issue Home Equity Loan-Backed Certificates, Series 1999-HS3,
which are not offered by this prospectus supplement. The certificates will be
issued pursuant to the trust agreement and will represent the beneficial
ownership interest in the trust.
PAYMENTS ON THE NOTES
Subservicers will collect monthly payments of interest or principal and interest
on the revolving credit loans. Each month, the subservicers will retain their
subservicing fee and forward the remainder of the collections, including
unscheduled payments, to the master servicer. After retaining its master
servicing fee, the fees payable to the owner trustee and the indenture trustee
and amounts that reimburse the subservicer or master servicer for reimbursable
expenses, the master servicer will forward all collections on the revolving
credit loans to the indenture trustee.
The aggregate amount of such monthly collections is described under the heading
'Description of the Servicing Agreement -- P&I Collections' in this prospectus
supplement.
Payments to noteholders will made from principal and interest collections as
follows:
Step 1
Interest to the notes
Step 2
Principal to the notes
Step 3
Principal to the notes in respect of specified amounts
of certain losses
Step 4
Payment to the credit enhancer of its premium for the
guaranty insurance policy and any previously unpaid
premiums (with interest thereon)
Step 5
Reimbursement of the credit enhancer for certain prior
draws made on the guaranty insurance policy
(with interest thereon)
Step 6
Additional principal to the notes if the level of
overcollateralization falls below what is required
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Step 7
Payment to the credit enhancer of any other amounts owed
Step 8
Payment of basis risk shortfalls not previously
paid to the notes
Step 9
Any remaining funds to the certificates
Principal payments on the notes will be made as described under 'Description of
the Securities -- Principal Payments on the Notes' in this prospectus
supplement.
In addition, payments to noteholders will be made on each payment date from
draws on the guaranty insurance policy, if necessary. Such draws will cover
shortfalls in amounts available to pay interest on the notes at the note rate
plus any losses allocated to the notes.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the term notes consists of:
EXCESS INTEREST. Mortgagors are generally required to pay more interest than is
necessary to pay the interest earned on the notes each month. Therefore, there
will generally be excess interest. Any excess interest will be available to
cover interest shortfalls and will be used to pay principal on the notes up to
specified amounts of certain 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 notes as principal. This will
reduce the principal balance of the notes faster than the principal balance of
the revolving credit loans so that the required level of overcollateralization
is reached.
OVERCOLLATERALIZATION. Initially, the principal amount of the notes issued by
the trust will be greater than the principal balance of the revolving credit
loans as of the cut-off date by approximately 1.0%. This difference represents
the initial undercollateralization. Overcollateralization is the excess, if any,
of the unpaid principal balance of the revolving credit loans over the remaining
balances of the notes. Any excess interest not used to cover interest shortfalls
or current period losses as described above will be paid as principal on the
notes to reduce the initial undercollateralization to zero and then to reduce
the principal balance of the notes so that the required level of
overcollateralization is reached. Any overcollateralization that is created may
absorb specified amounts of certain losses on the revolving credit loans, if not
covered by excess interest. Any loss amounts allocated to the notes that are not
covered by overcollateralization will be covered by the guaranty insurance
policy described below. If the level of overcollateralization falls below what
is required, the excess interest described above will again be paid to the notes
as principal in order to increase the level of overcollateralization to its
required level.
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
applicable note rate plus any losses allocated to the notes. The guaranty
insurance policy will not cover basis risk shortfalls that result if the note
rate is limited to less than LIBOR plus 0.27% per annum.
See 'Description of the Policy' herein and 'Description of Credit Enhancement'
in the Prospectus.
OPTIONAL TERMINATION
On any payment date on which the aggregate outstanding principal balance of the
revolving credit loans after applying payments received in the related
collection period is less than 10% of the aggregate principal balance as of the
cut-off date, the master servicer may, but is not required to, repurchase some
or all of the remaining revolving credit loans. An optional redemption will
cause the outstanding principal balance of the term notes to be paid 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.
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RATINGS
When issued, the term notes will receive the ratings shown on page S-3 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 revolving credit loans. The rate of prepayments, if different
than originally anticipated, could adversely affect the yield realized by
holders of the term notes.
See 'Ratings' in this prospectus supplement.
LEGAL INVESTMENT
The term 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 term notes constitute
legal investments for you.
See 'Legal Investment' in this prospectus supplement for important information
concerning possible restrictions on ownership of the term notes by regulated
institutions.
ERISA CONSIDERATIONS
Subject to important considerations, the term notes 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
term notes.
See 'ERISA Considerations' in the prospectus supplement and in the accompanying
prospectus.
TAX STATUS
For federal income tax purposes, the term 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
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RISK FACTORS
The term notes are not suitable investments for all investors. In
particular, you should not purchase the term notes unless you understand the
prepayment, credit, liquidity and market risks associated with the term notes.
The term 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 term notes:
RISKS ASSOCIATED WITH THE REVOLVING CREDIT LOANS
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Lien position may affect risk of 99.3% of the revolving credit loans (based on principal balances) included
loss on the revolving credit loans. in the mortgage 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 such
revolving credit loans only to the extent that 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 such revolving loan as a bad debt.
The foregoing risks are particularly applicable to revolving credit 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.
The master servicer is not required The master servicer is not obligated to advance scheduled monthly payments
to advance delinquent monthly of principal and interest on revolving credit loans that are delinquent or
payments. 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.
Adverse economic conditions may Mortgage loans of the type similar to those included in the revolving
increase risk to investors. credit 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 revolving credit loans. In such
circumstances, no prediction can be made as to the severity of the effect
of an economic downturn on the rate of delinquencies and losses on the
revolving credit loans.
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Geographic concentration may affect One risk associated with investing in a pool of revolving credit loans is
risk of loss on the revolving credit created by any concentration of the related mortgaged properties in one or
loans. more geographic regions. If the regional economy or housing market of a
state (or any other region) having a significant concentration of the
properties underlying the revolving credit loans becomes weak, the
revolving credit loans related to properties in that region may experience
high rates of loss and delinquency, resulting in losses to the trust. 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 any of such events may also be felt in areas beyond the
region immediately affected by the disaster or disturbance. The properties
underlying the revolving credit loans may be concentrated in these regions.
Such concentration may result in greater losses to the trust than those
generally present for similar mortgage-backed securities without such
concentration.
Certain of the revolving credit Approximately 20.8% of the revolving credit loans (based on principal
loans do not require principal balances) do not require principal payments until maturity and, thus, will
payments until maturity. require payment in full of the outstanding principal balance (i.e., a
balloon payment) at their stated maturity. Revolving credit loans with
balloon payments involve a greater degree of risk because the ability of a
mortgagor to make a balloon payment typically will depend upon the
mortgagor's ability either to timely refinance the loan or to sell the
related mortgaged property.
See 'Description of the Mortgage Pool' in this prospectus supplement.
Mortgagors may be qualified on the The originators generally determine whether prospective borrowers qualify
basis of low initial interest rates for revolving credit loans on the basis of a monthly payment that reflects
an interest rate that is significantly lower than the maximum rate.
Approximately 40.0% of the revolving credit loans (by principal balances),
use a qualifying rate lower than the rate produced by adding the gross
margin to the index. Repayment of these revolving credit loans depends on
the ability of the borrower to make larger interest payments when the
interest rates on their revolving credit loans adjust.
Changes in bankruptcy laws may The Bankruptcy Reform Act of 1994 established the National Bankruptcy
affect the investor's interest. Review Commission for purposes of analyzing the nation's bankruptcy laws
and making recommendations to Congress for legislative changes to the
bankruptcy laws. Such Commission delivered a report on October 20, 1997
recommending that Congress amend the Bankruptcy Code in certain respects
with respect to mortgage loans such as the revolving credit loans.
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. Any such
bankruptcy law changes may affect future bankruptcies and therefore could
affect the rate and timing of payments on the revolving credit loans. Any
such changes to the Bankruptcy Code could have a negative effect on the
revolving credit loans and the enforcement of rights therein.
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LIMITED OBLIGATION
Payments on the revolving credit Credit enhancement will be provided for the term notes in the form of
loans, together with the guaranty excess interest collections, if available, any overcollateralization that
insurance policy, are the sole may be created and by the guaranty insurance policy. None of the depositor,
source of payments. the master servicer or any of their affiliates will have any obligation to
replace or supplement such credit enhancement, or take any other action to
maintain any rating of the term notes. To the extent that any losses are
incurred on any of the revolving credit loans that are not covered by the
foregoing, the holders of the term notes will bear all risk of such losses
resulting from default by mortgagors.
LIQUIDITY RISKS
Investors may have to hold the term A secondary market for the term notes may not develop. Even if a secondary
notes to maturity if the market does develop, it may not continue, or it may be illiquid.
marketability of the term notes is Illiquidity means an investor may not be able to find a buyer to buy its
limited. securities readily or at prices that will enable the investor to realize a
desired yield. Illiquidity can have an adverse effect on the market value
of the term notes.
SPECIAL YIELD AND PREPAYMENT CONSIDERATIONS
An investor's yield to maturity The yield to maturity of the term notes will depend on a variety of
will depend on various factors. factors, including:
the rate and timing of principal payments on the revolving credit loans
(including payments in excess of required installments, prepayments in
full, liquidations, and repurchases due to breaches of representations or
warranties);
the rate and timing of new draws on the revolving credit loans;
the note rate; and
the purchase price.
In general, if a term 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 term 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 Since mortgagors can generally prepay their revolving credit loans at any
revolving credit loans will be time, the rate and timing of principal payments on the term notes are
affected by various factors. highly uncertain. The interest rates on the revolving credit loans are
subject to adjustment based on changes in the prime rate and subject to
certain limitations. Any increase in the interest rate on a revolving
credit loan may encourage a mortgagor to repay the loan faster. The
deductibility of interest payments for federal tax purposes, however, may
act as a disincentive to repayment, despite the increase in the interest
rate. In addition, due to the revolving feature of the loans, the rate of
principal payments may be unrelated to changes in market rates of interest.
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Refinancing programs, which may involve soliciting all or some of the
mortgagors to refinance their revolving credit loans, may increase the rate
of prepayments on the revolving credit loans.
See 'Description of the Mortgage Pool -- Revolving Credit Loan Terms' in
this prospectus supplement and 'Maturity and Prepayment Considerations' in
the prospectus.
RISK OF CERTAIN SHORTFALLS
The term notes may not always The term notes may not always receive interest at a rate equal to LIBOR
receive interest based on LIBOR plus plus the margin. If the weighted average of the net loan rates on the
the margin. revolving credit loans is less than LIBOR plus the margin, the note rate on
the term notes will be limited to the available funds. Thus, the yield to
investors in the term notes will be sensitive to fluctuations in the level
of LIBOR and may be limited by the application of the weighted average net
loan rate on the revolving credit loans. The prepayment of the revolving
credit loans with higher net loan rates may result in a lower weighted
average net rate.
To the extent the weighted average net loan rate is paid on the term notes,
the difference between the rate of LIBOR plus the margin and the weighted
average net loan rate will create a basis risk shortfall that will carry
forward with interest thereon. However, such basis risk shortfall will not
be covered by the guaranty insurance policy and will only be payable from
excess interest that may be available in future periods.
See 'Description of the Securities -- Interest Payments on the Notes' in
this prospectus supplement.
</TABLE>
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INTRODUCTION
The Home Equity Loan Trust 1999-HS3 (the 'ISSUER' or the 'TRUST') will be
formed pursuant to a Trust Agreement dated as of March 23, 1999 (as amended by
the Amended and Restated Trust Agreement (the 'TRUST AGREEMENT') to be dated as
of March 29, 1999 (the 'CLOSING DATE'), between Residential Funding Mortgage
Securities II, Inc. (the 'DEPOSITOR') and Wilmington Trust Company, as Owner
Trustee. The Issuer will issue $275,000,000 aggregate principal amount of Home
Equity Loan-Backed Term Notes, Series 1999-HS3 (the 'TERM NOTES') and the Home
Equity Loan-Backed Variable Funding Notes, Series 1999-HS3 (the 'VARIABLE
FUNDING NOTES,' and together with the Term Notes, the 'NOTES'). The Notes will
be issued pursuant to an Indenture (the 'INDENTURE'), to be dated as of the
Closing Date between the Issuer and The Chase Manhattan Bank, as Indenture
Trustee. Pursuant to the Trust Agreement, the Issuer will issue one class of
Home Equity Loan-Backed Certificates, Series 1999-HS3 (the 'CERTIFICATES'). The
Notes and the Certificates are collectively referred to herein as the
'SECURITIES.' Only the Term Notes are offered hereby. On the Closing Date, the
Depositor will transfer to the Issuer a pool (the 'MORTGAGE POOL') of revolving
credit loans (the 'REVOLVING CREDIT LOANS') secured by one- to four-family
residential properties.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Revolving Credit Loans were originated pursuant to Credit Line
Agreements, approximately 99.3% (by Cut-off Date Balance) of which are secured
by second mortgages or deeds of trust and the remainder of which are first
mortgages or deeds of trust. The Mortgage Pool will include the unpaid principal
balance of the Revolving Credit Loans as of the close of business on the day
prior to March 1, 1999 (the 'CUT-OFF DATE BALANCE,' and March 1, 1999, the
'CUT-OFF DATE') and any additions thereto made after the Cut-off Date as a
result of new advances of money made pursuant to the applicable Credit Line
Agreement after such date (the 'ADDITIONAL BALANCES' or 'DRAWS') except as
otherwise provided herein. The properties securing the Revolving Credit Loans
consist primarily of residential properties that are one- to four-family
properties. As to approximately 98.7% of the Revolving Credit Loans (by Cut-off
Date Balance), the Mortgagor represented at the time of origination that the
related Mortgaged Property would be owner occupied as a primary, second or
vacation home.
All of the Revolving Credit Loans were acquired by Residential Funding (in
such capacity, the 'SELLER') from banks, savings and loan associations, mortgage
bankers, investment banking firms and other revolving credit loan originators
and sellers (the 'PROGRAM SELLERS'), under the Seller's Home Equity Program (the
'HOME EQUITY PROGRAM') on a servicing released basis. 22.7% of the Revolving
Credit Loans were acquired by the Seller from HomeComings Financial Network,
Inc., an affiliate of the Seller. No Unaffiliated Seller sold more than 8.7%
Revolving Credit Loans to Residential Funding. All of the Revolving Credit Loans
will be serviced by GMAC Mortgage Corporation. See 'Servicing of Revolving
Credit Loans -- Initial Subservicer' herein.
All percentages of the Revolving Credit Loans described herein are
approximate percentages determined (except as otherwise indicated) by Cut-off
Date Balance.
The Cut-off Date Balance of the Revolving Credit Loans is $272,277,228. The
average Cut-off Date Balance is $32,553, the minimum Cut-off Date Balance is $0,
the maximum Cut-off Date Balance is $295,143, the lowest Loan Rate and the
highest Loan Rate on the Cut-off Date are 5.99% and 14.00% per annum,
respectively, and the weighted average Loan Rate on the Cut-off Date is 8.8979%
per annum. The Combined Loan to Value Ratios range from 4.00% to 100.00%, with a
weighted average of 85.59%. The weighted average Credit Limit Utilization Rate
based on the Credit Limits of the Revolving Credit Loans is 76.48% as of the
Cut-off Date. The weighted average Junior Ratio of the Revolving Credit Loans
based on the related Credit Limit is approximately 19.99% as of the Cut-off
Date. The latest scheduled maturity of any Revolving Credit Loan will occur in
October 2028. With respect to 58.99% of the Revolving Credit Loans, the related
Mortgaged Properties are located in California.
As of the Cut-off Date, the Loan Rates on approximately 40.0% of the
Revolving Credit Loans (the 'TEASER LOANS') will be introductory rates that are
lower than the rate that would have been in effect if the applicable Index and
Gross Margin at the time these loans were originated were used to determine the
Loan Rate. Commencing on their first Adjustment Date, the Loan Rates on the
Teaser Loans will be based on the
S-11
<PAGE>
<PAGE>
applicable Index and Gross Margin. As of the Cut-off Date, the weighted average
months until the Teaser Loans reach their teaser expiration date is
approximately two months.
As of the Cut-off Date, no Revolving Credit Loan will be 30 or more days
delinquent in payment. For a description of the methodology used to categorize
mortgage loans as delinquent, see 'Servicing of Revolving Credit
Loans -- Delinquency and Loss Experience of the Master Servicer's Portfolio'
herein.
REVOLVING CREDIT LOAN TERMS
Interest on each Revolving Credit Loan is calculated based on the average
daily balance outstanding during the Billing Cycle, and with respect to each
Revolving Credit Loan, the 'BILLING CYCLE' is the calendar month preceding the
related Due Date (as defined herein).
Each Revolving Credit Loan has a Loan Rate that is subject to adjustment on
the first day of each related Billing Cycle commencing on a specified date (each
such day, an 'ADJUSTMENT DATE') to equal the sum of (a) the prime rate for
corporate loans at United States commercial banks, as published in The Wall
Street Journal (the 'INDEX') on the first business day of the month in which
such Billing Cycle begins, and (b) the Gross Margin specified in the related
Credit Line Agreement, provided, however, that the Loan Rate on each Revolving
Credit Loan will in no event be greater than the maximum Loan Rate (the 'MAXIMUM
LOAN RATE') set forth in the related Credit Line Agreement (subject to the
maximum rate permitted by applicable law). If, on any day, more than one prime
rate or a range of prime rates for corporate loans at United States commercial
banks is published in The Wall Street Journal, the Index on such day will be the
highest of the prime rates.
Each Revolving Credit Loan had a term to maturity from the date of
origination of not more than 360 months. The Mortgagor for each Revolving Credit
Loan may make a Draw under the related Credit Line Agreement at any time during
the Draw Period. The Draw Period will be 5 years (with respect to 42.03% of the
Revolving Credit Loans), 10 years (with respect to .04% of the Revolving Credit
Loans) and 15 years (with respect to 57.93% of the Revolving Credit Loans) from
the date of origination thereof. The related Mortgagor will not be permitted to
make any Draw during the 10 year period (or with respect to 0.21% of the
Revolving Credit Loans, the 15 year period) from the end of the related Draw
Period to the related maturity date (the 'REPAYMENT PERIOD'). The maximum amount
of each Draw with respect to any Revolving Credit Loan is equal to the excess,
if any, of the Credit Limit over the outstanding principal balance under such
Credit Line Agreement at the time of such Draw. Each Revolving Credit Loan may
be prepaid in full or in part at any time and without penalty, but with respect
to each Revolving Credit Loan, the related Mortgagor will have the right during
the related Draw Period to make a Draw in the amount of any prepayment
theretofore made with respect to such Revolving Credit Loan. Each Mortgagor
generally will have access to make Draws with either checks or a credit card,
subject to applicable law. The Credit Line Agreement or Mortgage related to each
Revolving Credit Loan generally will contain a customary 'due-on-sale' clause.
As to each Revolving Credit Loan, the Mortgagor's rights to receive Draws
during the Draw Period may be suspended, or the Credit Limit may be reduced for
cause under a number of circumstances, including, but not limited to: a
materially adverse change in the Mortgagor's financial circumstances; a decline
in the value of the Mortgaged Property significantly below its appraised value
at origination; or a payment default by the Mortgagor. However, generally such
suspension or reduction will not affect the payment terms for previously drawn
balances. The Subservicers and the Master Servicer will have no obligation to
investigate as to whether any such circumstances have occurred and may have no
knowledge thereof; therefore there can be no assurance that any Mortgagor's
ability to receive Draws will be suspended or reduced in the event that the
foregoing circumstances occur. In the event of default under a Revolving Credit
Loan, the Revolving Credit Loan may be terminated and declared immediately due
and payable in full. For this purpose, a default includes, but is not limited
to: the Mortgagor's failure to make any payment as required; any action or
inaction by the Mortgagor that adversely affects the Mortgaged Property or the
rights in the Mortgaged Property; or fraud or material misrepresentation by a
Mortgagor in connection with the Revolving Credit Loan.
Prior to the related Repayment Period or prior to the date of maturity for
loans without Repayment Periods, the Mortgagor for each Revolving Credit Loan
will be obligated to make monthly payments thereon in a minimum amount that
generally will be equal to the Finance Charge (as defined below) for each
Billing Cycle. In addition, except as described below, if such loan has a
Repayment Period, during such period, the Mortgagor will be obligated to make
monthly payments consisting of principal installments which would substantially
S-12
<PAGE>
<PAGE>
amortize the Principal Balance by the maturity date, and to pay any current
Finance Charges and Additional Charges (as defined below).
Notwithstanding the foregoing, with respect to the Balloon Loans,
representing approximately 20.8% of the Revolving Credit Loans, the Mortgagor
will be obligated to make a payment on the related maturity date in an amount
equal to the related Account Balance. Such Balloon Loans will not have a
Repayment Period and prior to the related maturity date, the related Mortgagors
will be obligated to make monthly payments thereon in a minimum amount that
generally will equal the Finance Charge for the related Billing Cycle. See 'Risk
Factors -- Risks Associated with the Revolving Credit Loans' herein.
With respect to each Revolving Credit Loan, (a) the 'FINANCE CHARGE' for
any Billing Cycle will be an amount equal to the aggregate of, as calculated for
each day in the Billing Cycle, the then-applicable Loan Rate divided by 365
multiplied by such day's Principal Balance and (b) the 'ACCOUNT BALANCE' on any
day generally will be the principal balance of the Revolving Credit Loan for
such day, plus the sum of any unpaid fees, insurance premiums and other charges,
if any (collectively, 'ADDITIONAL CHARGES') and any unpaid Finance Charges that
are due on such Revolving Credit Loan, plus the aggregate of all related Draws
funded on such day, minus the aggregate of all payments and credits that are
applied to the repayment of any such Draws on such day. Payments made by or on
behalf of the Mortgagor for each Revolving Credit Loan will be applied to any
unpaid Finance Charges that are due thereon prior to application to any unpaid
principal outstanding.
With respect to each Revolving Credit Loan, the 'COMBINED LOAN-TO-VALUE
RATIO' or 'CLTV' generally will be the ratio, expressed as a percentage, of (A)
the sum of (i) the Credit Limit and (ii) any outstanding principal balance, at
the time of origination of such Revolving Credit Loan, of all other mortgage
loans, if any, secured by senior or subordinate liens on the related Mortgaged
Property, to (B) the Appraised Value, or, to the extent permitted by the Guide
(as defined herein), the Stated Value. The 'APPRAISED VALUE' for any Revolving
Credit Loan will be the appraised value of the related Mortgaged Property
determined in the appraisal used in the origination of such Revolving Credit
Loan (which may have been obtained at an earlier time); provided that if such
Revolving Credit Loan was originated simultaneously with or not more than 12
months after a senior lien on the related Mortgaged Property, the Appraised
Value shall be the lesser of the appraised value at the origination of the
senior lien and the sales price for such Mortgaged Property. However, with
respect to not more than 2.8% of the Revolving Credit Loans, the 'STATED VALUE'
will be the value of the property as stated by the related Mortgagor in his or
her application. See 'Trust Asset Program -- Underwriting Standards Applicable
to the Revolving Credit Loans' in the Prospectus and 'Description of the
Mortgage Pool -- Underwriting Standards' herein.
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 allow 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 such Revolving Credit Loans exceed 5% of the current Pool Balance.
REVOLVING CREDIT LOAN CHARACTERISTICS
Set forth below is a description of certain additional characteristics of
the Revolving Credit Loans as of the Cut-off Date. Unless otherwise specified,
all Principal Balances of the Revolving Credit Loans are by aggregate, as of the
Cut-off Date and are rounded to the nearest dollar. All percentages are
approximate percentages by aggregate Principal Balance as of the Cut-off Date
(except as indicated otherwise).
S-13
<PAGE>
<PAGE>
PROPERTY TYPES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
PROPERTY TYPE CREDIT LOANS BALANCE BALANCE
- ------------------------------------------------------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
Single Family..................................................... 6,378 $207,055,677 76.05%
PUD - Detached.................................................... 1,094 40,159,664 14.75
Condominium....................................................... 481 14,099,617 5.18
PUD - Attached.................................................... 185 5,022,583 1.84
Multifamily (2-4 Units)........................................... 164 4,145,755 1.52
Townhouse/Rowhouse - Attached..................................... 48 1,450,498 0.53
Manufactured Home................................................. 9 181,885 0.07
Townhouse/Rowhouse - Detached..................................... 5 161,548 0.06
------ ------------ -------
Totals....................................................... 8,364 $272,277,228 100.00%
------ ------------ -------
------ ------------ -------
</TABLE>
OCCUPANCY TYPES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
OCCUPANCY (AS INDICATED BY BORROWER) CREDIT LOANS BALANCE BALANCE
- ------------------------------------------------------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
Primary........................................................... 8,169 $268,290,215 98.54%
Non-Owner Occupied................................................ 183 3,565,918 1.31
Second/Vacation................................................... 12 421,095 0.15
------ ------------ -------
Totals....................................................... 8,364 $272,277,228 100.00%
------ ------------ -------
------ ------------ -------
</TABLE>
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
RANGE OF PRINCIPAL BALANCES CREDIT LOANS BALANCE BALANCE
- ------------------------------------------------------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
Equal to $0.00.................................................... 102 $ 0 0.00%*
$ 0.01 - 25,000.00.......................................... 3,820 56,177,008 20.63
$ 25,000.01 - 50,000.00.......................................... 3,159 117,369,347 43.11
$ 50,000.01 - 75,000.00.......................................... 766 46,647,469 17.13
$ 75,000.01 - 100,000.00.......................................... 424 38,198,979 14.03
$100,000.01 - 125,000.00.......................................... 26 2,863,344 1.05
$125,000.01 - 150,000.00.......................................... 33 4,693,975 1.72
$150,000.01 - 175,000.00.......................................... 11 1,745,570 0.64
$175,000.01 - 200,000.00.......................................... 21 4,044,788 1.49
$200,000.01 - 250,000.00.......................................... 1 241,605 0.09
$250,000.01 - 300,000.00.......................................... 1 295,143 0.11
------ ------------ -------
Totals....................................................... 8,364 $272,277,228 100.00%
------ ------------ -------
------ ------------ -------
</TABLE>
- ------------
* Represents less than 0.01% of the Cut-off Balance.
The average Principal Balance of the Revolving Credit Loans as of the
Cut-off Date will be $32,553.47.
S-14
<PAGE>
<PAGE>
GEOGRAPHICAL DISTRIBUTIONS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
STATE CREDIT LOANS BALANCE BALANCE
- ------------------------------------------------------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
California........................................................ 4,357 $160,628,916 58.99%
Colorado.......................................................... 380 10,437,568 3.83
Florida........................................................... 403 10,244,440 3.76
Michigan.......................................................... 374 9,867,752 3.62
Georgia........................................................... 279 7,682,594 2.82
Massachusetts..................................................... 227 7,440,128 2.73
New Jersey........................................................ 241 6,964,098 2.56
Utah.............................................................. 265 6,832,888 2.51
New York.......................................................... 173 6,511,504 2.39
Washington........................................................ 204 5,634,738 2.07
Other(1).......................................................... 1,461 40,032,604 14.70
------ ------------ -------
Totals....................................................... 8,364 $272,277,228 100.00%
------ ------------ -------
------ ------------ -------
</TABLE>
- ------------
(1) Other includes states and the District of Columbia under 2.00% of the
Cut-off Date Balance individually.
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
RANGE OF COMBINED LOAN-TO-VALUE RATIOS (%) CREDIT LOANS BALANCE BALANCE
- ------------------------------------------------------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
00.01 - 10.00.................................................... 3 $ 43,026 0.02%
10.01 - 20.00.................................................... 14 203,872 0.07
20.01 - 30.00.................................................... 24 693,319 0.25
30.01 - 40.00.................................................... 47 1,325,619 0.49
40.01 - 50.00.................................................... 86 2,968,560 1.09
50.01 - 60.00.................................................... 180 5,636,469 2.07
60.01 - 70.00.................................................... 368 12,516,230 4.60
70.01 - 75.00.................................................... 417 13,334,134 4.90
75.01 - 80.00.................................................... 882 28,029,740 10.29
80.01 - 85.00.................................................... 444 11,647,463 4.28
85.01 - 90.00.................................................... 2,857 80,722,386 29.65
90.01 - 95.00.................................................... 2,156 82,692,889 30.37
95.01 - 100.00.................................................... 886 32,463,520 11.92
------ ------------ -------
Totals....................................................... 8,364 $272,277,228 100.00%
------ ------------ -------
------ ------------ -------
</TABLE>
The weighted average Combined Loan-to-Value Ratio based on the Credit
Limits of the Revolving Credit Loans as of the Cut-off Date will be 85.59%.
S-15
<PAGE>
<PAGE>
JUNIOR RATIOS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
RANGE OF JUNIOR RATIOS (%)(1) CREDIT LOANS BALANCE BALANCE
- ------------------------------------------------------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
0.01 - 5.00.................................................... 102 $ 1,238,820 0.46%
5.01 - 10.00.................................................... 815 15,474,536 5.73
10.01 - 15.00.................................................... 2,348 64,954,282 24.03
15.01 - 20.00.................................................... 2,986 105,262,091 38.94
20.01 - 25.00.................................................... 920 34,918,243 12.92
25.01 - 30.00.................................................... 492 20,168,046 7.46
30.01 - 40.00.................................................... 439 18,094,751 6.69
40.01 - 50.00.................................................... 113 4,779,347 1.77
50.01 - 60.00.................................................... 62 3,307,511 1.22
60.01 - 70.00.................................................... 15 1,070,340 0.40
70.01 - 80.00.................................................... 13 814,351 0.30
80.01 - 90.00.................................................... 1 195,128 0.07
90.01 - 100.00.................................................... 2 17,560 0.01
------ ------------ -------
Totals....................................................... 8,308 $270,295,006 100.00%
------ ------------ -------
------ ------------ -------
</TABLE>
- ------------
(1) Excludes first lien revolving credit loans. Junior Ratio is defined as the
ratio of the Credit Limits of the second lien revolving credit loans to the
sum of (i) the Credit Limits of the second lien revolving credit loans, and
(ii) the unpaid principal balance of any senior lien balance at the time of
origination of the second lien revolving credit loan.
The weighted average Junior Ratio as of the Cut-off Date based on the
Credit Limit of the Revolving Credit Loans will be 19.99%.
LOAN RATES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF LOAN RATES (%) CREDIT LOANS BALANCE DATE BALANCE
- ------------------------------------------------------------------ ------------ ------------ --------------
<S> <C> <C> <C>
5.501 - 6.000................................................... 860 $ 26,350,278 9.68%
6.001 - 6.500................................................... 1 49,412 0.02
6.501 - 7.000................................................... 2,566 84,720,948 31.12
7.501 - 8.000................................................... 123 2,587,210 0.95
8.001 - 8.500................................................... 452 13,086,742 4.81
8.501 - 9.000................................................... 277 9,812,276 3.60
9.001 - 9.500................................................... 495 12,567,914 4.62
9.501 - 10.000................................................... 542 16,387,563 6.02
10.001 - 10.500................................................... 809 28,192,443 10.35
10.501 - 11.000................................................... 640 25,130,562 9.23
11.001 - 11.500................................................... 690 24,173,885 8.88
11.501 - 12.000................................................... 528 18,710,884 6.87
12.001 - 12.500................................................... 156 5,642,288 2.07
12.501 - 13.000................................................... 210 4,518,143 1.66
13.001 - 13.500................................................... 12 229,283 0.08
13.501 - 14.000................................................... 3 117,398 0.04
------ ------------ -------
Totals....................................................... 8,364 $272,277,228 100.00%
------ ------------ -------
------ ------------ -------
</TABLE>
The weighted average Loan Rate as of the Cut-off Date will be 8.8979%.
S-16
<PAGE>
<PAGE>
GROSS MARGINS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
RANGE OF GROSS MARGINS (%) CREDIT LOANS BALANCE BALANCE
- ------------------------------------------------------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
0.00.............................................................. 5 $ 189,045 0.07%
0.010 - 0.500..................................................... 980 26,027,540 9.56
0.501 - 1.000..................................................... 707 25,517,296 9.37
1.001 - 1.500..................................................... 468 14,071,815 5.17
1.501 - 2.000..................................................... 1,097 31,989,687 11.75
2.001 - 2.500..................................................... 1,385 46,575,398 17.11
2.501 - 3.000..................................................... 847 29,939,676 11.00
3.001 - 3.500..................................................... 1,072 38,218,270 14.04
3.501 - 4.000..................................................... 1,085 38,114,984 14.00
4.001 - 4.500..................................................... 396 13,909,154 5.11
4.501 - 5.000..................................................... 288 7,031,131 2.58
5.001 - 5.500..................................................... 26 505,121 0.19
Over 5.500........................................................ 8 188,112 0.07
------ ------------ -------
Totals....................................................... 8,364 $272,277,228 100.00%
------ ------------ -------
------ ------------ -------
</TABLE>
The weighted average Gross Margin as of the Cut-off Date will be 2.50%.
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CREDIT LIMIT UTILIZATION RATES (%) CREDIT LOANS BALANCE BALANCE
- ------------------------------------------------------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
0.00............................................................. 102 $ 0 0.00%*
00.01 - 10.00................................................... 339 716,506 0.26
10.01 - 20.00................................................... 243 2,009,451 0.74
20.01 - 30.00................................................... 263 3,515,039 1.29
30.01 - 40.00................................................... 261 4,470,187 1.64
40.01 - 50.00................................................... 343 7,994,331 2.94
50.01 - 60.00................................................... 319 7,992,140 2.94
60.01 - 70.00................................................... 313 8,172,582 3.00
70.01 - 80.00................................................... 373 12,197,142 4.48
80.01 - 90.00................................................... 447 15,447,091 5.67
90.01 - 100.00................................................... 5,339 208,960,185 76.75
100.01 - 101.50................................................... 22 802,574 0.29
------ ------------ -------
Totals....................................................... 8,364 $272,277,228 100.00%
------ ------------ -------
------ ------------ -------
</TABLE>
- ------------
* Represents less than 0.01% of the Cut-off Date Balance.
The weighted average Credit Limit Utilization Rate based on the Credit
Limits of the Revolving Credit Loans as of the Cut-off Date will be 76.48%.
S-17
<PAGE>
<PAGE>
CREDIT LIMITS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CREDIT LIMITS CREDIT LOANS BALANCE BALANCE
- ------------------------------------------------------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
$ 0.01 - 25,000.00.......................................... 2,587 $ 39,530,260 14.52%
$ 25,000.01 - 50,000.00.......................................... 3,823 117,968,113 43.33
$ 50,000.01 - 75,000.00.......................................... 1,013 49,066,705 18.02
$ 75,000.01 - 100,000.00.......................................... 790 49,284,230 18.10
$100,000.01 - 125,000.00.......................................... 27 2,416,090 0.89
$125,000.01 - 150,000.00.......................................... 50 5,163,572 1.90
$150,000.01 - 175,000.00.......................................... 17 1,655,365 0.61
$175,000.01 - 200,000.00.......................................... 51 6,160,595 2.26
$225,000.01 - 250,000.00.......................................... 2 416,611 0.15
$275,000.01 - 300,000.00.......................................... 2 443,282 0.16
Greater than 300,000.00........................................... 2 172,405 0.06
------ ------------ -------
Totals....................................................... 8,364 $272,277,228 100.00%
------ ------------ -------
------ ------------ -------
</TABLE>
The total Credit Limits as of the Cut-off Date will be $356,009,858.00.
MAXIMUM LOAN RATES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
MAXIMUM LOAN RATES (%) CREDIT LOANS BALANCE BALANCE
- ------------------------------------------------------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
10.00............................................................. 3 $ 101,009 0.04%
14.00............................................................. 9 282,455 0.10
16.00............................................................. 44 1,195,591 0.44
17.00............................................................. 2 29,159 0.01
18.00............................................................. 7,304 235,092,778 86.34
20.00............................................................. 9 131,716 0.05
21.00............................................................. 21 590,896 0.22
21.75............................................................. 37 838,267 0.31
22.20............................................................. 11 439,430 0.16
24.00............................................................. 865 31,884,771 11.71
25.00............................................................. 59 1,691,157 0.62
------ ------------ -------
Totals....................................................... 8,364 $272,277,228 100.00%
------ ------------ -------
------ ------------ -------
</TABLE>
The weighted average Maximum Loan Rate as of the Cut-off Date will be
18.756%.
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
RANGE OF MONTHS REMAINING TO SCHEDULED MATURITY CREDIT LOANS BALANCE BALANCE
- ------------------------------------------------------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
1 - 96......................................................... 4 $ 102,538 0.04%
121 - 144......................................................... 13 291,357 0.11
145 - 156......................................................... 21 480,298 0.18
157 - 168......................................................... 504 16,316,295 5.99
169 - 180......................................................... 4,366 153,891,584 56.52
181 - 288......................................................... 149 3,934,722 1.45
289 - 300......................................................... 3,291 96,690,293 35.51
Greater than 301.................................................. 16 570,141 0.21
------ ------------ -------
Totals....................................................... 8,364 $272,277,228 100.00%
------ ------------ -------
------ ------------ -------
</TABLE>
The weighted average months remaining to scheduled maturity as of the
Cut-off Date will be 219 months.
S-18
<PAGE>
<PAGE>
ORIGINATION YEAR
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
ORIGINATION YEAR CREDIT LOANS BALANCE BALANCE
- ------------------------------------------------------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
1989.............................................................. 1 $ 74,402 0.03%
1990.............................................................. 2 19,978 0.01
1991.............................................................. 1 8,158 0.00*
1994.............................................................. 8 190,274 0.07
1995.............................................................. 19 453,177 0.17
1996.............................................................. 34 758,713 0.28
1997.............................................................. 317 9,224,258 3.39
1998.............................................................. 6,968 229,774,651 84.39
1999.............................................................. 1,014 31,773,617 11.67
------ ------------ -------
Totals....................................................... 8,364 $272,277,228 100.00%
------ ------------ -------
------ ------------ -------
</TABLE>
- ------------
* Represents less than 0.01% of the Cut-off Date Balance.
LIEN PRIORITY
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
LIEN PRIORITY CREDIT LOANS BALANCE BALANCE
- ------------------------------------------------------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
First Lien........................................................ 56 $ 1,982,222 0.73%
Second Lien....................................................... 8,308 270,295,006 99.27
------ ------------ -------
Totals....................................................... 8,364 $272,277,228 100.00%
------ ------------ -------
------ ------------ -------
</TABLE>
S-19
<PAGE>
<PAGE>
CREDIT SCORES
'Credit Scores' are obtained by many lenders in connection with revolving
credit loan applications to help assess a borrower's credit-worthiness. 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 revolving credit
loan. Furthermore, Credit Scores were not developed specifically for use in
connection with home equity revolving credit 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 equity
revolving credit loans and consumer loans generally or the specific
characteristics of the related revolving credit loan (for example, the Combined
Loan-to-Value Ratio, the collateral for the revolving credit 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 Revolving Credit Loans.
The following table sets forth information as to the Credit Scores of the
related Mortgagors as utilized in the origination of the Revolving Credit Loans.
CREDIT SCORES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF CUT-OFF DATE MORTGAGE POOL
REVOLVING PRINCIPAL BY CUT-OFF DATE
CREDIT SCORE RANGE CREDIT LOANS BALANCE BALANCE
- ------------------------------------------------------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
0................................................................. 2 $ 19,978 0.01%
600 - 619......................................................... 5 106,199 0.04
620 - 639......................................................... 150 3,014,378 1.11
640 - 659......................................................... 661 20,023,815 7.35
660 - 679......................................................... 790 25,829,641 9.49
680 - 699......................................................... 1,453 52,555,767 19.30
700 - 719......................................................... 1,363 48,330,215 17.75
720 - 739......................................................... 1,348 42,839,595 15.73
740 - 759......................................................... 1,221 37,958,648 13.94
760 - 779......................................................... 922 28,620,765 10.51
780 - 799......................................................... 396 11,148,089 4.09
Greater than or equal to 800...................................... 53 1,830,136 0.67
------ ------------ -------
Totals....................................................... 8,364 $272,277,228 100.00%
------ ------------ -------
------ ------------ -------
</TABLE>
UNDERWRITING STANDARDS
The following is a brief description of the various underwriting standards
and procedures applicable to the Revolving Credit Loans. For a more detailed
description of the underwriting standards and procedures applicable to the
Revolving Credit Loans, see 'Trust Asset Program -- Underwriting Standards
Applicable to the Revolving Credit Loans' in the Prospectus.
The Seller's underwriting standards with respect to the Revolving Credit
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 set forth in the Guide are continuously revised based
on prevailing conditions in the residential
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<PAGE>
mortgage market and the market for mortgage securities. Under the Guide, the
Revolving Credit Loans are generally underwritten by the related Program Seller
or by a designated third party, and the Seller or a designated third party may
perform only sample quality assurance reviews to determine whether Revolving
Credit Loans purchased by it were underwritten in accordance with applicable
standards.
Each Program Seller is an entity approved by the Seller for participation
in the Home Equity Program. Each Program Seller was required at the time of its
approval to meet certain eligibility requirements, including minimum origination
and net worth levels determined by the Seller. However, there can be no
assurance that any Program Seller currently meets such standards. Generally, the
Program Seller will have originated the Revolving Credit Loans sold by it to the
Seller either directly or through correspondents or loan brokers, and will have
underwritten each Revolving Credit Loan prior to funding.
The underwriting standards set forth in the Guide with respect to Revolving
Credit Loans originated under the Home Equity Program generally require that
such Revolving Credit Loans be fully documented or that such Revolving Credit
Loans be supported by alternative documentation. For fully documented loans, a
prospective borrower is required to complete 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
Revolving Credit Loan originated under the Home Equity Program, an appraisal is
made of each property considered for financing. The Revolving Credit Loans
included in the Mortgage Pool generally were originated subject to a maximum
CLTV of 100% 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 Revolving
Credit Loans will not increase from the levels established at origination.
The underwriting standards set forth in the Guide with respect to Revolving
Credit Loans originated under the Home Equity Program may be varied in
appropriate cases. There can be no assurance that every Revolving Credit Loan
was originated in conformity with the applicable underwriting standards in all
material respects, or that the quality or performance of the Revolving Credit
Loans will be equivalent under all circumstances.
REPRESENTATIONS AND WARRANTIES
Each Program Seller has made or will make certain limited representations
and warranties regarding the related Revolving Credit Loans, as of the date of
purchase thereof by the Seller. However, such representations and warranties
will not be assigned to the Owner Trustee or the Indenture Trustee for the
benefit of the holders of the Notes or the Certificates, and therefore a breach
of such representations and warranties will not be enforceable on behalf of the
Trust.
SERVICING OF REVOLVING CREDIT LOANS
GENERAL
The Master Servicer will be responsible for servicing the Revolving Credit
Loans directly or through one or more Subservicers in accordance with the Guide
and the terms of the Servicing Agreement. See 'Servicing of Trust Assets' in the
Prospectus.
Billing statements are mailed monthly by the Subservicers. The statement
details the monthly activity on the related Revolving Credit Loan and specifies
the minimum payment due to the Subservicers and the available credit line.
Notice of changes in the applicable Loan Rate are provided by the related
Subservicers to the Mortgagor with such statements. All payments are due by the
20th day of the month (the 'DUE DATE').
RELEASE OF LIEN; REFINANCING OF SENIOR LIEN
The Servicing Agreement permits the Master Servicer to release the lien on
the Mortgaged Property securing a Revolving Credit Loan under certain
circumstances, if the Revolving Credit Loan is current in payment. Such a
release may be made in any case where the borrower simultaneously delivers a
mortgage on a substitute Mortgaged Property, if the Combined Loan-to-Value Ratio
is not increased. A release may also be
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<PAGE>
<PAGE>
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) 100% 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
Revolving Credit Loan to become unsecured, subject to certain limitations set
forth in the Servicing Agreement. At the time of such release, certain terms of
the Revolving Credit Loan may be modified (including a Loan Rate increase), and
the terms of the Revolving Credit Loan may be further modified in the event that
the borrower subsequently delivers a mortgage on a substitute Mortgage Property.
The Master Servicer may permit the refinancing of any existing lien senior
to a Revolving Credit Loan subject to the terms described in the Servicing
Agreement.
COLLECTION AND LIQUIDATION PRACTICES; LOSS MITIGATION
The Servicer is authorized to engage in a wide variety of loss mitigation
practices with respect to the Revolving Credit Loans, including waivers,
modifications, payment forbearances, partial forgiveness, entering into
repayment schedule arrangements, and capitalization of arrearages; provided in
any case that the Master Servicer determines that such action is not materially
adverse to the interests of the holders of the Securities or the Credit Enhancer
and is generally consistent with the Master Servicer's policies with respect to
similar loans; and provided further that certain of such modifications
(including reductions in the Loan Rate, partial forgiveness or a maturity
extension) may only be taken if the Revolving Credit Loan is in default or if
default is reasonably foreseeable. With respect to Revolving Credit 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 Revolving Credit Loan as a 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 REVOLVING CREDIT LOANS
Pursuant to the Servicing Agreement, the Master Servicer will have the
option to purchase from the Trust any Revolving Credit Loan which is 60 days or
more delinquent at a purchase price equal to the Principal Balance thereof plus
accrued interest thereon.
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 the Master Servicer's business judgment, changes in the Master Servicer's
portfolio of real estate secured revolving credit line loans that it services
for its clients and applicable laws and regulations, and other considerations.
INITIAL SUBSERVICER
GMAC Mortgage Corporation (the 'INITIAL SUBSERVICER' or 'GMACMC'), an
affiliate of the Depositor, is the Initial Subservicer of the Revolving Credit
Loans. GMACMC will act as Initial Subservicer for the Revolving Credit Loans
pursuant to 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.
GMACMC's executive offices are located at 100 Witmer Road, Horsham,
Pennsylvania 19044-0963.
DELINQUENCY AND LOSS EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO
The following tables summarize the delinquency and loss experience for all
home equity lines of credit ('HELOC') loans originated 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 Revolving Credit Loans will be similar to that set forth
below.
As used herein, 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
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<PAGE>
<PAGE>
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 herein 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 HELOC loan
portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of such HELOC loans serviced for each
period would be higher than those shown if certain of such home equity loans
were artificially isolated at a point in time and the information showed the
activity only with respect to such HELOC loans.
There can be no assurance that the delinquency experience set forth below
will be representative of the results that may be experienced with respect to
the Revolving Credit Loans serviced by the Initial Subservicer.
<TABLE>
<CAPTION>
HELOC LOAN PORTFOLIO DELINQUENCY EXPERIENCE
------------------------------------------------------
AT DECEMBER 31, 1997 AT DECEMBER 31, 1998
------------------------ ------------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF OF AMOUNT OF
LOANS LOANS LOANS LOANS
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Total Active HELOC Portfolio.......................... 41,233 $1,447,556,745 37,922 $1,256,577,897
Total HELOC Portfolio Line Amt........................ 59,588 $2,619,880,830 77,386 $3,405,067,240
Period of Delinquency
30-59 days....................................... 550 $ 19,618,521 606 $ 19,488,834
60-89 days....................................... 166 $ 6,727,095 100 $ 3,057,342
90+ days......................................... 520 $ 21,876,995 407 $ 18,164,892
------ -------------- ------ --------------
Total delinquent loans................................ 1,236 $ 48,222,612 1,113 $ 40,711,068
------ -------------- ------ --------------
------ -------------- ------ --------------
Percent of Active Portfolio........................... 3.00% 3.33% 2.93% 3.24%
</TABLE>
<TABLE>
<CAPTION>
TOTAL HELOC LOAN FORECLOSURE EXPERIENCE
------------------------------------------------------
AT DECEMBER 31, 1997 AT DECEMBER 31, 1998
------------------------ ------------------------
<S> <C> <C> <C> <C>
Completed Foreclosure(1).............................. 24 $ 2,139,878 34 $ 3,016,285
Foreclosure %......................................... 0.04% 0.08% 0.04% 0.09%
Completed Chargeoffs(2)............................... 352 $ 14,315,398 756 $ 28,075,008
Chargeoff %........................................... 0.59% 0.55% 0.98% 0.82%
</TABLE>
- ------------
(1) The aggregate of the outstanding principal balances of the related HELOC
loans for which foreclosure proceedings have been completed or a deed in
lieu of foreclosure has been accepted and resulted in an REO property or
alternative form of disposition.
(2) The aggregate of the outstanding principal balances of the related HELOC
loans actually charged-off.
Because effective May 1, 1999 the primary servicing of the Revolving Credit
Loans subserviced by the Initial Subservicer will be transferred to Residential
Funding immediately upon delinquency, the loss and delinquency experience of the
Initial Subservicer is not relevant and is therefore not included herein.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fees for each Revolving Credit Loan are payable out of the
interest payments on such Revolving Credit Loan. The weighted average Servicing
Fee as of the Cut-off Date will be approximately 0.58% per annum. The Servicing
Fees consist of (a) servicing compensation payable to the Master Servicer in
respect of its master servicing activities and (b) subservicing and other
related compensation retained by the Subservicer. The Master Servicer is
obligated to pay certain ongoing expenses associated with its servicing
activities and incurred by the Master Servicer in connection with its
responsibilities under the Servicing Agreement.
S-23
<PAGE>
<PAGE>
THE ISSUER
GENERAL
The Home Equity Loan Trust 1999-HS3 is a business trust formed under the
laws of the State of Delaware pursuant to the Trust Agreement dated as of March
23, 1999 between the Depositor and the Owner Trustee for the purposes described
in this Prospectus Supplement. The Trust Agreement constitutes the 'governing
instrument' under the laws of the State of Delaware relating to business trusts.
After its formation, the Issuer will not engage in any activity other than (i)
acquiring and holding the Revolving Credit Loans and the other assets of the
Issuer and proceeds therefrom, (ii) issuing the Notes and the Certificates,
(iii) making payments on the Notes and the Certificates and (iv) engaging in
other activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith.
The Issuer's principal offices are in Wilmington, Delaware, in care of
Wilmington Trust Company, as Owner Trustee, at 1100 N. Market Street,
Wilmington, Delaware 19890-0001.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust Agreement.
The Owner Trustee is a Delaware banking corporation and its principal offices
are located at Rodney Square North, 1100 North Market Street, in Wilmington,
Delaware 19890-0001.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Securityholders
for any action taken or for refraining from the taking of any action in good
faith pursuant to the Trust Agreement or for errors in judgment; provided,
however, that none of the Owner Trustee and any director, officer or employee
thereof will be protected against any liability which would otherwise be imposed
by reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
Trust Agreement. All persons into which the Owner Trustee may be merged or with
which it may be consolidated or any person resulting from such merger or
consolidation shall be the successor of the Owner Trustee under the Trust
Agreement.
THE INDENTURE TRUSTEE
The Chase Manhattan Bank, a New York State banking corporation, is the
Indenture Trustee under the Indenture. The principal offices of the Indenture
Trustee are located in New York, New York.
THE CREDIT ENHANCER
The following information has been supplied by Ambac Assurance Corporation
(the 'CREDIT ENHANCER') for inclusion in this Prospectus Supplement. No
representation is made by the Depositor, the Master Servicer, the Underwriter or
any of their affiliates as to the accuracy or completeness of such information.
The Credit Enhancer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and 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 Ambac Financial Group, Inc.
(formerly, AMBAC, Inc.) a 100% publicly-held company. Moody's, Standard & Poor's
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, 1997 and December 31, 1996, and for the three
years ended December 31, 1997, prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of Ambac
Financial Group, Inc. (which was filed with the Commission on March 31, 1998;
Commission File Number 1-10777) and the unaudited consolidated financial
statements of the Credit Enhancer and its subsidiaries as of September 30, 1998
and for the periods ending September 30, 1998 and September 30, 1997 included in
the Quarterly Report on Form 10-Q of Ambac Financial Group, Inc. for the period
ended September 30, 1998 (which was filed with the Commission on November 13,
1998), are hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in a document
incorporated herein by reference shall be modified or superseded for the
purposes of this Prospectus Supplement to the extent that a
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<PAGE>
statement contained herein by reference herein also modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of the Credit Enhancer and its subsidiaries
included in documents filed by Ambac Financial Group, Inc. with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, subsequent to the date of this Prospectus Supplement and prior
to the termination of the offering of the Notes shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The following table sets forth the Credit Enhancer's capitalization as of
December 31, 1995, December 31, 1996, December 31, 1997 and September 30, 1998,
respectively, in conformity with generally accepted accounting principles.
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997 1998
------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Unearned premiums........................... $ 906 $ 995 $1,184 $ 1,260
Other liabilities........................... 295 259 562 803
------------ ------------ ------------ -------------
Total liabilities........................... 1,201 1,254 1,746 2,063
------------ ------------ ------------ -------------
Stockholder's equity:(1)
Common Stock................................ 82 82 82 82
Additional paid-in capital.................. 481 515 521 527
Accumulated other comprehensive income...... 87 66 118 167
Retained earnings........................... 907 992 1,180 1,341
------------ ------------ ------------ -------------
Total stockholder's equity.................. 1,557 1,655 1,901 2,117
------------ ------------ ------------ -------------
Total liabilities and stockholder's equity.. $2,758 $2,909 $3,647 $ 4,180
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>
- ------------
(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.
S-25
<PAGE>
<PAGE>
For additional financial information concerning the Credit Enhancer, see
the audited and unaudited financial statements of the Credit Enhancer
incorporated by reference herein. Copies of the financial statements of the
Credit Enhancer incorporated herein by reference and copies of the Credit
Enhancer's annual statement for the year ended December 31, 1997 prepared in
accordance with statutory accounting standards are available, without charge,
from the Credit Enhancer. The address of the Credit Enhancer's administrative
offices and its telephone number are One State Street Plaza, 17th Floor, New
York, New York 10004 and (212) 668-0340.
The Credit Enhancer makes no representation regarding the Notes or the
advisability of investing in the Notes and makes no representation regarding,
nor has it participated in the preparation of, this Prospectus Supplement other
than the information supplied by the Credit Enhancer and presented under the
headings 'The Credit Enhancer' and 'Description of the Policy' and in the
financial statements incorporated herein by reference.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
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<PAGE>
<PAGE>
DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to the Indenture dated as of March 29,
1999 between the Issuer and The Chase Manhattan Bank, as Indenture Trustee. The
Certificates will be issued pursuant to the Trust Agreement. The following
summaries describe certain provisions of the Securities, the Indenture and the
Trust Agreement. The summaries do not purport to be complete and are subject to,
and qualified in their entirety by reference to, the provisions of the
applicable agreement.
The Notes will be secured by the assets of the Trust pledged by the Issuer
to the Indenture Trustee pursuant to the Indenture which will consist of: (i)
the Revolving Credit Loans; (ii) all amounts on deposit in the Payment Account;
(iii) the Policy; and (iv) proceeds of the foregoing.
The Variable Funding Notes initially will be issued to Residential Funding.
The Security Balance of the Variable Funding Notes may be increased from time to
time during the Revolving Period (as long as an Amortization Event has not
occurred) in consideration for Additional Balances sold to the Trust under the
Purchase Agreement, if Principal Collections are insufficient or unavailable to
cover the related Draws. On any Payment Date after the end of the Revolving
Period, so long as an Amortization Event has not occurred, the acquisition of
all Additional Balances will be reflected in an increase in the Security Balance
of the Variable Funding Notes. Notwithstanding the foregoing, the Security
Balance of the Variable Funding Notes may not exceed an aggregate amount equal
to $83,732,630 minus any amounts paid as principal on the Variable Funding
Notes, or such greater amount as may be permitted under the Indenture (the
'MAXIMUM VARIABLE FUNDING NOTE BALANCE'). Initially the Variable Funding Notes
will have no Security Balance.
BOOK-ENTRY NOTES
General. The Term Notes will initially be issued as Book-Entry Notes. Term
Note Owners may elect to hold their Term Notes through DTC in the United States,
or Cedel or Euroclear, in Europe if they are Participants of such systems, or
indirectly through organizations which are Participants in such systems. The
Book-Entry Notes will be issued in one or more securities which equal the
aggregate principal balance of the Term Notes and will initially be registered
in the name of Cede & Co., the nominee of DTC. Cedel and Euroclear will hold
omnibus positions on behalf of their Participants through customers' securities
accounts in Cedel's and Euroclear's names on the books of their respective
depositaries (in such capacities, individually the 'RELEVANT DEPOSITARY' and
collectively the 'EUROPEAN DEPOSITARIES') which in turn will hold such positions
in customers' securities accounts in the depositaries' names on the books of
DTC. Investors may hold such beneficial interests in the Book-Entry Notes in
minimum denominations representing Security Balances of $25,000 and in integral
multiples of $1,000 in excess thereof. Except as described below, no Beneficial
Owner will be entitled to receive a physical certificate representing such
security (a 'DEFINITIVE TERM NOTE'). Unless and until Definitive Term Notes are
issued, it is anticipated that the only 'HOLDER' of the Term Notes will be Cede
& Co., as nominee of DTC. Term Note Owners will not be Holders as that term is
used in the Indenture.
The Beneficial Owner's ownership of a Book-Entry Note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a 'FINANCIAL INTERMEDIARY') that maintains the Beneficial
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Notes will be recorded on the records of DTC (or of
a Participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the Beneficial
Owner's Financial Intermediary is not a DTC Participant and on the records of
Cedel or Euroclear, as appropriate).
Term Note Owners will receive all payments of principal and interest on the
Term Notes from the Indenture Trustee through DTC and DTC Participants. While
the Term Notes are outstanding (except under the circumstances described below),
under the rules, regulations and procedures creating and affecting DTC and its
operations (the 'RULES'), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Term Notes and is
required to receive and transmit payments of principal and interest on the Term
Notes.
Participants and Indirect Participants with whom Term Note Owners have
accounts with respect to Term Notes are similarly required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Term Note Owners. Accordingly, although Term Note Owners will not possess
physical
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<PAGE>
certificates, the Rules provide a mechanism by which Term Note Owners will
receive payments and will be able to transfer their interest.
Term Note Owners will not receive or be entitled to receive Definitive Term
Notes representing their respective interests in the Term Notes, except under
the limited circumstances described below. Unless and until Definitive Term
Notes are issued, Term Note Owners who are not Participants may transfer
ownership of Term Notes only through Participants and Indirect Participants by
instructing such Participants and Indirect Participants to transfer the Term
Notes, by book-entry transfer, through DTC for the account of the purchasers of
such Term Notes, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Term Notes will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and Indirect Participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Term Note
Owners.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Indenture Trustee to Cede & Co. Payments with respect to Term
Notes held through Cedel or Euroclear will be credited to the cash accounts of
Cedel Participants or Euroclear Participants in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. Such payments will be subject to tax reporting in accordance with
relevant United States tax laws and regulations. Because DTC can only act on
behalf of Financial Intermediaries, the ability of a Beneficial Owner to pledge
Book-Entry Notes to persons or entities that do not participate in the
Depositary system, or otherwise take actions in respect of such Book-Entry
Notes, may be limited due to the lack of physical certificates for such
Book-Entry Notes. In addition, issuance of the Book-Entry Notes in book-entry
form may reduce the liquidity of such Term Notes in the secondary market since
certain potential investors may be unwilling to purchase securities for which
they cannot obtain physical certificates.
DTC has advised the Indenture Trustee that, unless and until Definitive
Term Notes are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Notes under the Indenture only at the direction of one
or more Financial Intermediaries to whose DTC accounts the Book-Entry Notes are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Notes. Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by Term Noteholders under the Indenture on behalf of a Cedel
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to the ability of the Relevant Depositary to effect
such actions on its behalf through DTC. DTC may take actions, at the direction
of the related Participants, with respect to some Term Notes which conflict with
actions taken with respect to other Term Notes.
Definitive Term Notes. Definitive Term Notes will be issued to Beneficial
Owners of the Book-Entry Notes, or their nominees, rather than to DTC, if (a)
the Indenture Trustee determines that the DTC is no longer willing, qualified or
able to discharge properly its responsibilities as nominee and depository with
respect to the Book-Entry Notes and the Indenture Trustee is unable to locate a
qualified successor, (b) the Indenture Trustee elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default, pursuant
to the Indenture, Beneficial Owners having Percentage Interests aggregating at
least a majority of the Security Balances of the Term Notes advise the DTC
through the Financial Intermediaries and the DTC Participants in writing that
the continuation of a book-entry system through DTC (or a successor thereto) is
no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all
Beneficial Owners of the occurrence of such event and the availability through
DTC of Definitive Term Notes. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Notes and instructions for
re-registration, the Indenture Trustee will issue and authenticate Definitive
Term Notes, and thereafter the Indenture Trustee will recognize the holders of
such Definitive Term Notes as Holders under the Indenture.
Year 2000. DTC has further 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 the
same relate to the timely payment of distributions (including
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principal and interest payments) to securityholders, book-entry deliveries, and
settlement of trades within 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 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 direct and indirect 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 such 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 such 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.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Term Notes among Participants of DTC, Cedel
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time. See Annex I
hereto.
For additional information regarding DTC, Cedel, Euroclear and the Term
Notes, see 'Description of the Notes -- Form of Notes' in the Prospectus.
PAYMENTS ON THE NOTES
Payments on the Notes will be made by the Indenture Trustee or the Paying
Agent on the 20th day of each month or, if such day is not a Business Day, then
the next succeeding Business Day, commencing in April 1999. Payments on the Term
Notes will be made to the persons in whose names such Term Notes are registered
at the close of business on the day prior to each Payment Date or, if the Term
Notes are no longer Book-Entry Notes, on the Record Date. See 'Description of
the Notes -- Payments' in the Prospectus. Payments will be made by check or
money order mailed (or upon the request of a Holder owning Term Notes having
denominations aggregating at least $1,000,000, by wire transfer or otherwise) to
the address of the person entitled thereto (which, in the case of Book-Entry
Notes, will be DTC or its nominee) as it appears on the Security Register in
amounts calculated as described herein on the Determination Date. However, the
final payment in respect of the Term Notes will be made only upon presentation
and surrender thereof at the office or the agency of the Indenture Trustee
specified in the notice to Holders of such final payment. A 'BUSINESS DAY' is
any day other than (i) a Saturday or Sunday or (ii) a day on which banking
institutions in the State of California, Minnesota, New York, Pennsylvania,
Illinois or Delaware are required or authorized by law to be closed.
INTEREST PAYMENTS ON THE NOTES
Interest payments will be made on the Notes on each Payment Date at the
Note Rate for the related Interest Period, subject to the limitations set forth
below, which may result in Basis Risk Shortfalls. The 'NOTE RATE' for an
Interest Period will generally be a floating rate equal to the lesser of (i) the
sum of (a) LIBOR, determined as specified herein, as of the second LIBOR
Business Day prior to the first day of such Interest Period (or as of two LIBOR
Business Days prior to the Closing Date, in the case of the first Interest
Period) plus (b) 0.27% per annum and (ii) 17.25% per annum. However, on any
Payment Date on which interest accrued on the Notes during the related Interest
Period exceeds an amount equal to one-twelfth of the product of (a) the
aggregate Principal Balance of the Revolving Credit Loans multiplied by (b)the
Net Loan Rate Cap (as described below), the amount of such difference (any such
amount, a 'BASIS RISK SHORTFALL') will not be included as interest payments on
the Notes for such Payment Date and such amount will accrue interest at the Note
Rate on the Notes (as adjusted from time to time) and will be paid on future
Payment Dates pro rata based on the Security Balance thereof only to the extent
funds are available therefor as set forth herein under ' -- Allocation of
Payments on the Revolving Credit Loans.' Basis Risk Shortfalls will not be
covered by the Policy and may remain unpaid on the final Payment Date. In
addition, the securities ratings on the Term Notes
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do not address the likelihood of the receipt of any amounts in respect of Basis
Risk Shortfalls. The 'NET LOAN RATE CAP' will be equal to the weighted average
of the Loan Rates as of the last day of the related Billing Cycle (net of 0.72%
per annum), adjusted to an effective rate reflecting accrued interest calculated
on the basis of the actual number of days in the related Interest Period and a
year assumed to consist of 360 days.
Interest on the Notes in respect of any Payment Date will accrue on the
applicable Security Balance from the preceding Payment Date (or in the case of
the first Payment Date, from the Closing Date) through the day preceding such
Payment Date (each such period, an 'INTEREST PERIOD') on the basis of the actual
number of days in the Interest Period and a 360-day year. Interest payments on
the Notes will be funded from payments on the Revolving Credit Loans and, if
necessary, from draws on the Policy (subject to certain limitations).
On each Payment Date, LIBOR shall be established by the Indenture Trustee
and as to any Interest Period, LIBOR will equal the rate for United States
dollar deposits for one month which appears on the Telerate Screen Page 3750 as
of 11:00 A.M., London time, on the second LIBOR Business Day prior to the first
day of such Interest Period. 'TELERATE SCREEN PAGE 3750' means the display
designated as page 3750 on the Bridge Telerate Service (or such other page as
may replace page 3750 on that service for the purpose of displaying London
interbank offered rates of major banks). If such rate does not appear on such
page (or such other page as may replace that page on that service, or if such
service is no longer offered, such other service for displaying LIBOR or
comparable rates as may be selected by the Indenture Trustee after consultation
with the Master Servicer and the Credit Enhancer), the rate will be the
Reference Bank Rate. The 'REFERENCE BANK RATE' will be determined on the basis
of the rates at which deposits in U.S. Dollars are offered by the reference
banks (which shall be three major banks that are engaged in transactions in the
London interbank market, selected by the Indenture Trustee after consultation
with the Master Servicer and the Credit Enhancer) as of 11:00 A.M., London time,
on the day that is two LIBOR Business Days prior to the immediately preceding
Payment Date to prime banks in the London interbank market for a period of one
month in amounts approximately equal to the aggregate Security Balances of all
of the Securities then outstanding. The Indenture Trustee will request the
principal London office of each of the reference banks to provide a quotation of
its rate. If at least two such quotations are provided, the rate will be the
arithmetic mean of the quotations. If on such date fewer than two quotations are
provided as requested, the rate will be the arithmetic mean of the rates quoted
by one or more major banks in New York City, selected by the Indenture Trustee
after consultation with the Master Servicer and the Credit Enhancer, as of
11:00 A.M., New York City time, on such date for loans in U.S. Dollars to
leading European banks for a period of one month in amounts approximately equal
to the aggregate Security Balances of all of the Securities then outstanding. If
no such quotations can be obtained, the rate will be LIBOR for the prior Payment
Date. 'LIBOR BUSINESS DAY' means any day other than (i) a Saturday or a Sunday
or (ii) a day on which banking institutions in the city of London, England are
required or authorized by law to be closed.
The establishment of LIBOR as to each Interest Period by the Indenture
Trustee and the Indenture Trustee's calculation of the rate of interest
applicable to the Notes for the related Interest Period shall (in the absence of
manifest error) be final and binding.
PRINCIPAL PAYMENTS ON THE NOTES
On each Payment Date, other than the Final Payment Date, principal payments
will be due and payable on the Notes in an amount equal to the aggregate of the
Principal Collection Distribution Amount, together with any Reserve Increase
Amounts and Liquidation Loss Distribution Amounts (each as defined below) for
such Payment Date, as and to the extent described below. On the Final Payment
Date, principal will be due and payable on the Notes in amounts equal to the
Security Balance, if any, of the Notes on such Payment Date. In no event will
principal payments on the Notes on any Payment Date exceed the Security Balance
thereof on such date.
ALLOCATION OF PAYMENTS ON THE REVOLVING CREDIT LOANS
The Master Servicer on behalf of the Trust will establish an account (the
'PAYMENT ACCOUNT') into which the Master Servicer will deposit P&I Collections
(as defined herein) for each Payment Date on the Business Day prior thereto. The
Payment Account will be an Eligible Account and amounts on deposit in the
Payment Account will be invested in Permitted Investments.
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On each Payment Date, P&I Collections will be allocated from the Payment
Account in the following order of priority:
(i) to pay accrued interest due on the applicable Security Balance of
the Term Notes and the Variable Funding Notes (other than any Basis Risk
Shortfalls);
(ii) to pay principal in an amount equal to the Principal Collection
Distribution Amount for such Payment Date on the Term Notes and the
Variable Funding Notes;
(iii) to pay as principal on the Term Notes and the Variable Funding
Notes, an amount equal to (A) 100% of the Liquidation Loss Amounts (other
than any Excess Loss Amounts) on such Payment Date, plus (B) any such
Liquidation Loss Amounts (other than any Excess Loss Amounts) remaining
undistributed from any preceding Payment Date (together with interest
thereon from the date initially distributable to the date paid), provided,
that any such Liquidation Loss Amount shall not be required to be paid to
the extent that such Liquidation Loss Amount was paid on the Term Notes and
the Variable Funding Notes by means of a draw on the Policy or was
reflected in the reduction of the Outstanding Reserve Amount (the aggregate
amount so distributed under this clause (iii) on any Payment Date, a
'LIQUIDATION LOSS DISTRIBUTION AMOUNT');
(iv) to pay the Credit Enhancer the premium for the Policy and any
previously unpaid premiums for the Policy (with interest thereon);
(v) to reimburse the Credit Enhancer for prior draws made on the
Policy (other than those attributable to Excess Loss Amounts) with interest
thereon;
(vi) to pay as principal on the Term Notes and the Variable Funding
Notes, an additional amount to the extent necessary to reduce the aggregate
Security Balance of the Notes to the Pool Balance as of the end of the
related Collection Period (if applicable) and then to bring the Outstanding
Reserve Amount up to the Reserve Amount Target (the aggregate amount so
distributed on any Payment Date, the 'RESERVE INCREASE AMOUNT');
(vii) to pay the Credit Enhancer any other amounts owed pursuant to
the Insurance Agreement;
(viii) to pay the Term Notes and Variable Funding Notes, pro rata
based on the Security Balances thereof, any Basis Risk Shortfalls not
previously paid together with interest thereon; and
(ix) to pay any remaining amounts to the holders of the Certificates.
The 'SECURITY BALANCE' of any Security on any day is, with respect to the
Term Notes, the respective initial balance thereof as of the Closing Date, and
with respect to the Variable Funding Notes, the aggregate principal amount added
to the Variable Funding Notes prior to such day, in each case reduced by all
payments of principal thereon prior to and as of such day.
Payments pursuant to clause (i) will be allocated to the Term Notes and
Variable Funding Notes pro rata based on the amount of interest each such
Security is entitled to receive pursuant to such clause. Payments pursuant to
clauses (ii), (iii) and (vi) will constitute payments of principal and will be
allocated among the Term Notes and Variable Funding Notes pro rata based on the
outstanding Security Balances.
For any Payment Date, the 'PRINCIPAL COLLECTION DISTRIBUTION AMOUNT' will
equal (i) Net Principal Collections for such Payment Date, so long as no
Amortization Event has occurred and such Payment Date is during the Revolving
Period, or (ii) Principal Collections for such Payment Date if an Amortization
Event has occurred or if such Payment Date is after the end of the Revolving
Period, provided however, on any Payment Date with respect to which the
Outstanding Reserve Amount that would result without regard to this proviso
exceeds the Reserve Amount Target, the Principal Collection Distribution Amount
will be reduced by the amount of such excess until the Outstanding Reserve
Amount equals the Reserve Amount Target.
'LIQUIDATION LOSS AMOUNT' means with respect to any Liquidated Revolving
Credit Loan, the unrecovered Principal Balance thereof at the end of the related
Collection Period in which such Revolving Credit Loan became a Liquidated
Revolving Credit Loan, after giving effect to the Net Liquidation Proceeds
applied in reduction of the Principal Balance thereof.
A 'LIQUIDATED REVOLVING CREDIT LOAN' means, as to any Payment Date, any
Revolving Credit Loan in respect of which the Master Servicer has determined,
based on the servicing procedures specified in the
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Servicing Agreement, as of the end of the preceding Collection Period that all
liquidation proceeds which it expects to recover with respect to the disposition
of the related Mortgaged Property have been recovered.
As to any Payment Date prior to the Payment Date occurring in March 2001,
the 'RESERVE AMOUNT TARGET' will be 1.85% of the Cut-off Date Balance. As to any
Payment Date on or after the Payment Date in March 2001, the Reserve Amount
Target will be equal to the lesser of (a) the Reserve Amount Target as of the
Cut-off Date and (b) 3.70% of the Pool Balance as of the beginning of the
related Collection Period (but not lower than $1,361,386 (0.5% of the Cut-off
Date Balance) plus 50% of the outstanding Principal Balance of all Revolving
Credit Loans 90 or more days delinquent as of such Payment Date); provided
however that any scheduled reduction to the Reserve Amount Target described
above shall not be made as of any Payment Date unless (i) the outstanding
Principal Balance of the Revolving Credit Loans delinquent 90 days or more
averaged over the last six months as a percentage of the aggregate outstanding
Principal Balance of all Revolving Credit Loans averaged over the last six
months does not exceed 3.00%, (ii) the aggregate cumulative Liquidation Loss
Amounts on the Revolving Credit Loans prior to any such Payment Date occurring
during the first year and the second year (or any year thereafter) after the
Payment Date in March 2001 are less than 3.00% and 4.00%, respectively, of the
Cut-off Date Pool Balance and (iii) there has been no draw on the Policy on such
Payment Date that remains unreimbursed. In addition, the Reserve Amount Target
may be reduced with the prior written consent of the Credit Enhancer and the
Rating Agencies.
To the extent the Reserve Amount Target decreases on any Payment Date, the
amount of the Principal Collection Distribution Amount will be reduced on such
Payment Date and on each subsequent Payment Date to the extent the remaining
Outstanding Reserve Amount is in excess of the reduced Reserve Amount Target
until the Outstanding Reserve Amount equals the Reserve Amount Target.
An 'AMORTIZATION EVENT' will be deemed to occur upon (i) the occurrence of
certain events relating to a violation of the Seller's obligations under the
Purchase Agreement, (ii) the occurrence of certain events of bankruptcy,
insolvency or receivership relating to the Seller or the Issuer, (iii) the
Issuer becomes subject to regulation as an investment company within the meaning
of the Investment Company Act of 1940, as amended, (iv) a Servicing Default
relating to the Master Servicer occurs under the Servicing Agreement and the
Master Servicer is the Seller, (v) if the aggregate of all draws under the
Policy (other than those with respect to any undercollateralization) exceeds
1.00% of the Cut-off Date Balance or (vi) the Issuer is determined to be an
association taxable as a corporation for federal income tax purposes.
OUTSTANDING RESERVE AMOUNT
As of the Closing Date, the aggregate Security Balance of the Notes will
exceed the Cut-off Date Balance of the Revolving Credit Loans by $2,722,772
(approximately 1.0% of the Cut-off Date Balance) (such excess at any time, the
'UNDERCOLLATERALIZATION AMOUNT'), representing an initial undercollateralization
of the Notes relative to the Revolving Credit Loans. On each Payment Date, the
Reserve Increase Amount, if any, will be used first, in reduction of the
Undercollateralization Amount by reducing the aggregate Security Balance of the
Notes until it is equal to the Pool Balance as of the end of the related
Collection Period, and then to increase the Outstanding Reserve Amount until
such amount is equal to the Reserve Amount Target. On each Payment Date, the
Outstanding Reserve Amount (as in effect immediately prior to such Payment
Date), if any, shall be deemed to be reduced by an amount equal to any
Liquidation Loss Amounts (other than any Excess Loss Amounts) for such Payment
Date, except to the extent that such Liquidation Loss Amounts were covered on
such Payment Date by a Liquidation Loss Distribution Amount (which amount would
be so distributed, if available, from any excess interest collections for such
Payment Date). Any Liquidation Loss Amounts not so covered will be covered by
draws on the Policy to the extent provided herein. However, any Excess Loss
Amounts are required to be covered by a draw on the Policy in all cases, without
regard to the availability of the Outstanding Reserve Amount, and the
Outstanding Reserve Amount will not be reduced by any Excess Loss Amount so long
as a corresponding draw on the Policy is made as so required. The 'OUTSTANDING
RESERVE AMOUNT' available on any Payment Date is the amount, if any, by which
(i) the Pool Balance as of the end of the related Collection Period exceeds
(ii) the aggregate Security Balances of all of the Notes on such Payment Date
(after application of Net Principal Collections or Principal Collections, as the
case may be, and increases, if any, in the Security Balance of the Variable
Funding Notes due to the acquisition of Additional Balances for such date).
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To the extent that the Outstanding Reserve Amount is insufficient or not
available to absorb Liquidation Loss Amounts that are not covered by the
Liquidation Loss Distribution Amount, if payments are not made under the Policy
as required, a Noteholder may incur a loss.
EXCESS LOSS AMOUNT
On any Payment Date, the 'EXCESS LOSS AMOUNT' will be equal to the sum of
(i) any Liquidation Loss Amounts (other than as described in clauses (ii)-(v)
below) for the related Collection Period which, when added to the aggregate of
such Liquidation Loss Amounts for all preceding Collection Periods exceed
$30,631,188, (ii) any Special Hazard Losses in excess of the Special Hazard
Amount, (iii) any Fraud Losses in excess of the Fraud Loss Amount, (iv) any
Bankruptcy Losses in excess of the Bankruptcy Loss Amount, and (v) certain
losses occasioned by war, civil insurrection, certain governmental actions,
nuclear reaction and certain other risks as described in the Indenture. Excess
Loss Amounts will not be covered by any Liquidation Loss Distribution Amount or
by a reduction in the Outstanding Reserve Amount. Any Excess Loss Amounts
however, will be covered by the Policy, and in the event payments are not made
as required under the Policy, such losses will be allocated first to the
Certificates and, after the Security Balance of the Certificates is reduced to
zero to the Notes pro rata based on the outstanding Security Balances thereof.
The 'SPECIAL HAZARD AMOUNT' shall initially be equal to $2,722,772. As of
any date of determination following the Cut-off Date, the Special Hazard Amount
shall equal $2,722,772 less the sum of (A) the aggregate of any Liquidation Loss
Amounts on the Revolving Credit Loans due to Special Hazard Losses and (B) the
Adjustment Amount. The Adjustment Amount will be equal to an amount calculated
pursuant to the terms of the Indenture.
The 'FRAUD LOSS AMOUNT' shall initially be equal to $8,168,317. As of any
date of determination after the Cut-off Date, the Fraud Loss Amount shall equal
(X) prior to the first anniversary of the Cut-off Date an amount equal to 3.00%
of the aggregate of the Credit Limits of the Revolving Credit Loans as of the
Cut-off Date minus the aggregate of any Liquidation Loss Amounts on the
Revolving Credit Loans due to Fraud Losses up to such date of determination;
(Y) from the first to the second anniversary of the Cut-off Date, an amount
equal to (1) the lesser of (a) the Fraud Loss Amount as of the most recent
anniversary of the Cut-off Date and (b) 2% of the aggregate of the Credit Limits
of the Revolving Credit Loans as of the most recent anniversary of the Cut-off
Date minus (2) the aggregate of any Liquidation Loss Amounts on the Revolving
Credit Loans due to Fraud Losses since the most recent anniversary of the
Cut-off Date up to such date of determination; and (Z) from the second to the
fifth anniversary of the Cut-off Date, an amount equal to (1) the lesser of (a)
the Fraud Loss Amount as of the most recent anniversary of the Cut-off Date and
(b) 1% of the aggregate of the Credit Limits of the Revolving Credit Loans as of
the most recent anniversary of the Cut-off Date minus (2) the aggregate of any
Liquidation Loss Amounts on the Revolving Credit Loans due to Fraud Losses since
the most recent anniversary of the Cut-off Date up to such date of
determination. On and after the fifth anniversary of the Cut-off Date the Fraud
Loss Amount shall be zero.
The 'BANKRUPTCY AMOUNT' will initially be equal to $100,000. As of any date
of determination, the Bankruptcy Amount shall equal $100,000 less the sum of any
Liquidation Loss Amounts on the Revolving Credit Loans due to such losses up to
such date of determination.
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 Final Payment Date, to the extent
of the related outstanding Security Balance on such date, if any. In addition, a
principal payment may be made in partial or full redemption of the Notes after
the Pool Balance is reduced to an amount less than or equal to $27,227,722 (10%
of the Cut-off Date Balance), upon the exercise by the Master Servicer of its
option to purchase all or a portion of the Revolving Credit Loans and related
assets. In the event that all of the Revolving Credit Loans are purchased by the
Master Servicer, the purchase price will be equal to the sum of (i) the
outstanding Pool Balance and accrued
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and unpaid interest thereon at the weighted average of the Loan Rates through
the day preceding the Payment Date (including Interest Shortfalls and interest
thereon) on which such purchase occurs, and (ii) all amounts due and owing to
the Credit Enhancer.
In the event that a portion of the Revolving Credit Loans are purchased by
the Master Servicer the purchase price will be equal to the sum of the aggregate
Principal Balances of the Revolving Credit Loans so purchased and accrued and
unpaid interest thereon at the weighted average of the related Loan Rates on
such Revolving Credit Loans through the day preceding the Payment Date on which
such purchase occurs together with all amounts due and owing to the Credit
Enhancer with respect to the Revolving Credit Loans so purchased. In lieu of a
cash payment, if an Amortization Event had previously occurred, all or a portion
of such purchase price may be in the form of Additional Balances on other
Revolving Credit Loans not previously conveyed to the Trust. Any such purchase
will be subject to satisfaction of certain conditions specified in the Servicing
Agreement, including: (i) the Master Servicer shall have delivered to the
Indenture Trustee a schedule containing a list of all Revolving Credit Loans
remaining in the Trust after such removal; (ii) the Master Servicer shall
represent and warrant that no selection procedures reasonably believed by the
Master Servicer to be adverse to the interests of the Securityholders or the
Credit Enhancer were used by the Master Servicer in selecting such Revolving
Credit Loans; and (iii) each Rating Agency shall have been notified of the
proposed retransfer and shall not have notified the Master Servicer that such
retransfer would result in a reduction or withdrawal of the ratings of the
Securities without regard to the Policy.
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 at the turn of the century. The responsibilities of
Residential Funding as the Master Servicer include collecting payments from the
Initial Sub-servicer in respect of the Revolving Credit Loans, calculating the P
& I Collections for each Payment Date, remitting such amount to the Indenture
Trustee prior to each Payment Date, calculating the amount of principal and
interest payments to be made to the Noteholders on each Payment, and preparing
the monthly statement to be sent to Noteholders on each Payment 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:
hardware, including mainframe computers, desktop computers and network
devices;
facilities equipment, including elevators, telephone systems, heating
systems and security systems;
software applications, including vendor purchased applications, in-house
developed applications and end-user developed applications;
business partner communication links, which primarily provide data
transmissions to and from business partners; and
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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:
<TABLE>
<CAPTION>
PHASE OBJECTIVE
- -------------------------------------------- ------------------------------------------------
<S> <C>
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 such Components.
Phase II -- Inventory....................... To (i) create an inventory of all Components and
(ii) assess the Y2K risks associated with such
Components.
Phase III -- Assessment..................... To (i) determine which Components are not Y2K
ready and (ii) decide whether such 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.
</TABLE>
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 such
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, 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, the Initial Subservicer, the Indenture Trustee, the Custodian and
certain depositary institutions, as well as their respective suppliers and
vendors. Accordingly, Residential Funding is communicating with certain 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 the Initial Subservicer, the
Indenture 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 inquires 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.
S-35
<PAGE>
<PAGE>
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:
<TABLE>
<CAPTION>
PHASE OBJECTIVE
- ---------------------------------------------- ----------------------------------------------
<S> <C>
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.
</TABLE>
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. Such disruptions could have a
material adverse effect on Residential Funding's ability to (i) collect (and
monitor the Initial Subservicer's collection of) payments on the Revolving
Credit Loans, (ii) distribute such collections to the Indenture Trustee and
(iii) provide reports to Noteholders as set forth herein. Furthermore, if the
Initial Subservicer, the Indenture 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 Revolving Credit Loans (in the case of the
Initial Subservicer or any of their respective vendors or third party service
providers) and (b) make distributions to Noteholders (in the case of the
Indenture 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. Generally,
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 certain risks and uncertainties. Important factors
that could cause results to differ materially from such 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 such 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.
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 certain payments on the Notes. On each Payment Date, a
draw will be made on the Policy equal to the sum of (a) the amount by which
accrued interest
S-36
<PAGE>
<PAGE>
on the Notes at the Note Rate on such Payment Date (exclusive of any Basis Risk
Shortfalls) exceeds the amount on deposit in the Payment Account available for
interest distributions on such Payment Date, (b) any Liquidation Loss Amount
(other than any Excess Loss Amount) for such Payment Date, to the extent not
currently covered by a Liquidation Loss Distribution Amount or a reduction in
the Outstanding Reserve Amount and (c) any Excess Loss Amount for such Payment
Date. In addition, on the date (the 'Insured Undercollateralization Payment
Date') which is the earliest of (i) the ninth Payment Date, (ii) the Payment
Date immediately following the optional redemption of the Notes by the Master
Servicer as described herein, or (iii) the Payment Date on which the Principal
Balance of the Term Notes is reduced to zero, a draw will be made on the Policy
to cover the then applicable Undercollateralization Amount, if any. For purposes
of the foregoing, amounts in the Payment Account available for interest
distributions on any Payment Date shall be deemed to include all amounts in the
Payment Account for such Payment Date, other than the Principal Collection
Distribution Amount and the Liquidation Loss Distribution Amount (if any)
distributed thereon. Basis Risk Shortfalls will not be covered by the Policy.
Pursuant to the terms of the Indenture, draws under the Policy in respect of any
Liquidation Loss Amount will be paid to the Notes by the Paying Agent as
principal, pro rata among the Term Notes and the Variable Funding Notes based on
the Security Balances thereof. In addition, a draw will be made on the Policy to
cover certain shortfalls in amounts allocable to the Noteholders following the
sale, liquidation or other disposition of the assets of the Trust in connection
with the liquidation of the Trust as permitted under the Indenture following an
Event of Default thereunder. In addition, the Policy will guarantee the payment
of the outstanding Security Balance of the Notes on the Final Payment Date. In
the absence of payments under the Policy, Noteholders will directly bear the
credit risks associated with their investment to the extent such risks are not
covered by the Outstanding Reserve Amount or otherwise.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
PROSPECTIVE NOTEHOLDERS SHOULD CONSIDER, AMONG OTHER THINGS, THE ITEMS
DISCUSSED UNDER 'RISK FACTORS' HEREIN, 'YIELD AND PREPAYMENT CONSIDERATIONS' IN
THE PROSPECTUS AND THE FOLLOWING FACTORS IN CONNECTION WITH THE PURCHASE OF THE
TERM NOTES.
The rate and timing of defaults on the Revolving Credit Loans will also
affect the rate and timing of principal payments on the Revolving Credit Loans
and thus the yield on the Term Notes. There can be no assurance as to the rate
of losses or delinquencies on any of the Revolving Credit Loans, however, the
rate of such losses and delinquencies are likely to be higher than those of
traditional first lien mortgage loans, particularly in the case of Revolving
Credit Loans with high Combined Loan-to-Value Ratios or low Junior Ratios. In
addition, because borrowers of Balloon Loans are required to make a relatively
large single payment upon maturity, the default risk associated with Balloon
Loans is greater than that associated with fully-amortizing revolving credit
loans. See 'Risk Factors' herein. To the extent that any losses are incurred on
any of the Revolving Credit Loans that are not covered by the Liquidation Loss
Distribution Amount, a reduction in the Outstanding Reserve Amount or the
Policy, holders of the Term Notes will bear all risk of such losses resulting
from default by Mortgagors. See 'Risk Factors -- Limitations, Reduction and
Substitution of Credit Enhancement' in the Prospectus. Even where the Policy
covers all losses incurred on the Revolving Credit Loans, the effect of losses
may be to increase prepayment rates on the Revolving Credit Loans, thus reducing
the weighted average life and affecting the yield to maturity. In addition, the
rate of prepayments of the Revolving Credit Loans and the yield to investors on
the Term Notes may be affected by certain refinancing programs, which may
include general or targeted solicitations, as described under 'Maturity and
Prepayment Considerations' in the Prospectus.
There can be no assurance as to the rate of principal payments and Draws on
the Revolving Credit Loans. The rate of principal payments and the rate of Draws
may fluctuate substantially from time to time. Generally, home equity loans are
not viewed by mortgagors as permanent financing. Due to the unpredictable nature
of both principal payments and Draws, the rates of principal payments net of
Draws on the Revolving Credit Loans may be much more volatile than for typical
first lien mortgage loans. See 'Yield and Prepayment Considerations' in the
Prospectus and 'Risk Factors' herein.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security to the date of distribution to the
investor of each dollar distributed in reduction of principal of such security
(assuming no losses). The weighted average life of the Term Notes will be
influenced by, among other things, the rate of principal payments and Draws on
the Revolving Credit Loans.
S-37
<PAGE>
<PAGE>
The model used in this Prospectus Supplement assumes that the outstanding
principal balance of a pool of HELOC loans prepays at a specified constant
annual rate ('CPR'). In generating monthly cash flows, this rate is converted to
an equivalent constant monthly rate. To assume 35% of CPR or any other CPR
percentage is to assume that the stated percentage of the outstanding principal
balance of the pool is prepaid over the course of a year. No representation is
made that the Revolving Credit Loans will prepay at that or any other rate. In
addition, the model assumes that the amount of Additional Balances on the
Revolving Credit Loans drawn each month is drawn at a specified annual rate (the
'CONSTANT DRAW RATE'). This rate is converted to a constant monthly rate. To
assume a 15% Constant Draw Rate is to assume the stated percentage of the
outstanding principal balance of the pool is drawn on over the course of the
year. No representation is made that draws will be made on the Revolving Credit
Loans at that or any other rate.
The tables set forth below are based on a CPR, Constant Draw Rate and
optional termination assumptions as indicated in the tables below. For the
following tables, it was assumed that the Revolving Credit Loans have been
aggregated into three pools, one pool with a principal balance of
$114,429,293.14, a second pool with a principal balance of $101,195,155.78 and a
third pool with a principal balance of $56,652,779.08. Further, Revolving Credit
Loans with respect to the three pools are assumed to have Loan Rates of 9.6788%
per annum, 8.0063% per annum and 8.9134% per annum, respectively, which will
adjust to 10.7884% per annum, 9.6305% per annum and 10.2544% per annum,
respectively, all in the second month. Further, Revolving Credit Loans with
respect to the three pools are assumed to have Credit Limit Utilization Rates of
84.74%, 70.2676% and 73.65%, respectively, terms in which the loans do not
amortize and in which Additional Draws may be made of 53 months, 176 months and
174 months, respectively, and as of the Closing Date, remaining terms to
maturity of 173 months, 296 months and 175 months, respectively. In addition,
each pool is assumed to have an aggregate Servicing Fee Rate and Policy premium
rate of 0.72% per annum.
In addition, it was assumed that (i) payments are made in accordance with
the description set forth under 'Description of the Securities,' (ii) payments
on the Notes will be made on the 20th day of each calendar month regardless of
the day on which the Payment Date actually occurs commencing in April 1999,
(iii) no extension past the scheduled maturity date of a Revolving Credit Loan
is made, (iv) no delinquencies or defaults occur, (v) monthly Draws are
calculated under each of the assumptions as set forth in the tables below before
giving effect to prepayments, (vi) the Revolving Credit Loans pay on the basis
of a 30-day month and a 360-day year, (vii) there is no restriction on the
Maximum Variable Funding Note Balance, (viii) no Amortization Event occurs,
(ix) the scheduled Due Date for each of the Revolving Credit Loans is the first
day of each month, (x) the Closing Date is March 29 1999, (xi) for each Payment
Date, the Note Rate is equal to 5.205940% per annum and (xii) the initial
Security Balance of the Term Notes as set forth on the cover page hereof is
$275,000,000.
The actual characteristics and performance of the Revolving Credit Loans
will differ from the assumptions used in constructing the tables set forth
below, which are hypothetical in nature and are provided only to give a general
sense of how the principal cash flows might behave under varying prepayment and
Draw scenarios. For example, it is very unlikely that the Revolving Credit Loans
will prepay and experience Draws at a constant rate until maturity or that all
of the Revolving Credit Loans will prepay or experience Draws at the same rate.
Moreover, the diverse remaining terms to stated maturity of the Revolving Credit
Loans could produce slower or faster principal distributions than indicated in
the tables at the various assumptions specified, even if the weighted average
remaining term to stated maturity of the Revolving Credit Loans is as assumed.
Any difference between such assumptions and the actual characteristics and
performance of the Revolving Credit Loans, or actual prepayment experience, will
affect the percentages of initial Security Balance outstanding over time and the
weighted average life of the Term Notes.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of the Term Notes, and sets forth the
percentages of the initial Security Balance of the Term Notes that would be
outstanding after each of the Payment Dates shown at various percentages of CPR
and Constant Draw Rates.
S-38
<PAGE>
<PAGE>
PERCENT OF INITIAL TERM NOTE BALANCE OUTSTANDING(1)(2)
<TABLE>
<CAPTION>
CPR
----------------------------------------------------
DISTRIBUTION DATE 0% 20% 25% 30% 35% 40% 45%
- -------------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage........ 100% 100% 100% 100% 100% 100% 100%
March 2000.......... 97 91 86 80 74 68 63
March 2001.......... 97 86 76 66 56 48 40
March 2002.......... 97 81 67 54 43 34 26
March 2003.......... 97 76 59 44 33 24 17
March 2004.......... 96 68 49 35 24 16 10
March 2005.......... 94 53 36 24 15 9 0
March 2006.......... 91 41 26 16 10 0 0
March 2007.......... 88 32 19 11 0 0 0
March 2008.......... 85 24 14 7 0 0 0
March 2009.......... 81 19 10 0 0 0 0
March 2010.......... 77 15 7 0 0 0 0
March 2011.......... 73 11 5 0 0 0 0
March 2012.......... 68 9 4 0 0 0 0
March 2013.......... 62 7 3 0 0 0 0
March 2014.......... 38 3 0 0 0 0 0
March 2015.......... 35 3 0 0 0 0 0
March 2016.......... 32 0 0 0 0 0 0
March 2017.......... 29 0 0 0 0 0 0
March 2018.......... 26 0 0 0 0 0 0
March 2019.......... 22 0 0 0 0 0 0
March 2020.......... 18 0 0 0 0 0 0
March 2021.......... 14 0 0 0 0 0 0
March 2022.......... 9 0 0 0 0 0 0
March 2023.......... 0 0 0 0 0 0 0
March 2024.......... 0 0 0 0 0 0 0
March 2025.......... 0 0 0 0 0 0 0
March 2026.......... 0 0 0 0 0 0 0
March 2027.......... 0 0 0 0 0 0 0
March 2028.......... 0 0 0 0 0 0 0
March 2029.......... 0 0 0 0 0 0 0
Weighted Average
Life(3)........... 14.8 6.7 5.1 3.9 3.1 2.5 2.0
</TABLE>
- ------------
(1) Assumes (i) that an optional termination is exercised on the first Payment
Date when the Pool Balance is less than or equal to 10% of the Cut-off Date
Balance and (ii) a constant Draw Rate of 15%.
(2) All percentages are rounded to the nearest 1%.
(3) 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 reduction
of the Note Balance described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE STRUCTURING ASSUMPTIONS (INCLUDING THE
ASSUMPTIONS REGARDING THE CHARACTERISTICS AND PERFORMANCE OF THE REVOLVING
CREDIT LOANS WHICH DIFFER FROM THE ACTUAL CHARACTERISTICS AND PERFORMANCE
THEREOF) AND SHOULD BE READ IN CONJUNCTION THEREWITH.
S-39
<PAGE>
<PAGE>
WEIGHTED AVERAGE LIFE(1) AND FINAL SCHEDULED
PAYMENT DATE(2) SENSITIVITY OF THE TERM NOTES
TO PREPAYMENTS AND DRAWS
<TABLE>
<CAPTION>
CPR(3)
-----
0% 20% 25% 30% 35% 40%
--------------- --------------- --------------- --------------- --------------- ---------------
CONSTANT DRAW RATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE
- ----------------------- ----- ------- ---- -------- ---- -------- ---- -------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0%.................... 14.39 1/20/22 3.75 10/20/08 2.98 12/20/06 2.43 7/20/05 2.02 7/20/04 1.72 10/20/03
10%.................... 14.80 8/20/22 5.51 10/20/13 4.17 12/20/09 3.26 7/20/07 2.62 12/20/05 2.15 10/20/04
15%.................... 14.81 8/20/22 6.68 5/20/15 5.08 7/20/13 3.88 3/20/09 3.06 12/20/06 2.46 6/20/05
20%.................... 14.82 8/20/22 8.29 2/20/18 6.15 1/20/15 4.71 10/20/12 3.64 7/20/08 2.87 6/20/06
25%.................... 14.82 8/20/22 8.46 2/20/19 7.63 6/20/17 5.73 9/20/14 4.41 12/20/11 3.42 12/20/07
<CAPTION>
45%
---------------
CONSTANT DRAW RATE WAL DATE
- ----------------------- ---- --------
<S> <C> <C>
0%.................... 1.47 2/20/03
10%.................... 1.79 12/20/03
15%.................... 2.02 6/20/04
20%.................... 2.31 2/20/05
25%.................... 2.70 12/20/05
</TABLE>
<TABLE>
<CAPTION>
CPR(4)
-----
0% 20% 25% 30% 35% 40%
---------------- --------------- --------------- --------------- --------------- ---------------
CONSTANT DRAW RATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE
- ---------------------- ----- -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0%................... 14.48 10/20/23 4.00 4/20/17 3.20 3/20/14 2.63 10/20/12 2.20 11/20/10 1.86 3/20/09
10%................... 14.85 11/20/23 5.58 3/20/21 4.31 4/20/18 3.42 6/20/15 2.78 10/20/13 2.30 4/20/11
15%................... 14.85 11/20/23 6.74 6/20/22 5.11 2/20/20 3.99 5/20/17 3.19 10/20/14 2.60 2/20/13
20%................... 14.86 11/20/23 8.32 3/20/23 6.18 8/20/21 4.74 2/20/19 3.72 7/20/16 2.98 3/20/14
25%................... 14.87 11/20/23 8.48 5/20/23 7.64 10/20/22 5.74 10/20/20 4.43 4/20/18 3.49 11/20/15
<CAPTION>
45%
---------------
CONSTANT DRAW RATE WAL DATE
- ---------------------- ---- --------
<S> <C> <C>
0%................... 1.60 11/20/07
10%................... 1.92 5/20/09
15%................... 2.15 7/20/10
20%................... 2.43 3/20/12
25%................... 2.79 10/20/13
</TABLE>
- ------------
(1) The weighted average life of the Term Notes is determined by (i) multiplying
the amount of each payment allocated to principal by the number of years
from the date of issuance to the related Payment Date, (ii) adding the
results, and (iii) dividing the sum by the original Security Balance
thereof.
(2) The final scheduled payment date of the Term Notes is the date on which the
Security Balance thereof is reduced to zero.
(3) Assumes that an optional termination is exercised on the first Payment Date
when the Pool Balance is less than or equal to 10% of the Cut-off Date
Balance.
(4) Assumes no optional termination is exercised.
S-40
<PAGE>
<PAGE>
DESCRIPTION OF THE PURCHASE AGREEMENT
The Revolving Credit Loans and related Additional Balances to be
transferred to the Trust by the Depositor were or will be purchased by the
Depositor from Residential Funding (in such capacity, the 'SELLER') pursuant to
a Revolving Credit Loan Purchase Agreement (the 'PURCHASE AGREEMENT'). The
following summary describes certain terms of the form of the Purchase Agreement
and is qualified in its entirety by reference to the form of Purchase Agreement.
TRANSFER OF REVOLVING CREDIT LOANS
Pursuant to the Purchase Agreement, the Seller will transfer and assign to
the Depositor all of its right, title and interest in and to the Revolving
Credit Loans, the related Credit Line Agreement, mortgages and other related
documents (collectively, the 'RELATED DOCUMENTS') and all of the Additional
Balances thereafter created prior to the occurrence of an Amortization Event.
The purchase price of the Revolving Credit Loans is a specified percentage of
the face amount thereof as of the time of transfer and is payable by the
Depositor as provided in the Purchase Agreement. The purchase price of each
Additional Balance is the amount of the related new advance and is payable by
the Trust, either in cash or in the form of an increase in the Security Balance
of the Variable Funding Notes (or, in certain circumstances, the issuance of
additional Certificates), as provided in the Purchase Agreement.
The Purchase Agreement will require that, within the time period specified
therein, the Seller deliver to the Indenture Trustee (as the Trust's agent for
such purpose) the Revolving Credit Loans and the Related Documents. In lieu of
delivery of original mortgages, the Seller may deliver true and correct copies
thereof which have been certified as to authenticity by the appropriate county
recording office where such mortgage is recorded. In addition, under the terms
of the Purchase Agreement, the Seller will cause the Custodian to record
assignments of mortgages relating to such Revolving Credit Loans.
REPRESENTATIONS AND WARRANTIES
The Seller will also represent and warrant to the Depositor that, among
other things, (a) the information with respect to the Revolving Credit Loans set
forth in the schedule attached to the Purchase Agreement is true and correct in
all material respects and (b) immediately prior to the sale of the Revolving
Credit Loans to the Depositor, the Seller was the sole owner and holder of the
Revolving Credit Loans free and clear of any and all liens and security
interests. The Seller will also represent and warrant to the Depositor that,
among other things, as of the Closing Date, (a) the Purchase Agreement
constitutes a legal, valid and binding obligation of the Seller and (b) the
Purchase Agreement constitutes a valid transfer and assignment to the Depositor
of all right, title and interest of the Seller in and to the Revolving Credit
Loans and the proceeds thereof. The benefit of the representations and
warranties made to the Depositor by the Seller in the Purchase Agreement will be
assigned by the Depositor to the Trust.
Within 90 days of the Closing Date, Norwest Bank Minnesota, N.A. (the
'CUSTODIAN') will review or cause to be reviewed the Revolving Credit Loans and
the Related Documents and if any Revolving Credit Loan or Related Document is
found to be defective in any material respect, which may materially and
adversely affect the value of the related Revolving Credit Loan, or the
interests of the Indenture Trustee (as pledgee of the Trust Fund), the
Securityholders or the Credit Enhancer in such Revolving Credit Loan and such
defect is not cured within 90 days following notification thereof to the Seller
and the Trust by the Custodian, the Seller will be obligated under the Purchase
Agreement to deposit the Repurchase Price into the Custodial Account. In lieu of
any such deposit, the Seller may substitute an Eligible Substitute Loan. Any
such purchase or substitution will result in the removal of such Revolving
Credit Loan required to be removed from the Trust (each such Revolving Credit
Loan, a 'DELETED LOAN'). The obligation of the Seller to remove a Deleted Loan
from the Trust is the sole remedy regarding any defects in the Revolving Credit
Loans and Related Documents available to the Trust, the Certificateholders (or
the Owner Trustee on behalf of the Certificateholders) and the Noteholders (or
the Indenture Trustee on behalf of the Noteholders) against the Seller.
With respect to any Revolving Credit Loan, the 'REPURCHASE PRICE' is equal
to the Principal Balance of such Revolving Credit Loan at the time of any
removal described above plus accrued and unpaid interest thereon to the date of
removal. In connection with the substitution of an Eligible Substitute Loan, the
Seller will be required to deposit in the Custodial Account an amount (the
'SUBSTITUTION ADJUSTMENT AMOUNT') equal to the
S-41
<PAGE>
<PAGE>
excess of the Principal Balance of the related Deleted Loan over the Principal
Balance of such Eligible Substitute Loan.
An 'ELIGIBLE SUBSTITUTE LOAN' is a revolving credit loan substituted by the
Seller for a Deleted Loan which must, on the date of such substitution, (i) have
an outstanding Principal Balance (or in the case of a substitution of more than
one Revolving Credit Loan for a Deleted Loan, an aggregate Principal Balance)
not in excess of the Principal Balance relating to such Deleted Loan; (ii) have
a Loan Rate, Net Loan Rate and Gross Margin no lower than and not more than 1%
in excess of the Loan Rate, Net Loan Rate and Gross Margin, respectively, of
such Deleted Loan; (iii) have a Combined Loan-to-Value Ratio at the time of
substitution no higher than that of the Deleted Loan at the time of
substitution; (iv) have a remaining term to maturity not more than one year
earlier and not later than the remaining term to maturity of the Deleted Loan;
(v) comply with each representation and warranty as to the Revolving Credit
Loans set forth in the Purchase Agreement (deemed to be made as of the date of
substitution); and (vi) satisfy certain other conditions specified in the
Indenture.
In addition the Seller will be obligated to deposit the Repurchase Price or
substitute an Eligible Substitute Loan with respect to a Revolving Credit Loan
as to which there is a breach of a representation or warranty in the Purchase
Agreement and such breach is not cured by the Seller within the time provided in
the Purchase Agreement.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing Agreement,
dated as of March 1, 1999 among the Trust, the Indenture Trustee and the Master
Servicer. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Servicing
Agreement. Whenever particular defined terms of the Servicing Agreement are
referred to, such defined terms are thereby incorporated herein by reference.
See 'Servicing of Trust Assets' and 'The Agreements' in the Prospectus.
P&I COLLECTIONS
The Master Servicer shall establish and maintain an account (the 'CUSTODIAL
ACCOUNT') in which the Master Servicer shall deposit or cause to be deposited
any amounts representing payments on and any collections received in respect of
the Revolving Credit Loans received by it subsequent to the Cut-off Date. The
Custodial Account shall be an Eligible Account. On the 15th day of each month or
if such day is not a Business Day, the next succeeding Business Day (the
'DETERMINATION DATE'), the Master Servicer will notify the Paying Agent and the
Indenture Trustee of the aggregate amounts required to be withdrawn from the
Custodial Account and deposited into the Payment Account prior to the close of
business on the Business Day next succeeding each Determination Date.
'PERMITTED INVESTMENTS' are specified in the Servicing Agreement and are
limited to investments which meet the criteria of the Rating Agencies from time
to time as being consistent with their then-current ratings of the Securities.
The Master Servicer will make the following withdrawals from the Custodial
Account and deposit such amounts as follows:
(i) to the Payment Account, an amount equal to the P&I Collections on
the Business Day prior to each Payment Date; and
(ii) to pay to itself or the Seller various reimbursement amounts and
other amounts as provided in the Servicing Agreement.
As to any Payment Date, 'P&I COLLECTIONS' will equal the sum of (a)
Interest Collections for such Payment Date and (b) so long as an Amortization
Event has not occurred and if during the Revolving Period, 'NET PRINCIPAL
COLLECTIONS' for such Payment Date which are the excess, if any, of Principal
Collections for such Payment Date over the aggregate amount of Additional
Balances created during the related Collection Period and conveyed to the Trust,
or if an Amortization Event has occurred or the Revolving Period has ended,
Principal Collections for such date. Upon the occurrence of an Amortization
Event or after the end of the Revolving Period, Principal Collections for a
Collection Period will no longer be applied to acquire Additional Balances
during such Collection Period.
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All collections on the Revolving Credit Loans will generally be allocated
in accordance with the Credit Line Agreements between amounts collected in
respect of interest and amounts collected in respect of principal. As to any
Payment Date, 'INTEREST COLLECTIONS' will be equal to the sum of (i) the amounts
collected during the related Collection Period, including Net Liquidation
Proceeds (as defined below), allocated to interest pursuant to the terms of the
Credit Line Agreements (exclusive of the pro rata portion thereof attributable
to Additional Balances not conveyed to the Trust following an Amortization
Event), reduced by the Servicing Fees for such Collection Period and (ii) the
interest portion of the Repurchase Price for any Deleted Loans and the cash
purchase price paid in connection with any optional purchase of the Revolving
Credit Loans by the Master Servicer. As to any Payment Date, 'PRINCIPAL
COLLECTIONS' will be equal to the sum of (i) the amount collected during the
related Collection Period, including Net Liquidation Proceeds allocated to
principal pursuant to the terms of the Credit Line Agreements (exclusive of the
pro rata portion thereof attributable to Additional Balances not conveyed to the
Trust following an Amortization Event) and (ii) any Substitution Adjustment
Amounts and the principal portion of the Repurchase Price for any Deleted Loans
and (iii) the cash purchase price paid in connection with any optional purchase
of the Revolving Credit Loans by the Master Servicer.
As to any Payment Date, the 'COLLECTION PERIOD' is the calendar month
preceding the month of such Payment Date.
'NET LIQUIDATION PROCEEDS' with respect to a Revolving Credit Loan are the
proceeds (excluding amounts drawn on the Policy) received in connection with the
liquidation of any Revolving Credit Loan, whether through trustee's sale,
foreclosure sale or otherwise, reduced by related expenses, but not including
the portion, if any, of such amount that exceeds the Principal Balance of the
Revolving Credit Loan at the end of the Collection Period immediately preceding
the Collection Period in which such Revolving Credit Loan became a Liquidated
Revolving Credit Loan.
With respect to any date, the 'POOL BALANCE' will be equal to the aggregate
of the Principal Balances of all Revolving Credit Loans as of such date owned by
the Trust. The Principal Balance of a Revolving Credit Loan (other than a
Liquidated Revolving Credit Loan) on any day is equal to the Cut-off Date
Balance thereof, plus (i) any Additional Balances in respect of such Revolving
Credit Loan conveyed to the Trust minus (ii) all collections credited against
the Principal Balance of such Revolving Credit Loan in accordance with the
related Credit Line Agreement prior to such day (exclusive of the pro rata
portion thereof attributable to Additional Balances not conveyed to the Trust
following an Amortization Event). The Principal Balance of a Liquidated
Revolving Credit Loan after final recovery of substantially all of the related
Liquidation Proceeds which the Master Servicer reasonably expects to receive
shall be zero.
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE
The following summary describes certain terms of the Trust Agreement and
the Indenture. The summary does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the provisions of the Trust
Agreement and the Indenture. Whenever particular defined terms of the Indenture
are referred to, such defined terms are thereby incorporated herein by
reference. See 'The Agreements' in the Prospectus.
THE TRUST FUND
Simultaneously with the issuance of the Notes, the Issuer will pledge the
Trust Fund to the Indenture Trustee as collateral for the Notes. As pledgee of
the Revolving Credit Loans, the Indenture Trustee will be entitled to direct the
Issuer in the exercise of all rights and remedies of the Depositor against the
Seller under the Purchase Agreement and against the Master Servicer under the
Servicing Agreement.
REPORTS TO HOLDERS
The Indenture Trustee will mail to each Holder of Term Notes, at its
address listed on the Security Register maintained with the Indenture Trustee, a
report setting forth certain amounts relating to the Notes for each Payment
Date, among other things:
(i) the amount of principal, if any, payable on such Payment Date to
Securityholders;
(ii) the amount of interest payable on such Payment Date to
Securityholders separately stating the portion thereof in respect of
overdue accrued interest;
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(iii) the Security Balances of the Notes after giving effect to the
payment of principal on such Payment Date;
(iv) P&I Collections for the related Collection Period;
(v) the aggregate Principal Balance of the Revolving Credit Loans as
of the end of the preceding Collection Period;
(vi) the Outstanding Reserve Amount as of the end of the related
Collection Period; and
(vii) the amount paid, if any, under the Policy for such Payment Date.
In the case of information furnished pursuant to clauses (i) and (ii)
above, the amounts shall be expressed as a dollar amount per $1,000 in face
amount of Notes.
CERTAIN COVENANTS
The Indenture will provide that the Issuer may not consolidate with or
merge into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes, by an
indenture supplemental to the Indenture, the Issuer's obligation to make due and
punctual payments upon the Notes and the performance or observance of any
agreement and covenant of the Issuer under the Indenture, (iii) no Event of
Default shall have occurred and be continuing immediately after such merger or
consolidation, (iv) the Issuer has received consent of the Credit Enhancer and
has been advised that the ratings of the Securities (without regard to the
Policy) then in effect would not be reduced or withdrawn by any Rating Agency as
a result of such merger or consolidation, (v) any action that is necessary to
maintain the lien and security interest created by the Indenture is taken, (vi)
the Issuer has received an Opinion of Counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Issuer or to any Noteholder or Certificateholder and (vii) the Issuer has
delivered to the Indenture Trustee an officer's certificate and an Opinion of
Counsel each stating that such consolidation or merger and such supplemental
indenture comply with the Indenture and that all conditions precedent, as
provided in the Indenture, relating to such transaction have been complied with.
The Issuer will not, among other things, (i) except as expressly permitted by
the Indenture, sell, transfer, exchange or otherwise dispose of any of the
assets of the Issuer, (ii) claim any credit on or make any deduction from the
principal and interest payable in respect of the Notes (other than amounts
withheld under the Code or applicable state law) or assert any claim against any
present or former holder of Notes because of the payment of taxes levied or
assessed upon the Issuer, (iii) permit the validity or effectiveness of the
Indenture to be impaired or permit any person to be released from any covenants
or obligations with respect to the Notes under the Indenture except as may be
expressly permitted thereby or (iv) permit any lien, charge, excise, claim,
security interest, mortgage or other encumbrance to be created on or extend to
or otherwise arise upon or burden the assets of the Issuer or any part thereof,
or any interest therein or the proceeds thereof. The Issuer may not engage in
any activity other than as specified under 'The Issuer' herein.
MODIFICATION OF INDENTURE
With the consent of the holders of a majority of each of the outstanding
Term Notes and Variable Funding Notes and the Credit Enhancer, the Issuer and
the Indenture Trustee may execute a supplemental indenture to add provisions to,
change in any manner or eliminate any provisions of, the Indenture, or modify
(except as provided below) in any manner the rights of the Noteholders. Without
the consent of the holder of each outstanding Note affected thereby and the
Credit Enhancer, however, no supplemental indenture will: (i) change the due
date of any installment of principal of or interest on any Note or reduce the
principal amount thereof, the interest rate specified thereon or change any
place of payment where or the coin or currency in which any Note or any interest
thereon is payable; (ii) impair the right to institute suit for the enforcement
of certain provisions of the Indenture regarding payment; (iii) reduce the
percentage of the aggregate amount of the outstanding Notes, the consent of the
holders of which is required for any supplemental indenture or the consent of
the holders of which is required for any waiver of compliance with certain
provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the Issuer,
the Depositor or an affiliate of any of them; (v) decrease the percentage of the
aggregate principal amount of Notes required to amend the sections of the
Indenture which specify the applicable percentage of aggregate principal amount
of the Notes necessary to
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amend the Indenture or certain other related agreements; (vi) modify any of the
provisions of the Indenture in such manner as to affect the calculation of the
amount of any payment of interest or principal due on any Note (including the
calculation of any of the individual components of such calculation); or (vii)
permit the creation of any lien ranking prior to or, except as otherwise
contemplated by the Indenture, on a parity with the lien of the Indenture with
respect to any of the collateral for the Notes or, except as otherwise permitted
or contemplated in the Indenture, terminate the lien of the Indenture on any
such collateral or deprive the holder of any Note of the security afforded by
the lien of the Indenture.
The Issuer and the Indenture Trustee may also enter into supplemental
indentures, with the consent of the Credit Enhancer and without obtaining the
consent of the Noteholders, for the purpose of, among other things, curing any
ambiguity or correcting or supplementing any provision in the Indenture that may
be inconsistent with any other provision therein.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE ISSUER
Neither the Indenture Trustee nor any director, officer or employee of the
Indenture Trustee will be under any liability to the Issuer or the related
Noteholders for any action taken or for refraining from the taking of any action
in good faith pursuant to the Indenture or for errors in judgment; provided,
however, that none of the Indenture Trustee and any director, officer or
employee thereof will be protected against any liability which would otherwise
be imposed by reason of willful malfeasance, bad faith or negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties under the Indenture. Subject to certain limitations set forth in the
Indenture, the Indenture Trustee and any director, officer, employee or agent of
the Indenture Trustee shall be indemnified by the Issuer and held harmless
against any loss, liability or expense incurred in connection with
investigating, preparing to defend or defending any legal action, commenced or
threatened, relating to the Indenture other than any loss, liability or expense
incurred by reason of willful malfeasance, bad faith or negligence in the
performance of its duties under such Indenture or by reason of reckless
disregard of its obligations and duties under the Indenture. All persons into
which the Indenture Trustee may be merged or with which it may be consolidated
or any person resulting from such merger or consolidation shall be the successor
of the Indenture Trustee under the Indenture.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Stroock & Stroock & Lavan LLP, counsel to the Depositor,
for federal income tax purposes, the Term Notes will be characterized as
indebtedness and the Issuer, as created pursuant to the terms and conditions of
the Trust Agreement, will not be characterized as an association (or publicly
traded partnership within the meaning of section 7704 of the Code) taxable as a
corporation or as a taxable mortgage pool within the meaning of section 7701(i)
of the Code.
For federal income tax purposes, the Term Notes will not be treated as
having been issued with 'original issue discount' (as defined in the
Prospectus). See 'Certain Federal Income Tax Consequences' in the Prospectus.
The Term Notes will not be treated as assets described in Section
7701(a)(19)(C) of the Code and 'real estate assets' under Section 856(c)(4)(A)
of the Code. In addition, interest on the Term 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 Term 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 certain federal income and state and local tax
laws to the Issuer and purchasers of the Term Notes.
ERISA CONSIDERATIONS
Any fiduciary or other investor of Plan assets that proposes to acquire or
hold the Term Notes on behalf of or with Plan assets of any Plan should consult
with its counsel with respect to the potential applicability of the 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.
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Each Purchaser of a Term Note, by its acceptance of such Term Note, shall
be deemed to have represented either that a Class or individual exemption under
section 406 of ERISA or section 4975 of the Code is applicable to the
acquisition of the Term Note by such purchaser or the acquisition of the Term
Note by such purchaser does not constitute or give rise to a prohibited
transaction under section 406 of ERISA or section 4975 of the Code, for which no
statutory, regulatory or administrative exemption is available. See 'ERISA
Considerations' in the Prospectus.
Insurance companies contemplating the investment of general account assets
in the Term Notes 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 hereof.
The Term 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 such Plan assets; (b) has authority or responsibility to give, or regularly
gives, investment advice with respect to such Plan assets, for a fee and
pursuant to an agreement or understanding that such advice (i) will serve as a
primary basis for investment decisions with respect to such Plan assets and
(ii) will be based on the particular investment needs for such Plan; or (c) is
an employer maintaining or contributing to such Plan.
LEGAL INVESTMENT
The Term Notes will not constitute 'mortgage related securities' for
purposes of SMMEA. Accordingly, many institutions with legal authority to invest
in mortgage related securities may not be legally authorized to invest in the
Term Notes. No representation is made herein as to whether the Term Notes
constitute legal investments for any entity under any applicable statute, law,
rule, regulation or order. Prospective purchasers are urged to consult with
their counsel concerning the status of the Term Notes as legal investments for
such purchasers prior to investing in Term Notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated March 23, 1999 (the 'UNDERWRITING AGREEMENT'), the Underwriter has agreed
to offer the Term Notes on a best efforts basis and the Depositor has agreed to
sell to the Underwriter such Term Notes when and if sold by the Underwriter. The
termination date of the offering of the Term Notes is the earlier to occur of
March 29, 2000, or the date on which all of such Term Notes have been sold.
Proceeds of the offering of the Term Notes will not be placed in any escrow,
trust or similar arrangement. It is expected that delivery of the Term Notes
will be made only in book-entry form through the Same Day Funds Settlement
System of DTC, Cedel and Euroclear on or about March 29, 1999, against payment
therefor in immediately available funds.
The Underwriter is offering the Term Notes on a best efforts basis and will
only be obligated to pay for and accept delivery of any of the Term Notes at
such time as it sells such Term Notes. The Underwriter is an indirect
wholly-owned subsidiary of the parent of the Depositor.
In addition, the Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Term Notes is subject to,
among other things, the receipt of certain legal opinions and to the conditions,
among others, that no stop order suspending the effectiveness of the Depositor's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The Term Notes will be offered by the Underwriter, on a best efforts basis,
from time to time to the public, directly or through dealers, in one or more
negotiated transactions, or otherwise, at varying prices to be determined at the
time of sale. The proceeds to the Depositor from any sale of the Term Notes will
be equal to the purchase price paid by the purchaser thereof, net of any
expenses payable by the Depositor and any compensation payable to the
Underwriter and any such dealer. The Underwriter may effect such transactions by
selling its Term Notes to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriter. In connection with the sale of the Term 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
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distribution of the Term Notes may be deemed to be underwriters and any profit
on the resale of the Term Notes positioned by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter, and that under limited circumstances the Underwriter will indemnify
the Depositor, against certain civil liabilities under the Securities Act of
1933, or contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the Term Notes will
develop or, if it does develop, that it will continue. The primary source of
information available to investors concerning the Term Notes will be the monthly
statements discussed in the Prospectus under 'Description of the Notes --
Reports to Noteholders,' which will include information as to the outstanding
principal balance of the Term Notes. There can be no assurance that any
additional information regarding the Term Notes will be available through
any other source. In addition, the Depositor is not aware of any source through
which price information about the Term Notes will be generally available on an
ongoing basis. The limited nature of such information regarding the Term Notes
may adversely affect the liquidity of the Term Notes, even if a secondary market
for the Term Notes becomes available.
The Underwriter is an affiliate of the Depositor and the Master Servicer.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation and
subsidiaries, as of December 31, 1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997 are incorporated by reference herein
and in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the Term Notes will be passed upon
for the Depositor and the Underwriter by Stroock & Stroock & Lavan LLP, New
York.
RATINGS
It is a condition to issuance that the Term Notes be rated 'Aaa' by Moody's
and 'AAA' by Standard & Poor's. The Depositor has not requested a rating on the
Term Notes by any rating agency other than Moody's and Standard & Poor's.
However, there can be no assurance as to whether any other rating agency will
rate the Term Notes, or, if it does, what rating would be assigned by any such
other rating agency. A rating on the Term Notes by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Term Notes by
Moody's and Standard & Poor's. A securities rating addresses the likelihood of
the receipt by holders of Term Notes of distributions on the Revolving Credit
Loans. The rating takes into consideration the structural and legal aspects
associated with the Term Notes. The ratings on the Term Notes do not, however,
constitute statements regarding the possibility that Holders might realize a
lower than anticipated yield. In addition, such ratings do not address the
likelihood of the receipt of any amounts in respect of Basis Risk Shortfalls. A
securities rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Residential
Funding Mortgage Securities II, Inc., Home Equity Loan-Backed Term Notes, Series
1999-HS3 (the 'GLOBAL SECURITIES') will be available only in book-entry form.
Investors in the Global Securities may hold such Global Securities through any
of DTC, Cedel or Euroclear. The Global Securities will be tradeable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their Relevant Depositary
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in 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 such accrual period and a
year assumed to consist of 360 days. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first day
of the following month. Payment will then be made by the Relevant Depositary to
the DTC Participant's
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account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Cedel Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Cedel or Euroclear cash debt will be valued instead as of the
actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their account one day later. As an alternative, if
Cedel or Euroclear has extended a line of credit to them, Cedel Participants or
Euroclear Participants can elect not to preposition funds and allow that credit
line to be drawn upon to finance settlement. Under this procedure, Cedel
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges, although
the result will depend on each Cedel Participant's or Euroclear Participant's
particular cost of funds. Since the settlement is taking place during New York
business hours, DTC Participants can employ their usual procedures for crediting
Global Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
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(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate: Exemption for
Non-U.S. Persons (Form W-8). Beneficial Holders of Global Securities that are
Non-U.S. Persons (as defined below) can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form 1001. Holdership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8. Form
1001 may be filed by Certificate Holders or their agent. Exemption for U.S.
Persons (Form W-9). U.S. Persons can obtain a complete exemption from the
withholding tax by filing Form W-9 (Payer's Request for Taxpayer Identification
Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term 'U.S. PERSON' means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof (unless, in
the case of a partnership, future Treasury regulations provide otherwise), (iii)
an estate that is subject to U.S. 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. Certain 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.
I-3
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PROSPECTUS
ASSET-BACKED NOTES
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
Depositor
The Asset-Backed Notes (the 'NOTES') offered hereby may be sold from time to
time in series, as described in the related Prospectus Supplement. Each series
of Notes will represent indebtedness of the related trust fund (the 'TRUST
FUND') secured by certain assets deposited therein (the 'TRUST ASSETS')
described below. The Trust Fund for a series of Notes and the related
Certificates (as defined herein, and together with the Notes, the 'SECURITIES')
will consist primarily of a segregated pool (a 'POOL') of (i) one- to
four-family first or junior lien home equity revolving lines of credit (the
'REVOLVING CREDIT LOANS'); (ii) one- to four-family first or junior lien closed
end home equity loans for property improvement, debt consolidation and home
equity purposes (the 'HOME EQUITY LOANS'); (iii) home improvement installment
sales contracts and installment loan agreements (the 'HOME IMPROVEMENT
CONTRACTS'), that are either unsecured or secured by first or junior liens on
one- to four-family residential properties or by purchase money security
interests in the home improvements financed thereby (the 'HOME IMPROVEMENTS');
(iv) manufactured housing installment sales contracts and installment loan
agreements (the 'MANUFACTURED HOUSING CONTRACTS' and together with the Home
Improvement Contracts, the 'CONTRACTS') secured by either security interests in
Manufactured Homes (as defined herein) or by mortgages on real estate on which
the related Manufactured Homes are located; (v) certain balances of the
foregoing and/or (vi) certain interests in the foregoing (which may include
Private Securities, as defined herein). To the extent specified in the related
Prospectus Supplement, the Contracts may be partially insured by the Federal
Housing Administration (the 'FHA') pursuant to Title I (as defined herein) (the
'TITLE I CONTRACTS'). Each of the Trust Assets will be acquired by the Company
from one or more affiliated or unaffiliated institutions. See 'The Pools.' Only
the Notes are offered hereby. See 'Index of Principal Definitions' for the
meanings of capitalized terms and acronyms.
The Trust Assets described herein under 'The Pools' and in the related
Prospectus Supplement will be held in the related Trust Fund pursuant to a trust
agreement (the 'TRUST AGREEMENT') and pledged pursuant to an indenture (the
'INDENTURE') to secure a series of Notes to the extent and as described herein
and in the related Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, each Pool will consist of one or more types of
Trust Assets described under 'The Pools.' Information regarding each class of
Notes of a series, and the general characteristics of the Trust Assets securing
such Notes, will be set forth in the related Prospectus Supplement.
Each series of Notes will include one or more classes. Each class of Notes of
any series will represent the right, which right may be senior or subordinate to
the rights of one or more of the other classes of Securities or other interests
in the related Trust Fund, to receive a specified portion of payments of
principal or interest (or both) on the Trust Assets in the related Trust Fund in
the manner described herein and in the related Prospectus Supplement. See
'Description of the Notes -- Payments.' A series may include one or more classes
of Notes entitled to principal payments, with disproportionate, nominal or no
interest payments, or to interest payments, with disproportionate, nominal or no
principal payments. A series may include two or more classes of Notes which
differ as to the timing, sequential order, priority of payment, Interest Rate or
amount of payments of principal or interest or both.
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Notes may include any one or any combination of a Financial Guaranty
Insurance Policy, Letter of Credit (each as defined herein), bankruptcy bond,
special hazard insurance policy, Reserve Fund (as defined herein), or other form
of credit support. In addition to or in lieu of the foregoing, credit
enhancement may be provided by means of subordination. See 'Description of
Credit Enhancement.'
The rate of payment of principal of each class of Notes will depend on the
priority of payment of such class and the rate and timing of principal payments
(including payments in excess of required installments, prepayments, Draws or
terminations, liquidations and repurchases) on the Trust Assets. A rate of
principal payment lower or higher than that anticipated may affect the yield on
each class of Notes in the manner described herein and in the related Prospectus
Supplement. See 'Yield and Prepayment Considerations.'
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE NOTES, SEE
'RISK FACTORS,' WHICH BEGINS ON PAGE 9.
PROCEEDS OF THE TRUST ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS
ON THE NOTES. THE NOTES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
COMPANY, RESIDENTIAL FUNDING, GMAC MORTGAGE GROUP, INC. ('GMAC MORTGAGE') OR ANY
OF THEIR AFFILIATES. NEITHER THE NOTES NOR THE UNDERLYING TRUST ASSETS WILL BE
GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE
COMPANY, RESIDENTIAL FUNDING CORPORATION, GMAC MORTGAGE OR ANY OF THEIR
AFFILIATES, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT. NONE OF SUCH ENTITIES WILL HAVE ANY OBLIGATIONS IN RESPECT OF THE
NOTES, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT.
THESE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Offers of the Notes may be made through one or more different methods, including
offerings through underwriters, as described under 'Methods of Distribution' and
in the related Prospectus Supplement.
There will be no secondary market for any series of Notes prior to the offering
thereof. There can be no assurance that a secondary market for any of the Notes
will develop or, if it does develop, that it will continue. The Notes will not
be listed on any securities exchange.
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of Notes offered hereby unless accompanied by a Prospectus
Supplement.
------------------------
The date of this Prospectus is January 22, 1998.
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ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'COMMISSION') a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Notes (the 'REGISTRATION STATEMENT'). The Company
is also subject to certain of the information requirements of the Securities
Exchange Act of 1934, as amended (the 'EXCHANGE ACT'), and, accordingly, will
file reports thereunder with the Commission. The Registration Statement and the
exhibits thereto, and reports and other information filed by the Company
pursuant to the Exchange Act can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at certain of its Regional Offices located as follows: Midwest
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and Northeast Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048 and electronically through the Commission's
Electronic Data Gathering, Analysis and Retrieval System at the Commission's Web
Site (http://www.sec.gov).
REPORTS TO NOTEHOLDERS
Monthly reports that contain information concerning the Trust Fund for a
series of Notes will be sent by the Master Servicer or the Indenture Trustee to
each holder of record of the Notes of the related series. See 'Description of
the Notes -- Reports to Noteholders.' Any reports forwarded to holders will
contain financial information that has not been examined nor reported upon by an
independent certified public accountant. The Company will file with the
Commission such periodic reports with respect to the Trust Fund for a series of
Notes as are required under the Exchange Act, and the rules and regulations of
the Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each series of Notes offered hereby, there are incorporated
herein and in the related Prospectus Supplement by reference all documents and
reports filed or caused to be filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, prior to the termination of the offering
of the related series of Notes, that relate specifically to such related series
of Notes. The Company will provide or cause to be provided without charge to
each person to whom this Prospectus and related Prospectus Supplement is
delivered in connection with the offering of one or more classes of such series
of Notes, upon written or oral request of such person, a copy of any or all such
reports incorporated herein by reference, in each case to the extent such
reports relate to one or more of such classes of such series of Notes, other
than the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents. Requests should be directed in
writing to Residential Funding Mortgage Securities II, Inc., 8400 Normandale
Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437, or by telephone at
(612) 832-7000.
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No dealer, salesman, or any other person has been authorized to give any
information, or to make any representations, other than those contained in this
Prospectus or the related Prospectus Supplement and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any dealer, salesman, or any other person. Neither the
delivery of this Prospectus or the related Prospectus Supplement nor any sale
made hereunder or thereunder shall under any circumstances create an implication
that there has been no change in the information herein or therein since the
date hereof. This Prospectus and the related Prospectus Supplement are not an
offer to sell or a solicitation of an offer to buy any security in any
jurisdiction in which it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
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Additional Information............................ 2
Reports to Noteholders............................ 2
Incorporation of Certain Information by
Reference....................................... 2
Summary of Prospectus............................. 4
Risk Factors...................................... 9
Special Features of Certain Trust Assets that
are Secured by Junior Liens on Mortgaged
Properties.................................. 9
Limitations on FHA Insurance for Title I
Contracts................................... 11
Risks Associated with Certain Trust Assets.... 12
Limitations, Reduction and Substitution of
Credit Enhancement.......................... 13
Yield and Prepayment Considerations........... 13
Limited Liquidity............................. 14
Limited Obligations........................... 14
The Pools......................................... 15
General....................................... 15
Revolving Credit Loans........................ 17
The Home Equity Loans and the Contracts....... 18
Trust Asset Program............................... 19
Underwriting Standards Applicable to the
Revolving Credit Loans...................... 19
Qualifications of Sellers..................... 22
Representations Relating to Trust Assets...... 23
Subservicing.................................. 25
Description of the Notes.......................... 26
General....................................... 26
Form of Notes................................. 26
Assignment of the Trust Assets................ 28
Review of Trust Assets........................ 29
Excess Spread and Excluded Spread............. 30
Payments on Trust Assets; Deposits to Payment
Account..................................... 30
Withdrawals from the Custodial Account........ 32
Payments...................................... 32
Funding Account............................... 33
Reports to Noteholders........................ 34
Hazard Insurance; Claims Thereunder........... 35
Description of Credit Enhancement................. 36
Financial Guaranty Insurance Policy........... 37
Letter of Credit.............................. 37
Subordination................................. 37
Overcollateralization......................... 38
Reserve Funds................................. 38
Maintenance of Credit Enhancement............. 39
Reduction or Substitution of Credit
Enhancement................................. 39
Purchase Obligations.............................. 40
Description of FHA Insurance under Title I........ 40
The Company....................................... 42
Residential Funding Corporation................... 42
Servicing of Trust Assets......................... 42
Subservicing.................................. 42
Collection and Other Servicing Procedures..... 43
Realization Upon Defaulted Loans.............. 44
Servicing Compensation and Payment of
Expenses.................................... 45
Evidence as to Compliance..................... 46
Certain Matters Regarding the Master Servicer
and the Company............................. 46
The Agreements.................................... 47
Events of Default; Rights Upon Event of
Default..................................... 47
Amendment..................................... 49
Termination; Redemption of Notes.............. 50
The Owner Trustee............................. 50
The Indenture Trustee......................... 50
Yield and Prepayment Considerations............... 50
Certain Legal Aspects of the Trust Assets and
Related Matters................................. 56
General; Trust Assets Secured by Mortgages on
Mortgaged Property.......................... 56
Cooperative Loans............................. 56
Tax Aspects of Cooperative Ownership.......... 57
Manufactured Housing Contracts................ 58
Foreclosure on Revolving Credit Loans, Home
Equity Loans and Certain Contracts.......... 59
Foreclosure on Shares of Cooperatives......... 60
Repossession with Respect to Manufactured
Housing Contracts........................... 61
Rights of Redemption.......................... 62
Notice of Sale; Redemption Rights with Respect
to Manufactured Homes....................... 62
Anti-Deficiency Legislation and Other
Limitations on Lenders...................... 63
Environmental Legislation..................... 64
Consumer Protection Laws with Respect to
Manufactured Housing Contracts.............. 65
Enforceability of Certain Provisions.......... 66
Transfer of Manufactured Homes................ 66
The Home Improvement Contracts................ 67
Applicability of Usury Laws................... 69
Alternative Mortgage Instruments.............. 69
Formaldehyde Litigation with Respect to
Manufactured Housing Contracts.............. 70
Soldiers' and Sailors' Civil Relief Act of
1940........................................ 70
Forfeitures in Drug and RICO Proceedings...... 71
Junior Mortgages; Rights of Senior
Mortgagees.................................. 71
Certain Federal Income Tax Consequences........... 72
General....................................... 72
State and Other Tax Consequences.................. 77
ERISA Considerations.............................. 77
Plan Asset Regulations........................ 77
Prohibited Transaction Exemptions............. 78
Insurance Company General Accounts............ 79
Representation from Plans Investing in Notes
with 'Substantial Equity Features'.......... 79
Tax Exempt Investors.......................... 79
Consultation with Counsel..................... 80
Legal Investment Matters.......................... 80
Use of Proceeds................................... 80
Methods of Distribution........................... 80
Legal Matters..................................... 81
Financial Information............................. 81
Index of Principal Definitions.................... 82
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SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each series of Notes contained in the Prospectus
Supplement to be prepared and delivered in connection with the offering of such
series. Capitalized terms used in this summary that are not otherwise defined
shall have the meanings ascribed thereto in this Prospectus. An index indicating
where certain terms used herein are defined appears at the end of this
Prospectus.
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Securities Offered........................ Asset-Backed Notes.
Company................................... Residential Funding Mortgage Securities II, Inc., the depositor. See
'The Company.'
Master Servicer........................... The entity identified as Master Servicer in the related Prospectus
Supplement, which may be Residential Funding Corporation, an
affiliate of the Company ('RESIDENTIAL FUNDING'). See 'Residential
Funding Corporation' and 'Servicing of the Trust Assets -- Certain
Matters Regarding the Master Servicer and the Company.'
Administrator............................. An entity may be named as the Administrator in the related Prospectus
Supplement if required in addition to or in lieu of the Master
Servicer or Servicer for a series of Notes (the 'ADMINISTRATOR').
Indenture Trustee......................... The Indenture Trustee for each series of Notes will be specified in
the related Prospectus Supplement (the 'INDENTURE TRUSTEE').
Owner Trustee............................. The Owner Trustee for each related Trust Fund will be specified in
the related Prospectus Supplement (the 'OWNER TRUSTEE').
The Notes................................. Each series of Notes will be secured by a Pool of Trust Assets as
described herein (exclusive of any portion of interest payments (the
Excess Spread or Excluded Spread as defined herein) relating to each
Trust Asset retained by the Company or any of its affiliates), and
certain other assets as described below. The Trust Fund (sometimes
referred to herein as the 'ISSUER') will be created pursuant to a
Trust Agreement between the Company and the Owner Trustee. The
ownership of the Trust Fund will be evidenced by certificates (the
'CERTIFICATES') issued under the Trust Agreement, which are not
offered hereby. Each series of Notes will represent indebtedness of
the related Trust Fund and will be issued pursuant to an Indenture
between the Trust Fund and the Indenture Trustee.
As specified in the related Prospectus Supplement, each series of
Notes, or class of Notes in the case of a series consisting of two or
more classes, may have a stated principal balance, no stated
principal balance or a notional amount and may be entitled to
payments of interest based on a specified interest rate or rates
(each, an 'INTEREST RATE'). Each series or class of Notes may have a
different Interest Rate, which may be a fixed, variable or adjustable
Interest Rate, or any combination of two or more of such Interest
Rates. The related Prospectus Supplement will specify the Interest
Rate or Rates for each series or class of Notes, or the initial
Interest Rate or Rates and the method for determining subsequent
changes to the Interest Rate or Rates.
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A series may include one or more classes of Notes (each, a 'STRIP
NOTE') entitled to (i) principal payments, with disproportionate,
nominal or no interest payments, or (ii) interest payments, with
disproportionate, nominal or no principal payments. In addition, a
series may include classes of Notes that differ as to timing,
sequential order, priority of payment, Interest Rate or amount of
payments of principal or interest or both, or as to which payments of
principal or interest or both on any class may be made upon the
occurrence of specified events, in accordance with a schedule or
formula, or on the basis of collections from designated portions of
the Pool. In addition, a series may include one or more classes of
Notes ('ACCRUAL NOTES') as to which certain accrued interest will not
be paid but rather will be added to the principal balance thereof in
the manner described in the related Prospectus Supplement. One or
more classes of Notes in a series may be entitled to receive
principal payments pursuant to an amortization schedule under the
circumstances described in the related Prospectus Supplement.
Each series of Notes will be senior in right of payment to the
related Certificates. If so provided in the related Prospectus
Supplement, a series of Notes may include one or more classes of
Notes which are senior to one or more other classes of notes
(collectively, together with the related Certificates, the
'SUBORDINATE SECURITIES') in respect of certain payments of principal
and interest and allocations of losses on the Trust Assets. See
'Description of Credit Enhancement -- Subordination.' The Notes will
be issued in fully-registered certificated or book-entry form in the
authorized denominations specified in the related Prospectus
Supplement. See 'Description of the Notes.'
Neither the Notes nor the underlying Trust Assets will be guaranteed
or insured by any governmental agency or instrumentality or the
Company, Residential Funding, GMAC Mortgage or any of their
affiliates, except as set forth herein or in the related Prospectus
Supplement. See 'Risk Factors -- Limited Obligations.'
The Pools................................. As specified in the related Prospectus Supplement, each Trust Fund
will consist primarily of a Pool of Trust Assets which may include
(i) Revolving Credit Loans secured by first or junior liens on one- to
four-family residential properties located in any one of the fifty
states, the District of Columbia or the Commonwealth of Puerto Rico
(the 'MORTGAGED PROPERTIES'); (ii) Home Equity Loans; (iii) Home
Improvement Contracts; (iv) Manufactured Housing Contracts; (v)
certain balances of the foregoing and/or (vi) Private Securities. All
or a portion of the Contracts underlying a series of Notes may be
partially insured by the FHA pursuant to Title I ('TITLE I') of the
National Housing Act of 1934, as amended (the 'NATIONAL HOUSING
ACT'). All of the Trust Assets will have been purchased by the
Company, either directly or through Residential Funding, from loan
originators or sellers who, as specified in the related Prospectus
Supplement, may or may not be affiliated with the Company, including
GMAC Mortgage Corporation, Residential Money Centers, Inc. and
HomeComings Financial Network, Inc. (each affiliates of the Company).
See 'Trust Asset Program.' For a
</TABLE>
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<TABLE>
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description of the types of Trust Assets that may be included in the
Pools, see 'The Pools.'
If specified in the related Prospectus Supplement, a Trust Fund may
include pass-through certificates or other instruments evidencing
interests in or secured by Revolving Credit Loans, Home Equity Loans,
Home Improvement Contracts and Manufactured Housing Contracts, or
certain balances of any of the foregoing ('PRIVATE SECURITIES') and
certain interests in the foregoing, as described herein. See 'The
Pools -- General' herein.
Interest Payments......................... Except as otherwise specified herein or in the related Prospectus
Supplement, interest on each class of Notes of each series, other
than Strip Notes or Accrual Notes (prior to the time when accrued
interest becomes payable thereon), will be remitted at the applicable
Interest Rate on the outstanding principal balance of such class, on
the day specified as a payment date for such series or class in the
related Prospectus Supplement (each, a 'PAYMENT DATE'). Payments, if
any, with respect to interest on Strip Notes will be made on each
Payment Date as described herein and in the related Prospectus
Supplement. See 'Description of the Notes -- Payments.' Strip Notes
that are entitled to payments of principal only will not receive
payments in respect of interest. Interest that has accrued but is not
yet payable on any Accrual Notes will be added to the principal
balance of such class on the related Payment Date, and will
thereafter bear interest at the applicable Interest Rate. Payments of
interest with respect to any series of Notes (or accruals thereof in
the case of Accrual Notes), or with respect to one or more classes
included therein, may be reduced to the extent of interest shortfalls
not covered by the applicable form of credit support. See 'Yield and
Prepayment Considerations' and 'Description of the Notes.'
Principal Payments........................ Except as otherwise specified in the related Prospectus Supplement,
principal payments on the Notes of each series, or of the class or
classes of Notes then entitled thereto, will be made on a pro rata
basis among all such Notes or among the Notes of any such class, in
proportion to their respective outstanding principal balances or the
percentage interests represented by such class, in the priority and
manner specified in the related Prospectus Supplement. Strip Notes
with no principal balance will not receive payments of principal. In
the event that principal payments on the Trust Assets are reduced due
to certain delinquencies or losses not covered by the applicable form
of credit enhancement, the payments of principal on the Notes may be
reduced.
In addition, for any series of Notes, there may be no principal
payments on such Notes in any given month as a result of the payment
terms of any of the Revolving Credit Loans in the Trust Fund, certain
of which may require only limited or no payments of principal prior
to the related maturity date, or the payment terms of such series of
Notes, including provisions whereby principal payments on certain
Revolving Credit Loans may be applied to cover Draws on other
Revolving Credit Loans. If specified in the related Prospectus
Supplement, a series of Notes may provide for a period during which
all or a portion of the principal collections on
</TABLE>
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<TABLE>
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the Revolving Credit Loans are reinvested in Additional Balances or
additional Revolving Credit Loans or are accumulated in a trust
account pending commencement of an amortization period. See 'The
Pools,' 'Yield and Prepayment Considerations' and 'Description of the
Notes.'
Funding Account........................... If so specified in the related Prospectus Supplement, a portion of
the proceeds of the sale of one or more classes of Notes of a series
or a portion of collections on the Trust Assets in respect of
principal may be deposited in a segregated account to be applied to
acquire additional Trust Assets from the Sellers, subject to the
limitations set forth herein under 'Description of the
Notes -- Funding Account.' Monies on deposit in the Funding Account
and not applied to acquire such additional Trust Assets within the
time set forth in the related Trust Agreement or other applicable
agreement may be treated as principal and applied in the manner
described in the related Prospectus Supplement.
Yield and Prepayment Considerations....... The Trust Assets supporting a series of Notes will have unique
characteristics that will affect the yield to maturity and the rate
of payment of principal on such Notes. See 'Risk Factors' herein and
'Yield and Prepayment Considerations' herein and in the related
Prospectus Supplement.
Credit Enhancement........................ If so specified in the related Prospectus Supplement, the Trust Fund
with respect to any series of Notes may include any one or any
combination of a Letter of Credit, Financial Guaranty Insurance
Policy, special hazard insurance policy, bankruptcy bond, Reserve
Fund, or other type of credit support to provide full or partial
coverage for certain defaults and losses relating to the Trust
Assets. Credit support also will be provided in the form of
subordination of the Certificates and may be provided in the form of
subordination of one or more classes of subordinate Notes in a series
under which certain losses are first allocated to such Subordinate
Securities up to a specified limit or in the form of
Overcollateralization (as defined herein). Any form of credit
enhancement may have certain limitations and exclusions from coverage
thereunder, which will be described in the related Prospectus
Supplement. Losses not covered by any form of credit enhancement will
be borne by the holders of the related Notes (or certain classes
thereof). If so specified in the related Prospectus Supplement, the
Contracts may be partially insured by the FHA pursuant to Title I. To
the extent not set forth herein, the amount and types of coverage,
the identification of any entity providing the coverage, the terms of
any subordination and related information will be set forth in the
Prospectus Supplement relating to a series of Notes. See 'Description
of Credit Enhancement.'
Optional Redemption....................... The Master Servicer, the Company or a person specified in the related
Prospectus Supplement, may at its option either (i) effect early
redemption of any series of Notes through the purchase of the Pool in
the related Trust Fund or (ii) purchase, in whole but not in part,
the Notes of any series; in each case under the circumstances and in
the manner set forth herein under 'The Agreements -- Termination;
Redemption of Notes' and in the related Prospectus Supplement.
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Rating.................................... At the date of issuance, as to each series, each class of Notes
offered hereby will be rated at the request of the Company in one of
the four highest rating categories by one or more nationally
recognized statistical rating agencies (each, a 'RATING AGENCY'). See
'Ratings' in the related Prospectus Supplement.
Legal Investment.......................... Unless otherwise specified in the related Prospectus Supplement, the
Notes offered hereby will not constitute 'mortgage related
securities' for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ('SMMEA'). See 'Legal Investment Matters.'
ERISA Considerations...................... A fiduciary of an employee benefit plan and certain other plans and
arrangements, including individual retirement accounts and annuities,
Keogh plans, bank collective investment funds, insurance company
general or separate accounts and certain other entities in which such
plans, accounts, annuities or arrangements are invested, which is
subject to the Employee Retirement Income Security Act of 1974, as
amended ('ERISA'), or Section 4975 of the Internal Revenue Code of
1986 (the 'CODE'), and any other person contemplating purchasing a
Note with Plan Assets (as defined herein), should carefully review
with its legal counsel whether the purchase or holding of Notes could
give rise to a transaction that is prohibited or is not otherwise
permissible either under ERISA or Section 4975 of the Code. See
'ERISA Considerations' herein and in the related Prospectus
Supplement.
Certain Federal Income Tax Consequences... In the opinion of Tax Counsel (as defined herein), for federal income
tax purposes, the Notes will be characterized as indebtedness and the
Issuer, as created pursuant to the terms and conditions of the Trust
Agreement, will not be characterized as an association (or publicly
traded partnership) taxable as a corporation or as a taxable mortgage
pool within the meaning of section 7701(i) of the Code.
For further information regarding certain federal income tax
consequences of an investment in the Notes see 'Certain Federal
Income Tax Consequences' and 'State and Other Tax Consequences'
herein and 'Certain Federal Income Tax Consequences' in the
Prospectus Supplement.
</TABLE>
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Notes:
SPECIAL FEATURES OF CERTAIN TRUST ASSETS THAT ARE SECURED BY JUNIOR LIENS ON
MORTGAGED PROPERTIES
General
Although the Revolving Credit Loans, Home Equity Loans and, if applicable,
Contracts may be secured by liens on Mortgaged Properties, such collateral may
not provide assurance of repayment of such Trust Assets comparable to that
provided under many first lien lending programs, and such Trust Assets
(especially those with high Combined Loan-to-Value Ratios (as defined herein))
may have risk of repayment characteristics more similar to unsecured consumer
loans.
Since the Revolving Credit Loans, Home Equity Loans and, if applicable,
Contracts may be subordinate to the rights of the mortgagee under the related
senior mortgage or mortgages, the proceeds from any foreclosure, liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of such Trust Assets secured by junior mortgages only to the
extent that the claims of such senior mortgages have been satisfied in full,
including any related foreclosure costs. With respect to a Contract partially
insured by the FHA pursuant to Title I, however, an FHA claim may be payable
subject to certain limitations, as described in the related Prospectus
Supplement and herein. With respect to the Trust Assets secured by junior liens
that have low Junior Ratios (as defined herein), foreclosure costs may be
substantial relative to the outstanding balance of such Trust Assets upon
default, and therefore the amount of any liquidation proceeds payable to
Noteholders may be smaller as a percentage of the outstanding balance of such
Trust Assets than would be the case in a typical pool of first lien residential
loans. In addition, the holder of a loan secured by a junior mortgage may not
foreclose on the Mortgaged Property unless it forecloses subject to the senior
mortgages, in which case it must either pay the entire amount due on the senior
mortgages to the senior mortgagees at or prior to the foreclosure sale or
undertake the obligation to make payments on the senior mortgages in the event
the mortgagor is in default thereunder. The Trust Fund will not have any source
of funds to satisfy the senior mortgages or make payments due to the senior
mortgagees, although the Master Servicer or Subservicer may, at its option,
advance such amounts to the extent deemed recoverable and prudent, but will not
be obligated to do so. In the event that such proceeds from a foreclosure or
similar sale of the related Mortgaged Property are insufficient to satisfy all
senior liens and such Trust Asset in the aggregate, the Trust Fund, as the
holder of the junior lien, and, accordingly, Holders of one or more classes of
the Notes are likely to (i) incur losses in jurisdictions in which a deficiency
judgment against the borrower is not available or in the Master Servicer's
discretion, seeking such judgment is not advisable, and (ii) incur losses if any
deficiency judgment obtained is not realized upon. See 'Certain Legal Aspects of
the Trust Assets and Related Matters.'
No assurance can be given that the values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Trust Assets. If the residential real estate market should experience an
overall decline in value (including as a result of the general economic factors
discussed below under ' -- Mortgagor Credit'), any such decline could extinguish
the value of the interest of a junior mortgagee in the Mortgaged Property before
having any adverse effect on the interest of the related senior mortgagees.
With respect to Trust Assets secured by junior liens that have high
Combined Loan-to-Value Ratios or low Junior Ratios, many circumstances exist,
including those described above, under which it would be uneconomical to
foreclose on the Mortgaged Property in the event of a default. For purposes of
the foregoing, the actual Junior Ratio for a Trust Asset at any time may be
lower than indicated in the Prospectus Supplement as a result of any reductions
in the Stated Principal Balance thereof. In such circumstances, repayment of the
Trust Asset would be dependent solely on the credit of the borrower under the
related Revolving Credit Loan, Home Equity Loan or Contract (the 'MORTGAGOR'),
and the ability to obtain repayment of such Trust Asset may be generally similar
to that which would be experienced if such Trust Asset were an unsecured
consumer loan. Moreover, while in most jurisdictions a mortgagee would be
permitted to elect to either foreclose or sue to collect the debt evidenced by
the Mortgage Note, in some jurisdictions that prohibit suits to collect the debt
until the mortgagee has sought to foreclose against the security, the mortgagee
may be forced to foreclose first and obtain a deficiency judgment. In addition,
in some jurisdictions, where the mortgagee has chosen to sue on the debt in lieu
of foreclosure, the mortgagee will be barred from foreclosing against the
security. In addition, no
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assurance can be given that a borrower under the related Home Improvement
Contract (other than Title I Contracts) will use the proceeds thereof for Home
Improvements and consequently, no additional value will have been added to the
Mortgage Property. See 'Certain Legal Aspects of the Trust Assets and Related
Matters -- Anti-Deficiency Legislation and Other Limitations on Lenders.'
Mortgagor Credit
As a result of the foregoing considerations, the underwriting standards and
procedures applicable thereto, as well as the repayment prospects thereof, may
be more dependent on the creditworthiness of the Mortgagor and less dependent on
the adequacy of the Mortgaged Property as collateral than would be the case
under many first lien lending programs. As to such Trust Assets, future changes
in the Mortgagor's economic circumstances will have a significant effect on the
likelihood of repayment. This is particularly so with respect to Revolving
Credit Loans, since additional Draws may be made by the Mortgagor in the future
up to the applicable Credit Limit. Although the Revolving Credit Loans are
generally subject to provisions whereby the Credit Limit may be reduced as a
result of a material adverse change in the Mortgagor's economic circumstances,
the Servicer or Master Servicer generally will not monitor for such changes and
may not become aware of them until after the Mortgagor has defaulted. Under
certain circumstances, a Mortgagor may draw his entire Credit Limit in response
to personal financial needs resulting from an adverse change in circumstances.
Future changes in a Mortgagor's economic circumstances may result from a
variety of unforeseeable personal factors, including loss of employment,
reduction in income, illness and divorce. Any increase in prevailing market
interest rates may adversely affect a Mortgagor by increasing debt service on
any floating rate Revolving Credit Loans, Home Equity Loans, Contracts or other
similar debt of the Mortgagor. In addition, for any Trust Assets secured by
junior mortgages, changes in the payment terms of any related senior mortgage
loan may adversely affect the Mortgagor's ability to pay principal and interest
on such senior mortgage loan. For example, such changes may result if the senior
mortgage loan is an adjustable rate loan and the interest rate thereon
increases, which may occur with or without an increase in prevailing market
interest rates if the increase is due to the phasing out of a reduced initial
rate. Specific information about such senior mortgage loans, other than the
amount thereof at origination of the corresponding Trust Asset, generally will
not be available and will not be included in the related Prospectus Supplement.
General economic conditions, both on a national and regional basis, will
also have an impact on the ability of Mortgagors to repay their Revolving Credit
Loans, Home Equity Loans or Contracts. Certain geographic regions of the United
States from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency than will be experienced on mortgage loans generally. For example, a
region's economic condition and housing market may be directly, or indirectly,
adversely affected by natural disasters or civil disturbances such as
earthquakes, hurricanes, floods, eruptions or riots. The economic impact of any
of these types of events may also be felt in areas beyond the region immediately
affected by the disaster or disturbance. The Trust Assets underlying a series of
Notes may be concentrated in these regions, and such concentration may present
risk considerations in addition to those generally present for similar
mortgage-backed securities without such concentration. Any change in the
deductibility for federal income tax purposes of interest payments on home
equity loans may also have an impact on the ability of Mortgagors to repay such
Trust Assets.
Revolving Credit Loan Characteristics
Certain of the types of Revolving Credit Loans that may be included in the
Pools may involve additional uncertainties not present in traditional types of
mortgage loans, or in home equity or home improvement loans originated under
other programs.
Except for certain programs under which the Draw Period is less than the
full term thereof, required minimum monthly payments on Revolving Credit Loans
are generally equal to or not significantly larger than the amount of interest
currently accruing thereon, and therefore are not expected to significantly
amortize the outstanding principal amount of such Revolving Credit Loan prior to
maturity, which amount may include substantial Draws recently made. As a result,
a borrower will generally be required to pay a substantial principal amount at
the maturity of a Revolving Credit Loan. The ability of a borrower to make such
a payment may be dependent on the ability to obtain refinancing of the balance
due on such Revolving Credit Loan or to sell the
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related Mortgaged Property. Furthermore, Revolving Credit Loans generally have
adjustable rates that are subject to much higher maximum rates than typically
apply to adjustable rate first mortgage loans, and which may be as high as
applicable usury limitations. Mortgagors under such Revolving Credit Loans are
generally qualified based on an assumed payment which reflects either the
initial interest rate or a rate significantly lower than the maximum rate. An
increase in the interest rate over the Mortgage Rate applicable at the time the
Revolving Credit Loan was originated may have an adverse effect on the
Mortgagor's ability to pay the required monthly payment. In addition, an
increase in prevailing market interest rates may reduce the borrower's ability
to obtain refinancing and to pay the balance of a Revolving Credit Loan at its
maturity.
To the extent that any losses are incurred on any of the Revolving Credit
Loans that are not covered by the applicable credit enhancement, holders of
Notes of the series secured by the related Pool (or certain classes thereof)
will bear all risk of such losses resulting from default by Mortgagors.
LIMITATIONS ON FHA INSURANCE FOR TITLE I CONTRACTS
The related Prospectus Supplement will specify the number and percentage of
Contracts, if any, included in the related Trust Fund that are partially insured
by the FHA pursuant to Title I. Since the FHA Insurance Amount (as defined
herein) for the Title I Contracts is limited as described herein and in the
related Prospectus Supplement, and since the adequacy of such FHA Insurance
Amount is dependent upon future events, including reductions for the payment of
FHA claims, no assurance can be given that the FHA Insurance Amount is or will
be adequate to cover 90% of all potential losses on the Title I Contracts
included in the related Trust Fund. If the FHA Insurance Amount for the Title I
Contracts is reduced to zero, such contracts will be uninsured from and after
the date of such reduction. Under Title I, until a claim for insurance
reimbursement is submitted to the FHA, the FHA does not review or approve for
qualification for insurance the individual Title I Contract insured thereunder
(as is typically the case with other federal loan insurance programs).
Consequently, the FHA has not acknowledged that any of the Title I Contracts are
eligible for FHA insurance, nor has the FHA reviewed or approved the
underwriting and qualification by the originating lenders of any individual
Title I Contracts. See 'Description of FHA Insurance Under Title I.'
The availability of FHA insurance reimbursement following a default on a
Title I Contract is subject to a number of conditions, including strict
compliance by the originating lender of such loan, the Seller, the FHA Claims
Administrator (as defined herein), the servicer and any subservicer with the FHA
Regulations (as defined herein) in originating and servicing such Title I
Contract, and limits on the aggregate insurance coverage available in the FHA
Reserve (as defined herein). For example, the FHA Regulations provide that,
prior to originating a Title I Contract, a lender must exercise prudence and
diligence in determining whether the borrower and any co-maker or co-signer is
solvent and an acceptable credit risk with a reasonable ability to make payments
on the loan. Although the related Seller will represent and warrant that the
Title I Contracts have been originated and serviced in compliance with all FHA
Regulations, these regulations are susceptible to substantial interpretation.
Failure to comply with any FHA Regulations may result in a denial of FHA claims,
and there can be no assurance that the FHA's enforcement of the FHA Regulations
will not become more strict in the future. See 'Description of FHA Insurance
Under Title I.'
Because the Trust Fund is not eligible to hold an FHA contract of insurance
under Title I, the FHA will not recognize the Trust Fund or the Noteholders as
the owners of the Title I Contracts, or any portion thereof, entitled to submit
FHA claims. Accordingly, neither the Trust Fund nor the Noteholders will have a
direct right to receive insurance payments from the FHA. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will either
serve as or contract with the person specified in the Prospectus Supplement to
serve as the Administrator for FHA claims (each an 'FHA CLAIMS ADMINISTRATOR')
pursuant to an FHA claims administration agreement (the 'FHA CLAIMS
ADMINISTRATION AGREEMENT'). The FHA Claims Administrator will be responsible for
administering, processing and submitting FHA claims with respect to the Title I
Contracts. The Noteholders will be dependent on the FHA Claims Administrator to
(i) make claims on the Title I Contracts in accordance with FHA Regulations and
(ii) remit all FHA insurance proceeds received from the FHA in accordance with
the related agreement. The Noteholders' rights relating to the receipt of
payment from and the administration, processing and submission of FHA claims by
any FHA Claims Administrator is limited and governed by the related agreement
and the FHA Claims Administration Agreement and these functions are obligations
of the FHA Claims Administrator, but not the FHA.
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RISKS ASSOCIATED WITH CERTAIN TRUST ASSETS
No Hazard Insurance for Title I Contracts
With respect to any Title I Contract, the FHA Regulations do not require
that a borrower obtain title or fire and casualty insurance as a condition to
obtaining a Home Improvement Contract. However, with respect to both
Manufactured Home Contracts and House Improvement Contracts that are Title I
Contracts, if the related Mortgaged Property is located in a flood hazard area,
flood insurance in an amount at least equal to the loan amount is required. In
addition, the FHA Regulations do not require that the borrower obtain insurance
against physical damage arising from earth movement (including earthquakes,
landslides and mudflows) as a condition to obtaining a property improvement loan
insured under Title I. Accordingly, if a Mortgaged Property that secures a Title
I Contract suffers any uninsured hazard or casualty losses, holders of the
related series of Notes that are secured in whole or in part by such Title I
Contract may bear the risk of loss resulting from a default by the borrower to
the extent such losses are not recovered by foreclosure on the defaulted loans
or from any FHA Insurance Proceeds (as defined herein). Such loss may be
otherwise covered by amounts available from the credit enhancement provided for
the related series of Notes, as specified in the related Prospectus Supplement.
Contracts Secured by Manufactured Homes
The Manufactured Housing Contracts will be secured by security interests in
Manufactured Homes that are not considered to be real property because such
homes are not permanently affixed to real estate. Perfection of security
interests in such Manufactured Homes and enforcement of rights to realize upon
the value of such Manufactured Homes as collateral for such Manufactured Housing
Contracts are subject to a number of Federal and state laws, including the UCC
as adopted in each state and each state's certificate of title statutes. The
steps necessary to perfect the security interest in a Manufactured Home will
vary from state to state. Because of the expense and administrative
inconvenience involved, unless otherwise specified in the related Prospectus
Supplement, the certificate of title to Manufactured Homes will not be amended
to change the lienholder specified therein to the applicable Owner Trustee and
will not deliver any certificate of title to such Owner Trustee or note thereon.
Consequently, in some states, in the absence of such an amendment, the
assignment to such Owner Trustee of the security interest in the Manufactured
Home may not be effective or such security interest may not be perfected and, in
the absence of such notation or delivery to such Owner Trustee, the assignment
of the security interest in the Manufactured Home may not be effective against
creditors of the lienholder or a trustee in bankruptcy of the lienholder. In
addition, if the owner of a Manufactured Home were to relocate such Manufactured
Home to another state or if a Manufactured Home becomes permanently attached to
its site, other parties could obtain an interest in the Manufactured Home which
may be prior to the original security interest. See 'Certain Legal Aspects of
the Trust Assets and Related Matters -- Manufactured Housing Contracts.' If any
related Credit Enhancement is exhausted and such Manufactured Housing Contract
is in default, then recovery of outstanding principal and unpaid interest due on
such Contract generally is dependent on repossession and resale of the
Manufactured Home securing such Manufactured Housing Contract. Manufactured
Homes, unlike Mortgaged Properties, generally depreciate in value and may have a
limited market for resale. Therefore, the amount recoverable upon repossession
and resale may not be sufficient to pay amounts due on the defaulted Contract.
Certain other factors may limit the ability of the Master Servicer to realize
upon a Manufactured Home or may limit the amount realized to less than the
amount due.
Unsecured Contracts
The obligations of the borrower under any unsecured Contract included as
part of the related Trust Fund will not be secured by an interest in the related
real estate or otherwise (an 'UNSECURED CONTRACT'), and the related Owner
Trustee on behalf of the Trust Fund, as the owner of such Unsecured Contract,
will be a general unsecured creditor as to such obligations. As a consequence,
in the event of a default under an Unsecured Contract, the related Trust Fund
will have recourse only against the borrower's assets generally, along with all
the other general unsecured creditors of such borrower. In a bankruptcy or
insolvency proceeding relating to a borrower on an Unsecured Contract, the
obligations of the borrower under such Unsecured Contract may be discharged in
their entirety or in part (for example, the amount due and owing by such
borrower under such Unsecured Contract that exceeds payments made to the
Indenture Trustee as a general unsecured creditor may be discharged). Investors
should be aware that a borrower on an Unsecured Contract may not demonstrate the
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same degree of concern over performance of its obligations under such Unsecured
Contract as a borrower whose obligations were secured by a single family
residence owned by such borrower.
Consumer Protection Laws Related to Contracts
Numerous federal and state consumer protection laws impose requirements on
lending under retail installment sales contracts and installment loan agreements
such as the Contracts, and the failure by the lender or seller of goods to
comply with such requirements could cause assignees of such agreements to be
partially liable for amounts due under such agreements and claims by such
assignees may be subject to set-off or rescission as a result of such lender's
or seller's noncompliance. See 'Certain Legal Aspects of the Trust Assets and
Related Matters -- Consumer Protection Laws with Respect to Manufactured Housing
Contracts' and ' -- The Home Improvement Contracts -- Consumer Protection Laws.'
These laws would apply to an Indenture Trustee as an assignee of Contracts. Each
Seller will warrant that each Contract complies with all requirements of law
and, with respect to any Manufactured Housing Contract secured only by the
related Manufactured Home, will make certain warranties relating to the
validity, subsistence, perfection and priority of the security interest in each
Manufactured Home securing such Contract.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
With respect to each series of Notes, credit enhancement may be provided to
cover delinquencies and losses on the underlying Trust Assets, subject to any
applicable limitations. Credit enhancement will be provided in one or more of
the forms referred to herein, including, but not limited to: subordination of
Subordinate Securities of the same series; Overcollateralization; a Financial
Guaranty Insurance Policy; a Letter of Credit; a Reserve Fund or any combination
thereof. If so specified in the related Prospectus Supplement, the Contracts may
be partially insured by the FHA pursuant to Title I. See 'Description of Credit
Enhancement' herein.
As to any series of Notes, the amount of coverage under the applicable
credit enhancement may be limited in amount, and if limited may be subject to
periodic reduction in accordance with a schedule or formula. Furthermore, such
credit enhancement may provide only very limited coverage as to certain types of
losses or risks, and may provide no coverage as to certain other types of losses
or risks. For any type of credit enhancement which is generated in whole or in
part by cash flows on the underlying Trust Assets (as may be the case for a
Reserve Fund or Overcollateralization, for example), the amount of coverage
provided thereby may be adversely affected under a variety of scenarios by
factors such as the prepayment and draw experience of the Trust Assets, changes
in the Mortgage Rates or Gross Margins applicable to the Trust Assets pursuant
to the terms thereof, and changes in the relationship between the Mortgage Rates
on the Trust Assets and the Interest Rates on the Notes (which changes may
result, in part, from changes in the relationship between different indexes
respectively used to determine the Mortgage Rates and the Interest Rates). In
the event losses exceed the amount of coverage provided by any credit
enhancement or losses of a type not covered by any credit enhancement occur,
such losses will be borne by the holders of the related Notes (or certain
classes thereof).
The rating of any series of Notes by any Rating Agency may be lowered
following the initial issuance thereof as a result of the downgrading or
nonperformance of the obligations of any applicable credit support provider, or
as a result of losses on the related Trust Assets in excess of the levels
contemplated by such Rating Agency at the time of its initial rating analysis.
None of the Company, the Master Servicer, GMAC Mortgage or any of their
affiliates will have any obligation to replace or supplement any credit
enhancement, or to take any other action to maintain any rating of any series of
Notes. See 'Description of Credit Enhancement -- Reduction or Substitution of
Credit Enhancement.'
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Notes of each series will depend on the rate
and timing of principal payments (including payments in excess of required
installments, prepayments or terminations, liquidations and repurchases) on the
Trust Assets, the rate and timing of Draws, and the price paid by Noteholders.
Such yield may be adversely affected by a higher or lower than anticipated rate
of principal payments or Draws on the related Revolving Credit Loans. The Trust
Assets generally may be prepaid in full or in part without penalty. The Company
has no significant experience with respect to the rate of principal prepayments
on home improvement contracts or manufactured housing contracts, but generally
expects that prepayments on home
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improvement contracts will be higher than certain other Trust Assets due to the
possibility of increased property value resulting from the home improvement and
greater refinance options. The Company generally expects that prepayments on
manufactured housing contracts will be lower than on other Trust Assets because
manufactured housing contracts may have less refinance options. Principal
payments or Draws are influenced by a number of factors, including prevailing
market interest rates, national and regional economic conditions and changes in
Mortgagors' personal and economic circumstances. See 'Yield and Prepayment
Considerations' herein. In addition, the yield to maturity of the Notes of any
series, or the rate and timing of principal payments or Draws on the related
Revolving Credit Loans, may be affected by a wide variety of specific terms and
conditions applicable to the respective programs under which the Revolving
Credit Loans were originated. For example, the Revolving Credit Loans may
provide for future Draws to be made only in specified minimum amounts, or
alternatively may permit Draws to be made by check or through a credit card in
any amount. A pool of Revolving Credit Loans subject to the latter provisions
may be likely to remain outstanding longer with a higher aggregate principal
balance than a pool of Revolving Credit Loans with the former provisions,
because of the relative ease of making new Draws. Furthermore, certain Trust
Assets may provide for interest rate changes on a daily or monthly basis, or may
have Gross Margins that may vary under certain circumstances over the term of
the loan. In extremely high market interest rate scenarios, Notes secured by
Trust Assets with adjustable rates subject to substantially higher maximum rates
than typically apply to adjustable rate first mortgage loans may experience
rates of default and liquidation substantially higher than those that have been
experienced on other adjustable rate mortgage loan pools. The yield to maturity
of the Notes of each series will also be affected by the rate and timing of
defaults on the related Trust Assets. See ' -- Special Features of Certain Trust
Assets Secured by Junior Liens on Mortgaged Properties' above.
The yield to maturity on any Strip Notes will be extremely sensitive to the
rate and timing of principal payments or Draws on the related Revolving Credit
Loans. In addition, the yield to maturity on certain other types of classes of
Notes, including Accrual Notes, Notes with a Interest Rate which fluctuates
inversely with an index or certain other classes in a series including more than
one class of Notes, may be relatively more sensitive to the rate and timing of
principal payments or Draws on the related Revolving Credit Loans than other
classes of Notes.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Notes of any
series will develop or, if it does develop, that it will provide Noteholders
with liquidity of investment or that it will continue for the life of the Notes
of any series. Although the Prospectus Supplement for any series of Notes may
indicate that an underwriter specified therein intends to establish a secondary
market in such Notes, no underwriter will be obligated to do so. The Notes will
not be listed on any securities exchange.
LIMITED OBLIGATIONS
The Notes will evidence an obligation of the related Trust Fund to remit
certain payments to the registered holder thereof. The Notes will not represent
an interest in or obligation of the Company, Residential Funding, GMAC Mortgage
or any of their affiliates. The only obligations of the foregoing entities with
respect to the Notes, the Revolving Credit Loans, the Home Equity Loans, the
Contracts or any Private Securities will be the obligations (if any) of
Residential Funding pursuant to certain limited representations and warranties
made with respect to such Trust Assets, the obligation of Residential Funding
(or such other entity specified in the related Prospectus Supplement) to advance
funds to Mortgagors in respect of Draws and the servicing obligations of
Residential Funding as Master Servicer under the related Servicing Agreement. If
any affiliate of the Company has originated any Trust Assets, such affiliate
will only have an obligation with respect to such Trust Assets to the same
extent as a Seller, as described herein. Neither the Notes nor the underlying
Trust Assets will be guaranteed or insured by any governmental agency or
instrumentality, or by the Company, Residential Funding, GMAC Mortgage or any of
their affiliates, except as expressly set forth herein or in the related
Prospectus Supplement. Proceeds of the assets included in the related Trust Fund
(including the Trust Assets and any form of credit enhancement) will be the sole
source of payments on the Notes, and there will be no recourse to the Company,
Residential Funding, GMAC Mortgage or any other entity in the event that such
proceeds are insufficient or otherwise unavailable to make all payments provided
for under the Notes.
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THE POOLS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each Pool
will consist primarily of (i) Revolving Credit Loans; (ii) Home Equity Loans;
(iii) Home Improvement Contracts; (iv) Manufactured Housing Contracts; (v)
certain balances of any of the foregoing and/or (vi) certain interests in the
foregoing (which may include Private Securities) excluding any interest retained
by the Company or any other entity specified in the Prospectus Supplement. The
Revolving Credit Loans, Home Equity Loans and, if applicable, Contracts will be
evidenced by promissory notes (the 'MORTGAGE NOTES') secured by mortgages or
deeds of trust or other similar security instruments (collectively, 'MORTGAGES')
creating first or junior liens on one- to four-family residential properties.
All or a portion of the Contracts underlying a series of Notes may be partially
insured by the FHA pursuant to Title I. The Mortgaged Properties will consist
primarily of owner-occupied attached or detached one-family dwelling units, two-
to four-family dwelling units, condominiums, townhouses, row houses, individual
units in planned-unit developments, Manufactured Homes which may be permanently
affixed to the real property on which they are located and certain other
dwelling units, and the fee, leasehold or other interests in the underlying real
property. The Mortgaged Properties may include vacation, second and non-
owner-occupied homes. If specified in the related Prospectus Supplement relating
to a series of Notes, a Pool may contain cooperative apartment loans
('COOPERATIVE LOANS') evidenced by promissory notes ('COOPERATIVE NOTES')
secured by security interests in shares issued by Cooperatives and in the
related proprietary leases or occupancy agreements granting exclusive rights to
occupy specific dwelling units in the related buildings. As used herein, unless
the context indicates otherwise, 'Revolving Credit Loans,' 'Home Equity Loans'
and, if applicable, 'Contracts' include Cooperative Loans, 'Mortgaged
Properties' includes shares in the related Cooperative and the related
proprietary leases or occupancy agreements securing Cooperative Notes, 'Mortgage
Notes' includes Cooperative Notes and 'Mortgages' includes a security agreement
with respect to a Cooperative Note.
Each Trust Asset will be selected by the Company for inclusion in a Pool
from among those purchased by the Company, either directly or through its
affiliates, including Residential Funding, GMAC Mortgage Corporation,
Residential Money Centers, Inc. and HomeComings Financial Network, Inc.
('AFFILIATED SELLERS'), or from banks, savings and loan associations, mortgage
bankers, investment banking firms, the FDIC and other mortgage loan originators
or sellers not affiliated with the Company ('UNAFFILIATED SELLERS');
(Unaffiliated Sellers and Affiliated Sellers are collectively referred to herein
as 'SELLERS'), all as described below under 'Trust Asset Program.' If a Pool is
composed of Trust Assets acquired by the Company directly from Sellers other
than Residential Funding, the related Prospectus Supplement will specify the
extent of Trust Assets so acquired. The characteristics of the Trust Assets are
as described in the related Prospectus Supplement. Other mortgage loans
available for purchase by the Company may have characteristics which would make
them eligible for inclusion in a Pool but were not selected for inclusion in
such Pool.
Under certain circumstances, the Trust Assets will be delivered either
directly or indirectly to the Company by one or more Sellers identified in the
related Prospectus Supplement, concurrently with the issuance of the related
series of Notes (a 'DESIGNATED SELLER TRANSACTION'). Such Notes may be sold in
whole or in part to any such Seller in exchange for the related Trust Assets, or
may be offered under any of the other methods described herein under 'Methods of
Distribution.' The related Prospectus Supplement for a Pool composed of Trust
Assets acquired by the Company pursuant to a Designated Seller Transaction will
generally include information, provided by the related Seller (the 'DESIGNATED
SELLER'), about the Designated Seller, the Trust Assets and the underwriting
standards applicable to the Trust Assets. None of the Company, Residential
Funding, GMAC Mortgage or any of their affiliates will make any representation
or warranty with respect to such Trust Assets, or any representation as to the
accuracy or completeness of such information provided by the Seller.
If specified in the related Prospectus Supplement, the Trust Fund securing
a series of Notes may include Private Securities. The Private Securities may
have been issued previously by the Company or an affiliate thereof, a financial
institution or other entity engaged generally in the business of mortgage
lending or a limited purpose corporation organized for the purpose of, among
other things, acquiring and depositing mortgage loans into such trusts, and
selling beneficial interests in such trusts. As to any such series of Notes, the
related Prospectus Supplement will include a description of such Private
Securities and any related credit enhancement, and the assets underlying such
Private Securities will be described together with any other Trust Assets
included in the Pool relating to such series.
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In addition, with respect to any series of Notes secured by Private
Securities, such Private Securities may consist of an ownership interest (an
'OWNERSHIP INTEREST') in a structuring entity formed by the Company for the
limited purpose of holding the Trust Assets relating to such series of Notes (a
'SPECIAL PURPOSE ENTITY'). A Special Purpose Entity may be organized in the form
of a trust, limited partnership or limited liability company, and will be
structured in a manner that will insulate the holders of Notes from liabilities
of the Special Purpose Entity. The provisions governing such Special Purpose
Entity generally will restrict the Special Purpose Entity from engaging in or
conducting any business other than the holding of Trust Assets and any related
assets and the issuance of ownership interests in such Trust Assets and certain
activities incidental thereto. Any such Ownership Interest will evidence an
ownership interest in the related Trust Assets as well as the right to receive
specified cash flows derived from such Trust Assets, as described in the related
Prospectus Supplement. The obligations of the Depositor in respect of any such
Ownership Interest will generally be limited to certain representations and
warranties with respect to the Trust Assets, as described herein. Credit support
of any of the types described herein under 'Description of Credit Enhancement'
may be provided for the benefit of any such Ownership Interest, if so specified
in the related Prospectus Supplement. As to any such series of Notes, the term
'Pool' includes the Trust Assets underlying such Private Securities.
The Prospectus Supplement for each series of Notes will contain information
as to the type of Trust Assets which will be included in the related Pool. Each
Prospectus Supplement applicable to a series of Notes will include certain
information, generally as of the Cut-off Date and to the extent then available
to the Company, on an approximate basis, as to (i) the aggregate principal
balance of the Trust Assets, (ii) the type of property securing the Trust Assets
and related lien priority, if any, (iii) the original or modified terms to
maturity of the Trust Assets, (iv) the earliest origination or modification date
and latest maturity date of the Trust Assets, (v) the Loan-to-Value Ratios or
Combined Loan-to-Value Ratios of the Trust Assets, as applicable, (vi) the
Mortgage Rate or range of Mortgage Rates borne by the Trust Assets, (vii) the
applicable Index, the range of Gross Margins, the weighted average Gross Margin,
the frequency of adjustments and maximum loan rate, (viii) the geographical
distribution of the Mortgaged Properties, (ix) the aggregate Credit Limits of
the related Credit Line Agreements, (x) the number and percentage of Contracts
that are partially insured by the FHA pursuant to Title I and (xi) if
applicable, the weighted average Junior Ratio and Credit Utilization Rate. A
Current Report on Form 8-K will be available upon request to holders of the
related series of Notes and will be filed, together with the related Trust
Agreement, with the Commission within fifteen days after the initial issuance of
such Notes. The composition and characteristics of a Pool that contains
Revolving Credit Loans may change from time to time as a result of any Draws
made after the related Cut-off Date under the related Credit Line Agreements
that are included in such Pool. In the event that Trust Assets are added to or
deleted from the Trust Fund after the date of the related Prospectus Supplement
other than as a result of any such Draws with respect to the Revolving Credit
Loans, such addition or deletion will be noted in the Current Report on Form
8-K.
With respect to each Revolving Credit Loan, the 'Combined Loan-to-Value
Ratio' or 'CLTV' generally will be the ratio, expressed as a percentage, of the
sum of (i) the greater of the Cut-off Date Principal Balance or the Credit
Limit, if applicable, and (ii) the principal balance of any related senior
mortgage loan at origination of such Revolving Credit Loan together with any
mortgage loan subordinate thereto, to the lesser of (x) the appraised value of
the related Mortgaged Property determined in the appraisal used in the
origination of such Revolving Credit Loan and (y) if applicable under the
corresponding program, the sales price of each Mortgaged Property. With respect
to each Revolving Credit Loan, the 'JUNIOR RATIO' generally will be the ratio,
expressed as a percentage, of the greater of the Cut-off Date Principal Balance
or the Credit Limit, if applicable, of such Revolving Credit Loan to the sum of
(i) the greater of the Cut-off Date Principal Balance or the Credit Limit, if
applicable, of such Revolving Credit Loan and (ii) the principal balance of any
related senior mortgage loan at origination of such Revolving Credit Loan. With
respect to each Home Equity Loan or Contract, the CLTV and Junior Ratio will be
computed in the manner described in the related Prospectus Supplement. The
'CREDIT UTILIZATION RATE' is determined by dividing the Cut-off Date Principal
Balance of a Revolving Credit Loan by the Credit Limit of the related Credit
Line Agreement.
The Company will cause the Trust Assets constituting each Pool (or Private
Securities evidencing interests therein) to be assigned to the Owner Trustee
named in the related Prospectus Supplement, for the benefit of the holders of
all of the Securities of a series. The Master Servicer named in the related
Prospectus Supplement will service the Trust Assets, either directly or through
other mortgage servicing institutions ('SUBSERVICERS'), pursuant to a Servicing
Agreement and will receive a fee for such services. See 'Trust Asset Program'
and 'Description of the Notes.' With respect to those Trust Assets serviced by
the Master Servicer through a
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Subservicer, the Master Servicer will remain liable for its servicing
obligations under the related Servicing Agreement as if the Master Servicer
alone were servicing such Trust Assets. In addition to or in lieu of the Master
Servicer for a series of Notes, the related Prospectus Supplement may identify
an Administrator for the Trust Fund. The Administrator may be an affiliate of
the Company. All references herein to 'Master Servicer' and any discussions of
the servicing and administration functions of the Master Servicer will also
apply to the Administrator to the extent applicable.
The Company's assignment of the Trust Assets to the Owner Trustee on behalf
of the Trust will be without recourse. See 'Description of the
Notes -- Assignment of Trust Assets.' The Master Servicer's obligations with
respect to the Trust Assets will consist principally of its contractual
servicing obligations under the related Servicing Agreement (including its
obligation to enforce certain purchase obligations of Residential Funding or any
Designated Seller and other obligations of Subservicers, as described herein
under 'Trust Asset Program -- Representations Relating to Trust Assets,' and
' -- Subservicing' and 'Description of the Notes -- Assignment of Trust Assets'
or pursuant to the terms of any Private Securities. Residential Funding (or such
other entity specified in the related Prospectus Supplement) will be obligated
to advance funds to Mortgagors in respect of Draws made after the related
Cut-off Date.
A Mortgaged Property securing a Revolving Credit Loan, Home Equity Loan
and, if applicable, a Contract may be subject to the senior liens of one or more
conventional mortgage loans at the time of origination and may be subject to one
or more junior liens at the time of origination or thereafter. A mortgage loan
secured by any such junior lien or senior lien will likely not be included in
the related Pool, and the Company, an affiliate of the Company or an
Unaffiliated Seller may have an interest in such mortgage loan. Revolving Credit
Loans, Home Equity Loans and Contracts that are secured by junior liens
generally will not be required by the Company to be covered by a primary
mortgage guaranty insurance policy insuring against default on such Trust
Assets.
REVOLVING CREDIT LOANS
The Revolving Credit Loans will be originated pursuant to loan agreements
(the 'CREDIT LINE AGREEMENTS'). Interest on each Revolving Credit Loan will be
calculated based on the average daily balance outstanding during the billing
cycle and the billing cycle generally will be the calendar month preceding a Due
Date. Each Revolving Credit Loan will have an interest rate (a 'MORTGAGE RATE')
that is subject to adjustment on the day specified in the related Mortgage Note,
which may be daily or monthly, equal to the sum of (a) the index* on such day as
specified in the related Prospectus Supplement, and (b) a fixed percentage set
forth in the related Mortgage Note (the 'GROSS MARGIN'), subject to the maximum
rate set forth in the Mortgage Note and permitted by applicable law.
Notwithstanding the forgoing, if so specified in the related Prospectus
Supplement, a Revolving Credit Loan may have an introductory rate that is lower
than the rate that would be in effect if the applicable Index and Gross Margin
were used to determine the Mortgage Rate and as a result of such introductory
rate, interest payments on the Notes may initially be lower than expected. See
'Risk Factors -- Special Features of Certain Trust Assets Secured by Junior
Liens on Mortgaged Properties -- Revolving Credit Loan Characteristics' herein.
Unless otherwise specified in the related Prospectus Supplement, each
Revolving Credit Loan will have a term to maturity from the date of origination
of not more than 25 years. The Mortgagor for each Revolving Credit Loan may draw
money (each, an 'ADDITIONAL BALANCE' or a 'DRAW') under the related Credit Line
Agreement at any time during the period specified therein (such period as to any
Revolving Credit Loan, the 'DRAW PERIOD'). Unless otherwise specified in the
related Prospectus Supplement, the Draw Period generally will not be more than
15 years. Unless otherwise specified in the related Prospectus Supplement, if
the Draw
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*The index (the 'INDEX') for a particular Pool will be specified in the related
Prospectus Supplement and may include one of the following indexes: (i) the
weekly average yield on U.S. Treasury securities adjusted to a constant maturity
of either six months or one year, (ii) the weekly auction average investment
yield of U.S. Treasury bills of six months, (iii) the daily Bank Prime Loan rate
made available by the Federal Reserve Board, (iv) the cost of funds of member
institutions for the Federal Home Loan Bank of San Francisco, (v) the interbank
offered rates for U.S. dollar deposits in the London market, each calculated as
of a date prior to each scheduled interest rate adjustment date which will be
specified in the related Prospectus Supplement or (vi) the weekly average of
secondary market interest rates on six-month negotiable certificates of deposit.
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Period is less than the full term thereof, the related Mortgagor will not be
permitted to make any Draw during the period from the end of the related Draw
Period to the related maturity date. The Mortgagor for each Revolving Credit
Loan will be obligated to make monthly payments thereon in a minimum amount as
specified in the related Mortgage Note, which generally will not be less than
the Finance Charge for the related billing cycle. The Mortgagor for each
Revolving Credit Loan will be obligated to make a payment on the related
maturity date in an amount equal to the Account Balance thereof on such maturity
date, which may be a substantial principal amount. The maximum amount of any
Draw is equal to the excess, if any, of the Credit Limit over the principal
balance outstanding under such Mortgage Note at the time of such Draw.
Unless otherwise specified in the related Prospectus Supplement, (a) the
Finance Charge (the 'FINANCE CHARGE') for any billing cycle generally will be
equal to interest accrued on the average daily principal balance of such
Revolving Credit Loan for such billing cycle at the related Mortgage Rate, (b)
the Account Balance (the 'ACCOUNT BALANCE') on any day generally will be the
aggregate of the unpaid principal of the Revolving Credit Loan outstanding at
the beginning of such day, plus all related Draws funded on such day, plus the
sum of any unpaid Finance Charges and any unpaid fees, insurance premiums and
other charges (collectively, 'ADDITIONAL CHARGES') that are due on such
Revolving Credit Loan minus the aggregate of all payments and credits that are
applied to the repayment of any such Draws on such day, and (c) the 'principal
balance' on any day generally will be the related Account Balance minus the sum
of any unpaid Finance Charges and Additional Charges that are due on such
Revolving Credit Loan. Payments made by or on behalf of the Mortgagor for each
Revolving Credit Loan generally will be applied, first, to any unpaid Finance
Charges that are due thereon, second, to any unpaid Additional Charges that are
due thereon, and third, to any related Draws outstanding.
Unless otherwise specified in the related Prospectus Supplement, each
Revolving Credit Loan may be prepaid in full or in part at any time and without
penalty, the related Mortgagor will have the right during the related Draw
Period to make a Draw in the amount of any prepayment theretofore made with
respect to such Revolving Credit Loan. The Mortgage Note or Mortgage related to
each Revolving Credit Loan will generally contain a customary 'due-on-sale'
clause.
As to each Revolving Credit Loan, the Mortgagor's rights to receive Draws
during the Draw Period may be suspended, or the Credit Limit may be reduced, for
cause under a limited number of circumstances, including, but not limited to: a
materially adverse change in the Mortgagor's financial circumstances or a
non-payment default by the Mortgagor. However, with respect to each Revolving
Credit Loan, generally such suspension or reduction will not affect the payment
terms for previously drawn balances. In the event of default under a Revolving
Credit Loan, at the discretion of the Master Servicer, the Revolving Credit Loan
may be terminated and declared immediately due and payable in full. For this
purpose, a default includes, but is not limited to: the Mortgagor's failure to
make any payment as required; any action or inaction by the Mortgagor that
materially and adversely affects the Mortgaged Property or the rights in the
Mortgaged Property; or fraud or material misrepresentation by a Mortgagor in
connection with the Loan.
The proceeds of the Revolving Credit Loans may be used by the borrower to
improve the related Mortgaged Properties, may be retained by the related
Mortgagors or may be used for purposes unrelated to such Mortgaged Properties.
THE HOME EQUITY LOANS AND THE CONTRACTS
As specified in the related Prospectus Supplement, the Home Equity Loans
will be secured by first or junior liens on the related Mortgaged Properties,
mortgage loans for property improvement, debt consolidation and/or home equity
purposes. As specified in the related Prospectus Supplement, the Manufactured
Housing Contracts will be secured by either Manufactured Homes (as defined
below), located in any of the fifty states, the District of Columbia or the
Commonwealth or Puerto Rico, or by Mortgages on the real estate on which the
Manufactured Homes are located. As specified in the related Prospectus
Supplement, the Home Improvement Contracts will either be unsecured or secured
primarily by (i) Mortgages on one- to four-family residential properties that
are generally subordinate to other mortgages on the same Mortgaged Property, or
(ii) purchase money security interests in the Home Improvements financed
thereby. The Contracts will be conventional contracts or contracts partially
insured by the FHA pursuant to Title I. Unless otherwise specified in the
related Prospectus Supplement, the Home Equity Loans and the Contracts will be
fully amortizing and may have fixed interest rates or adjustable interest rates
and may provide for other payment characteristics as described below and in the
related Prospectus Supplement.
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Unless otherwise specified in the related Prospectus Supplement, the Home
Improvements securing the Home Improvement Contracts include, but are not
limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels. The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or lot
(or cooperative interest therein) on which to place such home or the purchase of
both a manufactured home loan and the lot (or cooperative interest therein) on
which such home is placed.
Unless otherwise specified in the related Prospectus Supplement, the
manufactured homes (the 'MANUFACTURED HOMES') underlying the Manufactured
Housing Contracts will consist of manufactured homes within the meaning of Title
42 of the United States Code, Section 5402(6). Section 5402(6) defines a
'manufactured home' as 'a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width, forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air-conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of HUD and complies with the standards
established under [this] chapter.'
Manufactured Homes and Home Improvements, unlike Mortgaged Properties,
generally depreciate in value. Consequently, at any time after origination it is
possible, especially in the case of Contracts with high Loan-to-Value Ratios at
origination, that the market value of a Manufactured Home or Home Improvement
may be lower than the principal amount outstanding under the related Contract.
TRUST ASSET PROGRAM
The Trust Assets will have been purchased by the Company, either directly
or indirectly through Residential Funding from Sellers. The Revolving Credit
Loans will generally have been originated in accordance with the Company's
underwriting standards or alternative underwriting criteria as described below
under 'Underwriting Standards Applicable to the Revolving Credit Loans' or as
described in the related Prospectus Supplement. The Home Equity Loans and the
Contracts generally will have been originated in accordance with the
underwriting standards described in the related Prospectus Supplement.
UNDERWRITING STANDARDS APPLICABLE TO THE REVOLVING CREDIT LOANS
General Standards
The Company's underwriting standards with respect to the Revolving Credit
Loans will generally conform to those published in Residential Funding's Seller
Guide (together with Residential Funding's Servicer Guide, the 'GUIDE,' as
modified from time to time), including the provisions of the Guide applicable to
the Company's Home Equity Program (the 'HOME EQUITY PROGRAM'). The underwriting
standards as set forth in the Guide are continuously revised based on
opportunities and prevailing conditions in the residential mortgage market, the
consumer lending market and the market for mortgage securities. The Revolving
Credit Loans may be underwritten by Residential Funding or by a designated third
party. In certain circumstances, however, the Revolving Credit Loans may be
underwritten only by the Seller with little or no review performed by
Residential Funding. See 'Underwriting Standards Applicable to the Revolving
Credit Loans -- Guide Standards' and 'Qualifications of Sellers.' Residential
Funding or a designated third party may perform only sample quality assurance
reviews to determine whether the Revolving Credit Loans in any Pool were
underwritten in accordance with applicable standards.
With respect to the Company's underwriting standards, as well as any other
underwriting standards that may be applicable to any Revolving Credit Loans,
such underwriting standards generally include a set of specific criteria
pursuant to which the underwriting evaluation is made. However, the application
of such underwriting standards does not imply that each specific criterion was
satisfied individually. Rather, a Revolving Credit Loan will be considered to be
originated in accordance with a given set of underwriting standards if, based on
an overall qualitative evaluation, the loan is in substantial compliance with
such underwriting standards. For example, a Revolving Credit Loan may be
considered to comply with a set of underwriting
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standards, even if one or more specific criteria included in such underwriting
standards were not satisfied, if other factors compensated for the criteria that
were not satisfied or if the Revolving Credit Loan is considered to be in
substantial compliance with the underwriting standards.
In addition, the Company purchases Revolving Credit Loans which do not
conform to the underwriting standards set forth in the Guide. Certain of the
Revolving Credit Loans will be purchased in negotiated transactions, and such
negotiated transactions may be governed by agreements ('MASTER COMMITMENTS')
relating to ongoing purchases of Revolving Credit Loans by Residential Funding,
from Sellers who will represent that the Revolving Credit Loans have been
originated in accordance with underwriting standards agreed to by Residential
Funding. Residential Funding, on behalf of the Company or a designated third
party, will generally review only a limited portion of the Revolving Credit
Loans in any delivery of such Revolving Credit Loans from the related Seller for
conformity with the applicable underwriting standards. Certain other Revolving
Credit Loans will be purchased from Sellers who will represent that the
Revolving Credit Loans were originated pursuant to underwriting standards
acceptable to Residential Funding.
The level of review, if any, by Residential Funding or the Company of any
Revolving Credit Loan for conformity with the applicable underwriting standards
will vary depending on a number of factors, including (i) factors relating to
the experience and status of the Seller, and (ii) factors relating to the
specific Revolving Credit Loan, including the principal amount or Credit Limit,
the Combined Loan-to-Value Ratio, the loan type or loan program, and the
applicable credit score of the related Mortgagor used in connection with the
origination of the Revolving Credit Loan (as determined based on a credit
scoring model acceptable to the Company). Generally, such credit scoring models
provide a means for evaluating the information about a prospective borrower that
is available from a credit reporting agency. The underwriting criteria
applicable to any program under which the Mortgage Loans may be originated may
provide that qualification for the loan, the level of review of the loan's
documentation, or the availability of certain loan features (such as maximum
loan amount, maximum Loan-to-Value Ratio, property type and use, and
documentation level) may depend on the mortgagor's credit score.
The underwriting standards utilized in negotiated transactions and Master
Commitments and the underwriting standards applicable to Revolving Credit Loans
underlying Private Securities may vary substantially from the underwriting
standards set forth in the Guide. Such underwriting standards are generally
intended to provide an underwriter with information to evaluate the borrower's
repayment ability and the value of the Mortgaged Property as collateral. Due to
the variety of underwriting standards and review procedures that may be
applicable to the Revolving Credit Loans included in any Pool, the related
Prospectus Supplement generally will not distinguish among the various
underwriting standards applicable to the Revolving Credit Loans nor describe any
review for compliance with applicable underwriting standards performed by the
Company or Residential Funding. Moreover, there can be no assurance that every
Revolving Credit Loan was originated in conformity with the applicable
underwriting standards in all material respects, or that the quality or
performance of Revolving Credit Loans underwritten pursuant to varying standards
as described above will be equivalent under all circumstances. In the case of a
Designated Seller Transaction, the applicable underwriting standards will be
those of the Designated Seller or of the originator of the Revolving Credit
Loans, and will be described in the related Prospectus Supplement.
The Company, either directly or indirectly through Residential Funding,
will also purchase Revolving Credit Loans from its affiliates, including GMAC
Mortgage Corporation, Residential Money Centers, Inc. and HomeComings Financial
Network, Inc., with underwriting standards generally in accordance with the
Guide or as otherwise agreed to by the Company. However, in certain limited
circumstances, such Revolving Credit Loans may be employee or preferred customer
loans with respect to which, in accordance with such affiliate's mortgage loan
programs, income, asset and employment verifications and appraisals may not have
been required. With respect to Revolving Credit Loans made under any employee
loan program maintained by Residential Funding, or its affiliates, in certain
limited circumstances preferential interest rates may be allowed. Neither the
Company nor Residential Funding will review any affiliate's mortgage loans for
conformity with the underwriting standards set forth in the Guide.
Guide Standards
The following is a brief description of the underwriting standards under
the Home Equity Program set forth in the Guide for full documentation loan
programs. Initially, a prospective borrower (other than a trust if the
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trust is the borrower) is required to fill out a detailed application providing
pertinent credit information. As part of the application, the borrower is
required to provide a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the borrower's
credit history with merchants and lenders and any record of bankruptcy. Under
the Home Equity Program, the borrower generally must show, among other things, a
minimum of one year credit history reported on the credit report and that no
mortgage delinquencies (thirty days or greater) in the past 12 months existed.
Borrowers who have less than a 12 month first mortgage payment history may be
subject to certain additional lending restrictions. In addition, under the Home
Equity Program, borrowers with a previous foreclosure or bankruptcy within the
past seven years may not be allowed and a borrower generally must satisfy all
judgments, liens and other legal actions with an original amount of $1,000 or
greater prior to closing. In addition, an employment verification is obtained
which reports the borrower's current salary and may contain the length of
employment and an indication as to whether it is expected that the borrower will
continue such employment in the future. If a prospective borrower is self-
employed, the borrower may be required to submit copies of signed tax returns.
The borrower may also be required to authorize verification of deposits at
financial institutions where the borrower has accounts. In the case of a
Revolving Credit Loan secured by a property owned by a trust, the foregoing
procedures may be waived where the Mortgage Note is executed on behalf of the
trust.
Unless otherwise specified in the related Prospectus Supplement, an
appraisal is made of the Mortgaged Property securing each Revolving Credit Loan.
Such appraisals may be performed by appraisers independent from or affiliated
with the Company, Residential Funding or their affiliates. Such appraisals,
however, will not establish that the Mortgaged Properties provide assurance of
repayment of the Revolving Credit Loans. See 'Risk Factors' and 'Servicing of
Trust Assets -- Realization Upon Defaulted Loans' herein. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. In certain circumstances, the
appraiser is only required to perform an exterior inspection of the property.
The appraisal is based on various factors, including the market value of
comparable homes and the cost of replacing the improvements. Except as otherwise
provided in the related Prospectus Supplement, under the Home Equity Program,
each appraisal is required to be dated no more than 180 days prior to the date
of origination of the Revolving Credit Loan; provided, that depending on the
Credit Limit an earlier appraisal may be utilized if such appraisal was made not
earlier than two years prior to the date of origination of the mortgage loan and
the related appraiser certifies that the value of the related mortgaged property
has not declined since the date of the original appraisal or if a field review
or statistical property valuation is obtained. Title searches are undertaken in
most cases, and title insurance is required on all Revolving Credit Loans with
Credit Limits in excess of $100,000.
Under the Home Equity Program, the CLTV is generally calculated by
reference to the lower of the appraised value as so determined or the sales
price, if the Revolving Credit Loan is originated concurrently with or not more
than 12 months after the origination of a first mortgage loan. In all other
cases, the value used is generally the appraised value as so determined.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet the borrower's monthly obligations
on the proposed mortgage loan and other expenses related to the home (such as
property taxes and hazard insurance) and other financial obligations (including
debt service on any related mortgage loan secured by a senior lien on the
related Mortgaged Property). Unless otherwise provided in the related Prospectus
Supplement, for qualification purposes the monthly payment will be assumed to be
an amount equal to 1.00% times the applicable Credit Limit. The Mortgage Rate in
effect from the origination date of a Revolving Credit Loan to the first
adjustment date generally will be lower, and may be significantly lower, than
the sum of the then applicable Index and Gross Margin. Unless otherwise
specified in the related Prospectus Supplement, the Revolving Credit Loans will
not provide for negative amortization. Payment of the full outstanding principal
balance at maturity may depend on the borrower's ability to obtain refinancing
or to sell the Mortgaged Property prior to the maturity of the mortgage loan,
and there can be no assurance that such refinancing will be available to the
borrower or that such a sale will be possible.
The underwriting standards set forth in the Guide may be varied in
appropriate cases, including in 'limited' or 'reduced loan documentation'
mortgage loan programs. Limited documentation programs generally permit fewer
supporting documents to be obtained or waive income, asset and employment
documentation requirements, and limited documentation programs generally
compensate for increased credit
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risk by placing greater emphasis on either the review of the property to be
financed or the borrower's ability to repay the Revolving Credit Loan. For
example, under Residential Funding's Easy Docs limited mortgage loan
documentation program, certain submission requirements regarding income
verification and debt-to-income ratios are removed, but the Seller is still
required to perform a thorough credit underwriting of the mortgage loan.
Generally, in order to be eligible for a reduced loan documentation program, a
Mortgagor must have a good credit history, and other compensating factors (such
as a relatively low Combined Loan-to-Value Ratio, or other favorable
underwriting factors) must be present and the borrower's eligibility for such
program may be determined by use of a credit scoring model.
The Home Equity Program sets forth certain limitations with respect to the
CLTV for the Revolving Credit Loans and certain restrictions with respect to any
related underlying first mortgage loan. The underwriting guidelines for the Home
Equity Program generally permit CLTV's as high as 100% except as otherwise
provided in the related Prospectus Supplement; however, the maximum permitted
CLTV may be reduced due to a variety of underwriting criteria. In areas where
property values are considered to be declining, the maximum permitted CLTV is
75%. The underwriting guidelines also include restrictions based on the
borrower's debt-to-income ratio. In addition to the foregoing, an evaluation of
the prospective borrower's credit quality will be made based on a credit scoring
model approved by the Company. The Home Equity Program underwriting guidelines
include minimum credit score levels that may apply depending on certain factors
of the Revolving Credit Loan. The required Gross Margins for Revolving Credit
Loans purchased under the Home Equity Program, as announced from time to time,
vary based on a number of factors including CLTV, Credit Limit, documentation
level, property type, and borrower debt-to-income ratio and credit score.
In its evaluation of mortgage loans which have twenty-four or more months
of payment experience, Residential Funding generally places greater weight on
payment history and may take into account market and other economic trends while
placing less weight on underwriting factors generally applied to newly
originated mortgage loans.
QUALIFICATIONS OF SELLERS
Except with respect to Designated Seller Transactions or unless otherwise
specified in the related Prospectus Supplement, each Seller (other than the
Federal Deposit Insurance Corporation (the 'FDIC') and investment banking firms)
will have been approved by Residential Funding for participation in Residential
Funding's loan purchase program. In determining whether to approve a seller for
participation in the loan purchase program, Residential Funding generally will
consider, among other things, the financial status (including the net worth) of
the seller, the previous experience of the seller in originating home equity,
home improvement, manufactured housing or first mortgage loans, the prior
delinquency and loss experience of the seller, the underwriting standards
employed by the seller and the quality control and, if applicable, servicing
operations established by the seller. There can be no assurance that any Seller
presently meets any qualifications or will continue to meet any qualifications
at the time of inclusion of mortgage loans sold by it in the Trust Fund for a
series of Notes, or thereafter. If a Seller becomes subject to the direct or
indirect control of the FDIC, or if a Seller's net worth, financial performance
or delinquency and foreclosure rates deteriorate, such institution may continue
to be treated as a Seller. Any such event may adversely affect the ability of
any such Seller to repurchase the Mortgage Loans in the event of a breach of a
representation or warranty which has not been cured.
Residential Funding generally monitors which Sellers are under control of
the FDIC or are insolvent, otherwise in receivership or conservatorship or
financially distressed. Such Seller may make no representations and warranties
with respect to Trust Assets sold by it. The FDIC (either in its corporate
capacity or as receiver for a depository institution) may also be a Seller of
Trust Assets, in which event neither the FDIC nor the related depository
institution may make representations and warranties with respect to the Trust
Assets sold, or only limited representations and warranties may be made (for
example, that the related legal documents are enforceable). The FDIC may have no
obligation to repurchase any Trust Asset for a breach of a representation and
warranty.
Unless otherwise specified in the related Prospectus Supplement, the
qualifications required of Sellers for approval by Residential Funding as
participants in its loan purchase programs may not apply to Designated Sellers.
To the extent the Designated Seller fails to or is unable to repurchase the
Trust Asset due to a breach of representation and warranty, neither the Company,
Residential Funding nor any other entity will have assumed
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the representations and warranties, and any related losses will be borne by the
Noteholders or by the credit enhancement, if any.
REPRESENTATIONS RELATING TO TRUST ASSETS
Except as set forth above, each Seller (other than a Designated Seller)
will have made representations and warranties to Residential Funding with
respect to the Trust Assets sold by such Seller. However, except as otherwise
provided in the related Prospectus Supplement, the representations and
warranties of the Seller will not be assigned to the Indenture Trustee for the
benefit of the holders of the related series of Notes, and therefore a breach of
the representations and warranties of the Seller generally will not be
enforceable on behalf of the Trust Fund.
In the case of a Pool consisting of Trust Assets purchased by the Company
from Sellers through Residential Funding, Residential Funding, except in the
case of a Designated Seller Transaction or as to Trust Assets underlying any
Private Securities or unless otherwise specified in the related Prospectus
Supplement, will have made certain limited representations and warranties
regarding the Trust Assets to the Company at the time that they are sold to the
Company. Such representations and warranties will generally include, among other
things, that: (i) as of the Cut-off Date, the information set forth in a listing
of the related Trust Assets is true and correct in all material respects; (ii)
Residential Funding was the sole holder and owner of the Trust Assets free and
clear of any and all liens and security interests; (iii) each Trust Asset
complied in all material respects with all applicable local, state and federal
laws; (iv) except as otherwise indicated in the related Prospectus Supplement,
no Trust Asset is one month or more delinquent in payment of principal and
interest; (v) there is no delinquent tax, or to the best of Residential
Funding's knowledge, assessment lien against any Mortgaged Property; and (vi) to
the best of Residential Funding's knowledge, any Contract that is partially
insured by the FHA pursuant to Title I was originated in accordance with
applicable FHA regulations and is insured, without set-off, surcharge or defense
by the FHA. In the event of a breach of a representation or warranty made by
Residential Funding that materially adversely affects the interests of the
Noteholders in a Trust Asset, Residential Funding will be obligated to
repurchase or substitute for such Trust Asset as described below. In addition,
Residential Funding will be obligated to repurchase or substitute for any
Revolving Credit Loan, Home Equity Loan and any Contract secured by a lien on
Mortgaged Property as to which it is discovered that the related Mortgage is not
a valid lien on the related Mortgaged Property having at least the priority set
forth with respect to such Revolving Credit Loan, Home Equity Loan or such
Contract, as applicable, in the listing of related Trust Assets, subject only to
(a) liens of real property taxes and assessments not yet due and payable, (b)
covenants, conditions and restrictions, rights of way, easements and other
matters of public record as of the date of recording of such Mortgage and
certain other permissible title exceptions, (c) other matters to which like
properties are commonly subject which do not materially adversely affect the
value, use, enjoyment or marketability of the Mortgaged Property, and (d) if
applicable, the liens of the related senior mortgage loans. In addition, with
respect to any Revolving Credit Loan, Home Equity Loan or Contract as to which
the Company delivers to the Indenture Trustee or the custodian an affidavit
certifying that the original Mortgage Note has been lost or destroyed, if such
Trust Asset subsequently is in default and the enforcement thereof or of the
related Mortgage is materially adversely affected by the absence of the original
Mortgage Note, Residential Funding will be obligated to repurchase or substitute
for such Trust Asset, in the manner described below. However, Residential
Funding will not be required to repurchase or substitute for any Trust Asset as
described above if the circumstances giving rise to such requirement also
constitute fraud in the origination of the related Revolving Credit Loan, Home
Equity Loan or Contract. Furthermore, because the listing of the related Trust
Assets generally contains information with respect to the Trust Assets as of the
Cut-off Date, prepayments and, in certain limited circumstances, modifications
to the interest rate and principal and interest payments may have been made with
respect to one or more of the related Trust Assets between the Cut-off Date and
the Closing Date. Residential Funding will not be required to purchase or
substitute for any Trust Asset as a result of such prepayment or modification.
In a Designated Seller Transaction, unless otherwise specified in the
related Prospectus Supplement, the Designated Seller will have made certain
representations and warranties regarding the Trust Assets to the Company
generally similar to those made in the preceding paragraph by Residential
Funding.
The Company will assign to the Owner Trustee (or the Special Purpose
Entity, if applicable) all of its right, title and interest in each agreement by
which it purchased a Trust Asset from Residential Funding or a
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Designated Seller, insofar as such agreement relates to the representations and
warranties made by a Designated Seller or Residential Funding, as the case may
be, in respect of such Trust Asset and any remedies provided for with respect to
any breach of such representations and warranties. If a Designated Seller or
Residential Funding, as the case may be, cannot cure a breach of any
representation or warranty made by it in respect of a Trust Asset which
materially and adversely affects the interests of the Noteholders in such Trust
Asset, within 90 days after notice from the Master Servicer, such Designated
Seller or Residential Funding, as the case may be, will be obligated to purchase
such Trust Asset at a price (the 'PURCHASE PRICE') set forth in the related
Agreement, which Purchase Price generally will be equal to the principal balance
thereof as of the date of purchase plus accrued and unpaid interest to the first
day of the month following the month of repurchase at the Mortgage Rate (less
the amount, expressed as a percentage per annum, payable in respect of master
servicing compensation or subservicing compensation, as applicable, and if
applicable, the Excluded Spread (as defined herein)).
Unless otherwise specified in the related Prospectus Supplement, as to any
such Trust Asset required to be purchased by Residential Funding as provided
above, rather than purchase the Trust Asset, Residential Funding may, at its
sole option, remove such Trust Asset (a 'DELETED LOAN') from the Trust Fund (or
from the assets underlying any Private Securities, if applicable) and cause the
Company to substitute in its place another Trust Asset of like kind (an
'ELIGIBLE SUBSTITUTE LOAN'). The related Prospectus Supplement will set forth
the condition of any Eligible Substitute Loan. The related Agreement may include
additional requirements or additional provisions relating to meeting the
foregoing requirements on an aggregate basis where a number of substitutions
occur contemporaneously. Unless otherwise specified in the related Prospectus
Supplement, a Designated Seller will have no option to substitute for a Trust
Asset that it is obligated to repurchase in connection with a breach of a
representation and warranty.
The Master Servicer will be required under the Servicing Agreement to use
its best reasonable efforts to enforce this purchase or substitution obligation
for the benefit of the Indenture Trustee and the Noteholders, using practices it
would employ in its good faith business judgment and which are normal and usual
in its general mortgage servicing activities; provided, however, that this
purchase or substitution obligation will not become an obligation of the Master
Servicer in the event the Designated Seller or Residential Funding, as the case
may be, fails to honor such obligation. The Master Servicer will be entitled to
reimbursement for any costs and expenses incurred in pursuing such a purchase or
substitution obligation, including but not limited to any costs or expenses
associated with litigation. In instances where a Designated Seller is unable, or
disputes its obligation, to purchase affected Trust Assets, the Master Servicer,
employing the standards set forth in the preceding sentence, may negotiate and
enter into one or more settlement agreements with such Designated Seller that
may provide for, among other things, the purchase of only a portion of the
affected Trust Assets or coverage of certain loss amounts. Any such settlement
could lead to losses on the Trust Assets which would be borne by the Credit
Enhancement supporting the related series of Notes, and to the extent not
available, by the Noteholders of such series. Furthermore, if applicable, the
Master Servicer may pursue foreclosure (or similar remedies) concurrently with
pursuing any remedy for a breach of a representation and warranty. However, the
Master Servicer is not required to continue to pursue both such remedies if it
determines that one such remedy is more likely to result in a greater recovery.
In accordance with the above described practices, the Master Servicer will not
be required to enforce any purchase of a Designated Seller arising from any
misrepresentation by the Designated Seller, if the Master Servicer determines in
the reasonable exercise of its business judgment that the matters related to
such misrepresentation did not directly cause or are not likely to directly
cause a loss on the related Trust Asset. If the Designated Seller fails to
repurchase and no breach of either the Company's or Residential Funding's
representations has occurred, the Designated Seller's purchase obligation will
not become an obligation of the Company or Residential Funding. Unless otherwise
specified in the related Prospectus Supplement, the foregoing obligations will
constitute the sole remedies available to Noteholders or the Indenture Trustee
for a breach of any representation by a Designated Seller or by Residential
Funding in its capacity as a seller of Trust Assets to the Company, or for any
other event giving rise to such obligations as described above.
Neither the Company nor the Master Servicer will be obligated to purchase a
Trust Asset if a Designated Seller defaults on its obligation to do so, and no
assurance can be given that the Designated Sellers will carry out such
obligations with respect to Trust Assets. Such a default by a Designated Seller
is not a default by the Company or by the Master Servicer. Any Trust Asset not
so purchased or substituted for shall remain in the related Trust Fund and any
losses related thereto shall be allocated to the related credit enhancement, and
to the extent not available to the related Notes.
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Notwithstanding the foregoing, with respect to any Designated Seller that
requests Residential Funding's consent to the transfer of subservicing rights
relating to any Trust Assets to a successor servicer, Residential Funding may
release such Designated Seller from liability under its representations and
warranties described above, upon the assumption of such successor servicer of
the Designated Seller's liability for such representations and warranties as of
the date they were made. In that event, Residential Funding's rights under the
instrument by which such successor servicer assumes the Designated Seller's
liability will be assigned to the Owner Trustee (or the Special Purpose Entity,
if applicable), and such successor servicer shall be deemed to be the Designated
Seller for purposes of the foregoing provisions.
SUBSERVICING
The servicing for each Trust Asset will generally either be retained by the
Seller (or its designee approved by the Master Servicer) as Subservicer, or will
be released by the Seller to the Master Servicer and will be subsequently
transferred to a Subservicer approved by the Master Servicer, and in either case
will thereafter be serviced by the Subservicer pursuant to an agreement between
the Master Servicer and the Subservicer (a 'SUBSERVICING AGREEMENT'). The Master
Servicer may, but is not obligated to, assign such subservicing to designated
subservicers which will be qualified Sellers and which may include GMAC Mortgage
Corporation or its affiliates. While such Subservicing Agreement will be a
contract solely between the Master Servicer and the Subservicer, the Servicing
Agreement applicable to any series of Notes will provide that, if for any reason
the Master Servicer for such series of Notes is no longer the master servicer of
the related Trust Assets, any successor Master Servicer must recognize the
Subservicer's rights and obligations under such Subservicing Agreement. For
further information relating to subservicing see 'Servicing of Trust
Assets-Subservicing' herein.
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DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued in series. Each series of Notes will be issued
pursuant to an Indenture between the related Trust Fund and the entity named in
the related Prospectus Supplement as Indenture Trustee with respect to such
series. A form of Indenture has been filed as an exhibit to the Registration
Statement of which this prospectus forms a part. Each Indenture and Trust
Agreement will be filed with the Commission as an exhibit to a Form 8-K. The
following summaries (together with additional summaries under 'The Agreements'
below as well as other pertinent information included elsewhere in this
Prospectus, and subject to the related Prospectus Supplement) do not describe
all terms thereof but reflect the material provisions relating to the Notes
common to each Agreement.
Each series of Notes may consist of any one or a combination of the
following: (i) a single class of Notes; (ii) two or more classes of Notes, one
or more classes of Notes that are senior to any class or classes of any class or
classes of Subordinate Securities as described in the respective Prospectus
Supplement (any such series, a 'SENIOR/SUBORDINATE SERIES'); (iii) one or more
classes of Strip Notes which will be entitled to (a) principal payments, with
disproportionate, nominal or no interest payments or (b) interest payments, with
disproportionate, nominal or no principal payments; (iv) two or more classes of
Notes which differ as to the timing, sequential order, rate or amount of
payments of principal or interest or both, or as to which payments of principal
or interest or both on any class may be made upon the occurrence of specified
events, in accordance with a schedule or formula (including 'planned
amortization classes' and 'targeted amortization classes' and 'very accurately
defined maturity classes'), or on the basis of collections from designated
portions of the Pool, which series may include one or more classes of Accrual
Notes with respect to which certain accrued interest will not be paid but rather
will be added to the principal balance thereof on each Payment Date for the
period described in the related Prospectus Supplement; or (v) similar classes of
Notes with other payment characteristics, as described in the related Prospectus
Supplement. Credit support for each series of Notes will be provided by a
Financial Guaranty Insurance Policy, Letter of Credit, Reserve Fund, by the
subordination of one or more classes of Subordinate Securities,
Overcollateralization or other credit enhancement as described in the Prospectus
Supplement or under 'Description of Credit Enhancement,' or by any combination
of the foregoing.
FORM OF NOTES
As specified in the related Prospectus Supplement, the Notes of each series
will be issued either as physical certificates or in book-entry form. If issued
as physical certificates, the Notes will be in fully registered form only in the
denominations specified in the related Prospectus Supplement, and will be
transferrable and exchangeable at the corporate trust office of the person
appointed under the related Agreement to register the Notes (the 'NOTE
REGISTRAR'). No service charge will be made for any registration of exchange or
transfer of Notes, but the Indenture Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge. The term 'NOTEHOLDER'
as used herein refers to the entity whose name appears on the records of the
Note Registrar (or, if applicable, a transfer agent) as the registered holder
thereof, except as otherwise indicated in the related Prospectus Supplement.
If issued in book-entry form certain classes of a series of Notes will be
initially issued through the book-entry facilities of The Depository Trust
Company ('DTC'), or Cedel Bank, societeanonyme ('CEDEL') or the Euroclear System
('EUROCLEAR') (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems, or
through such other depository or facility as may be specified in the related
Prospectus Supplement. As to any such class of Notes so issued ('BOOK-ENTRY
NOTES'), the record holder of such Notes will be DTC's nominee. CEDEL and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries (the 'DEPOSITARIES'), which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, which holds securities for its participating organizations
('DTC PARTICIPANTS,' and together with the CEDEL and Euroclear participating
organizations 'PARTICIPANTS') and facilitates the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in the accounts of Participants. Participants include
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securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations. Other institutions that are not
Participants but clear through or maintain a custodial relationship with
Participants (such institutions, 'INDIRECT PARTICIPANTS') have indirect access
to DTC's clearance system.
Unless otherwise specified in the related Prospectus Supplement, no person
acquiring an interest in any Book-Entry Notes (each such person, a 'BENEFICIAL
OWNER') will be entitled to receive a Note representing such interest in
registered, certificated form, unless either (i) DTC ceases to act as depository
in respect thereof and a successor depository is not obtained or (ii) the
Indenture Trustee elects in its sole discretion to discontinue the registration
of such Notes through DTC. Prior to any such event, Beneficial Owners will not
be recognized by the Indenture Trustee or the Master Servicer as holders of the
related Notes for purposes of the related Agreement, and Beneficial Owners will
be able to exercise their rights as owners of such Notes only indirectly through
DTC, Participants and Indirect Participants. Any Beneficial Owner that desires
to purchase, sell or otherwise transfer any interest in Book-Entry Notes may do
so only through DTC, either directly if such Beneficial Owner is a Participant
or indirectly through Participants and, if applicable, Indirect Participants.
Pursuant to the procedures of DTC, transfers of the beneficial ownership of any
Book-Entry Notes will be required to be made in minimum denominations specified
in the related Prospectus Supplement. The ability of a Beneficial Owner to
pledge Book-Entry Notes to persons or entities that are not Participants in the
DTC system, or to otherwise act with respect to such Notes, may be limited
because of the lack of physical certificates evidencing such Notes and because
DTC may act only on behalf of Participants.
Because of time zone differences, the securities account of a CEDEL or
Euroclear participant as a result of a transaction with a DTC Participant (other
than a depositary holding on behalf of CEDEL or Euroclear) will be credited
during subsequent securities settlement processing day (which must be a business
day for CEDEL or Euroclear, as the case may be) immediately following the DTC
settlement date. Such credits or any transactions in such securities settled
during such processing will be reported to the relevant Euroclear Participant or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant to a DTC Participant (other than the depositary for CEDEL or
Euroclear) will be received with value on the DTC settlement date, but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant Depositaries; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC. CEDEL
Participants and Euroclear Participants may not deliver instructions directly to
the Depositaries.
CEDEL, as a professional depository, holds securities for its participating
organizations ('CEDEL PARTICIPANTS') and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. As a professional
depository, CEDEL is subject to regulation by the Luxembourg Monetary Institute.
Euroclear was created to hold securities for participants of Euroclear
('EUROCLEAR PARTICIPANTS') and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty
Trust Company of New York (the 'EUROCLEAR OPERATOR'), under contract with
Euroclear Clearance Systems S.C., a Belgian co-operative corporation (the
'CLEARANCE COOPERATIVE'). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Clearance
Cooperative. The Clearance Cooperative establishes
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policy for Euroclear on behalf of Euroclear Participants. The Euroclear Operator
is the Belgian branch of a New York banking corporation which is a member bank
of the Federal Reserve System. As such, it is regulated and examined by the
Board of Governors of the Federal Reserve System and the New York State Banking
Department, as well as the Belgian Banking Commission. Securities clearance
accounts and cash accounts with the Euroclear Operator are governed by the Terms
and Conditions Governing Use of Euroclear and the related Operating Procedures
of the Euroclear System and applicable Belgian law (collectively, the 'TERMS AND
CONDITIONS'). The Terms and Conditions govern transfers of securities and cash
within Euroclear, withdrawals of securities and cash from Euroclear, and
receipts of payments with respect to securities in Euroclear. All securities in
Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts.
Payments in respect of the Book-Entry Notes will be forwarded by the
Indenture Trustee to DTC, and DTC will be responsible for forwarding such
payments to Participants, each of which will be responsible for disbursing such
payments to the Beneficial Owners it represents or, if applicable, to Indirect
Participants. Accordingly, Beneficial Owners may experience delays in the
receipt of payments in respect of their Notes. Under DTC's procedures, DTC will
take actions permitted to be taken by holders of any class of Book-Entry Notes
under the related Agreement only at the direction of one or more Participants to
whose account the Book-Entry Notes are credited and whose aggregate holdings
represent no less than any minimum amount of Percentage Interests or voting
rights required therefor. DTC may take conflicting actions with respect to any
action of Noteholders of any class to the extent that Participants authorize
such actions. None of the Master Servicer, the Company, the Indenture Trustee,
the Owner Trustee or any of their respective affiliates will have any liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the Book-Entry Notes, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
ASSIGNMENT OF THE TRUST ASSETS
At the time of issuance of a series of Notes, the Company will cause the
Trust Assets and any other assets being included in the related Trust Fund to be
assigned without recourse to the Owner Trustee or its nominee (which may be the
Custodian), on behalf of the related Trust, together with, if specified in the
related Prospectus Supplement, all principal and interest received on or with
respect to such Trust Assets after the Cut-off Date (other than principal and
interest due on or before the Cut-off Date and any Excluded Spread). The Owner
Trustee will, concurrently with such assignment, grant a security interest in
the related Trust Fund to the Indenture Trustee to secure such Notes. Each Trust
Asset will be identified in a schedule appearing as an exhibit to the related
Agreement. Such schedule will include, among other things, information as to the
principal balance of each Trust Asset as of the Cut-off Date, as well as
information respecting the Mortgage Rate, the currently scheduled monthly
payment of principal and interest, the maturity of the Mortgage Note and the
Combined Loan-to-Value Ratio at origination or modification.
The Company will, as to each Trust Asset other than Trust Assets underlying
any Private Securities, deliver to an entity specified in the related Prospectus
Supplement (which may be the Indenture Trustee, a Custodian or another entity
appointed by the Indenture Trustee) the legal documents relating to such Trust
Assets that are in possession of the Company, which may include, as applicable,
depending upon whether such Trust Asset is secured by a lien on Mortgaged
Property: (i) the Mortgage Note (and any modification or amendment thereto)
endorsed without recourse either in blank or to the order of the Owner Trustee
or the Indenture Trustee (or a nominee thereof); (ii) the Mortgage (except for
any Mortgage not returned from the public recording office) with evidence of
recording indicated thereon or, in the case of a Cooperative Loan, the
respective security agreements and any applicable UCC financing statements;
(iii) an assignment in recordable form of the Mortgage (or, with respect to a
Cooperative Loan, an assignment of the respective security agreements, any
applicable UCC financing statements, recognition agreements, relevant stock
certificates, related blank stock powers and the related proprietary leases or
occupancy agreements); (iv) if applicable, any riders or modifications to such
Mortgage Note and Mortgage, together with certain other documents at such times
as set forth in the related Agreement; and (v) the original Contract and copies
of documents and instruments related to each Contract and, other than in the
case of unsecured Contracts, the security interest in the property securing such
Contract. Such assignments may be blanket assignments covering Mortgages secured
by Mortgaged Properties located in the same county, if permitted by law. If so
specified in the related Prospectus Supplement, the Company may not be
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required to deliver one or more of such documents if such documents are missing
from the files of the party from whom such Revolving Credit Loans, Home Equity
Loans and certain Contracts were purchased.
In the event that, with respect to any Revolving Credit Loan, Home Equity
Loan or Contract secured by a lien on Mortgaged Property, the Company cannot
deliver the Mortgage or any assignment with evidence of recording thereon
concurrently with the execution and delivery of the related Trust Agreement
because of a delay caused by the public recording office, the Company will
deliver or cause to be delivered to the Indenture Trustee, the Custodian or
another entity appointed by the Indenture Trustee a true and correct photocopy
of such Mortgage or assignment. The Company will deliver or cause to be
delivered to the Indenture Trustee or the Custodian such Mortgage or assignment
with evidence of recording indicated thereon after receipt thereof from the
public recording office or from the related Subservicer.
Assignments of the Revolving Credit Loans, Home Equity Loans and Contracts
secured by a lien on Mortgaged Property will be recorded in the appropriate
public recording office, except in states where, in the opinion of counsel
acceptable to the Indenture Trustee or Owner Trustee, such recording is not
required to protect the Indenture Trustee's or Owner Trustee's interests in such
Revolving Credit Loans, Home Equity Loans and Contracts against the claim of any
subsequent transferee or any successor to or creditor of the Company or the
originator of such Revolving Credit Loans, Home Equity Loans or Contracts, or
except as otherwise specified in the related Prospectus Supplement.
Under certain circumstances, as to any series of Notes, the Company may
have the option to repurchase Trust Assets from the Trust Fund for cash, or in
exchange for other Trust Assets or Permitted Investments. Alternatively, for any
series of Notes secured by Private Securities, the Company may have the right to
so repurchase Revolving Credit Loans, Home Equity Loans and/or Contracts from
the entity that issued such Private Securities. All provisions relating to such
optional repurchase provisions will be described in the related Prospectus
Supplement.
REVIEW OF TRUST ASSETS
The Indenture Trustee will be authorized to appoint one or more custodians
(each, a 'CUSTODIAN') pursuant to a custodial agreement to maintain possession
of and review documents relating to the Trust Assets as the agent of the
Indenture Trustee or, following payment in full of the Notes and discharge of
the Indenture, the Owner Trustee. The identity of such Custodian, if any, will
be set forth in the related Prospectus Supplement.
The Indenture Trustee or the Custodian will hold such documents in trust
for the benefit of the holders of the Securities (the 'SECURITYHOLDERS') and,
generally will review such documents within such period specified in the related
Prospectus Supplement. If any such document is found to be defective in any
material respect, the Indenture Trustee or such Custodian shall notify the
Master Servicer and the Company, and if so specified in the related Prospectus
Supplement, the Master Servicer, the Servicer or the Indenture Trustee shall
notify Residential Funding or the Designated Seller. If Residential Funding or,
in a Designated Seller Transaction, the Designated Seller cannot cure such
defect within such period specified in the related Prospectus Supplement after
notice of the defect is given to Residential Funding (or, if applicable, the
Designated Seller), Residential Funding (or, if applicable, the Designated
Seller) is required to, within such period specified in the related Prospectus
Supplement, either repurchase the related Trust Asset or any property acquired
in respect thereof from the Indenture Trustee, or if permitted substitute for
such Trust Asset a new Trust Asset in accordance with the standards set forth
herein. The Master Servicer will be obligated to enforce this obligation of
Residential Funding or the Designated Seller to the extent described above under
'Trust Asset Program -- Representations Relating to Trust Assets,' but such
obligation is subject to the provisions described below under 'Servicing of
Trust Assets -- Realization Upon Defaulted Loans.' There can be no assurance
that the applicable Designated Seller will fulfill its obligation to purchase
any Trust Asset as described above. Unless otherwise specified in the related
Prospectus Supplement, neither Residential Funding, the Master Servicer nor the
Company will be obligated to purchase or substitute for such Trust Asset if the
Designated Seller defaults on its obligation to do so. Unless otherwise
specified in the related Prospectus Supplement, the obligation to repurchase or
substitute for a Trust Asset constitutes the sole remedy available to the
Noteholders or the Indenture Trustee for a material defect in a constituent
document. Any Trust Asset not so purchased or substituted for shall remain in
the related Trust Fund.
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The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under the Servicing Agreement. Upon a breach of any such
representation of the Master Servicer which materially adversely affects the
interests of the Securityholders in a Trust Asset, the Master Servicer will be
obligated either to cure the breach in all material respects or to purchase the
Trust Asset at its Purchase Price (less unreimbursed advances, if applicable,
made by the Master Servicer with respect to such Trust Asset) or, unless
otherwise specified in the related Prospectus Supplement, to substitute for such
Trust Asset an Eligible Substitute Loan in accordance with the provisions for
such substitution described above under 'Trust Asset Program -- Representations
Relating to Trust Assets.' Unless otherwise specified in the related Prospectus
Supplement, this purchase obligation will constitute the sole remedy available
to Noteholders or the Indenture Trustee for such a breach of representation by
the Master Servicer. Any Trust Asset not so purchased or substituted for shall
remain in the related Trust Fund.
EXCESS SPREAD AND EXCLUDED SPREAD
The Company, the Master Servicer or any of their affiliates, or such other
entity as may be specified in the related Prospectus Supplement may retain or be
paid a portion of interest due with respect to the related Trust Assets. The
payment of any such portion of interest will be disclosed in the related
Prospectus Supplement. This payment may be in addition to any other payment
(such as the servicing fee) that any such entity is otherwise entitled to
receive with respect to the Trust Assets. Any such payment in respect of the
Trust Assets will represent a specified portion of the interest payable thereon
and as specified in the related Prospectus Supplement, will either be part of
the assets transferred to the related Trust Fund (the 'EXCESS SPREAD') or will
be excluded from the assets transferred to the related Trust Fund (the 'EXCLUDED
SPREAD'). The interest portion of a Realized Loss or Extraordinary Loss and any
partial recovery of interest in respect of the Trust Assets will be allocated
between the owners of any Excess Spread or Excluded Spread and the Noteholders
entitled to payments of interest as provided in the applicable Agreement.
PAYMENTS ON TRUST ASSETS; DEPOSITS TO PAYMENT ACCOUNT
Each Subservicer servicing a Trust Asset pursuant to a Subservicing
Agreement will establish and maintain an account (the 'SUBSERVICING ACCOUNT')
which generally meets the requirements set forth in the Guide from time to time
or is approved by Residential Funding. A Subservicer is required to deposit into
its Subservicing Account on a daily basis all amounts that are received by it in
respect of the Trust Assets, less its servicing or other compensation.
As specified in the Subservicing Agreement, the Subservicer must remit or
cause to be remitted to the Master Servicer all funds held in the Subservicing
Account with respect to Trust Assets that are required to be so remitted on a
periodic basis not less frequently than monthly. If so specified in the related
Prospectus Supplement, the Subservicer may also be required to advance on the
scheduled date of remittance any monthly installment of principal and interest,
less its servicing or other compensation, on any Trust Asset for which payment
was not received from the Mortgagor.
The Master Servicer will deposit or will cause to be deposited into an
account (the 'CUSTODIAL ACCOUNT') certain payments and collections received by
it subsequent to the Cut-off Date (other than payments due on or before the
Cut-off Date), as specifically set forth in the related Agreement, which (except
as otherwise provided therein) generally will include the following:
(i) payments on account of principal on the Trust Assets comprising a
Trust Fund;
(ii) payments on account of interest on the Trust Assets comprising
such Trust Fund, net of the portion of each payment thereof retained by the
Subservicer, if any, as its servicing or other compensation;
(iii) amounts (net of unreimbursed liquidation expenses and insured
expenses incurred, and unreimbursed Servicing Advances, if any, made by the
related Subservicer) received and retained in connection with the
liquidation of any defaulted Trust Asset, by foreclosure or otherwise
('LIQUIDATION PROCEEDS'), including all proceeds of any hazard or other
insurance policy or guaranty covering any Trust Asset in such Pool
including proceeds from FHA insurance (with respect to any Contract
partially insured by the FHA pursuant to Title I included in the Pool))
(together with any payments under any Letter of Credit, 'INSURANCE
PROCEEDS') or proceeds from any alternative arrangements established in
lieu of any such insurance and described in the applicable Prospectus
Supplement, other than proceeds to be applied to
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the restoration of the related property or released to the Mortgagor in
accordance with the Master Servicer's normal servicing procedures;
(iv) proceeds of any Trust Asset in such Trust Fund purchased (or, in
the case of a substitution, certain amounts representing a principal
adjustment) by the Master Servicer, the Company, Residential Funding, any
Subservicer or Seller or any other person pursuant to the terms of the
related Agreement. See 'Trust Asset Program -- Representations Relating to
Trust Assets,' and ' -- Assignment of Trust Assets' above;
(v) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments of funds held in the
Custodial Account, as described below; and
(vi) any amounts required to be transferred from the Payment Account
to the Custodial Account.
In addition to the Custodial Account, the Master Servicer will establish
and maintain, in the name of the Indenture Trustee for the benefit of the
holders of each series of Notes, an account for the disbursement of payments on
the Trust Assets evidenced by each series of Notes (the 'PAYMENT ACCOUNT'). Both
the Custodial Account and the Payment Account must be either (i) maintained with
a depository institution whose debt obligations at the time of any deposit
therein are rated by any Rating Agency that rated any Notes of the related
series not less than a specified level comparable to the rating category of such
Notes, (ii) an account or accounts the deposits in which are fully insured to
the limits established by the FDIC, provided that any deposits not so insured
shall be otherwise maintained such that, as evidenced by an opinion of counsel,
the Noteholders have a claim with respect to the funds in such accounts or a
perfected first priority security interest in any collateral securing such funds
that is superior to the claims of any other depositors or creditors of the
depository institution with which such accounts are maintained, (iii) in the
case of the Custodial Account, a trust account or accounts maintained in either
the corporate trust department or the corporate asset services department of a
financial institution which has debt obligations that meet certain rating
criteria, (iv) in the case of the Payment Account, a trust account or accounts
maintained with the Indenture Trustee, or (v) such other account or accounts
acceptable to any applicable Rating Agency (an 'ELIGIBLE ACCOUNT'). The
collateral that is eligible to secure amounts in an Eligible Account is limited
to certain permitted investments, which are generally limited to United States
government securities and other investments that are rated, at the time of
acquisition, in one of the categories permitted by the related Agreement
('PERMITTED INVESTMENTS').
On the day set forth in the related Prospectus Supplement, the Master
Servicer will withdraw from the Custodial Account and deposit into the
applicable Payment Account, in immediately available funds, the amount to be
paid therefrom to Noteholders on such Payment Date, except as otherwise provided
in the related Prospectus Supplement. The Master Servicer or the Indenture
Trustee will also deposit or cause to be deposited into the Payment Account (i)
any payments under any Letter of Credit, Financial Guaranty Insurance Policy and
any amounts required to be transferred to the Payment Account from a Reserve
Fund, as described under 'Credit Enhancement' below or (iii) any amounts
required to be paid by the Master Servicer out of its own funds due to the
operation of a deductible clause in any blanket policy maintained by the Master
Servicer to cover hazard losses on the Trust Assets as described under
'Description of the Notes -- Hazard Insurance; Claims Thereunder' below, any
payments received on any Private Securities included in the Trust Fund and any
other amounts as set forth in the related Agreement.
The portion of any payment received by the Master Servicer in respect of a
Trust Asset that is allocable to Excess Spread or Excluded Spread, as
applicable, will generally be deposited into the Custodial Account, but any
Excluded Spread will not be deposited in the Payment Account for the related
series of Notes and will be paid as provided in the related Agreement.
Funds on deposit in the Custodial Account may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next Payment Date, and funds on deposit in the related Payment Account may be
invested in Permitted Investments maturing, in general, no later than the
Payment Date. Unless otherwise specified in the related Prospectus Supplement,
all income and gain realized from any such investment will be for the account of
the Master Servicer as additional servicing compensation. The amount of any loss
incurred in connection with any such investment must be deposited in the
Custodial Account or in the Payment Account, as the case may be, by the Master
Servicer out of its own funds upon realization of such loss.
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WITHDRAWALS FROM THE CUSTODIAL ACCOUNT
The Master Servicer may, from time to time, make withdrawals from the
Custodial Account for certain purposes, as specifically set forth in the related
Agreement, which (except as otherwise provided therein) generally will include
the following:
(i) to make deposits to the Payment Account in the amounts and in the
manner provided in the related Agreement and described above under
' -- Payments on Trust Assets; Deposits to Payment Account' or in the
related Prospectus Supplement;
(ii) to reimburse itself or any Subservicer for amounts advanced in
respect of taxes, insurance premiums or similar expenses ('SERVICING
ADVANCES') as to any Mortgaged Property, out of late payments, Insurance
Proceeds, Liquidation Proceeds or collections on the Trust Asset with
respect to which such Servicing Advances were made;
(iii) to pay to itself or any Subservicer unpaid Servicing Fees and
Subservicing Fees, out of payments or collections of interest on each Trust
Asset;
(iv) to pay to itself as additional servicing compensation any
investment income on funds deposited in the Custodial Account, any amounts
remitted by Subservicers as interest in respect of partial prepayments on
the Trust Assets, and, if so provided in the Servicing Agreement, any
profits realized upon disposition of a Mortgaged Property acquired by deed
in lieu of foreclosure or repossession or otherwise allowed under the
Agreement;
(v) to pay to itself, a Subservicer, Residential Funding, the Company
or the Seller all amounts received with respect to each Trust Asset
purchased, repurchased or removed pursuant to the terms of the related
Agreement and not required to be paid as of the date on which the related
Purchase Price is determined;
(vi) to pay the Company or its assignee, or any other party named in
the related Prospectus Supplement all amounts allocable to the Excluded
Spread, if any, out of collections or payments which represent interest on
each Trust Asset (including any Trust Asset as to which title to the
underlying Mortgaged Property was acquired);
(vii) to reimburse itself or the Company for certain other expenses
incurred for which it or the Company is entitled to reimbursement
(including reimbursement in connection with enforcing any repurchase,
substitution or indemnification obligation of any Designated Seller),
including payment of FHA insurance premiums, if applicable, or against
which it or the Company is indemnified pursuant to the related Agreement;
(viii) to withdraw any amount deposited in the Custodial Account that
was not required to be deposited therein;
(ix) to pay to itself or any Subservicer for the funding of any Draws
made on the Revolving Credit Loans, if applicable; and
(x) to make deposits to the Funding Account in the amounts and in the
manner provided in the related Agreement, if applicable.
PAYMENTS
On each Payment Date, payments of principal and interest (or, where
applicable, of principal only or interest only) on each class of Notes entitled
thereto will be made from amounts on deposit in the Payment Account by the
Indenture Trustee, the Master Servicer acting on behalf of the Indenture Trustee
or a paying agent appointed by the Indenture Trustee or the Issuer (the 'PAYING
AGENT'). Unless otherwise specified in the related Prospectus Supplement, such
payments will be made to the persons who are registered as the holders of such
Notes at the close of business on the last business day of the preceding month
(the 'RECORD DATE'). Payments will be made in immediately available funds (by
wire transfer or otherwise) to the account of a Noteholder at a bank or other
entity having appropriate facilities therefor, if such Noteholder has so
notified the Indenture Trustee, the Master Servicer or the Paying Agent, as the
case may be, and the applicable Agreement provides for such form of payment, or
by check mailed to the address of the person entitled thereto as it appears on
the Note Register. The final payment in redemption of the Notes will be made
only upon presentation and surrender of the Notes at the office or agency of the
Indenture Trustee specified in the notice to Noteholders.
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Payments will be made to each Noteholder in accordance with such holder's
Percentage Interest in a particular class. The ('PERCENTAGE INTEREST')
represented by a Note of a particular class will be equal to the percentage
obtained by dividing the initial principal balance or notional amount of such
Note by the aggregate initial amount or notional balance of all the Notes of
such class. In addition, amounts remaining in the Payment Account on each
Payment Date after payments on the Notes will be applied for the purposes set
forth in the Agreements, as described in the related Prospectus Supplement,
including distributions on the related Certificates. Any amounts so distributed
on the Certificates will be released from the lien of the Indenture.
Principal and Interest on the Notes
The method of determining, and the amount of, payments of principal and
interest (or, where applicable, of principal only or interest only) on a
particular series of Notes will be described in the related Prospectus
Supplement. Payments of interest on each class of Notes will be made prior to
payments of principal thereon. Each class of Notes (other than certain classes
of Strip Notes) may have a different Interest Rate, which may be a fixed,
variable or adjustable Interest Rate, or any combination of two or more such
Interest Rates. The related Prospectus Supplement will specify the Interest Rate
or Rates for each class, or the initial Interest Rate or Rates and the method
for determining the Interest Rate or Rates. Unless otherwise specified in the
related Prospectus Supplement, interest on the Notes will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
On each Payment Date for a series of Notes, the Indenture Trustee or the
Master Servicer on behalf of the Indenture Trustee will pay or cause the Paying
Agent to pay, as the case may be, principal and interest to each holder of
record on the Record Date of a class of Notes. Unless otherwise specified in the
related Prospectus Supplement, payments to Noteholders of all classes within a
series in respect of interest will have the same priority.
In the case of a series of Notes which includes two or more classes of
Notes, the timing, sequential order, priority of payment or amount of payments
in respect of principal, and any schedule or formula or other provisions
applicable to the determination thereof shall be as set forth in the related
Prospectus Supplement. Payments in respect of principal of any class of Notes
will be made on a pro rata basis among all of the Notes of such class unless
otherwise set forth in the related Prospectus Supplement. In addition, unless
otherwise specified in the related Prospectus Supplement, payments of principal
on the Notes will be limited to monthly principal payments on the Trust Assets,
any Excess Interest, if applicable, applied as principal payments on the Notes
and any amount paid as a payment of principal under the related form of Credit
Enhancement. If so specified in the related Prospectus Supplement, a series of
Notes may provide for a period during which all or a portion of the principal
collections on the Trust Assets otherwise available for payment to the Notes are
reinvested in Additional Balances or additional Trust Assets or accumulated in a
trust account pending the commencement of an amortization period specified in
the related Prospectus Supplement or the occurrence of certain events specified
in the related Prospectus Supplement.
On the day specified in the related Prospectus Supplement as the
determination date (the 'DETERMINATION DATE'), the Master Servicer will
determine the amounts of principal and interest which will be paid to
Noteholders on the succeeding Payment Date. Prior to the close of business on
the business day succeeding each Determination Date, the Master Servicer will
furnish a statement to the Indenture Trustee setting forth, among other things,
the amount to be paid on the next succeeding Payment Date.
FUNDING ACCOUNT
If so specified in the related Prospectus Supplement, the Trust Agreement
or other agreement may provide for the transfer by the Sellers of additional
Trust Assets to the related Trust after the Closing Date. Such additional Trust
Assets will be required to conform to the requirements set forth in the related
Agreement or other agreement providing for such transfer. As specified in the
related Prospectus Supplement, such transfer may be funded by the establishment
of a Funding Account (a 'FUNDING ACCOUNT'). If a Funding Account is established,
all or a portion of the proceeds of the sale of one or more classes of Notes of
the related series or a portion of collections on the Trust Assets in respect of
principal will be deposited in such account to be released as additional Trust
Assets are transferred. Unless otherwise specified in the related Prospectus
Supplement, a Funding Account will be required to be maintained as an Eligible
Account, all amounts therein will be required
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to be invested in Permitted Investments and the amount held therein shall at no
time exceed 25% of the aggregate outstanding principal balance of the Notes.
Unless otherwise specified in the related Prospectus Supplement, the related
Agreement or other agreement providing for the transfer of additional Trust
Assets will provide that all such transfers must be made within 9 months (as to
amounts representing proceeds of the sale of the Securities) or 12 months (as to
amounts representing principal collections on the Trust Assets ) after the
Closing Date, and that amounts set aside to fund such transfers (whether in a
Funding Account or otherwise) and not so applied within the required period of
time will be deemed to be principal prepayments and applied in the manner set
forth in such Prospectus Supplement.
REPORTS TO NOTEHOLDERS
On each Payment Date, the Master Servicer will forward or cause to be
forwarded to each Noteholder of record a statement or statements with respect to
the related Trust Fund setting forth the information described in the related
Agreement. Except as otherwise provided in the related Agreement, such
information generally will include the following, as applicable:
(i) the amount, if any, of such payment allocable to principal;
(ii) the amount, if any, of such payment allocable to interest, and
the amount, if any, of any shortfall in the amount of interest and
principal;
(iii) the aggregate unpaid principal balance of the Trust Assets after
giving effect to the payment of principal on such Payment Date;
(iv) the outstanding principal balance or notional amount of each
class of Notes after giving effect to the payment of principal on such
Payment Date;
(v) based on the most recent reports furnished by Subservicers, the
number of Trust Assets in the related Pool that are delinquent (a) one
month, (b) two months and (c) three months, and that are in foreclosure and
the aggregate principal balances of such Trust Assets or;
(vi) the book value of any property acquired by such Trust Fund
through foreclosure or grant of a deed in lieu of foreclosure;
(vii) the balance of the Reserve Fund, if any, at the close of
business on such Payment Date;
(viii) the amount of coverage under any Letter of Credit or other form
of credit enhancement covering default risk as of the close of business on
the applicable Determination Date and a description of any credit
enhancement substituted therefor;
(ix) if applicable, any limited amounts available under the applicable
credit support to cover Special Hazard Losses, Fraud Losses and Bankruptcy
Losses, as of the close of business on the applicable Payment Date and a
description of any change in the calculation of such amounts;
(x) in the case of Notes benefiting from alternative credit
enhancement arrangements described in a Prospectus Supplement, the amount
of coverage under such alternative arrangements as of the close of business
on the applicable Determination Date;
(xi) with respect to any series of Notes as to which the Trust Fund
includes Private Securities, certain additional information as required
under the related Agreement; and
(xii) the FHA Insurance Amount.
Each amount set forth pursuant to clause (i) or (ii) above will be
expressed as a dollar amount per Single Note. As to a particular class of Notes,
a 'SINGLE NOTE' generally will evidence a Percentage Interest obtained by
dividing $1,000 by the initial principal balance or notional balance of all the
Notes of such class, except as otherwise provided in the related Agreement. In
addition to the information described above, reports to Noteholders will contain
such other information as is set forth in the applicable Agreement, which may
include, without limitation, reimbursements to Subservicers and the Master
Servicer and losses borne by the related Trust Fund.
In addition, to the extent described in the related Agreement, within a
reasonable period of time after the end of each calendar year, the Master
Servicer will furnish a report to each holder of record of a class of Notes at
any time during such calendar year. Such report will include information as to
the aggregate of amounts
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reported pursuant to clauses (i) and (ii) above for such calendar year or, in
the event such person was a holder of record of a class of Notes during a
portion of such calendar year, for the applicable portion of such year.
HAZARD INSURANCE; CLAIMS THEREUNDER
Unless otherwise specified in the related Prospectus Supplement, each
Revolving Credit Loan, Home Equity Loan and Contract that is secured by a lien
on a Mortgaged Property (in each case, other than a Cooperative Loan) will be
required to be covered by a hazard insurance policy (as described below). See
'Risk Factors -- Risks Associated with Certain Trust Assets -- No Hazard
Insurance for Title I Contracts.' The following summary, as well as other
pertinent information included elsewhere in this Prospectus, do not describe all
terms of a hazard insurance policy but will reflect all material terms thereof
relevant to an investment in the Notes. Such insurance is subject to
underwriting and approval of individual Trust Assets by the respective insurers.
The descriptions of any insurance policies described in this Prospectus or any
Prospectus Supplement and the coverage thereunder do not purport to be complete
and are qualified in their entirety by reference to such forms of policies.
Unless otherwise specified in the related Prospectus Supplement, the
Servicing Agreement will require the Master Servicer to cause to be maintained
for each Mortgaged Property a hazard insurance policy providing for no less than
the coverage of the standard form of fire insurance policy with extended
coverage customary in the state in which the property is located. Such coverage
generally will be in an amount equal to the lesser of (i) the maximum insurable
value of the Mortgaged Property or (ii) the outstanding balance of the related
Revolving Credit Loan, Home Equity Loan or Contract plus the outstanding balance
on any mortgage loan senior to such Revolving Credit Loan, Home Equity Loan or
Contract except that, if generally available, such coverage must not be less
than the minimum amount required under the terms thereof to fully compensate for
any damage or loss on a replacement cost basis. The ability of the Master
Servicer to ensure that hazard insurance proceeds are appropriately applied may
be dependent on its being named as an additional insured under any hazard
insurance policy or upon the extent to which information in this regard is
furnished to the Master Servicer by Mortgagors or Subservicers.
As set forth above, all amounts collected by the Master Servicer under any
hazard policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures) will be deposited initially in
the Custodial Account and ultimately in the Payment Account. The Master Servicer
may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy insuring against losses on such Trust Assets. If
such blanket policy contains a deductible clause, the Master Servicer will
deposit in the Custodial Account or the applicable Payment Account all amounts
which would have been deposited therein but for such clause.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer shall also cause to be maintained on property acquired upon
foreclosure, or deed in lieu of foreclosure, of any applicable Trust Asset, fire
insurance with extended coverage in an amount which is at least equal to the
amount necessary to avoid the application of any co-insurance clause contained
in the related hazard insurance policy. See 'Risk Factors -- Risks Associated
with Certain Trust Assets -- No Hazard Insurance for Title I Contracts.'
Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the Revolving Credit Loans, Home Equity
Loans and Contracts may decline as the principal balances owing thereon
decrease, and since residential properties have historically appreciated in
value over time, hazard insurance proceeds could be insufficient to restore
fully the damaged property in the event of a partial loss.
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DESCRIPTION OF CREDIT ENHANCEMENT
As set forth in the related Prospectus Supplement, the credit support
provided with respect to each series of Notes will include one or more of the
following: subordination provided by the related Certificates, and by any other
class of Subordinated Securities related to such series of Notes;
Overcollateralization; a Reserve Fund; a Financial Guaranty Insurance Policy; a
Letter of Credit; mortgage repurchase bond, mortgage pool insurance policy,
special hazard insurance policy, bankruptcy bond or other types of insurance
policies, or a secured or unsecured corporate guaranty, as described in the
related Prospectus Supplement; or in such other form as may be described in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Contracts may be partially insured by the FHA pursuant to Title
I. See 'Risk Factors -- Limitations on FHA Insurance for Title I Contracts' and
'Description of FHA Insurance Under Title I' herein.
As to each series of Notes, each element of the credit support will cover
losses or shortfalls incurred on the Trust Assets, or losses or shortfalls
allocated to or borne by the Notes, as and to the extent described in the
related Prospectus Supplement and at such times as described therein. If so
provided in the related Prospectus Supplement, any element of the credit support
may not be subject to limitations relating to the specific type of loss or
shortfall incurred as to any Trust Asset. Alternatively, if so provided in the
related Prospectus Supplement, the coverage provided by any element of the
credit support may be comprised of one or more of the components described
below. Each such component may have a dollar limit and will generally provide
coverage with respect to Realized Losses, as defined below, that are, as
applicable, (i) attributable to the Mortgagor's failure to make any payment of
principal or interest as required under the Mortgage Note, but not including
Special Hazard Losses, Extraordinary Losses or other losses resulting from
damage to a Mortgaged Property, Bankruptcy Losses or Fraud Losses (any such
loss, a 'DEFAULTED LOAN LOSS'); (ii) of a type generally covered by a special
hazard insurance policy (any such loss, a 'SPECIAL HAZARD LOSS') as described in
the related Prospectus Supplement; (iii) attributable to certain actions which
may be taken by a bankruptcy court in connection with a Trust Asset, including a
reduction by a bankruptcy court of the principal balance of or the Mortgage Rate
on a Trust Asset or an extension of its maturity (any such loss, a 'BANKRUPTCY
LOSS'); and (iv) incurred on defaulted Trust Assets as to which there was fraud
in the origination of such Trust Assets (any such loss, a 'FRAUD LOSS').
Unless otherwise specified in the related Prospectus Supplement, credit
support will not provide protection against all risks of loss and will not
guarantee repayment of the entire outstanding principal balance of the Notes and
interest thereon. If losses occur which exceed the amount covered by credit
support or which are not covered by the credit support, Noteholders will bear
their allocable share of deficiencies. In particular, if so provided in the
related Prospectus Supplement, Defaulted Loan Losses, Special Hazard Losses,
Bankruptcy Losses and Fraud Losses in excess of the amount of coverage provided
therefor and losses occasioned by war, civil insurrection, certain governmental
actions, nuclear reaction and certain other risks ('EXTRAORDINARY LOSSES') will
not be covered. To the extent that the credit enhancement for any series of
Notes is exhausted or unavailable for any reason, the Noteholders will bear all
further risks of loss not otherwise insured against.
With respect to any defaulted Trust Asset that is finally liquidated, the
amount of loss realized, if any (as described in the related Agreement, a
'REALIZED LOSS'), will equal the portion of the Stated Principal Balance
remaining after application of all amounts recovered (net of expenses allocable
to the Trust Fund) towards interest and principal owing on the Trust Asset. With
respect to a Trust Asset the principal balance of which has been reduced in
connection with bankruptcy proceedings, the amount of such reduction will be
treated as a Realized Loss. The 'STATED PRINCIPAL BALANCE'of any Trust Asset as
of any date of determination is equal to the principal balance thereof as of the
Cut-off Date, after application of all scheduled principal payments due on or
before the Cut-off Date whether received or not, reduced by all amounts
allocable to principal that are paid to Noteholders on or before the date of
determination, and as further reduced to the extent that any Realized Loss
thereon has been allocated to any Notes on or before such date.
Each Prospectus Supplement will include a description of (a) the amount
payable under the credit enhancement arrangement, if any, provided with respect
to a series, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions under which the amount payable under such credit
support may be reduced and under which such credit support may be terminated or
replaced and (d) the material provisions of any agreement relating to such
credit support. Additionally, each such Prospectus Supplement will set forth
certain information with respect to the issuer of any third-party credit
enhancement (the 'CREDIT ENHANCER'). As to any series of Notes, the related
Agreements may be modified from the descriptions set forth
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herein to provide for reimbursement rights, control rights or other provisions
that may be required by the Credit Enhancer.
The descriptions of any insurance policies, bonds or other instruments
described in this Prospectus or any Prospectus Supplement and the coverage
thereunder do not describe all terms thereof but will reflect all relevant terms
thereof material to an investment in the Notes. Copies of such instruments will
be included as exhibits to the Form 8-K to be filed with the Commission in
connection with the issuance of the related series of Notes.
FINANCIAL GUARANTY INSURANCE POLICY
If so specified in the related Prospectus Supplement, a financial guaranty
insurance policy (a 'FINANCIAL GUARANTY INSURANCE POLICY') may be obtained and
maintained for a class or series of Notes. The issuer of the Financial Guaranty
Insurance Policy (the 'INSURER') will be described in the related Prospectus
Supplement and a copy of the form of Financial Guaranty Insurance Policy will be
filed with the related Current Report on Form 8-K.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will be unconditional and irrevocable and
will guarantee to holders of the applicable Notes that an amount equal to the
full amount of payments due to such holders will be received by the Indenture
Trustee or its agent on behalf of such holders for payment on each Payment Date.
The specific terms of any Financial Guaranty Insurance Policy will be set forth
in the related Prospectus Supplement. A Financial Guaranty Insurance Policy may
have limitations and generally will not insure the obligation of the Sellers or
the Master Servicer to purchase or substitute for a defective Trust Asset and
will not guarantee any specific rate of principal prepayments. Unless otherwise
specified in the related Prospectus Supplement, the Insurer will be subrogated
to the rights of each holder to the extent the Insurer makes payments under the
Financial Guaranty Insurance Policy.
LETTER OF CREDIT
If any component of credit enhancement as to any series of Notes is to be
provided by a letter of credit (the 'LETTER OF CREDIT'), a bank (the 'LETTER OF
CREDIT BANK') will deliver to the Indenture Trustee an irrevocable Letter of
Credit. The Letter of Credit may provide direct coverage with respect to the
Trust Assets. The Letter of Credit Bank, the amount available under the Letter
of Credit with respect to each component of credit enhancement, the expiration
date of the Letter of Credit, and a more detailed description of the Letter of
Credit will be specified in the related Prospectus Supplement. On or before each
Payment Date, the Letter of Credit Bank will be required to make certain
payments after notification from the Indenture Trustee, to be deposited in the
related Payment Account with respect to the coverage provided thereby.
SUBORDINATION
With respect to each series of Notes, the related Certificates will be
subordinate thereto as described in the Prospectus Supplement. A
Senior/Subordinate Series of Notes will consist of one or more classes of Notes
and one or more classes of Subordinate Securities, as set forth in the related
Prospectus Supplement. With respect to any Senior/Subordinate Series, the total
amount available for payment on each Payment Date, as well as the method for
allocating such amount among the various classes of Notes included in such
series, will be described in the related Prospectus Supplement. Generally, with
respect to any such series the amount available for payment will be allocated
first to interest on the Notes of such series, and then to principal of the
Notes up to the amounts described in the related Prospectus Supplement, prior to
allocation of any amounts to the Subordinate Securities of such series.
Realized Losses will be allocated to the Subordinate Securities of the
related series in the order specified in the related Prospectus Supplement until
the outstanding principal balance of such class has been reduced to zero.
Additional Realized Losses, if any, will be allocated to the Notes. If such
series includes more than one class of Notes, such additional Realized Losses
will be allocated either on a pro rata basis among all of the Notes in
proportion to their respective outstanding principal balances or as otherwise
provided in the related Prospectus Supplement. The respective amounts of
specified types of losses (including certain Special Hazard Losses, Fraud Losses
and Bankruptcy Losses) that may be borne solely by the Subordinate Securities
may be limited to an amount described in the related Prospectus Supplement, in
which case such losses would be
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allocated on a pro rata basis among all outstanding classes of Notes. Generally,
any allocation of a Realized Loss to a Note will be made by reducing the
outstanding principal balance thereof as of the Payment Date following the
calendar month in which such Realized Loss was incurred.
To the extent provided in the related Prospectus Supplement, certain
amounts otherwise payable on any Payment Date to holders of Subordinate
Securities may be deposited into a Reserve Fund. Amounts held in any Reserve
Fund may be applied as described under 'Description of Credit Enhancement
Reserve Funds' in the related Prospectus Supplement.
With respect to any Senior/Subordinate Series, the terms and provisions of
the subordination may vary from those described above. Any such variation and
any additional credit enhancement will be described in the related Prospectus
Supplement.
OVERCOLLATERALIZATION
If so specified in the related Prospectus Supplement, interest collections
on the Trust Assets may exceed interest payments on the Securities for the
related Payment Date (such excess referred to as 'EXCESS INTEREST'). Such Excess
Interest may be deposited into a Reserve Fund or applied as a payment of
principal on the Notes. To the extent Excess Interest is applied as principal
payments on the Notes, the effect will be to reduce the principal balance of the
Notes relative to the outstanding balance of the Trust Assets, thereby creating
'OVERCOLLATERALIZATION' and additional protection to the Noteholders, as
specified in the related Prospectus Supplement.
RESERVE FUNDS
If so specified in the related Prospectus Supplement, the Company will
deposit or cause to be deposited in an account (a 'RESERVE FUND') any
combination of cash or Permitted Investments in specified amounts, or any other
instrument satisfactory to the Rating Agency or Agencies, which will be applied
and maintained in the manner and under the conditions specified in the related
Prospectus Supplement and related Agreement. In the alternative or in addition
to such deposit, to the extent described in the related Prospectus Supplement, a
Reserve Fund may be funded through application of all or a portion of amounts
otherwise payable on any related Securities, from the Excess Spread, Excluded
Spread or otherwise. A Reserve Fund for a series of Notes which is funded over
time by depositing therein a portion of the interest payment on each Trust Asset
may be referred to as a 'SPREAD ACCOUNT' in the related Prospectus Supplement
and related Agreement. To the extent that the funding of the Reserve Fund is
dependent on amounts otherwise payable on related Subordinate Securities, Excess
Spread, Excluded Spread or other cash flows attributable to the related Trust
Assets or on reinvestment income, the Reserve Fund may provide less coverage
than initially expected if the cash flows or reinvestment income on which such
funding is dependent are lower than anticipated. With respect to any series of
Notes as to which credit enhancement includes a Letter of Credit, if so
specified in the related Prospectus Supplement, under certain circumstances the
remaining amount of the Letter of Credit may be drawn by the Indenture Trustee
and deposited in a Reserve Fund.
Amounts in a Reserve Fund may be paid to Noteholders, or applied to
reimburse the Master Servicer for outstanding advances, or may be used for other
purposes, in the manner and to the extent specified in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement, any
such Reserve Fund will not be deemed to be part of the related Trust Fund. A
Reserve Fund may provide coverage to more than one series of Notes if set forth
in the related Prospectus Supplement. If so specified in the related Prospectus
Supplement, Reserve Funds may be established to provide limited protection
against only certain types of losses and shortfalls. Following each Payment Date
amounts in a Reserve Fund in excess of any amount required to be maintained
therein may be released from the Reserve Fund under the conditions and to the
extent specified in the related Prospectus Supplement and will not be available
for further application to the Notes.
Unless otherwise specified in the related Prospectus Supplement, the
Indenture Trustee will have a perfected security interest for the benefit of the
Noteholders in the assets in the Reserve Fund. However, to the extent that the
Company, any affiliate thereof or any other entity has an interest in any
Reserve Fund, in the event of the bankruptcy, receivership or insolvency of such
entity, there could be delays in withdrawals from the Reserve Fund and the
corresponding payments to the Noteholders. Such delays could adversely affect
the yield to investors on the related Notes.
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Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
Master Servicer or any other person named in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited to the
related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to the Master Servicer or another service provider as additional
compensation.
MAINTENANCE OF CREDIT ENHANCEMENT
If credit enhancement has been obtained for a series of Notes, the
Indenture Trustee or Master Servicer (as set forth in the related Agreement)
will be obligated to exercise its best reasonable efforts to keep or cause to be
kept such credit enhancement in full force and effect throughout the term of the
applicable Agreements, unless coverage thereunder has been exhausted through
payment of claims or otherwise, or substitution therefor is made as described
below under ' -- Reduction or Substitution of Credit Enhancement.' The Master
Servicer, on behalf of itself, the Indenture Trustee and Noteholders, will
provide the Indenture Trustee information required for the Indenture Trustee to
draw any applicable credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will agree to pay the premiums for each Financial Guaranty Insurance
Policy on a timely basis. In the event the related insurer ceases to be a
'QUALIFIED INSURER' because it ceases to be qualified under applicable law to
transact such insurance business or coverage is terminated for any reason other
than exhaustion of such coverage, the Master Servicer will use its best
reasonable efforts to obtain from another Qualified Insurer a comparable
replacement insurance policy or bond with a total coverage equal to the then
outstanding coverage of such policy or bond. If the cost of the replacement
policy is greater than the cost of such policy or bond, the coverage of the
replacement policy or bond will, unless otherwise agreed to by the Company, be
reduced to a level such that its premium rate does not exceed the premium rate
on the original insurance policy. Any losses in market value of the Notes
associated with any reduction or withdrawal in rating by an applicable Rating
Agency shall be borne by the Noteholders.
For Trust Assets secured by a lien on Mortgaged Property, if any property
securing such a defaulted Trust Asset is damaged and proceeds, if any, from the
related hazard insurance policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any Letter of Credit, the
Master Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to one or more classes of Noteholders on liquidation of such Trust
Asset after reimbursement of the Master Servicer for its expenses and (ii) that
such expenses will be recoverable by it through Liquidation Proceeds or
Insurance Proceeds. If recovery under any Letter of Credit or other credit
enhancement is not available because the Master Servicer has been unable to make
the above determinations, has made such determinations incorrectly or recovery
is not available for any other reason, the Master Servicer is nevertheless
obligated to follow such normal practices and procedures (subject to the
preceding sentence) as it deems necessary or advisable to realize upon the
defaulted Trust Asset and in the event such determination has been incorrectly
made, is entitled to reimbursement of its expenses in connection with such
restoration.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
The amount of credit support provided with respect to any series of Notes
and relating to various types of losses incurred may be reduced under certain
specified circumstances. In most cases, the amount available as credit support
will be subject to periodic reduction on a non-discretionary basis in accordance
with a schedule or formula set forth in the related Agreement. Additionally, in
most cases, such credit support may be replaced, reduced or terminated, and the
formula used in calculating the amount of coverage with respect to Bankruptcy
Losses, Special Hazard Losses or Fraud Losses may be changed, without the
consent of the Noteholders, upon the written assurance from each applicable
Rating Agency that the then-current rating of the related series of Notes will
not be adversely affected thereby. Furthermore, in the event that the credit
rating of any obligor under any applicable credit enhancement is downgraded, the
credit rating of each class of the related Notes may be downgraded to a
corresponding level, and, unless otherwise specified in the related Prospectus
Supplement, neither the Master Servicer nor the Company will be obligated to
obtain replacement credit support in order to restore the rating of the Notes.
The Master Servicer will also be permitted to replace such credit support with
other credit enhancement instruments issued by obligors whose credit ratings are
equivalent to such downgraded level and in lower amounts which would satisfy
such downgraded level, provided that the then-current rating of
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each class of the related series of Notes is maintained. Where the credit
support is in the form of a Reserve Fund, a permitted reduction in the amount of
credit enhancement will result in a release of all or a portion of the assets in
the Reserve Fund to the Company, the Master Servicer or such other person that
is entitled thereto. Any assets so released and any amount by which the credit
enhancement is reduced will not be available for payments in future periods.
PURCHASE OBLIGATIONS
Certain types of Trust Assets and certain classes of Notes of any series,
as specified in the related Prospectus Supplement, may be subject to a purchase
obligation (a 'PURCHASE OBLIGATION') that would become applicable on one or more
specified dates, or upon the occurrence of one or more specified events, or on
demand made by or on behalf of the applicable Noteholders. A Purchase Obligation
may be in the form of a conditional or unconditional purchase commitment,
liquidity facility, maturity guaranty, put option or demand feature. The terms
and conditions of each Purchase Obligation, including the purchase price, timing
and payment procedure, will be described in the related Prospectus Supplement. A
Purchase Obligation with respect to Trust Assets may apply to those Trust Assets
or to the related Notes. Each Purchase Obligation may be a secured or unsecured
obligation of the provider thereof, which may include a bank or other financial
institution or an insurance company. Each Purchase Obligation will be evidenced
by an instrument delivered to the Trustee for the benefit of the applicable
Noteholders of the related series. Each Purchase Obligation with respect to
Trust Assets will be payable solely to the Trustee for the benefit of the
Noteholders of the related series. Other Purchase Obligations may be payable to
the Trustee or directly to the holders of the Notes to which such obligations
relate.
DESCRIPTION OF FHA INSURANCE UNDER TITLE I
Certain of the Contracts contained in a Trust Fund may be loans insured
under the Title I Program (the 'TITLE I LOANS') as described below and in the
related Prospectus Supplement. The regulations, rules and procedures promulgated
by the FHA under the Title I (the 'FHA REGULATIONS') contain the requirements
under which lenders approved for participation in the Title I Program (the
'TITLE I LENDERS') may obtain insurance against a portion of losses incurred
with respect to eligible loans that have been originated and serviced in
accordance with FHA Regulations, subject to the amount of insurance coverage
available in such Title I Lender's FHA Reserve, as described below and in the
related Prospectus Supplement, and subject to the terms and conditions
established under the National Housing Act and FHA Regulations. While FHA
Regulations permit the Secretary of the Department of Housing and Urban
Development ('HUD'), subject to statutory limitations, to waive a Title I
Lender's noncompliance with FHA Regulations if enforcement would impose an
injustice on the lender (provided the Title I Lender has acted in good faith, is
in substantial compliance with FHA Regulations and has credited the borrower for
any excess charges), in general, an insurance claim against the FHA will be
denied if the Title I Loan to which it relates does not strictly satisfy the
requirements of the National Housing Act and FHA Regulations.
Unlike certain other government loan insurance programs, loans under the
Title I Program (other than loans in excess of $25,000) are not subject to prior
review by the FHA. Under the Title I Program, the FHA disburses insurance
proceeds with respect to defaulted loans for which insurance claims have been
filed by a Title I Lender prior to any review of such loans. A Title I Lender is
required to repurchase a Title I Loan from the FHA that is determined to be
ineligible for insurance after insurance claim payments for such loan have been
paid to such lender. Under the FHA Regulations, if the Title I Lender's
obligation to repurchase the Title I Loan is unsatisfied, the FHA is permitted
to offset the unsatisfied obligation against future insurance claim payments
owed by the FHA to such lender. FHA Regulations permit the FHA to disallow an
insurance claim with respect to any loan that does not qualify for insurance for
a period of up to two years after the claim is made and to require the Title I
Lender that has submitted the insurance claim to repurchase the loan.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or lot
(or cooperative interest therein) on which to place such home or the purchase of
both a manufactured home loan and the lot (or cooperative interest therein) on
which such home is placed.
Subject to certain limitations described below, eligible Title I Loans are
generally insured by the FHA for 90% of an amount equal to the sum of (i) the
net unpaid principal amount and the uncollected interest earned to
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the date of default, (ii) interest on the unpaid loan obligation from the date
of default to the date of the initial submission of the insurance claim, plus 15
calendar days (the total period not to exceed nine months) at a rate of 7% per
annum, (iii) uncollected court costs, (iv) title examination costs, (v) fees for
required inspections by the lenders or its agents, up to $75, and (vi)
origination fees up to a maximum of 5% of the loan amount. However, the
insurance coverage provided by the FHA is limited to the extent of the balance
in the Title I Lender's FHA Reserve maintained by the FHA. Accordingly if
sufficient insurance coverage is available in such FHA Reserve, then the Title I
Lender bears the risk of losses on a Title I Loan for which a claim for
reimbursement is paid by the FHA of at least 10% of the unpaid principal,
uncollected interest earned to the date of default, interest from the date of
default to the date of the initial claim submission and certain expenses. Unlike
most other FHA insurance programs, the obligation of the FHA to reimburse a
Title I Lender for losses in the portfolio of insured loans held by such Title I
Lender is limited to the amount in an FHA Reserve maintained on a
lender-by-lender basis and not on a loan-by-loan basis.
Under Title I, the FHA maintains an FHA insurance coverage reserve account
(a 'FHA RESERVE') for each Title I Lender. The amount in each Title I Lender's
FHA Reserve is a maximum of 10% of the amounts disbursed, advanced or expended
by a Title I Lender in originating or purchasing eligible loans registered with
the FHA for Title I insurance, with certain adjustments permitted or required by
FHA Regulations. The balance of such FHA Reserve is the maximum amount of
insurance claims the FHA is required to pay to the related Title I Lender. Title
I Loans to be insured under Title I will be registered for insurance by the FHA.
Following either the origination or transfer of loans eligible under Title I,
the Title I Lender will submit such loans for FHA insurance coverage within its
FHA Reserve by delivering a transfer of note report or through an electronic
submission to the FHA in the form prescribed under the FHA Regulations (the
'TRANSFER REPORT'). The increase in the FHA insurance coverage for such loans in
the Title I Lender's FHA Reserve will occur on the date following the receipt
and acknowledgement by the FHA of the Transfer Report for such loans. The
insurance available to any Trust Fund will be subject to the availability, from
time to time, of amounts in each Title I Lender's FHA Reserve, which will
initially be limited to the amount specified in the related Prospectus
Supplement (the 'FHA INSURANCE AMOUNT').
Under the Title I, the FHA will reduce the insurance coverage available in
a Title I Lender's FHA Reserve with the respect to loans insured under such
Title I Lender's contract of insurance by (i) the amount of FHA insurance claims
approved for payment related to such loans and (ii) the amount of reduction of
the Title I Lender's FHA Reserve by reason of the sale, assignment or transfer
of loans registered under the Title I Lender's contract of insurance. Such
insurance coverage also may be reduced for any FHA insurance claims previously
disbursed to the Title I Lender that are subsequently rejected by the FHA.
In general, the FHA will insure Home Improvement Contracts up to $25,000
for a single-family property, with a maximum term of 20 years. The FHA will
insure loans of up to $17,500 for manufactured homes which qualify as real
estate under applicable state law and loans of up to $12,000 per unit for a
$48,000 limit for four units for owner-occupied multiple-family homes. If the
loan amount is $15,000 or more, the FHA requires a drive-by appraisal, the
current tax assessment value, or a full Uniform Residential Appraisal Report
dated within 12 months of the closing to verify the property's value. The
maximum loan amount on transactions requiring an appraisal is the amount of
equity in the property shown by the market value determination of the property.
Following a default on a Home Improvement Contract partially insured by the
FHA, the Master Servicer, either directly or through a subsidiary, may, subject
to certain conditions, either commence foreclosure proceedings against the
improved property securing the loan, if applicable, or submit a claim to FHA,
but may submit a claim to FHA after proceeding against the improved property
only with the prior approval of the Secretary of HUD. The availability of FHA
Insurance following a default on a Contract is subject to a number of
conditions, including strict compliance with FHA Regulations in originating and
servicing the Contract. Failure to comply with FHA Regulations may result in a
denial of or surcharge on the FHA insurance claim. Prior to declaring a Contract
in default and submitting a claim to FHA, the Master Servicer must take certain
steps to attempt to cure the default, including personal contact with the
borrower either by telephone or in a meeting and providing the borrower with 30
days' written notice prior to declaration of default. FHA may deny insurance
coverage if the borrower's nonpayment is related to a valid objection to faulty
contractor performance. In such event, the Master Servicer or other entity as
specified in the related Prospectus Supplement will seek to obtain payment by or
a judgment against the borrower, and may resubmit the claim to FHA following
such a judgment.
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THE COMPANY
The Company is an indirect wholly-owned subsidiary of GMAC Mortgage, which
is a wholly-owned subsidiary of General Motors Acceptance Corporation. The
Company was incorporated in the State of Delaware on May 5, 1995. The Company
was organized for the purpose of acquiring first or junior lien home equity
mortgage loans, home improvement contracts, manufactured housing contracts and
mortgage securities and issuing securities backed by such mortgage loans,
contracts and mortgage securities. The Company anticipates that it will in many
cases have acquired Trust Assets indirectly through Residential Funding, which
is also an indirect wholly-owned subsidiary of GMAC Mortgage. The Company does
not have, nor is it expected in the future to have, any significant assets.
The Notes do not represent an interest in or an obligation of the Company.
The Company's only obligations with respect to a series of Notes will be
pursuant to certain limited representations and warranties made by the Company
or as otherwise provided in the related Prospectus Supplement.
The Company maintains its principal office at 8400 Normandale Lake
Boulevard, Suite 600, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000.
RESIDENTIAL FUNDING CORPORATION
If so specified in the related Prospectus Supplement, Residential Funding,
an affiliate of the Company, will act as the Master Servicer or Administrator
for a series of Notes.
Residential Funding buys mortgage loans under several loan purchase
programs from mortgage loan originators or sellers nationwide, including
affiliates, that meet its seller/servicer eligibility requirements and services
mortgage loans for its own account and for others. Residential Funding's
principal executive offices are located at 8400 Normandale Lake Boulevard, Suite
600, Minneapolis, Minnesota 55437. Its telephone number is (612) 832-7000.
Residential Funding conducts operations from its headquarters in Minneapolis and
from offices located in California, Colorado, Connecticut, Florida, Georgia,
Maryland, New York, North Carolina, Rhode Island and Texas. At March 31, 1997,
Residential Funding was master servicing a first lien loan portfolio of
approximately $34.8 billion and a second lien loan portfolio of approximately
$1.8 billion.
SERVICING OF TRUST ASSETS
The Master Servicer will be required to service and administer the Trust
Assets in a manner generally consistent with the terms of the servicing
agreement entered into by the Master Servicer with the Company, an affiliate of
the Company or other applicable entity (each, a 'SERVICING AGREEMENT') and the
Guide with respect to the Revolving Credit Loans or with respect to a Designated
Seller Transaction, as specified in the related Prospectus Supplement.
As to any series of Notes secured by Private Securities, the applicable
procedures for servicing of the related Revolving Credit Loans, Home Equity
Loans, Home Improvement Contracts and Manufactured Housing Contracts will be
described in the related Prospectus Supplement.
SUBSERVICING
In connection with any series of Securities the Master Servicer may enter
into one or more Subservicing Agreements. See 'Trust Asset
Program -- Subservicing.' Each Subservicer generally will be required to perform
the customary functions of a servicer, including but not limited to, collection
of payments from Mortgagors and remittance of such collections to the Master
Servicer; maintenance of escrow or impoundment accounts of Mortgagors for
payment of taxes, insurance and other items required to be paid by the Mortgagor
pursuant to the Trust Asset, if applicable; processing of assumptions or
substitutions (although, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer is generally required to exercise due-on-sale
clauses to the extent such exercise is permitted by law and would not adversely
affect insurance coverage); attempting to cure delinquencies; supervising
foreclosures; inspection and management of Mortgaged Properties under certain
circumstances; and maintaining accounting records relating to the Trust Assets.
The Subservicer may be required to make advances to the holder of any related
first mortgage loan to avoid or cure any delinquencies to the extent that doing
so would be prudent and necessary to protect the interests of the
Securityholders. A Subservicer also may be obligated to make advances to the
Master Servicer in respect of certain taxes and
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insurance premiums not paid on a timely basis by Mortgagors. The Subservicer
generally shall be responsible for performing all collection and other servicing
functions with respect to any delinquent loan or foreclosure proceeding. In
addition, the Subservicer is required to advance funds to cover any Draws made
on a Revolving Credit Loan subject to reimbursement by the entity specified in
the related Prospectus Supplement. No assurance can be given that the
Subservicers will carry out their advance or payment obligations with respect to
the Trust Assets. Unless otherwise specified in the related Prospectus
Supplement, a Subservicer may transfer its servicing obligations to another
entity that has been approved for participation in Residential Funding's loan
purchase programs, but only with the approval of the Master Servicer.
Each Subservicer will be required to agree to indemnify the Master Servicer
for any liability or obligation sustained by the Master Servicer in connection
with any act or failure to act by the Subservicer in its servicing capacity.
Each Subservicer is required to maintain a fidelity bond and an errors and
omissions policy with respect to its officers, employees and other persons
acting on its behalf or on behalf of the Master Servicer.
Each Subservicer will be required to service each Trust Asset pursuant to
the terms of the Subservicing Agreement for the entire term of such Trust Asset,
unless the Subservicing Agreement is earlier terminated by the Master Servicer
or unless servicing is released to the Master Servicer. Subject to applicable
law, the Master Servicer may have the right to terminate a Subservicing
Agreement immediately upon the giving of notice upon certain stated events,
including the violation of such Subservicing Agreement by the Subservicer, or up
to ninety days' notice to the Subservicer without cause upon payment of certain
amounts set forth in the Subservicing Agreement. Upon termination of a
Subservicing Agreement, the Master Servicer may act as servicer of the related
Trust Assets or enter into one or more new Subservicing Agreements. The Master
Servicer may agree with a Subservicer to amend a Subservicing Agreement. Any
amendments to a Subservicing Agreement or to a new Subservicing Agreement may
contain provisions different from those described above which are in effect in
the original Subservicing Agreements.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Subservicers, as the case may be,
will make reasonable efforts to collect all payments called for under the Trust
Assets and will, consistent with the related Servicing Agreement and any
applicable insurance policy, FHA insurance or other credit enhancement, follow
such collection procedures which shall be normal and usual in its general
mortgage servicing activities with respect to mortgage loans comparable to the
Trust Assets. Consistent with the foregoing, the Master Servicer may in its
discretion waive any prepayment charge in connection with the prepayment of a
Trust Asset or extend the Due Dates for payments due on a Trust Asset, provided
that the insurance coverage for such Trust Asset or any coverage provided by any
alternative credit enhancement will not be adversely affected thereby. With
respect to any series of Notes as to which the Trust Fund includes Private
Securities, the Master Servicer's servicing and administration obligations will
be pursuant to the terms of such Private Securities.
Under its Subservicing Agreement, a Subservicer is granted certain
discretion to extend relief to Mortgagors whose payments become delinquent. A
Subservicer may grant a period of temporary indulgence (generally up to three
months) to a Mortgagor or may enter into a liquidating plan providing for
repayment by the Mortgagor of delinquent amounts within six months from the date
of execution of the plan, in each case without the prior approval of the Master
Servicer. Other types of forbearance generally require Master Servicer approval.
Neither indulgence nor forbearance with respect to a Trust Asset will affect the
interest rate or rates used in calculating payments to Securityholders. See
'Description of the Notes -- Payments.'
In certain instances in which a Trust Asset is in default (or if default is
reasonably foreseeable), and if determined by the Master Servicer to be in the
best interests of the related Noteholders, the Master Servicer may permit
certain modifications of the Trust Asset or make forbearances on the Trust Asset
rather than proceeding with foreclosure or repossession (if applicable). In
making such determination, the estimated Realized Loss that might result if such
Trust Asset were liquidated would be taken into account. Such modifications may
have the effect of reducing the Mortgage Rate or extending the final maturity
date of the Trust Asset. Any such modified Trust Asset may remain in the related
Trust Fund, and the reduction in collections resulting from such modification
may result in reduced distributions of interest (or other amounts) on, or may
extend the final maturity of, one or more classes of the related Notes.
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In any case in which property subject to a Trust Asset is being conveyed by
the Mortgagor, the Master Servicer, directly or through a Subservicer, shall in
general be obligated, to the extent it has knowledge of such conveyance, to
exercise its rights to accelerate the maturity of such Trust Asset under any
due-on-sale clause applicable thereto, but only if the exercise of such rights
is permitted by applicable law and only to the extent it would not adversely
affect or jeopardize coverage under any applicable credit enhancement
arrangements. If the Master Servicer or Subservicer is prevented from enforcing
such due-on-sale clause under applicable law or if the Master Servicer or
Subservicer determines that it is reasonably likely that a legal action would be
instituted by the related Mortgagor to avoid enforcement of such due-on-sale
clause, the Master Servicer or Subservicer will enter into an assumption and
modification agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person will become liable under the
Mortgage Note subject to certain specified conditions. The original Mortgagor
may be released from liability on a Trust Asset if the Master Servicer or
Subservicer shall have determined in good faith that such release will not
adversely affect the ability to make full and timely collections on the related
Trust Asset. Any fee collected by the Master Servicer or Subservicer for
entering into an assumption or substitution of liability agreement will be
retained by the Master Servicer or Subservicer as additional servicing
compensation unless otherwise set forth in the related Prospectus Supplement.
See 'Certain Legal Aspects of Trust Assets and Related Matters -- Enforceability
of Certain Provisions' herein. In connection with any such assumption, the
Mortgage Rate borne by the related Mortgage Note may not be altered.
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. The Master Servicer or the related Subservicer may approve such
a request if it has determined, exercising its good faith business judgment in
the same manner as it would if it were the owner of the related Trust Asset,
that such approval will not adversely affect the security for, and the timely
and full collectability of, the related Trust Asset. Any fee collected by the
Master Servicer or the Subservicer for processing such request will be retained
by the Master Servicer or Subservicer as additional servicing compensation.
The Master Servicer is required to maintain a fidelity bond and errors and
omissions policy with respect to its officers and employees and other persons
acting on behalf of the Master Servicer in connection with its activities under
the Servicing Agreement. The Master Servicer may be subject to certain
restrictions under the Servicing Agreement with respect to the refinancing of a
lien senior to a Revolving Credit Loan, Home Equity Loan or a Contract secured
by a lien on the related Mortgaged Property.
REALIZATION UPON DEFAULTED LOANS
With respect to a Revolving Credit Loan, Home Equity Loan or a Contract
secured by a lien on a Mortgaged Property in default, the Master Servicer or the
related Subservicer will decide whether to foreclose upon the Mortgaged Property
or with respect to any such Trust Asset, write off the principal balance of the
Trust Asset as a bad debt or take an unsecured note. Realization on other
defaulted Contracts may be accomplished through repossession and subsequent
resale of the underlying Manufactured Home or Home Improvement. In connection
with such decision, the Master Servicer or the related Subservicer will,
following usual practices in connection with senior and junior mortgage
servicing activities or repossession and resale activities, estimate the
proceeds expected to be received and the expenses expected to be incurred in
connection with such foreclosure or repossession and resale to determine whether
a foreclosure proceeding or a repossession and resale is appropriate. To the
extent that a Revolving Credit Loan, Home Equity Loan or a Contract secured by a
lien on a Mortgaged Property is junior to another lien on the related Mortgaged
Property, following any default thereon, unless foreclosure proceeds for such
Trust Asset are expected to at least satisfy the related senior mortgage loan in
full and to pay foreclosure costs, it is likely that such Trust Asset will be
written off as bad debt with no foreclosure proceeding. See 'Risk
Factors -- Special Features of Certain Trust Assets Secured by Junior Liens on
Mortgaged Properties' herein. In the event that title to any Mortgaged Property
is acquired in foreclosure or by deed in lieu of foreclosure, the deed or
certificate of sale will be issued to the Indenture Trustee or to its nominee on
behalf of Noteholders. Notwithstanding any such acquisition of title and
cancellation of the related Trust Asset, such Revolving Credit Loan, Home Equity
Loan or Contract secured by a lien on a Mortgaged Property (an 'REO LOAN') will
be considered for most purposes to be an outstanding Trust Asset held in the
Trust Fund until such time as the Mortgaged Property is sold and all recoverable
Liquidation Proceeds and Insurance Proceeds have been received with respect to
such defaulted Trust Asset (a 'LIQUIDATED LOAN'). To
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the extent provided in the related Agreement and related Servicing Agreement,
any income (net of expenses and other than gains described below) received by
the Subservicer or the Master Servicer on such Mortgaged Property, prior to its
disposition will be deposited in the Custodial Account upon receipt and will be
available at such time for making payments to Noteholders.
With respect to a Revolving Credit Loan, Home Equity Loan or a Contract
secured by a lien on a Mortgaged Property in default, the Master Servicer may
pursue foreclosure (or similar remedies) subject to any senior lien positions
and certain other restrictions pertaining to junior loans as described under
'Certain Legal Aspects of Trust Assets and Related Matters -- Foreclosure on
Revolving Credit Loans, Home Equity Loans and Certain Contracts' concurrently
with pursuing any remedy for a breach of a representation and warranty. However,
the Master Servicer is not required to continue to pursue both such remedies if
it determines that one such remedy is more likely to result in a greater
recovery. Upon the first to occur of final liquidation and a repurchase or
substitution pursuant to a breach of a representation and warranty, such Trust
Asset will be removed from the related Trust Fund. The Master Servicer may elect
to treat a defaulted Trust Asset as having been finally liquidated if
substantially all amounts expected to be received in connection therewith have
been received. Any additional liquidation expenses relating to such Trust Asset
thereafter incurred will be reimbursable to the Master Servicer (or any
Subservicer) from any amounts otherwise payable to the related Noteholders, or
may be offset by any subsequent recovery related to such Trust Asset.
Alternatively, for purposes of determining the amount of related Liquidation
Proceeds to be paid to Noteholders, the amount of any Realized Loss or the
amount required to be drawn under any applicable form of credit enhancement, the
Master Servicer may take into account minimal amounts of additional receipts
expected to be received, as well as estimated additional liquidation expenses
expected to be incurred in connection with such defaulted Trust Asset.
With respect to certain series of Notes, if so provided in the related
Prospectus Supplement, the applicable form of credit enhancement may provide, to
the extent of coverage thereunder, that a defaulted Trust Asset or REO Loan will
be removed from the Trust Fund prior to the final liquidation thereof. In
addition, the Master Servicer will generally have the option to purchase from
the Trust Fund any defaulted Trust Asset after a specified period of
delinquency. If a defaulted Trust Asset or REO Loan is not so removed from the
Trust Fund, then, upon the final liquidation thereof, if a loss is realized
which is not covered by any applicable form of credit enhancement or other
insurance, the Noteholders will bear such loss. However, if a gain results from
the final liquidation of an REO Loan which is not required by law to be remitted
to the related Mortgagor, the Master Servicer will be entitled to retain such
gain as additional servicing compensation unless the related Prospectus
Supplement provides otherwise. For a description of the Master Servicer's
obligations to maintain and make claims under applicable forms of credit
enhancement and insurance relating to the Trust Assets, see 'Description of
Credit Enhancement' and 'Description of the Securities -- Hazard Insurance;
Claims Thereunder.'
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each series of Notes will be
equal to the percentage per annum described in the related Prospectus Supplement
(which may vary under certain circumstances). As compensation for its servicing
duties, a Subservicer or, if there is no Subservicer, the Master Servicer will
be entitled to a monthly servicing fee as described in the related Prospectus
Supplement, which may vary under certain circumstances from the amounts
described in the Prospectus Supplement. Certain Subservicers may also receive
additional compensation in the amount of all or a portion of the interest due
and payable on the applicable Trust Asset which is over and above the interest
rate specified at the time the Company or Residential Funding, as the case may
be, committed to purchase the Trust Asset. See 'Trust Asset
Program -- Subservicing.' Subservicers will be required to pay to the Master
Servicer an amount equal to one month's interest (net of its servicing or other
compensation) on the amount of any partial Principal Prepayment. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will retain such amounts to the extent collected from Subservicers. The Master
Servicer or a Subservicer will retain all prepayment charges, assumption fees
and late payment charges, to the extent collected from Mortgagors, and any
benefit which may accrue as a result of the investment of funds in the Custodial
Account or the applicable Payment Account (unless otherwise specified in the
related Prospectus Supplement) or in a Subservicing Account, as the case may be.
In addition, certain duties of the Master Servicer may be
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performed by an affiliate of the Master Servicer who will be entitled to
reasonable compensation therefor from the Trust Fund.
The Master Servicer (or, if specified in the related Agreement, the
Indenture Trustee on behalf of the applicable Trust Fund) will pay or cause to
be paid certain ongoing expenses associated with each Trust Fund and incurred by
it in connection with its responsibilities under the Servicing Agreement,
including, without limitation, payment of any fee or other amount payable in
respect of certain credit enhancement arrangements, payment of any FHA insurance
premiums, if applicable, payment of the fees and disbursements of the Indenture
Trustee, the Owner Trustee, any custodian, the Note Registrar and any Paying
Agent, and payment of expenses incurred in enforcing the obligations of
Subservicers and Designated Sellers. The Master Servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of Subservicers
and Designated Sellers under certain limited circumstances. In addition, as
indicated in the preceding section, the Master Servicer will be entitled to
reimbursements for certain expenses incurred by it in connection with Liquidated
Loans and in connection with the restoration of Mortgaged Properties, such right
of reimbursement being prior to the rights of Noteholders to receive any related
Liquidation Proceeds (including Insurance Proceeds).
EVIDENCE AS TO COMPLIANCE
Each Servicing Agreement will provide for delivery (on or before a
specified date in each year) to the Indenture Trustee of an annual statement
signed by an officer of the Master Servicer to the effect that the Master
Servicer has fulfilled in all material respects the minimum servicing standards
set forth in the audit guide for audits of non-supervised mortgagees approved by
the Department of Housing and Urban Development for use by independent public
accountants, the Uniform Single Attestation Program for Mortgage Bankers or the
Audit Program for Mortgages serviced for Federal Home Loan Mortgage Corporation
(each, an 'AUDIT GUIDE') throughout the preceding year or, if there has been a
material default in the fulfillment of any such obligation, such statement shall
specify each such known default and the nature and status thereof. Such
statement may be provided as a single form making the required statements as to
more than one Servicing Agreement.
Each Servicing Agreement will also provide that on or before a specified
date in each year, beginning the first such date that is at least a specified
number of months after the Cut-off Date, a firm of independent public
accountants will furnish a statement to the Company and the Indenture Trustee to
the effect that, on the basis of an examination by such firm conducted
substantially in compliance with the standards established by the American
Institute of Certified Public Accountants, the servicing of mortgage loans under
agreements (including the related Servicing Agreement) was conducted
substantially in compliance with the minimum servicing standards set forth in
the related Audit Guide (to the extent that procedures in such Audit Guide are
applicable to the servicing obligations set forth in such agreements) except for
such significant exceptions or errors in records that shall be reported in such
statement. In rendering its statement such firm may rely, as to the matters
relating to the direct servicing of mortgage loans by Subservicers, upon
comparable statements for examinations conducted substantially in compliance
with the related Audit Guide described above (rendered within one year of such
statement) of firms of independent public accountants with respect to those
Subservicers which also have been the subject of such an examination.
Copies of the annual statement of an officer of the Master Servicer may be
obtained by Noteholders without charge upon written request to the Master
Servicer, at the address indicated in the monthly statement to Noteholders.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
The Servicing Agreement for each series of Notes will provide that the
Master Servicer may not resign from its obligations and duties thereunder except
upon a determination that performance of such duties is no longer permissible
under applicable law or except in connection with a permitted transfer of
servicing. No such resignation will become effective until the Indenture Trustee
or a successor servicer has assumed the Master Servicer's obligations and duties
under the Servicing Agreement.
Each Servicing Agreement will also provide that, except as set forth below,
neither the Master Servicer, the Company nor any director, officer, employee or
agent of the Master Servicer or the Company will be under any liability to the
Trust Fund or the Noteholders for any action taken or for refraining from the
taking of any action in good faith pursuant to the Servicing Agreement, or for
errors in judgment; provided, however, that neither the
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Master Servicer, the Company nor any such person will be protected against any
liability which would otherwise be imposed by reason of willful misfeasance, bad
faith or gross negligence in the performance of duties or by reason of reckless
disregard of obligations and duties thereunder. Each Servicing Agreement will
further provide that the Master Servicer, the Company and any director, officer,
employee or agent of the Master Servicer or the Company is entitled to
indemnification by the Trust Fund (or the Special Purpose Entity, if applicable)
and will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Servicing Agreement or the
related series of Notes, other than any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. In addition, each Servicing Agreement will provide that the
Master Servicer and the Company will not be under any obligation to appear in,
prosecute or defend any legal or administrative action that is not incidental to
its respective duties under the Servicing Agreement and which in its opinion may
involve it in any expense or liability. The Master Servicer or the Company may,
however, in its discretion undertake any such action which it may deem necessary
or desirable with respect to the Servicing Agreement and the rights and duties
of the parties thereto and the interests of the Noteholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund (or the
Special Purpose Entity, if applicable) and the Master Servicer or the Company,
as the case may be will be entitled to be reimbursed therefor out of funds
otherwise payable to Noteholders.
Any person into which the Master Servicer may be merged or consolidated,
any person resulting from any merger or consolidation to which the Master
Servicer is a party or any person succeeding to the business of the Master
Servicer will be the successor of the Master Servicer under the Servicing
Agreement, provided that such person meets the requirements set forth in the
Servicing Agreement. In addition, notwithstanding the prohibition on its
resignation, the Master Servicer may assign its rights and delegate its duties
and obligations under a Servicing Agreement to any person reasonably
satisfactory to the Company and the Indenture Trustee and meeting the
requirements set forth in the related Servicing Agreement. In the case of any
such assignment, the Master Servicer will be released from its obligations under
such Servicing Agreement, exclusive of liabilities and obligations incurred by
it prior to the time of such assignment.
THE AGREEMENTS
The following summaries describe certain provisions of the Trust Agreement,
the Indenture and Servicing Agreement relating to a series of Notes (each, an
'AGREEMENT' and, collectively, the 'AGREEMENTS'). The summaries do not purport
to be complete and are qualified entirely by reference to the actual terms of
the Agreements relating to a series of Notes.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Servicing Agreement
A 'SERVICING DEFAULT' under the Servicing Agreement in respect of a series
of Securities, unless otherwise specified in the Prospectus Supplement,
generally will include: (i) any failure by the Master Servicer to make a
required deposit to the Custodial Account or the Payment Account or, if the
Master Servicer is the Paying Agent, to pay to the holders of any class of
Securities of such series any required payment which continues unremedied for
five business days after the giving of written notice of such failure to the
Master Servicer by the Indenture Trustee or the Issuer (or the majority holder
of the Ownership Interest in the Special Purpose Entity or the Credit Enhancer,
if applicable); (ii) any failure by the Master Servicer duly to observe or
perform in any material respect any other of its covenants or agreements in the
Servicing Agreement with respect to such series of Securities which continues
unremedied for 45 days after the giving of written notice of such failure to the
Master Servicer by the Indenture Trustee or the Issuer (or the majority holder
of the Ownership Interest in the Special Purpose Entity or the Credit Enhancer,
if applicable); (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings regarding the
Master Servicer and certain actions by the Master Servicer indicating its
insolvency or inability to pay its obligations and (iv) any other Servicing
Default as set forth in the Servicing Agreement. A default pursuant to the terms
of any Servicing Agreement relating to any Private Securities included in any
Trust Fund will not constitute an Event of Default under the related Trust
Agreement or Indenture.
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So long as a Servicing Default remains unremedied, either the Company or
the Indenture Trustee may (except as otherwise provided for in the related
Agreement with respect to the Special Purpose Entity or the Credit Enhancer, if
applicable), by written notification to the Master Servicer and to the Issuer or
the Indenture Trustee or Trust Fund, as applicable, terminate all of the rights
and obligations of the Master Servicer under the Servicing Agreement (other than
any right of the Master Servicer as Securityholder and other than the right to
receive servicing compensation, expenses for servicing the Trust Assets during
any period prior to the date of such termination, and such other reimbursement,
of amounts the Master Servicer is entitled to withdraw from the Custodial
Account) whereupon the Indenture Trustee will succeed to all responsibilities,
duties and liabilities of the Master Servicer under such Servicing Agreement
(other than the obligation to purchase Trust Assets under certain circumstances)
and will be entitled to similar compensation arrangements. In the event that the
Indenture Trustee would be obligated to succeed the Master Servicer but is
unwilling so to act, it may appoint (or if it is unable so to act, it shall
appoint) or petition a court of competent jurisdiction for the appointment of an
approved mortgage servicing institution with a net worth of at least $10,000,000
to act as successor to the Master Servicer under the Servicing Agreement (unless
otherwise set forth in the Servicing Agreement). Pending such appointment, the
Indenture Trustee is obligated to act in such capacity. The Indenture Trustee
and such successor may agree upon the servicing compensation to be paid, which
in no event may be greater than the compensation to the initial Master Servicer
under the Servicing Agreement.
Indenture
An 'EVENT OF DEFAULT' under the Indenture in respect of each series of
Notes, unless otherwise specified in the Prospectus Supplement, generally will
include: (i) a default for five days or more in the payment of any principal of
or interest on any Note of such series; (ii) failure to perform any other
covenant of the Company or the Trust Fund in the Indenture which continues for a
period of thirty days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement (and if the Credit
Enhancer defaults in the performance of its obligations, if applicable); (iii)
any representation or warranty made by the Company or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such series having been
incorrect in a material respect as of the time made, and such breach is not
cured within thirty days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iv) certain events
of bankruptcy, insolvency, receivership or liquidation of the Company or the
Trust Fund (and if the Credit Enhancer defaults in the performance of its
obligations, if applicable); or (v) any other Event of Default provided with
respect to Notes of that series.
If an Event of Default with respect to the Notes of any series at the time
outstanding occurs and is continuing, either the Indenture Trustee, the Credit
Enhancer (if applicable) or the holders of a majority of the then aggregate
outstanding amount of the Notes of such series may declare the principal amount
(or, if the Notes of that series are Accrual Notes, such portion of the
principal amount as may be specified in the terms of that series, as provided in
the related Prospectus Supplement) of all the Notes of such series to be due and
payable immediately. Such declaration may, under certain circumstances, be
rescinded and annulled by the holders of a majority in aggregate outstanding
amount of the related Notes.
If, following an Event of Default with respect to any series of Notes, the
Notes of such series have been declared to be due and payable, the Indenture
Trustee (with the consent of the Credit Enhancer, if applicable) may, in its
discretion, notwithstanding such acceleration, elect to maintain possession of
the collateral securing the Notes of such series and to continue to apply
payments on such collateral as if there had been no declaration of acceleration
if such collateral continues to provide sufficient funds for the payment of
principal of and interest on the Notes of such series as they would have become
due if there had not been such a declaration. In addition, the Indenture Trustee
may not sell or otherwise liquidate the collateral securing the Notes of a
series following an Event of Default, unless (a) the holders of 100% of the then
aggregate outstanding amount of the Notes of such series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding Notes of
such series (and to reimburse the Credit Enhancer, if applicable) at the date of
such sale or (c) the Indenture Trustee determines that such collateral would not
be sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such Notes had not been declared due and
payable, and the Indenture Trustee obtains
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the consent of the holders of 66 2/3% of the then aggregate outstanding amount
of the Notes of such series (and the Credit Enhancer, if applicable).
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default, the Indenture provides that the Indenture
Trustee will have a prior lien on the proceeds of any such liquidation for
unpaid fees and expenses. As a result, upon the occurrence of such an Event of
Default, the amount available for payments to the Noteholders would be less than
would otherwise be the case. However, the Indenture Trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the Noteholders after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount that is unamortized.
No Securityholder generally will have any right under a Trust Agreement or
Indenture to institute any proceeding with respect to such Agreement unless (a)
such holder previously has given to the Indenture Trustee written notice of
default and the continuance thereof, (b) the holders of Securities of any class
evidencing not less than 25% of the aggregate Percentage Interests constituting
such class (i) have made written request upon the Indenture Trustee to institute
such proceeding in its own name as Indenture Trustee thereunder and (ii) have
offered to the Indenture Trustee reasonable indemnity, (c) the Indenture Trustee
has neglected or refused to institute any such proceeding for 60 days after
receipt of such request and indemnity and (d) no direction inconsistent with
such written request has been given to the Indenture Trustee during such 60 day
period by the Holders of a majority of the Security Balances of such class
(except as otherwise provided for in the related Agreement with respect to the
Credit Enhancer). However, the Indenture Trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the applicable Agreement or
to institute, conduct or defend any litigation thereunder or in relation thereto
at the request, order or direction of any of the holders of Securities covered
by such Agreement, unless such Securityholders have offered to the Indenture
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
AMENDMENT
Unless otherwise stated in the related Prospectus Supplement, each
Agreement may be amended by the parties thereto (except as otherwise provided
for in the related Agreement with respect to the Credit Enhancer) without the
consent of the related Noteholders, (i) to cure any ambiguity; (ii) to correct
or supplement any provision therein which may be inconsistent with any other
provision therein or to correct any error; (iii) to change the timing and/or
nature of deposits in the Custodial Account or the Payment Account or to change
the name in which the Custodial Account is maintained (except that (a) deposits
to the Payment Account may not occur later than the related Payment Date, (b)
such change may not adversely affect in any material respect the interests of
any Securityholder, as evidenced by an opinion of counsel, and (c) such change
may not adversely affect the then-current rating of any rated Securities, as
evidenced by a letter from each applicable Rating Agency) as specified in the
related Prospectus Supplement; or (iv) to make any other provisions with respect
to matters or questions arising under such Agreement which are not materially
inconsistent with the provisions thereof, so long as such action will not
adversely affect in any material respect the interests of any Securityholder.
Unless otherwise stated in the related Prospectus Supplement, each
Agreement may also be amended by the parties thereto (except as otherwise
provided for in the related Agreement with respect to the Credit Enhancer) with
the consent of the holders of Securities of each class affected thereby
evidencing, in each case, not less than 66% of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Agreement or
of modifying in any manner the rights of the related Securityholders, except
that no such amendment may (i) reduce in any manner the amount of, or delay the
timing of, payments received on Trust Assets which are required to be paid on a
Security of any class without the consent of the holder of such Security, (ii)
impair the right of any Securityholder to institute suit for the enforcement of
the provisions of the Agreements or
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(iii) reduce the percentage of Securities of any class the holders of which are
required to consent to any such amendment unless the holders of all Securities
of such class have consented to the change in such percentage.
TERMINATION; REDEMPTION OF NOTES
Trust Agreement
The obligations created by the Trust Agreement for each series of
Securities (other than certain limited payment and notice obligations of the
Owner Trustee and the Company, respectively) will terminate upon the payment to
the related Securityholders (including, the Notes issued pursuant to the related
Indenture) of all amounts held by the Master Servicer and required to be paid to
such Securityholders following the earlier of (i) the final payment or other
liquidation or disposition (or any advance with respect thereto) of the last
Trust Asset subject thereto and all property acquired upon foreclosure or deed
in lieu of foreclosure of any Trust Asset and (ii) the purchase by the Master
Servicer or the Company from the Trust Fund (or from the Special Purpose Entity,
if applicable) for such series of all remaining Trust Assets and all property
acquired in respect of such Trust Assets.
Indenture
The Indenture will be discharged with respect to a series of Notes (except
with respect to certain continuing rights specified in the Indenture) upon the
distribution to Noteholders of all amounts required to be distributed pursuant
to the Indenture.
THE OWNER TRUSTEE
The Owner Trustee under the Trust Agreement will be named in the related
Prospectus Supplement. The commercial bank or trust company serving as Owner
Trustee may have normal banking relationships with the Company and/or its
affiliates, including Residential Funding.
The Owner Trustee may resign at any time, in which event the Administrator
or the Indenture Trustee will be obligated to appoint a successor owner trustee
as set forth in the Agreements. The Administrator or the Indenture Trustee may
also remove the Owner Trustee if the Owner Trustee ceases to be eligible to
continue as such under the Trust Agreement or if the Owner Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Administrator or the
Indenture Trustee will be obligated to appoint a successor Owner Trustee. Any
resignation or removal of the Owner Trustee and appointment of a successor Owner
Trustee will not become effective until acceptance of the appointment by the
successor Owner Trustee.
THE INDENTURE TRUSTEE
The Indenture Trustee under the Indenture will be named in the related
Prospectus Supplement. The commercial bank or trust company serving as Indenture
Trustee may have normal banking relationships with the Company and/or its
affiliates, including Residential Funding.
The Indenture Trustee may resign at any time, in which event the Company,
the Owner Trustee or the Administrator will be obligated to appoint a successor
indenture trustee as set forth in the Indenture. The Company, the Owner Trustee
or the Administrator as set forth in the Indenture may also remove the Indenture
Trustee if the Indenture Trustee ceases to be eligible to continue as such under
the Indenture or if the Indenture Trustee becomes insolvent. Upon becoming aware
of such circumstances, the Company, the Owner Trustee or the Administrator will
be obligated to appoint a successor Indenture Trustee. If so specified in the
Indenture, the Indenture Trustee may also be removed at any time by the holders
of a majority principal balance of the Notes. Any resignation or removal of the
Indenture Trustee and appointment of a successor Indenture Trustee will not
become effective until acceptance of the appointment by the successor Indenture
Trustee.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a Note will depend on the price paid by the holder
for such Note, the Interest Rate on any such Note entitled to payments of
interest (which Interest Rate may vary if so specified in the related Prospectus
Supplement) and the rate and timing of principal payments (including payments in
excess of required
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installments, prepayments or terminations, liquidations and repurchases) on the
Trust Assets and the rate and timing of Draws (if applicable) and the allocation
thereof to reduce the principal balance of such Note (or notional amount
thereof, if applicable).
The amount of interest payments on a Trust Asset made monthly to holders of
a class of Notes entitled to payments of interest will be calculated on the
basis of such class's specified percentage of each such payment of interest (or
accrual in the case of Accrual Notes) and will be expressed as a fixed,
adjustable or variable Interest Rate payable on the outstanding principal
balance or notional amount of such Note, or any combination of such Interest
Rates, calculated as described herein and in the related Prospectus Supplement.
See 'Description of the Notes -- Payments.' Holders of Strip Notes or a class of
Notes having a Interest Rate that varies based on the weighted average Mortgage
Rate of the underlying Trust Assets will be affected by disproportionate
prepayments and repurchases of Trust Assets having higher Net Mortgage Rates or
rates applicable to the Strip Notes, as applicable.
The effective yield to maturity to each holder of Notes entitled to
payments of interest will be below that otherwise produced by the applicable
Interest Rate and purchase price of such Note to the extent that interest
accrues on each Trust Asset during the calendar month or a period preceding a
Payment Date instead of through the day immediately preceding such Payment Date.
A class of Notes may be entitled to payments of interest at a variable or
adjustable Interest Rate, or any combination of such Interest Rates, as
specified in the related Prospectus Supplement. A variable Interest Rate may be
calculated based on the weighted average of the Mortgage Rates (net of Servicing
Fees and any Excess Spread or Excluded Spread) of the related Trust Assets (the
'NET MORTGAGE RATE') or certain balances thereof for the month preceding the
Payment Date, by reference to an index or otherwise. The aggregate payments of
interest on a class of Notes, and the yield to maturity thereon, will be
affected by the rate of payment of principal on the Notes (or the rate of
reduction in the notional amount of Notes entitled to payments of interest
only). The yield on the Notes will also be affected by liquidations of Trust
Assets following Mortgagor defaults and by purchases of Trust Assets in the
event of certain breaches of representations made in respect of such Trust
Assets. See 'Trust Asset Program -- Representations Relating to Trust Assets'
and 'Description of the Notes -- Assignment of Trust Assets' above. In addition,
if the index used to determine the Interest Rate for the Notes is different than
the Index applicable to the Mortgage Rates, the yield on the Notes will be
sensitive to changes in the index related to the Interest Rate and the yield on
the Notes may be reduced by application of a cap on the Interest Rate based on
the weighted average of the Net Mortgage Rates or such other formulas as may be
set forth in the related Prospectus Supplement.
In general, if a Note is purchased at a premium over its face amount and
payments of principal on such Note occur at a rate faster than anticipated at
the time of purchase, the purchaser's actual yield to maturity will be lower
than that assumed at the time of purchase. Conversely, if a Note is purchased at
a discount from its face amount and payments of principal on such Note occur at
a rate slower than that assumed at the time of purchase, the purchaser's actual
yield to maturity will be lower than that originally anticipated. If Strip Notes
are issued evidencing a right to payments of interest only or disproportionate
payments of interest, a faster than expected rate of principal payments on the
Trust Assets (net of Draws, if applicable) will negatively affect the total
return to investors in any such Notes. The yield on a class of Strip Notes that
is entitled to receive payments of interest only will nevertheless be affected
by any losses on the related Trust Assets because of the effect on the timing
and amount of payments. In certain circumstances, rapid principal payments on
the Trust Assets (net of Draws, if applicable) may result in the failure of such
holders to recoup their original investment. If Strip Notes are issued
evidencing a right to payments of principal only or disproportionate payments of
principal, a slower than expected rate of principal payments on the Trust Assets
(net of Draws, if applicable) could negatively affect the anticipated yield on
such Strip Notes. In addition, the total return to investors of Notes evidencing
a right to payments of interest at a rate that is based on the weighted average
Net Mortgage Rate of the Trust Assets from time to time will be adversely
affected by principal payments on Trust Assets with Mortgage Rates higher than
the weighted average Mortgage Rate on the Trust Assets. In general, mortgage
loans with higher Mortgage Rates or Gross Margins are likely to prepay at a
faster rate than mortgage loans with lower Mortgage Rates or Gross Margins. In
addition, the yield to maturity on certain other types of classes of Notes,
including Accrual Notes, Notes with a Interest Rate that fluctuates inversely
with or at a multiple of an index or certain other classes in a series including
more than one class of Notes, may be relatively more sensitive to the rate of
principal payments on the related Trust Assets (net of Draws if applicable) than
other classes of Notes.
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The outstanding principal balances of manufactured housing contracts, home
equity loans and home improvement contracts are, in general, much smaller than
traditional first lien mortgage loan balances, and the original terms to
maturity of such contracts are generally shorter than those of traditional first
lien mortgage loans. As a result, changes in interest rates will not affect the
monthly payments on manufactured housing contracts and home improvement
contracts to the same degree that changes in mortgage interest rates will affect
the monthly payments on such mortgage loans. Consequently, the effect of changes
in prevailing interest rates on the prepayment rates on manufactured housing
contracts and home improvement contracts may not be similar to the effects of
such changes on mortgage loan prepayment rates, or such effects may be similar
to the effects of such changes on mortgage loan prepayment rates, but to a
smaller degree.
The timing of changes in the rate of principal payments on a Note may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments experienced over time is consistent with an
investor's expectation. In general, the earlier a payment of principal on a
Note, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments occurring at a
rate higher (or lower) than the rate anticipated by the investor during the
period immediately following the issuance of a series of Notes would not be
fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
The rate and timing of defaults on the Trust Assets will also affect the
rate and timing of principal payments on the Trust Assets and thus the yield on
the related Notes. For a general discussion of the risk of defaults on the Trust
Assets, see 'Risk Factors' herein. There can be no assurance as to the rate of
losses or delinquencies on any of the Trust Assets, however, such losses and
delinquencies may be expected to be higher than those of traditional first lien
mortgage loans. To the extent that any losses are incurred on any of the Trust
Assets that are not covered by the applicable credit enhancement, holders of
Notes of the series evidencing interests in the related Pool (or certain classes
thereof) will bear all risk of such losses resulting from default by Mortgagors.
See 'Risk Factors -- Limitations, Reduction and Substitution of Credit
Enhancement' herein. Even where the applicable credit enhancement covers all
losses incurred on the Trust Assets, the effect of losses may be to increase
prepayment experience on the Trust Assets, thus reducing average weighted life
and affecting yield to maturity.
With respect to certain Trust Assets, the Mortgage Rate at origination may
be below the rate that would result from the sum of the then-applicable Index
and Gross Margin. Under the applicable underwriting standards, Mortgagors are
generally qualified based on an assumed payment which reflects a rate
significantly lower than the maximum rate. The repayment of any such Trust Asset
may thus be dependent on the ability of the mortgagor to make larger interest
payments following the adjustment of the Mortgage Rate.
As discussed under 'Risk Factors -- Special Features of Certain Trust
Assets Secured by Junior Liens on Mortgaged Properties -- Revolving Credit Loan
Characteristics,' the Revolving Credit Loans are not expected to significantly
amortize prior to maturity. As a result, a borrower will generally be required
to pay a substantial principal amount at the maturity of a Revolving Credit
Loan. Such Revolving Credit Loans pose a greater risk of default than
fully-amortizing Revolving Credit Loans, because the Mortgagor's ability to make
such a substantial payment at maturity will generally depend on the Mortgagor's
ability to obtain refinancing of such Revolving Credit Loans or to sell the
Mortgaged Property prior to the maturity of the Revolving Credit Loan. The
ability to obtain refinancing will depend on a number of factors prevailing at
the time refinancing or sale is required, including, without limitation, the
Mortgagor's personal economic circumstances, the Mortgagor's equity in the
related Mortgaged Property, real estate values, prevailing market interest
rates, tax laws and national and regional economic conditions. For a general
discussion of factors that may affect a Mortgagor's personal economic
circumstances, see 'Risk Factors -- Special Features of Certain Trust Assets
Secured by Junior Liens on Mortgaged Properties -- Mortgagor Credit' herein.
Unless otherwise specified in the related Prospectus Supplement, neither the
Company, Residential Funding, GMAC Mortgage nor any of their affiliates will be
obligated to refinance or repurchase any Trust Asset or to sell any Mortgaged
Property.
For any Revolving Credit Loans, Home Equity Loans and any Contracts secured
by junior mortgages, any inability of the Mortgagor to pay off the balance
thereof may also affect the ability of the Mortgagor to obtain refinancing at
any time of any related senior mortgage loan, thereby preventing a potential
improvement in the Mortgagor's circumstances. Furthermore, if so specified in
the related Prospectus Supplement, under the Servicing Agreement the Master
Servicer may be restricted or prohibited from consenting to any refinancing of
any related senior mortgage loan, which in turn could adversely affect the
Mortgagor's circumstances or result in
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a prepayment or default under the corresponding junior Revolving Credit Loan,
Home Equity Loan or Contract, as applicable.
In addition to the Mortgagor's personal economic circumstances, a number of
factors, including homeowner mobility, job transfers, changes in the Mortgagor's
housing needs, the Mortgagor's net equity in the Mortgaged Property, changes in
the value of the Mortgaged Property, national and regional economic conditions,
enforceability of due-on-sale clauses, prevailing market interest rates,
servicing decisions, solicitations and the availability of mortgage funds,
seasonal purchasing and payment habits of borrowers or changes in the
deductibility for federal income tax purposes of interest payments on home
equity loans, may affect the rate and timing of principal payments on the Trust
Assets or Draws on the Revolving Credit Loans. For a discussion of certain
factors that may affect national and regional economic conditions, see 'Risk
Factors -- Special Features of Certain Trust Assets Secured by Junior Liens on
Mortgaged Properties -- Mortgagor Credit' herein. There can be no assurance as
to the rate of principal payments or Draws on the Revolving Credit Loans. The
Trust Assets generally may be prepaid in full or in part without penalty. The
Company has no significant experience with respect to the rate of principal
prepayments on home improvement contracts or manufactured housing contracts, but
generally expects that prepayments on home improvement contracts will be higher
than certain other Trust Assets due to the possibility of increased property
value resulting from the home improvement and greater refinance options. The
Company generally expects that prepayments on manufactured housing contracts
will be lower than on other Trust Assets because manufactured housing contracts
may have less refinance options. The rate of principal payments and the rate of
Draws (if applicable) may fluctuate substantially from time to time. Generally,
home equity loans are not viewed by mortgagors as permanent financing. Due to
the unpredictable nature of both principal payments and Draws, the rates of
principal payments net of Draws for such loans may be much more volatile than
for typical first lien mortgage loans.
The yield to maturity of the Notes of any series, or the rate and timing of
principal payments or Draws (if applicable) on the related Trust Assets, may
also be affected by a wide variety of specific terms and conditions applicable
to the respective programs under which the Trust Assets were originated. For
example, the Revolving Credit Loans may provide for future Draws to be made only
in specified minimum amounts, or alternatively may permit Draws to be made by
check or through a credit card in any amount. A pool of Revolving Credit Loans
subject to the latter provisions may be likely to remain outstanding longer with
a higher aggregate principal balance than a pool of Revolving Credit Loans with
the former provisions, because of the relative ease of making new Draws.
Furthermore, the Trust Assets may provide for interest rate changes on a daily
or monthly basis, or may have Gross Margins that may vary under certain
circumstances over the term of the loan. In extremely high market interest rate
scenarios, Notes backed by Trust Assets with adjustable rates subject to
substantially higher maximum rates than typically apply to adjustable rate first
mortgage loans may experience rates of default and liquidation substantially
higher than those that have been experienced on other adjustable rate mortgage
loan pools.
The yield to maturity of the Notes of any series, or the rate and timing of
principal payments on the Trust Assets or Draws on the related Revolving Credit
Loans and corresponding payments on the Notes, will also be affected by the
specific terms and conditions applicable to the Notes. For example, if the index
used to determine the Interest Rates for a series of Notes is different from the
Index applicable to the Mortgage Rates of the underlying Trust Assets, the yield
on the Notes may be reduced by application of a cap on the Interest Rates based
on the weighted average of the Mortgage Rates. Depending on applicable cash flow
allocation provisions, changes in the relationship between the two indexes may
also affect the timing of certain principal payments on the Notes, or may affect
the amount of any Overcollateralization (or the amount on deposit in any Reserve
Fund) which could in turn accelerate the payment of principal on the Notes if so
provided in the Prospectus Supplement. For any series of Notes backed by
Revolving Credit Loans, provisions governing whether future Draws on the
Revolving Credit Loans will be included in the Trust Fund will have a
significant effect on the rate and timing of principal payments on the Notes.
The yield to maturity of the Notes of any series, or the rate and timing of
principal payments on the Trust Assets may also be affected by the risks
associated with certain Trust Assets. See 'Risk Factors -- Risks Associated with
Certain Trust Assets' herein and 'Risk Factors' in the related Prospectus
Supplement.
As a result of the payment terms of the Revolving Credit Loans or of the
Note provisions relating to future Draws, there may be no principal payments on
such Notes in any given month. In addition, it is possible that the aggregate
Draws on Revolving Credit Loans included in a Pool may exceed the aggregate
payments with respect
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to principal on such Revolving Credit Loans for the related period. If specified
in the related Prospectus Supplement, a series of Notes may provide for a period
during which all or a portion of the principal collections on the Revolving
Credit Loans are reinvested in Additional Balances or are accumulated in a trust
account pending commencement of an amortization period with respect to the
Notes.
Unless otherwise specified in the related Prospectus Supplement, Revolving
Credit Loans generally will and Home Equity Loans and, as applicable, Contracts
may contain due-on-sale provisions permitting the mortgagee to accelerate the
maturity of such Trust Asset upon sale or certain transfers by the Mortgagor of
the underlying Mortgaged Property. Unless the related Prospectus Supplement
indicates otherwise, the Master Servicer will generally enforce any due-on-sale
clause to the extent it has knowledge of the conveyance or proposed conveyance
of the underlying Mortgaged Property and it is entitled to do so under
applicable law; provided, however, that the Master Servicer will not take any
action in relation to the enforcement of any due-on-sale provision that would
adversely affect or jeopardize coverage under any applicable insurance policy.
Adjustable Rate Home Equity Loans and, as applicable, Contracts may be assumable
under certain conditions if the proposed transferee of the related Mortgaged
Property establishes its ability to repay such Trust Asset and, in the
reasonable judgment of the Master Servicer or the related Subservicer, the
security for such Trust Asset would not be impaired by the assumption. The
extent to which Trust Assets are assumed by purchasers of the Mortgaged
Properties rather than prepaid by the related Mortgagors in connection with the
sales of the Mortgaged Properties will affect the weighted average life of the
related series of Notes. See 'Servicing of Trust Assets -- Collection and Other
Servicing Procedures' and 'Certain Legal Aspects of the Trust Assets and Related
Matters -- Enforceability of Certain Provisions' for a description of certain
provisions of the Servicing Agreement and certain legal developments that may
affect the prepayment experience on the Trust Assets.
In addition, certain Private Securities included in a Pool may be backed by
underlying Trust Assets having differing interest rates. Accordingly, the rate
at which principal payments are received on the related Notes will, to a certain
extent, depend on the interest rates on such underlying Trust Assets.
A Subservicer or the Master Servicer may allow the refinancing of a Trust
Asset in any Trust Fund by accepting prepayments thereon and permitting a new
loan to the same borrower secured by a mortgage on the same property, which may
be originated by the Subservicer or the Master Servicer or any of their
respective affiliates or by an unrelated entity. In the event of such a
refinancing, the new loan would not be included in the related Trust Fund and,
therefore, such refinancing would have the same effect as a prepayment in full
of the related Trust Asset. A Subservicer or the Master Servicer may, from time
to time, implement programs designed to encourage refinancing. Such programs may
include, without limitation, modifications of existing loans, general or
targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. Targeted
solicitations may be based on a variety of factors, including the credit of the
borrower or the location of the mortgaged property. In addition, Subservicers or
the Master Servicer may encourage assumptions of Trust Assets, including
defaulted Trust Assets, under which creditworthy borrowers assume the
outstanding indebtedness of such Trust Assets which may be removed from the
related Pool. As a result of such programs, with respect to the Pool underlying
any Trust Fund (i) the rate of principal prepayments of the Trust Assets in such
Pool may be higher than would otherwise be the case, and (ii) in some cases, the
average credit or collateral quality of the Trust Assets remaining in the Pool
may decline.
If the applicable Agreement for a series of Notes provides for a Funding
Account or other means of funding the transfer of additional Trust Assets to the
related Trust, as described under 'Description of the Notes -- Funding Account'
herein, and the Trust is unable to acquire such additional Trust Assets within
any applicable time limit, the amounts set aside for such purpose may be applied
as principal payments on one or more classes of Notes of such series. In
addition, if the Trust Fund for a series of Notes includes Additional Balances
and the rate at which such Additional Balances are generated decreases, the rate
and timing of principal payments on the Notes will be affected and the weighted
average life of the Notes will vary accordingly. The rate at which Additional
Balances are generated may be affected by a variety of factors. See 'Risk
Factors -- Yield and Prepayment Considerations.'
Although the Mortgage Rates on Revolving Credit Loans will and certain
Trust Assets may be subject to periodic adjustments, such adjustments generally
(i) will not increase such Mortgage Rates over a fixed maximum rate during the
life of any Trust Asset and (ii) will be based on an Index (which may not rise
and fall consistently with prevailing market interest rates) plus the related
Gross Margin (which may vary under certain circumstances, and which may be
different from margins being used at the time for newly originated adjustable
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rate mortgage loans). As a result, the Mortgage Rates on the Trust Assets in any
Pool at any time may not equal the prevailing rates for similar, newly
originated adjustable rate home equity mortgage loans, lines of credit, home
improvement loans or manufactured housing contracts and accordingly the rate of
principal payments and Draws (if applicable) may be lower or higher that would
otherwise be anticipated. In certain rate environments, the prevailing rates on
fixed-rate mortgage loans may be sufficiently low in relation to the
then-current Mortgage Rates on Trust Assets that the rate of prepayment may
increase as a result of refinancings. There can be no certainty as to the rate
of principal payments on the Trust Assets or Draws on the Revolving Credit Loans
during any period or over the life of any series of Notes.
With respect to any index used in determining the Interest Rates for a
series of Notes or Mortgage Rates of the underlying Trust Assets, a number of
factors affect the performance of such index and may cause such index to move in
a manner different from other indices. To the extent that such index may reflect
changes in the general level of interest rates less quickly than other indices,
in a period of rising interest rates, increases in the yield to Noteholders due
to such rising interest rates may occur later than that which would be produced
by other indices, and in a period of declining rates, such index may remain
higher than other market interest rates which may result in a higher level
prepayments of the Trust Assets, which adjust in accordance with such index,
than of mortgage loans which adjust in accordance with other indices.
Under certain circumstances, the Master Servicer, the Company or, if
specified in the related Prospectus Supplement, another person may have the
option to purchase the Trust Assets in a Trust Fund, thus resulting in the early
retirement of the related Notes. See 'The Agreements -- Termination; Redemption
of Notes.'
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CERTAIN LEGAL ASPECTS OF THE TRUST ASSETS
AND RELATED MATTERS
The following discussion contains summaries of certain legal aspects of the
Trust Assets that are general in nature. Because such legal aspects are governed
in part by state law (which laws may differ from state to state), the summaries
do not purport to be complete, to reflect the laws of any particular state or to
encompass the laws of all states in which the Trust Assets may be situated.
These legal aspects are in addition to the requirements of any applicable FHA
Regulations described in 'Description of FHA Insurance' herein and in the
related Prospectus Supplement with respect to the Contracts partially insured by
FHA pursuant to Title I. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Revolving
Credit Loans, Home Equity Loans, Home Improvement Contracts and Manufactured
Housing Contracts.
GENERAL; TRUST ASSETS SECURED BY MORTGAGES ON MORTGAGED PROPERTY
The Revolving Credit Loans and Home Equity Loans will and, if applicable,
Contracts (in each case other than Cooperative Loans) may be secured by either
deeds of trust, mortgages or deeds to secure debt, depending upon the prevailing
practice in the state in which the related Mortgaged Property is located, and
may have first, second or third priority. Mortgages and deeds to secure debt are
herein referred to as 'mortgages.' Manufactured Housing Contracts evidence both
the obligation of the obligor to repay the loan evidenced thereby and grant a
security interest in the related Manufactured Homes to secure repayment of such
loan. However, as Manufactured Homes have become larger and often have been
attached to their sites without any apparent intention by the borrowers to move
them, courts in many states have held that Manufactured Homes may, under certain
circumstances become subject to real estate title and recording laws. See
' -- Manufactured Housing Contracts' below. In some states, a mortgage or deed
of trust creates a lien upon the real property encumbered by the mortgage or
deed of trust. However, in other states, the mortgage or deed of trust conveys
legal title to the property respectively, to the mortgagee or to a trustee for
the benefit of the mortgagee subject to a condition subsequent (i.e., the
payment of the indebtedness secured thereby). The lien created by the mortgage
or deed of trust is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers. Priority between
mortgages depends on their terms or on the terms of separate subordination or
inter-creditor agreements, the knowledge of the parties in some cases and
generally on the order of recordation of the mortgage in the appropriate
recording office. There are two parties to a mortgage, the mortgagor, who is the
borrower and homeowner, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. In the case of a land trust, there are three parties because title to
the property is held by a land trustee under a land trust agreement of which the
borrower is the beneficiary; at origination of a mortgage loan, the borrower
executes a separate undertaking to make payments on the mortgage note. Although
a deed of trust is similar to a mortgage, a deed of trust has three parties: the
trustor who is the borrower-homeowner; the beneficiary who is the lender; and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. The
trustee's authority under a deed of trust, the grantee's authority under a deed
to secure debt and the mortgagee's authority under a mortgage are governed by
the law of the state in which the real property is located, the express
provisions of the deed of trust or mortgage, and, in certain deed of trust
transactions, the directions of the beneficiary.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of Notes,
the Revolving Credit Loans, Home Equity Loans and Contracts may include
Cooperative Loans. Each debt instrument (a 'COOPERATIVE NOTE') evidencing a
Cooperative Loan will be secured by a security interest in shares issued by the
related corporation (a 'COOPERATIVE') that owns the related apartment building,
which is a corporation entitled to be treated as a housing cooperative under
federal tax law, and in the related proprietary lease or occupancy agreement
granting exclusive rights to occupy a specific dwelling unit in the
Cooperative's building. The security agreement will create a lien upon the
shares of the Cooperative, the priority of which will depend on, among other
things, the terms of the particular security agreement as well as the order of
recordation and/or filing of the agreement (or financing statements related
thereto) in the appropriate recording office.
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Unless otherwise specified in the related Prospectus Supplement, all
Cooperative buildings relating to the Cooperative Loans are located in the State
of New York. Generally, each Cooperative owns in fee or has a leasehold interest
in all the real property and owns in fee or leases the building and all separate
dwelling units therein. The Cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is an underlying
mortgage (or mortgages) on the Cooperative's building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the Cooperative, as mortgagor or lessor, as the case may be, is also
responsible for fulfilling such mortgage or rental obligations. An underlying
mortgage loan is ordinarily obtained by the Cooperative in connection with
either the construction or purchase of the Cooperative's building or the
obtaining of capital by the Cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that Cooperative is the
landlord is generally subordinate to the interest of the holder of an underlying
mortgage and to the interest of the holder of a land lease. If the Cooperative
is unable to meet the payment obligations (i) arising under an underlying
mortgage, the mortgagee holding an underlying mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements or (ii) arising under its land lease, the holder of the landlord's
interest under the land lease could terminate it and all subordinate proprietary
leases and occupancy agreements. In addition, an underlying mortgage on a
Cooperative may provide financing in the form of a mortgage that does not fully
amortize, with a significant portion of principal being due in one final payment
at maturity. The inability of the Cooperative to refinance a mortgage and its
consequent inability to make such final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land,
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
a foreclosure by the holder of an underlying mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the mortgagee who financed the purchase by an individual
tenant-stockholder of shares of the Cooperative or, in the case of the Revolving
Credit Loans and the Home Equity Loans, the collateral securing the Cooperative
Loans.
Each Cooperative is owned by shareholders (referred to as
tenant-stockholders) who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. Generally, a tenant-stockholder
of a Cooperative must make a monthly payment to the Cooperative pursuant to the
proprietary lease, which payment represents such tenant-stockholder's pro rata
share of the Cooperative's payments for its underlying mortgage, real property
taxes, maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights may be financed
through a Cooperative Loan evidenced by a Cooperative Note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related shares of the related Cooperative.
The mortgagee generally takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the mortgagee's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the Cooperative Note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares. See ' -- Foreclosure on Shares of Cooperatives' below.
TAX ASPECTS OF COOPERATIVE OWNERSHIP
In general, a 'tenant-stockholder' (as defined in Section 216(b)(2) of the
Code) of a corporation that qualifies as a 'cooperative housing corporation'
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation representing
his proportionate share of certain interest expenses and certain real estate
taxes allowable as a deduction under Section 216(a) of the Code to the
corporation under Sections 163 and 164 of the Code. In order for a corporation
to qualify under Section 216(b)(1) of the Code for its taxable year in which
such items are allowable as a deduction to the corporation, such section
requires, among other things, that at least 80% of the gross income of the
corporation be derived from its tenant-stockholders. By virtue of this
requirement, the status of a corporation for purposes of Section 216(b)(1) of
the Code must be determined on a year-to-year basis. Consequently, there can be
no assurance that Cooperatives relating to the Cooperative Loans will qualify
under such section for any particular
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year. In the event that such a Cooperative fails to qualify for one or more
years, the value of the collateral securing any related Cooperative Loans could
be significantly impaired because no deduction would be allowable to
tenant-stockholders under Section 216(a) of the Code with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that such a failure would be permitted to continue over
a period of years appears remote.
MANUFACTURED HOUSING CONTRACTS
Except as set forth below, under the laws of most states, manufactured
housing constitutes personal property and is subject to the motor vehicle
registration laws of the state or other jurisdiction in which the unit is
located. In the few states in which certificates of title are not required for
manufactured homes, security interests are perfected by the filing of a
financing statement under Article 9 of the UCC, which has been adopted by all
states. Such financing statements are effective for five years and must be
renewed prior to the end of each five year period. The certificate of title laws
adopted by the majority of states provide that ownership of motor vehicles and
manufactured housing shall be evidenced by a certificate of title issued by the
motor vehicles department (or a similar entity) of such state. In the states
that have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law.
The Master Servicer will be required under the related agreement to effect
such notation or delivery of the required documents and fees, and to obtain
possession of the certificate of title, as appropriate under the laws of the
state in which any Manufactured Home is registered. In the event the Master
Servicer fails, due to clerical errors or otherwise, to effect such notation or
delivery, or files the security interest under the wrong law (for example, under
a motor vehicle title statute rather than under the UCC, in a few states), the
Indenture Trustee may not have a first priority perfected security interest in
the Manufactured Home securing a Manufactured Housing Contract. As Manufactured
Homes have become larger and often have been attached to their sites without any
apparent intention by the borrowers to move them, courts in many states have
held that Manufactured Homes may, under certain circumstances, become subject to
real estate title and recording laws. As a result, a security interest in a
Manufactured Home could be rendered subordinate to the interests of other
parties claiming an interest in the Manufactured Home under applicable state
real estate law. In order to perfect a security interest in a Manufactured Home
under real estate laws, the holder of the security interest must file either a
'fixture filing' under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the home is located. These filings must
be made in the real estate records office of the county where the home is
located. Generally, Manufactured Housing Contracts will contain provisions
prohibiting the obligor from permanently attaching the Manufactured Home to its
site. So long as the obligor does not violate this agreement, a security
interest in the Manufactured Home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to its site, other parties could
obtain an interest in the Manufactured Home that is prior to the security
interest originally retained by the seller and transferred to the Depositor.
The Depositor will assign or cause to be assigned a security interest in
the Manufactured Homes to the Indenture Trustee, on behalf of the
Securityholders. Unless otherwise specified in the related Prospectus
Supplement, neither the Depositor, the Master Servicer nor the Indenture Trustee
will amend the certificates of title to identify the Indenture Trustee, on
behalf of the Securityholders, as the new secured party and, accordingly, the
Depositor or the Seller will continue to be named as the secured party on the
certificates of title relating to the Manufactured Homes. In most states, such
assignment is an effective conveyance of such security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the Depositor's rights as the secured party. However,
in some states there exists a risk that, in the absence of an amendment to the
certificate of title, such assignment of the security interest might not be
effective against creditors of the Depositor or Seller.
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In the absence of fraud, forgery, permanent affixation of the Manufactured
Home to its site, or administrative error by state recording officials, the
notation of the lien of the Depositor on the certificate of title or delivery of
the required documents and fees would be sufficient to protect the Indenture
Trustee against the rights of subsequent purchasers of a Manufactured Home or
subsequent lenders who take a security interest in the Manufactured Home. If
there are any Manufactured Homes as to which the Depositor has failed to perfect
or cause to be perfected the security interest assigned to the Trust Fund, such
security interest would be subordinate to, among others, subsequent purchasers
for value of such Manufactured Home and holders of perfected security interests
in such Manufactured Home. There also exists a risk in not identifying the
Indenture Trustee, on behalf of the Securityholders, as the new secured party on
the certificate of title that, through fraud or negligence, the security
interest of the Indenture Trustee could be released.
In the event that the owner of a Manufactured Home moves such house to a
state other than the state in which such Manufactured Home initially is
registered, under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in the new state.
If the owner were to relocate a Manufactured Home to another state and
re-register the Manufactured Home in such state, and if the Depositor did not
take steps to re-perfect its security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Depositor must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states that provide for notation of lien, the
Depositor would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the
Depositor would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states that do not require a
certificate of title for registration of a Manufactured Home, re-registration
could defeat perfection. Similarly, when an obligor under a manufactured housing
conditional sales contract sells a Manufactured Home, the obligee must surrender
possession of the certificate of title or it will receive notice as a result of
its lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related manufactured housing conditional sales contract
before release of the lien. Under each related agreement, the Master Servicer
will be obligated to take such steps, at the Master Servicer's expense, as are
necessary to maintain perfection of security interests in the Manufactured
Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a prior perfected security interest
therein. The Depositor will obtain the representation of the Seller that it has
no knowledge of any such liens with respect to any Manufactured Home securing a
Manufactured Housing Contract. However, such liens could arise at any time
during the term of a Manufactured Housing Contract. No notice will be given to
the Indenture Trustee or Noteholders in the event such a lien arises.
FORECLOSURE ON REVOLVING CREDIT LOANS, HOME EQUITY LOANS AND CERTAIN CONTRACTS
Although a deed of trust may also be foreclosed by judicial action,
foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In addition to any notice requirements
contained in a deed of trust, in some states, prior to a sale the trustee must
record a notice of default and send a copy to the borrower/trustor and to any
person who has recorded a request for a copy of notice of default and notice of
sale. In addition, in some states, prior to such sale, the trustee must provide
notice to any other individual having an interest of record in the real
property, including any junior lienholders. If the deed of trust is not
reinstated within a specified period, a notice of sale must be posted in a
public place and, in most states, published for a specific period of time in one
or more newspapers in a specified manner prior to the date of trustee's sale. In
addition, some states' laws require that a copy of the notice of sale be posted
on the property and sent to all parties having an interest of record in the real
property.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
in such states, the borrower, or any other person having a junior encumbrance on
the real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation.
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Foreclosure of a mortgage generally is accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. If the mortgagee's right to foreclose is contested, the legal
proceedings necessary to resolve the issue can be time consuming.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is generally a
public sale. However, because of the difficulty a potential third-party buyer at
the sale might have in determining the exact status of title, and because the
physical condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for a credit bid less than or equal to the unpaid
principal amount of note plus the accrued and unpaid interest and the expense of
foreclosure, in which case the mortgagor's debt will be extinguished unless the
lender purchases the property for a lesser amount in order to preserve its right
against a borrower to seek a deficiency judgment and such remedy is available
under state law and the related loan documents. In the same states, there is a
statutory minimum purchase price which the lender may offer for the property and
generally, state law controls the amount of foreclosure costs and expenses,
including attorneys' fees, which may be recovered by a lender. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale.
Generally, the lender will obtain the services of a real estate broker and pay
the broker's commission in connection with the sale of the property. Depending
upon market conditions, the ultimate proceeds of the sale of the property may
not equal the lender's investment in the property and, in some states, the
lender may be entitled to a deficiency judgment. Any loss may be reduced by the
receipt of any mortgage insurance proceeds or other forms of credit enhancement
for a series of Notes. See 'Description of Credit Enhancement.'
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure by a junior
mortgagee triggers the enforcement of a 'due-on-sale' clause in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees to avoid foreclosure. Accordingly,
with respect to those Trust Assets which are junior mortgage loans, if the
lender purchases the property, the lender's title will be subject to all senior
liens and claims and certain governmental liens. The proceeds received by the
referee or trustee from the sale are applied first to the costs, fees and
expenses of sale and then in satisfaction of the indebtedness secured by the
mortgage or deed of trust under which the sale was conducted. Any remaining
proceeds are generally payable to the holders of junior mortgages or deeds of
trust and other liens and claims in order of their priority, whether or not the
borrower is in default. Any additional proceeds are generally payable to the
mortgagor or trustor. The payment of the proceeds to the holders of junior
mortgages may occur in the foreclosure action of the senior mortgagee or may
require the institution of separate legal proceedings. See 'Risk
Factors -- Special Features of Certain Trust Assets Secured by Junior Liens on
Mortgaged Properties' and 'Servicing of Trust Assets -- Realization Upon
Defaulted Loans' herein.
FORECLOSURE ON SHARES OF COOPERATIVES
The Cooperative shares owned by the tenant-stockholder, together with the
rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged, may
be cancelled by the Cooperative for failure by the tenant-stockholder to pay its
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the Cooperative's building incurred by such tenant-stockholder.
Generally, obligations and charges arising under a proprietary lease or
occupancy agreement which are owed to the Cooperative are made liens upon the
shares to which the
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proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the Cooperative to terminate such
lease or agreement in the event the borrower defaults in the performance of
covenants thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which, together with any lender protection provisions
contained in the proprietary lease or occupancy agreement, establishes the
rights and obligations of both parties in the event of a default by the tenant-
stockholder on its obligations under the proprietary lease or occupancy
agreement. A default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under such proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the amount realized upon a sale of
the collateral below the outstanding principal balance of the Cooperative Loan
and accrued and unpaid interest thereon.
Recognition agreements also generally provide that in the event the lender
succeeds to the tenant-shareholder's shares and proprietary lease or occupancy
agreement as the result of realizing upon its collateral for a Cooperative Loan,
the lender must obtain the approval or consent of the board of directors of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Such approval or consent
is usually based on the prospective purchaser's income and net worth, among
other factors, and may significantly reduce the number of potential purchasers,
which could limit the ability of the lender to sell and realize upon the value
of the collateral. Generally, the lender is not limited in any rights it may
have to dispossess the tenant-stockholder.
Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
In New York, foreclosure on the Cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the New York
Uniform Commercial Code (the 'UCC') and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
'commercially reasonable' manner. Whether a sale has been conducted in a
'commercially reasonable' manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the sale and the sale
price. Generally, a sale conducted according to the usual practice of banks
selling similar collateral in the same area will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See ' -- Anti-Deficiency Legislation
and Other Limitations on Lenders' below.
REPOSSESSION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
Repossession of manufactured housing is governed by state law. A few states
have enacted legislation that requires that the debtor be given an opportunity
to cure its default (typically 30 days to bring the account current) before
repossession can commence. So long as a manufactured home has not become so
attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in the
event of a default by the obligor will generally be governed by the UCC
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(except in Louisiana). Article 9 of the UCC provides the statutory framework for
the repossession of manufactured housing units. While the UCC as adopted by the
various states may vary in certain small particulars, the general repossession
procedure established by the UCC is as follows:
(i) Except in those states where the debtor must receive notice of the
right to cure a default, repossession can commence immediately upon default
without prior notice. Repossession may be effected either through self-help
(peaceable retaking without court order), voluntary repossession or through
judicial process (repossession pursuant to court-issued writ of replevin).
The self-help and/or voluntary repossession methods are more commonly
employed, and are accomplished simply by retaking possession of the
manufactured home. In cases in which the debtor objects or raises a defense
to repossession, a court order must be obtained from the appropriate state
court, and the manufactured home must then be repossessed in accordance
with that order. Whether the method employed is self-help, voluntary
repossession or judicial repossession, the repossession can be accomplished
either by an actual physical removal of the manufactured home to a secure
location for refurbishment and resale or by removing the occupants and
their belongings from the manufactured home and maintaining possession of
the manufactured home on the location where the occupants were residing.
Various factors may affect whether the manufactured home is physically
removed or left on location, such as the nature and term of any lease of
the site on which it is located and the condition of the unit. In many
cases, leaving the manufactured home on location is preferable, in the
event that the home is already constructed, in order to avoid the cost of
removing the structure. However, in cases where the home is not moved,
expenses for site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation for the
subsequent sale of the manufactured home can commence. Such disposition may
be by public or private sale provided the method, manner, time, place and
terms of the sale are commercially reasonable.
(iii) Sale proceeds will be applied first to repossession expenses
(including expenses incurred in repossessing, storing, refurbishing and
selling costs) and then to satisfaction of the indebtedness. While some
states impose prohibitions or limitations on deficiency judgments if the
net proceeds from resale do not cover the full amount of the indebtedness,
the remainder may be sought from the debtor in the form of a deficiency
judgment in those states that do not prohibit or limit such judgments. The
deficiency judgment is a personal judgment against the debtor for the
deficiency. Occasionally, after resale of a manufactured home and payment
of all expenses and indebtedness, there is a surplus of funds. In such
event, the UCC requires the party suing for the deficiency judgment to
remit the surplus to the debtor. Because the defaulting owner of a
manufactured home generally has very little capital or income available
following repossession, a deficiency judgment is generally not sought or,
if obtained, will be settled at a significant discount in light of the
defaulting owner's limited financial condition.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors or other parties are given
a statutory period (generally ranging from six months to two years) in which to
redeem the property from the foreclosure sale. In some states, redemption may
occur only upon payment of the entire principal balance of the loan, accrued
interest and expenses of foreclosure. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. In some
states, the right to redeem is an equitable right. The equity of redemption,
which is a non-statutory right that must be exercised prior to a foreclosure
sale, should be distinguished from statutory rights of redemption. The effect of
a statutory right of redemption is to diminish the ability of the lender to sell
the foreclosed property. The rights of redemption would defeat the title of any
purchaser subsequent to foreclosure or sale under a deed of trust. Consequently,
the practical effect of the redemption right is to force the lender to maintain
the property and pay the expenses of ownership until the redemption period has
expired.
NOTICE OF SALE; REDEMPTION RIGHTS WITH RESPECT TO MANUFACTURED HOMES
While state laws do not usually require notice to be given to debtors prior
to repossession, many states require delivery of a notice of default and notice
of the debtor's right to cure defaults before repossession. The
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law in most states also requires that the debtor be given notice of sale prior
to the resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states (including California), statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender. In
the case of a Revolving Credit Loan, Home Equity Loan and a Contract secured by
a property owned by a trust where the Mortgage Note is executed on behalf of the
trust, a deficiency judgment against the trust following foreclosure or sale
under a deed of trust, even if obtainable under applicable law, may be of little
value to the mortgagee or beneficiary if there are no trust assets against which
such deficiency judgment may be executed. Some state statutes require the
beneficiary or mortgagee to exhaust the security afforded under a deed of trust
or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. In certain other states, the
lender has the option of bringing a personal action against the borrower on the
debt without first exhausting such security; however, in some of these states,
the lender, following judgment on such personal action, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the security. Consequently, the practical effect of the election requirement, in
those states permitting such election, is that lenders will usually proceed
against the security first rather than bringing a personal action against the
borrower.
Finally, in certain other states, statutory provisions limit any deficiency
judgment against the borrower following a foreclosure to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a beneficiary
or mortgagee from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative Shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Article 9 to prohibit or limit a deficiency award in certain
circumstances, including circumstances where the disposition of the collateral
(which, in the case of a Cooperative Loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement) was not
conducted in a commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon its collateral and/or
enforce a deficiency judgment. For example, under the federal bankruptcy law,
all actions against the debtor, the debtor's property and any co-debtor are
automatically stayed upon the filing of a bankruptcy petition. Moreover, a court
having federal bankruptcy jurisdiction may permit a debtor through its Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on such debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule, even though the lender accelerated the mortgage loan and final
judgment of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by permitting the borrower to pay over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property which is not the principal
residence of the debtor may be modified. These courts have allowed modifications
that include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule, forgiving all or a portion of the
debt and reducing the lender's security interest to the value of the residence,
thus leaving the lender a general unsecured creditor for the difference between
the value of the residence and the outstanding balance of the loan. Generally,
however, the terms of a mortgage loan secured only by a mortgage on real
property that is the debtor's principal residence may not be modified pursuant
to a plan confirmed pursuant to Chapter 13 except with respect to mortgage
payment arrearages, which may be cured within a reasonable time period. Courts
with federal bankruptcy jurisdiction similarly may be able to modify the terms
of a Cooperative Loan.
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Certain tax liens arising under the Code may, in certain circumstances,
have priority over the lien of a mortgage or deed of trust. This may have the
effect of delaying or interfering with the enforcement of rights with respect to
a defaulted Revolving Credit Loan, Home Equity Loan or a Contract. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
The Revolving Credit Loans, Home Equity Loans and Contracts may be subject
to special rules, disclosure requirements and other provisions that were added
to the federal Truth-in-Lending Act by the Home Ownership and Equity Protection
Act of 1994 (such Revolving Credit Loans, Home Equity Loans and Contracts, 'HIGH
COST LOANS'), if such Trust Assets were originated on or after October 1, 1995,
are not loans made to finance the purchase of the mortgaged property and have
interest rates or origination costs in excess of certain prescribed levels.
Purchasers or assignees of any High Cost Loan, including any Trust Fund, could
be liable for all claims and subject to all defenses arising under such
provisions that the borrower could assert against the originator thereof.
Remedies available to the borrower include monetary penalties, as well as
rescission rights if the appropriate disclosures were not given as required.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ('CERCLA'), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the 'CONSERVATION ACT') amended, among other things, the provisions of CERCLA
with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the mortgaged property. The
Conservation Act provides that 'merely having the capacity to influence, or
unexercised right to control' operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of substantially all of the operational functions of the
mortgaged property. The Conservation Act also provides that a lender will
continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
Other federal and state laws in certain circumstances may impose liability
on a secured party which takes a deed-in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a mortgaged property on
which contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. Such cleanup costs may be substantial. It is possible that
such cleanup costs could become a liability of a Trust Fund and reduce the
amounts otherwise payable to the holders of the related series of Notes.
Moreover, certain federal statutes and certain states by statute impose a lien
for any cleanup costs incurred by such state on the property that is the subject
of such cleanup costs (an 'ENVIRONMENTAL LIEN'). All subsequent liens on such
property generally are
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subordinated to such an Environmental Lien and, in some states, even prior
recorded liens are subordinated to Environmental Liens. In the latter states,
the security interest of the trustee in a related parcel of real property that
is subject to such an Environmental Lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged property
prior to the origination of the mortgage loan or prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Accordingly, the Company has not made
and will not make such evaluations prior to the origination of the Secured
Contracts. Neither the Company nor any replacement Servicer will be required by
any Agreement to undertake any such evaluations prior to foreclosure or
accepting a deed-in-lieu of foreclosure. The Company does not make any
representations or warranties or assume any liability with respect to the
absence or effect of contaminants on any related real property or any casualty
resulting from the presence or effect of contaminants. However, the Company will
not be obligated to foreclose on related real property or accept a deed-in-lieu
of foreclosure if it knows or reasonably believes that there are material
contaminated conditions on such property. A failure so to foreclose may reduce
the amounts otherwise available to Noteholders of the related series.
CONSUMER PROTECTION LAWS WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
federal Truth-in-Lending Act, Regulation 'Z', the Equal Credit Opportunity Act,
Regulation 'B', the Fair Credit Reporting Act and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions. In some cases, this liability may affect an assignee's ability
to enforce the related contract. In addition, certain of the Contracts may be
subject to special rules, disclosure requirements and other provisions that are
applicable to High Cost Loans discussed above.
Manufactured housing contracts often contain provisions requiring the
obligor to pay late charges if payments are not timely made. In certain cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Unless otherwise provided in the related Prospectus Supplement,
under the related agreement, late charges will be retained by the Master
Servicer as additional servicing compensation and any inability to collect these
amounts will not affect payments to Noteholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called 'HOLDER-IN-DUE-COURSE' Rule of the Federal Trade Commission
(the 'FTC RULE') has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses that the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due thereunder.
Most of the Manufactured Housing Contracts in a Trust Fund will be subject
to the requirements of the FTC Rule. Accordingly, the Indenture Trustee, as
holder of the Manufactured Housing Contracts, will be subject to any claims or
defenses that the purchaser of the related Manufactured Home may assert against
the seller of the Manufactured Home, subject to a maximum liability equal to the
amounts paid by the obligor on the Manufactured Housing Contract. If an obligor
is successful in asserting any such claim or defense, and if the Seller had or
should have had knowledge of such claim or defense, the Master Servicer will
have the right to require the Seller to repurchase the Manufactured Housing
Contract because of a breach of its Seller's representation and warranty that no
claims or defenses exist that would affect the obligor's obligation to make the
required payments under the Manufactured Housing Contract. The Seller would then
have the right to require the originating dealer to repurchase the Manufactured
Housing Contract from it and might also have the
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right to recover from the dealer any losses suffered by the Seller with respect
to which the dealer would have been primarily liable to the obligor.
ENFORCEABILITY OF CERTAIN PROVISIONS
The Revolving Credit Loans, Home Equity Loans and, as applicable, Contracts
generally contain due-on-sale clauses. These clauses permit the mortgagee to
accelerate the maturity of the loan if the borrower sells, transfers or conveys
the property without the prior consent of the mortgagee. The enforceability of
these clauses has been the subject of legislation or litigation in many states,
and in some cases the enforceability of these clauses has been limited or
denied. However, the Garn-St Germain Depository Institutions Act of 1982 (the
'GARN-ST GERMAIN ACT'), subject to certain exceptions, preempts state law that
prohibits the enforcement of due-on-sale clauses and permits lenders to enforce
these clauses in accordance with their terms. The Garn-St Germain Act does
'encourage' lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of a prepayment penalty upon the acceleration of a loan pursuant
to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the related Trust Assets and the number of Trust Assets which may be
outstanding until maturity.
Forms of notes and mortgages used by lenders may contain provisions
obligating the borrower to pay a late charge if payments are not timely made,
and in some circumstances may provide for prepayment fees or penalties if the
obligation is paid prior to maturity. In addition to limitations imposed by FHA
Regulations with respect to Contracts partially insured by the FHA pursuant to
Title I, in certain states, there are or may be specific limitations upon the
late charges that a lender may collect from a borrower for delinquent payments.
Certain states also limit the amounts that a lender may collect from a borrower
as an additional charge if the loan is prepaid.
In foreclosure actions, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have required that lenders reinstate
loans or recast payment schedules in order to accommodate borrowers who are
suffering from temporary financial disability. In other cases, courts have
limited the right of the lender to foreclose if the default under the mortgage
instrument is not monetary, such as the borrower failing to adequately maintain
the property or the borrower executing a second mortgage or deed of trust
affecting the property. Finally, some courts have been faced with the issue of
whether or not federal or state constitutional provisions reflecting due process
concerns for adequate notice require that borrowers under deeds of trust or
mortgages receive notices in addition to the statutorily prescribed minimum. For
the most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale by a trustee under a deed of trust or under a
mortgage having a power of sale, does not involve sufficient state action to
afford constitutional protections to the borrower.
TRANSFER OF MANUFACTURED HOMES
Generally, Manufactured Housing Contracts contain provisions prohibiting
the sale or transfer of the related manufactured homes without the consent of
the obligee on the contract and permitting the acceleration of the maturity of
such contracts by the obligee on the contract upon any such sale or transfer to
which consent has not been given. Unless otherwise provided in the related
Prospectus Supplement, the Master Servicer will, to the extent it has knowledge
of such conveyance or proposed conveyance, exercise or cause to be exercised its
rights to accelerate the maturity of the related Manufactured Housing Contracts
through enforcement of due-on-sale
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clauses, subject to applicable state law. In certain cases, the transfer may be
made by a delinquent obligor in order to avoid a repossession proceeding with
respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the related due-on-sale clause. The Garn-St Germain Act preempts, subject to
certain exceptions and conditions, state laws prohibiting enforcement of
due-on-sale clauses applicable to the Manufactured Homes. Consequently, in some
cases the Master Servicer may be prohibited from enforcing a due-on-sale clause
in respect of certain Manufactured Homes.
THE HOME IMPROVEMENT CONTRACTS
General
The Home Improvement Contracts, other than those Home Improvement Contracts
that are unsecured or secured by mortgages on real estate (such Home Improvement
Contracts are hereinafter referred to in this section as 'contracts') generally
are 'chattel paper' or constitute 'purchase money security interests' each as
defined in the UCC. Pursuant to the UCC, the sale of chattel paper is treated in
a manner similar to perfection of a security interest in chattel paper. Under
the related agreement, the Depositor will transfer physical possession of the
contracts to the Indenture Trustee or a designated custodian or may retain
possession of the contracts as custodian for the Indenture Trustee. In addition,
the Depositor will make an appropriate filing of a UCC-1 financing statement in
the appropriate states to give notice of the Indenture Trustee's ownership of
the contracts. Unless otherwise specified in the related Prospectus Supplement,
the contracts will not be stamped or otherwise marked to reflect their
assignment from the Depositor to the Indenture Trustee. Therefore, if through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
Indenture Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements
The contracts that are secured by the Home Improvements financed thereby
grant to the originator of such contracts a purchase money security interest in
such Home Improvements to secure all or part of the purchase price of such Home
Improvements and related services. A financing statement generally is not
required to be filed to perfect a purchase money security interest in consumer
goods. Such purchase money security interests are assignable. In general, a
purchase money security interest grants to the holder a security interest that
has priority over a conflicting security interest in the same collateral and the
proceeds of such collateral. However, to the extent that the collateral subject
to a purchase money security interest becomes a fixture, in order for the
related purchase money security interest to take priority over a conflicting
interest in the fixture, the holder's interest in such Home Improvement must
generally be perfected by a timely fixture filing. In general, under the UCC, a
security interest does not exist under the UCC in ordinary building material
incorporated into an improvement on land. Home Improvement Contracts that
finance lumber, bricks, other types of ordinary building material or other goods
that are deemed to lose such characterization, upon incorporation of such
materials into the related property, will not be secured by a purchase money
security interest in the Home Improvement being financed.
Enforcement of Security Interest in Home Improvements
So long as the Home Improvement has not become subject to the real estate
law, a creditor can repossess a Home Improvement securing a contract by
voluntary surrender, 'self-help' repossession that is 'peaceful' (i.e., without
breach of the peace) or, in the absence of voluntary surrender and the ability
to repossess without breach of the peace, judicial process. The holder of a
contract must give the debtor a number of days' notice, which varies from 10 to
30 days or more depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states restrict
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states also
requires that the debtor be given notice of any sale prior to resale of the
related property so that the debtor may redeem it at or before such resale.
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Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equity principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws
The FTC Rule is intended to defeat the ability of the transferor of a
consumer credit contract that is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
that the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Indenture Trustee against such obligor. Numerous other
federal and state consumer protections laws impose requirements applicable to
the origination and lending pursuant to the contracts, including the Truth in
Lending Act, the Federal Trade Commission Act, the Fair Credit Billing Act, the
Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt
Collection Practices Act and the Uniform Consumer Credit Code. In the case of
some of these laws, the failure to comply with their provisions may affect the
enforceability of the related contract.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ('TITLE V') provides that, subject to the following conditions,
state usury limitations shall not apply to any contract that is secured by a
first lien on certain kinds of consumer goods. The contracts would be covered if
they satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no contract that imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
Installment Contracts
The Trust Assets may also consist of installment sales contracts. Under an
installment contract ('INSTALLMENT CONTRACT') the seller (hereinafter referred
to in this section as the 'lender') retains legal title to the property and
enters into an agreement with the purchaser (hereinafter referred to in this
section as the 'borrower') for the payment of the purchase price, plus interest,
over the term of such contract. Only after full performance by the borrower of
the Installment Contract is the lender obligated to convey title to the property
to the purchaser. As with mortgage or deed of trust financing, during the
effective period of the Installment
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Contract, the borrower is generally responsible for the maintaining the property
in good condition and for paying real estate taxes, assessments and hazard
insurance premiums associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated and the
buyer's equitable interest in the property is forfeited. The lender in such a
situation is not required to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the Installment Contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an Installment Contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under Installment Contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the Installment Contract may be reinstated upon full payment of the defaulted
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an Installment Contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, the lender's procedures for obtaining possession and clear title
under an Installment Contract in a given state are simpler and less time
consuming and costly than are the procedures for foreclosing and obtaining clear
title to a property subject to one or more liens.
APPLICABILITY OF USURY LAWS
Title V provides that state usury limitations shall not apply to certain
types of residential first mortgage loans, including cooperative loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to impose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision which expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits or to limit discount
points or other charges.
Usury limits apply to junior mortgage loans in many states. Any applicable
usury limits in effect at origination will be reflected in the maximum Mortgage
Rates for the Trust Assets, as set forth in the related Prospectus Supplement.
Unless otherwise set forth in the related Prospectus Supplement, each
Seller of a Revolving Credit Loan, Home Equity Loan and a Contract will have
represented that such Revolving Credit Loan, Home Equity Loan or Contract was
originated in compliance with then applicable state laws, including usury laws,
in all material respects. However, the Mortgage Rates on the Revolving Credit
Loans and the Home Equity Loans will be subject to applicable usury laws as in
effect from time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and adjustable rate cooperative loans, and early ownership mortgage loans,
originated by non-federally chartered lenders have historically been subjected
to a variety of restrictions. Such restrictions differed from state to state,
resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act ('TITLE VIII').
Title VIII provides that, notwithstanding any state law to the contrary, (i)
state-chartered banks may originate alternative mortgage instruments in
accordance with regulations promulgated by the Comptroller of the Currency with
respect to the origination of alternative mortgage instruments by national
banks, (ii) state-chartered credit unions may originate alternative mortgage
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instruments in accordance with regulations promulgated by the National Credit
Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions and (iii) all other non-federally chartered
housing creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII also
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
FORMALDEHYDE LITIGATION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts and related
persons in the distribution process. The Depositor is aware of a limited number
of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under ' -- Consumer Protection
Laws' and 'Consumer Protection Laws with Respect to Manufactured Housing
Contracts,' the holder of any Contract secured by a Manufactured Home with
respect to which a formaldehyde claim has been successfully asserted may be
liable to the obligor for the amount paid by the obligor on the related Contract
and may be unable to collect amounts still due under the Contract. The
successful assertion of such claim constitutes a breach of a representation or
warranty of the Seller, and the related Trust Fund would suffer a loss only to
the extent that (i) the Seller breached its obligation to repurchase the
Contract in the event an obligor is successful in asserting such a claim, and
(ii) the Seller, the Depositor or the Indenture Trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the Noteholders
against the manufacturer or other persons who were directly liable to the
plaintiff for the damages. Typical products liability insurance policies held by
manufacturers and component suppliers of Manufactured Homes may not cover
liabilities arising from formaldehyde in manufactured housing, with the result
that recoveries from such manufacturers, suppliers or other persons may be
limited to their corporate assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the 'RELIEF ACT'), a Mortgagor who enters military service after the
origination of such Mortgagor's Revolving Credit Loan, Home Equity Loan and
certain Contracts (including a Mortgagor who was in reserve status and is called
to active duty after origination of the Revolving Credit Loan, Home Equity Loan
and certain Contracts) may not be charged interest (including fees and charges)
above an annual rate of 6% during the period of such Mortgagor's active duty
status, unless a court orders otherwise upon application of the lender. The
Relief Act applies to Mortgagors who are members of the Air Force, Army,
Marines, Navy, National Guard, Reserves, Coast Guard, and officers of the U.S.
Public Health Service assigned to duty with the military. Because the Relief Act
applies to Mortgagors who enter military service (including reservists who are
called to active duty) after origination of the related Revolving Credit Loan,
Home Equity Loan and related Contract, no information can be provided as to the
number of loans that may be affected by the Relief Act. Application of the
Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Master Servicer to collect full amounts of interest on certain of
the Revolving Credit Loans, Home Equity Loans and Contracts. Any shortfall in
interest collections resulting from the application of the Relief Act or similar
legislation or regulations, which would not be recoverable from the related
Revolving Credit Loans, Home Equity Loans and Contracts, would result in a
reduction of the amounts payable to the holders of the related Notes, and may
not be covered by the applicable form of credit enhancement provided in
connection with the related series of Notes. In addition, the Relief Act imposes
limitations that would impair the ability of the Master Servicer to foreclose on
an affected Revolving Credit Loan, Home Equity Loan or Contract during the
Mortgagor's period of active duty status, and, under certain circumstances,
during an additional three month period thereafter. Thus, in the event that the
Relief Act or similar legislation or regulations applies to any Revolving Credit
Loan, Home Equity Loan and Contract
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which goes into default, there may be delays in payment and losses on the
related Notes in connection therewith. Any other interest shortfalls, deferrals
or forgiveness of payments on the Revolving Credit Loans, Home Equity Loans and
Contracts resulting from similar legislation or regulations may result in delays
in payments or losses to Noteholders of the related series.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ('RICO') statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the 'CRIME
CONTROL ACT'), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties 'known to have an alleged interest in the property,' including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, 'reasonably without cause to believe' that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
The Revolving Credit Loans, Home Equity Loans, certain Contracts or certain
Private Securities included in the Trust Fund for a series will be secured by
mortgages or deeds of trust which generally will be junior to other mortgages or
deeds of trust held by other lenders or institutional investors. The rights of
the Trust Fund (and therefore the Noteholders), as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee under the senior mortgage,
including the prior rights of the senior mortgagee to receive hazard insurance
and condemnation proceeds and to cause the property securing the Revolving
Credit Loan, Home Equity Loan or Contract to be sold upon default of the
mortgagor, which may extinguish the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, in certain cases, either reinitiates or satisfies the defaulted
senior loan or loans. A junior mortgagee may satisfy a defaulted senior loan in
full or, in some states, may cure such default and bring the senior loan current
thereby reinstating the senior loan, in either event usually adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee. Where applicable law or the terms of the senior
mortgage or deed of trust do not require notice of default to the junior
mortgagee, the lack of any such notice may prevent the junior mortgagee from
exercising any right to reinstate the loan which applicable law may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply such proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in such order as
the mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property is
taken by condemnation, the mortgagee or beneficiary under underlying senior
mortgages will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of junior mortgages in the order
of their priority. Another provision sometimes found in the form of the mortgage
or deed of trust used by institutional lenders obligates the mortgagor to pay
before delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are prior to the mortgage
or deed of trust, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee under the mortgage. Upon a failure of
the mortgagor to perform any of these obligations, the mortgagee or beneficiary
is given the right under certain mortgages or deeds of trust to perform the
obligation itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All
sums so expended by a senior mortgagee become part of the indebtedness secured
by the senior mortgage.
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The form of credit line trust deed or mortgage used by most institutional
lenders which make Revolving Credit Loans typically contains a 'future advance'
clause, which provides, in essence, that additional amounts advanced to or on
behalf of the borrower by the beneficiary or lender are to be secured by the
deed of trust or mortgage. The priority of the lien securing any advance made
under the clause may depend in most states on whether the deed of trust or
mortgage is designated as a credit line deed of trust or mortgage. If the
beneficiary or lender advances additional amounts, the advance is entitled to
receive the same priority as amounts initially advanced under the trust deed or
mortgage, notwithstanding the fact that there may be junior trust deeds or
mortgages and other liens which intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and notwithstanding
that the beneficiary or lender had actual knowledge of such intervening junior
trust deeds or mortgages and other liens at the time of the advance. In most
states, the trust deed or mortgage lien securing mortgage loans of the type
which includes Revolving Credit Loans applies retroactively to the date of the
original recording of the trust deed or mortgage, provided that the total amount
of advances under the Credit Limit does not exceed the maximum specified
principal amount of the recorded trust deed or mortgage, except as to advances
made after receipt by the lender of a written notice of lien from a judgment
lien creditor of the trustor.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of certain anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Notes offered hereunder. This discussion has been prepared with the advice
of Thacher Proffitt & Wood and Orrick, Herrington & Sutcliffe LLP, counsel to
the Company. This discussion is directed solely to Noteholders that hold the
Notes as capital assets within the meaning of Section 1221 of the Code and does
not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which may be subject
to special rules (such as banks, insurance companies, foreign investors,
tax-exempt organizations, dealers in securities or currencies, mutual funds,
real estate investment trusts, natural persons, cash method taxpayers, S
corporations, estates and trusts, investors that hold the Notes as part of a
hedge, straddle or, an integrated or conversion transaction, or holders whose
'functional currency' is not the United States dollar. Also, it does not address
alternative minimum tax consequences or the indirect effects on the holders of
equity interests in a Noteholder). Further, the authorities on which this
discussion, and the opinion referred to below, are based are subject to change
or differing interpretations, which could apply retroactively. Taxpayers and
preparers of tax returns should be aware that under applicable Treasury
regulations a provider of advice on specific issues of law is not considered an
income tax return preparer unless the advice (i) is given with respect to events
that have occurred at the time the advice is rendered and is not given with
respect to the consequences of contemplated actions, and (ii) is directly
relevant to the determination of an entry on a tax return. Accordingly,
taxpayers should consult their tax advisors and tax return preparers regarding
the preparation of any item on a tax return, even where the anticipated tax
treatment has been discussed herein. In addition to the federal income tax
consequences described herein, potential investors should consider the state and
local tax consequences, if any, of the purchase, ownership and disposition of
the Notes. See 'State and Other Tax Consequences.' Noteholders are advised to
consult their tax advisors concerning the federal, state, local or other tax
consequences to them of the purchase, ownership and disposition of the Notes
offered hereunder.
Upon the issuance of the Notes, Thacher Proffitt & Wood or Orrick,
Herrington & Sutcliffe LLP ('TAX COUNSEL'), counsel to the Company, will deliver
its opinion generally to the effect that, for federal income tax purposes,
assuming compliance with all provisions of the Indenture, Trust Agreement and
certain related documents, (i) the Notes will be treated as indebtedness and
(ii) the Issuer, as created pursuant to the terms and conditions of the Trust
Agreement, will not be characterized as an association (or publicly traded
partnership within the meaning of Code section 7704) taxable as a corporation or
as a taxable mortgage pool within the meaning of Code section 7701(i). The
following discussion is based in part upon the rules governing original issue
discount that are set forth in Code sections 1271-1273 and 1275 and in the
Treasury regulations issued thereunder (the 'OID REGULATIONS'). The OID
Regulations do not adequately address certain issues relevant to, and in some
instances provide that they are not applicable to, securities such as the Notes.
For purposes of this tax discussion, references to a 'Noteholder' or a 'holder'
are to the beneficial owner of a Note.
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Status as Real Property Loans
(i) Notes held by a domestic building and loan association will not
constitute 'loans . . . secured by an interest in real property' within the
meaning of Code section 7701(a)(19)(C)(v); and (ii) Notes held by a real estate
investment trust will not constitute 'real estate assets' within the meaning of
Code section 856(c)(5)(A) and interest on Notes will not be considered 'interest
on obligations secured by mortgages on real property' within the meaning of Code
section 856(c)(3)(B).
Original Issue Discount
The Notes are not expected to be considered issued with original issue
discount since the principal amount of the Notes will not exceed their issue
price by more than a de minimis amount. The stated interest thereon will be
taxable to a Noteholder as ordinary interest income when received or accrued in
accordance with such Noteholder's method of tax accounting. Under the OID
Regulations, a holder of a Note issued with a de minimis amount of original
issue discount must include such discount in income, on a pro rata basis, as
principal payments are made on the Note.
The original issue discount, if any, on a Note would be the excess of its
stated redemption price at maturity over its issue price. The issue price of a
particular class of Notes will be the first cash price at which a substantial
amount of Notes of that class is sold (excluding sales to bond houses, brokers
and underwriters) on the date of their initial issuance (the 'CLOSING DATE'). If
less than a substantial amount of a particular class of Notes is sold for cash
on or prior to the Closing Date, the issue price of such class will be treated
as the fair market value of such class on the Closing Date. Under the OID
Regulations, the stated redemption price of a Note is equal to the total of all
payments to be made on such Note other than 'qualified stated interest.'
'Qualified stated interest' includes interest that is unconditionally payable at
least annually at a single fixed rate, or in the case of a variable rate debt
instrument, at a 'qualified floating rate,' an 'objective rate,' a combination
of a single fixed rate and one or more 'qualified floating rates' or one
'qualified inverse floating rate,' or a combination of 'qualified floating
rates' that generally does not operate in a manner that accelerates or defers
interest payments on such Note.
In the case of Notes bearing adjustable interest rates, the determination
of the total amount of original issue discount and the timing of the inclusion
thereof will vary according to the characteristics of such Notes. In general
terms original issue discount is accrued by treating the interest rate of the
Notes as fixed and making adjustments to reflect actual interest rate payments.
Certain classes of the Notes may provide for the first interest payment
with respect to such Notes to be made more than one month after the date of
issuance, a period which is longer than the subsequent monthly intervals between
interest payments. Assuming the 'accrual period' (as defined below) for original
issue discount is each monthly period that ends on a Distribution Date, in some
cases, as a consequence of this 'long first accrual period,' some or all
interest payments may be required to be included in the stated redemption price
of the Note and accounted for as original issue discount.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a Note will reflect such accrued
interest. In such cases, information returns to the Noteholders and the IRS will
be based on the position that the portion of the purchase price paid for the
interest accrued with respect to periods prior to the Closing Date is treated as
part of the overall purchase price of such Note (and not as a separate asset the
purchase price of which is recovered entirely out of interest received on the
next Distribution Date) and that portion of the interest paid on the first
Distribution Date in excess of interest accrued for a number of days
corresponding to the number of days from the Closing Date to the first
Distribution Date should be included in the stated redemption price of such
Note. However, the OID Regulations state that all or some portion of such
accrued interest may be treated as a separate asset the cost of which is
recovered entirely out of interest paid on the first Distribution Date. It is
unclear how an election to do so would be made under the OID Regulations and
whether such an election could be made unilaterally by a Noteholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a Note will be considered to be de minimis if it is less than
0.25% of the stated redemption price of the Note multiplied by its weighted
average maturity. For this purpose, the weighted average maturity of the Note is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such Note, by
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multiplying (i) the number of complete years (rounding down for partial years)
from the issue date until such payment is expected to be made (possibly taking
into account a prepayment assumption) by (ii) a fraction, the numerator of which
is the amount of the payment, and the denominator of which is the stated
redemption price at maturity of such Note. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original issue
discount attributable to a so-called 'teaser' interest rate or an initial
interest holiday) will be included in income as each payment of stated principal
is made, based on the product of the total amount of such de minimis original
issue discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding stated
principal amount of the Note. The OID Regulations also would permit a Noteholder
to elect to accrue de minimis original issue discount into income currently
based on a constant yield method. See ' -- Market Discount' for a description of
such election under the OID Regulations.
If original issue discount on a Note is in excess of a de minimis amount,
the holder of such Note must include in ordinary gross income the sum of the
'daily portions' of original issue discount for each day during its taxable year
on which it held such Note, including the purchase date but excluding the
disposition date. In the case of an original holder of a Note, the daily
portions of original issue discount will be determined as follows.
As to each 'accrual period,' that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to a Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original issue
discount that accrues in any accrual period will equal the excess, if any, of
(i) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the Note, if any, in future
periods and (B) the distributions made on such Note during the accrual period of
amounts included in the stated redemption price, over (ii) the adjusted issue
price of such Note at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated using a discount rate equal to the original yield to maturity of the
Notes, and possibly assuming that distributions on the Note will be received in
future periods based on the Trust Assets being prepaid at a rate equal to a
prepayment assumption. For these purposes, the original yield to maturity of the
Note would be calculated based on its issue price and possibly assuming that
distributions on the Note will be made in all accrual periods based on the Trust
Assets being prepaid at a rate equal to a prepayment assumption. The adjusted
issue price of a Note at the beginning of any accrual period will equal the
issue price of such Note, increased by the aggregate amount of original issue
discount that accrued with respect to such Note in prior accrual periods, and
reduced by the amount of any distributions made on such Note in prior accrual
periods of amounts included in its stated redemption price. The original issue
discount accruing during any accrual period, computed as described above, will
be allocated ratably to each day during the accrual period to determine the
daily portion of original issue discount for such day. Although the Issuer will
calculate original issue discount, if any, based on its determination of the
accrual periods, a Noteholder may, subject to certain restrictions, elect other
accrual periods.
A subsequent purchaser of a Note that purchases such Note at a price
(excluding any portion of such price attributable to accrued qualified stated
interest) less than its remaining stated redemption price will also be required
to include in gross income the daily portions of any original issue discount
with respect to such Note. However, each such daily portion will be reduced, if
such cost is in excess of its 'adjusted issue price,' in proportion to the ratio
such excess bears to the aggregate original issue discount remaining to be
accrued on such Note. The adjusted issue price of a Note on any given day equals
(i) the adjusted issue price (or, in the case of the first accrual period, the
issue price) of such Note at the beginning of the accrual period which includes
such day plus (ii) the daily portions of original issue discount for all days
during such accrual period prior to such day less (iii) any principal payments
made during such accrual period with respect to such Note.
Market Discount
A Noteholder that purchases a Note at a market discount, that is, assuming
the Note is issued without original issue discount, at a purchase price less
than its remaining stated principal amount, will recognize gain upon receipt of
each distribution representing stated principal. In particular, under Code
section 1276 such a Noteholder generally will be required to allocate the
portion of each such distribution representing stated
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principal first to accrued market discount not previously included in income,
and to recognize ordinary income to that extent. A Noteholder may elect to
include market discount in income currently as it accrues rather than including
it on a deferred basis in accordance with the foregoing. If made, such election
will apply to all market discount bonds acquired by such Noteholder on or after
the first day of the first taxable year to which such election applies. In
addition, the OID Regulations permit a Noteholder to elect to accrue all
interest, discount (including de minimis market or original issue discount) and
premium in income as interest, based on a constant yield method. If such an
election were made with respect to a Note with market discount, the Noteholder
would be deemed to have made an election to include currently market discount in
income with respect to all other debt instruments having market discount that
such Noteholder acquires during the taxable year of the election or thereafter,
and possibly previously acquired instruments. Similarly, a Noteholder that made
this election for a Note that is acquired at a premium would be deemed to have
made an election to amortize bond premium with respect to all debt instruments
having amortizable bond premium that such Noteholder owns or acquires. See
' -- Premium' below. Each of these elections to accrue interest, discount and
premium with respect to a Note on a constant yield method would be irrevocable.
However, market discount with respect to a Note will be considered to be de
minimis for purposes Code section 1276 if such market discount is less than
0.25% of the remaining principal amount of such Note multiplied by the number of
complete years to maturity remaining after the date of its purchase. In
interpreting a similar rule with respect to original issue discount on
obligations payable in installments, the OID Regulations refer to the weighted
average maturity of obligations, and it is likely that the same rule will be
applied with respect to market discount, possibly taking into account a
prepayment assumption. If market discount is treated as de minimis under this
rule, it appears that the actual discount would be treated in a manner similar
to original issue discount of a de minimis amount. See ' -- Original Issue
Discount' above.
Code section 1276(b)(3) specifically authorizes the Treasury Department to
issue regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until regulations are issued by the Treasury Department, certain rules described
in the legislative history to the Code section 1276 (the 'COMMITTEE REPORT')
apply. The Committee Report indicates that in each accrual period market
discount on Notes should accrue, at the Noteholder's option: (i) on the basis of
a constant yield method, or (ii) in the case of a Note issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the Notes as of the
beginning of the accrual period. Moreover, any prepayment assumption used in
calculating the accrual of original issue discount is also used in calculating
the accrual of market discount. Because the regulations referred to in this
paragraph have not been issued, it is not possible to predict what effect such
regulations might have on the tax treatment of a Note purchased at a discount in
the secondary market. Further, it is uncertain whether a prepayment assumption
would be required to be used for the Notes if they were issued with original
issue discount.
To the extent that Notes provide for monthly or other periodic
distributions throughout their term, the effect of these rules may be to require
market discount to be includible in income at a rate that is not significantly
slower than the rate at which such discount would accrue if it were original
issue discount. Moreover, in any event a holder of a Note generally will be
required to treat a portion of any gain on the sale or exchange of such Note as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income.
Further, under Code section 1277 a holder of a Note may be required to
defer a portion of its interest deductions for the taxable year attributable to
any indebtedness incurred or continued to purchase or carry a Note purchased
with market discount. For these purposes, the de minimis rule referred to above
applies. Any such deferred interest expense would not exceed the market discount
that accrues during such taxable year and is, in general, allowed as a deduction
not later than the year in which such market discount is includible in income.
If such holder elects to include market discount in income currently as it
accrues on all market discount instruments acquired by such holder in that
taxable year or thereafter, the interest deferral rule described above will not
apply.
Premium
If a holder purchases a Note for an amount greater than its remaining
principal amount, such holder will be considered to have purchased such Note
with amortizable bond premium equal in amount to such excess, and
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may elect to amortize such premium using a constant yield method over the
remaining term of the Note and to offset interest otherwise to be required to be
included in income in respect of such Note by the premium amortized in such
taxable year. If such an election is made, it will apply to all debt instruments
having amortizable bond premium that the holder owns or subsequently acquires.
The OID Regulations also permit Noteholders to elect to include all interest,
discount and premium in income based on a constant yield method. See ' -- Market
Discount' above. The Committee Report states that the same rules that apply to
accrual of market discount (which rules may require use of a prepayment
assumption in accruing market discount with respect to Notes without regard to
whether such Notes have original issue discount) would also apply in amortizing
bond premium under Code section 171.
Realized Losses
Under Code section 166 both corporate and noncorporate holders of the Notes
that acquire such Notes in connection with a trade or business should be allowed
to deduct, as ordinary losses, any losses sustained during a taxable year in
which their Notes become wholly or partially worthless as the result of one or
more realized losses on the Trust Assets. However, it appears that a
noncorporate holder that does not acquire a Note in connection with a trade or
business will not be entitled to deduct a loss under Section 166 of the Code
until such holder's Note becomes wholly worthless (i.e., until its outstanding
principal balance has been reduced to zero) and that the loss will be
characterized as a short-term capital loss.
Each holder of a Note will be required to accrue interest and original
issue discount with respect to such Note, without giving effect to any
reductions in distributions attributable to defaults or delinquencies on the
Trust Assets until it can be established that any such reduction ultimately will
not be recoverable. As a result, the amount of taxable income reported in any
period by the holder of a Note could exceed the amount of economic income
actually realized by the holder in such period. Although the holder of a Note
eventually will recognize a loss or reduction in income attributable to
previously accrued and included income that, as the result of a realized loss,
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
Sales of Notes
If a Note is sold, the selling Noteholder will recognize gain or loss equal
to the difference between the amount realized on the sale and its adjusted basis
in the Note. The adjusted basis of a Note generally will equal the cost of such
Note to such Noteholder, increased by the amount of any original issue discount
or market discount previously reported by such Noteholder with respect to such
Note and reduced by any amortized premium and any principal payment received by
such Noteholder. Except as provided in the following three paragraphs, any such
gain or loss will be capital gain or loss, provided such Note is held as a
capital asset (generally, property held for investment) within the meaning of
Code section 1221.
Gain recognized on the sale of a Note by a seller who purchased such Note
at a market discount will be taxable as ordinary income in an amount not
exceeding the portion of such discount that accrued during the period such Note
was held by such holder, reduced by any market discount included in income under
the rules described above under ' -- Market Discount' and ' -- Premium.'
Backup Withholding
Payments of interest and principal, as well as payments of proceeds from
the sale of Notes, may be subject to the 'backup withholding tax' under Section
3406 of the Code at a rate of 31% if recipients of such payments fail to furnish
to the payor certain information, including their taxpayer identification
numbers, or otherwise fail to establish an exemption from such tax. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's federal income tax. Furthermore, certain
penalties may be imposed by the IRS on a recipient of payments that is required
to supply information but that does not do so in the proper manner.
The Issuer will report to the Holders and to the IRS for each calendar year
the amount of any 'reportable payments' during such year and the amount of tax
withheld, if any, with respect to payments on the Notes.
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Tax Treatment of Foreign Investors
Interest paid on a Note to a nonresident alien individual, foreign
partnership or foreign corporation that has no connection with the United States
other than holding Notes ('NONRESIDENTS') will normally qualify as portfolio
interest (except, in general, where (i) the recipient is a holder, directly or
by attribution, of 10% or more of the capital or profits interest in the Issuer,
or (ii) the recipient is a controlled foreign corporation to which the Issuer is
a related person) and will be exempt from federal income tax. Upon receipt of
appropriate ownership statements, the Issuer normally will be relieved of
obligations to withhold tax from such interest payments. These provisions
supersede the generally applicable provisions of United States law that would
otherwise require the issuer to withhold at a 30% rate (unless such rate were
reduced or eliminated by an applicable tax treaty) on, among other things,
interest and other fixed or determinable, annual or periodic income paid to
Nonresidents. For these purposes a Noteholder may be considered to be related to
the Issuer by holding a Certificate or by having common ownership with any other
holder of a Certificate or any affiliate thereof.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in 'Certain
Federal Income Tax Consequences,' potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Notes offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their tax advisors with respect
to the various tax consequences of investments in the Notes offered hereunder.
ERISA CONSIDERATIONS
Sections 404 and 406 of ERISA impose certain fiduciary and prohibited
transaction restrictions on employee pension and welfare benefit plans subject
to ERISA ('ERISA PLANS') and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans, bank
collective investment funds and insurance company general and separate accounts
in which such ERISA Plans are invested. Section 4975 of the Code imposes
essentially the same prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code and on Individual
Retirement Accounts described in Section 408 of the Code (collectively, 'TAX
FAVORED PLANS').
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA), are not
subject to the ERISA requirements discussed herein. Accordingly, assets of such
plans may be invested in Notes without regard to the ERISA considerations
described below, subject to the provisions of applicable federal and state law.
Any such plan that is qualified and exempt from taxation under Sections 401(a)
and 501(a) of the Code, however, is subject to the prohibited transaction rules
set forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving assets of ERISA Plans and Tax-Favored Plans (collectively, 'PLANS')
and persons ('PARTIES IN INTEREST' under ERISA or 'DISQUALIFIED PERSONS' under
the Code, collectively 'PARTIES IN INTEREST') who have certain specified
relationships to the Plans, unless a statutory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to a penalty (or an excise tax) imposed pursuant to
Section 502(i) of ERISA or Section 4975 of the Code, unless a statutory or
administrative exemption is available with respect to any such transaction.
PLAN ASSET REGULATIONS
An investment of the assets of a Plan in Notes may cause the underlying
Trust Assets and other assets included in the Trust Fund to be deemed 'Plan
Assets' of such Plan. The U.S. Department of Labor (the 'DOL') has promulgated
regulations at 29 C.F.R. Section 2510.3-101 (the 'DOL REGULATIONS') defining the
term 'Plan Assets' for purposes of applying the general fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA and
Section 4975 of the Code. Under the DOL Regulations,
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generally, when a Plan acquires an 'equity interest' in another entity (such as
the Trust Fund), the underlying assets of that entity may be considered to be
Plan Assets unless certain exceptions apply. Exceptions contained in the DOL
Regulations provide that a Plan's assets will not include an undivided interest
in each asset of an entity in which it makes an equity investment if: (1) the
entity is an operating company; or (2) the equity investment made by the Plan is
either a 'publicly-offered security' that is 'widely held' (both as defined in
the DOL Regulations) or a security issued by an investment company registered
under the Investment Company Act of 1940, as amended; or (3) Benefit Plan
Investors do not own 25% or more in value of any class of equity interests
issued by the entity. For this purpose, the term 'Benefit Plan Investors'
include Plans, as well as any 'employee benefit plan' (as defined in Section
3(3) or ERISA) which is not subject to Title I of ERISA, such as governmental
plans (as defined in Section 3(32) of ERISA), church plans (as defined in
Section 3(33) of ERISA) which have not made an election under Section 410(d) of
the Code, foreign plans and any entity whose underlying assets include Plan
Assets by reason of a Plan's investment in the entity. The DOL Regulations
provide that the term 'equity interest' means any interest in an entity other
than an instrument which is treated as indebtedness under applicable local law
and which has no 'substantial equity features.' Because of the factual nature of
certain of the rules governing the applicability of the above-described
exceptions under the DOL Regulations, Plans or persons investing Plan Assets
should not acquire any Note which may be deemed in the respective Prospectus
Supplement to have 'substantial equity features' in reliance upon the
availability of any such exception. For purposes of this section 'ERISA
Considerations,' the term 'PLAN ASSETS' or 'assets of a Plan' has the meaning
specified in the DOL Regulations and includes an undivided interest in the
underlying assets of certain entities in which a Plan invests.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Fund and cause the Company, the Master
Servicer, any Subservicer, any Administrator, the Indenture Trustee, the Owner
Trustee, the obligor under any credit enhancement mechanism or certain
affiliates thereof to be considered or become Parties in Interest with respect
to an investing Plan (or of a Plan holding an interest in an investing entity).
If so, the acquisition or holding of Notes by or on behalf of the investing Plan
could also give rise to a prohibited transaction under ERISA and Section 4975 of
the Code, unless a statutory or administrative exemption is available. Notes
acquired by a Plan may be assets of that Plan. Under the DOL Regulations, the
Trust Fund, including the Trust Assets and the other assets held in the Trust
Fund, may also be deemed to be assets of each Plan that acquires Notes. Special
caution should be exercised before Plan Assets are used to acquire a Note in
such circumstances, especially if, with respect to such assets, the Company, the
Master Servicer, any Subservicer, any Administrator, the Indenture Trustee, the
Owner Trustee, the obligor under any credit enhancement mechanism or an
affiliate thereof either (i) has investment discretion with respect to the
investment of Plan Assets or (ii) has authority or responsibility to give (or
regularly gives) investment advice with respect to Plan Assets for a fee
pursuant to an agreement or understanding that such advice will serve as a
primary basis for investment decisions with respect to such Plan Assets.
Any person who has discretionary authority or control with respect to the
management or disposition of Plan Assets and any person who provides investment
advice with respect to such Plan Assets for a fee (in the manner described
above) is a fiduciary of the investing Plan. If the Trust Assets or other assets
in a Trust Fund were to constitute Plan Assets, then any party exercising
management or discretionary control with respect to those Plan Assets may be
deemed to be a Plan 'fiduciary,' and thus subject to the fiduciary
responsibility requirements of ERISA and the prohibited transaction provisions
of ERISA and Section 4975 of the Code with respect to any investing Plan.
Therefore, if the Trust Assets and other assets included in a Trust Fund were to
constitute Plan Assets, then the acquisition or holding of Notes by or on behalf
of a Plan or with Plan Assets, as well as the operation of such Trust Fund, may
constitute or involve a prohibited transaction under ERISA and Section 4975 of
the Code, unless a statutory or administrative exemption is available.
PROHIBITED TRANSACTION EXEMPTIONS
A Plan fiduciary or other Plan Asset investor should consider the
availability of certain class exemptions granted by the DOL, which provide
relief from certain of the prohibited transaction provisions of ERISA and the
related excise tax provisions of the Code, including Prohibited Transaction
Class Exemption ('PTCE') 95-60, regarding transactions by insurance company
general accounts; PTCE 84-14, regarding transactions effected by a 'qualified
professional asset manager'; PTCE 90-1, regarding transactions by insurance
company pooled separate accounts; PTCE 91-38, regarding investments by bank
collective investment funds; and
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PTCE 96-23, regarding transactions effected by an 'in-house asset manager.' The
respective Prospectus Supplement may contain additional information regarding
the application of PTCE 95-60 or other DOL class exemptions with respect to the
Notes offered thereby.
INSURANCE COMPANY GENERAL ACCOUNTS
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Notes by an insurance company general account, the
Small Business Job Protection Act of 1996 added a new Section 401(c) to ERISA,
which provides certain exemptive relief from the provisions of Part 4 of Title I
of ERISA and Section 4975 of the Code, including the prohibited transaction
restrictions imposed by ERISA and the related excise taxes imposed by Section
4975 of the Code, for transactions involving an insurance company general
account. Pursuant to Section 401(c) of ERISA, the DOL is required to issue final
regulations ('401(C) REGULATIONS') no later than December 31, 1997 which are to
provide guidance for the purpose of determining, in cases where insurance
policies supported by an insurer's general account are issued to or for the
benefit of a Plan on or before December 31, 1998, which general account assets
constitute Plan Assets. Section 401(c) of ERISA generally provides that, until
the date which is 18 months after the 401(c) Regulations become final, no person
shall be subject to liability under Part 4 of Title I of ERISA and Section 4975
of the Code on the basis of a claim that the assets of an insurance company
general account constitute Plan Assets, unless (i) as otherwise provided by the
Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan Assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan Assets of any Plan invested in
such separate account. Insurance companies contemplating the investment of
general account assets in the Notes should consult with their legal counsel with
respect to the applicability of PTCE 95-60 and Section 401(c) of ERISA,
including the general account's ability to continue to hold the Notes after the
date which is 18 months after the date the 401(c) Regulations become final.
REPRESENTATION FROM PLANS INVESTING IN NOTES WITH 'SUBSTANTIAL EQUITY FEATURES'
If the related Prospectus Supplement provides that any of the Notes being
issued have 'substantial equity features' within the meaning of the DOL
Regulations, transfers of such Notes to a Plan, to a trustee or other person
acting on behalf of any Plan, or to any other person using the assets of any
Plan to effect such acquisition will not be registered by the Indenture Trustee
unless the transferee provides the Company, the Indenture Trustee and the Master
Servicer with an opinion of counsel satisfactory to the Company, the Indenture
Trustee and the Master Servicer, which opinion will not be at the expense of the
Company, the Indenture Trustee or the Master Servicer, that the purchase of such
Notes by or on behalf of such Plan is permissible under applicable law and will
not subject the Company, the Indenture Trustee or the Master Servicer to any
obligation in addition to those undertaken in the Trust Agreement. In lieu of
such opinion of counsel, the transferee may provide a certification of facts
substantially to the effect that (x) the purchase of Notes by or on behalf of
such Plan is permissible under applicable law, will not constitute or result in
any non-exempt prohibited transaction under ERISA or Section 4975 of the Code
and will not subject the Company, the Indenture Trustee or the Master Servicer
to any obligation in addition to those undertaken in the Trust Agreement, and
(y) the following statements are correct: (i) the transferee is an insurance
company, (ii) the source of funds used to purchase such Notes is an 'insurance
company general account' (as such term is defined in PTCE 95-60) and (iii) the
conditions set forth in Section I of PTCE 95-60 have been satisfied as of the
date of the acquisition of such Notes.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a 'TAX-EXEMPT INVESTOR') nonetheless will be subject to federal
income taxation to the extent that its income is 'unrelated business taxable
income' ('UBTI') within the meaning of Section 512 of the Code.
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CONSULTATION WITH COUNSEL
There can be no assurance that any DOL exemption will apply with respect to
any particular Plan that acquires the Notes or, even if all the conditions
specified therein were satisfied, that the exemption would apply to transactions
involving the Trust Fund. Prospective Plan investors should consult with their
legal counsel concerning the impact of ERISA and Section 4975 of the Code and
the potential consequences to their specific circumstances prior to making an
investment in the Notes.
Before purchasing a Note in reliance on any DOL exemption or Section 401(c)
of ERISA, a fiduciary of a Plan or other Plan Asset investor should itself
confirm that all of the specific and general conditions set forth in such
exemption or Section 401(c) of ERISA would be satisfied. In addition to making
its own determination as to the availability of the exemptive relief provided in
such exemption, a Plan fiduciary should consider its general fiduciary
obligations under ERISA in determining whether to purchase a Note on behalf of a
Plan.
LEGAL INVESTMENT MATTERS
Each class of Notes offered hereby and by the related Prospectus Supplement
will be rated at the date of issuance in one of the four highest rating
categories by at least one Rating Agency. Unless otherwise specified in the
related Prospectus Supplement, each class of Notes will evidence an interest in
Trust Assets primarily secured by second or more junior liens, and therefore
will not constitute 'mortgage related securities' for purposes of SMMEA.
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their legal advisors to determine whether and to
what extent the Notes constitute legal investments for them.
All depository institutions considering an investment in the Notes should
review the Federal Financial Institutions Examination Council's Supervisory
Policy Statement on the Selection of Securities Dealers and Unsuitable
Investment Practices (to the extent adopted by their respective regulators),
setting forth, in relevant part, certain investment practices deemed to be
unsuitable for an institution's investment portfolio, as well as guidelines for
investing in certain types of mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, 'prudent investor' provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not 'interest
bearing' or 'income paying.'
There may be other restrictions on the ability of certain investors either
to purchase certain classes of Notes or to purchase any class of Notes
representing more than a specified percentage of the investors' assets. The
Company will make no representations as to the proper characterization of any
class of Notes for legal investment or other purposes, or as to the ability of
particular investors to purchase any class of Notes under applicable legal
investment restrictions. These uncertainties may adversely affect the liquidity
of any class of Notes. Accordingly, all investors whose investment activities
are subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent the Notes of any class
constitute legal investments or are subject to investment, capital or other
restrictions.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of Notes will
be applied by the Company to finance the purchase of, or to repay short-term
loans incurred to finance the purchase of, the Trust Assets underlying the Notes
or will be used by the Company for general corporate purposes. The Company
expects that it will make additional sales of securities similar to the Notes
from time to time, but the timing and amount of any such additional offerings
will be dependent upon a number of factors, including the volume of mortgage
loans purchased by the Company, prevailing interest rates, availability of funds
and general market conditions.
METHODS OF DISTRIBUTION
The Notes offered hereby and by the related Prospectus Supplements will be
offered in series through one or more of the methods described below. The
Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the net proceeds to the
Company from such sale.
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The Company intends that Notes will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular series of
Notes may be made through a combination of two or more of these methods. Such
methods are as follows:
1. by negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. by placements by the Company with institutional investors through
dealers; and
3. by direct placements by the Company with institutional investors.
In addition, if specified in the related Prospectus Supplement, a series of
Notes may be offered in whole or in part to the Seller of the related Trust
Assets (and other assets, if applicable) that would comprise the Pool in respect
of such Notes.
If underwriters are used in a sale of any Notes (other than in connection
with an underwriting on a best efforts basis), such Notes will be acquired by
the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at fixed public
offering prices or at varying prices to be determined at the time of sale or at
the time of commitment therefor. Such underwriters may be broker-dealers
affiliated with the Company whose identities and relationships to the Company
will be as set forth in the related Prospectus Supplement. The managing
underwriter or underwriters with respect to the offer and sale of a particular
series of Notes will be set forth on the cover of the Prospectus Supplement
relating to such series and the members of the underwriting syndicate, if any,
will be named in such Prospectus Supplement.
In connection with the sale of the Notes, underwriters may receive
compensation from the Company or from purchasers of the Notes in the form of
discounts, concessions or commissions. Underwriters and dealers participating in
the distribution of the Notes may be deemed to be underwriters in connection
with such Notes, and any discounts or commissions received by them from the
Company and any profit on the resale of Notes by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933, as
amended.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of Notes will provide that the obligations of the underwriters will
be subject to certain conditions precedent, that the underwriters will be
obligated to purchase all such Notes if any are purchased (other than in
connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the Company will indemnify the several underwriters and the
underwriters will indemnify the Company against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to distribution required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Company and purchasers of
Notes of such series.
The Company anticipates that the Notes offered hereby will be sold
primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Notes, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be 'underwriters' within the
meaning of the Securities Act of 1933, as amended, in connection with reoffers
and sales by them of Notes. Holders of Notes should consult with their legal
advisors in this regard prior to any such reoffer or sale.
LEGAL MATTERS
Certain legal matters, including certain federal income tax matters, will
be passed upon for the Company by Thacher Proffitt & Wood, New York, New York,
or by Orrick, Herrington & Sutcliffe LLP, New York, New York, as specified in
the Prospectus Supplement.
FINANCIAL INFORMATION
The Company has determined that its financial statements are not material
to the offering made hereby. The Notes do not represent an interest in or an
obligation of the Company. The Company's only obligations with respect to a
series of Notes will be to repurchase Trust Assets upon any breach of certain
limited representations and warranties made by the Company, or as otherwise
provided in the applicable Prospectus Supplement.
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
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<S> <C>
401(c) Regulations............................. 111
Account Balance................................ 18
Accrual Notes.................................. 5
Additional Balance............................. 17
Additional Charges............................. 18
Administrator.................................. 4
Affiliated Sellers............................. 15
Agreement...................................... 47
Agreements..................................... 47
Audit Guide.................................... 46
Bankruptcy Loss................................ 36
Beneficial Owner............................... 27
Book-Entry Notes............................... 26
CEDEL.......................................... 26
CEDEL Participants............................. 27
CERCLA......................................... 64
Certificates................................... 4
Clearance Cooperative.......................... 27
Closing Date................................... 73
CLTV........................................... 16
Code........................................... 8
Commission..................................... 2
Committee Report............................... 75
Conservation Act............................... 64
Contracts...................................... 1
Cooperative.................................... 56
Cooperative Loans.............................. 15
Cooperative Note............................... 56
Cooperative Notes.............................. 15
Credit Enhancer................................ 36
Credit Line Agreements......................... 17
Credit Utilization Rate........................ 17
Crime Control Act.............................. 71
Custodial Account.............................. 30
Custodian...................................... 29
Defaulted Loan Loss............................ 36
Deleted Loan................................... 24
Depositaries................................... 26
Designated Seller.............................. 15
Designated Seller Transaction.................. 15
Determination Date............................. 33
Disqualified Persons........................... 77
DOL............................................ 77
DOL Regulations................................ 77
Draw........................................... 17
Draw Period.................................... 17
DTC............................................ 26
DTC Participants............................... 26
Eligible Account............................... 31
Eligible Substitute Loan....................... 24
Environmental Lien............................. 64
<CAPTION>
PAGE
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<S> <C>
ERISA.......................................... 8
ERISA Plans.................................... 77
Euroclear...................................... 26
Euroclear Operator............................. 27
Euroclear Participants......................... 27
Event of Default............................... 48
Excess Interest................................ 38
Excess Spread.................................. 30
Exchange Act................................... 2
Excluded Spread................................ 30
Extraordinary Losses........................... 36
FDIC........................................... 22
FHA............................................ 1
FHA Claims Administration Agreement............ 11
FHA Claims Administrator....................... 11
FHA Insurance Amount........................... 41
FHA Regulations................................ 40
FHA Reserve.................................... 41
Finance Charge................................. 18
Financial Guaranty Insurance Policy............ 37
Fraud Loss..................................... 36
FTC Rule....................................... 65
Funding Account................................ 33
Garn-St Germain Act............................ 66
GMAC Mortgage.................................. 1
Gross Margin................................... 17
Guide.......................................... 19
High Cost Loans................................ 64
Holder-in-Due-Course........................... 65
Home Equity Loans.............................. 1
Home Equity Program............................ 19
Home Improvement Contracts..................... 1
Home Improvements.............................. 1
HUD............................................ 40
Indenture...................................... 1
Indenture Trustee.............................. 4
Index.......................................... 17
Indirect Participants.......................... 27
Installment Contract........................... 68
Insurance Proceeds............................. 30
Insurer........................................ 37
Interest Rate.................................. 4
Issuer......................................... 4
Junior Ratio................................... 16
Letter of Credit............................... 37
Letter of Credit Bank.......................... 37
Liquidated Loan................................ 44
Liquidation Proceeds........................... 30
Manufactured Homes............................. 19
Manufactured Housing Contracts................. 1
Master Commitments............................. 20
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Mortgages...................................... 15
Mortgage Notes................................. 15
Mortgage Rate.................................. 17
Mortgaged Properties........................... 5
Mortgagor...................................... 9
National Housing Act........................... 5
Net Mortgage Rate.............................. 51
Nonresidents................................... 77
Note Registrar................................. 26
Noteholder..................................... 26
Notes.......................................... 1
OID Regulations................................ 72
Overcollateralization.......................... 38
Owner Trustee.................................. 4
Ownership Interest............................. 16
Participants................................... 26
Parties in Interest............................ 77
Paying Agent................................... 32
Payment Account................................ 31
Payment Date................................... 6
Percentage Interest............................ 33
Permitted Investments.......................... 31
Plan Assets.................................... 78
Plans.......................................... 77
Pool........................................... 1
Private Securities............................. 6
PTCE........................................... 78
Purchase Obligation............................ 40
Purchase Price................................. 24
Qualified Insurer.............................. 39
Rating Agency.................................. 8
Realized Loss.................................. 36
Record Date.................................... 32
Registration Statement......................... 2
Relief Act..................................... 70
REO Loan....................................... 44
Reserve Fund................................... 38
Residential Funding............................ 4
Revolving Credit Loans......................... 1
<CAPTION>
PAGE
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<S> <C>
RICO........................................... 71
Securities..................................... 1
Securityholders................................ 29
Sellers........................................ 15
Senior/Subordinate Series...................... 26
Servicing Advances............................. 32
Servicing Agreement............................ 42
Servicing Default.............................. 47
Single Note.................................... 34
SMMEA.......................................... 8
Special Hazard Loss............................ 36
Special Purpose Entity......................... 16
Spread Account................................. 38
Stated Principal Balance....................... 36
Strip Note..................................... 5
Subordinate Securities......................... 5
Subservicers................................... 16
Subservicing Account........................... 30
Subservicing Agreement......................... 25
Tax Counsel.................................... 72
Tax-Exempt Investor............................ 79
Tax Favored Plans.............................. 77
Terms and Conditions........................... 28
Title I........................................ 5
Title I Contracts.............................. 1
Title I Lenders................................ 40
Title I Loans.................................. 40
Title V........................................ 68
Title VIII..................................... 69
Transfer Report................................ 41
Trust Agreement................................ 1
Trust Assets................................... 1
Trust Fund..................................... 1
UBTI........................................... 79
UCC............................................ 61
Unaffiliated Sellers........................... 15
Unsecured Contract............................. 12
401(c) Regulations............................. 79
</TABLE>
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RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
$275,000,000
HOME EQUITY LOAN-BACKED TERM NOTES
SERIES 1999-HS3
PROSPECTUS SUPPLEMENT
RESIDENTIAL FUNDING SECURITIES CORPORATION
UNDERWRITER
YOU SHOULD RELY ON ONLY 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 HEREBY IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED.
WE REPRESENT THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS ONLY AS OF THE DATES ON THEIR RESPECTIVE COVERS.
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 June 21, 1999.
